CONEXANT SYSTEMS INC
10-12G/A, 1998-12-01
SEMICONDUCTORS & RELATED DEVICES
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<PAGE>   1
 
   
    AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 1, 1998
    
 
                                                              FILE NO. 000-24923
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
 
                       SECURITIES AND EXCHANGE COMMISSION
 
                             WASHINGTON, D.C. 20549
                            ------------------------
 
   
                                AMENDMENT NO. 2
    
                                       TO
 
                                   FORM 10/A
 
                                GENERAL FORM FOR
                           REGISTRATION OF SECURITIES
                     PURSUANT TO SECTION 12(b) OR 12(g) OF
                      THE SECURITIES EXCHANGE ACT OF 1934
                            ------------------------
 
                             CONEXANT SYSTEMS, INC.
   
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
    
 
<TABLE>
<S>                                            <C>
                   DELAWARE                                      25-1799439
       (STATE OR OTHER JURISDICTION OF              (I.R.S. EMPLOYER IDENTIFICATION NO.)
        INCORPORATION OR ORGANIZATION)

              4311 JAMBOREE ROAD
          NEWPORT BEACH, CALIFORNIA                              92660-3095
   (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                      (ZIP CODE)
</TABLE>
 
       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (949) 221-4600
 
                            ------------------------
 
     SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
 
       SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
 
                      Common Stock, par value $1 per share
                                (TITLE OF CLASS)
 
                        Preferred Share Purchase Rights
                                (TITLE OF CLASS)
 
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>   2
 
                             CONEXANT SYSTEMS, INC.
 
                                     PART I
 
                 INFORMATION INCLUDED IN INFORMATION STATEMENT
                    AND INCORPORATED IN FORM 10 BY REFERENCE
              CROSS-REFERENCE SHEET BETWEEN INFORMATION STATEMENT
                              AND ITEMS OF FORM 10
 
<TABLE>
<CAPTION>
ITEM
NO.                   CAPTION                            LOCATION IN INFORMATION STATEMENT
- ----                  -------                            ---------------------------------
<C>    <S>                                    <C>
 1.    Business.............................  "Summary of Certain Information"; "Risk Factors"; "The
                                              Semiconductor Systems Business"; "Management's
                                              Discussion and Analysis of Financial Condition and
                                              Results of Operations"; "The
                                              Distribution -- Introduction"; and "The Distribution --
                                              Background and Reasons for the Distribution".
 
 2.    Financial Information................  "Summary of Certain Information"; "Historical Selected
                                              Financial Data"; "Unaudited Pro Forma Condensed
                                              Financial Statements of the Company"; "Management's
                                              Discussion and Analysis of Financial Condition and
                                              Results of Operations"; "The Distribution"; and
                                              "Semiconductor Systems Combined Financial Statements and
                                              Schedule".
 
 3.    Properties...........................  "The Semiconductor Systems Business -- Properties".
 
 4.    Security Ownership of Certain
       Beneficial Owners and Management.....  "The Distribution -- Trading Market" and "Management of
                                              the Company -- Ownership of Company Common Stock".
 
 5.    Directors and Executive Officers.....  "Arrangements Between Rockwell and the Company";
                                              "Management of the Company"; and "Liability and
                                              Indemnification of Directors and Officers".
 
 6.    Executive Compensation...............  "Arrangements Between Rockwell and the Company" and
                                              "Management of the Company".
 
 7.    Certain Relationships and Related
       Transactions.........................  "Summary of Certain Information" and "Arrangements
                                              Between Rockwell and the Company".
 
 8.    Legal Proceedings....................  "The Semiconductor Systems Business -- Legal
                                              Proceedings".
 
 9.    Market Price of and Dividends on the
       Registrant's Common Equity and
       Related Shareowner Matters...........  "Summary of Certain Information"; "Risk Factors"; "The
                                              Distribution -- Introduction"; and "The
                                              Distribution -- Trading Market".
 
10.    Recent Sales of Unregistered
       Securities...........................  Not Applicable.
 
11.    Description of Registrant's
       Securities to be Registered..........  "The Distribution -- Trading Market" and "Description of
                                              Company Capital Stock".
</TABLE>
 
                                        i
<PAGE>   3
 
<TABLE>
<CAPTION>
ITEM
NO.                   CAPTION                            LOCATION IN INFORMATION STATEMENT
- ----                  -------                            ---------------------------------
<C>    <S>                                    <C>
12.    Indemnification of Directors and
       Officers.............................  "Liability and Indemnification of Directors and
                                              Officers".
 
13.    Financial Statements and
       Supplementary Data...................  "Summary of Certain Information"; "Historical Selected
                                              Financial Data"; "Unaudited Pro Forma Condensed
                                              Financial Statements of the Company"; "Management's
                                              Discussion and Analysis of Financial Condition and
                                              Results of Operations"; and "Semiconductor Systems
                                              Combined Financial Statements and Schedule".
 
14.    Changes in and Disagreements with
       Accountants on Accounting and
       Financial Disclosure.................  Not Applicable.
 
15.    Financial Statements and Exhibits....  "Semiconductor Systems Combined Financial Statements and
                                              Schedule".
</TABLE>
 
                                       ii
<PAGE>   4
 
                                                                 [ROCKWELL LOGO]
 
   
December 2, 1998
    
 
Dear Shareowner:
 
     Over the last few years, Rockwell International Corporation ("Rockwell")
has undergone a dramatic transformation to better position our leadership
businesses to achieve their full potential and deliver greater value to our
shareowners. These strategic actions allow us to leverage our financial strength
and enhance our ability to focus on our core Automation and Avionics &
Communications businesses.
 
     On November 4, 1998, the Board of Directors of Rockwell approved the
distribution (the "Distribution") to our shareowners of all of the outstanding
shares of common stock of Conexant Systems, Inc. ("Conexant"), a wholly-owned
subsidiary of Rockwell, which after the Distribution will be a separately-traded
public company owning and operating Rockwell's semiconductor systems business.
The Distribution, which is expected to occur on December 31, 1998, will be at
the rate of one share of Conexant common stock for every two shares of Rockwell
common stock held as of the close of business on December 11, 1998. Rockwell has
received a favorable ruling from the Internal Revenue Service as to the tax-free
status of the Distribution. The enclosed Information Statement explains the
Distribution in detail and provides important financial and other information
regarding Conexant. Holders of Rockwell common stock are not required to take
any action to participate in the Distribution. A shareowner vote is not
required, and, accordingly, your proxy is not being sought.
 
     Conexant, like many of its Silicon Valley-based counterparts, is a business
with a rich heritage of innovation and technology leadership. It also has
excellent people, facilities and resources and a broad and exciting array of
innovative products. The Distribution will separate Rockwell's Automation and
Avionics & Communications businesses from the semiconductor systems business and
will result in your ownership of shares of two separate and distinct
publicly-traded companies: Rockwell, which will focus on its Automation and
Avionics & Communications businesses, and Conexant, which will focus on the
semiconductor systems business. With this separation, investors will also be
able to focus on the specific growth, market and value creation characteristics
of each company.
 
     As announced in September, Conexant is implementing several restructuring
actions to improve competitiveness and to position the business for future
profitability. Conexant will begin operations as a leading supplier of chipsets
and other products for the communications electronics market, with revenues in
its latest fiscal year of $1.2 billion. We are confident about the future of
Conexant as an independent public company.
 
     Our continuing businesses of Automation and Avionics & Communications
achieved earnings per share of $2.33 (before special charges) in fiscal 1998.
Now we are focused on our commitment to deliver $100 million in pre-tax savings
in 1999 from the restructuring we announced in June. This will help us achieve
our fiscal 1999 earnings target of $2.90 to $3.00 per share.
 
     Automation's 1998 financial performance is expected to be among the best in
the industry, as this business continues to be the largest industrial automation
supplier in North America and a global leader, generating strong returns and
cash flow. I am also encouraged that as the full impact of the restructuring
actions takes effect in fiscal 1999 and beyond, Automation's operating margins
should reach industry-leading levels.
<PAGE>   5
 
     The strong performance of the Rockwell Collins businesses in fiscal 1998
should be a precursor to an even stronger 1999. Our Government Systems segment
captured a record one billion dollars in new orders in 1998, while Air Transport
Systems grew 1998 revenues and profits by more than 20 percent, and the Business
and Regional Aircraft Systems segment yielded its sixth consecutive year of
record sales and profit. Passenger Systems, our In-Flight Entertainment
business, generated $460 million in new orders in fiscal 1998.
 
     Our Electronic Commerce business also had an excellent fiscal 1998 relative
to capturing new business, driven by the introduction of new software-based call
center management products, and further penetration of international markets.
Going forward, we anticipate that revenues and profits for this business will
continue to increase at double-digit rates.
 
     The actions we have taken to position Conexant for profitability as an
independent company and to strengthen the continuing Rockwell underscore our
focus on developing and positioning each business to deliver value to our
shareowners. We are confident that these actions will be successful.
 
Sincerely,
 
/s/ Don H. Davis, Jr.
 
Don H. Davis, Jr.
Chairman and Chief Executive Officer
<PAGE>   6
 
                                [CONEXANT LOGO]
 
   
December 2, 1998
    
 
Dear Future Shareowner:
 
     The following pages contain a great deal of information about Conexant, of
which you will soon become a shareowner. In this letter, I would like to take
the opportunity to briefly summarize the history, strategy and business
performance of the semiconductor systems business ("Semiconductor Systems") as a
part of Rockwell and to outline some of the reasons we feel confident in the
prospects for success of Conexant as an independent organization.
 
     Rockwell has a rich heritage in the communications market and Semiconductor
Systems has been involved in the development of analog modem technology for over
three decades. The first to apply semiconductor integration capabilities to
emerging facsimile markets of the 1970s, Semiconductor Systems achieved a better
than seventy percent market share position that continues to this day. In the
1980s, Semiconductor Systems again was first to introduce modem chipset products
for the nascent Personal Computer communications market. A continuous innovator,
Semiconductor Systems once more built a number one market share position, and
despite fierce competition, has held this top position for seven product
generations from 2400bps (V.22bis) to today's 56,000bps (V.90) modem products.
In the process, Semiconductor Systems profitably grew its modem revenue base
from approximately $200 million in the early 1990s to almost $1.2 billion in
sales and over $300 million in earnings from operations in 1996.
 
     Even as the modem market was demonstrating strong growth, the Semiconductor
Systems management team foresaw the maturation and eventual decline of this
communications segment, and in 1995 launched an aggressive portfolio
diversification program. The strategy of this diversification was to build on
our existing core capabilities, what we call mixed-signal processing, and to
leverage these capabilities to address adjacent communications markets. The
execution focus of this program was both internal, through expanded product
development programs and investment in high performance mixed-signal and radio
frequency manufacturing capabilities, and external, through targeted technology
and market position acquisitions. The investment level driving these initiatives
was substantial; in fact, over the three-year period ending in 1997 total
expenditures for research and development, capital expenditures and acquisitions
exceeded $1.7 billion.
 
     Early 1998 found us mid-course in our diversification strategy when we were
faced with twin challenges. First, the existing slowdown in the worldwide
semiconductor market turned into a recession driven by significant industry
over-capacity, the Asia-Pacific market turmoil and slowing PC sales. Second, and
more critical, the decline in our analog PC modem business was occurring sooner
and proceeding more rapidly than we had earlier anticipated. By 1998, the
significant successes of our expansion platforms were contributing almost $600
million in revenues; however, this was not sufficient to offset the precipitous
decline in analog PC modem margins, and significant operating losses resulted.
In September of this year, we announced and began implementation of a
comprehensive resizing program that is expected to reduce annualized operating
costs by over $200 million from recent levels and position us for future
profitability.
 
     It is this challenging environment -- driving toward completion of a
strategic diversification during a period of semiconductor industry
retrenchment -- in which Conexant will begin to operate as an independent
entity. Despite these hurdles we are optimistic about the future and feel there
are several very solid reasons for our confidence. First, the communications
marketplace is generally considered one of the most outstanding long-term growth
segments in the semiconductor industry, and we will begin life as the largest
company in the
<PAGE>   7
 
world focused exclusively on providing semiconductor products for communication
applications. Second, when complete, our product portfolios in Wireless
Communications, Network Access, Digital Infotainment, Personal Imaging and
Personal Computing will provide a balanced revenue foundation for renewed
growth, with significant opportunities for technology re-use and the leverage of
intellectual property to achieve economies of scale in these converging markets.
Third, the cumulative investments of our diversification program in technology
research, intellectual property portfolio acquisition, and development of high
performance mixed-signal and radio frequency manufacturing capabilities are a
critical asset that will drive future product success. Fourth, and most
important, Conexant has a talented and motivated employee team with a proven
track record of product innovation, profitable business growth and the
demonstrated ability to compete and win. We look forward to your support as we
address our present challenge and as we seek to capitalize on our many
opportunities.
 
Sincerely,
 
/s/ Dwight W. Decker
 
Dwight W. Decker
Chairman and Chief Executive Officer
<PAGE>   8
 
   
                             INFORMATION STATEMENT
    
 
                             CONEXANT SYSTEMS, INC.

                            ------------------------
 
                      COMMON STOCK, PAR VALUE $1 PER SHARE
             (INCLUDING ASSOCIATED PREFERRED SHARE PURCHASE RIGHTS)
 
     This Information Statement is being furnished to shareowners of Rockwell
International Corporation ("Rockwell") in connection with the distribution (the
"Distribution") by Rockwell to its shareowners of all of the outstanding shares
of common stock of its wholly-owned subsidiary, Conexant Systems, Inc. (the
"Company"). Following the Distribution, the Company will own and operate
Rockwell's semiconductor systems business ("Semiconductor Systems").
 
     The Distribution is expected to be made on December 31, 1998, to holders of
record of common stock, par value $1 per share, of Rockwell ("Rockwell Common
Stock") as of the close of business on December 11, 1998 (the "Record Date"), on
the basis of one share of common stock, par value $1 per share, of the Company
(the "Common Stock") for every two shares of Rockwell Common Stock. The Common
Stock and the associated preferred share purchase rights of the Company
(described below) are collectively referred to herein as the "Company Common
Stock". No consideration will be paid by shareowners of Rockwell for the shares
of Company Common Stock to be received by them in the Distribution, nor will
they be required to surrender or exchange shares of Rockwell Common Stock or
take any other action in order to receive Company Common Stock.
 
   
     There is no current trading market for the Company Common Stock, although a
"when-issued" trading market is expected to develop prior to the Distribution
Date (as defined below). The Company Common Stock has been approved for listing
on The Nasdaq Stock Market, Inc. National Market System ("Nasdaq") under the
trading symbol "CNXT".
    
 
 SHAREOWNERS SHOULD CAREFULLY CONSIDER THE MATTERS DISCUSSED UNDER THE SECTION
             ENTITLED "RISK FACTORS" IN THIS INFORMATION STATEMENT.
 
     NO VOTE OF SHAREOWNERS IS REQUIRED IN CONNECTION WITH THE DISTRIBUTION. WE
  ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A PROXY.

                            ------------------------
 
    NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
 COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
 ACCURACY OR ADEQUACY OF THIS INFORMATION STATEMENT. ANY REPRESENTATION TO THE
                        CONTRARY IS A CRIMINAL OFFENSE.

                            ------------------------
 
     THIS INFORMATION STATEMENT DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
                SOLICITATION OF AN OFFER TO BUY ANY SECURITIES.
 
   
          The date of this Information Statement is December 2, 1998.
    
<PAGE>   9
 
                               TABLE OF CONTENTS
 
   
<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
AVAILABLE INFORMATION.......................................     4
SUMMARY OF CERTAIN INFORMATION..............................     5
RISK FACTORS................................................    12
  Recent and Anticipated Future Losses......................    12
  Declining Contribution of Analog PC Modem Business........    12
  Dependence on Timely Success of Expansion Platforms.......    13
  Rapid Technological Change................................    13
  Dependence on New Product Development and Product Cost
     Reductions.............................................    13
  Future Capital Sources....................................    14
  Research and Development Expenses.........................    14
  Capital Expenditures......................................    14
  Fluctuations in Operating Results.........................    14
  Credit Facility and Restrictive Covenants.................    15
  Intellectual Property Matters.............................    15
  Competition...............................................    16
  Manufacturing Risks.......................................    16
  Order and Shipment Uncertainties..........................    17
  Cyclical Nature of the Semiconductor Industry.............    18
  Dependence on Key Personnel...............................    18
  Risks of International Sales and Operations...............    18
  Investments, Alliances and Acquisitions...................    19
  Demands on Management Resources...........................    19
  Environmental Matters.....................................    19
  Year 2000 Readiness Disclosure............................    20
  Absence of History as an Independent Company..............    20
  No Prior Market For Company Common Stock; Volatility;
     Possibility of Substantial Sales of Company Common
     Stock..................................................    20
  Certain Anti-takeover Effects.............................    21
  Certain Federal Income Tax Considerations.................    21
THE SEMICONDUCTOR SYSTEMS BUSINESS..........................    22
  Industry Background.......................................    23
  Company Approach..........................................    24
  Company Strategy..........................................    25
  The Five Product Platforms................................    26
  Customers; Sales and Marketing............................    32
  Competition...............................................    33
  Raw Materials and Supplies................................    33
  Research and Development..................................    33
  Intellectual Property.....................................    34
  Employees.................................................    34
  Cyclicality; Seasonality..................................    35
  Properties................................................    35
  Environmental Matters.....................................    36
  Legal Proceedings.........................................    37
  General...................................................    38
CREDIT FACILITY.............................................    39
HISTORICAL SELECTED FINANCIAL DATA..........................    40
</TABLE>
    
 
                                        2
<PAGE>   10
 
   
<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS OF THE
  COMPANY...................................................    41
  Unaudited Pro Forma Condensed Combined Balance Sheet of
     the Company............................................    41
  Unaudited Pro Forma Condensed Combined Statement of
     Operations of the Company..............................    42
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
  AND RESULTS OF OPERATIONS.................................    43
  Overview..................................................    43
  Results of Operations.....................................    45
  Income Taxes..............................................    47
  Acquisitions..............................................    47
  Liquidity and Capital Resources...........................    48
  Year 2000 Readiness Disclosure............................    49
  Quantitative and Qualitative Disclosures About Market
     Risk...................................................    50
  Cautionary Statement......................................    50
THE DISTRIBUTION............................................    52
  Introduction..............................................    52
  Background and Reasons for the Distribution...............    52
  Manner of Effecting the Distribution......................    52
  Trading Market............................................    53
  Dividend Policy...........................................    54
  Certain Federal Income Tax Consequences of the
     Distribution...........................................    54
  Conditions; Termination...................................    55
ARRANGEMENTS BETWEEN ROCKWELL AND THE COMPANY...............    56
  Distribution Agreement....................................    56
  Employee Matters Agreement................................    58
  Tax Allocation Agreement..................................    59
  Transition Agreement......................................    60
MANAGEMENT OF THE COMPANY...................................    61
  Directors of the Company..................................    61
  Committees of the Board of Directors......................    62
  Compensation of Directors.................................    63
  Executive Officers of the Company.........................    64
  Historical Compensation of Executive Officers.............    66
  Option Grants.............................................    68
  Aggregated Option Exercises and Fiscal Year-End Values....    69
  Long-Term Incentive Plan Awards...........................    69
  Retirement Benefits.......................................    69
  Benefit Plans Following the Distribution..................    70
  Ownership of Company Common Stock.........................    77
DESCRIPTION OF COMPANY CAPITAL STOCK........................    78
  Company Common Stock......................................    78
  Company Preferred Stock...................................    78
  Certain Provisions in the Company Certificate and Company
     By-Laws................................................    81
  Company Rights Plan.......................................    85
  Anti-takeover Legislation.................................    87
LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS.....    88
GLOSSARY OF TECHNICAL TERMS.................................    89
INDEX TO SEMICONDUCTOR SYSTEMS COMBINED FINANCIAL STATEMENTS
  AND SCHEDULE..............................................   F-1
</TABLE>
    
 
                                        3
<PAGE>   11
 
                             AVAILABLE INFORMATION
 
     The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form 10 (the "Registration Statement")
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), with
respect to the Company Common Stock. This Information Statement does not contain
all of the information set forth in the Registration Statement and the exhibits
thereto. The Registration Statement and any amendments thereto, including
exhibits filed as a part thereof, are available for reading and copying as set
forth below.
 
   
     The Company is subject to the Exchange Act and files reports, proxy and
information statements and other information relating to itself with the
Commission. The public may read and copy such reports, proxy and information
statements and other information filed by the Company, including the
Registration Statement and exhibits thereto, at the Commission's Public
Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. The public may
obtain information on the operation of the Public Reference Room by calling the
Commission at 1-800-SEC-0330. The Commission also maintains an Internet site
that contains reports, proxy and information statements and other information
regarding registrants (including the Company) that file electronically with the
Commission (http://www.sec.gov). The Company's Internet site is
http://www.conexant.com.
    
 
   
     Reports, proxy statements and other information concerning the Company also
can be inspected at the offices of Nasdaq, 1735 K Street, N.W., Washington, D.C.
20006-1500.
    
 
     NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION WITH RESPECT TO THE MATTERS DESCRIBED IN THIS INFORMATION
STATEMENT OTHER THAN THOSE CONTAINED HEREIN OR IN THE DOCUMENTS INCORPORATED BY
REFERENCE HEREIN AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS INFORMATION STATEMENT DOES
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY SECURITIES.
NEITHER THE DELIVERY OF THIS INFORMATION STATEMENT NOR ANY DISTRIBUTION OF
SHARES OF COMPANY COMMON STOCK MADE AS DESCRIBED HEREIN SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
 
                                        4
<PAGE>   12
 
                         SUMMARY OF CERTAIN INFORMATION
 
   
     The following summary is not intended to be complete and is qualified by
reference to the more detailed information set forth elsewhere in this
Information Statement, which should be reviewed carefully in its entirety.
Unless the context otherwise indicates, as used in this Information Statement,
the term the "Company" means Semiconductor Systems for periods prior to the
Distribution and Conexant Systems, Inc. and its subsidiaries for periods
following the Distribution. For the convenience of the reader, a glossary of
technical terms used herein appears on page 89.
    
 
                                THE DISTRIBUTION
 
Distributing Company..........   Rockwell International Corporation, a Delaware
                                 corporation.
 
Shares to be Distributed......   Approximately 95 million shares of Company
                                 Common Stock, based on the number of shares of
                                 Rockwell Common Stock outstanding as of October
                                 31, 1998. No consideration will be paid by
                                 shareowners of Rockwell for the shares of
                                 Company Common Stock to be received by them in
                                 the Distribution, nor will they be required to
                                 surrender or exchange shares of Rockwell Common
                                 Stock or take any other action in order to
                                 receive Company Common Stock. See "The
                                 Distribution -- Manner of Effecting the
                                 Distribution".
 
Distribution Ratio............   One share of Company Common Stock for every two
                                 shares of Rockwell Common Stock. See "The
                                 Distribution -- Manner of Effecting the
                                 Distribution".
 
Direct (Book-Entry)
Registration; Share
  Certificates................   Company shareowners initially will have their
                                 ownership of Company Common Stock registered
                                 only in book-entry form. Book-entry
                                 registration refers to a method of recording
                                 stock ownership in the Company's records in
                                 which no share certificates are issued. On the
                                 Distribution Date, each holder of Rockwell
                                 Common Stock as of the close of business on the
                                 Record Date will be credited through book-entry
                                 in the records of the Company with the number
                                 of whole shares of Company Common Stock
                                 received by the shareowner. Each such Rockwell
                                 shareowner will receive an account statement
                                 indicating the number of shares of Company
                                 Common Stock that the shareowner owns.
                                 Following the Distribution Date, any Company
                                 shareowner whose ownership of Company Common
                                 Stock is registered in book-entry form may
                                 obtain at any time without charge a certificate
                                 to represent the number of whole shares by
                                 contacting the Transfer Agent (as defined
                                 below). See "The Distribution -- Manner of
                                 Effecting the Distribution".
 
Fractional Share Interests....   The distribution ratio for the number of shares
                                 of Company Common Stock to be issued for each
                                 share of Rockwell Common Stock outstanding on
                                 the Record Date will be such that the
                                 Distribution will give rise to fractional
                                 shares of Company Common Stock. Fractional
                                 shares of Company Common Stock will not be
                                 distributed. Fractional shares will be
                                 aggregated and sold in the public market by the
                                 Distribution Agent (as defined below) and the
                                 aggregate net proceeds will be distributed
                                 ratably to
 
                                        5
<PAGE>   13
 
                                 those shareowners entitled to fractional
                                 interests. The Distribution Agent is
                                 independent from the Company. See "The
                                 Distribution -- Manner of Effecting the
                                 Distribution". Although the Distribution is
                                 intended to be tax-free, shareowners will
                                 recognize gain or loss for tax purposes in an
                                 amount equal to the difference between the cash
                                 received in respect of any fractional share and
                                 the amount of such shareowner's tax basis
                                 allocable to such fractional share. See "The
                                 Distribution -- Certain Federal Income Tax
                                 Consequences of the Distribution".
 
Record Date...................   The Record Date is the close of business on
                                 December 11, 1998.
 
Distribution Date.............   The Distribution is expected to occur at the
                                 close of business on December 31, 1998 (the
                                 "Distribution Date"). On or about the
                                 Distribution Date, the Distribution Agent will
                                 commence mailing account statements reflecting
                                 ownership of shares of Company Common Stock to
                                 holders of Rockwell Common Stock as of the
                                 close of business on the Record Date.
 
Distribution Agent............   ChaseMellon Shareholder Services, L.L.C.
                                 ("ChaseMellon") will serve as the distribution
                                 agent (the "Distribution Agent") for the
                                 Distribution. ChaseMellon will also serve as
                                 transfer agent and registrar (the "Transfer
                                 Agent") for the Company Common Stock.
                                 ChaseMellon's address is P.O. Box 3315, South
                                 Hackensack, New Jersey 07606-1915, and its
                                 telephone number is (800) 204-7800.
 
Federal Income Tax
Consequences..................   Rockwell has received a ruling (the "Tax
                                 Ruling") from the Internal Revenue Service (the
                                 "IRS") to the effect that the Distribution will
                                 qualify as a tax-free reorganization within the
                                 meaning of Section 368(a)(1)(D) of the Internal
                                 Revenue Code of 1986, as amended (the "Code").
                                 See "The Distribution -- Certain Federal Income
                                 Tax Consequences of the Distribution".
 
   
Trading Market and Symbol.....   There is no current trading market for the
                                 Company Common Stock, although a "when-issued"
                                 trading market is expected to develop prior to
                                 the Distribution Date. The Company Common Stock
                                 has been approved for listing on Nasdaq under
                                 the trading symbol "CNXT". See "The
                                 Distribution -- Trading Market".
    
 
   
Conditions to the
Distribution..................   The Distribution is subject to the satisfaction
                                 or waiver of certain conditions set forth in
                                 the Distribution Agreement (as defined below).
                                 Regardless of whether the conditions are
                                 satisfied, the Distribution Agreement may be
                                 terminated and the Distribution abandoned by
                                 Rockwell's Board of Directors, in its sole
                                 discretion, without the approval of Rockwell
                                 shareowners, at any time prior to the
                                 Distribution. See "The Distribution -- 
                                 Conditions; Termination".
    
 
Arrangements Between Rockwell
and the Company...............   For the purpose of governing certain of the
                                 relationships between Rockwell and the Company
                                 relating to the Distribution, to provide for an
                                 orderly transition and for other matters,
                                 Rockwell and the
 
                                        6
<PAGE>   14
 
                                 Company will, prior to the Distribution, enter
                                 into certain agreements, including (i) the
                                 Distribution Agreement providing for, among
                                 other things, the principal corporate
                                 transactions required to effect the separation
                                 of Semiconductor Systems from the Automation
                                 Business and the Avionics & Communications
                                 Business (each as defined below) and the
                                 Distribution, and certain other agreements
                                 governing the relationship between Rockwell and
                                 the Company with respect to or in consequence
                                 of the Distribution; (ii) the Employee Matters
                                 Agreement (as defined below) providing for,
                                 among other things, certain matters relating to
                                 employees, employee benefit plans and certain
                                 compensation arrangements for current and
                                 former employees of Semiconductor Systems and
                                 their beneficiaries; (iii) the Tax Allocation
                                 Agreement (as defined below) providing for,
                                 among other things, the allocation between
                                 Rockwell and the Company of federal, state,
                                 local and foreign tax liabilities relating to
                                 Semiconductor Systems; and (iv) the Transition
                                 Agreement (as defined below) providing for,
                                 among other things, the provision by Rockwell
                                 to the Company, for specified periods after the
                                 Distribution Date and on mutually agreed terms,
                                 of certain services which prior to the
                                 Distribution Date have been provided to the
                                 Company by Rockwell. See "Arrangements Between
                                 Rockwell and the Company".
 
   
Trading in Rockwell Common
Stock Prior to the
Distribution..................   It is expected that the New York Stock Exchange
                                 (the "NYSE") will determine that Rockwell
                                 Common Stock traded on or after December 9,
                                 1998, the second trading day prior to the
                                 Record Date, may be traded either
                                 "ex-distribution -- when issued" or "regular
                                 way"(with due bills attached). Rockwell Common
                                 Stock traded "ex-distribution -- when issued"
                                 will entitle the buyer to receive only the
                                 underlying shares of Rockwell Common Stock and
                                 will entitle a seller who was the holder of
                                 record of those shares on the Record Date to
                                 receive shares of Company Common Stock in the
                                 Distribution. Rockwell Common Stock traded
                                 "regular way" (with due bills attached) will
                                 have due bills attached entitling the buyer to
                                 receive and requiring the seller to deliver the
                                 shares of Company Common Stock to be issued in
                                 the Distribution as well as the underlying
                                 shares of Rockwell Common Stock. Beginning on
                                 the first NYSE trading day after the
                                 Distribution Date, it is expected that trading
                                 of Rockwell Common Stock "ex-distribution -- 
                                 when issued" or "regular way" (with due bills 
                                 attached) will no longer be permitted and 
                                 Rockwell Common Stock will trade "regular way"
                                 only, entitling the buyer to receive only 
                                 Rockwell Common Stock.
    
 
                                        7
<PAGE>   15
 
                                  THE COMPANY
 
The Company...................   The Company, a Delaware corporation formerly
                                 named Rockwell Semiconductor Systems, Inc., is
                                 currently a wholly-owned subsidiary of Rockwell
                                 which, together with certain other subsidiaries
                                 of Rockwell, operates Semiconductor Systems.
                                 Following consummation of the Distribution, the
                                 Company will be a separately-traded public
                                 company owning and operating Semiconductor
                                 Systems. Prior to the Distribution, Rockwell
                                 will transfer to the Company assets and
                                 liabilities of Semiconductor Systems not
                                 already owned by the Company, including the
                                 stock of certain subsidiaries, and the Company
                                 will transfer to Rockwell all assets and
                                 liabilities not constituting part of
                                 Semiconductor Systems, including all assets and
                                 liabilities of Rockwell's electronic commerce
                                 business.
 
The Semiconductor Systems
Business......................   Following the Distribution, Semiconductor
                                 Systems will be the world's largest company
                                 focused exclusively on providing semiconductor
                                 products for communications electronics. With
                                 over 30 years of experience in developing
                                 analog modem technology, Semiconductor Systems
                                 utilizes its expertise in mixed-signal
                                 processing and communications technology to
                                 deliver semiconductor products for a broad
                                 range of communications applications. In
                                 addition to its semiconductor integrated
                                 circuit products, the Company's system-level
                                 solutions integrate signal processing
                                 algorithms, communication protocols and
                                 applications software.
 
                                 Semiconductor Systems' products facilitate
                                 communications worldwide through wireline voice
                                 and data communications networks, cordless and
                                 cellular wireless telephony systems and
                                 emerging cable and wireless broadband
                                 communications networks. Semiconductor Systems
                                 focuses its business in five key product
                                 platforms: Personal Computing, Personal
                                 Imaging, Wireless Communications, Digital
                                 Infotainment and Network Access. Through these
                                 strategic product platforms, Semiconductor
                                 Systems believes it is well positioned to
                                 supply semiconductor products for a broad range
                                 of closely interrelated and converging markets.
                                 See "The Semiconductor Systems Business" and
                                 "Semiconductor Systems Combined Financial
                                 Statements and Schedule".
 
Management....................   Most of the initial executive officers of the
                                 Company are expected to be persons who
                                 currently serve as officers or other employees
                                 of Semiconductor Systems or Rockwell. All such
                                 persons who are employees of Rockwell will
                                 resign from their positions with Rockwell prior
                                 to the Distribution, so that the Company and
                                 Rockwell will have no executive officers in
                                 common and none of the executive officers of
                                 the Company will be employees of Rockwell. It
                                 is expected that Donald R. Beall, former
                                 Chairman and Chief Executive Officer of
                                 Rockwell and currently Chairman of the
                                 Executive Committee of the Board of Directors
                                 of Rockwell, will serve as a non-executive
                                 director of the Company. It is also expected
                                 that Richard M. Bressler, who is currently a
                                 director of Rockwell, will serve as a
                                 non-employee director of the Company.
 
                                        8
<PAGE>   16
 
                                 Mr. Bressler will resign as a Rockwell director
                                 at the time of the Distribution. See
                                 "Management of the Company".
 
Credit Facility...............   Prior to the Distribution, the Company expects
                                 to enter into a three-year $350 million secured
                                 revolving credit facility with a group of banks
                                 led by Credit Suisse First Boston (the "Credit
                                 Facility"), which will be used for working
                                 capital and other general corporate purposes of
                                 the Company and its subsidiaries following the
                                 Distribution. See "Credit Facility".
 
Certain Anti-takeover
Effects.......................   Certain provisions of the Company's Restated
                                 Certificate of Incorporation (the "Company
                                 Certificate") and the Company's Amended By-Laws
                                 (the "Company By-Laws"), as each will be in
                                 effect as of the Distribution Date, would have
                                 the effect of making more difficult an
                                 acquisition of control of the Company in a
                                 transaction not approved by the Company's Board
                                 of Directors. See "Description of Company
                                 Capital Stock -- Certain Provisions in the
                                 Company Certificate and Company By-Laws". The
                                 Rights Agreement to be entered into between the
                                 Company and ChaseMellon, as rights agent, also
                                 would make more difficult an acquisition of
                                 control of the Company in a transaction not
                                 approved by the Board of Directors of the
                                 Company. See "Description of Company Capital
                                 Stock -- Company Rights Plan". Certain tax
                                 consequences may also discourage an acquisition
                                 of control of the Company for some period of
                                 time. See "Risk Factors -- Certain Federal
                                 Income Tax Considerations".
 
Post-Distribution Dividend
Policy........................   It is anticipated that following the
                                 Distribution, the Company initially will not
                                 pay dividends and Rockwell initially will
                                 continue to pay quarterly cash dividends at the
                                 same annual rate of $1.02 per share as
                                 currently paid on Rockwell Common Stock.
                                 However, the declaration and payment of
                                 dividends by the Company and Rockwell will be
                                 at the sole discretion of their respective
                                 Boards of Directors. See "The
                                 Distribution -- Dividend Policy".
 
Risk Factors..................   Shareowners should carefully consider the
                                 matters discussed under the section entitled
                                 "Risk Factors" in this Information Statement.
 
                          RECENT SEPARATION DECISIONS
 
     In connection with the separation of Semiconductor Systems from Rockwell,
Rockwell and the Company decided in November 1998 that prior to the
Distribution, the Company will distribute its wafer fabrication facilities in
Colorado Springs, Colorado (and the related tax benefit) to Rockwell. See
"Arrangements Between Rockwell and the Company -- Distribution Agreement". The
Company had previously announced in September 1998 that it would close and
dispose of these facilities. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Overview". Also in November
1998, Rockwell and the Company decided that prior to the Distribution, Rockwell
will contribute $65 million in cash to the Company, which will be placed in an
escrow account to be used to satisfy Semiconductor Systems' obligation with
respect to the judgment rendered against Semiconductor Systems in the
intellectual property litigation brought by Celeritas Technologies, Ltd. See
"The Semiconductor Systems Business -- Legal Proceedings" and "Arrangements
Between Rockwell and the Company -- Distribution Agreement". These transactions
are not reflected in the historical combined financial statements of the Company
but are set forth as adjustments in the pro forma condensed financial statements
of the Company included herein. See "Unaudited Pro Forma Condensed Financial
Statements of the Company".
 
                                        9
<PAGE>   17
 
                             SUMMARY FINANCIAL DATA
 
     The following summary financial data have been derived from the financial
statements of Semiconductor Systems. The data should be read in conjunction with
the financial statements of Semiconductor Systems and notes thereto included
elsewhere in this Information Statement. The statement of operations data for
the years ended September 30, 1998, 1997, 1996 and 1995 and the balance sheet
data as of September 30, 1998, 1997 and 1996 have been derived from the audited
financial statements of Semiconductor Systems. The statement of operations data
for the year ended September 30, 1994 and the balance sheet data as of September
30, 1995 and 1994 have been derived from unaudited financial information of
Semiconductor Systems.
 
<TABLE>
<CAPTION>
                                                                   FISCAL YEAR ENDED SEPTEMBER 30,
                                                            ---------------------------------------------
                                                             1998     1997     1996      1995      1994
                                                            ------   ------   -------   -------   -------
                                                                            (IN MILLIONS)
<S>                                                         <C>      <C>      <C>       <C>       <C>
COMBINED STATEMENT OF OPERATIONS DATA:
Net sales................................................   $1,200   $1,412   $1,470    $  784    $  599
Cost of sales............................................      909      744      849       483       347
                                                            ------   ------   ------    ------    ------
Gross margin.............................................      291      668      621       301       252
Research and development.................................      337      280      155        91        74
Selling, general and administrative......................      251      191      150       103        79
Purchased research and development(1)....................       --       30      121        --        --
Special charges(2).......................................      147       --       --        --        --
                                                            ------   ------   ------    ------    ------
Operating (loss) earnings................................     (444)     167      195       107        99
Other income, net........................................       14       13        3         4         1
                                                            ------   ------   ------    ------    ------
(Loss) income before income taxes........................     (430)     180      198       111       100
(Benefit) provision for income taxes.....................     (168)      54      114        35        33
                                                            ------   ------   ------    ------    ------
Net (loss) income........................................   $ (262)  $  126   $   84    $   76    $   67
                                                            ======   ======   ======    ======    ======
COMBINED BALANCE SHEET DATA:
  (at end of period)
Working capital..........................................   $  256   $  222   $  229    $  130    $   95
Property, net............................................      713      802      656       351       215
Total assets.............................................    1,418    1,486    1,383       671       448
Rockwell's net investment................................    1,009    1,107      899       478       301
OTHER DATA:
Capital expenditures.....................................   $  270   $  317   $  380    $  166    $  148
Depreciation and amortization............................      220      181      132        61        44
Cash provided by operating activities....................       98      296      315       106        49
Cash used for investing activities.......................     (270)    (382)    (634)     (202)     (147)
Cash provided by financing activities....................      172       86      319        96        98
</TABLE>
 
- ---------------
(1) Purchased research and development relates to the acquisitions of the
    Hi-Media broadband communication chipset business of ComStream Corporation
    in May 1997 and Brooktree Corporation in September 1996.
 
(2) In September 1998, Semiconductor Systems recorded special charges of
    approximately $147 million ($90 million after tax) related to its decision
    to close and dispose of its wafer fabrication facilities in Colorado
    Springs, Colorado, a worldwide workforce reduction and certain other
    actions.
 
                                       10
<PAGE>   18
 
                            PRO FORMA CAPITALIZATION
 
     The following table sets forth the unaudited pro forma cash, short-term
debt and capitalization of the Company as of September 30, 1998. This
information should be read in conjunction with the pro forma financial
information and the financial statements of Semiconductor Systems and notes
thereto appearing elsewhere herein. The pro forma information may not reflect
the cash, short-term debt and capitalization of the Company in the future or as
it would have been had the Company been a stand-alone company on September 30,
1998. Assumptions regarding the number of shares of Company Common Stock may not
reflect the actual number outstanding on the Distribution Date.
 
                         PRO FORMA CAPITALIZATION TABLE
                            AS OF SEPTEMBER 30, 1998
 
   
<TABLE>
<CAPTION>
                                                       SEMICONDUCTOR
                                                          SYSTEMS         PRO FORMA        COMPANY
                                                        HISTORICAL      ADJUSTMENTS(1)    PRO FORMA
                                                       -------------    --------------    ---------
                                                                        (IN MILLIONS)
<S>                                                    <C>              <C>               <C>
Cash.................................................     $   14           $    --         $   14
                                                          ======           =======         ======
 
Short-term debt(3)...................................     $   14           $    --         $   14
                                                          ======           =======         ======
Shareowners' equity:
  Rockwell's net investment..........................     $1,017           $(1,017)(4)     $   --
  Common Stock.......................................         --                95(4)          95
  Additional paid-in capital.........................         --               922(4)         886
                                                                               (78)(5)
                                                                                42(2)
  Retained earnings..................................         --                --             --
  Currency translation...............................         (8)               --             (8)
                                                          ------           -------         ------
          Total shareowners' equity and
            capitalization...........................     $1,009           $   (36)        $  973
                                                          ======           =======         ======
</TABLE>
    
 
- ---------------
(1) Rockwell will pay the costs related to the Distribution which are estimated
    at $18 million and, accordingly, such costs are not reflected in the
    historical financial statements or as a pro forma adjustment.
 
   
(2) Prior to the Distribution, Rockwell will contribute $65 million in cash to
    the Company, which will be placed in an escrow account to be used to satisfy
    Semiconductor Systems' obligation with respect to the Celeritas litigation.
    The adjustment reflects the escrow deposit (which will be set forth as
    restricted cash on the Company's balance sheet) and the realization by
    Rockwell of the related tax benefit.
    
 
(3) The Company is in the process of arranging a three-year $350 million secured
    revolving credit facility with a group of banks. The credit facility will be
    used to support working capital requirements and for other general corporate
    purposes when the Company becomes an independent company.
 
(4) To reflect the Distribution as the elimination of Rockwell's net investment
    and the issuance of an estimated 95 million shares of Company Common Stock,
    par value $1 per share. This is based on the number of shares of Rockwell
    Common Stock outstanding on September 30, 1998 of approximately 190 million
    shares and the distribution ratio of one share of Company Common Stock for
    every two shares of Rockwell Common Stock outstanding.
 
(5) Prior to the Distribution, the Company will distribute its wafer fabrication
    facilities in Colorado Springs, Colorado (and the related tax benefit) to
    Rockwell. The adjustment reflects the elimination of the assets held for
    disposal and the related tax benefit.
 
                                       11
<PAGE>   19
 
                                  RISK FACTORS
 
     Shareowners should carefully consider and evaluate all of the information
set forth in this Information Statement, including the risk factors listed
below. Any one or more of such risk factors could materially and adversely
affect the Company's business, financial condition and results of operations,
which in turn could materially and adversely affect the price of the Company
Common Stock. In addition to the historical information included herein, this
Information Statement contains statements relating to future results of the
Company (including certain projections and business trends) that are
"forward-looking statements". Actual results may differ materially from those
projected as a result of certain risks and uncertainties, including but not
limited to the factors listed below and those detailed from time to time in the
filings of the Company with the Commission. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Cautionary
Statement".
 
RECENT AND ANTICIPATED FUTURE LOSSES
 
     Although Semiconductor Systems experienced rapid growth in sales and
operating earnings during the five fiscal years ended September 30, 1996, in
fiscal 1997 sales declined $58 million, or four percent, to $1,412 million and
operating earnings declined $119 million, or 38 percent, to $197 million, before
acquisition related charges in both years. Moreover, for the fiscal year ended
September 30, 1998 Semiconductor Systems had sales of $1,200 million and
incurred an operating loss of $444 million. In September 1998, the Company
announced a comprehensive plan to restructure its business to position the
Company for future profitability. This plan resulted in fourth quarter fiscal
1998 special charges of approximately $90 million after tax and includes
workforce reductions, facility closures and other actions. Semiconductor
Systems' fiscal 1998 full-year net loss after tax was $262 million, including
inventory write-offs of $66 million, a charge for intellectual property matters
of $43 million and the fourth quarter special charges. The Company anticipates a
pre-tax loss of approximately $80 million in the first quarter of fiscal 1999.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations". There can be no assurance as to whether or when the Company will
return to profitability or whether it will be able to sustain such
profitability, if achieved.
 
DECLINING CONTRIBUTION OF ANALOG PC MODEM BUSINESS
 
     The Company is the world's leading supplier of analog PC modem chipsets for
personal computing applications. However, revenues and gross margin from sales
of these products, which make up most of the Company's Personal Computing
platform, have recently declined, most particularly in fiscal 1998, due to,
among other factors, intense competitive price pressures as modem chipset
suppliers aggressively compete for market share. Other material factors
contributing to the decline in gross margin from sales of analog PC modem
products include slower than planned implementation of cost reduction programs,
including the transition from .35 micron to .25 micron process technologies
(which would enable the Company to produce lower-cost products), and excess
capacity in the Company's wafer fabrication facilities. Revenues of the
Company's Personal Computing platform declined from $1,173 million
(approximately 80 percent of sales) in fiscal 1996 to $640 million
(approximately 53 percent of sales) in fiscal 1998. Revenues and margins from
sales of analog PC modem products are expected to decline even further as unit
growth in the markets for these products is not anticipated to offset continued
price erosion. In the past year, as a result of the significant price erosion
for PCs, driven to a significant extent by the market demand for sub-$1,000 PCs,
PC original equipment manufacturers ("OEMs") are demanding less expensive modem
devices, which has placed significant pricing pressure on the Company's
traditional hardware-based modem chipset products. The Company's inability to
offset further declines in the analog PC modem business with revenues and gross
margin from sales of other products would have a material adverse effect on the
Company's business, financial condition and results of operations.
 
                                       12
<PAGE>   20
 
DEPENDENCE ON TIMELY SUCCESS OF EXPANSION PLATFORMS
 
     In 1995, Semiconductor Systems began to diversify its business and expand
in selected related product platforms -- Personal Imaging, Wireless
Communications, Digital Infotainment and Network Access -- with higher growth
prospects than its analog PC modem business. The Company's future financial
performance and overall success, particularly in the long term, will depend in
large measure on the rate of sales growth and margin contribution of the
Company's expansion platforms and whether these platforms will increase their
contribution to the Company's financial performance sufficiently and soon enough
to offset the anticipated continued declining financial contribution of the
Company's analog PC modem chipset products.
 
     There are numerous risks inherent in the Company's diversification and
expansion strategy, many of which are beyond the Company's control. In certain
of its expansion platforms, the Company currently has minimal market presence
relative to other more established competitors. Moreover, the Company's success
with its expansion platforms will depend, in part, on the ability of the
Company's customers to develop new and enhanced products and successfully
introduce and market such products to end users. There can be no assurance that
the Company will be successful in its diversification and expansion program, and
its failure to do so would have a material adverse effect on the Company's
business, financial condition and results of operations.
 
RAPID TECHNOLOGICAL CHANGE
 
     The markets for the Company's products are generally characterized by rapid
technological developments, evolving industry standards, changes in customer
requirements, frequent new product introductions and enhancements and short
product life cycles with declining prices over the life cycle of the product. A
faster than anticipated change in one or more of the technologies related to its
products or in market demand for products based on a particular technology, in
particular due to the introduction of new technology which represents a
substantial advance over current technology, could result in faster than
anticipated obsolescence of the Company's products and could have a material
adverse effect on the Company's business, financial condition and results of
operations. For example, increased market demand for sub-$1,000 PCs is causing
PC OEMs to require less expensive modem devices, such as software modems, which
require fewer semiconductor components than the Company's traditional modem
chipsets and may render obsolete the traditional hardware upgrade path for the
Company's modem products. Currently accepted industry standards are also subject
to change, which may contribute to the obsolescence of the Company's products.
 
DEPENDENCE ON NEW PRODUCT DEVELOPMENT AND PRODUCT COST REDUCTIONS
 
     The Company's operating results will depend to a significant extent on its
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, the Company's ability to anticipate
customer and market requirements and changes in technology and industry
standards, accurate new product definition, timely completion and introduction,
differentiation from offerings of the Company's competitors and market
acceptance. Furthermore, the Company is required to continually evaluate planned
product development expenditures and choose among alternative technologies based
upon its expectations of future market growth. There can be no assurance that
the Company will be able to develop and introduce new or enhanced products in a
timely and cost-effective manner or that such products will satisfy customer
requirements, achieve market acceptance or anticipate new industry standards and
technological changes or that the Company will be able to respond to new product
announcements and introductions by competitors.
 
     In addition, as prices of established products decline, sometimes
significantly, over time, the Company believes that in order to remain
competitive it must continue to reduce the cost of producing and delivering
existing products at the same time as it is developing and introducing new or
enhanced products. There can be no assurance that the Company will be able to
continue to reduce the cost of its products to remain competitive.
 
                                       13
<PAGE>   21
 
FUTURE CAPITAL SOURCES
 
     Over the past several years, Semiconductor Systems has obtained significant
investments from Rockwell to help satisfy its capital needs. Following the
Distribution, the Company will no longer be able to rely on investments from
Rockwell. Prior to the Distribution, the Company expects to enter into the
Credit Facility, which will be used for working capital and other general
corporate purposes of the Company and its subsidiaries following the
Distribution. Although the Company believes that anticipated improved cash flows
from operations resulting in part from the restructuring actions announced in
September 1998 (see "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Overview") and available borrowings under the
Credit Facility will be sufficient to satisfy its future research and
development, capital expenditure, working capital and other financing
requirements, there can be no assurance that this will be the case or that
alternative sources of liquidity will be available to the Company.
 
RESEARCH AND DEVELOPMENT EXPENSES
 
     The semiconductor industry requires substantial investment in research and
development. In order to remain competitive, the Company must continue to make
substantial investments in research and development to develop new and enhanced
products. There can be no assurance that the Company will have sufficient
resources to develop new and enhanced technologies and competitive products. As
part of its plan to resize its business announced in September 1998, the Company
intends to reduce research and development expenditures in fiscal 1999 by
approximately 25 percent from fiscal 1998 levels. The Company's failure to make
sufficient investments in research and development programs could have a
material adverse effect on the Company's business, financial condition and
results of operations.
 
CAPITAL EXPENDITURES
 
     The semiconductor industry is capital intensive. Semiconductor
manufacturing requires a constant upgrading of process technology to remain
competitive, as new and enhanced semiconductor processes are developed which
permit smaller, more efficient and more powerful semiconductor devices. The
Company maintains its own manufacturing, assembly and test facilities which have
required and will continue to require significant investments in manufacturing
technology and equipment. After several years of significant capital investments
to improve manufacturing capabilities, the Company expects fiscal 1999 capital
expenditures to be approximately $110 million less than in fiscal 1998. There
can be no assurance that the Company will have sufficient capital resources to
make necessary investments in manufacturing technology and equipment.
 
FLUCTUATIONS IN OPERATING RESULTS
 
     The Company's operating results are subject to substantial quarterly and
annual fluctuations due to a number of factors, many of which are beyond the
Company's control. Such factors may include, among others, the effects of
competitive pricing pressures, decreases in average selling prices of the
Company's products, production capacity levels and fluctuations in manufacturing
yields, availability and cost of products from the Company's suppliers, the gain
or loss of significant customers, the Company's ability to develop, introduce
and market new products and technologies on a timely basis, new product and
technology introductions by the Company's competitors, changes in the mix of
products produced and sold, market acceptance of the Company's and its
customers' products, intellectual property disputes, seasonal customer demand,
the timing of significant orders and the timing and extent of product
development costs. Operating results also could be adversely affected by general
economic and other conditions causing a downturn in the market for semiconductor
products, or otherwise affecting the timing of customer orders or causing order
cancellations or rescheduling. The Company's customers may change delivery
schedules or cancel or reduce orders without significant penalty and generally
are not subject to minimum purchase requirements. The foregoing factors are
difficult to forecast, and these or other factors could materially adversely
affect the Company's quarterly or annual operating results. If the Company's
operating results fail to meet the expectations of analysts or investors, the
price of the Company Common Stock could be materially and adversely affected.
 
                                       14
<PAGE>   22
 
CREDIT FACILITY AND RESTRICTIVE COVENANTS
 
     The Company anticipates that it will enter into a three-year $350 million
secured revolving credit facility prior to the Distribution (see "Credit
Facility"). The Credit Facility is expected to include, among other things,
restrictions on capital expenditures, indebtedness, acquisitions, mergers, asset
sales and liens on assets and requirements that the Company meet certain
financial tests and maintain certain financial ratios. Although the Company
believes that it will be able to comply with these requirements, such compliance
may restrict the Company's operating and financial flexibility, and there can be
no assurance that the Company will in fact be able to satisfy all of the
requirements in the Credit Facility. The fact that substantially all of the
Company's and its subsidiaries' assets will be pledged as collateral under the
Credit Facility could also significantly limit the operating and financial
flexibility of the Company. The failure to maintain the financial ratios or
comply with the other covenants to be included in the Credit Facility could
result in a default that would entitle the lenders thereunder to declare all
amounts owed to them due and payable and to proceed against their collateral,
which would have a material adverse effect on the Company's business, financial
condition and results of operations.
 
INTELLECTUAL PROPERTY MATTERS
 
     The semiconductor industry is characterized by vigorous protection and
pursuit of intellectual property rights. Litigation has been necessary in the
past and is expected to be necessary in the future to enforce the Company's
intellectual property rights, to protect the Company's trade secrets or to
determine the validity and scope of proprietary rights of others, including the
Company's customers. The Company has received, and may continue to receive in
the future, claims of infringement of intellectual property rights of others.
The Company is a party to certain pending proceedings involving such claims.
There can be no assurance that the Company will prevail in pending actions, or
that other actions alleging infringement by the Company of third-party patents
or invalidity of the patents held by the Company will not be asserted or
prosecuted against the Company, or that any assertions of infringement or
prosecutions seeking to establish the invalidity of Company-held patents will
not materially and adversely affect the Company's business, financial condition
and results of operations. Even if the Company is successful in such matters,
the attempted enforcement of intellectual property rights by or against the
Company could result in significant costs and diversion of the Company's
resources and could have a material adverse effect on the Company's business,
financial condition and results of operations. If claims or actions are asserted
or commenced against the Company, the Company in certain situations may seek to
obtain licenses under a third party's intellectual property rights to avert or
resolve a controversy. There can be no assurance that under such circumstances a
license would be available on commercially reasonable terms, if at all. See "The
Semiconductor Systems Business -- Intellectual Property" and "-- Legal
Proceedings".
 
     The Company relies primarily on patent, copyright, trademark and trade
secret laws, as well as nondisclosure and confidentiality agreements and other
methods to protect its proprietary technologies and processes. In addition, the
Company often incorporates the intellectual property of its customers into its
designs, and the Company has certain obligations with respect to the non-use and
non-disclosure of such intellectual property. There can be no assurance that the
steps taken by the Company to prevent misappropriation or infringement of the
intellectual property of the Company or its customers will be successful; that
any existing or future patents will not be challenged, invalidated or
circumvented; or that any of the protective measures described above would
provide meaningful protection to the Company. The failure of any patents to
provide protection to the Company's technology would make it easier for the
Company's competitors to offer similar products. Moreover, despite these
precautions, it may be possible for a third party to copy or otherwise obtain
and use the Company's technology without authorization, develop similar
technology independently or design around the Company's patents. In addition,
effective copyright, trademark and trade secret protection may be unavailable or
limited in certain countries.
 
     The Company has historically indemnified its customers for certain of the
costs and damages of patent infringement in circumstances where the Company's
product is the factor creating the customer's infringement exposure (generally
excluding coverage where infringement arises out of the combination of the
 
                                       15
<PAGE>   23
 
Company's products with products of others). This policy could have a material
adverse effect on the business, financial condition and results of operations of
the Company, particularly with respect to the Company's products designed for
use in devices manufactured by its customers that comply with international
standards. Such international standards are often covered by patent rights held
by competitors of the Company or its customers and the combined costs of
obtaining licenses from all holders of patent rights essential to such standards
could be high and could have a material adverse effect on the Company's
business, financial condition and results of operations.
 
COMPETITION
 
     The semiconductor industry in general and the markets in which the Company
competes in particular are intensely competitive. The Company currently faces
significant competition in its markets and expects that intense price and
product competition will continue. Such competition has resulted and is expected
to continue to result in declining average selling prices for the Company's
products. As a result of the trend toward global expansion by foreign and
domestic competitors, technological and public policy changes and relatively low
barriers to entry in certain segments of the industry, the Company anticipates
that additional competitors will enter its markets. Although the Company enjoys
substantial market shares in its analog data and facsimile ("fax") modem chipset
product lines, as the Company pursues its diversification strategy and develops
its expansion platforms it is and will be competing in certain new markets in
which it has little or no market share and where existing competitors have
dominant market positions. Moreover, certain of the Company's customers offer
products that compete with similar products offered by the Company.
 
     Many of the Company's current and potential competitors have longer
operating histories and presence in key markets, greater name recognition,
access to larger customer bases and significantly greater financial, sales and
marketing, manufacturing, distribution, technical and other resources than the
Company. As a result, such competitors may be able to adapt more quickly to new
or emerging technologies and changes in customer requirements or devote greater
resources to the development, promotion and sale of their products than the
Company. Current and potential competitors also have established or may
establish financial or strategic relationships among themselves or with existing
or potential customers, resellers or other third parties, which may affect
customers' purchasing decisions. Accordingly, it is possible that new
competitors or alliances among competitors could emerge and rapidly acquire
significant market share. There can be no assurance that the Company will be
able to compete successfully against current or potential competitors, or that
competition will not have a material adverse effect on the Company's business,
financial condition and results of operations. See "The Semiconductor Systems
Business -- Competition".
 
     The high-growth nature of the communications electronics industry, coupled
with the "time-to-market" pressures on suppliers to decrease the time required
for product conception, research and development, sampling and production launch
before product reaches the market, has led to consolidation among participants
in the markets that the Company serves, including both competitors and customers
of the Company, and this trend is expected to continue. Investments, alliances
and acquisitions may enable semiconductor suppliers, including the Company and
its competitors, to augment technical capabilities or achieve faster
time-to-market for their products than internal development. Certain
participants in the markets served by the Company have been actively engaged in
merger and acquisition transactions. Consolidations by industry participants,
including, in some cases, acquisition of certain of the Company's customers by
competitors of the Company, are creating entities with increased market share,
customer base, technology and marketing expertise in markets in which the
Company competes. These developments may significantly and adversely affect the
Company's current markets, the markets the Company is seeking to serve and the
Company's ability to compete successfully in such markets.
 
MANUFACTURING RISKS
 
     The fabrication of integrated circuits is an extremely complex and precise
process consisting of hundreds of separate steps and requiring production in a
highly controlled, clean environment. Minute impurities, errors
 
                                       16
<PAGE>   24
 
in any step of the fabrication process, defects in the masks used to print
circuits on a wafer or a number of other factors can cause a substantial
percentage of wafers to be rejected or numerous die on each wafer to be
non-functional.
 
     The Company maintains its own manufacturing, assembly and test facilities,
including three operating wafer fabrication facilities, a test and assembly
facility and a module assembly facility. The Company also has arrangements with
third parties, including entities outside the United States, for the production,
assembly and testing of certain of its semiconductor products. The Company's
assembly and test facility in Mexicali, Mexico and its international subcontract
manufacturing arrangements are subject to a number of risks of operating abroad.
The semiconductor industry is currently experiencing an excess of wafer
fabrication capacity. In this environment, the Company is at a relative
disadvantage when compared to some of its competitors who rely primarily on
outside foundries because the Company's wafer fabrication facilities require
substantial fixed costs and investment. In September 1998, the Company announced
that it would close and dispose of its Colorado Springs, Colorado wafer
fabrication facilities, which will be distributed to Rockwell prior to the
Distribution. See "Arrangements Between Rockwell and the Company -- Distribution
Agreement". The Company is also exploring wafer manufacturing alternatives,
including increased use of outside foundries, entering into joint ventures with
respect to wafer manufacturing or other actions in respect of its wafer
manufacturing facilities. There can be no assurance that the Company will
succeed in implementing any such alternatives.
 
     Lengthy or recurring disruptions of operations at any of the Company's
production facilities or those of its subcontractors for any reason, including
labor strikes, work stoppages, fire, earthquake, flooding or other natural
disasters, could cause significant delays in shipments until the Company could
shift the products from an affected facility or subcontractor to another
facility or subcontractor. In such event, there can be no assurance that
required alternate capacity, particularly wafer production capacity, would be
available on a timely basis or at all, or that if available, it could be
obtained on favorable terms, thereby potentially resulting in a loss of
customers. Any inability of the Company to generate sufficient manufacturing
capacities to meet demand, either at its own facilities or through foundry or
similar arrangements with others, could have a material adverse effect on the
Company's business, financial condition and results of operations. Certain of
the Company's manufacturing facilities are located near major earthquake fault
lines, including the Company's Newport Beach, California and Mexicali, Mexico
facilities. The Company maintains only minimal earthquake insurance coverage
with respect to these facilities. See "The Semiconductor Systems
Business -- Properties".
 
     Due to the highly specialized nature of the Gallium Arsenide ("GaAs")
semiconductor manufacturing process, in the event of a disruption at the
Company's Newbury Park, California wafer fabrication facility, alternate GaAs
production capacity would not be readily available from third party sources. In
addition, the Company is dependent on a single source supplier for epitaxial
wafers used in its GaAs manufacturing processes. The number of qualified
alternative suppliers for such wafers is limited and the process of qualifying a
new epitaxial wafer supplier could require a substantial leadtime. See "The
Semiconductor Systems Business -- Raw Materials and Supplies". Any disruption of
operations at the Company's Newbury Park, California wafer fabrication facility
or the interruption in the supply of epitaxial wafers used in its GaAs process
could have a material adverse effect on the Company's business, financial
condition and results of operations, particularly with respect to the Company's
Wireless Communications products.
 
ORDER AND SHIPMENT UNCERTAINTIES
 
     The Company's sales are typically made pursuant to individual purchase
orders and the Company generally does not have long-term supply arrangements
with its customers. The Company's customers may cancel orders until 30 days
prior to the shipping date. In addition, the Company sells a portion of its
products through distributors who have certain rights to return unsold products
to the Company. Moreover, semiconductor companies, including the Company,
routinely manufacture or purchase inventory based on estimates of customer
demand for their products, which is difficult to predict. 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 the Company holding excess or obsolete inventory which could have a
material
 
                                       17
<PAGE>   25
 
adverse effect on the Company's business, financial condition and results of
operations. For example, in the fourth quarter of fiscal 1998, the Company made
a provision for excess and obsolete inventories of $66 million due to lower
anticipated demand, price declines and the obsolescence of certain products.
 
CYCLICAL NATURE OF THE SEMICONDUCTOR INDUSTRY
 
     The semiconductor industry is highly cyclical and is characterized by
constant and rapid technological change, rapid product obsolescence and price
erosion, evolving standards, short product life cycles and wide fluctuations in
product supply and demand. The industry has experienced significant downturns,
often in connection with, or in anticipation of, maturing product cycles (of
both semiconductor companies' and their customers' products) and declines in
general economic conditions. These downturns have been characterized by
diminished product demand, production overcapacity, high inventory levels and
accelerated erosion of average selling prices. The Company is currently
experiencing these conditions in its analog PC modem chipset business and may
experience such downturns in the future. In fiscal 1998, average selling prices
for the Company's Personal Computing products fell by approximately 50 percent,
the annual growth rate for such products fell to approximately 20 percent and in
the fourth quarter, the Company made a provision for excess and obsolete
inventories of $66 million due to lower anticipated demand, price declines and
the obsolescence of certain products. The current downturn in the Company's
analog modem chipset business, which has been exacerbated by the Asia-Pacific
region's current economic situation, has had, and any future downturns may have,
a material adverse effect on the Company's business, financial condition and
results of operations. The semiconductor industry also from time to time has
experienced periods of increased demand and production capacity constraints. The
Company thus may experience substantial changes in future operating results due
to general semiconductor industry conditions, general economic conditions and
other factors.
 
DEPENDENCE ON KEY PERSONNEL
 
     The Company's future success depends to a significant extent upon the
continued service of its executive officers and other key management and
technical personnel and on its ability to continue to attract, retain and
motivate qualified personnel. The Company is dependent on key technical
personnel, who represent a significant asset of the Company as the source of its
technological and product innovations. The competition for such personnel is
intense in the semiconductor industry. There can be no assurance that the
Company will be able to continue to attract and retain qualified management and
other personnel necessary for the design, development, manufacture and sale of
its products. The ability of the Company to attract and retain key personnel may
be negatively impacted during periods of poor operating performance by the
Company. The loss of the services of one or more of the Company's key employees
or the Company's failure to attract, retain and motivate qualified personnel
could have a material adverse effect on the Company's business, financial
condition and results of operations. In particular, the loss of the services of
Dwight W. Decker, Chairman and Chief Executive Officer of the Company, or
certain key design and technical personnel could materially and adversely affect
the Company.
 
RISKS OF INTERNATIONAL SALES AND OPERATIONS
 
     For the fiscal year ended September 30, 1998, approximately 59 percent of
total sales of Semiconductor Systems were to customers located outside the
United States, primarily in Japan and other Asian-Pacific countries. In
addition, the Company has facilities and suppliers located outside the United
States, including its assembly and test facility in Mexicali, Mexico and
third-party foundries located in the Asia-Pacific region. The Company's
international sales and operations are subject to a number of risks inherent in
selling and operating abroad, including, but not limited to, risks with respect
to 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, import or export licensing requirements,
limitations on the repatriation of funds, difficulty in obtaining distribution
and support, nationalization, the laws and policies of the United States
affecting trade, foreign investment and loans, and tax laws. Because most of the
Company's international sales, other than sales to Japan (which are denominated
principally in Japanese yen), are currently denominated in U.S. dollars, the
Company's products could become less competitive in international markets if the
value of the U.S. dollar increases relative to
                                       18
<PAGE>   26
 
foreign currencies. Moreover, the Company may be competitively disadvantaged
relative to competitors of the Company located outside the United States who may
benefit from a devaluation of their local currency. There can be no assurance
that the factors described above will not have a material adverse effect on the
Company's ability to increase or maintain its foreign sales or on its business,
financial condition and results of operations.
 
     The decline in the Company's operating performance has been exacerbated by
the current economic situation in the Asia-Pacific region. This economic
situation has increased the uncertainty with respect to the long-term viability
of certain of the Company's customers and suppliers in the region. Sales to
customers in Japan and other countries in the Asia-Pacific region, principally
Taiwan, South Korea and Hong Kong, represented approximately 47 percent of total
Semiconductor Systems sales in fiscal 1998.
 
     The Company enters into foreign currency forward exchange contracts,
principally for the Japanese yen, to minimize risk of loss from currency
exchange rate fluctuations for foreign currency commitments entered into in the
ordinary course of business. The Company has not experienced nor does it
anticipate any material adverse effect on its results of operations or financial
condition related to these foreign currency forward exchange contracts. The
Company has not entered into foreign currency forward exchange contracts for
other purposes and the Company's financial condition and results of operations
could be affected (negatively or positively) by currency fluctuations.
 
INVESTMENTS, ALLIANCES AND ACQUISITIONS
 
     Although the Company invests significant resources in research and
development activities, the complexity and rapidity of technological changes
make it impractical for the Company to pursue development of all technological
solutions on its own. As part of its goal to provide advanced semiconductor
products and systems, the Company expects to review on an ongoing basis
investment, alliance and acquisition prospects that would complement its
existing product offerings, augment its market coverage or enhance its
technological capabilities. However, there can be no assurance that the Company
will be able to identify and consummate suitable investment, alliance or
acquisition transactions in the future. Moreover, should the Company consummate
such transactions, they could result in the diversion of management resources,
as well as dilutive issuances of equity securities, large one-time write-offs,
the incurrence of debt and contingent liabilities, amortization of expenses
related to goodwill and other intangible assets and other acquisition related
costs, any of which could materially adversely affect the Company's business,
financial condition and results of operations and the price of the Company
Common Stock. The ultimate success of any such investments, alliances or
acquisitions in achieving the purposes for which they are undertaken will depend
on the ability of the Company to integrate successfully any acquired business
and to retain key personnel, as well as a variety of other factors.
 
DEMANDS ON MANAGEMENT RESOURCES
 
     A combination of circumstances currently presents the Company's management
with a variety of challenges. In addition to implementing the Company's ongoing
diversification and expansion strategy, the Company will need to dedicate
significant managerial and other resources to implement the restructuring of
Semiconductor Systems announced in September 1998 and to establish the
infrastructure and systems necessary for the Company to operate as an
independent public company. While the Company believes that it has sufficient
management resources to execute each of these initiatives, there can be no
assurance that this will be the case or that the initiatives will be
successfully implemented. Failure to implement these initiatives successfully
could have a material adverse effect on the Company's business, financial
condition and results of operations.
 
ENVIRONMENTAL MATTERS
 
     The Company uses a variety of chemicals in its manufacturing operations and
is subject to a wide range of environmental protection regulations in the United
States and Mexico. While the Company has not experienced any material adverse
effect on its operations as a result of such regulations, there can be no
assurance that current or future regulations would not have a material adverse
effect on the Company's business, financial condition and results of operations.
In the United States, environmental regulations often require parties to fund
remedial action regardless of fault. As a consequence, it is often difficult to
estimate the
 
                                       19
<PAGE>   27
 
future impact of environmental matters, including potential liabilities. There
can be no assurance that the amount of expense and capital expenditures which
might be required to complete remedial actions and to continue to comply with
applicable environmental laws will not have a material adverse effect on the
Company's business, financial condition and results of operations. See "The
Semiconductor Systems Business -- Environmental Matters".
 
   
YEAR 2000 READINESS DISCLOSURE
    
 
   
     The Company is in the process of implementing plans to address issues
related to the impact of the Year 2000 on the Company's products, business
systems, infrastructure, manufacturing systems and suppliers. A five-step
process is applied to each of these areas to inventory all possibly affected
assets, assess non-compliance with Year 2000, formulate a remediation strategy,
upgrade the system and test compliance. The Company continues to evaluate the
estimated costs associated with these efforts based on actual experience. While
the Company believes, based on available information, that it will be able to
manage its total Year 2000 transition without any material adverse effect on its
business, financial condition and results of operations, there can be no
assurance that such will be the case. In addition, the Company and the economy
in general may be adversely affected by the failure of federal, state, local and
international governments to address Year 2000 issues affecting their systems.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Year 2000 Readiness Disclosure".
    
 
ABSENCE OF HISTORY AS AN INDEPENDENT COMPANY
 
     The Company does not have an operating history as an independent company.
Accordingly, the financial information included herein may not necessarily
reflect the results of operations, financial position and cash flows of
Semiconductor Systems had the Company been operated independently during the
periods presented. While Semiconductor Systems had been profitable as part of
Rockwell, Semiconductor Systems has experienced recent operating losses and
anticipates future operating losses at least in the short-term. There can be no
assurance that as a stand-alone company the Company will return to, or maintain
any particular level of, profitability. Semiconductor Systems has historically
relied on Rockwell for cash investments and various financial and administrative
services. After the Distribution, although Rockwell will provide to the Company
certain transitional services which prior to the Distribution have been provided
to Semiconductor Systems by Rockwell, the Company will maintain its own sources
of funding, banking relationships and administrative functions. See "Credit
Facility".
 
NO PRIOR MARKET FOR COMPANY COMMON STOCK; VOLATILITY; POSSIBILITY OF SUBSTANTIAL
SALES OF COMPANY COMMON STOCK
 
   
     There is no current trading market for the Company Common Stock, and while
a "when-issued" trading market is expected to develop prior to the Distribution,
there can be no assurance as to the prices at which trading in the Company
Common Stock will occur after completion of the Distribution. The Company Common
Stock has been approved for listing on Nasdaq under the trading symbol "CNXT".
At least until the Company Common Stock is fully distributed and an orderly
market develops, and even thereafter, the prices at which trading in such stock
occurs may fluctuate significantly. There can be no assurance that an active
trading market in the Company Common Stock will develop or be sustained in the
future. The prices at which shares of Company Common Stock trade will be
determined by the marketplace and may be influenced by many factors, including,
among other things, the Company's performance and prospects, the depth and
liquidity of the market for Company Common Stock, investor perception of the
Company and the industry in which it operates, 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 extreme price and trading volume
volatility, particularly in high technology sectors of the market. This
volatility has significantly affected the market prices of securities of many
technology companies for reasons frequently unrelated to the operating
performance of the specific companies. These broad market fluctuations may
adversely affect the market price of the Company Common Stock. See "The
Distribution -- Trading Market".
    
 
                                       20
<PAGE>   28
 
     Substantially all of the shares of Company Common Stock distributed in the
Distribution will be eligible for immediate resale in the public market. In
spin-off transactions similar to the Distribution, it is not unusual for a
significant redistribution of shares to occur during the first few weeks or even
months following completion of the spin-off. Neither Rockwell nor the Company is
able to predict whether substantial amounts of Company Common Stock will be sold
in the open market following the Distribution or what effect such sales may have
on prices at which shares of Company Common Stock may trade. Any sales of
substantial amounts of Company Common Stock in the public market during this
period, or the perception that any redistribution has not been completed, could
materially adversely affect the market price of Company Common Stock. For a
description of the treatment of shares of Company Common Stock to be held by the
Rockwell International Corporation Savings Plan (the "Rockwell Savings Plan"),
see "Arrangements Between Rockwell and the Company -- Employee Matters
Agreement".
 
CERTAIN ANTI-TAKEOVER EFFECTS
 
     The Company Certificate, the Company By-Laws, the Company Rights Agreement
(as defined below) and the General Corporation Law of the State of Delaware (the
"DGCL") contain several provisions that would make more difficult the
acquisition of control of the Company in a transaction not approved by the
Company's Board of Directors. See "Description of Company Capital
Stock -- Certain Provisions in the Company Certificate and Company By-Laws",
"-- Company Rights Plan" and "-- Anti-takeover Legislation". Certain tax
consequences may also discourage an acquisition of control of the Company for
some period of time. See "-- Certain Federal Income Tax Considerations".
 
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
 
     Rockwell has received the Tax Ruling from the IRS to the effect that the
Distribution will qualify as a tax-free reorganization within the meaning of
Section 368(a)(1)(D) of the Code. See "The Distribution -- Certain Federal
Income Tax Consequences of the Distribution". While the Tax Ruling generally is
binding on the IRS, the continuing validity of the Tax Ruling is subject to
certain factual representations and assumptions. Rockwell and the Company are
not aware of any facts or circumstances that would cause such representations
and assumptions to be untrue. The Tax Allocation Agreement provides that neither
Rockwell nor the Company is to take any action inconsistent with, nor fail to
take any action required by, the request for the Tax Ruling or the Tax Ruling
unless required to do so by law or the other party has given its prior written
consent or, in certain circumstances, a supplemental ruling permitting such
action is obtained. Rockwell and the Company will agree to indemnify each other
with respect to any tax liability resulting from their respective failures to
comply with such provisions. The Tax Allocation Agreement also provides that the
Company will be responsible for any taxes imposed on Rockwell, the Company or
Rockwell shareowners as a result of the failure of the Distribution to qualify
as a tax-free reorganization within the meaning of Section 368(a)(1)(D) of the
Code or the subsequent disqualification of the Distribution as a tax-free
transaction to Rockwell under Section 361(c)(2) of the Code if such failure or
disqualification is attributable to certain post-Distribution actions by or in
respect of the Company (including its subsidiaries) or its shareowners, such as
the acquisition of the Company by a third party at a time and in a manner that
would cause such a failure or disqualification. In addition, in connection with
Rockwell's spin-off of Meritor Automotive, Inc. on September 30, 1997, certain
tax-free intragroup spin-offs were effected by the Company. The Tax Allocation
Agreement provides that the Company will be responsible for any taxes imposed on
Rockwell, the Company or Rockwell shareowners in respect of those intragroup
spin-offs if such taxes are attributable to certain post-Distribution actions by
or in respect of the Company (including its subsidiaries) or its shareowners,
such as the acquisition of the Company by a third party at a time and in a
manner that would cause such taxes to be incurred. In the event that any of the
taxes described above were to become payable by the Company, such payment would
have a material adverse effect on the financial position, results of operations
and cash flow of the Company. See "Arrangements Between Rockwell and the
Company -- Tax Allocation Agreement".
 
                                       21
<PAGE>   29
 
                       THE SEMICONDUCTOR SYSTEMS BUSINESS
 
     Following the Distribution, Semiconductor Systems will be the world's
largest company focused exclusively on providing semiconductor products for
communications electronics. With over 30 years of experience in developing
analog modem technology, Semiconductor Systems utilizes its expertise in mixed-
signal processing and communications technology to deliver semiconductor
products for a broad range of communications applications. In addition to its
semiconductor integrated circuit products, the Company's system-level solutions
integrate signal processing algorithms, communication protocols and applications
software.
 
     The Company's core technological capability in mixed-signal processing
forms the foundation of its analog PC modem business as well as the building
blocks for the Company's expansion platforms, as illustrated below.
 
             [DESCRIPTION OF ILLUSTRATION: MIXED-SIGNAL PROCESSING
              (SIGNAL CONVERSION, SIGNAL PROCESSING ALGORITHMS AND
                     COMMUNICATION PROTOCOLS) BRIDGING THE
                         ANALOG AND DIGITAL WORLDS.]
 
                                       22
<PAGE>   30
 
INDUSTRY BACKGROUND
 
     Initially developed in the 1950s, analog data modems have played a crucial
role in the history of data communications, revolutionizing computing by
allowing users to have distributed and remote-computing communications
capabilities. The word "modem" is a contraction of the device's primary
functions: modulation, where outgoing digital signals are converted into analog
tones that can be communicated over telephone lines, and demodulation, which
performs the reverse function for incoming signals. Early modem systems were
large, self-contained pieces of equipment housed in three- to four-foot tall
cabinets, operating at speeds below 150 bits per second ("bps"). These modems
were primarily used for early computer applications such as airline reservations
and financial services. In the 1980s, the modem industry's growth was driven by
the beginning of the PC revolution, the V.22bis international industry standard
and significant technology advancements in modem semiconductors. Advances in
integrated circuit design techniques and process technologies have enabled
improvements in modem product building blocks, such as digital signal processors
("DSPs"), microcontrollers, signal converters and embedded memory. These
advances have allowed manufacturers to improve performance and offer an
ever-increasing variety of features, while simultaneously reducing the number
and cost of components. While the first widely-available PC modems operated at
speeds of approximately 1200 bps, today's V.90 modems operate at speeds of up to
56 Kbps, representing a doubling of modem performance every two years since the
mid-1980s. In the mid-1990s, modems became the primary interface for the
Internet explosion, propelling the modem from a niche PC peripheral to a key PC
communications feature.
 
     In the early 1980s, fax communications revolutionized business
communications by enabling the electronic transfer of documents in near
real-time. Modem technology also is the basis for communications in fax
equipment, which scans and modulates a digital image locally followed by
demodulation and printing the image remotely. Fax machines designed in the late
1970s were large, cumbersome pieces of equipment approximately the size of
today's commercial copy machine. Since then, streamlining the scanning and
printing mechanics has significantly reduced the size and cost of fax machines.
Since the late 1970s, fax modem electronic content has declined from over 200
components costing approximately $1,000 and covering more than 128 square inches
of circuit board space to one semiconductor package containing two die covering
less than one square inch of circuit board space. Concurrent with this decrease
in size, a decrease in cost to less than $20 per unit and an increase in speeds
to 33.6 Kbps (V.34), fax modem functionality has evolved to include digital
answering machine, speakerphone and caller ID features.
 
     In addition to use in PCs and fax machines, analog modems are increasingly
employed in a wide range of embedded applications. These applications include
credit card verification machines, automated teller machines, game machines and
personal digital assistants.
 
     Today, nearly every form of communication is being revolutionized by the
growing use of digital communications to move all types of data, voice and video
around the world. In addition to data and fax modem functionality, different
technologies, protocols and media have evolved which are uniquely suited to the
particular application required. Each of these technologies requires specific
transport and access hardware devices, including handsets and base stations for
wireless telephony, switches and routers for telecommunications and data
networking, set-top boxes for cable and satellite communications, and digital
cable and digital subscriber line ("xDSL") modems for Internet access.
 
     The advent of the Internet as a communications medium has dramatically
increased business and consumer demand for high-speed access to multimedia and
entertainment content. As businesses and consumers increasingly rely on the
Internet and intranets, networks are under unprecedented stress. A bandwidth
constraint has emerged, particularly at the last mile of network
infrastructures, challenging users and industry participants in a number of
communications segments. In response to growing network demands,
telecommunications, data communications and cable network operators are making
significant investments to alleviate congestion and support emerging high
bandwidth, integrated data, voice and video services. Specific technologies
addressing this bandwidth problem include cable modems and xDSL, including
asymmetric digital subscriber line ("ADSL"), for residential applications, high
speed digital subscriber line ("HDSL") and T1/E1 for high speed network access
in commercial applications, and Asynchronous Transfer Mode
 
                                       23
<PAGE>   31
 
("ATM"), Synchronous Optical Network ("SONET") and Synchronous Digital Hierarchy
("SDH") for network backbone transmission.
 
     For wireless communications, digital wireless services are rapidly
eclipsing analog wireless services for next generation voice and data
applications by providing superior voice quality, improved security, more
efficient use of bandwidth and the ability to provide enhanced features. In
emerging markets, where wireline infrastructure is inadequate or limited,
digital wireless networks are providing a viable and economic alternative that
can be rapidly deployed. Wireless systems also deliver digital entertainment via
direct broadcast satellite ("DBS"), multi-point, multi-channel distribution
system ("MMDS") and local multi-channel distribution system ("LMDS") networks.
 
     The various forms of digital communications will continue to evolve and are
expected to grow. In all forms of digital communications products, the core
competencies required include the mixed-signal processing competencies employed
in traditional data and fax modem products. These signal conversion and
processing functions are best addressed by highly integrated mixed-signal
devices that combine analog and digital functions with high-performance digital
signal processing circuitry using cost-effective semiconductor technologies to
achieve faster, smaller, lower cost and more integrated product offerings.
 
     In order to address the evolving needs of their increasingly diverse
customer base and to provide products for the broad array of communications
protocols and functionalities, providers of communications semiconductor
solutions are being continually challenged to enhance product performance
features. To be successful, they must have access to the core technologies of
communications semiconductors, including signal conversion, signal processing,
radio frequency techniques and applications software. To keep pace with changes
across various communications media, providers must also have access to the
breadth of manufacturing process technologies required to produce new and
innovative solutions.
 
COMPANY APPROACH
 
     The Company is the worldwide leader in supplying analog PC and fax modem
chipsets. In addition, it is at the forefront of advances in digital
communications, providing semiconductor products for a broad range of wireline
and wireless communications applications. The Company's strong business
relationships with leading OEMs have enabled collaboration in successful new
product introductions and definition of product roadmaps. These relationships
also provide a foundation for expansion into new market areas.
 
     Semiconductor Systems has had a continuous presence as a leader of the
modem industry, having led seven generations of modem chipset evolution, from
Semiconductor Systems' early heritage in driving the standard for V.22bis (2400
bps) data modems to its industry-leading position in V.90 (56 Kbps) data modems.
The Company has maintained its leadership position in modem technology by
integrating additional functionality in its data and fax modem portfolio,
including simultaneous voice and data, audio and full-featured telephony (caller
ID, speakerphone and digital answering machine). In building its market
leadership positions in analog modems, the Company has advanced its core
competencies in signal conversion, signal processing, communication algorithms
and protocols and applications software, and has evolved to become one of the
largest application-specific DSP providers in the world.
 
     Semiconductor Systems has successfully leveraged its core technological
competencies to expand into related high growth communications markets,
developing leading positions in digital cellular handset power amplifiers, HDSL
devices, global positioning system ("GPS") components and video decoder/encoder
devices. Additionally, the Company has capitalized on its system-level design
and integration expertise to provide OEMs with higher value semiconductor
systems, such as its industry leading 900 MHz digital spread spectrum ("DSS")
cordless telephone chipsets.
 
                                       24
<PAGE>   32
 
COMPANY STRATEGY
 
     The Company's products facilitate communications worldwide through wireline
voice and data communication networks, cordless and cellular wireless telephony
systems and emerging cable and wireless broadband communications networks, as
illustrated below.
 

          [DESCRIPTION OF ILLUSTRATION: LEVERAGING CORE COMPETENCIES
            IN MIXED-SIGNAL PROCESSING FOR MULTIPLE COMMUNICATIONS
              NETWORKS (PSTN, CABLE, CELLULAR/PCS AND SATELLITE).]

 
     The Company's strategic intent is to drive to world leadership in providing
semiconductor products for communications electronics by leveraging its
competencies in signal conversion, signal processing, communication algorithms
and protocols and applications software. Key elements of the Company's strategy
include the following:
 
          Diversification and Expansion.  In view of the rapid expansion of
     communications electronics markets in areas other than traditional analog
     data and fax modem communication over telephone lines, the Company decided
     to diversify its product offerings into new, higher growth markets. The
     interrelationship and convergence within the Company's product platforms
     offers opportunities for the Company to leverage its strength in
     mixed-signal processing technology and to spread its core technological
     competencies and intellectual property quickly and cost-effectively across
     multiple product initiatives to develop communications products for each of
     its targeted markets. The Company is building on its leadership position in
     the modem chipset marketplace to expand into selected related product areas
     that draw upon the same core competencies established with its modem
     business.
 
          Core Technology Strategy.  The Company believes that executing a core
     technology strategy that deploys technology building blocks, such as DSPs,
     radio frequency integrated circuits ("RFIC"), mixed-signal cores and
     software, across multiple product platforms is integral to its
     diversification and expansion strategy. The Company believes this will
     allow the continued creation of economies of scale in research
                                       25
<PAGE>   33
 
     and development and facilitate reducing the time-to-market for its key
     products. The Company intends to continue to leverage its broad-based
     talent pool of approximately 1,500 engineers to extend its technology
     portfolio and, in parallel, seek to form alliances to gain access to
     critical technology, thereby ensuring agility and flexibility to meet
     rapidly changing market and technology requirements.
 
          Integrated Solutions Focus.  The Company seeks to capitalize on its
     design capabilities and experience by providing suppliers of communications
     electronics products with complete semiconductor system solutions. High
     levels of integration allow the Company to enhance the benefits of its
     products by reducing production costs through fewer external components,
     reduced board space and improved yields, improvement of performance and
     reliability and reduced time-to-market for end products. Through the
     combination of all the necessary communication functions for a complete
     system solution, the Company seeks to increase semiconductor value-added
     content, thereby offering its existing and potential customers more
     compelling and cost-effective products.
 
          Process, Design and Manufacturing Capabilities.  Semiconductor Systems
     intends to maintain access to small geometry, high volume semiconductor
     design and manufacturing resources (CMOS, Bipolar, BiCMOS, RFCMOS, GaAs and
     SiGe) that are the driving force behind today's smaller, more integrated,
     lower power, lower cost devices. These design and manufacturing resources
     are supported by the Company's platform technologies organization, which
     develops semiconductor manufacturing processes, advanced packaging
     techniques and design automation tools/kits for re-use across multiple
     product platforms. The Company will continue to use both internal wafer
     fabrication production and external foundries to optimize capacity
     availability and reduce time-to-market, while seeking to reduce capital and
     operating infrastructure requirements.
 
          Strategic Customer Relationships.  The Company believes that the
     strength of its relationships with leading customers in each of its product
     platforms is a competitive advantage that enables it to target more
     effectively its product development activities. Semiconductor Systems has
     established relationships with leading OEMs in each of its addressed
     markets. The Company will seek to enhance its existing leadership market
     positions and gain market share in new high-growth segments by continuing
     to offer innovative products to existing and new customers.

 
THE FIVE PRODUCT PLATFORMS
 
     The Company focuses its business in five key product platforms:
 
 
          -  Personal Computing            -  Wireless Communications

          -  Digital Infotainment          -  Network Access

                              -  Personal Imaging

 
                                       26
<PAGE>   34
 
Through these strategic product platforms, the Company believes it is well
positioned to supply semiconductor products for a broad range of closely
interrelated and converging markets, as illustrated below.
 
                  [DESCRIPTION OF ILLUSTRATION: TERMINALS AND
                NETWORK INFRASTRUCTURE EQUIPMENT FOR WHICH THE
               COMPANY'S FIVE PRODUCT PLATFORMS SUPPLY PRODUCTS.]
 
     Semiconductor Systems sales by product platform for the three fiscal years
ended September 30, 1998 were as follows (in millions):
 
<TABLE>
<CAPTION>
                                                                 YEAR ENDED SEPTEMBER 30,
                                                                --------------------------
                                                                 1998      1997      1996
                                                                ------    ------    ------
<S>                                                             <C>       <C>       <C>
Personal Computing..........................................    $  640    $  861    $1,173
Personal Imaging............................................       102       131       113
Wireless Communications.....................................       170       115        45
Digital Infotainment........................................       145       112        32
Network Access..............................................       143       193       107
                                                                ------    ------    ------
          Total.............................................    $1,200    $1,412    $1,470
                                                                ======    ======    ======
</TABLE>
 
                                       27
<PAGE>   35
 
  PERSONAL COMPUTING
 
     The Personal Computing product platform provides telephony-based
communications products for personal computing terminals, including desktops,
notebooks and handheld PCs. The Company is the world's leading supplier of
voiceband analog modem chipsets to modem subsystems manufacturers who supply
modems to PC OEMs and retail modem markets. In addition, the Company supplies
audio semiconductor system hardware and software which provide multimedia
functionality for PCs.
 
     The Company offers a wide range of analog PC modem products for
communications over standard telephone wires, including high-speed data/fax
modems incorporating simultaneous voice and data, speakerphone and enhanced
audio capabilities. The Company supports a number of modem standards, including
the V.34 standard for data transmission at speeds of up to 33.6 Kbps and the
K56Flex(TM) and V.90 standards for data transmission at up to 56 Kbps. The
Company has been an active participant in the development of 56 Kbps modem
technology beginning with the introduction of its K56Flex(TM) modem product in
1997, jointly developed and promoted with Lucent Technologies, Inc. ("Lucent").
Following an extended period of intense competition in 1997 between the
Company's K56Flex(TM) modem products and modem products using x2(TM) technology,
an incompatible 56 Kbps solution developed by 3Com/U.S. Robotics Corporation,
the International Telecommunications Union (the "ITU") established the V.90
standard which permits inter-operability among competing 56 Kbps modem products
supplied by the Company and its competitors. In February 1998, the Company began
shipment of V.90 standard 56 Kbps modem chipsets. The V.90 standard was formally
ratified by the ITU in September 1998. Due to line quality and FCC limitations,
actual speeds are less than rated speeds.
 
     The Company's modem products are supplied in multiple and single chip
configurations, and include DSPs, analog-to-digital ("A/D") and
digital-to-analog ("D/A") converters and, in most cases, microcontrollers
together with optimized signal processing algorithms, communication protocols
and applications software. Increasingly, modems are becoming a key
communications feature of PCs. To provide a broader range of modem products to
its customers, particularly to address the low-cost, sub-$1,000 PC segment, the
Company is developing mixed-signal intensive controllerless modem chipsets and
software modem solutions which take advantage of the increasing power of PC
central processors and use software to perform functions traditionally enabled
by semiconductor components.
 
     The Company is also developing system solutions that merge the
communications functionality of modems with audio capabilities to enable PC
audio telephony while eliminating the need for separate dedicated audio and
modem chipsets. The Company's RipTide(TM) audio/communications device includes a
full complement of modem functions, mainstream audio capabilities and advanced
wavetable synthesis for next generation, audio-intensive communications
applications, such as 3-D multiplayer gaming and interactive music.
 
     Capitalizing on its core mixed-signal processing technologies and its xDSL
technology alliances, the Company is developing chipsets that provide xDSL modem
capabilities permitting broadband digital transmission of data, voice and video
over existing standard telephone lines at speeds of up to 8 Mbps. The Company's
xDSL modem architecture is designed to support digital modem products based on
specifications being developed by the ITU and the Universal ADSL Working Group,
a consortium of leading computer and telecommunications suppliers. The Company
is also developing Home Networking communications solutions that are designed to
enable the interconnection of equipment, such as PCs, printers and multifunction
peripherals ("MFPs"), over existing home wiring.
 
     The Company markets and sells PC modem chipsets worldwide to modem
subsystem manufacturers who, in turn, sell complete modem boards to PC OEMs and
to PC system integrators. The Company also markets its Personal Computing
products to leading PC OEMs directly, and indirectly through modem subsystem
manufacturers. The Company markets and sells its Personal Computing products
worldwide to retail modem manufacturers, who sell modems to consumers in the
retail aftermarket.
 
                                       28
<PAGE>   36
 
  PERSONAL IMAGING
 
     The Personal Imaging product platform supplies semiconductor products that
enable image capture, processing and printing. These products are used in a wide
array of office automation products such as fax machines and MFPs, which combine
printer, plain paper fax, copier, scanner and telephone functionality into one
system. The Company is the world's leading supplier of fax modem chipsets to fax
machine OEMs, supplying more than 70 percent of the worldwide market. In
addition, the Company is capitalizing on its leading position in fax machine
chipsets by offering complete system-level chipsets for the growing market for
high-performance MFPs. The Company's fax modem and MFP products incorporate
DSPs, A/D and D/A converters and microcontrollers integrated within a single
package, together with optimized signal processing algorithms, communication
protocols and application software.
 
     The Company offers a wide range of standard fax modem products with speeds
ranging from 9600 bps to 33.6 Kbps (V.34). The Company is now shipping V.34 fax
modems to leading fax machine OEMs with whom Semiconductor Systems collaborated
on the standardization of V.34 protocols and interoperability for fax
applications. The Company's FAXENGINE(TM) family of complete system-level fax
chipsets consists of a fax controller, fax modem and system firmware to provide
all the standard facsimile functions. Optional features include digital
answering machine and full-duplex speakerphone functionality.
 
     The Company is also integrating additional functionality with its core fax
modem to address the high-performance MFP market and offers the MFPEngine(TM)
family of products which combine the functions of traditional stand-alone
business machines, such as fax, copier, printer and scanner machines, into a
two-chip semiconductor chipset. In order to accelerate development time for its
MFP products, the Company has entered into strategic partnerships with market
leaders in key technology areas.
 
  WIRELESS COMMUNICATIONS
 
     The Wireless Communications product platform provides components,
subsystems and system-level semiconductor products for wireless voice and data
communications. The Company supplies silicon and GaAs-based components and
systems for use in digital cordless telephones, digital cellular handsets and
base stations and GPS receivers. Many of these products include DSPs, A/D and
D/A converters, microcontrollers and RFICs, together with optimized signal
processing algorithms, communication protocols and applications software.
 
     The Company is the world leader in supplying complete antenna-to-microphone
system-level semiconductor products for the 900 MHz DSS digital cordless
telephone market. DSS technology offers extended range, improved voice quality
and increased security relative to traditional analog cordless phones and other
digital cordless products.
 
     The Company is the worldwide leader in supplying GaAs power amplifiers for
use in digital cellular handsets. The Company's power amplifier micromodules
provide a smaller package, lower parts count and lower power consumption than
traditional multiple discrete component solutions. The Company supplies digital
cellular handset OEMs with power amplifier components for a wide range of
digital cellular standards, including the GSM (Global System for Mobile
Communications) standard, the CDMA (Code Division Multiple Access) standard and
the TDMA (Time Division Multiple Access) standard. The Company also supplies
GaAs single and dual band receivers for cellular base stations for the GSM and
CDMA digital cellular standards.
 
     The Company is developing RFICs, chipset subsystems that integrate the
functions of mixers, oscillators and amplifiers and thereby reduce the number of
radio frequency ("RF") components, for use in digital cellular handsets. The
first RFICs to be offered by the Wireless Communications product platform are
for the CDMA standard.
 
     The Company is developing semiconductor system solutions for GSM handsets
that will seek to integrate the RF front end, which receives and filters the RF
signal, with the baseband backend, which processes the voice signal, to provide
digital cellular handset OEMs with complete antenna-to-microphone system-level
 
                                       29
<PAGE>   37
 
chipsets in smaller, less expensive and less power consuming packages. These
chipsets are designed to enable OEMs to provide a broad range of low- to
high-end products, while improving time-to-market performance.
 
     The Company designs and manufactures GPS receiver components and supplies
them to OEMs for incorporation into end products for marine, automotive and
personal computer applications. GPS receivers use signals from a series of
satellites to provide precise location determination anywhere on earth. Building
on Rockwell's long heritage as an industry leader in GPS military receivers and
satellites, the Company offers the 12-channel Jupiter(TM) GPS receiver module on
a printed circuit board for lower-volume applications and the two-device
Zodiac(TM) chipset for high-volume applications.
 
     The Company markets and sells its Wireless Communications products to a
wide variety of cellular and cordless telephony OEMs who require various levels
of integration for wireless components.
 
  DIGITAL INFOTAINMENT
 
     The Digital Infotainment product platform provides semiconductor products
that perform communication and media processing functions within a variety of
electronics equipment for digital information and entertainment. Digital
infotainment is the delivery of digitally encoded information or entertainment
content to the consumer from a storage device or via broadcast transmission over
the air or satellite or cable network, for display on a television set or on a
PC. As entertainment media transition to a digital format, a convergence of
functionality is taking place, wherein televisions become more interactive
devices through digital set-top boxes and PCs enable more home entertainment
applications. The Company offers broadband wireless communications and cable
modem products and RF tuners, which process high-speed data, voice and video
transmissions from various sources. The Company is also developing semiconductor
products and systems for digital infotainment applications by combining
communications technologies with video encoder and decoder technology, which
convert video signals for television to a format that can be displayed on a PC
monitor or PC images to a format that can be displayed on a television. Many of
the Company's Digital Infotainment products include DSPs, A/D and D/A converters
and microcontrollers, together with optimized signal processing algorithms,
communication protocols and application software.
 
     The Company offers high-speed broadband wireless and cable communication
and demodulation tuner integrated circuits (ICs). These products process the
signals received from various broadband transmissions, such as satellites, cable
or MMDS microwave transmissions, and send high-speed and high-resolution digital
information and entertainment both to PCs and other consumer appliances. The
Company is currently a leading supplier of products for digital MMDS. The
Company has developed a tuner and demodulator product for receiving satellite
transmissions, in which the tuner section receives the RF input signal and
performs channel selection, filtering and RF to baseband conversion and the
demodulator section processes and decodes the video signal. The Company plans to
sell these products to manufacturers of set-top boxes, satellite service
providers and PC OEMs and add-in card manufacturers for use in PC receiver cards
and in products which provide interactive services.
 
     The Company currently supplies analog modem chipsets for set-top boxes
which provide users with interactive capability over traditional telephone
lines. The Company is also developing a family of cable modem chipsets that will
enable data transmission at speeds up to 100 times the speed of the fastest
conventional analog modems. These system-level semiconductor chipsets are
designed to enable OEMs to develop client-side modems that support the
Multimedia Cable Network Systems Data Over Cable Services Interface
Specifications ("MCNS/DOCSIS") and to combine communications and media
processing technology. These cable modems can be used internally in a set-top
box or a PC or as a stand-alone appliance external to a PC.
 
     For the PC platform, the Company also offers its Fusion(TM) family of
NTSC/PAL/SECAM analog-to-digital video decoders which enable use of the PC to
receive radio and television broadcasts and create and edit videos. The Company
markets and sells video encoder and decoder components, as well as integrated
decoder/tuner products, to PC subsystem manufacturers and also markets its
products to leading PC OEMs.
 
                                       30
<PAGE>   38
 
  NETWORK ACCESS
 
     The Network Access product platform provides network infrastructure OEMs
with semiconductor products for electronic equipment that resides at
communications access points between individual client users and wide area
networks ("WANs"). These products enable the transportation of voice, data and
video between and within networks. WAN access equipment provides connectivity
for PCs, fax machines, cellular telephones and local area networks ("LANs")
through the Public Switched Telephone Network, the Internet, intranets and other
high speed corporate data networks, cellular networks and cable networks. WAN
transport equipment provides network backbone point-to-point communications at
very high speeds. Many of the Company's Network Access products include DSPs,
A/D and D/A converters and microcontrollers, together with optimized signal
processing algorithms, communication protocols and applications software.
 
     The Company is a leading supplier of analog modem chipsets for central site
equipment used by Internet service providers ("ISPs"). Utilizing the same core
56 Kbps analog modem technology used in client-side PC modems supplied by the
Personal Computing product platform, the Network Access product platform offers
network infrastructure OEMs complete system-level chipsets for high-density
remote access servers used by ISPs. These central site modems can support data,
fax and voice over IP (Internet Protocol). The Company is developing a complete
system-level solution for xDSL network modems which, together with the
client-side xDSL modem products offered by the Personal Computing product
platform, will enable high-speed digital Internet connectivity at speeds of up
to 8 Mbps over existing telephone lines.
 
     The Company supplies network infrastructure OEMs with semiconductor
products that enable telecommunications and data communications companies to
deploy digital T1/E1 and T3/E3 communications over existing telephone lines. The
Network Access product platform offers line interface units, framers and
controllers for a variety of networking equipment. In addition, the Network
Access product platform offers xDSL products which simplify the deployment of
T1/E1 transmission lines by eliminating the need for repeaters and other line
conditioning equipment to achieve digital service at speeds up to 1.5 Mbps.
 
     The Company also supplies chipsets to network infrastructure OEMs for ATM
packet-switched networking products, which subdivide digital information into
individual packets with unique identifiers to be sent by various routes through
the network and reassembled at their destination, for high speed voice, video
and data transmission. These segmentation and reassembly ("SAR") chipsets
implement the ATM specifications for subdividing and reassembling data, enabling
transmission speeds of 155 Mbps, and the Company is developing a family of 622
Mbps SAR devices. In addition, the Company has developed mixed-signal intensive
physical layer devices (PHYs), which enable transmission of ATM packets and,
together with its SAR products, allow the Company to provide network system OEMs
with a complete semiconductor system for ATM transmissions.
 
     The Network Access product platform also offers a GaAs-based front-end
transceiver chipset for 2.5 Gbps transmission (OC-48) over fiber-optic lines
based on SONET and SDH communication standards. The Company is developing a
similar GaAs transceiver chipset for next generation 9.6 Gbps (OC-192) optical
standards.
 
     The Company markets and sells WAN access products to network infrastructure
OEMs that provide high density remote access equipment, primarily for the ISP
market. The Company markets and sells WAN transport products to network
infrastructure OEMs that provide WAN hubs, routers, switches, analog and digital
multiplexors and other multi-service networking equipment.
 
                                       31
<PAGE>   39
 
CUSTOMERS; SALES AND MARKETING
 
     The Company markets and sells its products to leading OEMs of
communications electronics products in each of its product platforms, including
the following:
 
PERSONAL COMPUTING (PC OEMs, PC systems integrators, retail modem manufacturers
and modem subsystem manufacturers)
 
<TABLE>
<S>                             <C>                             <C>
Acer Incorporated               Dell Computer Corporation       International Business
Apple Computer, Inc.            Diamond Multimedia                Machines Corporation
Aztech Systems Ltd.               Systems, Inc.                 Packard Bell NEC, Inc. 
Best Data Products, Inc.        Fujitsu Limited                 Psion Dacom plc
Boca Research, Inc.             GVC Corporation                 Toshiba Corporation
Compaq Computer Corporation     Hewlett-Packard Company         
</TABLE>
 
PERSONAL IMAGING (Fax and multifunction peripherals manufacturers)
 
<TABLE>
<S>                             <C>                             <C>
Brother Industries, Ltd.        Lexmark International           Ricoh Company Ltd.
Canon Inc.                        Group, Inc.                   Sagem S.A.
Daewoo Telecom Ltd.             Matsushita Electric Industrial  Samsung Electronics Co., Ltd.
Fuji Xerox Co., Ltd.              Co., Ltd.                     Sanyo Electric Company Ltd.
Hewlett-Packard Company         NEC Corporation                 Sharp Corporation
Kinpo Electronics Inc.          Olivetti S.p.A.
</TABLE>
 
WIRELESS COMMUNICATIONS (Wireless base station equipment, cellular and cordless
handset and navigation systems manufacturers)
 
<TABLE>
<S>                             <C>                             <C>
Casio PhoneMate Inc.            NEC Corporation                 Samsung Electronics Co., Ltd.
Ericsson, Inc.                  Nokia Corporation               Sanyo Electric Company Ltd.
Fujitsu Limited                 Northern Telecom Limited        Sharp Corporation
Lowrance Electronics, Inc.      QUALCOMM Incorporated           Sony Corporation
Mitsubishi Wireless             Sagem S.A.                      Uniden Corporation
  Communications, Inc.
</TABLE>
 
DIGITAL INFOTAINMENT (PC OEMs, PC subsystem manufacturers, set-top box
manufacturers and satellite service providers)
 
<TABLE>
<S>                             <C>                             <C>
ATI Technologies, Inc.          Hewlett-Packard Company         Sony Corporation
Compaq Computer Corporation     Hughes Network Systems, Inc.    Sun Microsystems, Inc.
EchoStar Communications         Intel Corporation               Thomson Corporation
  Corporation                   Matsushita Electric Industrial  Toshiba Corporation
Gateway 2000, Inc.                Co., Ltd.                     Web TV Networks, Inc.
General Instruments, Inc.       Philips Electronics N.V.
</TABLE>
 
NETWORK ACCESS (Data communications and telecommunications network
infrastructure manufacturers)
 
<TABLE>
<S>                             <C>                             <C>
ADC Telecommunications, Inc.    Cisco Systems, Inc.             Lucent Technologies, Inc.
Alcatel Data Networks, S.A.     Copper Mountain, Inc.           Newbridge Networks Corporation
Ascend Communications, Inc.     ECI Telecommunications          Nokia Corporation
Cabletron Systems, Inc.         Ericsson, Inc.                  Northern Telecom Limited
CIENA Corporation               Fujitsu Limited                 Tellabs, Inc.
</TABLE>
 
     Semiconductor Systems has a worldwide sales organization comprised of
approximately 215 employees as of September 30, 1998, with 10 domestic and 13
international sales offices. To complement its direct sales and customer support
efforts, the Company also sells its products through approximately 44
independent manufacturers' representatives and approximately 50 distributors.
The Company has a marketing staff that is
 
                                       32
<PAGE>   40
 
organized around its five product platforms. In addition, the Company's design
and applications engineering staff is actively involved with customers during
all phases of design and production and provides customer support through the
Company's worldwide sales offices, which are generally in close proximity to
customers' facilities.
 
COMPETITION
 
     The semiconductor industry in general and the markets in which the Company
competes in particular are intensively competitive. The Company competes
worldwide with a number of United States and international manufacturers that
are both larger and smaller than the Company in terms of resources and market
share. In addition, customers for certain of the Company's products offer other
products that compete with similar products offered by the Company. The Company
believes that the principal competitive factors for silicon providers to the
Company's addressed markets are product performance, level of integration,
quality, compliance with industry standards, price, time-to-market, system cost,
design and engineering capabilities, new product innovation and customer
support. The specific bases on which the Company competes vary by product
platform. See "Risk Factors -- Competition".
 
     Within PC analog modem products, the Company competes primarily with Lucent
in the PC OEM market and with Cirrus Logic, Inc. and Lucent in the PC system
integrator market. For semiconductor sales to retail modem manufacturers, the
Company competes primarily with Texas Instruments Incorporated (which supplies
basic DSP chipsets without communications software to 3Com/U.S. Robotics
Corporation) and Lucent. The Company's competitors in the Personal Imaging
market include Hyundai Electronics Industries Co., Ltd., Matsushita Electric
Industrial Co., Ltd., Samsung Electronics Co., Ltd. and Toshiba Corporation. The
Company's competitors in the markets addressed by the Wireless Communications
platform include ANADIGICS, Inc., Analog Devices, Inc., Hitachi Ltd., Lucent,
Motorola, Inc., National Semiconductor Corporation, Philips Electronics N.V., RF
Micro Devices, Inc., Siemens Corporation, Texas Instruments Incorporated,
TriQuint Semiconductor, Inc. and VLSI Technology, Inc. In the Digital
Infotainment market, competitors of the Company include Broadcom, Inc., C-Cube
Microsystems, ITT Industries, Inc., Libit Signal Processing Ltd., LSI Logic
Corporation, Philips Electronics N.V., STMicroelectronics N.V. and VLSI
Technology, Inc. In the Network Access market, competitors of the Company
include Analog Devices, Inc., Applied Micro Circuits Corporation, Level One
Communications Incorporated, Lucent, MMC Networks, Inc., PMC-Sierra Inc.,
STMicroelectronics N.V., Siemens Corporation, Texas Instruments Incorporated and
Vitesse Semiconductor, Inc.
 
RAW MATERIALS AND SUPPLIES
 
     The Company believes it has adequate sources for the supply of raw
materials and components for its manufacturing needs with suppliers located
around the world. Blank wafers and other raw materials used in the production of
the Company's CMOS products are available from several suppliers. However, the
Company is dependent on a single source supplier for epitaxial wafers used in
the GaAs semiconductor manufacturing processes at its Newbury Park, California
facility. The number of qualified alternative suppliers for such wafers is
limited and the process of qualifying a new epitaxial wafer supplier could
require a substantial leadtime. Although the Company historically has not
experienced any significant difficulties in obtaining an adequate supply of raw
materials and components necessary for its manufacturing operations, the loss of
a significant supplier or the inability of a supplier to meet performance and
quality specifications or delivery schedules could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Risk Factors -- Manufacturing Risks".
 
RESEARCH AND DEVELOPMENT
 
     The Company has significant research, development, engineering and product
design capabilities. At September 30, 1998, the Company employed approximately
1,500 engineers.
 
     Ongoing research and development projects in each of the Company's product
platforms include the following: In the Personal Computing platform, the Company
is developing a software modem that replaces
 
                                       33
<PAGE>   41
 
DSP and microcontroller functions traditionally enabled through hardware chip
devices with software to be processed by the host PC's processor. For its
Personal Imaging platform, the Company is developing MFP chipsets that provide a
complete suite of office equipment in a single platform, with future development
planned for combined monochrome and color devices. In the Wireless
Communications platform, the Company is developing complete
antenna-to-microphone system solutions for 900 MHz GSM cellular handsets, with
future developments in similar products for all three GSM frequency bands
planned. For the Digital Infotainment platform, the Company is focusing its
development efforts on next generation MCNS compliant cable modems with higher
levels of function, performance and integration and is working with major OEMs
and CableLabs to develop technical specifications for packet voice telephony. In
the Network Access platform, the Company is investing in WAN solutions,
particularly T1/E1, T3/E3 and SONET products, focusing on integrating
functionality, reducing power requirements and increasing the port density of
network access equipment.
 
     The Company spent $337 million, $280 million and $155 million in fiscal
1998, 1997 and 1996, respectively, on research and development. The Company
expects to spend approximately $250 million on research and development in
fiscal 1999. See "Risk Factors -- Research and Development Expenses" and
"-- Future Capital Sources".
 
     Rockwell's Science Center also provides assistance to the Company in the
development of various technological and product advancements and will continue
to provide assistance after the Distribution. See "Arrangements Between Rockwell
and the Company -- Transition Agreement".
 
INTELLECTUAL PROPERTY
 
     Numerous United States and foreign patents and patent applications are
owned or licensed by the Company relating to its manufacturing operations and
other activities. The Company has filed federal and international trademark
applications seeking registered protection of the Conexant name and logo. In
addition, the Company owns a number of other trademarks applicable only to
certain of its products. Management believes that intellectual property,
including patents, patent applications and licenses, and trademarks are of
material importance to the Company. In addition to the protection of its
proprietary technologies and processes, the Company is seeking to strengthen its
intellectual property portfolio to enhance its ability to obtain cross-licenses
of intellectual property from others, whether to obtain access to intellectual
property the Company does not possess or to resolve potential intellectual
property claims against the Company, without the need to make financial
payments.
 
     Various claims of patent infringement have been made against the Company.
Management believes that none of these claims will have a material adverse
effect on the consolidated financial statements of the Company. Pursuant to the
Distribution Agreement, the Company will assume all liabilities in respect of
intellectual property matters related to current and former operations of
Semiconductor Systems. See "-- Legal Proceedings" and "Risk
Factors -- Intellectual Property Matters". Prior to the Distribution, Rockwell
will contribute $65 million in cash to the Company, which will be placed in an
escrow account to be used to satisfy Semiconductor Systems' obligation with
respect to the Celeritas litigation matter. See "Arrangements Between Rockwell
and the Company -- Distribution Agreement".
 
EMPLOYEES
 
     As of September 30, 1998, Semiconductor Systems had approximately 6,300
full-time employees, of whom approximately 1,500 were engineers. Approximately
500 Semiconductor Systems employees in the United States and 1,050 employees in
Mexico are covered by collective bargaining agreements. In July 1998, following
a 50-day strike by members of the International Brotherhood of Electrical
Workers (IBEW) Local 2295, Semiconductor Systems entered into a collective
bargaining agreement with that union covering approximately 500 employees at the
Company's Newport Beach, California facility. The agreement will expire in May
2003. No other significant work stoppages have occurred in the past five years.
 
     In September 1998, in connection with its plan to restructure its business,
the Company announced a worldwide workforce reduction of approximately 10
percent and the closure and planned disposition of its
                                       34
<PAGE>   42
 
Colorado Springs, Colorado wafer fabrication facilities (which will be
distributed to Rockwell prior to the Distribution). The plan included the offer
of voluntary early retirement packages to certain eligible employees,
approximately 185 of whom have accepted the early retirement program.
 
CYCLICALITY; SEASONALITY
 
     The semiconductor industry is highly cyclical. Sales of the Company's
Personal Computing, Wireless Communications and Personal Imaging product
platforms are subject to seasonal fluctuation related to the increase in sales
of products which include the Company's products, such as PCs, cordless and
cellular telephones and fax machines, generally associated with the Christmas
season. The Company's sales for these product platforms generally increase
beginning in August and September and continue at a higher level through the end
of the calendar year. See "Risk Factors -- Cyclical Nature of the Semiconductor
Industry" and " -- Fluctuations in Operating Results".
 
PROPERTIES
 
     At September 30, 1998, the Company operated four manufacturing facilities
in the United States and one facility in Mexico. It also had 13 design centers
and 23 sales offices. These facilities had an aggregate floor space of
approximately 3.0 million square feet, approximately 70 percent of which was
owned and approximately 30 percent of which was leased. Approximately 676,000
square feet of the Company's owned facilities is unused space at the Company's
Colorado Springs, Colorado facility. Another 72,000 square feet of leased office
space in San Diego, California is unoccupied and 19,200 square feet of leased
warehouse space in El Paso, Texas is vacant. As of September 30, 1998, there
were no major encumbrances (other than financing arrangements which in the
aggregate are not material) on any of the Company's property, plants or
equipment. In the opinion of management, the Company's properties have been well
maintained, are in sound operating condition and contain all the equipment and
facilities necessary to operate at present levels. A summary of floor space of
the Company's facilities at September 30, 1998 is as follows:
 
<TABLE>
<CAPTION>
                                                     OWNED         LEASED
TYPE OF FACILITY                                   FACILITIES    FACILITIES    TOTAL
- ----------------                                   ----------    ----------    -----
                                                     (IN THOUSANDS OF SQUARE FEET)
<S>                                                <C>           <C>           <C>
Manufacturing....................................    1,719          152        1,871
General office space.............................      403          727        1,130
                                                     -----          ---        -----
          Total..................................    2,122          879        3,001
                                                     =====          ===        =====
</TABLE>
 
     The following table outlines the functions and capabilities of the
Company's major manufacturing facilities:
 
<TABLE>
<CAPTION>
         FACILITY                      FUNCTION                      CAPACITY
         --------                      --------                      --------
<S>                           <C>                           <C>
Newport Beach, California     Wafer fabrication facility    - 4500 8-inch wafer starts
                              - Class 1 and Class 10          per week
                                clean rooms
                              - 0.25-0.5 micron CMOS
                              - RF BiPolar
                              - Embedded flash, BiCMOS
                                in development
 
Newbury Park, California      GaAs wafer fabrication        - 500 4-inch wafer starts
                              facility                        per week
                              - 2.0 micron HBT
                                Fmax 50 GHz
                              - 0.7 micron MESFET
 
Mexicali, Mexico              Assembly and test facility    - 110 million assembly
                              - High volume/low cost          starts per year
                                multichip modules
 
El Paso, Texas                Module design and assembly    - 400,000 modules and
                              facility                        systems per month
</TABLE>
 
                                       35
<PAGE>   43
 
     The Company's headquarters and primary wafer fabrication facility are
located in Newport Beach, California, consisting of approximately 633,000 square
feet of owned and approximately 420,000 square feet of leased floor space;
approximately 80,000 square feet is subleased to several tenants. This location
includes a 130,000 square foot wafer fabrication facility. The Company
manufactures GaAs products at its wafer fabrication facility located in Newbury
Park, California. In September 1998, the Company announced that it will close
and dispose of its wafer fabrication facilities in Colorado Springs, Colorado.
Prior to the Distribution, the Company will distribute its wafer fabrication
facilities in Colorado Springs, Colorado to Rockwell.
 
     The Company owns an approximately 198,000 square foot assembly and test
facility in Mexicali, Mexico, which has been in operation for over 25 years. The
Mexicali facility assembles semiconductor die from the Company's wafer
fabrication facilities and outside foundry sources into various types of chipset
packages and tests the packages using automatic test equipment with a full range
of analog, digital and radio frequency capability. This facility is ISO 9002
certified and focuses on high volume, industry standard plastic packaging but
has the capability to manufacture a wide variety of high- and low-volume and
specialized packages using conventional and proprietary assembly techniques.
 
     The Company operates a fully integrated electronic module design and
assembly facility in El Paso, Texas, consisting of approximately 152,000 square
feet of leased manufacturing space. This facility provides full turnkey design
capabilities and the ability to manufacture and test standard and custom
products for each of the Company's product platforms, ranging from prototypes to
high volume production. At this facility, the Company integrates its
semiconductor chipset devices into electronic modules, such as internal cards
for PCs and digital infotainment equipment and standard PCMCIA interface cards,
as well as custom products and complete, market-ready systems. This facility has
been ISO 9002 certified since 1993.
 
     The Company's design centers provide design engineering and product
application support as well as after-sales customer service. The design centers
are strategically located around the world to be in close proximity to the
Company's OEM customers and to take advantage of key technical and engineering
talent worldwide.
 
     Certain of the Company's facilities, including the Newport Beach,
California and Mexicali, Mexico facilities, are located near major earthquake
fault lines. The Company maintains only minimal earthquake insurance with
respect to these facilities. A portion of the Mexicali, Mexico facility is
seismically isolated and the Company is currently undertaking a $28 million
program to seismically isolate certain portions of its Newport Beach, California
facility. See "Risk Factors -- Manufacturing Risks".
 
ENVIRONMENTAL MATTERS
 
     Federal, state and local requirements relating to the discharge of
substances into the environment, the disposal of hazardous wastes, and other
activities affecting the environment have had and will continue to have an
impact on the manufacturing operations of Semiconductor Systems. Thus far,
compliance with environmental requirements and resolution of environmental
claims have been accomplished without material effect on Semiconductor Systems'
liquidity and capital resources, competitive position or financial statements.
 
     Semiconductor Systems has been designated as a potentially responsible
party ("PRP") at one Superfund site located at a former silicon wafer
manufacturing facility and steel fabrication plant in Parker Ford, Pennsylvania
formerly occupied by Semiconductor Systems. The site was also formerly occupied
by Recticon Corporation and Allied Steel Products Corporation, each also named
as a PRP and each of which is insolvent. The remediation plan for the site
includes installation of a public water supply line and a groundwater pump and
treat system, as well as routine groundwater sampling. Management estimates the
total reasonably possible costs the Company could incur for the remediation of
this Superfund site to be approximately $4 million and has accrued for these
costs as of September 30, 1998.
 
     In addition, the Company is engaged in two other remediations of
groundwater contaminations at its Newport Beach and Newbury Park, California
facilities. Management estimates the total reasonably possible costs the Company
could incur for these remediations to be approximately $5 million and has
accrued for these costs as of September 30, 1998.
 
                                       36
<PAGE>   44
 
     Pursuant to the Distribution Agreement, the Company will assume all
liabilities in respect of environmental matters related to current and former
operations of Semiconductor Systems. See "Arrangements Between Rockwell and the
Company -- Distribution Agreement".
 
     Management of the Company believes that Semiconductor Systems' expenditures
for environmental capital investment and remediation necessary to comply with
present regulations governing environmental protection and other expenditures
for the resolution of environmental claims will not have a material adverse
effect on the Company's liquidity and capital resources, competitive position or
financial statements. Management cannot assess the possible effect of compliance
with future requirements. See "Risk Factors -- Environmental Matters".
 
LEGAL PROCEEDINGS
 
   
     On September 27, 1995, Celeritas Technologies, Ltd. filed a suit against
Rockwell in the U.S. District Court for the Central District of California for
patent infringement, misappropriation of trade secrets and breach of contract
relating to cellular telephone data transmission technology utilized in certain
modem products produced by the Company in 1995 and 1996. The court entered
judgment against Rockwell in January 1997 and, in ruling on post-trial motions
in July 1997, entered a revised judgment awarding damages of $57 million, plus
interest. On July 20, 1998, the U.S. Court of Appeals for the Federal Circuit
reversed the holding of the trial court based on patent infringement and found
Celeritas's patent invalid but affirmed the trial court holding based on breach
of contract. The Company's petition for a rehearing (and rehearing en banc) and
a motion to certify the contract issue to the California Supreme Court were
denied in September 1998. The Company continues to believe that the judgment is
in error and on November 23, 1998 filed a petition for certiorari with the
United States Supreme Court. At September 30, 1998, $65 million had been accrued
for the ultimate resolution of this matter. Prior to the Distribution, Rockwell
will contribute $65 million in cash to the Company, which will be placed in an
escrow account to be used to satisfy the Company's obligation with respect to
the Celeritas matter. See "Arrangements Between Rockwell and the Company --
Distribution Agreement".
    
 
     The Company was joined on April 7, 1998 as a defendant in a suit filed by
Harris Corporation against PairGain Technologies, Inc. in the Superior Court of
California for Orange County. Harris alleges that a "teaming agreement" between
it and PairGain to develop a complete ADSL solution constituted a joint venture
and that the Company's subsequent exclusive agreement with PairGain to develop
digital modem products using PairGain's ADSL technology constituted an
intentional interference with contractual relations, intentional interference
with prospective economic advantage, negligent interference with contractual
relations and an unfair trade practice in violation of the California Business &
Professions Code. The Company believes it has meritorious defenses to these
claims and will vigorously defend this action. Discovery is ongoing.
 
     On October 14, 1997, Brent Townshend filed suit against Rockwell and the
Company in the Superior Court of California for San Mateo County seeking an
injunction to halt the sale of products containing the Company's K56Flex(TM)
chipsets and requesting unspecified damages, claiming that the Company had
engaged in unfair competition, misappropriation of trade secrets, breach of
contract and breach of confidence by using technical information disclosed in
confidence by Mr. Townshend to accelerate its development of 56 Kbps modem
technology. The Company is vigorously defending its position that it
independently developed the 56 Kbps modem technology using entirely its own
skills and public domain information. Trial on this matter is expected to
commence in the spring of 1999.
 
     On July 29, 1991, Shumpei Yamazaki filed suit against a Japanese subsidiary
of Rockwell in the Tokyo District Court, Twenty-ninth Civil Division for patent
infringement relating to the Company's facsimile modem chipsets seeking 685
million yen (approximately $5.89 million based on the exchange rate on October
30, 1998) and court costs. In October 1998, the District Court rendered its
decision dismissing the suit, from which decision Mr. Yamazaki has appealed. The
Company believes it has meritorious defenses to these claims and will vigorously
defend this action.
 
     On May 30, 1997, Klaus Holtz filed suit against Rockwell in the U.S.
District Court for the Northern District of California for patent infringement
relating to the Company's modem products utilizing the V.42bis
                                       37
<PAGE>   45
 
standard for data compression. The Company believes that it has meritorious
defenses to these claims and will vigorously defend this action. The case is
expected to go to trial in the first half of 1999.
 
     On May 6, 1998, Western Atlas, Inc. filed suit against Rockwell in the U.S.
District Court for the Southern District of Texas alleging infringement of
several patents acquired by Western Atlas covering certain aspects of GPS
technology. The complaint explicitly identifies the Company's Jupiter(TM) GPS
receiver as an allegedly infringing product. The Company believes that it has
meritorious defenses to these claims and will vigorously contest the
infringement claims and the validity of the asserted patents. No trial date has
been set in this matter.
 
     On May 5, 1997, former shareowners of Brooktree Corporation ("Brooktree"),
now a subsidiary of the Company, commenced a class action in the Superior Court
of the State of California for the County of San Diego against Brooktree and
officers of Brooktree alleging fraud on the market by Brooktree and its officers
arising from allegedly false statements made during introduction of certain
Brooktree products in 1995 and 1996. Following dismissal of that action, a
similar action was filed in the United States District Court for the Southern
District of California. On March 10, 1998, the complaint was dismissed without
prejudice, and on August 14, 1998, plaintiffs filed an amended complaint in this
action. The Company believes that is has meritorious defenses to these claims
and will vigorously defend this action.
 
     The Company conducts its business in market sectors where the Lemelson
Foundation broadly asserts certain intellectual property rights against all
participants. The Lemelson Foundation has made explicit demands that virtually
all semiconductor companies must be licensed under those intellectual property
rights and must pay the Foundation a royalty calculated as a percentage of
product sales. The Lemelson Foundation thereafter filed a patent infringement
suit in the U.S. District Court in Arizona against approximately twenty
defendants from the semiconductor industry. Although the Company has received
notice from the Lemelson Foundation, stating its desire to negotiate a license
under which the Company would operate, the Company has not been named or joined
in the pending Arizona litigation. If the Lemelson Foundation prevails in the
Arizona litigation, the Company would expect to negotiate a royalty no worse
than the industry-wide royalty established as a result of that lawsuit. It is
the Company's position that a portion of any such royalty the Company would be
obligated to pay should be indemnified by certain vendors to the Company. If the
Lemelson Foundation were to lose the Arizona litigation, the Company would
expect to benefit from that result and avoid the obligation to pay any royalty.
 
     Various other lawsuits, claims and proceedings have been or may be
instituted or asserted against Rockwell or the Company or their respective
subsidiaries relating to Semiconductor Systems, including those pertaining to
product liability, intellectual property, environmental, safety and health, and
employment matters.
 
     Pursuant to the Distribution Agreement, the Company will assume
responsibility for all current and future litigation (including environmental
and intellectual property proceedings) against Rockwell or its subsidiaries in
respect of Semiconductor Systems.
 
     Although the outcome of litigation cannot be predicted with certainty and
some lawsuits, claims or proceedings may be disposed of unfavorably to the
Company, based on its evaluation of matters which are pending or asserted,
management of the Company believes the disposition of such matters will not have
a material adverse effect on the financial statements of Semiconductor Systems.
 
GENERAL
 
     In connection with the sale of Rockwell's aerospace and defense businesses
to The Boeing Company in December 1996, Semiconductor Systems was reorganized as
a wholly-owned subsidiary of Rockwell in the form of the Company, a Delaware
corporation incorporated in September 1996. The Company's executive offices are
located at 4311 Jamboree Road, Newport Beach, California 92660-3095, and its
telephone number is (949) 221-4600.
 
                                       38
<PAGE>   46
 
                                CREDIT FACILITY
 
     The Company has obtained a commitment letter dated October 6, 1998 from
Credit Suisse First Boston to provide a senior secured revolving credit facility
for the Company. The Credit Facility will be used for working capital and other
general corporate purposes of the Company and its subsidiaries following the
Distribution. The Company expects to sign a definitive credit agreement
including terms substantially as described below prior to the Distribution Date.
 
     The Credit Facility is expected to be a three-year $350 million revolving
loan facility. The Credit Facility will be guaranteed by each of the Company's
domestic subsidiaries. It will also be secured by (i) a first-priority security
interest in substantially all domestic assets of the Company and its domestic
subsidiaries and (ii) a pledge of the stock of the Company's domestic and
foreign subsidiaries, subject to certain exceptions to be agreed upon.
 
     Loans obtained under the Credit Facility will bear interest at a rate per
annum equal, at the election of the Company, to either (i) a base rate ("ABR"),
which is the higher of Credit Suisse First Boston's prime rate and 0.50 percent
over the federal funds rate and (ii) the London interbank offered rate for
offshore dollar deposits ("LIBOR"), plus, in either case, a variable margin. For
the first six months following the Distribution Date, the margin will be fixed
at 75 basis points for ABR-based loans and 175 basis points for LIBOR-based
loans. After that, the margin will be based on the Company's total debt to total
capitalization ratio. The Company will pay a facility fee on the unused amount
of the Credit Facility at a per annum rate that will vary depending on the same
criteria used to determine the interest rate margin. The Company also will pay
other customary fees.
 
     The Credit Facility is expected to contain, among other terms,
representations and warranties, conditions precedent, covenants, mandatory and
voluntary prepayment provisions and events of default customary for facilities
of this type. Covenants will include certain restrictions on capital
expenditures, consolidations and mergers, sales of assets, incurrence of
indebtedness and creation of liens and encumbrances. The Credit Facility is
expected to include various financial covenants, including a minimum net worth
requirement and required financial ratios in respect of (i) earnings before
interest, taxes, depreciation and amortization ("EBITDA") to interest expense,
(ii) debt to EBITDA and (iii) cash, cash equivalents and net accounts receivable
classified as current assets to current liabilities.
 
                                       39
<PAGE>   47
 
                              HISTORICAL SELECTED
                                 FINANCIAL DATA
 
     The following selected financial data have been derived from the financial
statements and financial information of Semiconductor Systems. The data should
be read in conjunction with the financial statements of Semiconductor Systems
and notes thereto included elsewhere in this Information Statement. The
statement of operations data for the years ended September 30, 1998, 1997, 1996
and 1995 and the balance sheet data as of September 30, 1998, 1997 and 1996 have
been derived from the audited financial statements of Semiconductor Systems. The
statement of operations data for the year ended September 30, 1994 and the
balance sheet data as of September 30, 1995 and 1994 have been derived from
unaudited financial information of Semiconductor Systems.
 
<TABLE>
<CAPTION>
                                                                     YEAR ENDED SEPTEMBER 30,
                                                           ---------------------------------------------
                                                            1998      1997      1996      1995     1994
                                                           ------    ------    -------    -----    -----
                                                                           (IN MILLIONS)
<S>                                                        <C>       <C>       <C>        <C>      <C>
COMBINED STATEMENT OF OPERATIONS DATA:
Net sales................................................  $1,200    $1,412    $1,470     $ 784    $ 599
Cost of sales............................................     909       744       849       483      347
                                                           ------    ------    ------     -----    -----
Gross margin.............................................     291       668       621       301      252
Research and development.................................     337       280       155        91       74
Selling, general and administrative......................     251       191       150       103       79
Purchased research and development(1)....................      --        30       121        --       --
Special charges(2).......................................     147        --        --        --       --
                                                           ------    ------    ------     -----    -----
Operating (loss) earnings................................    (444)      167       195       107       99
Other income, net........................................      14        13         3         4        1
                                                           ------    ------    ------     -----    -----
(Loss) income before taxes...............................    (430)      180       198       111      100
(Benefit) provision for taxes............................    (168)       54       114        35       33
                                                           ------    ------    ------     -----    -----
Net (loss) income........................................  $ (262)   $  126    $   84     $  76    $  67
                                                           ======    ======    ======     =====    =====
COMBINED BALANCE SHEET DATA:
  (at end of period)
Working capital..........................................  $  256    $  222    $  229     $ 130    $  95
Property (at cost).......................................   1,395     1,342     1,053       653      475
Accumulated depreciation.................................    (682)     (540)     (397)     (302)    (260)
Property, net............................................     713       802       656       351      215
Intangible assets, net...................................      53        87        36        14        9
Total assets.............................................   1,418     1,486     1,383       671      448
Short-term debt..........................................      14        14        14        14       14
Rockwell's net investment................................   1,009     1,107       899       478      301
OTHER DATA:
Capital expenditures.....................................  $  270    $  317    $  380     $ 166    $ 148
Depreciation and amortization............................     220       181       132        61       44
Cash provided by operating activities....................      98       296       315       106       49
Cash used for investing activities.......................    (270)     (382)     (634)     (202)    (147)
Cash provided by financing activities....................     172        86       319        96       98
</TABLE>
 
- ---------------
(1) Purchased research and development relates to the acquisitions of the
    Hi-Media broadband communication chipset business of ComStream Corporation
    in May 1997 and Brooktree Corporation in September 1996.
 
(2) In September 1998, Semiconductor Systems recorded special charges of
    approximately $147 million ($90 million after tax) related to its decision
    to close and dispose of its wafer fabrication facilities in Colorado
    Springs, Colorado, a worldwide workforce reduction and certain other
    actions.
 
                                       40
<PAGE>   48
 
                         UNAUDITED PRO FORMA CONDENSED
                      FINANCIAL STATEMENTS OF THE COMPANY
 
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET OF THE COMPANY
 
     The unaudited pro forma condensed combined balance sheet of the Company has
been derived from the historical balance sheet of Semiconductor Systems and has
been prepared assuming the Distribution occurred on September 30, 1998.
 
     The unaudited pro forma condensed combined balance sheet should be read in
conjunction with the historical financial statements of Semiconductor Systems
and the notes thereto for the three years ended September 30, 1998 included
elsewhere herein. The unaudited pro forma condensed combined balance sheet is
not necessarily indicative of the financial position of the Company had the
Distribution occurred on September 30, 1998.
 
   
<TABLE>
<CAPTION>
                                                                           SEPTEMBER 30, 1998
                                                              ---------------------------------------------
                                                              SEMICONDUCTOR
                                                                 SYSTEMS        PRO FORMA       COMPANY PRO
                                                               HISTORICAL     ADJUSTMENTS(1)       FORMA
                                                              -------------   --------------    -----------
                                                                              (IN MILLIONS)
<S>                                                           <C>             <C>               <C>
                                                  ASSETS
Cash........................................................     $   14          $                $   14
Restricted cash.............................................         --               65(2)           65
Receivables.................................................        167                              167
Inventories.................................................        201                              201
Assets held for disposal....................................         42              (42)(3)          --
Deferred taxes and other current assets.....................        163              (36)(3)         104
                                                                                     (23)(2)
                                                                 ------          -------          ------
    Total current assets....................................        587              (36)            551
Property, net...............................................        713                              713
Other assets................................................        118                              118
                                                                 ------          -------          ------
    Total assets............................................     $1,418          $   (36)         $1,382
                                                                 ======          =======          ======

                                    LIABILITIES AND SHAREOWNERS' EQUITY

Short-term debt.............................................     $   14          $                $   14
Accounts payable and accrued liabilities....................        317                              317
                                                                 ------          -------          ------
    Total current liabilities...............................        331                              331
                                                                 ------          -------          ------
Other liabilities...........................................         78                               78
Shareowners' equity:
Rockwell's net investment...................................      1,017           (1,017)(4)          --
Common stock................................................         --               95(4)           95
Additional paid-in capital..................................         --              922(4)          886
                                                                                     (78)(3)
                                                                                      42(2)
Retained earnings...........................................         --                               --
Currency translation........................................         (8)                              (8)
                                                                 ------          -------          ------
    Total shareowners' equity...............................      1,009              (36)            973
                                                                 ------          -------          ------
    Total liabilities and shareowners' equity...............     $1,418          $   (36)         $1,382
                                                                 ======          =======          ======
</TABLE>
    
 
- ---------------
(1) Rockwell will pay the costs related to the Distribution which are estimated
    at $18 million and accordingly, such costs are not reflected in the
    historical financial statements or as a pro forma adjustment.
 
   
(2) Prior to the Distribution, Rockwell will contribute $65 million in cash to
    the Company, which will be placed in an escrow account to be used to satisfy
    Semiconductor Systems' obligation with respect to the Celeritas litigation.
    The adjustment reflects the escrow deposit (which will be set forth as
    restricted cash on the Company's balance sheet) and the realization by
    Rockwell of the related tax benefit.
    
 
(3) Prior to the Distribution, the Company will distribute its wafer fabrication
    facilities in Colorado Springs, Colorado (and the related tax benefit) to
    Rockwell. The adjustment reflects the elimination of the assets held for
    disposal and the related tax benefit.
 
(4) To reflect the Distribution as the elimination of Rockwell's net investment
    and the issuance of an estimated 95 million shares of Company Common Stock,
    par value $1 per share. This is based on the number of shares of Rockwell
    Common Stock outstanding on September 30, 1998 of approximately 190 million
    shares and the distribution ratio of one share of Company Common Stock for
    every two shares of Rockwell Common Stock outstanding.
 
                                       41
<PAGE>   49
 
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS OF THE COMPANY
 
     The unaudited pro forma condensed combined statement of operations of the
Company has been derived from the historical statements of operations of
Semiconductor Systems and has been prepared assuming the Distribution occurred
on October 1, 1997.
 
     The unaudited pro forma condensed combined statement of operations should
be read in conjunction with the historical financial statements of Semiconductor
Systems and notes thereto for the three years in the period ended September 30,
1998 included elsewhere herein. The unaudited pro forma condensed combined
statement of operations is not necessarily indicative of the financial results
of the Company had the Distribution occurred on October 1, 1997.
 
   
<TABLE>
<CAPTION>
                                                           FISCAL YEAR ENDED SEPTEMBER 30, 1998
                                                       ---------------------------------------------
                                                       SEMICONDUCTOR
                                                          SYSTEMS        PRO FORMA       COMPANY PRO
                                                        HISTORICAL     ADJUSTMENTS(1)       FORMA
                                                       -------------   --------------    -----------
                                                          (IN MILLIONS, EXCEPT PER SHARE AMOUNT)
<S>                                                    <C>             <C>               <C>
Sales................................................     $1,200          $                $1,200
Cost of sales........................................        909                              909
                                                          ------          -------          ------
     Gross margin....................................        291                              291
Research and development.............................        337                              337
Selling, general and administrative..................        251                              251
Special charges......................................        147                              147
                                                          ------          -------          ------
     Operating loss..................................       (444)                            (444)
Other income, net....................................         14                               14
                                                          ------          -------          ------
Loss before income taxes.............................       (430)                            (430)
Income tax benefit...................................       (168)                            (168)
                                                          ------          -------          ------
     Net loss........................................     $ (262)         $    --          $ (262)
                                                          ======          =======          ======
Loss per share (basic and diluted)...................                                      $(2.65)(2)
                                                                                           ------
Average outstanding shares...........................                                        99.0(2)
                                                                                           ======
</TABLE>
    
 
- ---------------
   
(1) No pro forma adjustment to the pro forma statement of operations is
    presented with respect to the Company's Colorado Springs, Colorado wafer
    fabrication facilities that are to be distributed to Rockwell prior to the
    Distribution. The facilities are comprised primarily of assets (newly
    constructed wafer fabrication facilities) that have never been placed in
    service. Production that has occurred at the small fabrication facility that
    has been in operation at Colorado Springs will be transferred to other
    manufacturing locations, either the Company's Newport Beach, California
    facility or outside foundries. The cost of manufacturing these products will
    not differ significantly as a result of the transfer of production out of
    Colorado Springs.
    
 
   
(2) Loss per share and average outstanding shares are based on the
    post-Distribution capital structure of the Company. These amounts are based
    on average outstanding shares of Rockwell Common Stock of 197.9 million for
    the year ended September 30, 1998 and the distribution ratio of one share of
    Company Common Stock for every two shares of Rockwell Common Stock
    outstanding.
    
 
                                       42
<PAGE>   50
 
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
OVERVIEW
 
     Following the Distribution, the Company will be the world's largest company
focused exclusively on providing semiconductor products for communications
electronics. Semiconductor Systems continues to implement a strategic transition
from a narrow offering of primarily analog PC modem products to a more broadly
diversified product portfolio. The Company's product portfolio is now comprised
of its Personal Computing platform, which includes analog PC modems, and the
following expansion platforms: Personal Imaging, Digital Infotainment, Wireless
Communications and Network Access.
 
     From 1991 through 1997, Semiconductor Systems grew rapidly, with average
annual revenue growth of nearly 30 percent, driven principally by the growth of
the Internet and a correspondingly robust demand for data modems for personal
computers. During this growth period, management recognized that Semiconductor
Systems' dependence on analog PC modem products would likely result in declining
revenue and profits over time due to the eventual reduced pace of technological
change and a market migration to lower cost software-based solutions. In view of
the rapid expansion of communications electronics markets in areas beyond
traditional analog data and fax modems, the Company decided to diversify its
product offerings into new, higher growth markets. Beginning in 1995, the
Company aggressively implemented its diversification strategy, more than
trebling its annual research and development investments to $337 million in
fiscal 1998 and making several strategic acquisitions. See "The Semiconductor
Systems Business -- Company Strategy" for a detailed discussion of the Company's
diversification strategy. Expansion platforms generated almost half of the
Company's total sales in fiscal 1998 and are expected to grow as a percentage of
total sales over the next several years. However, the increase in sales in 1998
from the expansion platforms was insufficient to offset the significant decline
in margins from the Company's analog PC data modems.
 
     Following five years of double-digit revenue and profit growth, the
introduction of competing next generation 56 Kbps modem technologies in 1997
greatly intensified price competition in the markets for the Company's
K56Flex(TM) product and its older V.34 modems, resulting in lower operating
earnings. In fiscal 1998, average selling prices of Personal Computing products
fell by approximately 50 percent and the annual growth rate for such products
fell to approximately 20 percent. The greater than expected decline in prices
and lower than expected demand, combined with the Company's increasing
investments in its expansion product platforms and manufacturing process
technology, resulted in disappointing operating performance in fiscal 1998. This
decline in operating performance has been exacerbated by worldwide excess
capacity in the semiconductor industry and the weakening economic environment in
the Asia-Pacific region.
 
     The Company's full-year fiscal 1998 pre-tax loss was $430 million ($262
million after tax). The fourth quarter pre-tax loss was $378 million ($234
million after tax) and includes $275 million associated with the following (in
millions):
 
<TABLE>
<S>                                                           <C>
Special charges.............................................  $147(1)
Included in cost of sales:
  Inventory write-offs......................................    66(2)
  Intellectual property matters.............................    43(3)
  Manufacturing capacity underutilization...................    19(4)
                                                              ----
          Total.............................................  $275
                                                              ====
</TABLE>
 
- ---------------
 
(1) In September 1998, the Company implemented a comprehensive plan to
    restructure its business to position the Company for future profitability. A
    key element of this plan was the decision to close and dispose of its wafer
    fabrication facilities in Colorado Springs, Colorado. In addition,
    management decided to reduce its worldwide workforce by 10 percent and to
    curtail certain market and product development activities. This plan
    resulted in special charges of $147 million ($90 million after tax),
 
                                       43
<PAGE>   51
 
including $103 million related to the write-down of the Colorado Springs
facilities to fair value, $15 million for employee severance costs and costs
associated with a voluntary early retirement program, $11 million for intangible
     asset write-offs, and $18 million of other costs, principally lease
     termination costs, contractual liabilities and other asset write-offs.
 
(2) In the first quarter of fiscal 1998, the Company experienced strong demand
    for its modem products, particularly its older V.34 products. As a result of
    this first quarter demand and forecasts of high demand throughout the
    balance of fiscal 1998, the Company substantially increased production
    levels, including the expanded use of external foundries. In the second half
    of fiscal 1998, market acceptance of the V.90 standard for 56 Kbps modem
    technology, coupled with the precipitous drop in V.90 modem prices due to
    intensified competition, substantially reduced the demand for the Company's
    V.34 modem inventory, much of which was produced in early 1998. Lower than
    anticipated modem sales in the third and fourth quarters of fiscal 1998 and
    downward revisions to forecasted demand for certain of its products over the
    next six months, particularly for the V.34 modems, caused the Company to
    record additional inventory reserves of $66 million in the fourth quarter of
    fiscal 1998.
 
(3) On July 20, 1998, the U.S. Court of Appeals for the Federal Circuit affirmed
    a trial court's judgment of $57 million, plus interest, related to the
    Company's dispute with Celeritas Technologies, Ltd. As a result, the Company
    recorded a charge of $35 million to increase its reserve for this matter to
    $65 million. The Company also recorded additional provisions of $8 million
    in the fourth quarter related to other intellectual property matters.
 
(4) In July 1998, the Company reduced production at its manufacturing facilities
    to levels significantly below capacity, in order to align inventory levels
    with anticipated market demand. The Company estimates the cost of this
    manufacturing capacity underutilization in the fourth quarter of fiscal 1998
    to be approximately $19 million.
 
     The Company anticipates an operating loss before tax of approximately $80
million ($50 million after tax) in the first quarter of fiscal 1999. The pre-tax
operating loss includes $20 million related to the voluntary early retirement
program offered by the Company in September 1998. The first quarter charge
relates to those employees who accepted the Company's offer after September 30,
1998. The estimated operating loss also includes higher advertising costs
related to the introduction of the Company's new identity and higher operating
costs related to the residual effects of lower manufacturing capacity
utilization over the last four months. The Company expects to increase
production to full capacity in the first quarter of fiscal 1999 and is expecting
inventories to be reduced to appropriate levels by the end of the quarter.
 
   
     Management believes that, as a result of the comprehensive restructuring
plan, as well as other cost reduction initiatives, Semiconductor Systems will be
able to reduce operating costs by over $200 million on an annualized basis.
Management expects that continued declining average selling prices for analog PC
modem products will more than offset an anticipated modest increase in the
demand for such products, resulting in lower overall revenues from sales of such
products. However, assuming a modest increase in unit demand and a return to the
historical pattern of price erosion in the analog PC modem market, as well as
the successful implementation of the Company's diversification strategy and
restructuring plan, management expects to achieve a return to profitability by
the end of fiscal 1999.
    
 
                                       44
<PAGE>   52
 
RESULTS OF OPERATIONS
 
     The following table sets forth the Company's sales by product platform (in
millions):
 
<TABLE>
<CAPTION>
                                                               YEAR ENDED SEPTEMBER 30,
                                                              --------------------------
                                                               1998      1997      1996
                                                              ------    ------    ------
<S>                                                           <C>       <C>       <C>
Personal Computing..........................................  $  640    $  861    $1,173
Personal Imaging............................................     102       131       113
Wireless Communications.....................................     170       115        45
Digital Infotainment........................................     145       112        32
Network Access..............................................     143       193       107
                                                              ------    ------    ------
          Total.............................................  $1,200    $1,412    $1,470
                                                              ======    ======    ======
</TABLE>
 
     The following table sets forth certain Combined Statement of Operations
data of the Company:
 
<TABLE>
<CAPTION>
                                                               YEAR ENDED SEPTEMBER 30,
                                                              --------------------------
                                                               1998      1997      1996
                                                              ------    ------    ------
                                                                    (IN MILLIONS)
<S>                                                           <C>       <C>       <C>
Net sales...................................................  $1,200    $1,412    $1,470
Cost of sales...............................................     909       744       849
                                                              ------    ------    ------
Gross margin................................................     291       668       621
Research and development....................................     337       280       155
Selling, general and administrative.........................     251       191       150
Purchased research and development..........................      --        30       121
Special charges.............................................     147        --        --
                                                              ------    ------    ------
Operating (loss) earnings...................................    (444)      167       195
Other income, net...........................................      14        13         3
                                                              ------    ------    ------
(Loss) income before income taxes...........................    (430)      180       198
(Benefit) provision for income taxes........................    (168)       54       114
                                                              ------    ------    ------
Net (loss) income...........................................  $ (262)   $  126    $   84
                                                              ======    ======    ======
</TABLE>
 
<TABLE>
<CAPTION>
                                                                 YEAR ENDED SEPTEMBER 30,
                                                              -------------------------------
                                                               1998        1997        1996
                                                              -------     -------     -------
                                                              (AS A PERCENTAGE OF NET SALES)
<S>                                                           <C>         <C>         <C>
Net sales...................................................   100.0%      100.0%      100.0%
Cost of sales...............................................    75.8        52.7        57.8
                                                               -----       -----       -----
Gross margin................................................    24.2        47.3        42.2
Research and development....................................    28.1        19.9        10.5
Selling, general and administrative.........................    20.9        13.5        10.2
Purchased research and development..........................      --         2.1         8.2
Special charges.............................................    12.2          --          --
                                                               -----       -----       -----
Operating (loss) earnings...................................   (37.0)       11.8        13.3
Other income, net...........................................     1.2         0.9         0.2
                                                               -----       -----       -----
(Loss) income before income taxes...........................   (35.8)       12.7        13.5
(Benefit) provision for income taxes........................   (14.0)        3.8         7.8
                                                               -----       -----       -----
Net (loss) income...........................................   (21.8)%       8.9%        5.7%
                                                               =====       =====       =====
</TABLE>
 
                                       45
<PAGE>   53
 
  1998 COMPARED TO 1997
 
     Net sales.  Net sales decreased 15 percent to $1,200 million in fiscal 1998
from $1,412 million in fiscal 1997. This decrease was principally due to a
decline in sales of $221 million from PC modems in Personal Computing and $50
million from central site modems in Network Access. The decrease in modem sales
in 1998 was due to significant price declines of the Company's V.34 and 56 Kbps
products, partially offset by a 20 percent increase in modem unit volume.
Personal Imaging sales also declined 22 percent to $102 million, reflecting
lower product demand, principally as a result of the protracted Asia-Pacific
recession. These sales declines were partially offset by an increase in sales
from Wireless Communications and Digital Infotainment. Wireless Communications
sales grew 48 percent to $170 million, driven by increased volume of digital
cordless telephone chipsets and power amplifier components. Digital Infotainment
sales grew 30 percent to $145 million as a result of increased demand for video
encoders/decoders and broadband communications products.
 
     Gross margin.  Cost of sales consists predominantly of purchased materials,
labor and overhead (including depreciation) associated with product
manufacturing, royalty and other intellectual property costs, warranty and
sustaining engineering expenses pertaining to products sold. Gross margin
decreased 56 percent to $291 million in fiscal 1998 from $668 million in fiscal
1997. As a percentage of sales, gross margin declined to 24 percent in 1998 from
47 percent in fiscal 1997. This decline was due primarily to a 50 percent
reduction in average selling prices of PC modem products, slightly offset by
higher margins on Wireless Communications and Digital Infotainment products.
Gross margin was also adversely impacted by the fourth quarter 1998 inventory
write-off of $66 million (5.5 percent of sales), the $43 million charge (3.6
percent of sales) for intellectual property matters and $19 million (1.6 percent
of sales) related to the underutilization of manufacturing capacity. The 50-day
strike that ended in July 1998 had little or no effect on the full-year
operating results of the Company.
 
     Research and development.  Research and development expenses consist
primarily of salaries and selected costs of employees engaged in product/process
research, design and development activities, as well as related subcontracting
activities, prototype development, cost of design tools and technology license
agreement expenses. Investments in new product and process development increased
20 percent to $337 million in fiscal 1998 from $280 million in fiscal 1997. This
increase was due primarily to investments in expansion platform products,
including the expanded use of technology licensing agreements with external
partners. Significant product investments were made in audio/telephony modem
products, higher density central site modems, ATM, T1/E1 and SONET portfolio
expansion, GSM and CDMA RFICs, GSM systems, broadband communication products,
including cable modems, and MFP products. The Company also continued investments
in specialty process development activities, including Bipolar, BiCMOS and GaAs
processes.
 
     Selling, general and administrative expenses.  Selling, general and
administrative ("SG&A") expenses consist mainly of employee expenses not related
to product manufacturing or research and development, commissions to sales
representatives, advertising, marketing expenses, legal costs and provisions for
doubtful accounts. SG&A expenses increased 31 percent to $251 million in fiscal
1998 from $191 million in fiscal 1997. This increase was primarily due to higher
costs of cooperative advertising programs associated with various channel and
brand development campaigns of approximately $26 million and $11 million related
to the growth of the worldwide sales organization to support the Company's
expanding product portfolio, offset by a reduction in the allowance for doubtful
accounts in fiscal 1997, due to favorable resolution of accounts which were
previously reserved.
 
     Operating (loss) earnings.  The Company incurred an operating loss of $444
million (including special charges of $147 million) in fiscal 1998, compared to
operating earnings of $167 million (including a $30 million charge for purchased
research and development) in fiscal 1997.
 
     Other income, net.  Other income consists of royalty income from technology
license agreements, gains and losses on sales of property and investments and
other non-operating income and expense.
 
     Net (loss) income.  The net loss for fiscal 1998 was $262 million, compared
to fiscal 1997's net income of $126 million.
 
                                       46
<PAGE>   54
 
  1997 COMPARED TO 1996
 
     Net sales.  Net sales decreased 3.9 percent to $1,412 million in fiscal
1997 from $1,470 million in fiscal 1996 despite the addition of sales resulting
from the acquisition of Brooktree at the end of fiscal 1996. Analog PC modem
sales decreased $312 million due to severe price declines in all the Company's
PC modem products, primarily in connection with the introduction of the
Company's K56Flex(TM) product. Average selling prices for PC modem products
declined by 35 percent compared to fiscal 1996, partially offset by a modem unit
volume increase of 25 percent. This sales decrease was partially offset by sales
increases in the Company's expansion platforms. The Company's Personal Imaging
platform grew 16 percent to $131 million, led by a strong demand for fax modem
chipsets. Network Access sales grew 80 percent to $193 million, related to sales
of remote access concentrators. Digital Infotainment sales grew 250 percent to
$112 million, driven by video encoder/decoder product rollouts and the
introduction of RF tuner products. Sales in Wireless Communications increased
$70 million (or 156 percent) over the prior year primarily due to growth in
sales of the Company's digital cordless telephone products and power amplifier
components.
 
     Gross margin.  Gross margin increased 7.6 percent to $668 million in fiscal
1997 from $621 million in fiscal 1996. As a percentage of sales, gross margin
increased to 47 percent from 42 percent. This increase was due to $107 million
of lower costs of intellectual property matters in fiscal 1997 compared to
fiscal 1996, partially offset by the impact of approximately 25 percent lower
average selling prices for modem products.
 
     Research and development.  Investments in new product and process
development increased 81 percent to $280 million in fiscal 1997 from $155
million in fiscal 1996. This increase was due primarily to an increase in
investments in mixed signal and manufacturing process technologies and the
inclusion of research and development expenditures from Brooktree, the Hi-Media
broadband communication chipset business acquired from ComStream Corporation
("Hi-Media") and the Company's other acquisitions.
 
     Selling, general and administrative.  SG&A expenses increased 27 percent to
$191 million in fiscal 1997 from $150 million in fiscal 1996. The increase was
due to the inclusion of SG&A costs from Brooktree, costs of $6 million related
to the growth in the Company's worldwide sales organization and a $7 million
increase in advertising costs for the K56Flex(TM) campaign. The increase was
partially offset by a decrease in bad debt expense of $26 million associated
with receipt of payments for accounts which were previously reserved.
 
     Operating earnings.  Operating earnings (including a $30 million charge for
purchased research and development in connection with the acquisition of
Hi-Media) were $167 million in fiscal 1997, a decrease of $28 million from
operating earnings (including a $121 million charge for purchased research and
development in connection with the Brooktree acquisition) of $195 million in
fiscal 1996.
 
     Other income, net.  Other income increased $10 million from 1996 to 1997,
principally resulting from $7 million of income related to the favorable
settlement of a technology license dispute in 1997.
 
     Net income (loss).  Net income in 1997 was $126 million, compared with net
income of $84 million in 1996.
 
INCOME TAXES
 
     The effective income tax rates for Semiconductor Systems were determined on
a stand-alone basis and were 39.1 percent in 1998, 30.0 percent in 1997 and 57.6
percent in 1996. The effective tax rates are generally lower than the statutory
rate due to tax benefits utilized by Semiconductor Systems related to export
sales and research credits. The effective tax rate was higher in fiscal 1996 due
to the non-deductible charge recorded in connection with the Brooktree
acquisition.
 
ACQUISITIONS
 
     In September 1996, the Company acquired Brooktree, a designer and supplier
of mixed-signal integrated circuits for high-speed digital communications and
media processing applications, for $254 million, net of cash acquired. The
excess of the purchase price over the fair value of tangible net assets of $178
million was allocated to intangible assets, including $50 million for developed
technology, $7 million for assembled
 
                                       47
<PAGE>   55
 
workforce and $121 million for purchased research and development. Developed
technology and assembled workforce are being amortized on a straight-line basis
over eight and ten years, respectively.
 
     Purchased research and development, which represented the value assigned to
projects in process at Brooktree at the date of acquisition which had not yet
reached technological feasibility and had no alternative future use, was charged
immediately to expense. The research and development projects related to three
categories of products in process: Communications, which includes products for
the telecommunications industry and high-speed T1/E1 applications, as well as
WAN and ATM products; Graphics and Imaging, which includes integrated circuits
that enable PC vendors to offer cost-effective graphic and video processing; and
Multimedia, which includes products that enable PCs to simultaneously control
graphics, text, animation, sound and video through use of "packeted data".
 
     At the date of the acquisition, Brooktree had several projects in process
at various stages of completion. The efforts to complete these projects included
finalization of design, device layout, fabrication, testing and systems
integration. At the date of the acquisition, the estimated amount and timing of
effort to complete these projects varied by product platform and averaged
approximately $40 million annually for the first five years after the
acquisition, declining steadily thereafter.
 
     In May 1997, the Company acquired Hi-Media for $42 million in cash. The
purchase price allocation included $30 million ($19 million after-tax) for
purchased research and development. The projects in process at Hi-Media at the
date of acquisition which had not yet reached technological feasibility and had
no alternative future use related to integrated circuits for the direct
broadcast satellite (DBS), wireless (MMDS) and cable modem markets. The efforts
to complete these projects included finalization of design, device layout,
fabrication, testing and systems integration. At the date of the acquisition,
the estimated amount and timing of effort to complete these projects varied by
product platform and averaged approximately $11 million annually for the first
five years after the acquisition.
 
LIQUIDITY AND CAPITAL RESOURCES
 
     Semiconductor Systems has obtained significant investments from Rockwell as
the business pursued its strategies of product diversification and development
of world-class manufacturing capabilities. Net transfers of cash from Rockwell
to Semiconductor Systems totaled $172 million in fiscal 1998, $86 million in
fiscal 1997 and $341 million in fiscal 1996.
 
     Cash provided by operating activities was $98 million in fiscal 1998, $296
million in fiscal 1997 and $315 million in fiscal 1996. The Company's fiscal
1998 operating activities generated almost $100 million in cash despite the
significant net loss, due in part to improvement in accounts receivable
collections and the non-cash special and other charges included in 1998's net
loss. Fiscal 1997's operating cash flow was due to the Company's strong
profitability, offset somewhat by the settlement of certain intellectual
property matters. Fiscal 1996's operating cash flow was driven by explosive
revenue growth principally for the Company's V.34 PC modem products, partially
offset by increases in receivables and inventories of $205 million, related to
this strong market demand.
 
     Cash provided by operating activities as well as transfers from Rockwell
have funded significant investments in product and process technology, including
capital expenditures of $270 million in fiscal 1998, $317 million in fiscal 1997
and $380 million in fiscal 1996. The capital expenditures included capacity
expansion at the Company's main fabrication facility in Newport Beach,
California and investments in manufacturing process technology to reduce
manufacturing costs. The Company also made several strategic acquisitions to
broaden its product portfolio and market positions. These acquisitions included
Brooktree, for approximately $254 million (net of cash acquired) in fiscal 1996
and Hi-Media for approximately $42 million in fiscal 1997. Investing activities
from fiscal 1996 through fiscal 1998 also included approximately $128 million of
cash used for the Company's wafer fabrication facilities in Colorado Springs,
Colorado.
 
     Management expects that cash requirements during the next two or three
years will be reduced by several factors. As the Company's expansion platforms
mature, research and development expenditures should decline from $337 million
in fiscal 1998 to approximately $250 million in fiscal 1999. After several years
of
 
                                       48
<PAGE>   56
 
significant capital investments to improve manufacturing capabilities, the
Company expects fiscal 1999 capital expenditures to decline to approximately
$160 million from $270 million in fiscal 1998. In addition, the Company is
exploring wafer manufacturing alternatives, including the increased use of
foundries, joint ventures or other actions. These manufacturing alternatives are
expected to keep capital expenditures over the next two to three years below
$200 million per year.
 
     In September 1998, Semiconductor Systems began to take initial steps to
obtain financing on a stand-alone basis, in order to operate as an independent
company. Prior to the Distribution, the Company expects to enter into a
three-year $350 million secured revolving credit facility with a group of banks.
See "Credit Facility". Management believes that the credit facility, coupled
with improved operating cash flow resulting in part from the actions initiated
in the fourth quarter of fiscal 1998, will be sufficient to fund future capital
requirements.
 
     Prior to the Distribution, the Company will distribute its wafer
fabrication facilities in Colorado Springs, Colorado (and the related tax
benefit) to Rockwell. In addition, Rockwell will contribute $65 million in cash
to the Company, which will be placed in an escrow account to be used to satisfy
the Company's obligation with respect to the Celeritas litigation.
 
   
YEAR 2000 READINESS DISCLOSURE
    
 
     Semiconductor Systems has developed plans to address issues related to the
impact of the Year 2000 on each of five major areas: the Company's products,
business systems (computer systems that handle business processes),
infrastructure (servers, desktop computers, networks, telecom systems and
software), manufacturing systems (computer systems used in the manufacturing
process) and suppliers (critical materials suppliers to the business). Each of
the five areas will undergo the following process to ensure readiness for the
Year 2000. First, in the inventory phase, all Semiconductor Systems assets are
inventoried to identify those that have any type of software or hardware Year
2000-related issues. Second, in the assessment phase, all inventoried items are
assessed to confirm that a Year 2000-related issue is present and the extent of
remediation required. Third, in the strategy phase, a remediation strategy is
created to ensure that all critical systems are upgraded to be Year 2000 ready
by December 31, 1999. Fourth, in the conversion/upgrade phase, upgrades are
performed on all items identified in the assessment and strategy phases.
Finally, in the certification phase, all upgraded items receive final
certification testing to verify Year 2000 readiness. Semiconductor Systems has
completed the inventory phase for all five areas. In addition, it has completed
the assessment and strategy phases and is currently in the conversion and
certification phases for the products, business systems and manufacturing
systems areas. Semiconductor Systems is currently in the assessment and strategy
phases for the infrastructure and supplier areas. Semiconductor Systems is
integrating its testing efforts with SEMATECH, a consortium of semiconductor
manufacturing companies, to ensure best practice testing. The manufacturing
systems, hardware systems and software applications areas are being tested under
the SEMATECH guidelines.
 
     The Company's greatest area of uncertainty centers primarily in the
supplier and manufacturing areas, due to the number of equipment and materials
suppliers involved and their various stages of readiness for Year 2000. In
particular, the Company is dependent on semiconductor equipment manufacturers to
supply the upgrades required to remediate Year 2000 issues in the manufacturing
systems area and suppliers to upgrade their systems to ensure an uninterrupted
supply of materials. A Year 2000-related failure by a significant equipment or
materials supplier could result in the temporary slowdown of production by the
Company, the duration of which the Company reasonably estimates would be not
more than a few days. As a result, the Company's contingency planning centers
heavily on the supplier and manufacturing systems areas. For the top 5 to 10
percent of its critical materials and manufacturing suppliers, the Company is
planning on-site audits and intends to monitor specific Year 2000-based
milestones to ensure compliance. In the event a supplier does not meet the
Company's milestones for Year 2000 compliance, the Company is in the process of
identifying specific target dates (beginning as early as April 1999) for all
critical materials suppliers by which the Company will implement a contingency
plan that includes alternate sourcing and stockpiling of materials.
 
                                       49
<PAGE>   57
 
     Part of the Company's initial assessment phase included a detailed Year
2000 questionnaire sent to all critical materials and manufacturing suppliers.
This questionnaire included questions on products, services, internal operating
systems and the supplier's own supply chain. To date, the Company has received
responses from approximately 80 percent of those questioned. The Company is
following up the questionnaires, where necessary, with on-site audits to ensure
Year 2000 compliance. The Company has also contacted its major customers with
respect to their Year 2000 compliance efforts and does not believe that
customers will have any Year 2000 compliance problems that would have a material
adverse effect on the Company's business.
 
   
     In connection with the Company's receipt of transition services pursuant to
the Transition Agreement, the Company will rely on certain of Rockwell's
computer systems, including its payroll and benefits administration systems, for
a period of up to two years after the Distribution. See "Arrangements Between
Rockwell and the Company -- Transition Agreement". The Company believes that the
Rockwell systems on which it will rely for transition services will be Year 2000
compliant, such that its reliance thereon will not have a material adverse
effect on the Company's financial position or results of operations.
    
 
     Semiconductor Systems, utilizing both internal and external resources to
address the Year 2000 issue, expects to be substantially complete with this
project by the middle of calendar year 1999. The current estimate of total
project cost is approximately $6 million, which includes the cost of purchasing
certain hardware and software. Approximately $5 million of this amount is for
capital investments, with the remainder being expenses (primarily salary costs).
At September 30, 1998, approximately $500,000 had been spent, with the majority
of the remaining amount to be spent within the next year. Semiconductor Systems
continues to evaluate the estimated costs associated with these efforts based on
actual experience. Management believes, based on available information, that the
Company will be able to remediate Year 2000-related issues in the products,
business systems and infrastructure areas without any material adverse effect on
its business operations, products or financial condition. However, the Company
could be adversely impacted by the Year 2000 issues faced by major suppliers,
distributors, customers, vendors and financial services organizations with which
the Company interacts. Any disruption in the Company's operations as a result of
the failure of any of these third parties to be Year 2000 compliant could have a
material adverse effect on Semiconductor Systems' business operations, products
and financial condition.
 
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
     The Company's financial instruments include cash, short-term debt and
foreign currency forward exchange contracts. At September 30, 1998, the carrying
values of the Company's financial instruments approximated their fair values
based on current market prices and rates.
 
     It is the policy of the Company not to enter into derivative financial
instruments for speculative purposes. The Company enters into foreign currency
forward exchange contracts to protect itself from adverse currency rate
fluctuations on foreign currency commitments entered into in the ordinary course
of business. These commitments are generally for terms of less than one year.
The foreign currency forward exchange contracts are executed with creditworthy
banks and are denominated in currencies of major industrial countries. The
notional amount of all the Company's outstanding foreign currency forward
exchange contracts aggregated $17 million at September 30, 1998 and $28 million
at September 30, 1997. The gains and losses relating to these foreign currency
forward exchange contracts are deferred and included in the measurement of the
foreign currency transaction subject to the hedge. The Company believes that any
gain or loss incurred on foreign currency forward exchange contracts is offset
by the effects of currency movements on the respective underlying hedged
transactions.
 
     Based on the Company's overall currency rate exposure at September 30,
1998, a 10 percent change in currency rates would not have had a material effect
on the financial position, results of operations or cash flows of the Company.
 
CAUTIONARY STATEMENT
 
     This Information Statement contains statements relating to future results
of the Company (including certain projections and business trends) that are
"forward-looking statements". Actual results may differ
                                       50
<PAGE>   58
 
materially from those projected as a result of certain risks and uncertainties.
These risks and uncertainties include, but are not limited to, global and market
conditions, including, but not limited to, the cyclical nature of the
semiconductor industry and the markets addressed by the Company's and its
customers' products; demand for and market acceptance of new and existing
products; successful development of new products; the timing of new product
introductions; the availability and extent of utilization of manufacturing
capacity; price erosion; other competitive factors; changes in product mix;
fluctuations in manufacturing yields; product obsolescence; the ability to
develop and implement new technologies and to obtain protection of the related
intellectual property; a modest increase in unit demand and a return to the
historical pattern of price erosion in the PC modem market, as well as the
successful implementation of the Company's diversification strategy and
restructuring plan; labor relations of the Company, its customers and suppliers;
competitive product and pricing pressures; timely completion of the Year 2000
modifications by the Company and its key suppliers and customers; and the
uncertainties of litigation, as well as other risks and uncertainties, including
but not limited to those set forth under "Risk Factors" and those detailed from
time to time in the filings of the Company with the Commission.
 
                                       51
<PAGE>   59
 
                                THE DISTRIBUTION
 
INTRODUCTION
 
     On November 4, 1998, the Board of Directors of Rockwell approved the
Distribution, which will result in the separation of Rockwell into two companies
by means of a tax-free spin-off of Semiconductor Systems. The Distribution is
expected to occur at the close of business on December 31, 1998 (subject to the
satisfaction or waiver of certain conditions set forth in the Distribution
Agreement). At the time of the Distribution, the Company will own, directly or
through subsidiaries, substantially all of the assets, liabilities (including
liabilities relating to former operations) and operations which prior to the
Distribution Date comprise Semiconductor Systems. See "The Semiconductor Systems
Business".
 
     Shareowners of Rockwell with inquiries relating to the Distribution should
contact the Distribution Agent, telephone number (800) 204-7800, or Rockwell
Shareowner Services, telephone number (714) 424-4550. After the Distribution
Date, shareowners of the Company with inquiries relating to the Distribution or
their investment in the Company should contact the Company at 4311 Jamboree
Road, Newport Beach, California 92660-3095, telephone number (949) 221-4600 or
ChaseMellon, the Company's Transfer Agent, at P.O. Box 3315, South Hackensack,
New Jersey 07606-1915, telephone number (888) 470-5829.
 
BACKGROUND AND REASONS FOR THE DISTRIBUTION
 
     Rockwell's Board of Directors believes that the Distribution will
accomplish a number of important business objectives and, by enabling Rockwell
and the Company to develop their respective businesses separately, should better
position the two companies to produce greater total shareowner value over the
long term. The Distribution will separate Semiconductor Systems from Rockwell's
remaining automation (the "Automation Business") and avionics and communications
(the "Avionics & Communications Business") businesses, each with distinct
financial, investment and operating characteristics, so that each can adopt
strategies and pursue objectives appropriate to its specific business. The
Distribution will permit the management of each company to prioritize the
allocation of its respective management and financial resources for achievement
of its own corporate objectives. In particular, Rockwell believes that the
Distribution will permit each business to maximize its strengths and provide
greater flexibility to pursue business opportunities, including acquisitions,
joint ventures and other business alliances and combinations. In addition, the
establishment of Company Common Stock as a separate, publicly-traded equity
security will increase the Company's ability to participate in the ongoing
process of consolidation in its industry by facilitating the Company's ability
to effect acquisitions using Company Common Stock as consideration. Further, the
Distribution is expected to allow each of Rockwell and the Company to attract,
motivate and retain key personnel by enabling Rockwell and the Company to
provide more effective incentive compensation programs that are based on the
performance of the respective business in which such individuals are employed
without being influenced by the results of the business in which they have no
involvement. The Distribution also will enable shareowners and potential
investors to evaluate better the financial performance of each business and its
strategies, enhancing the likelihood that each will achieve appropriate market
recognition for its own performance.
 
MANNER OF EFFECTING THE DISTRIBUTION
 
     The Distribution is expected to be made on the Distribution Date to
shareowners of record of Rockwell Common Stock as of the close of business on
the Record Date. On the Distribution Date, Rockwell will effect the Distribution
by delivering all of the outstanding shares of Company Common Stock to the
Distribution Agent for allocation to the holders of record of Rockwell Common
Stock as of the close of business on the Record Date. In the Distribution, each
Rockwell shareowner will receive one share of Company Common Stock for every two
shares of Rockwell Common Stock held as of the close of business on the Record
Date. The delivery of a share of Company Common Stock in connection with the
Distribution also will constitute the delivery of the Company Right (as defined
below) associated with such share. Based on the number of
 
                                       52
<PAGE>   60
 
shares of Rockwell Common Stock outstanding as of October 31, 1998,
approximately 95 million shares of Company Common Stock will be distributed in
the Distribution.
 
     Company shareowners will have their ownership of Company Common Stock
registered only in book-entry form. Book-entry registration refers to a method
of recording stock ownership in the Company's records in which no share
certificates are issued. On the Distribution Date, each owner of Rockwell Common
Stock as of the close of business on the Record Date will be credited through
book-entry in the records of the Company with the number of whole shares of
Company Common Stock received by the shareowner. Commencing on or about the
Distribution Date, the Distribution Agent will begin mailing account statements
to such Rockwell shareowners indicating the number of shares of Company Common
Stock that each such shareowner owns. Following the Distribution Date, any
Company shareowner whose ownership of Company Common Stock is registered in
book-entry form may obtain at any time without charge, physical certificates to
represent the number of whole shares owned by such shareowner by contacting the
Transfer Agent. All shares of Company Common Stock distributed in the
Distribution will be fully paid and nonassessable and holders thereof will not
be entitled to preemptive rights. See "Description of Company Capital
Stock -- Company Common Stock".
 
     Fractional shares of Company Common Stock will not be distributed.
Fractional shares will be aggregated and sold in the public market by the
Distribution Agent and the aggregate net proceeds will be distributed ratably to
those shareowners entitled to fractional interests. See "-- Certain Federal
Income Tax Consequences of the Distribution".
 
     Participants in the Rockwell Investor Services Program will be credited
with the number of whole shares of Company Common Stock distributed in the
Distribution in respect of the Rockwell Common Stock held in their accounts.
Shares of Company Common Stock credited as a result of the Distribution to
participants in the Rockwell Investor Services Program in respect of the
Rockwell Common Stock held by such participants in their accounts will be
aggregated with shares of Company Common Stock distributed in the Distribution
in respect of Rockwell Common Stock held outside such accounts (except shares
held in the Rockwell Savings Plan) and will be credited to such shareowner
through book-entry in the records of the Company. After such aggregation any
fractional shares will be sold and the net proceeds distributed in the same
manner as described above.
 
     Participants in the Rockwell Savings Plan will have their Rockwell Common
Stock accounts credited with the number of shares (including fractional shares)
of Company Common Stock distributed in the Distribution in respect of the
Rockwell Common Stock held in their Rockwell Savings Plan accounts. Individual
Rockwell Savings Plan participants, rather than the Rockwell Savings Plan, will
have authority to determine if and when shares of Company Common Stock held in
their Rockwell Savings Plan accounts will be sold. See "Arrangements Between
Rockwell and the Company -- Employee Matters Agreement".
 
     NO CONSIDERATION WILL BE PAID BY SHAREOWNERS OF ROCKWELL FOR THE SHARES OF
COMPANY COMMON STOCK TO BE RECEIVED BY THEM IN THE DISTRIBUTION, NOR WILL THEY
BE REQUIRED TO SURRENDER OR EXCHANGE SHARES OF ROCKWELL COMMON STOCK OR TAKE ANY
OTHER ACTION IN ORDER TO RECEIVE COMPANY COMMON STOCK.
 
     The Distribution will not affect the number of outstanding shares of
Rockwell Common Stock or the rights attendant thereto. Certificates representing
outstanding shares of Rockwell Common Stock will continue also to represent
rights to purchase shares of Series A Junior Participating Preferred Stock,
without par value, of Rockwell ("Rockwell Junior Preferred Stock") pursuant to
the Rights Agreement, dated as of November 30, 1996, between Rockwell and
ChaseMellon, as rights agent.
 
TRADING MARKET
 
     There is no current trading market for the Company Common Stock, and while
a "when-issued" trading market is expected to develop prior to the Distribution,
there can be no assurance as to the prices at which trading in the Company
Common Stock will occur after completion of the Distribution. See "Risk
Factors --
 
                                       53
<PAGE>   61
 
No Prior Market For Company Common Stock; Volatility; Possibility of Substantial
Sales of Company Common Stock".
 
   
     The Company Common Stock has been approved for listing on Nasdaq under the
trading symbol "CNXT". The Company initially will have approximately 59,000
shareowners of record, based on the number of record holders of Rockwell Common
Stock as of October 31, 1998. For certain information regarding options to
purchase Company Common Stock that will be or may become outstanding after the
Distribution, see "Arrangements Between Rockwell and the Company -- Employee
Matters Agreement", "Management of the Company -- Historical Compensation of
Executive Officers" and "-- Benefit Plans Following the Distribution".
    
 
     Shares of Company Common Stock distributed to Rockwell shareowners in the
Distribution will be freely transferable, except for shares received by persons
who may be deemed to be "affiliates" of the Company under the Securities Act of
1933, as amended (the "Securities Act"), and the rules promulgated thereunder.
Persons who may be deemed to be affiliates of the Company after the Distribution
generally include individuals or entities that control, are controlled by, or
are under common control with the Company, and may include certain officers and
directors of the Company as well as principal shareowners of the Company, if
any. Persons who are affiliates of the Company will be permitted to sell their
shares of Company Common Stock only pursuant to an effective registration
statement under the Securities Act or an exemption from the registration
requirements of the Securities Act, such as the exemption afforded by Rule 144
under the Securities Act.
 
DIVIDEND POLICY
 
     It is anticipated that following the Distribution, the Company initially
will not pay cash dividends and Rockwell initially will continue to pay
quarterly cash dividends at the same annual rate of $1.02 per share as currently
paid on Rockwell Common Stock. However, the declaration and payment of dividends
by the Company and Rockwell will be at the sole discretion of their respective
Boards of Directors.
 
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE DISTRIBUTION
 
     Rockwell has received the Tax Ruling from the IRS to the effect that the
Distribution will qualify as a tax-free reorganization within the meaning of
Section 368(a)(1)(D) of the Code. So long as the Distribution qualifies as a
tax-free reorganization within the meaning of Section 368(a)(1)(D) of the Code
and is not disqualified as a tax-free transaction to Rockwell under Section
361(c)(2) of the Code because of a post-Distribution acquisition of Rockwell or
the Company by a third party, the material United States federal income tax
consequences of the Distribution will be as follows:
 
          (i) no gain or loss will be recognized by or be includable in the
     income of a holder of Rockwell Common Stock solely as a result of the
     receipt of Company Common Stock in the Distribution, except, as described
     below, in connection with cash received in lieu of fractional shares of
     Company Common Stock;
 
          (ii) no gain or loss will be recognized by Rockwell upon the
     Distribution;
 
          (iii) assuming that a holder of Rockwell Common Stock holds such
     Rockwell Common Stock as a capital asset, such holder's holding period for
     Company Common Stock received in the Distribution will include the period
     during which such Rockwell Common Stock was held;
 
          (iv) a Rockwell shareowner who receives cash as a result of the sale
     of a fractional share of Company Common Stock by the Distribution Agent on
     behalf of such shareowner will be treated as having received such
     fractional share in the Distribution and then having sold such fractional
     share. Accordingly, such shareowner will recognize gain or loss equal to
     the difference between the cash received and the amount of tax basis
     allocable (as described below) to such fractional share. Such gain or loss
     will be capital gain or loss if such fractional share would have been held
     by such shareowner as a capital asset; and
 
                                       54
<PAGE>   62
 
          (v) the tax basis of Rockwell Common Stock held by a Rockwell
     shareowner immediately prior to the Distribution will be apportioned (based
     upon relative fair market values at the time of the Distribution) between
     such Rockwell Common Stock and Company Common Stock received (including any
     fractional share of Company Common Stock deemed received) by such
     shareowner in the Distribution.
 
     While the Tax Ruling relating to the qualification of the Distribution as a
tax-free reorganization within the meaning of Section 368(a)(1)(D) of the Code
generally is binding on the IRS, the continuing validity of the Tax Ruling is
subject to certain factual representations and assumptions. Rockwell and the
Company are not aware of any facts or circumstances which would cause such
representations and assumptions to be untrue. If the Distribution were not to
qualify as a tax-free reorganization within the meaning of Section 368(a)(1)(D)
of the Code, Rockwell would recognize taxable gain equal to the excess of the
fair market value of the Company Common Stock distributed to Rockwell's
shareowners over Rockwell's tax basis in such Company Common Stock. In addition,
each Rockwell shareowner who receives Company Common Stock in the Distribution
would generally be treated as receiving a taxable distribution in an amount
equal to the fair market value of the Company Common Stock. If the Distribution
qualified under Section 368(a)(1)(D) of the Code but was disqualified as
tax-free to Rockwell under Section 361(c)(2) of the Code because of a post-
Distribution acquisition of Rockwell or the Company, Rockwell would recognize
taxable gain as described in the second preceding sentence above but the
Distribution would generally be tax-free to each Rockwell shareowner as
described in the preceding paragraph. See "Risk Factors -- Certain Federal
Income Tax Considerations".
 
     Promptly following the Distribution, information with respect to the
allocation of tax basis between Rockwell Common Stock and Company Common Stock
will be made available to the holders of Rockwell Common Stock.
 
     THE FOREGOING IS ONLY A SUMMARY OF THE MATERIAL UNITED STATES FEDERAL
INCOME TAX CONSEQUENCES OF THE DISTRIBUTION UNDER CURRENT LAW AND IS INTENDED
FOR GENERAL INFORMATION ONLY. EACH ROCKWELL SHAREOWNER SHOULD CONSULT HIS OR HER
TAX ADVISOR AS TO THE PARTICULAR CONSEQUENCES OF THE DISTRIBUTION TO SUCH
SHAREOWNER, INCLUDING THE APPLICATION OF STATE, LOCAL AND FOREIGN TAX LAWS, AND
AS TO POSSIBLE CHANGES IN TAX LAW THAT MAY AFFECT THE TAX CONSEQUENCES DESCRIBED
ABOVE.
 
     The Tax Allocation Agreement provides that neither Rockwell nor the Company
is to take any action inconsistent with, nor fail to take any action required
by, the request for the Tax Ruling or the Tax Ruling unless required to do so by
law or the other party has given its prior written consent or, in certain
circumstances, a supplemental ruling permitting such action is obtained. See
"Arrangements Between Rockwell and the Company -- Tax Allocation Agreement".
 
CONDITIONS; TERMINATION
 
     The Distribution is subject to the satisfaction or waiver of certain
conditions as set forth in the Distribution Agreement. Regardless of whether the
conditions are satisfied, Rockwell's Board of Directors, in its sole discretion,
without approval of Rockwell's shareowners, may terminate the Distribution
Agreement and abandon the Distribution at any time prior to the effective time
of the Distribution. See "Arrangements Between Rockwell and the
Company -- Distribution Agreement".
 
                                       55
<PAGE>   63
 
                 ARRANGEMENTS BETWEEN ROCKWELL AND THE COMPANY
 
     For the purpose of governing certain of the relationships between Rockwell
and the Company relating to the Distribution, to provide for an orderly
transition and for other matters, Rockwell and the Company will, prior to the
Distribution, enter into the agreements described below, forms of which (other
than the Transition Agreement) have been filed as exhibits to the Registration
Statement of which this Information Statement is a part. The following summaries
of the material terms of these agreements are qualified by reference to the
agreements as so filed.
 
DISTRIBUTION AGREEMENT
 
     Rockwell and the Company will enter into a distribution agreement (the
"Distribution Agreement") providing for, among other things, the principal
corporate transactions required to effect the separation of Semiconductor
Systems from the Automation and Avionics & Communications Businesses and the
Distribution, and certain other agreements governing the relationship between
Rockwell and the Company with respect to or in consequence of the Distribution.
The Distribution Agreement provides for the Distribution to be effective as of
the close of business on the Distribution Date.
 
     The Distribution Agreement further provides that prior to the Distribution,
Rockwell will transfer to the Company certain assets and liabilities of
Semiconductor Systems (including liabilities relating to former operations) not
already owned by the Company, including the stock of certain subsidiaries, and
the Company will transfer to Rockwell all assets and liabilities not
constituting part of Semiconductor Systems, including all assets and liabilities
of Rockwell's electronic commerce business. Rockwell will retain all cash and
cash equivalents of the Company and its wholly-owned subsidiaries at the time of
the Distribution, except for an amount equal to certain outstanding indebtedness
of the Company that will be retained by the Company (expected to be
approximately $14 million) and $65 million to be contributed to the Company in
respect of the Celeritas litigation, as described in the second following
paragraph. The Distribution Agreement generally provides for the elimination of
intercompany indebtedness between Rockwell and the Company in existence at the
time of the Distribution.
 
     The Distribution Agreement provides that prior to the Distribution, the
Company will distribute its wafer fabrication facilities in Colorado Springs,
Colorado (and the related tax benefit) to Rockwell. The Company will continue to
occupy the facilities after the Distribution until April 30, 1999 pursuant to a
lease from Rockwell. See "-- Transition Agreement".
 
     The Distribution Agreement also provides that prior to the Distribution,
Rockwell will contribute $65 million in cash to the Company, which will be
placed in an escrow account to be used to satisfy Semiconductor Systems'
obligation with respect to the Celeritas litigation. Pursuant to the
Distribution Agreement, the Company will be obligated to reimburse Rockwell for
any portion of the amount escrowed that is not used to satisfy the obligation
and is returned to the Company.
 
   
     Rockwell will retain all intellectual property owned by Rockwell or any of
its subsidiaries other than intellectual property used primarily in or related
primarily to Semiconductor Systems, which will be transferred to the Company
prior to the Distribution. The Distribution Agreement also includes cross
licenses by each of Rockwell and the Company to the other of rights to use,
subsequent to the Distribution, intellectual property of the licensor to the
extent the same is used by the licensee at the time of the Distribution. In
addition, for a period of five years following the Distribution Date, in certain
circumstances the Distribution Agreement authorizes each of Rockwell and the
Company to grant licenses of intellectual property owned by the other to
third-parties in connection with the resolution of intellectual property
disputes or the formation of alliances. The Distribution Agreement further
provides that if certain intellectual property to be transferred to the Company
is not commercially developed by the Company within a specified period, it will
be reconveyed to Rockwell.
    
 
     The Distribution Agreement provides that after the Distribution, Rockwell
will have all rights in and to the names "Rockwell" and "Rockwell International"
and all derivatives thereof, except for certain limited
 
                                       56
<PAGE>   64
 
rights of use granted to the Company. The Company will change the names of its
subsidiaries to eliminate therefrom the names "Rockwell", "Rockwell
International" and all derivatives thereof.
 
     In addition, pursuant to the Distribution Agreement, the Company will
assume all liabilities in respect of environmental matters to the extent
relating to current and former operations of Semiconductor Systems and
responsibility for all current and future litigation (including environmental
and intellectual property proceedings) against Rockwell or its subsidiaries to
the extent relating to Semiconductor Systems.
 
     Subject to certain exceptions, the Distribution Agreement provides for
cross-indemnities principally designed to place financial responsibility for the
liabilities of Semiconductor Systems (including liabilities relating to former
operations) with the Company and financial responsibility for the liabilities of
the Automation and Avionics & Communications Businesses (including liabilities
relating to former operations) with Rockwell. In addition, the Distribution
Agreement provides that each of Rockwell and the Company will indemnify the
other in the event of certain liabilities arising under the Exchange Act.
 
   
     The Distribution Agreement provides that prior to the Distribution the
Board of Directors of the Company will have approved the Company Certificate and
the Company By-Laws and that the Company and Rockwell will have taken all
actions which may be required to elect or otherwise appoint as directors of the
Company, at or prior to the time of the Distribution, the persons named herein
to constitute the Company's Board of Directors at the time of the Distribution.
See "Management of the Company -- Directors of the Company".
    
 
   
     The Distribution Agreement provides generally that all costs and expenses
incurred prior to the Distribution in connection with the Distribution, the
preparation, execution and delivery of the Distribution Agreement, the Employee
Matters Agreement, the Tax Allocation Agreement and the Transition Agreement and
the consummation of the transactions contemplated thereby will be charged to and
paid by Rockwell, other than (i) the costs and expenses of the Credit Facility,
(ii) $1 million representing approximately one-half of the cost of an outside
consultant retained to assist the Company in connection with the restructuring
and in establishing the Company as an independent, publicly-held company and
(iii) other costs and expenses to the extent relating to operations of
Semiconductor Systems subsequent to the Distribution, which will be charged to
and paid or reimbursed by the Company. Except as otherwise expressly provided,
all costs and expenses incurred following the Distribution in connection with
the implementation thereof will be charged to and paid by the party for whose
benefit the expenses are incurred, with any expenses which cannot be allocated
on such basis to be split equally between Rockwell and the Company.
    
 
   
     The Distribution Agreement provides that the Distribution will not be made
until all of the following conditions are satisfied or waived by Rockwell's
Board of Directors in its sole discretion: (i) receipt of the Tax Ruling; (ii)
final approval by Rockwell's Board of Directors of the Distribution; (iii)
receipt of all material consents required to effect the Distribution; (iv) the
Registration Statement of which this Information Statement is a part becoming
effective under the Exchange Act; (v) the Company Certificate, the Company
By-Laws and the Company Rights Agreement being adopted and in full force and
effect; (vi) the Company Common Stock being approved for listing on Nasdaq;
(vii) the transactions contemplated by the Distribution Agreement in connection
with separating Semiconductor Systems and the Automation and Avionics &
Communications Businesses being consummated in all material respects; (viii)
Rockwell and the Company having entered into each of the agreements,
instruments, understandings, assignments and other arrangements to be entered
into in connection with the transactions contemplated by the Distribution
Agreement, including, without limitation, any conveyance documents, the Employee
Matters Agreement, the Tax Allocation Agreement and the Transition Agreement,
and each such agreement being in full force and effect; (ix) a "no-action"
letter from the staff of the Commission being issued and in full force and
effect regarding the sale of Company Common Stock to be received by the Rockwell
Savings Plans in the Distribution by or on behalf of non-affiliate plan
participants without compliance with Rule 144 under the Securities Act; (x) no
order, injunction or decree having been issued by any court of competent
jurisdiction or other legal restraint or prohibition preventing consummation of
the Distribution being in effect; and (xi) no suit, action or proceeding by or
before any court of competent jurisdiction or other governmental entity having
been commenced and pending to restrain or challenge the Distribution, and no
inquiry having been received that in the reasonable
    
 
                                       57
<PAGE>   65
 
   
judgment of the Board of Directors of Rockwell may lead to such a suit, action
or proceeding. The conditions set forth in clauses (i) through (vi) of the
preceding sentence have been satisfied. Even if all the conditions have been
satisfied, the Distribution Agreement may be terminated and the Distribution
abandoned by Rockwell's Board of Directors, in its sole discretion, without the
approval of Rockwell shareowners, at any time prior to the Distribution.
    
 
EMPLOYEE MATTERS AGREEMENT
 
     Rockwell and the Company will enter into an employee matters agreement (the
"Employee Matters Agreement") providing for certain matters relating to
employees, employee benefit plans and compensation arrangements for current and
former employees of Semiconductor Systems and their beneficiaries (collectively,
the "Company Participants").
 
     The Employee Matters Agreement provides that, except as expressly set forth
therein, effective as of the time of the Distribution, the Company will or will
cause one or more of its subsidiaries to assume or retain, as the case may be,
all liabilities of Rockwell and its subsidiaries with respect to Company
Participants relating to employment by Rockwell or its subsidiaries, including
liabilities under medical, retiree health and life insurance, short and
long-term disability, workers compensation and other employee benefit plans,
policies and agreements.
 
     Pursuant to the Employee Matters Agreement and subject to the terms and
conditions thereof, Rockwell will retain liabilities for all vested benefits of
Company Participants accrued to the time of the Distribution under Rockwell's
U.S. and certain foreign pension plans and all related assets. Rockwell will
cause each employee participating in Rockwell's U.S. and such foreign pension
plans who will be employed by the Company at the time of the Distribution to
have a fully nonforfeitable right to such employee's benefit payable at normal
retirement age under Rockwell's U.S. and such foreign pension plans accrued as
of the time of the Distribution. Notwithstanding the foregoing, Rockwell shall
not grant to Company Participants credit for any purpose under Rockwell's U.S.
and such foreign pension plans for service with the Company after the
Distribution Date, including without limitation, credit for purposes of
determining eligibility for any early retirement or disability pension. The
Company will establish a defined benefit pension plan covering employees of
Semiconductor Systems who are members of Local 2295 of the International
Brotherhood of Electrical Workers and will establish a defined benefit pension
plan covering certain salaried employees accepting early retirement from the
Company as part of a voluntary early retirement program. The Company does not
expect to establish defined benefit pension plans for its remaining hourly and
salaried U.S. employees.
 
   
     The Employee Matters Agreement also provides for adjustment of outstanding
options to purchase Rockwell Common Stock ("Rockwell Options") granted under the
Rockwell International Corporation 1995 Long-Term Incentives Plan (the "Rockwell
1995 LTIP"), the Rockwell International Corporation 1988 Long-Term Incentives
Plan (the "Rockwell 1988 LTIP") and the Rockwell International Corporation
Directors Stock Plan (the "Rockwell Directors Plan", and, together with the
Rockwell 1995 LTIP and the Rockwell 1998 LTIP, the "Rockwell Option Plans").
Pursuant to the Employee Matters Agreement, Rockwell Options held by employees
of Semiconductor Systems (or by any director of the Company who is not also a
director of Rockwell) at the time of the Distribution will be replaced with
options to purchase shares of Company Common Stock ("Company Options"), with the
number of shares covered thereby and the exercise price per share to be
determined pursuant to a formula designed to cause (i) the economic value of
such Company Options (i.e., the difference between the aggregate fair market
value of the shares of Company Common Stock subject to such options and the
aggregate per share exercise price thereof) immediately after the Distribution
to be the same as the economic value immediately prior to the Distribution of
the Rockwell Options being replaced, and (ii) the ratio of the exercise price to
the fair market value of the underlying stock to remain the same immediately
before and immediately after the Distribution. See "Management of the
Company -- Benefit Plans Following the Distribution -- 1998 Stock Option Plan".
    
 
   
     Rockwell Options held by persons other than employees of Semiconductor
Systems (or any director of the Company who is not also a director of Rockwell)
at the time of the Distribution, other than those granted prior to January 1,
1990 or after August 31, 1998, will be adjusted so that following the
Distribution, each such
    
 
                                       58
<PAGE>   66
 
holder will hold options to purchase shares of Rockwell Common Stock and Company
Common Stock. The number of shares subject to, and the exercise price of, such
options will be adjusted to take into account the Distribution and to ensure
that the aggregate economic value (i.e., the difference between the aggregate
fair market value of the shares subject to such options and the aggregate per
share exercise price thereof) of the resulting Rockwell and Company options
immediately after the Distribution is equal to the aggregate economic value of
the Rockwell Options immediately prior to the Distribution.
 
   
     Rockwell Options held by persons other than employees of Semiconductor
Systems (or any director of the Company who is not also a director of Rockwell)
at the time of the Distribution that were granted prior to January 1, 1990 or
after August 31, 1998 will remain Rockwell Options, but the number of shares
covered thereby and the exercise price per share will be adjusted pursuant to a
formula designed to cause (i) the economic value of such Rockwell Options (i.e.,
the difference between the aggregate fair market value of the shares of Rockwell
Common Stock subject to such options and the aggregate per share exercise price
thereof) to remain the same immediately before and immediately after the
Distribution, after giving effect to any change in the fair market value of
Rockwell Common Stock resulting from the Distribution, and (ii) the ratio of the
exercise price to the fair market value of the underlying Rockwell Common Stock
to remain the same immediately before and immediately after the Distribution.
    
 
     Pursuant to the Employee Matters Agreement, following the Distribution,
Rockwell will retain sponsorship of the Rockwell Savings Plan and the trust
related thereto. Rockwell will cause each employee who will be employed by the
Company or one of its subsidiaries on the Distribution Date to have a fully
nonforfeitable right to such employee's account balances, if any, under the
Rockwell Savings Plan. The account balances of each such employee will be
maintained under the Rockwell Savings Plan; provided, however, that such
employees will not be entitled to make additional contributions into the
Rockwell Savings Plan and matching contributions will no longer be made by
either Rockwell or the Company on behalf of such employees. For purposes of
distribution of account balances under the Rockwell Savings Plan, continued
employment with the Company or any of its subsidiaries will be deemed to be
continued employment with Rockwell or one of its subsidiaries and such account
balances will not be distributed to such employees until termination of
employment with the Company or one of its subsidiaries, except as may otherwise
be permitted in accordance with the terms of the Rockwell Savings Plan and
applicable law.
 
     Based upon the Rockwell Savings Plan's ownership of Rockwell Common Stock
on October 31, 1998, the Rockwell Savings Plan is expected to hold approximately
17.8 million shares of Company Common Stock or approximately 19% of the Company
Common Stock outstanding immediately following the Distribution. The Rockwell
Savings Plan will provide Rockwell Savings Plan participants a high degree of
flexibility with respect to continued investment in Company Common Stock in
their Rockwell Savings Plan accounts, so that individual participants, rather
than the Rockwell Savings Plan, will have authority to determine if and when
shares of Company Common Stock held in participant accounts will be sold and
reinvested in accordance with the provisions of the Rockwell Savings Plan.
Participants in the Rockwell Savings Plan will be entitled to elect at any time,
but not more frequently than twice during each calendar month, to have all or a
portion of the Company Common Stock in their accounts under the Rockwell Savings
Plan sold, with the net proceeds reinvested as provided for in the Rockwell
Savings Plan. Under the Rockwell Savings Plan, dispositions of Company Common
Stock will be effected only at the direction and on behalf of individual
participants.
 
TAX ALLOCATION AGREEMENT
 
     Through the Distribution Date, the results of the operations of
Semiconductor Systems have been and will be included in Rockwell's consolidated
United States federal income tax returns. As part of the Distribution, Rockwell
and the Company will enter into a tax allocation agreement (the "Tax Allocation
Agreement") which provides, among other things, for the allocation between
Rockwell and the Company of federal, state, local and foreign tax liabilities
relating to Semiconductor Systems.
 
     The Tax Allocation Agreement also allocates between Rockwell and the
Company liability for any taxes which may arise in connection with separating
Semiconductor Systems and the Automation and Avionics & Communications
Businesses. The Tax Allocation Agreement provides, in general, that Rockwell
will be
 
                                       59
<PAGE>   67
 
responsible for any such taxes. The Tax Allocation Agreement also provides that
neither Rockwell nor the Company is to take any action inconsistent with, nor
fail to take any action required by, the request for the Tax Ruling or the Tax
Ruling unless required to do so by law or the other party has given its prior
written consent or, in certain circumstances, a supplemental ruling permitting
such action is obtained. Rockwell and the Company will agree to indemnify each
other with respect to any tax liability resulting from their respective failures
to comply with such provisions. In addition, the Company will be responsible for
any taxes imposed on Rockwell, the Company or Rockwell shareowners as a result
of the failure of the Distribution to qualify as a tax-free reorganization
within the meaning of Section 368(a)(1)(D) of the Code or the subsequent
disqualification of the Distribution as tax-free to Rockwell under Section
361(c)(2) of the Code if such failure or disqualification is attributable to
certain post-Distribution actions by or in respect of the Company (including its
subsidiaries) or its shareowners, such as the acquisition of the Company by a
third party at a time and in a manner that would cause such a failure or
disqualification. In addition, in connection with Rockwell's spin-off of Meritor
Automotive, Inc. on September 30, 1997, certain tax-free intragroup spin-offs
were effected by the Company. The Tax Allocation Agreement provides that the
Company will be responsible for any taxes imposed on Rockwell, the Company or
Rockwell shareowners in respect of those intragroup spin-offs if such taxes are
attributable to certain post-Distribution actions by or in respect of the
Company (including its subsidiaries) or its shareowners, such as the acquisition
of the Company by a third party at a time and in a manner that would cause such
taxes to be incurred. In the event that any of the taxes described above were to
become payable by the Company, such payment would have a material adverse effect
on the financial position, results of operations and cash flow of the Company.
 
     Though valid as between the parties thereto, the Tax Allocation Agreement
is not binding on the IRS and does not affect the liability of each of the
Company, Rockwell and their respective subsidiaries to the IRS for all federal
taxes of the consolidated group relating to periods through the Distribution
Date.
 
TRANSITION AGREEMENT
 
     Rockwell and the Company will enter into a transition services agreement
(the "Transition Agreement") prior to the Distribution. Pursuant to the
Transition Agreement, Rockwell will provide to the Company, for specified
periods after the Distribution Date and on mutually agreed terms, certain
services which prior to the Distribution have been provided to Semiconductor
Systems by Rockwell, including payroll and human resource services, health and
welfare benefit administration services, computing and telecommunications
services and research and development support services of the Rockwell Science
Center. Such services generally will be provided for periods of one to three
years. In addition, the Transition Agreement will provide for the continuation
of certain supply arrangements between the Company and Rockwell or certain
Rockwell subsidiaries. The Transition Agreement also will provide for continued
occupancy by the Company through April 30, 1999 of the Colorado Springs,
Colorado wafer fabrication facilities to be distributed to Rockwell prior to the
Distribution, pursuant to an operating lease under which the Company will pay
all costs of the facilities.
 
                                       60
<PAGE>   68
 
                           MANAGEMENT OF THE COMPANY
 
DIRECTORS OF THE COMPANY
 
     Immediately after the Distribution, the Board of Directors of the Company
is expected to consist of the individuals named below. The Company Certificate
provides that the Company will have three classes of directors, the initial
terms of office of which will expire, respectively, at the annual meetings of
shareowners in 2000, 2001 and 2002. The Company expects to hold its first annual
meeting of shareowners in February 2000. Successors to any directors whose terms
are expiring are elected to three-year terms and hold office until their
successors are elected and qualified. Also set forth below with respect to each
director is the class of which such director will be a member. Unless otherwise
indicated, (i) the business address for each person listed below is Conexant
Systems, Inc., 4311 Jamboree Road, Newport Beach, California 92660-3095 and (ii)
each individual listed below is a citizen of the United States. See "Description
of Company Capital Stock -- Certain Provisions in the Company Certificate and
Company By-Laws".
 
  CLASS I DIRECTORS
 
     Class I Directors will serve until the 2000 Annual Meeting of Shareowners
of the Company and until their respective successors are elected and qualified.
 
     DWIGHT W. DECKER -- Mr. Decker, age 48, will serve as Chairman of the Board
and Chief Executive Officer of the Company. Mr. Decker joined Rockwell in 1989
as director of data modem products engineering and, after serving in a number of
increasingly responsible management positions, served as Vice President/ General
Manager, Digital Communications Division of Rockwell's Telecommunications
Division from January 1993 to June 1995. He served as President,
Telecommunications of Rockwell from June 1995 to October 1995, President,
Rockwell Semiconductor Systems from October 1995 to March 1997, Senior Vice
President of Rockwell and President, Rockwell Semiconductor Systems and
Electronic Commerce from March 1997 to July 1998 and Senior Vice President of
Rockwell and President, Rockwell Semiconductor Systems since July 1998.
 
     F. CRAIG FARRILL -- Mr. Farrill, age 45, has been corporate Vice President,
Strategic Technology of AirTouch Communications, Inc. (wireless communications)
since June 1996. Prior thereto, he served as Vice President of Technology,
Planning and Development of AirTouch Communications, Inc. He is also a member of
the Board of Directors and a corporate officer of the CDMA Development Group, a
digital cellular technology consortium, which he founded in 1993.
 
  CLASS II DIRECTORS
 
     Class II Directors will serve until the 2001 Annual Meeting of Shareowners
of the Company and until their respective successors are elected and qualified.
 
   
     DONALD R. BEALL -- Mr. Beall, age 60, is former Chairman of the Board and
Chief Executive Officer of Rockwell and has been a director of Rockwell since
1978. He served as Chairman of the Board of Rockwell from February 1988 to
February 1998 and Chief Executive Officer of Rockwell from February 1988 to
September 1997, after serving nine years as President and Chief Operating
Officer. Mr. Beall joined Rockwell in 1968 and served in a number of senior
management positions prior to becoming Executive Vice President in September
1977 and President in February 1979. Mr. Beall is also Chairman of the Executive
Committee of the Board of Directors of Rockwell. Mr. Beall is a director of
Amoco Corporation, Meritor Automotive, Inc., The Procter & Gamble Company and
The Times Mirror Company. He is a trustee of the California Institute of
Technology and the University of California -- Irvine. He is an Overseer of the
Hoover Institution and is a member of The Business Council, The Chief Executives
Organization and The World Presidents Organization. He is also a director,
trustee or member of a number of other professional, civic and entrepreneurial
organizations.
    
 
     JERRE L. STEAD -- Mr. Stead, age 55, has been Chairman of the Board and
Chief Executive Officer of Ingram Micro Inc. (computer technology products and
services) since August 1996. Mr. Stead served as Chief Executive Officer and
Chairman of the Board of LEGENT Corporation (software development) from
 
                                       61
<PAGE>   69
 
January 1995 to August 1995. Prior thereto, Mr. Stead was Executive Vice
President, American Telephone and Telegraph Company and Chief Executive Officer
of AT&T Global Information Solutions (NCR Corporation) from May 1993 to December
1994 and President of AT&T Global Business Communications Systems from September
1991 to April 1993. He is a director of Armstrong World Industries, Inc.,
American Precision Industries, Inc. and TJ International, Inc. Mr. Stead is
Chairman of the Board of the Center of Ethics and Values at Garrett Seminary on
the Northwestern University campus.
 
  CLASS III DIRECTORS
 
     Class III Directors will serve until the 2002 Annual Meeting of Shareowners
of the Company and until their respective successors are elected and qualified.
 
     RICHARD M. BRESSLER -- Mr. Bressler, age 68, served as Chief Executive
Officer of Burlington Northern Inc. (rail transportation) from 1980 through
1988. Mr. Bressler retired in October 1990 as Chairman of both Burlington
Northern Inc. and Burlington Resources Inc. (natural resources operations),
positions he had held since 1982 and 1989, respectively. He served as Chairman
of the Plum Creek Management Company (timber operations) from April 1989 to
January 1993. He was Chairman of the El Paso Natural Gas Company from October
1990 through December 1993. Mr. Bressler, who has been a director of Rockwell
since 1986, will resign as a Rockwell director at the time of the Distribution.
Mr. Bressler is a director of H.F. Ahmanson and Company and General Mills, Inc.
and is active in a number of business and civic organizations.
 
   
COMMITTEES OF THE BOARD OF DIRECTORS
    
 
     The standing committees of the Board of Directors of the Company will
include an Audit Committee, a Compensation and Management Development Committee,
a Board Composition Committee and a Technology, Environmental and Social
Responsibility Committee, each of which will be comprised of non-employee
directors. The functions of each of these four committees are described below.
 
     The Audit Committee will review the scope and effectiveness of audits of
the Company by the Company's independent public accountants and internal
auditors; select and recommend to the Board of Directors the employment of
independent public accountants for the Company, subject to approval of the
shareowners; review the audit plans of the Company's independent public
accountants and internal auditors; review and approve the fees charged by the
independent public accountants; review the Company's annual financial statements
before their release; review the adequacy of the Company's system of internal
controls and recommendations of the independent public accountants with respect
thereto; review and act on comments and suggestions by the independent public
accountants and by the internal auditors with respect to their audit activities;
and monitor compliance by the employees of the Company with the Company's
standards of business conduct policies.
 
     The principal functions of the Compensation and Management Development
Committee (the "Compensation Committee") will be to evaluate the performance of
the Company's senior executives and plans for management succession and
development, to consider the design and competitiveness of the Company's
compensation plans, to review and approve senior executive compensation and to
administer the Company's incentive, deferred compensation, stock option and
long-term incentives plans pursuant to the terms of the respective plans. The
members of the Compensation Committee will be ineligible to participate in any
of the plans or programs which are administered by the Committee except the
Directors Plan (as defined below).
 
     The principal functions of the Board Composition Committee will be to
consider and recommend to the Board qualified candidates for election as
directors of the Company and periodically to prepare and submit to the Board for
adoption the Committee's selection criteria for director nominees. The Committee
will also periodically assess the performance of the Board of Directors and
report thereon to the Board. Shareowners of the Company may recommend candidates
for consideration by the Committee by writing to the Secretary of the Company
within certain specified time periods, giving the candidate's name, biographical
data and qualifications. See "Description of Company Capital Stock -- Certain
Provisions in the Company Certificate and Company By-Laws". Any such
recommendation should be accompanied by a written statement from the
 
                                       62
<PAGE>   70
 
individual of his or her consent to be named as a candidate and, if nominated
and elected, to serve as a director.
 
     The Technology, Environmental and Social Responsibility Committee will
review and monitor science and technological activities of the Company and will
review and assess the Company's policies and practices in the following areas:
employee relations, with emphasis on equal employment opportunity and
advancement; the protection and enhancement of the environment and energy
resources; product integrity and safety; employee health and safety; and
community and civic relations including programs for and contributions to
health, educational, cultural and other social institutions.
 
COMPENSATION OF DIRECTORS
 
     Non-employee directors of the Company will receive a retainer at the rate
of $30,000 per year for Board service, payable to initial non-employee directors
effective concurrently with the first grant of options under the 1999 LTIP (as
defined below). Pursuant to the Directors Plan, each non-employee director will
be granted an option to purchase 40,000 shares of Company Common Stock effective
upon election as a director (or, for the initial non-employee directors,
effective concurrently with the first grant of options under the 1999 LTIP).
Following completion of one year of service on the Board, each non-employee
director will thereafter be granted an option for 15,000 shares of Company
Common Stock immediately after each Annual Meeting of Shareowners of the
Company. Under the terms of the Company's directors' deferred compensation plan,
a director may elect to defer all or part of the cash payment of retainer fees
until such time as shall be specified, with interest on deferred amounts
accruing quarterly at 120% of the Federal long-term rate set each month by the
Secretary of the Treasury. Each director shall also have the option each year to
determine whether to defer all or any portion of the cash retainers by electing
to receive restricted shares valued at the closing price of the Company Common
Stock on Nasdaq on the date each retainer payment would otherwise be made in
cash. See "-- Benefit Plans Following the Distribution -- Directors Stock Plan".
 
                                       63
<PAGE>   71
 
EXECUTIVE OFFICERS OF THE COMPANY
 
     Set forth below are the name, age, position and office to be held with the
Company, principal occupations and employment during the past five years, and
education of those individuals who are expected to serve as executive officers
of the Company immediately following the Distribution. Those individuals named
below who are currently officers or employees of Rockwell will resign from all
such positions prior to the Distribution. Executive officers of the Company will
be elected to serve until they resign or are removed, or are otherwise
disqualified to serve, or until their successors are elected and qualified.
 
<TABLE>
<CAPTION>
NAME, OFFICE AND POSITION, PRINCIPAL OCCUPATIONS AND EMPLOYMENT, AND EDUCATION   AGE
- ------------------------------------------------------------------------------  -----
<S>                                                                             <C>
DWIGHT W. DECKER -- Chairman of the Board and Chief Executive Officer. Senior
  Vice President of Rockwell and President, Rockwell Semiconductor Systems
  since July 1998; Senior Vice President of Rockwell and President, Rockwell
  Semiconductor Systems and Electronic Commerce from March 1997 to July 1998;
  President, Rockwell Semiconductor Systems from October 1995 to March 1997;
  President, Telecommunications of Rockwell from June 1995 to October 1995;
  Vice President/General Manager, Digital Communications Division of
  Rockwell's Telecommunications Division 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..........              48
MOIZ M. BEGUWALA -- Senior Vice President and General Manager -- Wireless
  Communications. Vice President and General Manager -- Wireless
  Communications Division of Rockwell Semiconductor Systems since October
  1998; Vice President and General Manager -- Personal Computing Division of
  Rockwell Semiconductor Systems from January 1998 to October 1998; Vice
  President, Worldwide Sales of Rockwell Semiconductor Systems from October
  1995 to January 1998; Vice President, Worldwide Sales of Rockwell's
  Telecommunications Division from September 1995 to October 1995; Division
  Director, Worldwide Sales, Digital Communications Division of Rockwell's
  Telecommunications Division prior thereto. Mr. Beguwala received an M.B.A.
  and a B.S. in engineering from the University of California -- Los Angeles
  and an M.S. and a Ph.D. in electrical engineering from the University of
  Southern California ...............................................              52
ANTHONY C. D'AUGUSTINE -- Senior Vice President and General Manager -- Digital
  Infotainment. Vice President and General Manager -- Digital Infotainment
  Division of Rockwell Semiconductor Systems since April 1997; Vice
  President -- Graphic/Imaging Sub-Business Unit of Rockwell Semiconductor
  Systems' Brooktree subsidiary from October 1996 to April 1997; Vice
  President -- Graphic/Imaging Sub-Business Unit of Brooktree Corporation
  (graphics and multimedia semiconductor supplier) prior thereto. Mr.
  D'Augustine received an M.B.A. from Rutgers University and a B.S.E.E. in
  electrical engineering from Drexel University .....................              54
RAOUF Y. HALIM -- Senior Vice President and General Manager -- Network Access.
  Vice President and General Manager -- Network Access Division of Rockwell
  Semiconductor Systems since February 1997; Vice President -- VLSI
  Engineering of Rockwell Semiconductor Systems from October 1995 to February
  1997; Vice President -- VLSI Engineering of Rockwell's Telecommunications
  Division from September 1995 to October 1995; Division Director, VLSI
  Engineering, Digital Communications Division of Rockwell's
  Telecommunications Division prior thereto. Mr. Halim received an M.S.E.E. in
  electrical engineering from the Georgia Institute of Technology and a B.Sc.
  in electrical engineering from Alexandria University ..............              38
</TABLE>
 
                                       64
<PAGE>   72
 
   
<TABLE>
<CAPTION>
NAME, OFFICE AND POSITION, PRINCIPAL OCCUPATIONS AND EMPLOYMENT, AND EDUCATION   AGE
- ------------------------------------------------------------------------------  -----
<S>                                                                             <C>
BALAKRISHNAN S. IYER -- Senior Vice President and Chief Financial Officer.
  Senior Vice President and Chief Financial Officer of Rockwell Semiconductor
  Systems since October 1998; Senior Vice President and Chief Financial
  Officer of VLSI Technology, Inc. (semiconductors) from January 1997 to
  October 1998; Vice President and Corporate Controller of VLSI Technology,
  Inc. (semiconductors) from April 1993 to December 1996; Corporate Controller
  of Cypress Semiconductor Corporation (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 ...........................................              42
DENNIS E. O'REILLY -- Senior Vice President, General Counsel and Secretary
  (effective January 4, 1999). Director -- Business Development of Intel
  Corporation's Mobile and Handheld Products Group (semiconductors) since
  September 1997; 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 ...............              54
KERRY K. PETRY -- Vice President and Treasurer. Vice President and Treasurer
  of Rockwell Semiconductor Systems since October 1998; Assistant
  Treasurer -- Domestic 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 ..........................              49
F. MATTHEW RHODES -- Senior Vice President and General Manager -- Personal
  Computing. Vice President and General Manager -- Personal Computing Division
  of Rockwell Semiconductor Systems since October 1998; Director, Marketing
  Software Products of Rockwell Semiconductor Systems from January 1997 to
  October 1998; Director, VLSI and Technology of Pacific Communications
  Services, Inc. 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 .................              41
KEVIN V. STRONG -- Senior Vice President and General Manager -- Personal
  Imaging. Vice President and General Manager -- Personal Imaging Division of
  Rockwell Semiconductor Systems since September 1998; Division Director,
  Digital Communications Products, Personal Computing Division of Rockwell
  Semiconductor Systems from June 1998 to September 1998; Division Director,
  Technology Planning, Personal Computing Division of Rockwell Semiconductor
  Systems from June 1997 to June 1998; Business Director, Personal Computing
  Products, Multimedia Communications Division of Rockwell Semiconductor
  Systems from August 1996 to June 1997; Director Technology Planning -- Media
  Processing, Multimedia Communications Division of Rockwell Semiconductor
  Systems from January 1996 to August 1996; Manager -- Business Development,
  Multimedia Communications Division of Rockwell Semiconductor Systems prior
  thereto. Mr. Strong received a B.S. in electronic engineering from
  Southampton University ............................................              38
STEVEN M. THOMSON -- Vice President and Controller. Vice President and
  Controller of Rockwell Semiconductor Systems since October 1998;
  Director -- Financial Planning and Control of Rockwell Semiconductor Systems
  from October 1995 to October 1998; Director, Financial Planning and Control
  of Rockwell's Telecommunications Division prior thereto. Mr. Thomson
  received an M.S. in financial management from West Coast University and a
  B.A. in accounting from California State University, Fullerton.....              42
</TABLE>
    
 
                                       65
<PAGE>   73
 
HISTORICAL COMPENSATION OF EXECUTIVE OFFICERS
 
     There is shown below information concerning the annual and long-term
compensation for services rendered in all capacities to Rockwell and its
subsidiaries for the fiscal years ended September 30, 1996, 1997 and 1998 of the
individual who will serve as chief executive officer of the Company and for the
fiscal year ended September 30, 1998 for the other four most highly compensated
individuals who will serve as executive officers of the Company, in each case,
based on their employment by Rockwell or an affiliate of Rockwell at September
30, 1998 (the "Named Executive Officers"). The compensation described in this
table was paid by Rockwell or an affiliate of Rockwell. References to "stock
options" relate to awards of options under the Rockwell 1995 Long-Term
Incentives Plan. The services rendered to Rockwell were, in some cases, in
capacities not equivalent to those to be provided to the Company and this table
does not reflect the compensation to be paid to executive officers of the
Company in the future.
 
                         SUMMARY COMPENSATION TABLE(1)
 
<TABLE>
<CAPTION>
                                                                              LONG-TERM              ALL OTHER
                                          ANNUAL COMPENSATION                COMPENSATION         COMPENSATION(4)
                                   ----------------------------------   ----------------------    ---------------
                                                                         AWARDS      PAYOUTS
                                                                        --------    ----------
                                                            OTHER        STOCK      LONG-TERM
NAME AND                                                    ANNUAL      OPTIONS     INCENTIVE
PRINCIPAL POSITION(2)       YEAR    SALARY     BONUS     COMPENSATION   (SHARES)     PAYOUTS
- ---------------------       ----   --------   --------   ------------   --------    ----------
<S>                         <C>    <C>        <C>        <C>            <C>         <C>           <C>
Dwight W. Decker..........  1998   $357,405   $     --     $16,839       30,000     $       --        $    --
  Chairman of the Board     1997    305,039    300,000      17,278       85,568(3)   1,041,013(5)      39,558
  and
  Chief Executive Officer   1996    247,116    350,000       9,752      127,577(3)     600,000         18,504
Moiz M. Beguwala..........  1998    216,058     24,998       5,772       20,000             --         12,963
  Senior Vice President
  and General Manager --
  Wireless Communications
Anthony C. D'Augustine....  1998    216,346         --      21,050           --             --         12,981
  Senior Vice President
  and General
  Manager -- Digital
  Infotainment
Raouf Y. Halim............  1998    227,324         --      13,407           --             --         13,640
  Senior Vice President
  and General Manager --
  Network Access
F. Matthew Rhodes.........  1998    145,439         --         159           --             --          8,726
  Senior Vice President
  and General Manager --
  Personal Computing
</TABLE>
 
- ---------------
(1) In accordance with the executive compensation disclosure rules adopted by
    the Commission, the compensation of the Named Executive Officers, other than
    Mr. Decker, is not shown for fiscal 1996 and 1997 because the Company was
    not a reporting company under the Exchange Act for such years and such
    compensation information has not been provided in a prior filing with the
    Commission.
 
(2) The positions reflected in the table are the positions to be held by the
    Named Executive Officers with the Company at the time of the Distribution
    and were not the positions held by the Named Executive Officers with
    Rockwell during the period or periods covered by the table.
 
(3) Shares reflect anti-dilution adjustments made December 6, 1996 and September
    30, 1997 to preserve the intrinsic value of options following the
    reorganization of Rockwell in connection with the divestiture of its
    Aerospace and Defense businesses and the pro-rata distribution of shares of
    Meritor Automotive, Inc., respectively.
 
(4) Amounts contributed or accrued for the Named Executive Officers under the
    Rockwell Savings Plan and the related supplemental savings plan.
 
(5) Long-term incentive payments to Mr. Decker for the three-year performance
    period ended September 30, 1997 were paid in part by delivery of 8,205
    shares of restricted Rockwell Common Stock, valued at the closing price on
    the New York Stock Exchange -- Composite Transactions on November 28, 1997,
    the date specified for that purpose in the Rockwell 1995 LTIP ($48.75).
 
                                       66
<PAGE>   74
 
   
     Effective January 1, 1999 (January 4, 1999 for Mr. O'Reilly), the annual
salaries of Messrs. Decker, Iyer, O'Reilly, Beguwala, D'Augustine, Halim and
Rhodes are expected to be $308,000, $300,000, $260,000, $216,000, $202,500,
$216,000 and $193,500, respectively. Mr. Decker's 1999 annual salary will
reflect a reduction of approximately 20 percent from his 1998 annual salary and
the 1999 annual salaries of the other Named Executive Officers will reflect
reductions of approximately 10 percent from their 1998 annual salaries. These
salary reductions will remain in effect until the Company earns a profit in two
consecutive quarters. At such time, the salary reductions will be rescinded and
it is intended that the annual salaries for Messrs. Decker, Beguwala,
D'Augustine, Halim and Rhodes will be set at levels the Company determines are
competitive with those of its peer companies. In addition, each of Messrs.
Beguwala, D'Augustine and Halim is expected to receive a retention bonus of
$35,000, payable immediately prior to the Distribution and subject to forfeiture
if the recipient does not remain employed by the Company for a period of 12
months after the Distribution.
    
 
   
     It is anticipated that options for shares of Company Common Stock will be
granted to employees of the Company, including Messrs. Decker, Iyer, O'Reilly,
Beguwala, D'Augustine, Halim and Rhodes, in the second quarter of fiscal 1999.
The purchase price of the shares subject to such options will be the closing
price of the Company Common Stock on the date of grant. In addition, it is
expected that each of Messrs. Decker, Iyer, O'Reilly, Beguwala, D'Augustine,
Halim and Rhodes will receive grants of restricted shares of Company Common
Stock in lieu of payments from the Company's cash incentive plans in fiscal
1999. Each grant of restricted stock will be at a level that is 50 percent of
the target cash incentive it replaces. One-half of the restricted stock will
vest upon a 50 percent increase in the price of Company Common Stock over the
price on the date of grant and the remainder will vest upon a 100 percent
increase in the price of Company Common Stock over the price on the date of
grant, provided that no restricted stock will vest prior to one year after the
date of grant. In any event, the restricted stock will fully vest ten years
after the date of grant.
    
 
   
     Prior to the Distribution, the Company will enter into change of control
employment agreements ("Employment Agreements") with each of Messrs. Decker,
Iyer, O'Reilly, Beguwala, D'Augustine, Halim and Rhodes and certain other key
executives. Each such Employment Agreement becomes effective upon a "change of
control" of the Company (as defined in the Employment Agreement). Each
Employment Agreement provides for the continuing employment of the executive
after the change of control on terms and conditions no less favorable than those
in effect before the change of control. If the executive's employment is
terminated by the Company without "cause" or if the executive terminates his or
her own employment for "good reason" (each as defined in the Employment
Agreement), the executive is entitled to severance benefits equal to a multiple
of his or her annual compensation (including bonus) and continuation of certain
benefits for a number of years equal to the multiple. The multiple is three for
Mr. Decker and two for the other executives (or, in either case, the shorter
number of years until the executive's normal retirement date). The executives
are entitled to an additional payment, if necessary, to make them whole as a
result of any excise tax imposed by the Code on certain change of control
payments (unless the safe harbor below which the excise tax is imposed is not
exceeded by more than 10%, in which event the payments will be reduced to avoid
the excise tax).
    
 
                                       67
<PAGE>   75
 
OPTION GRANTS
 
     Shown below is further information on grants to the Named Executive
Officers of stock options pursuant to the Rockwell 1995 LTIP during the fiscal
year ended September 30, 1998, which are reflected in the Summary Compensation
Table above.
 
   
<TABLE>
<CAPTION>
                                                                                                      GRANT DATE
                                       INDIVIDUAL GRANTS                                                VALUE
- ------------------------------------------------------------------------------------------------   ----------------
                                               PERCENTAGE
                                                OF TOTAL
                               NUMBER OF         OPTIONS
                              SECURITIES       GRANTED TO
                              UNDERLYING        ROCKWELL        EXERCISE OR                           GRANT DATE
                            OPTIONS GRANTED   EMPLOYEES IN       BASE PRICE        EXPIRATION          PRESENT
NAME                          (SHARES)(1)      FISCAL 1998      (PER SHARE)           DATE             VALUE(2)
- ----                        ---------------   -------------   ----------------   ---------------   ----------------
<S>                         <C>               <C>             <C>                <C>               <C>
Dwight W. Decker..........       30,000            .99%           $48.125           12/3/2007          $418,500
Moiz M. Beguwala..........       20,000            .66             55.8125          4/23/2008           380,800
Anthony C. D'Augustine....           --             --                  --                 --                --
Raouf Y. Halim............           --             --                  --                 --                --
F. Matthew Rhodes.........           --             --                  --                 --                --
</TABLE>
    
 
- ---------------
(1) All options granted to Mr. Decker were granted on December 3, 1997 and the
    first of three substantially equal installments will become exercisable
    December 3, 1998. All options granted to Mr. Beguwala were granted on April
    23, 1998 and will become exercisable April 23, 2001.
 
(2) These values are based on the Black-Scholes option pricing model which
    produces a per option share value of $13.95 for the December 3, 1997 grant
    and $19.04 for the April 23, 1998 grant, using the following assumptions and
    inputs: options exercised after 7 1/2 years, eleven-month volatility of
    0.2908 (calculated after the Meritor Automotive, Inc. spin-off in September
    1997), dividend yield of 2.26% (for the December 3, 1997 grant) and 2.17%
    (for the April 23, 1998 grant) and an interest rate of 5.89% (for the
    December 3, 1997 grant) and 5.78% (for the April 23, 1998 grant), which was
    the zero coupon 7 1/2-year Treasury bond rate at date of grant. The actual
    value, if any, the executive officer may realize from these options will
    depend solely on the gain in stock value over the exercise price when the
    options are exercised.
 
   
     As set forth in the Employee Matters Agreement, Rockwell Options held by
employees of Semiconductor Systems (or by any director of the Company who is not
also a director of Rockwell) at the time of the Distribution will be converted
into Company Options, having the same terms and vesting schedule as the original
Rockwell Options, but with adjustments in order to provide equivalent value to
each optionholder. Rockwell Options held by persons other than employees of
Semiconductor Systems (or any director of the Company who is not also a director
of Rockwell) at the time of the Distribution, other than those granted prior to
January 1, 1990 or after August 31, 1998, will be adjusted so that following the
Distribution, each holder will hold options to purchase shares of Rockwell
Common Stock and Company Common Stock with adjustments in order to provide
equivalent value to each optionholder after giving effect to the Distribution.
Rockwell Options held by persons other than those who will be employed by
Semiconductor Systems (or any director of the Company who is not also a director
of Rockwell) at the time of the Distribution that were granted prior to January
1, 1990 or after August 31, 1998 will continue as Rockwell Options with
adjustments in order to provide equivalent value to each optionholder after
giving effect to the Distribution. See "Arrangements Between Rockwell and the
Company -- Employee Matters Agreement".
    
 
                                       68
<PAGE>   76
 
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END VALUES
 
     Shown below is information with respect to (i) exercises by the Named
Executive Officers during fiscal 1998 of options to purchase Rockwell Common
Stock granted under the Rockwell Option Plans and (ii) the unexercised options
to purchase Rockwell Common Stock granted to the Named Executive Officers in
fiscal 1998 and prior years under the Rockwell Option Plans and held by them at
September 30, 1998.
 
<TABLE>
<CAPTION>
                                                        NUMBER OF UNEXERCISED            VALUE OF UNEXERCISED
                                                           OPTIONS HELD AT             IN-THE-MONEY OPTIONS AT
                            SHARES                        SEPTEMBER 30, 1998            SEPTEMBER 30, 1998(1)
                           ACQUIRED       VALUE      ----------------------------    ----------------------------
NAME                      ON EXERCISE    REALIZED    EXERCISABLE    UNEXERCISABLE    EXERCISABLE    UNEXERCISABLE
- ----                      -----------    --------    -----------    -------------    -----------    -------------
<S>                       <C>            <C>         <C>            <C>              <C>            <C>
Dwight W. Decker........        --            --       41,905          213,389        $141,688             --
Moiz M. Beguwala........        --            --        2,672           44,300          31,162             --
Anthony C.
  D'Augustine...........        --            --           --           22,818              --             --
Raouf Y. Halim..........        --            --        1,576           47,118          21,596             --
F. Matthew Rhodes.......        --            --           --               --              --             --
</TABLE>
 
- ---------------
(1) Based on the closing price of Rockwell Common Stock on the NYSE Composite
    Transactions reporting system on September 30, 1998, the last trading day in
    that month ($36.25).
 
LONG-TERM INCENTIVE PLAN AWARDS
 
     All Rockwell long-term incentive plan awards granted to Semiconductor
Systems employees as of the time of the Distribution will have been paid or
terminated on or prior to the Distribution Date. Such long-term incentive plan
awards are based in part on achieving goals measured by sales growth, return on
sales and return on assets of Semiconductor Systems, and performance of Rockwell
Common Stock, for 3-year performance cycles ending on each of September 30,
1998, September 30, 1999 and September 30, 2000. No payments will be made in
respect of grants made for the 3-year performance cycle ending September 30,
1998 based on performance for the fiscal years ended September 30, 1996, 1997
and 1998. Grants made in respect of the 3-year performance cycles ending
September 30, 1999 and September 30, 2000 (including all grants made to each
Named Executive Officer during fiscal 1998) will be terminated without payment
as of the Distribution Date.
 
RETIREMENT BENEFITS
 
     All of the Named Executive Officers participate in Rockwell's defined
benefit pension plan which qualifies under Section 401(a) of the Code. Pursuant
to the Employee Matters Agreement, the Named Executive Officers will have a
fully non-forfeitable right in their benefits under the pension plan accrued as
of the time of the Distribution. See "Arrangements Between Rockwell and the
Company -- Employee Matters Agreement". The Company does not expect to adopt a
defined benefit pension plan.
 
     The following table shows the estimated aggregate annual retirement
benefits payable on a straight life annuity basis to participating employees in
the earnings and years of service classifications indicated, under the Rockwell
retirement plans which cover most officers and other salaried employees of the
Company on a noncontributory basis. Such benefits reflect termination of benefit
accrual on December 31, 1998 and a reduction to recognize in part the cost of
Social Security benefits related to service for Rockwell. The plans also provide
for the payment of benefits to an employee's surviving spouse or other
beneficiary.
 
<TABLE>
<CAPTION>
                                                             ESTIMATED ANNUAL RETIREMENT BENEFITS FOR
AVERAGE                                                             YEARS OF SERVICE INDICATED
ANNUAL                                                      ------------------------------------------
EARNINGS                                                     5 YEARS       10 YEARS         25 YEARS
- --------                                                    ----------    -----------      -----------
<S>                                                         <C>           <C>              <C>
$100,000..................................................   $12,620       $ 25,254         $ 42,096
 300,000..................................................    39,280         78,594          132,096
 500,000..................................................    65,940        131,934          222,096
 700,000..................................................    92,600        185,274          312,096
</TABLE>
 
                                       69
<PAGE>   77
 
     Covered compensation includes salary and annual bonus. The calculation of
retirement benefits under the plans generally is based upon average earnings for
the highest five consecutive years of the ten years preceding retirement.
 
     The credited years of service of Messrs. Decker, Beguwala, D'Augustine,
Halim and Rhodes are 10, 25, 5, 7 and 4 years, respectively.
 
     Sections 401(a)(17) and 415 of the Code limit the annual benefits which may
be paid from a tax-qualified retirement plan. As permitted by the Employee
Retirement Income Security Act of 1974, Rockwell has established supplemental
plans which authorize the payment out of its general funds of any benefits
calculated under provisions of the applicable retirement plan which may be above
the limits under these sections. Pursuant to the Employee Matters Agreement,
Rockwell will retain liabilities accrued as of the Distribution Date with
respect to Company Participants under such supplemental plans of Rockwell.
 
BENEFIT PLANS FOLLOWING THE DISTRIBUTION
 
     The following are descriptions of certain benefit plans that are expected
to provide benefits to employees and directors of the Company after the
Distribution.
 
  1999 LONG-TERM INCENTIVES PLAN
 
     The Company's 1999 Long-Term Incentives Plan (the "1999 LTIP") has been
adopted by the Company's Board of Directors and approved by Rockwell as the
Company's sole shareowner. The 1999 LTIP permits grants to be made from time to
time as nonqualified stock options, incentive stock options and restricted
stock.
 
     Administration.  The 1999 LTIP will be administered by the Compensation
Committee, consisting of two or more members of the Company's Board of Directors
who are not eligible to participate in the 1999 LTIP. In order to meet the
requirements of Section 162(m) of the Code and the rules under Section 16 of the
Exchange Act, all grants under the 1999 LTIP will be made by those members of
the Compensation Committee who are both "outside directors" as defined for
purposes of Section 162(m) of the Code and regulations thereunder and
"nonemployee directors" as defined for purposes of Section 16 of the Exchange
Act.
 
     Participation.  The persons to whom grants are made under the 1999 LTIP
("1999 LTIP Participants") will be selected from time to time by the
Compensation Committee in its sole discretion from among employees of the
Company and its subsidiaries who hold positions of significant responsibility
with the Company or a subsidiary of the Company or whose performance or
potential contribution, in the judgment of the Compensation Committee, will
benefit the future success of the Company and its subsidiaries.
 
     Shares Subject to 1999 LTIP.  The 1999 LTIP authorizes the issuance or
transfer of an aggregate of 10,185,000 shares of Company Common Stock, provided
that no more than 3,000,000 shares will be available for grants of restricted
stock. Shares of Company Common Stock subject to the unexercised or
undistributed portion of any terminated of forfeited grant under the 1999 LTIP
will be available for further awards.
 
     Stock Options and Restricted Stock.  The 1999 LTIP authorizes grants to
1999 LTIP Participants of stock options, which may be either incentive stock
options eligible for special tax treatment or nonqualified stock options, and
restricted stock. Under the 1999 LTIP, no single 1999 LTIP Participant will
receive, in any one calendar year, grants which over any three-year period
exceed an annual average of (i) 500,000 stock options, whether nonqualified
stock options or incentive stock options, and (ii) 100,000 shares of restricted
stock.
 
     Under the provisions of the 1999 LTIP authorizing the grant of stock
options, (a) the option price may not be less than the fair market value of the
shares of Company Common Stock at the date of grant, (b) the aggregate fair
market value (determined as of the date the option is granted) of the shares of
Company Common Stock for which any employee may be granted incentive stock
options which are exercisable for the first time in any calendar year may not
exceed $100,000, (c) stock options generally may not be exercised
 
                                       70
<PAGE>   78
 
prior to one year nor after ten years from the date of grant and (d) at the time
of exercise of a stock option the option price must be paid in full in cash or
in shares of Company Common Stock or in a combination of cash and shares of
Company Common Stock.
 
     Under the 1999 LTIP, the Compensation Committee may also grant to 1999 LTIP
Participants shares of Company Common Stock subject to restrictions on transfer
and such other restrictions on incidents of ownership as the Compensation
Committee may determine ("restricted stock"). During the restricted period,
shares of restricted stock have all the attributes of outstanding shares of
Company Common Stock, except that the Compensation Committee may provide at the
time of the grant that any dividends or other distributions paid on such
restricted stock while subject to such restrictions will be accumulated or
reinvested in Company Common Stock and held subject to the same restrictions as
the restricted stock and such other terms and conditions as the Compensation
Committee may determine.
 
     All grants made under the 1999 LTIP will be evidenced by an agreement
between the Company and the 1999 LTIP Participant (the "Award Agreement")
setting forth the terms and conditions applicable to the grants, as determined
by the Compensation Committee consistent with the terms of the 1999 LTIP. Award
Agreements will include, among other things, a provision describing the
treatment of grants in the event of the retirement, disability, death or other
termination of a 1999 LTIP Participant's employment with the Company or any of
the Company's subsidiaries, including terms relating to the vesting, time for
exercise, forfeiture or cancellation of a grant under such circumstances. Award
Agreements will also include a provision stating that in the event the 1999 LTIP
Participant's employment is terminated for cause, all grants made to such
participant will immediately terminate and be forfeited.
 
     The Compensation Committee may condition, or provide for the acceleration
of, the exercisability or vesting of any grant made under the 1999 LTIP upon
such prerequisites as the Compensation Committee, in its sole discretion, deems
appropriate, including achievement of specific performance objectives, with
respect to one or more measures of the performance of the Company or its
subsidiaries, including earnings per share, revenue, net income, stock price and
total shareowner return.
 
     Under the 1999 LTIP, stock options and restricted stock may not be granted
after December 31, 2008.
 
     Initial Grants.  It is anticipated that options to purchase approximately
7,700,000 shares of Company Common Stock will be granted under the 1999 LTIP to
employees of the Company (including options for approximately 875,000 shares to
be granted to the Named Executive Officers) in the second quarter of fiscal
1999. See "Arrangements Between Rockwell and the Company -- Employee Matters
Agreement".
 
   
     It is expected that for fiscal 1999, the Company will be authorized to make
one-time grants in an aggregate of up to 500,000 shares of restricted stock to
certain of the Company's technical and non-executive managerial staff as a
retention bonus. In addition, it is expected that the Company will be authorized
to make grants in an aggregate of up to 1,800,000 shares of restricted stock in
lieu of payments from the Company's cash incentive plans in fiscal 1999. The
grants will be made at levels below the target cash incentives they replace: 50
percent of target for the executives participating in the Company's Incentive
Compensation Plan ("ICP"); and 65 percent of target for those employees
participating in the Company's Horizons Program ("Horizons"). For each of the
ICP participants, one-half of the grants of restricted stock will vest upon a 50
percent increase in the price of Company Common Stock over the price on the date
of grant and the remainder will vest upon a 100 percent increase in the price of
Company Common Stock over the price on the date of grant, provided that no
restricted stock will vest prior to one year after the date of grant. In any
event, the restricted stock will fully vest ten years after the date of grant.
For Horizons participants, the shares of restricted stock will fully vest two
years after the date of grant.
    
 
     Tax Matters.  The following is a brief summary of the material Federal
income tax consequences of benefits under the 1999 LTIP under present law and
regulations:
 
          (a) Incentive Stock Options.  The grant of an incentive stock option
     will not result in any immediate tax consequences to the Company or the
     optionee. An optionee will not realize taxable income, and the Company will
     not be entitled to any deduction, upon the timely exercise of an incentive
     stock option, but the excess of the fair market value of the shares of
     Company Common Stock acquired
                                       71
<PAGE>   79
 
     over the option exercise price will be includable in the optionee's
     "alternative minimum taxable income" for purposes of the alternative
     minimum tax. If the optionee does not dispose of the shares of Company
     Common Stock acquired within one year after their receipt (and within two
     years after the option was granted), gain or loss realized on the
     subsequent disposition of the shares of Company Common Stock will be
     treated as long-term capital gain or loss. Capital losses of individuals
     are deductible only against capital gains and a limited amount of ordinary
     income. In the event of an earlier disposition, the optionee will realize
     ordinary income in an amount equal to the lesser of (i) the excess of the
     fair market value of the shares of Company Common Stock on the date of
     exercise over the option exercise price or (ii) if the disposition is a
     taxable sale or exchange, the amount of any gain realized. Upon such a
     disqualifying disposition, the Company will be entitled to a deduction in
     the same amount and at the same time as the optionee realizes such ordinary
     income.
 
          (b) Nonqualified Stock Options.  The grant of a nonqualified stock
     option will not result in any immediate tax consequences to the Company or
     the optionee. Upon the exercise of a nonqualified stock option, the
     optionee will realize ordinary income, and the Company will be entitled to
     a deduction, equal to the difference between the option exercise price and
     the fair market value of the shares of Company Common Stock acquired at the
     time of exercise.
 
          (c) Restricted Stock.  An employee normally will not realize taxable
     income in connection with an award of restricted stock, and the Company
     will not be entitled to a deduction, until the termination of the
     restrictions. Upon such termination, the employee will realize ordinary
     income in an amount equal to the fair market value of the shares of Company
     Common Stock at that time, plus the amount of the dividends and interest
     thereon to which the employee then becomes entitled. However, an employee
     may elect to realize taxable ordinary income in the year the restricted
     stock is awarded in an amount equal to its fair market value at that time,
     determined without regard to the restrictions. The Company will be entitled
     to a deduction in the same amount and at the same time as the employee
     realizes income.
 
   
     Change of Control Benefits.  In order to maintain the rights of 1999 LTIP
Participants in the event of a change of control of the Company, the 1999 LTIP
provides that upon the occurrence of such a change, all outstanding stock
options shall become fully exercisable whether or not otherwise then
exercisable, and the restrictions on all shares of Company Common Stock granted
as restricted stock would lapse. A change of control is deemed to occur if any
of the following occur: (a) the acquisition by any individual, entity or group
(within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a
"Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated
under the Exchange Act) of 20% or more of either (i) the then outstanding shares
of common stock of the Company (the "Outstanding Company Common Stock") or (ii)
the combined voting power of the then outstanding voting securities of the
Company entitled to vote generally in the election of directors (the
"Outstanding Company Voting Securities"); provided, however, that for purposes
of this clause (a), the following acquisitions shall not constitute a Change of
Control: (w) any acquisition directly from the Company, (x) any acquisition by
the Company, (y) any acquisition by any employee benefit plan (or related trust)
sponsored or maintained by the Company or Rockwell or by any corporation
controlled by the Company or Rockwell or (z) any acquisition pursuant to a
transaction which complies with clauses (i), (ii) and (iii) of clause (c) of
this definition; or (b) individuals who, as of the date of the Distribution,
constitute the Board of Directors (the "Incumbent Board") cease for any reason
to constitute at least a majority of the Board of Directors; provided, however,
that any individual becoming a director subsequent to that date whose election,
or nomination for election by the Company's shareowners, was approved by a vote
of at least a majority of the directors then comprising the Incumbent Board
shall be considered as though such individual were a member of the Incumbent
Board, but excluding, for this purpose, any such individual whose initial
assumption of office occurs as a result of an actual or threatened election
contest with respect to the election or removal of directors or other actual or
threatened solicitation of proxies or consents by or on behalf of a Person other
than the Board of Directors; or (c) consummation of a reorganization, merger or
consolidation or sale or other disposition of all or substantially all of the
assets of the Company or the acquisition of assets of another entity (a
"Corporate Transaction"), in each case, unless, following such Corporate
Transaction, (i) all or substantially all of the individuals and entities who
were the beneficial owners, respectively, of the Outstanding Company Common
    
 
                                       72
<PAGE>   80
 
Stock and Outstanding Company Voting Securities immediately prior to such
Corporate Transaction beneficially own, directly or indirectly, more than 60%
of, respectively, the then outstanding shares of common stock and the combined
voting power of the then outstanding voting securities entitled to vote
generally in the election of directors, as the case may be, of the corporation
resulting from such Corporate Transaction (including, without limitation, a
corporation which as a result of such transaction owns the Company or all or
substantially all of the Company's assets either directly or through one or more
subsidiaries) in substantially the same proportions as their ownership,
immediately prior to such Corporate Transaction, of the Outstanding Company
Common Stock and Outstanding Company Voting Securities, as the case may be, (ii)
no Person (excluding any employee benefit plan (or related trust) of the
Company, of Rockwell or of such corporation resulting from such Corporate
Transaction) beneficially owns, directly or indirectly, 20% or more of,
respectively, the then outstanding shares of common stock of the corporation
resulting from such Corporate Transaction or the combined voting power of the
then outstanding voting securities of such corporation except to the extent that
such ownership existed prior to the Corporate Transaction and (iii) at least a
majority of the members of the board of directors of the corporation resulting
from such Corporate Transaction were members of the Incumbent Board at the time
of the execution of the initial agreement, or of the action of the Board of
Directors, providing for such Corporate Transaction; or (d) approval by the
Company's shareowners of a complete liquidation or dissolution of the Company.
 
     Amendment, Suspension or Termination of 1999 LTIP.  The Board of Directors
of the Company may at any time amend, suspend or discontinue the 1999 LTIP and
the Compensation Committee may at any time alter or amend Award Agreements made
thereunder to the extent permitted by law, provided that no such alteration or
amendment will impair the rights of any recipient of grants without such
recipient's consent. In the event of any change in the outstanding shares of
Company Common Stock by reason of a stock dividend, stock split,
recapitalization, merger, consolidation, reorganization or similar corporate
change or an extraordinary dividend, the number of shares of Company Common
Stock then remaining subject to the 1999 LTIP and the maximum number of shares
that may be issued to a 1999 LTIP Participant, including those that are covered
by outstanding grants, will (i) in the event of an increase in the number of
outstanding shares of Company Common Stock, be proportionately increased and the
price for each share then covered by an outstanding grant will be
proportionately reduced, and (ii) in the event of a reduction in the number of
outstanding shares of Company Common Stock, be proportionately reduced and the
price for each share then covered by an outstanding grant will be
proportionately increased. The Compensation Committee may make any further
adjustments as it deems necessary to ensure equitable treatment of any holder of
a grant under the 1999 LTIP as the result of any transaction affecting the
securities subject to the 1999 LTIP.
 
  1998 STOCK OPTION PLAN
 
   
     The Company's 1998 Stock Option Plan (the "1998 Plan") has been adopted by
the Company's Board of Directors and approved by Rockwell as the Company's sole
shareowner. The 1998 Plan covers nonqualified stock options and incentive stock
options to purchase shares of Company Common Stock resulting from the
adjustments to Rockwell Options (i) held by employees of Semiconductor Systems
(or by any director of the Company who is not also a director of Rockwell) at
the time of the Distribution and (ii) held by persons other than employees of
Semiconductor Systems (or any director of the Company who is not also a director
of Rockwell) at the time of the Distribution that were granted between January
1, 1990 and August 31, 1998. See "Arrangements Between Rockwell and the
Company -- Employee Matters Agreement".
    
 
   
     Administration.  The 1998 Plan will be administered by the Compensation
Committee. In addition, the Company's Board of Directors has authority to
perform all functions of the Compensation Committee under the 1998 Plan.
    
 
   
     Participation.  The persons to whom grants are made under the 1998 Plan
("1998 Plan Participants") are (i) holders of Rockwell Options who are employees
of Semiconductor Systems (or any director of the Company who is not also a
director of Rockwell) at the time of the Distribution or (ii) holders of
Rockwell Options, other than employees of Semiconductor Systems (or any director
of the Company who is not also a director of Rockwell) at the time of the
Distribution, that were granted between January 1, 1990 and August 31, 1998.
    
                                       73
<PAGE>   81
 
     Shares Subject to 1998 Plan.  The 1998 Plan authorizes the issuance of the
aggregate number of shares of Company Common Stock (currently estimated to be 15
million) necessary to provide for the exercise of all Company Options
outstanding on the Distribution Date as a result of adjustments to Rockwell
Options, as may be adjusted under the 1998 Plan.
 
     Stock Options.  The 1998 Plan authorizes the issuance to 1998 Plan
Participants of Company Options, which may be either incentive stock options
eligible for special tax treatment or nonqualified stock options. Under the
provisions of the 1998 Plan authorizing the issuance of stock options, the
exercise price and the number of shares of Company Common Stock issuable upon
exercise of such options will be determined pursuant to the adjustments to the
Rockwell Options set forth under "Arrangements Between Rockwell and the
Company -- Employee Matters Agreement", and each stock option will otherwise
have substantially the same terms and conditions as the corresponding Rockwell
Option which was adjusted, except that references to Rockwell will be changed to
refer to the Company. Such terms and conditions include that (a) stock options
generally may not be exercised prior to one year nor after ten years from the
date of original grant under the Rockwell Plans and generally become exercisable
in three approximately equal installments on the first, second and third
anniversaries of the original date of grant under the Rockwell Plans and (b) at
the time of exercise of a stock option the option price must be paid in full in
cash or in shares of Company Common Stock or in a combination of cash and shares
of Company Common Stock. If a 1998 Plan Participant who holds an outstanding
stock option dies, the 1998 Plan permits the exercise thereof within three years
of the date of death (or the expiration date specified in the option if earlier)
even if it were not exercisable at such date. If a 1998 Plan Participant holding
an outstanding grant of options retires under a retirement plan specified in the
1998 Plan at any time after a portion of the options subject to a particular
grant has become exercisable, the options subject to that grant may be exercised
from and after the date upon which they are first exercisable under that grant
for five years after the date of retirement (or the expiration date specified in
the grant if earlier), even if any of them was not exercisable at the date of
retirement. Except as the Compensation Committee may otherwise determine
(subject to certain limitations), if a 1998 Plan Participant's employment
terminates for any other reason at any time after a portion of the options
subject to a particular grant has become exercisable, the options subject to
that grant may be exercised within 90 days after the date of termination of
employment (or the expiration date specified in the grant if earlier), only to
the extent the 1998 Plan Participant was entitled to exercise the options at the
time of termination of employment.
 
     No stock options may be granted under the 1998 Plan after the Distribution
Date.
 
   
     Total Grants.  It is anticipated that options to purchase approximately
5,450,000 shares of Company Common Stock will be issued to holders of Rockwell
Options, other than employees of Semiconductor Systems (or any director of the
Company who is not also a director of Rockwell) at the time of the Distribution,
that were granted between January 1, 1990 and August 31, 1998, in connection
with the adjustment of certain Rockwell Options held by such persons on the
Distribution Date. It is also anticipated that options to purchase Company
Common Stock will be issued to employees of the Company, including the Named
Executive Officers, in replacement of approximately 1,700,000 Rockwell Options,
including approximately 374,000 Rockwell Options held by the Named Executive
Officers, expected to be held by such employees on the Distribution Date. The
number of shares of Company Common Stock that will be subject to such options
will depend on the ratio between the respective market values of Company Common
Stock and Rockwell Common Stock at the time of the Distribution. See
"Arrangements Between Rockwell and the Company -- Employee Matters Agreement".
    
 
     Tax Matters.  The material Federal income tax consequences of receipt of
incentive stock options and non-qualified stock options under the 1998 Plan
under present law and regulations are as described for incentive stock options
and non-qualified stock options under the 1999 LTIP. See "-- 1999 Long-Term
Incentives Plan -- Tax Matters".
 
     Change of Control Benefits.  In order to maintain the rights of 1998 Plan
Participants in the event of a change of control of the Company, the 1998 Plan
provides that all stock options then outstanding shall become
 
                                       74
<PAGE>   82
 
fully exercisable whether or not otherwise then exercisable. A change of control
is deemed to occur under the same circumstances as provided in Article III,
Section 13(I) of the Company By-Laws. See "-- 1999 Long-Term Incentives Plan".
 
     Amendment, Suspension or Termination of 1998 Plan.  The Compensation
Committee may at any time amend, suspend or terminate the 1998 Plan or Company
Options subject thereto. In the event any change in or affecting shares of
Company Common Stock occurs, the Company's Board of Directors may make
appropriate amendments to or adjustments in the 1998 Plan or Company Options
subject thereto, including changes in the number of shares of Company Common
Stock which may be issued under the 1998 Plan and the number of shares of
Company Common Stock and price per share of Company Common Stock subject to
Company Options. The Company's Board of Directors and the Compensation Committee
may not, however (except in making amendments and adjustments in the event of
changes in or affecting shares of Company Common Stock) (i) without the consent
of the person affected, cancel or reduce an outstanding Company Option other
than as provided for or contemplated in the agreement evidencing the option or
(ii) without the approval of shareowners, increase the number of shares of
Company Common Stock that may be issued under the 1998 Plan or reduce the option
exercise price of any Company Option.
 
  DIRECTORS STOCK PLAN
 
     The Company's Directors Stock Plan (the "Directors Plan") has been adopted
by the Company's Board of Directors and approved by Rockwell as the Company's
sole shareowner. An aggregate of 315,000 shares of Company Common Stock may be
issued under the Directors Plan, subject to appropriate adjustment in the event
of any change in or affecting shares of Company Common Stock, including but not
limited to stock dividends, stock splits and recapitalizations.
 
     Participation.  Participation in the Directors Plan will be limited to
directors who are not employees of the Company or any of its subsidiaries.
 
     Restricted Shares.  Directors may elect to receive their cash retainer for
Board service in the form of restricted shares of Company Common Stock.
Restricted shares, if elected, would be held by the Company until ten days after
the recipient retires from the Company's Board of Directors after reaching age
72 and having served at least three years as a director or ceases to be a
director by reason of the antitrust laws, compliance with the Company's conflict
of interest policies, death, disability or other circumstances the Company's
Board of Directors determines not to be adverse to the best interests of the
Company. Restricted shares would have all the attributes of outstanding shares
including the right to vote and to receive dividends thereon.
 
     Stock Options.  Under the Directors Plan grants of options to purchase
40,000 shares of Company Common Stock will be made to each non-employee director
effective upon election as a director (or, for the initial non-employee
directors, effective concurrently with the first options granted under the 1999
LTIP). Following completion of one year of service on the Board by a
non-employee director, grants of options to purchase 15,000 shares of Company
Common Stock will thereafter be made annually to such non-employee director
immediately following each Annual Meeting of Shareowners. The purchase price of
the shares subject to the option will be one hundred percent (100%) of the fair
market value of Company Common Stock on the date an option is granted. Upon
exercise of an option, the option price must be paid in full in cash, shares of
Company Common Stock valued at their fair market value on the date of exercise,
or a combination of both.
 
     Options granted under the Directors Plan may not be exercised prior to one
year nor after ten years from the date of grant and become exercisable in four
approximately equal installments on the first, second, third and fourth
anniversaries of the date of grant. If an optionee who holds an outstanding
stock option dies, the Directors Plan permits the exercise of such option within
three years of the date of death (or until the expiration date specified in the
option, if earlier), even if it were not exercisable at such date. If an
optionee who holds an outstanding stock option retires from the Company's Board
of Directors after reaching age 72 or having served at least ten years as a
director, all options then held will be exercisable even if they were not
exercisable at such retirement date, provided that such options shall expire at
the earlier of five years from the date of retirement or the expiration date
specified in the options. The Directors Plan permits the Compensa-
                                       75
<PAGE>   83
 
tion Committee to make determinations as to exercisability upon other
termination of an optionee's membership on the Company's Board of Directors.
 
     Administration and Amendment.  The Directors Plan will be administered by
the Compensation Committee. The Company's Board of Directors may amend the
Directors Plan in any respect, provided that no amendment may be made without
shareowner approval that would materially (i) increase the maximum number of
shares of Company Common Stock available for delivery under the Directors Plan
(other than adjustments to reflect changes in or affecting shares of Company
Common Stock), (ii) increase the benefits accruing to participants under the
Directors Plan, or (iii) modify the requirements as to eligibility for
participation in the Directors Plan. The Company's Board of Directors also has
authority to terminate the Directors Plan at any time.
 
     Change of Control Benefits.  In order to maintain the rights of
participants in the Directors Plan in the event of a change of control of the
Company, the Directors Plan provides that upon the occurrence of such a change,
all outstanding stock options shall become fully exercisable whether or not then
exercisable and the restrictions on all restricted shares shall lapse. See
"-- 1999 Long-Term Incentives Plan".
 
     Tax Matters.  The material Federal income tax consequences of the issuance
or transfer of restricted shares awarded in lieu of cash retainers is that the
value thereof is not taxable to the recipient, and the Company will not be
entitled to its deduction, until the restriction lapses (at the value of the
shares on the date the restriction lapses).
 
     The material Federal income tax consequences of the grant of options under
the Directors Plan are that upon the exercise of an option, the optionee
realizes ordinary income, and the Company is entitled to a deduction, equal to
the difference between the option exercise price and the fair market value of
the shares acquired at the time of exercise.
 
  EMPLOYEE STOCK PURCHASE PLAN
 
   
     The Company has adopted (and Rockwell as the Company's sole shareowner has
approved) an employee stock purchase plan to be qualified under Section 423 of
the Code (the "Stock Purchase Plan") for anticipated implementation during
fiscal 1999. Participation in the Stock Purchase Plan is expected to be
available to all full-time employees of the Company (including represented
hourly employees) in the United States and all salaried employees at the
Company's international locations (to the extent permitted by local law).
Participants may elect to have up to 10 percent of their total compensation
withheld for quarterly purchases of Company Common Stock at a price equal to 85
percent of the lesser of the fair market value thereof at the beginning or end
of each quarter. It is anticipated that an aggregate of 1,500,000 shares of
Company Common Stock will initially be authorized for issuance pursuant to the
Stock Purchase Plan.
    
 
                                       76
<PAGE>   84
 
OWNERSHIP OF COMPANY COMMON STOCK
 
     The following table sets forth the number of shares of Company Common Stock
expected to be beneficially owned following the Distribution, directly or
indirectly, by each director, each Named Executive Officer and such persons and
other executive officers, as a group, based upon the beneficial ownership of
such persons of Rockwell Common Stock reported to Rockwell as of October 31,
1998, including shares as to which a right to acquire ownership exists (for
example, through the exercise of stock options, conversions of securities or
through various trust arrangements) within the meaning of Rule 13d-3(d)(1) under
the Exchange Act.
 
   
<TABLE>
<CAPTION>
                                                                       COMMON STOCK
                                                         -----------------------------------------
NAME                                                     SHARES(1)            PERCENT OF CLASS (2)
- ----                                                     ---------            --------------------
<S>                                                      <C>                  <C>
Donald R. Beall........................................    891,883(3)(4)(5)                    0.9%
Richard M. Bressler....................................      9,660(5)(6)                        --
Dwight W. Decker.......................................     78,557(3)(5)(7)                    0.1
F. Craig Farrill.......................................         --                     --
Jerre L. Stead.........................................         --                     --
Moiz M. Beguwala.......................................      7,629(3)(5)                        --
Anthony C. D'Augustine.................................        207(3)                           --
Raouf Y. Halim.........................................      2,457(3)(5)                        --
F. Matthew Rhodes......................................        683(3)(5)                        --
All of the above and other
  executive officers as a group (14 persons)...........  1,029,030(3)(5)                       1.1
</TABLE>
    
 
- ---------------
 
(1) Each person has sole voting and investment power with respect to the shares
    listed unless otherwise indicated.
 
(2) The shares owned by each person, and by the group, and the shares included
    in the number of shares outstanding have been adjusted, and the percentage
    of shares owned (where such percentage exceeds 0.1%) has been computed, in
    accordance with Rule 13d-3(d)(1) under the Exchange Act.
 
(3) Includes shares expected to be beneficially owned in respect of shares of
    Rockwell Common Stock held under Rockwell's savings plans as of October 31,
    1998.
 
(4) Includes shares, as to which beneficial ownership is disclaimed, as follows:
    125,506 shares expected to be held for the benefit of family members and
    5,000 shares expected to be owned by the Beall Family Foundation, of which
    Mr. Beall is President and a director. Does not include 144,104 shares in
    respect of shares of Rockwell Common Stock that may be acquired upon
    exercise of stock options assigned to family members who are the beneficial
    owners thereof.
 
   
(5) Includes shares in respect of shares of Rockwell Common Stock that may be
    acquired upon the exercise of outstanding stock options within 60 days as
    follows: 703,474; 7,668; 71,537; 2,672; 1,576; 500; and 821,515 for Messrs.
    Beall, Bressler, Decker, Beguwala, Halim, Rhodes and the group,
    respectively. For Mr. Beall, the number of shares of Company Common Stock is
    one-half the number of shares of Rockwell Common Stock that may be acquired
    upon exercise of such outstanding stock options. For Messrs. Bressler,
    Decker, Beguwala, Halim, Rhodes and the group (other than Mr. Beall), the
    number of shares of Company Common Stock is the same as the number of shares
    of Rockwell Common Stock that may be acquired upon exercise of such
    outstanding stock options; the actual number of shares of Company Common
    Stock that will be subject to such options will depend on the ratio between
    the respective market values of Company Common Stock and Rockwell Common
    Stock at the time of the Distribution.
    
 
(6) Includes 892 shares in respect of shares of Rockwell Common Stock granted to
    Mr. Bressler as restricted stock under the Rockwell Directors Plan.
 
(7) Includes 4,102 shares in respect of shares of Rockwell Common Stock granted
    to Mr. Decker as restricted stock in partial payment of long-term incentive
    payments earned for three-year performance periods ended September 30, 1997.
 
     With the exception of Wells Fargo Bank, N.A., as trustee under the Rockwell
Savings Plan, which held approximately 19% (of which approximately 6% was for
active Rockwell employees and the remainder for former Rockwell employees) of
the outstanding shares of Rockwell Common Stock as of October 31, 1998, there
are no persons known to Rockwell who are expected to be "beneficial owners" (as
that term is defined in the rules of the Commission) of more than 5% of any
class of the Company's voting securities outstanding as of the Distribution
Date.
 
                                       77
<PAGE>   85
 
                      DESCRIPTION OF COMPANY CAPITAL STOCK
 
     Immediately prior to the Distribution, the Company will be authorized to
issue (i) 500,000,000 shares of Company Common Stock, of which (based on the
number of shares of Rockwell Common Stock outstanding as of October 31, 1998)
approximately 95 million shares of Company Common Stock will be issued to
shareowners of Rockwell in the Distribution, and (ii) 25,000,000 shares of
Preferred Stock, without par value ("Company Preferred Stock"), of which
1,500,000 shares will be designated as Series A Junior Participating Preferred
Stock ("Company Junior Preferred Stock") for issuance in connection with the
exercise of the Company Rights. See "-- Company Rights Plan".
 
     The discussion of the material terms of the Company's capital stock
contained herein is qualified by reference to the Company Certificate, which
will be in effect immediately prior to the Distribution, a copy of which has
been filed as an exhibit to the Registration Statement of which this Information
Statement is a part.
 
COMPANY COMMON STOCK
 
   
     The Company Certificate (except as to the numbers of authorized shares of
capital stock) and the Company By-Laws are substantially similar to the Restated
Certificate of Incorporation of Rockwell (the "Rockwell Certificate") and the
By-Laws of Rockwell (the "Rockwell By-Laws"), including provisions establishing
a classified Board of Directors, requiring shareowners to provide advance notice
of any shareowner nominations of directors or any proposal of new business to be
considered at any meeting of shareowners, requiring a supermajority vote to
remove a director or to amend or repeal certain provisions of the Company
Certificate or the Company By-Laws and precluding shareowners from calling a
special meeting of shareowners. See "-- Certain Provisions in the Company
Certificate and Company By-Laws".
    
 
     Holders of Company Common Stock will be entitled to such dividends as may
be declared by the Board of Directors of the Company out of any funds of the
Company legally available therefor. Dividends may not be paid on Company Common
Stock unless all accrued dividends on Company Preferred Stock, if any, have been
paid or set aside. In the event of any liquidation, dissolution or winding up of
the Company, the holders of Company Common Stock will be entitled to share pro
rata in the assets remaining after payment to creditors and after payment of the
liquidation preference plus any unpaid dividends to holders of any outstanding
Company Preferred Stock. Each holder of Company Common Stock will be entitled to
one vote for each such share outstanding in such holder's name. No holder of
Company Common Stock will be entitled to cumulate such holder's votes in voting
for directors. The Company Certificate provides that, unless otherwise
determined by the Board of Directors of the Company, no holder of Company Common
Stock will, as such holder, have any right to purchase or subscribe for any
stock of any class which the Company may issue or sell.
 
     Except as described below under "-- Certain Provisions in the Company
Certificate and Company By-Laws", the rights, privileges and preferences of
Company Common Stock will otherwise be substantially similar to the rights,
privileges and preferences of Rockwell Common Stock.
 
COMPANY PREFERRED STOCK
 
  General
 
     The Company Certificate authorizes the Board of Directors of the Company to
establish one or more series of Company Preferred Stock (of up to an aggregate
of 25,000,000 shares) and to determine, with respect to any series of Company
Preferred Stock, the terms and rights of such series, including (i) the
designation of the series, (ii) the number of shares of the series, which number
the Board of Directors of the Company may thereafter (except where otherwise
provided in the applicable certificate of designation) increase or decrease (but
not below the number of shares thereof then outstanding), (iii) whether
dividends, if any, will be cumulative or noncumulative, and, in the case of
shares of any series having cumulative dividend rights, the date or dates or
method of determining the date or dates from which dividends on the shares of
such series shall be cumulative, (iv) the rate of any dividends (or method of
determining such dividends) payable to the holders of the shares of such series,
any conditions upon which such dividends will be paid and the date or dates or
the method for determining the date or dates upon which such dividends will be
payable, (v) the
 
                                       78
<PAGE>   86
 
redemption rights and price or prices, if any, for shares of the series, (vi)
the terms and amounts of any sinking fund provided for the purchase or
redemption of shares of the series, (vii) the amounts payable on and the
preferences, if any, of shares of the series in the event of any voluntary or
involuntary liquidation, dissolution or winding up of the affairs of the
Company, (viii) whether the shares of the series will be convertible or
exchangeable into shares of any other class or series, or any other security, of
the Company or any other corporation, and, if so, the specification of such
other class or series or such other security, the conversion or exchange price
or prices or rate or rates, any adjustments thereof, the date or dates as of
which such shares will be convertible or exchangeable and all other terms and
conditions upon which such conversion or exchange may be made, (ix) restrictions
on the issuance of shares of the same series or of any other class or series,
(x) the voting rights, if any, of the holders of the shares of the series and
(xi) any other relative rights, preferences and limitations of such series.
 
     The Board of Directors of the Company believes that the ability of the
Board to issue one or more series of Company Preferred Stock will provide the
Company with flexibility in structuring possible future financings and
acquisitions, and in meeting other corporate needs which might arise. The
authorized shares of Company Preferred Stock, as well as Company Common Stock,
will be available for issuance without further action by the Company's
shareowners, unless such action is required by applicable law or the rules of
any stock exchange or automated quotation system on which the Company's
securities may be listed or traded. If the approval of the Company's shareowners
is not so required, the Board of Directors of the Company may determine not to
seek shareowner approval.
 
     Although the Board of Directors of the Company has no intention at the
present time of doing so (other than as described below with respect to the
Company Junior Preferred Stock), it could issue a series of Company Preferred
Stock that could, depending on the terms of such series, impede the completion
of a merger, tender offer or other takeover attempt. The Board of Directors of
the Company will make any determination to issue such shares based on its
judgment as to the best interests of the Company and its shareowners. The Board
of Directors of the Company, in so acting, could issue Company Preferred Stock
having terms that could discourage an acquisition attempt through which an
acquirer may be able to change the composition of the Board of Directors of the
Company, including a tender offer or other transaction that some, or a majority,
of the Company's shareowners might believe to be in their best interests or in
which shareowners might receive a premium for their stock over the then current
market price of such stock.
 
  Company Junior Preferred Stock
 
     The summary of the material terms of the Company Junior Preferred Stock
contained herein is qualified by reference to the provisions of the Company
Certificate, a copy of which has been filed as an exhibit to the Registration
Statement of which this Information Statement is a part.
 
   
     The Board of Directors of the Company has authorized the issuance of up to
1,500,000 shares of Company Junior Preferred Stock. The terms of the Company
Junior Preferred Stock are set forth in the Company Certificate. The Company
Junior Preferred Stock, when issued upon exercise of the Company Rights, will be
fully paid and nonassessable. See "-- Company Rights Plan".
    
 
     Ranking and Redemption.  The Company Junior Preferred Stock will rank
junior to all series of any other class of Company Preferred Stock with respect
to payments of dividends and distribution of assets and will be non-redeemable.
 
     Dividend Rights.  Holders of Company Junior Preferred Stock will be
entitled to receive, when, as and if declared by the Board of Directors of the
Company out of funds legally available therefor, quarterly dividends equal to
the greater of (i) $1 or (ii) 100 times the amount of cash dividends and 100
times the amount (payable in kind) of non-cash dividends or other distributions
(other than stock dividends of Company Common Stock) declared per share of the
Company Common Stock. If the Company at any time declares or pays a stock
dividend payable in Company Common Stock, or effects a subdivision or
combination or consolidation of Company Common Stock, then the amount to which
holders of Company Junior Preferred Stock will be entitled under clause (ii) of
the previous sentence will be adjusted in accordance with the antidilution
provisions contained in the Company Certificate.
                                       79
<PAGE>   87
 
     Dividends and distributions on the Company Junior Preferred Stock will be
declared immediately after the declaration of the dividend or distribution on
the Company Common Stock and will be payable quarterly on the second Monday of
March, June, September and December in each year (a "Dividend Payment Date"). In
the event that no dividend or distribution is declared on Company Common Stock,
then a dividend of $1 per share of Company Junior Preferred Stock will
nevertheless be payable on the next Dividend Payment Date. The Board of
Directors of the Company may fix a record date for the determination of the
holders of Company Junior Preferred Stock entitled to receive payment of a
dividend or distribution declared thereon, which record date may not be more
than 60 days prior to the payment date. Dividends on the Company Junior
Preferred Stock will accrue and be cumulative. Accrued and unpaid dividends will
not bear interest.
 
     If quarterly dividends or other dividends or distributions payable on the
Company Junior Preferred Stock are in arrears, until all accrued and unpaid
dividends and distributions on the Company Junior Preferred Stock are paid in
full, the Company may not (i) declare or pay any dividend or distribution with
respect to any stock ranking junior to the Company Junior Preferred Stock; (ii)
declare or pay any dividend or distribution with respect to any stock ranking on
a parity with the Company Junior Preferred Stock, other than pro rata
distributions made on the Company Junior Preferred Stock and all such parity
stock; (iii) redeem or purchase or otherwise acquire shares of Company Junior
Preferred Stock or any stock ranking junior to the Company Junior Preferred
Stock (provided that the Company may redeem or purchase or otherwise acquire
shares of any such junior stock in exchange for shares of any stock ranking
junior to the Company Junior Preferred Stock); and (iv) redeem or purchase or
otherwise acquire shares of any stock ranking on a parity with the Company
Junior Preferred Stock, except in accordance with a purchase offer made in
writing or publication to all holders of such shares upon such terms as the
Board of Directors, after consideration of the respective annual dividend rates
and other relative rights and preferences of the respective series and classes,
shall determine in good faith will result in fair and equitable treatment among
the respective series or classes.
 
     Liquidation Preference.  In the event of any liquidation, dissolution or
winding up of the Company, no distributions will be made with respect to (i) any
shares of stock ranking junior to the Company Junior Preferred Stock, unless
holders of shares of Company Junior Preferred Stock have received an amount per
share equal to $100 plus an amount per share equal to any dividends accrued but
unpaid thereon, without interest, provided that such holders will be entitled to
receive an amount per share equal to 100 times the amount to be distributed per
share to holders of Company Common Stock or (ii) any shares of stock ranking on
a parity with the Company Junior Preferred Stock, except for pro rata
distributions made on the Company Junior Preferred Stock and all such parity
stock. If the Company at any time declares or pays a stock dividend payable in
Company Common Stock, or effects a subdivision or combination or consolidation
of Company Common Stock, then the amount to which holders of Company Junior
Preferred Stock will be entitled will be adjusted in accordance with the
antidilution provisions contained in the Company Certificate.
 
     Voting Rights.  Each share of Company Junior Preferred Stock will be
entitled to 100 votes per share. If the Company at any time declares or pays a
stock dividend payable in Company Common Stock, or effects a subdivision or
combination or consolidation of Company Common Stock, then the number of votes
to which holders of Company Junior Preferred Stock will be entitled will be
adjusted in accordance with the antidilution provisions contained in the Company
Certificate. The Company Junior Preferred Stock shall vote together with the
Company Common Stock and any other capital stock of the Company having general
voting rights as one class on all matters submitted to a vote of shareowners of
the Company, except as otherwise provided in a certificate of designation for
any other class of Company Preferred Stock filed with the Secretary of State of
the State of Delaware or by law. Except as otherwise provided by law, the
Company Junior Preferred Stock will have no special voting rights, and except to
the extent the Company Junior Preferred Stock is entitled to vote with the
Company Common Stock, the consent of the Company Junior Preferred Stock will not
be required for taking any corporate action.
 
     Rights Upon Consolidation, Merger or Combination.  If the Company enters
into any consolidation, merger, combination or other transaction in which shares
of Company Common Stock are exchanged for or changed into other stock or
securities, cash and/or other property, then each share of Company Junior
Preferred Stock will at the same time be similarly exchanged or changed into an
amount per share equal to 100 times the aggregate amount of stock, securities,
cash and/or other property (payable in kind) into which
                                       80
<PAGE>   88
 
or for which each share of Company Common Stock is changed or exchanged. If the
Company at any time declares or pays a stock dividend payable in Company Common
Stock, or effects a subdivision or combination or consolidation of Company
Common Stock, then the amount to which holders of Company Junior Preferred Stock
will be entitled with respect to such exchange or change will be adjusted in
accordance with the antidilution provisions contained in the Company
Certificate.
 
CERTAIN PROVISIONS IN THE COMPANY CERTIFICATE AND COMPANY BY-LAWS
 
   
     Except as described below, the Company Certificate and the Company By-Laws
are substantially similar to the Rockwell Certificate and the Rockwell By-Laws.
Accordingly, the Company Certificate and the Company By-Laws contain various
provisions intended to (i) promote stability of the Company's shareowner base
and (ii) render more difficult certain unsolicited or hostile attempts to take
over the Company which could disrupt the Company, divert the attention of the
Company's directors, officers and employees and adversely affect the
independence and integrity of the Company's business. A summary of the material
terms of these provisions of the Company Certificate and the Company By-Laws is
set forth below.
    
 
  Classified Board of Directors and Removal of Directors
 
     Pursuant to the Company Certificate, the number of directors of the Company
will be fixed by the Board of Directors of the Company. The directors (other
than those elected by the holders of any series of Company Preferred Stock or
any other series or class of stock, other than Company Common Stock) will be
divided into three classes, each class to consist as nearly as possible of
one-third of the directors. Directors elected by shareowners at an Annual
Meeting of Shareowners will be elected by a plurality of all votes cast at such
annual meeting. Initially, the terms of office of the three classes of directors
will expire, respectively, at the Annual Meetings of Shareowners in 2000, 2001
and 2002. The term of the successors of each such class of directors expires
three years from the year of election.
 
     The Company Certificate provides that except as otherwise provided for or
fixed by or pursuant to a certificate of designations setting forth the rights
of the holders of any class or series of Company Preferred Stock and unless the
Board of Directors of the Company otherwise determines, newly created
directorships resulting from any increase in the number of directors and any
vacancies on the Board of Directors of the Company resulting from death,
resignation, disqualification, removal or other cause will be filled by the
affirmative vote of a majority of the remaining directors then in office, even
though less than a quorum of the Board of Directors of the Company, and not by
the shareowners. Any director elected in accordance with the preceding sentence
will hold office for the remainder of the full term of the class of directors in
which the new directorship was created or the vacancy occurred and until such
director's successor shall have been duly elected and qualified. No decrease in
the number of directors constituting the Board of Directors of the Company will
shorten the term of any incumbent director. Subject to the rights of holders of
any Company Preferred Stock, any director may be removed from office only for
cause by the affirmative vote of the holders of at least 80 percent of the
voting power of all the outstanding capital stock of the Company entitled to
vote generally in the election of directors (the "Voting Power"), voting
together as a single class.
 
     These provisions of the Company Certificate would preclude a third party
from removing incumbent directors and simultaneously gaining control of the
Board of Directors of the Company by filling the vacancies created by removal
with its own nominees. Under the classified board provisions described above, it
would take at least two elections of directors for any individual or group to
gain control of the Board of Directors of the Company. Accordingly, these
provisions could discourage a third party from initiating a proxy contest,
making a tender offer or otherwise attempting to gain control of the Company.
 
  Fair Price Provision
 
     The Company Certificate contains a provision (the "Fair Price Provision")
pursuant to which a Business Combination (as defined below) between the Company
or a subsidiary of the Company and an Interested Shareowner (as defined below)
requires approval by the affirmative vote of the holders of not less than 80
percent of the Voting Power, unless the Business Combination is approved by at
least two-thirds of the
 
                                       81
<PAGE>   89
 
Continuing Directors (as defined below) or certain fair price criteria and
procedural requirements specified in the Fair Price Provision and described
below are met. If either the requisite Board of Directors approval or the fair
price and procedural requirements were met, the Business Combination would be
subject to the voting requirements otherwise applicable under the DGCL and
Nasdaq, which for most types of Business Combinations currently would be the
affirmative vote of the holders of a majority of the outstanding shares of stock
of the Company entitled to vote thereon.
 
     The general purpose of the Fair Price Provision is to protect shareowners
against so-called front-end loaded or two-tier tender offers which may afford
some shareowners a disproportionately higher price for their shares than
shareowners receive generally. The Fair Price Provision is intended to help
assure the Company's shareowners fair and equitable treatment in the event a
third party were to seek to acquire the Company.
 
     A "Business Combination" is defined as: (i) a merger or consolidation of
the Company or any subsidiary with an Interested Shareowner; (ii) the sale,
lease, exchange, mortgage, pledge, transfer or other disposition by the Company
or a subsidiary of assets or securities having a value of $25 million or more if
an Interested Shareowner is a party to the transaction; (iii) the adoption of
any plan or proposal for the liquidation or dissolution of the Company proposed
by or on behalf of an Interested Shareowner; (iv) any reclassification of
securities, recapitalization, merger with a subsidiary or other transaction
which has the effect, directly or indirectly, of increasing an Interested
Shareowner's proportionate share of the outstanding capital stock of the Company
or a subsidiary; or (v) any agreement or contract providing for any of the
foregoing.
 
     An "Interested Shareowner" is defined as any person who is the beneficial
owner of 10 percent or more of the Voting Power other than the Company, certain
of its subsidiaries, or the employee benefit plans of the Company, any
subsidiary or Rockwell and the trustees of such plans. A person is the
"beneficial owner" of stock that such person, directly or indirectly, owns or
has the right to acquire or vote. The Company is not aware of any person or
group who would have been within the definition of an "Interested Shareowner" if
the Distribution had occurred on October 31, 1998.
 
     "Fair Price" Criteria.  Under the Fair Price Provision, the fair price
criteria that must be satisfied to avoid the 80 percent shareowner voting
requirement include the requirements that the consideration paid to the
Company's shareowners in a Business Combination must be (i) either cash or the
same form of consideration used by the Interested Shareowner in acquiring its
beneficial ownership of the largest number of shares of the relevant class or
series of the Company's capital stock acquired by the Interested Shareowner and
(ii) at least equal to the highest of (A) the highest per share price paid by or
on behalf of the Interested Shareowner in the two-year period immediately
preceding the date of the first public announcement of the proposal of the
Business Combination or in the transaction in which it became an Interested
Shareowner, whichever is higher, (B) the fair market value per share of the
relevant class or series of the Company's capital stock on the date the
Interested Shareowner became an Interested Shareowner or the date of the first
public announcement of the proposal of the Business Combination, whichever is
higher, or (C) the liquidation preference of the relevant class or series of the
Company's capital stock (other than Company Common Stock). The Interested
Shareowner would be required to meet the fair price criteria with respect to
each class of the Company's capital stock, whether or not the Interested
Shareowner beneficially owned shares of that class prior to proposing the
Business Combination. If the Business Combination does not involve any cash or
other property being received by any of the other shareowners, such as a sale of
assets or an issuance of the Company's securities to an Interested Shareowner,
then the fair price criteria discussed above would not apply, and approval by
the holders of 80 percent of the Voting Power would be required unless the
transaction were approved by at least two-thirds of the Continuing Directors.
 
     Procedural Requirements.  Under the Fair Price Provision, even if the
foregoing fair price criteria are met, the following procedural requirements
must be met if the Business Combination is not to require approval by at least
two-thirds of the Continuing Directors or approval by the holders of 80 percent
of the Voting Power: (i) the Company, after the Interested Shareowner became an
Interested Shareowner, must not have failed to pay full quarterly dividends on
the Company Preferred Stock, if any, or reduced the rate of dividends paid on
the Company Common Stock, unless such failure or reduction was approved by at
least two-thirds of the Continuing Directors; (ii) the Interested Shareowner
must not have acquired at any time after
 
                                       82
<PAGE>   90
 
becoming an Interested Shareowner any additional shares of the Company's capital
stock in any transaction unless after giving effect to such acquisition there
would be no increase in the Interested Shareowner's percentage beneficial
ownership of any class of the Company's capital stock; (iii) the Interested
Shareowner must not have received (other than proportionately as a shareowner)
at any time after becoming an Interested Shareowner, whether in connection with
the proposed Business Combination or otherwise, the benefit of any loans or
other financial assistance or any tax advantages provided by the Company; (iv) a
proxy or information statement describing the proposed Business Combination and
complying with the requirements of the Exchange Act must have been mailed to all
shareowners of the Company at least 30 days prior to the consummation of the
Business Combination; and (v) the Interested Shareowner must not have made any
material change in the Company's business or equity capital structure without
the approval of at least two-thirds of the Continuing Directors.
 
     Continuing Director Approval.  If the Business Combination with an
Interested Shareowner is approved by at least two-thirds of the Continuing
Directors, neither the fair price criteria and other procedural requirements nor
the 80 percent shareowner vote requirement would be applicable. A "Continuing
Director" is any member of the Board of Directors of the Company who is not
affiliated or associated with or a representative of the Interested Shareowner
and who was a director of the Company prior to the time the Interested
Shareowner became an Interested Shareowner, and any successor to such Continuing
Director who is not affiliated or associated with or a representative of an
Interested Shareowner and who was recommended or elected by at least two-thirds
of the Continuing Directors.
 
   
     80 Percent Shareowner Vote.  If the fair price criteria and procedural
requirements are not satisfied and the Business Combination is not approved by
at least two-thirds of the Continuing Directors, the Fair Price Provision
requires the approval of the holders of 80 percent of the Voting Power, voting
as a single class, in addition to any vote required by law or otherwise. If the
fair price criteria and other procedural requirements were met or at least
two-thirds of the Continuing Directors approved a particular Business
Combination, the normal voting requirements of the DGCL and Nasdaq would apply.
Under current provisions of the DGCL, certain mergers, consolidations,
reclassifications of securities, sales of substantially all assets and plans of
dissolution would have to be approved by the holders of a majority of the
outstanding shares of stock of the Company entitled to vote thereon. Under the
current rules of Nasdaq, on which shares of Company Common Stock have been
approved for listing, the issuance of additional shares of Company Common Stock
aggregating 20 percent of the outstanding shares could, under certain
circumstances, require approval by a majority of the votes cast by the holders
of the shares of the stock of the Company entitled to vote thereon. Certain
other transactions, such as sales of less than substantially all assets, mergers
involving a 90%-owned subsidiary and recapitalizations not involving any
amendments to the Company Certificate, would not require shareowner approval
under the DGCL or Nasdaq rules, although such transactions may constitute
Business Combinations subject to the Fair Price Provision.
    
 
     Amendment of the Fair Price Provision.  Any amendment or repeal of the Fair
Price Provision, or the adoption of provisions inconsistent therewith, must be
approved by the affirmative vote of the holders of not less than 80 percent of
the Voting Power, voting together as a single class, unless such amendment,
repeal or adoption were approved by at least two-thirds of the Continuing
Directors, in which case the provisions of the DGCL would require the
affirmative vote of the holders of a majority of the outstanding shares of the
Company's stock entitled to vote thereon.
 
  Special Shareowners' Meetings and Right to Act By Written Consent
 
     The Company Certificate and the Company By-Laws provide that a special
meeting of shareowners may be called only by a resolution adopted by a majority
of the entire Board of Directors of the Company. Shareowners are not permitted
to call, or to require that the Board of Directors call, a special meeting of
shareowners. Moreover, the business permitted to be conducted at any special
meeting of shareowners is limited to the business brought before the meeting
pursuant to the notice of the meeting given by the Company. In addition, the
Company Certificate provides that any action taken by the shareowners of the
Company must be effected at an annual or special meeting of shareowners and may
not be taken by written consent in lieu of a meeting.
 
                                       83
<PAGE>   91
 
     The provisions of the Company Certificate and the Company By-Laws
prohibiting shareowner action by written consent may have the effect of delaying
consideration of a shareowner proposal until the next annual meeting. These
provisions would also prevent the holders of a majority of the Voting Power from
unilaterally using the written consent procedure to take shareowner action.
Moreover, a shareowner could not force shareowner consideration of a proposal
over the opposition of the Board of Directors of the Company by calling a
special meeting of shareowners prior to the time the Board believes such
consideration to be appropriate.
 
  Procedures for Shareowner Nominations and Proposals
 
     The Company By-Laws establish an advance notice procedure for shareowners
to nominate candidates for election as directors or to bring other business
before meetings of shareowners of the Company (the "Shareowner Notice
Procedure").
 
     Only those shareowner nominees who are nominated in accordance with the
Shareowner Notice Procedure will be eligible for election as directors of the
Company. Under the Shareowner Notice Procedure, notice of shareowner nominations
to be made at an annual meeting (or of any other business to be brought before
such meeting) must be received by the Company not less than 90 days nor more
than 120 days prior to the first anniversary of the previous year's annual
meeting (or, in the case of the 2000 Annual Meeting of Shareowners or if the
date of the annual meeting is more than 30 days before or more than 60 days
after such anniversary date, not earlier than the 120th day prior to such
meeting and not later than the later of (i) the 90th day prior to such meeting
or (ii) the 10th day after public announcement of the date of such meeting is
first made). Notwithstanding the foregoing, in the event that the number of
directors to be elected is increased and there is no public announcement naming
all of the nominees for director or specifying the size of the increased Board
of Directors made by the Company at least 100 days prior to the first
anniversary of the preceding year's annual meeting, a shareowner's notice will
be timely, but only with respect to nominees for any new positions created by
such increase, if it is received by the Company not later than the 10th day
after such public announcement is first made by the Company.
 
     The Company By-Laws provide that only such business may be conducted at a
special meeting as is specified in the notice of meeting. Nominations for
election to the Company's Board of Directors may be made at a special meeting at
which directors are to be elected only by or at the Company's Board of Directors
direction or by a shareowner who has given timely notice of nomination. Under
the Shareowner Notice Procedure, such notice must be received by the Company not
earlier than the 120th day before such meeting and not later than the later of
(i) the 90th day prior to such meeting or (ii) the 10th day after public
announcement of the date of such meeting is first made. Shareowners will not be
able to bring other business before special meetings of shareowners.
 
     The Shareowner Notice Procedure provides that at an annual meeting only
such business may be conducted as has been brought before the meeting by or at
the direction of the Company's Board of Directors or by a shareowner who has
given timely written notice (as set forth above with respect to shareowner's
nominations for election of directors at annual meetings) to the Company of such
shareowner's intention to bring such business before such meeting.
 
     Under the Shareowner Notice Procedure, a shareowner's notice to the Company
proposing to nominate an individual for election as a director must contain
certain information, including, without limitation, the identity and address of
the nominating shareowner, the class and number of shares of stock of the
Company owned by such shareowner, and all information regarding the proposed
nominee that would be required to be included in a proxy statement soliciting
proxies for the proposed nominee. Under the Shareowner Notice Procedure, a
shareowner's notice relating to the conduct of business other than the
nomination of directors must contain certain information about such business and
about the proposing shareowner, including, without limitation, a brief
description of the business the shareowner proposes to bring before the meeting,
the reasons for conducting such business at such meeting, the name and address
of such shareowner, the class and number of shares of stock of the Company
beneficially owned by such shareowner, and any material interest of such
shareowner in the business so proposed. If the Chairman or other officer
presiding at a meeting determines that an individual was not nominated, or other
business was not brought before the meeting, in accordance
 
                                       84
<PAGE>   92
 
with the Shareowner Notice Procedure, such individual will not be eligible for
election as a director, or such business will not be conducted at such meeting,
as the case may be.
 
     By requiring advance notice of nominations by shareowners, the Shareowner
Notice Procedure will afford the Company's Board of Directors an opportunity to
consider the qualifications of the proposed nominees and, to the extent deemed
necessary or desirable by the Company's Board of Directors, to inform
shareowners about such qualifications. By requiring advance notice of other
proposed business, the Shareowner Notice Procedure will provide a more orderly
procedure for conducting annual meetings of shareowners and, to the extent
deemed necessary or desirable by the Company's Board of Directors, will provide
the Company's Board of Directors with an opportunity to inform shareowners,
prior to such meetings, of any business proposed to be conducted at such
meetings, together with the Company's Board of Directors' position regarding
action to be taken with respect to such business, so that shareowners can better
decide whether to attend such a meeting or to grant a proxy regarding the
disposition of any such business.
 
     Although the Company By-Laws do not give the Company's Board of Directors
any power to approve or disapprove shareowner nominations for the election of
directors or proposals for action, they may have the effect of precluding a
contest for the election of directors or the consideration of shareowner
proposals if the proper procedures are not followed, and of discouraging or
deterring a third party from conducting a solicitation of proxies to elect its
own slate of directors or to approve its own proposal, without regard to whether
consideration of such nominees or proposals might be harmful or beneficial to
the Company and its shareowners.
 
  Amendment of the Company Certificate and Company By-Laws
 
     The Company Certificate provides that the affirmative vote of at least 80
percent of the Voting Power, voting together as a single class, would be
required to (i) amend or repeal the provisions of the Company Certificate with
respect to (A) the election of directors, (B) the right to call a special
shareowners' meeting and (C) the right to act by written consent, (ii) adopt any
provision inconsistent with such provisions and (iii) amend or repeal the
provisions of the Company Certificate with respect to amendments to the Company
Certificate or the Company By-Laws. In addition, the Company Certificate
provides that the Board of Directors of the Company may make, alter, amend and
repeal the by-laws of the Company and that the amendment or repeal by
shareowners of any by-laws of the Company would require the affirmative vote of
at least 80 percent of the Voting Power, voting together as a single class.
 
COMPANY RIGHTS PLAN
 
   
     The Company's Board of Directors has declared a dividend of one preferred
share purchase right ("Company Right") to be paid in respect of each share of
Company Common Stock to be issued in the Distribution. Each Company Right will
entitle the registered holder to purchase from the Company one one-hundredth of
a share of Company Junior Preferred Stock, at a price to be established by the
Board of Directors of the Company at the time the Company Rights Agreement is
entered into (the "Purchase Price"), subject to adjustment. The description and
terms of the Company Rights will be set forth in a Rights Agreement (the
"Company Rights Agreement") to be entered into between the Company and
ChaseMellon, as Rights Agent (the "Rights Agent").
    
 
     Until the earlier to occur of (i) 10 days following a public announcement
that a person or group of affiliated or associated persons (an "Acquiring
Person") has acquired beneficial ownership of 20% or more of the outstanding
Company Common Stock or (ii) 10 business days (or such later date as may be
determined by the Company's Board of Directors prior to such time as any person
or group becomes an Acquiring Person) following the commencement of, or
announcement of an intention to make, a tender offer or exchange offer the
consummation of which would result in the beneficial ownership by a person or
group of 20% or more of the outstanding Company Common Stock (the earlier of
such dates being called the "Rights Distribution Date"), the Company Rights will
be attached to Company Common Stock and the Company Rights will be owned by the
registered owners of Company Common Stock.
 
     The Company Rights Agreement will provide that, until the Rights
Distribution Date (or until the earlier redemption or expiration of the Company
Rights), (i) the Company Rights will be transferred with and only with the
Company Common Stock, (ii) certificates representing Company Common Stock and
statements in
 
                                       85
<PAGE>   93
 
respect of shares of Company Common Stock registered in book-entry or
uncertificated form will contain a notation incorporating the terms of the
Company Rights by reference and (iii) the transfer of any shares of Company
Common Stock will also constitute the transfer of the Company Rights associated
therewith. As soon as practicable following the Rights Distribution Date,
separate certificates evidencing the Company Rights ("Rights Certificates") will
be mailed to holders of record of the Company Common Stock as of the close of
business on the Rights Distribution Date and such separate Rights Certificates
alone will evidence the Company Rights.
 
     The Company Rights will not be exercisable until the Rights Distribution
Date. The Company Rights will expire on the tenth anniversary of the
Distribution (the "Final Expiration Date"), unless the Final Expiration Date is
extended or unless the Company Rights are earlier redeemed by the Company, in
each case, as described below.
 
     The Purchase Price payable, and the number of shares of Company Junior
Preferred Stock or other securities or property issuable, upon exercise of the
Company Rights will be subject to adjustment from time to time to prevent
dilution (i) in the event of a stock dividend on, or a subdivision, combination
or reclassification of, Company Junior Preferred Stock, (ii) upon the grant to
holders of shares of Company Junior Preferred Stock of certain rights or
warrants to subscribe for or purchase shares of Company Junior Preferred Stock
at a price, or securities convertible into shares of Company Junior Preferred
Stock with a conversion price, less than the then current market price of the
shares of Company Junior Preferred Stock or (iii) upon the distribution to
holders of shares of Company Junior Preferred Stock of evidences of indebtedness
or assets (excluding regular periodic cash dividends or dividends payable in
shares of Company Junior Preferred Stock) or of subscription rights or warrants
(other than those referred to above).
 
     The number of outstanding Company Rights and the number of one
one-hundredths of a share of Company Junior Preferred Stock issuable upon
exercise of each Company Right will also be subject to adjustment in the event
of a stock split of the Company Common Stock or a stock dividend on the Company
Common Stock payable in Company Common Stock or subdivisions, consolidations or
combinations of the Company Common Stock occurring, in any such case, prior to
the Rights Distribution Date.
 
     Shares of Company Junior Preferred Stock purchasable upon exercise of the
Company Rights will not be redeemable. Each share of Company Junior Preferred
Stock will be entitled to a minimum preferential quarterly dividend payment of
$1 per share but will be entitled to an aggregate dividend of 100 times the
dividend declared per share of Company Common Stock whenever such dividend is
declared. In the event of liquidation, the holders of Company Junior Preferred
Stock will be entitled to a minimum preferential liquidation payment of $100 per
share but will be entitled to an aggregate payment of 100 times the payment made
per share of Company Common Stock. Each share of Company Junior Preferred Stock
will have 100 votes, voting together with the Company Common Stock. In the event
of any merger, consolidation or other transaction in which shares of Company
Common Stock are exchanged, each share of Company Junior Preferred Stock will be
entitled to receive 100 times the amount received per share of Company Common
Stock. These rights will be protected by customary antidilution provisions.
 
     Because of the nature of the Company Junior Preferred Stock's dividend,
liquidation and voting rights, the value of the one one-hundredth interest in a
share of Company Junior Preferred Stock purchasable upon exercise of each
Company Right should approximate the value of one share of Company Common Stock.
 
     In the event that, at any time after a person has become an Acquiring
Person, the Company is acquired in a merger or other business combination
transaction or 50% or more of its consolidated assets or earning power is sold,
proper provision will be made so that each holder of a Company Right will
thereafter have the right to receive, upon the exercise thereof at the then
current exercise price of the Company Right, that number of shares of common
stock of the acquiring company which at the time of such transaction will have a
market value of two times the exercise price of the Company Right. In the event
that any person becomes an Acquiring Person, proper provision shall be made so
that each holder of a Company Right, other than Company Rights beneficially
owned by the Acquiring Person (which will thereafter be void), will thereafter
have the right to receive upon exercise, in lieu of shares of Company Junior
Preferred Stock, that number of shares of Company Common Stock having a market
value of two times the exercise price of the Company Right.
 
                                       86
<PAGE>   94
 
     At any time after any person or group of affiliated or associated persons
becomes an Acquiring Person, and prior to the acquisition by such person or
group of 50% or more of the outstanding shares of Company Common Stock, the
Company's Board of Directors may exchange the Company Rights (other than Company
Rights owned by such person or group, which will have become void after such
person became an Acquiring Person) for Company Common Stock or Company Junior
Preferred Stock, in whole or in part, at an exchange ratio of one share of
Company Common Stock, or one hundredth of a share of Company Junior Preferred
Stock (or of a share of another series of Company Preferred Stock having
equivalent rights, preferences and privileges), per Company Right (subject to
adjustment).
 
     With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments require an adjustment of at least 1% in
such Purchase Price. No fractional shares of Company Junior Preferred Stock will
be issued (other than fractions which are integral multiples of one
one-hundredth of a share of Company Junior Preferred Stock, which may, at the
election of the Company, be evidenced by depository receipts) and in lieu
thereof, an adjustment in cash will be made based on the market price of the
Company Junior Preferred Stock on the last trading day prior to the date of
exercise.
 
     At any time prior to the acquisition by a person or group of affiliated or
associated persons of beneficial ownership of 20% or more of the outstanding
shares of Company Common Stock, the Board of Directors of the Company may redeem
the Company Rights in whole, but not in part, at a price of $.01 per Company
Right (the "Redemption Price"). The redemption of the Company Rights may be made
effective at such time, on such basis and with such conditions as the Company's
Board of Directors may determine, in its sole discretion. Immediately upon any
redemption of the Company Rights, the right to exercise the Company Rights will
terminate and the only right of the holders of Company Rights will be to receive
the Redemption Price.
 
     The terms of the Company Rights may be amended by the Board of Directors of
the Company without the consent of the holders of the Company Rights, including
an amendment to decrease the threshold at which a person becomes an Acquiring
Person from 20% to not less than 10%, except that from and after such time as
any person becomes an Acquiring Person no such amendment may adversely affect
the interests of the holders of the Company Rights.
 
     Until a Company Right is exercised, the holder thereof, as such, will have
no rights as a shareowner of the Company, including, without limitation, the
right to vote or to receive dividends.
 
     The Company Rights will have certain anti-takeover effects. The Company
Rights will cause substantial dilution to a person or group that attempts to
acquire the Company on terms not approved by the Company's Board of Directors,
except pursuant to an offer conditioned on a substantial number of the Company
Rights being acquired. The Company Rights should not interfere with any merger
or business combination approved by the Company's Board of Directors, since the
Company Rights may be redeemed by the Company at the Redemption Price prior to
the time that a person or group has become an Acquiring Person.
 
     The foregoing summary of the material terms of the Company Rights is
qualified by reference to the form of the Company Rights Agreement, which has
been filed as an exhibit to the Registration Statement of which this Information
Statement is a part.
 
ANTI-TAKEOVER LEGISLATION
 
     Section 203 of the DGCL provides that, subject to certain exceptions
specified therein, a corporation shall not engage in any business combination
with any interested shareowner for a three-year period following the time that
such shareowner becomes an interested shareowner unless (i) prior to such time,
the board of directors of the corporation approved either the business
combination or the transaction which resulted in the shareowner becoming an
interested shareowner; (ii) upon consummation of the transaction which resulted
in the shareowner becoming an interested shareowner, the interested shareowner
owned at least 85% of the voting stock of the corporation outstanding at the
time the transaction commenced (excluding certain shares); or (iii) at or
subsequent to such time, the business combination is approved by the board of
directors of the corporation and by the affirmative vote of at least 66 2/3% of
the outstanding voting stock which is not owned by the interested shareowner.
Except as specified in Section 203 of the DGCL, an "interested shareowner" is
defined to include (x) any person that is the owner of 15% or more of the
outstanding voting stock of the corporation, or is an affiliate or associate of
the corporation and was the owner of 15% or more of the
 
                                       87
<PAGE>   95
 
outstanding voting stock of the corporation at any time within three years
immediately prior to the relevant date and (y) the affiliates and associates of
any such person.
 
     Under certain circumstances, Section 203 of the DGCL makes it more
difficult for a person who would be an interested shareowner to effect various
business combinations with a corporation for a three-year period, although the
shareowners may elect to exclude a corporation from the restrictions imposed
thereunder. The Company Certificate does not exclude the Company from the
restrictions imposed under Section 203 of the DGCL. It is anticipated that the
provisions of Section 203 of the DGCL may encourage companies interested in
acquiring the Company to negotiate in advance with the Company's Board of
Directors, since the shareowner approval requirement would be avoided if a
majority of the directors then in office approved either the business
combination or the transaction which resulted in the shareowner becoming an
interested shareowner.
 
            LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
 
     The DGCL permits Delaware corporations to eliminate or limit the monetary
liability of directors for breach of their fiduciary duty of care, subject to
certain limitations. The Company Certificate provides that Company directors are
not liable to the Company or its shareowners for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to the Company or its shareowners, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) for willful or negligent violation of the laws governing
the payment of dividends or the purchase or redemption of stock or (iv) for any
transaction from which a director derived an improper personal benefit.
 
     The DGCL provides for indemnification of directors, officers, employees and
agents subject to certain limitations. The Company By-Laws and the appendix
thereto provide for the indemnification of directors, officers, employees and
agents of the Company to the extent permitted by Delaware law. It is expected
that the Company's directors and officers will be insured against certain
liabilities for actions taken in such capacities, including liabilities under
the Securities Act.
 
                                       88
<PAGE>   96
 
                          GLOSSARY OF TECHNICAL TERMS
 
<TABLE>
<S>           <C>
A/D           Analog-to-Digital.
ADSL          Asymmetric Digital Subscriber Line.
ATM           Asynchronous Transfer Mode.
BiCMOS        Bipolar Complementary Metal-Oxide Semiconductor.
bps           Bits per second.
CDMA          Code Division Multiple Access.
CMOS          Complementary Metal Oxide Semiconductor.
D/A           Digital-to-Analog.
DBS           Direct Broadcast Satellite.
DSL           Digital Subscriber Line.
DSP           Digital Signal Processor.
DSS           Digital Spread Spectrum.
E1            European standard for digital transmission for speeds up to
              2.048 Mbps.
E3            European standard for digital transmission for speeds up to
              34.368 Mbps.
GaAs          Gallium Arsenide.
Gbps          Gigabits per second, a billion bits per second.
GHz           Gigahertz.
GPS           Global Positioning System.
GSM           Global System for Mobile Communications.
HBT           Heterojunction Bipolar Transistor.
HDSL          High-speed Digital Subscriber Line.
IC            Integrated Circuit.
IP            Internet Protocol.
ISO           International Standards Organization.
ISP           Internet Service Provider.
ITU           International Telecommunications Union.
Kbps          Kilobits per second, a thousand bits per second.
LAN           Local Area Network.
LMDS          Local Multi-channel Distribution Service.
Mbps          Megabits per second, a million bits per second.
MCNS/DOCSIS   Multimedia Cable Network Systems Data Over Cable Services
              Interface Specifications.
MESFET        Metal Semiconductor Field-Effect Transistor.
MFP           Multifunction peripheral.
MHz           Megahertz.
MMDS          Multi-point Multi-channel Distribution System.
NTSC          National Television Standards Committee (North American
              television standard).
OEM           Original Equipment Manufacturer.
PAL           Phase Alternate Line (European television standard).
PCMCIA        Personal Computer Memory Card International Association.
PHY           Physical layer device.
RF            Radio Frequency.
RFCMOS        Radio Frequency Complementary Metal Oxide Semiconductor.
RFIC          Radio Frequency Integrated Circuit.
SAR           Segmentation And Reassembly device.
SDH           Synchronous Digital Hierarchy.
SECAM         Systeme Electronique Couleur Avec Memorie (French television
              standard).
SiGe          Silicon Germanium.
SONET         Synchronous Optical Network.
T1            North American standard for digital transmission for speeds
              up to 1.544 Mbps.
T3            North American standard for digital transmission for speeds
              up to 45 Mbps.
TDMA          Time Division Multiple Access.
WAN           Wide Area Network.
xDSL          Generic term for digital subscriber line, including ADSL and
              HDSL.
</TABLE>
 
                                       89
<PAGE>   97
 
                    INDEX TO SEMICONDUCTOR SYSTEMS COMBINED
                       FINANCIAL STATEMENTS AND SCHEDULE
 
<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Independent Auditors' Report................................   F-2
Combined Balance Sheet as of September 30, 1998 and 1997....   F-3
Combined Statement of Operations for the years ended
  September 30, 1998, 1997 and 1996.........................   F-4
Combined Statement of Cash Flows for the years ended
  September 30, 1998, 1997 and 1996.........................   F-5
Notes to Combined Financial Statements......................   F-6
Schedule II -- Valuation and Qualifying Accounts............  F-20
</TABLE>
 
                                       F-1
<PAGE>   98
 
                          INDEPENDENT AUDITORS' REPORT
 
To the Board of Directors and Shareowners of
  Rockwell International Corporation:
 
     We have audited the accompanying combined balance sheet of the
semiconductor systems business (Semiconductor Systems) of Rockwell International
Corporation (Rockwell), as described in Note 1 to the financial statements, as
of September 30, 1998 and 1997, and the related combined statements of
operations and cash flows for each of the three years in the period ended
September 30, 1998. Our audits also included the financial statement schedule
listed in the Index to Semiconductor Systems Combined Financial Statements and
Schedule at page F-1. These financial statements and the financial statement
schedule are the responsibility of Rockwell's management. Our responsibility is
to express an opinion on the financial statements and financial statement
schedule based on our audits.
 
     We conducted our audits in accordance with generally accepted auditing
standards. 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, such combined financial statements present fairly, in all
material respects, the financial position of Semiconductor Systems as of
September 30, 1998 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended September 30, 1998, in
conformity with generally accepted accounting principles. Also, in our opinion,
such financial statement schedule, when considered in relation to the basic
combined financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
 
DELOITTE & TOUCHE LLP
 
Costa Mesa, California
November 4, 1998
 
                                       F-2
<PAGE>   99
 
                             SEMICONDUCTOR SYSTEMS
 
                             COMBINED BALANCE SHEET
                                 (IN MILLIONS)
 
<TABLE>
<CAPTION>
                                                               SEPTEMBER 30,
                                                              ----------------
                                                               1998      1997
                                                              ------    ------
<S>                                                           <C>       <C>
                                    ASSETS
 
CURRENT ASSETS:
Cash........................................................  $   14    $   14
Receivables (less allowance for doubtful accounts: 1998, $9;
  1997, $10)................................................     167       223
Inventories, net............................................     201       223
Deferred income taxes.......................................     153        50
Assets held for disposal (see Note 3).......................      42        --
Other current assets........................................      10        11
                                                              ------    ------
          Total current assets..............................     587       521
 
PROPERTY, NET...............................................     713       802
INTANGIBLE ASSETS, NET......................................      53        87
OTHER ASSETS................................................      65        76
                                                              ------    ------
          TOTAL ASSETS......................................  $1,418    $1,486
                                                              ======    ======
 
                  LIABILITIES AND ROCKWELL'S NET INVESTMENT
 
CURRENT LIABILITIES:
Short-term debt.............................................  $   14    $   14
Accounts payable............................................     151       189
Accrued compensation and benefits...........................      37        49
Other current liabilities...................................     129        47
                                                              ------    ------
          Total current liabilities.........................     331       299
OTHER LIABILITIES AND CONTINGENCIES.........................      78        80
ROCKWELL'S NET INVESTMENT...................................   1,009     1,107
                                                              ------    ------
          TOTAL LIABILITIES AND ROCKWELL'S NET INVESTMENT...  $1,418    $1,486
                                                              ======    ======
</TABLE>
 
                  See notes to combined financial statements.
 
                                       F-3
<PAGE>   100
 
                             SEMICONDUCTOR SYSTEMS
 
                        COMBINED STATEMENT OF OPERATIONS
                                 (IN MILLIONS)
 
<TABLE>
<CAPTION>
                                                               YEAR ENDED SEPTEMBER 30,
                                                              --------------------------
                                                               1998      1997      1996
                                                              ------    ------    ------
<S>                                                           <C>       <C>       <C>
Net sales...................................................  $1,200    $1,412    $1,470
Cost of sales...............................................     909       744       849
                                                              ------    ------    ------
GROSS MARGIN................................................     291       668       621
Research and development....................................     337       280       155
Selling, general and administrative.........................     251       191       150
Purchased research and development..........................      --        30       121
Special charges (see Note 3)................................     147        --        --
                                                              ------    ------    ------
OPERATING (LOSS) EARNINGS...................................    (444)      167       195
Other income, net...........................................      14        13         3
                                                              ------    ------    ------
(LOSS) INCOME BEFORE INCOME TAXES...........................    (430)      180       198
(Benefit) provision for income taxes........................    (168)       54       114
                                                              ------    ------    ------
          NET (LOSS) INCOME.................................  $ (262)   $  126    $   84
                                                              ======    ======    ======
</TABLE>
 
                  See notes to combined financial statements.
 
                                       F-4
<PAGE>   101
 
                             SEMICONDUCTOR SYSTEMS
 
                        COMBINED STATEMENT OF CASH FLOWS
                                 (IN MILLIONS)
 
<TABLE>
<CAPTION>
                                                               YEAR ENDED SEPTEMBER 30,
                                                              --------------------------
                                                               1998      1997      1996
                                                              ------    ------    ------
<S>                                                           <C>       <C>       <C>
OPERATING ACTIVITIES
Net (loss) income...........................................  $(262)    $ 126     $  84
Adjustments to net (loss) income to arrive at cash provided
  by operating activities:
  Depreciation and amortization.............................    220       181       132
  Deferred income taxes.....................................   (109)       32       (89)
  Special charges (see Note 3)..............................    147        --        --
  Purchased research and development........................     --        30       121
  Changes in assets and liabilities, excluding effects of
     acquisitions:
     Receivables............................................     52       (27)      (54)
     Inventories............................................     21        66      (151)
     Accounts payable.......................................    (42)       11        95
     Other current liabilities..............................    171      (125)      146
     Other..................................................   (100)        2        31
                                                              -----     -----     -----
 
          CASH PROVIDED BY OPERATING ACTIVITIES.............     98       296       315
                                                              -----     -----     -----
INVESTING ACTIVITIES
Capital expenditures........................................   (270)     (317)     (380)
Acquisitions of businesses, net of cash acquired............     --       (65)     (254)
                                                              -----     -----     -----
          CASH USED FOR INVESTING ACTIVITIES................   (270)     (382)     (634)
                                                              -----     -----     -----
 
FINANCING ACTIVITIES
Decrease in short-term borrowings...........................     --        --       (11)
Payments of long-term debt..................................     --        --       (11)
Net transfers from Rockwell.................................    172        86       341
                                                              -----     -----     -----
          CASH PROVIDED BY FINANCING ACTIVITIES.............    172        86       319
                                                              -----     -----     -----
 
CHANGE IN CASH..............................................     --        --        --
CASH AT BEGINNING OF PERIOD.................................     14        14        14
                                                              -----     -----     -----
CASH AT END OF PERIOD.......................................  $  14     $  14     $  14
                                                              =====     =====     =====
</TABLE>
 
                  See notes to combined financial statements.
 
                                       F-5
<PAGE>   102
 
                             SEMICONDUCTOR SYSTEMS
 
                     NOTES TO COMBINED FINANCIAL STATEMENTS
 
1.  BASIS OF PRESENTATION
 
     On November 4, 1998, the Board of Directors of Rockwell International
Corporation (Rockwell) approved the distribution (the Distribution) to Rockwell
shareowners of all of the outstanding shares of common stock of Conexant
Systems, Inc. (formerly named Rockwell Semiconductor Systems, Inc.) (the
Company), a wholly-owned subsidiary of Rockwell, which after the Distribution
will own Rockwell's semiconductor systems business (Semiconductor Systems). The
shares of the Company will be distributed on a pro rata basis to the shareowners
of Rockwell in a tax-free spin-off, with each Rockwell shareowner receiving one
share of Company Common Stock (including an associated preferred share purchase
right) for every two shares of Rockwell Common Stock owned on the record date
for the Distribution. The Company will become a separately traded, publicly-held
company. Prior to the Distribution, Rockwell will transfer to the Company those
assets and liabilities of Semiconductor Systems not already owned by the
Company, including the stock of certain subsidiaries, and the Company will
transfer to Rockwell those assets and liabilities not constituting part of
Semiconductor Systems, including all assets and liabilities of Rockwell's
Electronic Commerce business. The Distribution, which is subject to satisfaction
or waiver of several conditions, is expected to be completed on December 31,
1998. Rockwell has received a ruling from the Internal Revenue Service that the
Distribution will be tax-free to its shareowners.
 
     Prior to the Distribution, the Company will distribute its wafer
fabrication facilities in Colorado Springs, Colorado (and the related tax
benefit) to Rockwell. In addition, prior to the Distribution, Rockwell will
contribute $65 million in cash to the Company, which will be placed in an escrow
account to be used to satisfy Semiconductor Systems' obligation with respect to
the intellectual property litigation brought by Celeritas Technologies, Ltd. See
Note 17.
 
     The accompanying combined financial statements present the historical
financial position, results of operations, and cash flows of Semiconductor
Systems, as it had been operated by Rockwell for the periods presented
(including the assets and liabilities related to the Colorado Springs, Colorado
wafer fabrication facilities). The combined financial statements do not include
the assets, liabilities, and results of operations of businesses to be retained
by Rockwell. These financial statements are not necessarily indicative of what
the financial position, results of operations, or cash flows would have been had
Semiconductor Systems been an independent public company during the periods
presented.
 
     The combined financial statements of Semiconductor Systems have been
prepared in accordance with generally accepted accounting principles that
require management to make estimates and assumptions that affect the amounts
reported in the financial statements. Actual results could differ from those
estimates.
 
     Rockwell provides certain services to Semiconductor Systems' United States
(U.S.) operations, including payroll and employee benefits administration, data
processing and telecommunications services, and research and development
activities. Rockwell also administers certain programs in which Semiconductor
Systems' U.S. operations participate, including active medical and insurance
programs. Costs for these services and programs are billed to Semiconductor
Systems based on actual usage and are included in Semiconductor Systems'
Combined Statement of Operations. These costs totaled $23 million, $19 million
and $15 million in fiscal 1998, 1997, and 1996, respectively. Management
believes that the methods of billing these costs are reasonable and that the
costs charged to Semiconductor Systems are approximately those which would have
been incurred on a stand-alone basis. The nature and term of services to be
provided to the Company by Rockwell after the Distribution are subject to
finalization of a transition agreement and are expected to include payroll and
employee benefits administration, data processing, and certain research
development activities. The cost of services to be billed by Rockwell will be
approximately equal to the amounts billed in the historical financial
statements. The transition agreement also will provide for continued occupancy
by the Company through April 30, 1999 of the Colorado Springs, Colorado wafer
fabrication
 
                                       F-6
<PAGE>   103
                             SEMICONDUCTOR SYSTEMS
 
             NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
 
facilities to be distributed to Rockwell prior to the Distribution, pursuant to
an operating lease under which the Company will pay all costs of the facilities.
 
     Rockwell also provides management services to Semiconductor Systems,
including corporate oversight, financial, legal, tax, corporate communications,
and human resources. The costs of providing these services have been allocated
to Semiconductor Systems based on sales in proportion to total Rockwell sales
and are included in selling, general and administrative expense in the Combined
Statement of Operations. These costs totaled $12 million, $11 million and $12
million in fiscal 1998, 1997 and 1996, respectively. Management believes that
the method of allocating these costs to Semiconductor Systems is reasonable and
the amount is approximately equal to the cost of providing these services on a
stand-alone basis.
 
     Semiconductor Systems' U.S. and certain of its non-U.S. operations
participate in Rockwell's centralized cash management systems which manage all
of Semiconductor Systems' cash receipt and disbursement activities. Accordingly,
the combined financial statements exclude debt and interest income and expense
in countries with centralized cash management systems. Accounts payable includes
$20 million and $14 million as of September 30, 1998 and 1997, respectively,
related to outstanding checks drawn on U.S. centralized disbursement accounts.
Semiconductor Systems has no financing or debt arrangements with Rockwell.
 
     In connection with the Distribution, Rockwell will transfer to the Company
cash balances and an equal amount of short-term debt, expected to be
approximately $14 million.
 
2.  ACCOUNTING POLICIES
 
  Basis of Combination
 
     The combined financial statements include all subsidiaries and businesses
of Rockwell which relate to Semiconductor Systems. All significant accounts and
transactions among Semiconductor Systems' locations have been eliminated.
Certain reclassifications have been made to prior year amounts to conform to the
current year presentation.
 
     Intercompany accounts receivable and payable between Semiconductor Systems
and Rockwell or its subsidiaries as of the date of the Distribution will be
canceled or otherwise eliminated and, accordingly, have been reflected in
Rockwell's net investment on the combined balance sheet.
 
  Inventories
 
     Inventories are stated at the lower of cost (using the average cost method)
or market (determined on the basis of estimated realizable values). Management
evaluates the need for lower of cost or market impairment reserves by comparing
the total cost of inventories to total market value. Management determines
excess and obsolete inventory reserves based on current inventory levels and
projected usage for the following six month period.
 
  Property
 
     Property is stated at cost. Depreciation is based on estimated useful lives
(50 years for buildings and 10 to 30 years for building improvements; 5 years
for machinery and equipment; and the shorter of the remaining terms of the
leases or the estimated economic useful lives of the improvements for land and
leasehold improvements) using straight-line and double-declining methods.
Significant renewals and betterments are capitalized and replaced units are
written off. Maintenance and repairs, as well as renewals of a minor amount, are
charged to expense.
 
  Intangible Assets
 
     Goodwill and other intangible assets generally result from business
acquisitions. Semiconductor Systems accounts for business acquisitions by
assigning the purchase price to tangible and intangible assets and
 
                                       F-7
<PAGE>   104
                             SEMICONDUCTOR SYSTEMS
 
             NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
 
liabilities, including research and development projects which have not yet
reached technological feasibility and have no alternative future use (purchased
research and development). Assets acquired and liabilities assumed are recorded
at their fair values; the appraised value of purchased research and development
is immediately charged to expense, and the excess of the purchase price over the
amounts assigned is recorded as goodwill.
 
     Goodwill, patents, developed technology, and other intangibles are
amortized on a straight-line basis over their estimated useful lives, ranging
from 5 to 10 years.
 
  Impairment of Long-Lived Assets
 
     Semiconductor Systems reviews all long-lived assets for impairment when
events or circumstances indicate that the carrying amount of a long-lived asset
may not be recoverable, and for all assets to be disposed of. Long-lived assets
held for use are reviewed for impairment by comparing undiscounted cash flows
over remaining useful lives to net book value. When impairment is indicated for
a long-lived asset, the amount of impairment loss is the excess of net book
value over fair value.
 
  Revenue Recognition
 
     Generally, revenue is recognized when title to the product transfers.
Certain of Semiconductor Systems' domestic distributors have the right to return
all of Semiconductor Systems' products under certain circumstances. Revenue
associated with shipments to those distributors is deferred and is recognized
when the product is shipped to the ultimate customer. Gross revenue is reduced
by accruals for estimated pricing and other return activity on product shipments
based on historical experience.
 
  Environmental Matters
 
     Semiconductor Systems records accruals for environmental matters in the
accounting period in which its responsibility is established and the cost to
remediate can be reasonably estimated. At environmental sites in which more than
one potentially responsible party has been identified, Semiconductor Systems
records a liability for its allocable share of costs related to its involvement
with the site as well as an allocable share of costs related to insolvent
parties or unidentified shares. At environmental sites in which Semiconductor
Systems is the only responsible party, Semiconductor Systems records a liability
for the total estimated costs of remediation. Costs of future expenditures for
environmental remediation obligations are recorded on an undiscounted basis. If
recovery from insurers or other third parties is determined to be probable,
Semiconductor Systems records a receivable for the estimated recovery.
 
     In 1998, Semiconductor Systems adopted American Institute of Certified
Public Accountants (AICPA) Statement of Position (SOP) No. 96-1, "Environmental
Remediation Liabilities." The effect of adoption of this SOP on the combined
financial statements was not material.
 
  New Accounting Standards
 
     Effective October 1, 1997, Semiconductor Systems adopted AICPA SOP No.
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" (SOP 98-1). SOP 98-1 requires the cost of purchased software and
certain costs incurred in developing computer software for internal use to be
capitalized and amortized over future periods. During fiscal 1998, Semiconductor
Systems capitalized $4 million of such costs that would have been charged to
expense under its previous accounting policy.
 
     In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS 133), which is effective for fiscal 2000. SFAS 133
will require Semiconductor Systems to record all derivatives on the balance
sheet at fair value. For derivatives that are hedges, changes in the fair value
of derivatives will be offset
 
                                       F-8
<PAGE>   105
                             SEMICONDUCTOR SYSTEMS
 
             NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
 
by the change in fair value of the hedged assets, liabilities, or firm
commitments. Management believes the impact of adopting this standard will not
be material to the financial position or results of operations of Semiconductor
Systems.
 
3.  SPECIAL CHARGES
 
     In the fourth quarter of 1998, Semiconductor Systems restructured its
business and recorded special charges of $147 million ($90 million after tax).
The special charges include an asset impairment of $103 million related to the
closure and planned disposal of its wafer fabrication facilities in Colorado
Springs, Colorado, $15 million for employee severance and voluntary early
retirement program costs associated with an approximate 10 percent worldwide
workforce reduction, $11 million related to intangible asset write-offs and $18
million for other actions including lease termination costs, contractual
liabilities and other asset write-offs. These actions are expected to be
substantially completed by the end of 1999 with cash expenditures of $15
million.
 
     The effect of the special charges on the combined balance sheet at
September 30, 1998 is as follows (in millions):
 
<TABLE>
<S>                                                           <C>
Property, net...............................................  $103
Intangible assets, net......................................    11
Other assets................................................     4
Accrued compensation and benefits...........................     9
Other current liabilities...................................    14
Other liabilities and contingencies.........................     6
                                                              ----
Total.......................................................  $147
                                                              ====
</TABLE>
 
     In connection with the restructuring, management decided to close and
dispose of its wafer fabrication facilities in Colorado Springs, Colorado. The
$103 million charge represents the excess of the carrying value of the
long-lived assets of these facilities over their estimated fair value as
determined by independent appraisal. These facilities will be distributed to
Rockwell prior to the Distribution.
 
4.  ACQUISITIONS OF BUSINESSES
 
     In September 1996, Semiconductor Systems acquired Brooktree Corporation
(Brooktree), a designer and supplier of mixed-signal integrated circuits for
high-speed digital communications and media processing applications, for $254
million, net of cash acquired. The acquisition was accounted for as a purchase
as of September 30, 1996 and the price allocation included $121 million (before
and after tax) for purchased research and development which was immediately
expensed, and $57 million for purchased intangibles, primarily developed
technology, which is being amortized over 9 years.
 
     Semiconductor Systems acquired the Hi-Media broadband communications
chipset business of ComStream Corporation (Hi-Media) for $42 million in cash.
The acquisition was accounted for as a purchase as of May 31, 1997, and the
price allocation included $30 million ($19 million after tax) for purchased
research and development which was immediately expensed, and $18.5 million for
intangible assets, including goodwill, which are being amortized on a
straight-line basis over 10 years. Semiconductor Systems also acquired two other
businesses in fiscal 1997 at a net cost of $22 million.
 
     The following unaudited pro forma schedule presents combined information
for Semiconductor Systems, Brooktree and Hi-Media for the years ended September
30, 1997 and 1996 as if each of the acquisitions had
 
                                       F-9
<PAGE>   106
                             SEMICONDUCTOR SYSTEMS
 
             NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
 
taken place at the beginning of each period presented (the effects of the
purchased research and development charges for Brooktree and Hi-Media are
included in pro forma net income in the year of acquisition only):
 
<TABLE>
<CAPTION>
                                                            YEAR ENDED
                                                          SEPTEMBER 30,
                                                         ----------------
                                                          1997      1996
                                                         ------    ------
                                                          (IN MILLIONS)
<S>                                                      <C>       <C>
Net sales............................................    $1,447    $1,642
Net income...........................................       123        77
</TABLE>
 
5.  INVENTORIES
 
     Inventories are summarized as follows (in millions):
 
<TABLE>
<CAPTION>
                                                              SEPTEMBER 30,
                                                              --------------
                                                              1998     1997
                                                              -----    -----
<S>                                                           <C>      <C>
Finished goods..............................................  $109     $ 69
Die bank....................................................    74       85
Work-in-process.............................................    88      105
Raw materials, parts, and supplies..........................    36       30
                                                              ----     ----
Inventories, gross..........................................   307      289
Reserves....................................................  (106)     (66)
                                                              ----     ----
Inventories, net............................................  $201     $223
                                                              ====     ====
</TABLE>
 
     Die bank is work-in-process inventory that has completed all die processing
operations and is stored in wafer form. Die bank inventory needs to be cut,
packaged, assembled and tested to become finished goods.
 
     Reserves are primarily for excess and obsolete finished goods and die bank
inventory. In the fourth quarter of 1998, Semiconductor Systems recorded a
charge of $66 million, principally related to the write-off of certain PC modem
inventory.
 
6.  PROPERTY
 
     Property is summarized as follows (in millions):
 
<TABLE>
<CAPTION>
                                                              SEPTEMBER 30,
                                                            -----------------
                                                             1998       1997
                                                            ------     ------
<S>                                                         <C>        <C>
Property at cost:
  Land....................................................  $   16     $   16
  Land and leasehold improvements.........................       6         10
  Buildings...............................................     305        261
  Machinery and equipment.................................     954        727
  Construction in progress................................     114        328
                                                            ------     ------
Total.....................................................   1,395      1,342
Less accumulated depreciation.............................    (682)      (540)
                                                            ------     ------
Property, net.............................................  $  713     $  802
                                                            ======     ======
</TABLE>
 
     In September 1998, management decided to close and dispose of its wafer
fabrication facilities in Colorado Springs, Colorado (see Note 3). The net book
value of these facilities, which will be distributed to Rockwell prior to the
Distribution, is set forth on the combined balance sheet as assets held for
disposal as of
 
                                      F-10
<PAGE>   107
                             SEMICONDUCTOR SYSTEMS
 
             NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
 
September 30, 1998. The September 30, 1997 property balance includes $144
million related to these facilities.
 
7.  INTANGIBLE ASSETS
 
     Intangible assets are summarized as follows (in millions):
 
<TABLE>
<CAPTION>
                                                              SEPTEMBER 30,
                                                              -------------
                                                              1998     1997
                                                              ----     ----
<S>                                                           <C>      <C>
Developed technology and other..............................  $46      $ 49
Goodwill....................................................   18        36
Patents.....................................................    6        21
                                                              ---      ----
Total.......................................................   70       106
Less accumulated amortization...............................  (17)      (19)
                                                              ---      ----
Intangible assets, net......................................  $53      $ 87
                                                              ===      ====
</TABLE>
 
8.  OTHER ASSETS
 
     Other assets are summarized as follows (in millions):
 
<TABLE>
<CAPTION>
                                                              SEPTEMBER 30,
                                                              -------------
                                                              1998     1997
                                                              ----     ----
<S>                                                           <C>      <C>
Deferred income taxes (see Note 14).........................  $48      $42
Investments.................................................   17       16
Other.......................................................   --       18
                                                              ---      ---
Other assets................................................  $65      $76
                                                              ===      ===
</TABLE>
 
9.  OTHER CURRENT LIABILITIES
 
     Other current liabilities are summarized as follows (in millions):
 
<TABLE>
<CAPTION>
                                                             SEPTEMBER 30,
                                                            ----------------
                                                            1998        1997
                                                            ----        ----
<S>                                                         <C>         <C>
Accrued litigation -- Celeritas (see Note 17).............  $ 65        $--
Accrued restructuring.....................................    15         --
Accrued royalties and licenses............................    11         23
Accrued taxes other than income taxes.....................     8         10
Other.....................................................    30         14
                                                            ----        ---
Other current liabilities.................................  $129        $47
                                                            ====        ===
</TABLE>
 
                                      F-11
<PAGE>   108
                             SEMICONDUCTOR SYSTEMS
 
             NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
 
10.  OTHER LIABILITIES AND CONTINGENCIES
 
     Other liabilities and contingencies are summarized as follows (in
millions):
 
<TABLE>
<CAPTION>
                                                              SEPTEMBER 30,
                                                              --------------
                                                              1998     1997
                                                              -----    -----
<S>                                                           <C>      <C>
Accrued retirement benefits.................................   $36      $29
Environmental remediation costs.............................     9        4
Accrued litigation -- Celeritas (see Note 17)...............    --       30
Other.......................................................    33       17
                                                               ---      ---
                                                               $78      $80
                                                               ===      ===
</TABLE>
 
11.  FINANCIAL INSTRUMENTS
 
     Semiconductor Systems' financial instruments include cash, short-term debt
and foreign currency forward exchange contracts. As of September 30, 1998 and
1997, the carrying values of Semiconductor Systems' financial instruments
approximated their fair values based on prevailing market prices and rates.
 
     It is the policy of Semiconductor Systems not to enter into derivative
financial instruments for speculative purposes. Semiconductor Systems does enter
into foreign currency forward exchange contracts to minimize risk of loss from
currency rate fluctuations on foreign currency commitments entered into in the
ordinary course of business. These commitments are generally for terms of less
than one year. The foreign currency forward exchange contracts are executed with
creditworthy banks and are denominated in currencies of major industrial
countries. The notional amount of outstanding foreign currency forward exchange
contracts by country is as follows (in millions):
 
<TABLE>
<CAPTION>
                                                              SEPTEMBER 30,
                                                              --------------
                                                              1998     1997
                                                              -----    -----
<S>                                                           <C>      <C>
Japan (Yen).................................................   $14      $--
United States (Dollars).....................................     3       19
The Netherlands (Guilders)..................................    --        9
                                                               ---      ---
                                                               $17      $28
                                                               ===      ===
</TABLE>
 
     Semiconductor Systems does not anticipate any material adverse effect on
its financial position relating to these foreign currency forward exchange
contracts.
 
12.  RETIREMENT MEDICAL PLANS
 
     Semiconductor Systems has retirement medical plans which cover most of its
U.S. and certain non-U.S. employees and provide for medical payments to eligible
employees and dependents upon retirement.
 
     Retirement medical expense included in the combined statement of
operations, consisting principally of interest accrued on the accumulated
retirement medical obligation, was $3 million in 1998 and $2 million in each of
1997 and 1996.
 
                                      F-12
<PAGE>   109
                             SEMICONDUCTOR SYSTEMS
 
             NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The retirement medical obligation at September 30, 1998 and 1997 is
comprised of the following (in millions):
 
<TABLE>
<CAPTION>
                                                              SEPTEMBER 30,
                                                              -------------
                                                              1998     1997
                                                              -----    ----
<S>                                                           <C>      <C>
Accumulated retirement medical obligation:
  Retirees..................................................  $  14    $ 17
  Employees eligible to retire..............................      2       4
  Employees not eligible to retire..........................      5       9
                                                              -----    ----
          Total.............................................     21      30
Unamortized amounts:
  Plan amendments...........................................     18       3
  Actuarial losses..........................................     (8)     (3)
                                                              -----    ----
Recorded liability..........................................  $  31    $ 30
                                                              =====    ====
Assumptions used (June 30 measurement date):
  Discount rate.............................................   6.75%    7.5%
  Health care cost trend rate (decreasing to 5.5% after
     2015)..................................................    7.0%    8.0%
</TABLE>
 
     In 1998, Semiconductor Systems announced to its current and former U.S.
employees that it will be changing its active and retiree medical plans. The
changes included one common plan for all active employees and retirees and
increased employee and retiree cost sharing. Semiconductor Systems also
announced that it will discontinue offering retiree medical coverage to all
active salaried employees as of December 31, 1998. Unamortized amounts related
to these and other plan amendments at September 30, 1998 reflect the accumulated
cost reduction of the retirement benefit obligation.
 
     Increasing the health care cost trend rate by one percentage point would
increase the accumulated retirement medical obligation at September 30, 1998 by
approximately $1 million and would not significantly increase retirement medical
expense.
 
13.  RETIREMENT PENSION PLANS
 
     Semiconductor Systems participates in a Rockwell pension plan (the Rockwell
Pension Plan), which provides for monthly pension payments to eligible U.S.
employees upon retirement. Pension benefits for U.S. salaried employees are
based on years of credited service and compensation. Pension benefits for U.S.
hourly employees are based on years of service and specified benefit amounts.
 
     In connection with the Distribution, Rockwell will retain the obligation
for vested benefits earned by Semiconductor Systems participants in the Rockwell
Pension Plan and all related assets. For U.S. employees that are members of
Local 2295 of the International Brotherhood of Electrical Workers Union ("U.S.
Hourly Employees"), Semiconductor Systems will establish a pension plan with
substantially similar benefits and which credits these employees for service
earned with Rockwell. The benefits payable under this Semiconductor Systems'
plan will be equal to the difference between the total benefit earned with both
companies and the vested benefit obligation retained by Rockwell. Accordingly,
the balance sheet includes a liability for the pension obligations related to
U.S. Hourly Employees equal to the excess of the projected benefit obligation
over the vested benefit obligation retained by Rockwell. Semiconductor Systems
will not establish a pension plan for U.S. salaried and certain hourly employees
and, accordingly, no pension liability related to these employees has been
included in the combined balance sheet.
 
     In connection with the restructuring plan announced in September 1998,
Semiconductor Systems offered a voluntary early retirement program (VERP) to
certain salaried employees. Pension benefits under the VERP will be paid from a
newly established pension plan (the VERP Plan) of Semiconductor Systems.
Benefits payable under the VERP Plan will be equal to the excess of the total
early retirement pension benefit
 
                                      F-13
<PAGE>   110
                             SEMICONDUCTOR SYSTEMS
 
             NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
 
over the vested benefit obligation retained by Rockwell. Eligible employees
could accept the VERP through November 2, 1998. Special charges include $6
million for costs associated with employees who accepted the VERP on or before
September 30, 1998, and Semiconductor Systems anticipates an additional charge
in the first quarter of fiscal 1999 for costs associated with the employees who
accept the VERP after September 30, 1998.
 
     Non-U.S. pension plans which relate solely to employees and retirees of
Semiconductor Systems will be assumed by Semiconductor Systems.
 
     Net pension expense included in the combined statement of operations,
consisting principally of service cost for benefits earned during the year and
the cost of benefits related to the VERP in 1998, was $14 million in 1998 and $6
million in both 1997 and 1996. At each of September 30, 1998 and 1997, the
projected benefit obligation and the accrued liability included in the combined
balance sheet related to the pension obligations to be assumed by Semiconductor
Systems totaled $7 million and $1 million, respectively. There were no plan
assets at September 30, 1998 and 1997.
 
     Assumptions (using a June 30 measurement date) include a 7.75% discount
rate and a 4.5% compensation increase rate for both periods presented.
 
     Semiconductor Systems also participates in certain Rockwell defined
contribution savings plans for eligible employees. Expense related to these
plans was $7 million for 1998 and $4 million in both 1997 and 1996.
 
14.  INCOME TAXES
 
     Most of Semiconductor Systems' operations are included in the consolidated
or combined income tax returns of Rockwell. Rockwell intends to indemnify
Semiconductor Systems for all income tax liabilities and retain rights to all
tax refunds relating to operations included in consolidated or combined tax
returns for periods through the date of the Distribution. Accordingly, the
combined balance sheet does not include current or prior period income tax
receivables or payables related to wholly-owned subsidiaries which file on a
consolidated or combined basis with Rockwell. The income tax provisions included
in the combined statement of operations have been determined as if Semiconductor
Systems were a separate taxpayer.
 
     The components of the (benefit) provision for income taxes are summarized
as follows (in millions):
 
<TABLE>
<CAPTION>
                                                       YEAR ENDED SEPTEMBER 30,
                                                       ------------------------
                                                        1998     1997     1996
                                                       ------    -----    -----
<S>                                                    <C>       <C>      <C>
Current tax (benefit) provision:
  United States......................................  $ (66)     $12     $162
  Foreign............................................      5        7        9
  State and local....................................      2        3       32
                                                       -----      ---     ----
          Total current tax (benefit) provision......    (59)      22      203
                                                       -----      ---     ----
Deferred tax (benefit) provision:
  United States......................................    (94)      25      (76)
  State and local....................................    (15)       7      (13)
                                                       -----      ---     ----
          Total deferred tax (benefit) provision.....   (109)      32      (89)
                                                       -----      ---     ----
(Benefit) provision for income taxes.................  $(168)     $54     $114
                                                       =====      ===     ====
</TABLE>
 
                                      F-14
<PAGE>   111
                             SEMICONDUCTOR SYSTEMS
 
             NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Current deferred income tax benefits included in the combined balance sheet
at September 30, 1998 and 1997 consist of the tax effects of temporary
differences related to the following (in millions):
 
<TABLE>
<CAPTION>
                                                              SEPTEMBER 30,
                                                              --------------
                                                              1998     1997
                                                              -----    -----
<S>                                                           <C>      <C>
Accrued compensation and benefits...........................  $ 11      $ 6
Inventories.................................................    48       31
Assets held for disposal....................................    36       --
Allowance for doubtful accounts.............................     3        4
Accrued royalties and licenses..............................    26        2
Other, net..................................................    29        7
                                                              ----      ---
Current deferred income taxes...............................  $153      $50
                                                              ====      ===
</TABLE>
 
     Deferred income tax benefits included in Other Assets in the combined
balance sheet at September 30, 1998 and 1997 consist of the tax effects of
temporary differences related to the following (in millions):
 
<TABLE>
<CAPTION>
                                                              SEPTEMBER 30,
                                                              --------------
                                                              1998     1997
                                                              -----    -----
<S>                                                           <C>      <C>
Property....................................................  $ 24     $ 21
Retirement benefits.........................................    11       12
Accrued royalties and licenses..............................     9       16
Intangible assets...........................................    (4)     (11)
Other, net..................................................     8        4
                                                              ----     ----
Long-term deferred income taxes (see Note 8)................  $ 48     $ 42
                                                              ====     ====
</TABLE>
 
     Management believes it is more likely than not that current and long-term
deferred tax benefits will reduce future income tax payments. Significant
factors considered by management in its determination of the probability of the
realization of the deferred tax benefits included: (a) the historical operating
results of Semiconductor Systems, (b) expectations of future earnings, and (c)
available tax planning strategies.
 
     Semiconductor Systems' effective tax rate was different from the U.S.
statutory rate for the reasons set forth below:
 
<TABLE>
<CAPTION>
                                                       YEAR ENDED SEPTEMBER 30,
                                                       -------------------------
                                                       1998      1997      1996
                                                       -----     -----     -----
<S>                                                    <C>       <C>       <C>
Statutory tax rate...................................  35.0%     35.0%     35.0%
State and local income taxes.........................   1.8       3.4       3.8
Foreign income taxes.................................   0.2       0.8       1.0
Foreign sales corporation............................   0.2      (7.8)     (6.1)
Research and experimentation credits.................   2.2      (1.7)       --
Purchased research and development...................    --        --      23.8
Other................................................  (0.3)      0.3       0.1
                                                       ----      ----      ----
Effective tax rate...................................  39.1%     30.0%     57.6%
                                                       ====      ====      ====
</TABLE>
 
                                      F-15
<PAGE>   112
                             SEMICONDUCTOR SYSTEMS
 
             NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The income tax (benefit) provision was calculated based upon the following
components of (loss) income before income taxes (in millions):
 
<TABLE>
<CAPTION>
                                                   YEAR ENDED SEPTEMBER 30,
                                                   -------------------------
                                                   1998       1997      1996
                                                   -----      ----      ----
<S>                                                <C>        <C>       <C>
United States (loss) income......................  $(444)     $162      $179
Foreign income...................................     14        18        19
                                                   -----      ----      ----
Total............................................  $(430)     $180      $198
                                                   =====      ====      ====
</TABLE>
 
     No provision has been made for U.S., state, or additional foreign income
taxes related to approximately $12 million of undistributed earnings of foreign
subsidiaries which have been or are intended to be permanently reinvested.
 
15.  ROCKWELL'S NET INVESTMENT
 
     Changes in Rockwell's net investment are summarized as follows (in
millions):
 
<TABLE>
<CAPTION>
                                                     YEAR ENDED SEPTEMBER 30,
                                                     ------------------------
                                                      1998      1997     1996
                                                     ------    ------    ----
<S>                                                  <C>       <C>       <C>
Beginning balance..................................  $1,107    $  899    $478
Net (loss) income..................................    (262)      126      84
Net transfers from Rockwell........................     172        86     341
Currency translation loss..........................      (8)       (4)     (4)
                                                     ------    ------    ----
Ending balance.....................................  $1,009    $1,107    $899
                                                     ======    ======    ====
</TABLE>
 
     The cumulative deferred currency translation (loss) gain was $(11) million,
$(3) million, and $1 million as of September 30, 1998, 1997, and 1996,
respectively.
 
16.  SUPPLEMENTAL FINANCIAL INFORMATION
 
<TABLE>
<CAPTION>
                                                         YEAR ENDED SEPTEMBER 30,
                                                        --------------------------
                                                         1998      1997      1996
                                                        ------    ------    ------
                                                              (IN MILLIONS)
<S>                                                     <C>       <C>       <C>
Statement of operations data:
  Depreciation expense................................   $206      $167      $126
  Maintenance and repairs.............................     63        74        64
  Rental expense......................................     17        12         6
Statement of cash flows data:
  Income tax payments.................................      3        10         6
</TABLE>
 
     Minimum future rental commitments under operating leases having
non-cancelable lease terms in excess of one year aggregated $40 million as of
September 30, 1998 and are payable as follows (in millions): 1999, $9; 2000, $7;
2001, $6; 2002, $5; 2003, $5; and thereafter, $8.
 
17.  CONTINGENT LIABILITIES
 
     Compliance with federal, state and local environmental requirements and
resolution of environmental claims have been accomplished without material
effect on Semiconductor Systems' liquidity and capital resources, competitive
position, or financial statements.
 
                                      F-16
<PAGE>   113
                             SEMICONDUCTOR SYSTEMS
 
             NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Based on its assessment, management believes that Semiconductor Systems'
expenditures for environmental capital investment and remediation necessary to
comply with present regulations governing environmental protection and other
expenditures for the resolution of environmental claims will not have a material
adverse effect on Semiconductor Systems' liquidity and capital resources,
competitive position, or financial statements. Management cannot assess the
possible effect of compliance with future requirements.
 
   
     Semiconductor Systems has been designated as a potentially responsible
party (PRP) at one Superfund site located at a former silicon wafer
manufacturing facility and steel fabrication plant in Parker Ford, Pennsylvania
formerly occupied by Semiconductor Systems. The site was also formerly occupied
by Recticon Corporation and Allied Steel Products Corporation, each also named
as a PRP and each of which is insolvent. The remediation plan for the site
includes installation of a public water supply line and a groundwater pump and
treat system, as well as routine groundwater sampling. As each PRP is jointly
and severally liable, the Company has accrued $4 million as of September 30,
1998 related to this matter, which represents the total estimated costs of
remediation. In addition, the Company is engaged in two other remediations of
groundwater contaminations at its Newport Beach and Newbury Park, California
facilities. The Company has accrued $5 million as of September 30, 1998 related
to these matters.
    
 
     Claims have been asserted against Semiconductor Systems for utilizing the
intellectual property rights of others in certain of Semiconductor Systems'
products. The resolution of these matters may result in the negotiation of a
license agreement, a settlement or the resolution of such claims through
arbitration or litigation. Semiconductor Systems accrues the estimated cost of
the ultimate resolution of these matters.
 
     In September 1995, Celeritas Technologies, Ltd. filed suit against Rockwell
for patent infringement, misappropriation of trade secrets, and breach of
contract relating to cellular telephone data transmission technology utilized in
certain modem products produced by Semiconductor Systems. In July 1997, the
court entered a judgment awarding damages of $57 million, plus interest. On July
20, 1998, the U.S. Court of Appeals for the Federal Circuit affirmed the trial
court's judgment based on breach of contract. The Company continues to believe
the judgment is in error and intends to file a petition for certiorari with the
U.S. Supreme Court. Semiconductor Systems recorded an additional charge of $35
million in the fourth quarter of fiscal 1998 related to this matter to increase
its reserve at September 30, 1998 to approximately $65 million. Prior to the
Distribution, Rockwell will contribute $65 million in cash to the Company, which
will be placed in an escrow account to be used to satisfy Semiconductor Systems'
obligation with respect to this matter.
 
     Various other lawsuits, claims and proceedings have been or may be
instituted or asserted against Semiconductor Systems relating to the conduct of
its business, including those pertaining to product liability, safety and health
and employment matters. Although the outcome of litigation cannot be predicted
with certainty and some lawsuits, claims, or proceedings may be disposed of
unfavorably to Semiconductor Systems, management believes the disposition of
matters which are pending or asserted will not have a material adverse effect on
Semiconductor Systems' financial statements.
 
     The Company will assume all contingent liabilities (including those in
respect of intellectual property and environmental matters) related to current
and former operations of Semiconductor Systems.
 
18.  GEOGRAPHIC SEGMENT INFORMATION
 
     Semiconductor Systems operates in one industry segment which is engaged in
research, development, and manufacture of semiconductor products and systems for
communications electronics markets such as personal computers, personal imaging
devices, wireless communications products, network access devices, and digital
information and entertainment products.
 
                                      F-17
<PAGE>   114
                             SEMICONDUCTOR SYSTEMS
 
             NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
 
  Sales by Geographic Area of Origin
 
<TABLE>
<CAPTION>
                                                    YEAR ENDED SEPTEMBER 30,
                                                   --------------------------
                                                    1998      1997      1996
                                                   ------    ------    ------
                                                         (IN MILLIONS)
<S>                                                <C>       <C>       <C>
United States....................................  $1,178    $1,359    $1,443
Europe...........................................     148       131       145
Asia-Pacific.....................................     100       168       138
Other............................................      38        28        28
Eliminations.....................................    (264)     (274)     (284)
                                                   ------    ------    ------
     Total Sales.................................  $1,200    $1,412    $1,470
                                                   ======    ======    ======
</TABLE>
 
     United States sales include export sales to unaffiliated customers of $530
million, $517 million, and $434 million in fiscal 1998, 1997, and 1996,
respectively. Substantially all export sales are to the Asia-Pacific region.
 
  (Loss) Earnings by Geographic Area
 
<TABLE>
<CAPTION>
                                                      YEAR ENDED SEPTEMBER 30,
                                                      -------------------------
                                                       1998     1997      1996
                                                      ------    -----    ------
                                                            (IN MILLIONS)
<S>                                                   <C>       <C>      <C>
United States.......................................  $(310)    $151     $ 178
Europe..............................................      6        3         6
Asia-Pacific........................................      5       11         9
Other...............................................      2        2         2
Special charges.....................................   (147)      --        --
                                                      -----     ----     -----
Operating (loss) earnings...........................   (444)     167       195
Other income, net...................................     14       13         3
(Benefit) provision for income taxes................   (168)      54       114
                                                      -----     ----     -----
     Net (loss) income..............................  $(262)    $126     $  84
                                                      =====     ====     =====
</TABLE>
 
     In 1998, the special charges relate to the geographic areas as follows:
United States, $142 million; Europe, $3 million; Asia-Pacific, $2 million.
Included within United States earnings are pre-tax charges for the write-off of
purchased research and development in connection with the fiscal 1997 Hi-Media
acquisition and the fiscal 1996 Brooktree acquisition of $30 million and $121
million, respectively.
 
  Identifiable Assets by Geographic Area
 
<TABLE>
<CAPTION>
                                                         SEPTEMBER 30,
                                                   --------------------------
                                                    1998      1997      1996
                                                   ------    ------    ------
                                                         (IN MILLIONS)
<S>                                                <C>       <C>       <C>
United States....................................  $1,331    $1,375    $1,251
Europe...........................................      25        32        25
Asia-Pacific.....................................      40        63        93
Other............................................      22        16        14
                                                   ------    ------    ------
     Total.......................................  $1,418    $1,486    $1,383
                                                   ======    ======    ======
</TABLE>
 
                                      F-18
<PAGE>   115
                             SEMICONDUCTOR SYSTEMS
 
             NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
 
19.  QUARTERLY FINANCIAL INFORMATION (UNAUDITED) (IN MILLIONS)
 
<TABLE>
<CAPTION>
                                                            1998 FISCAL QUARTERS
                                                     ----------------------------------
                                                     FIRST    SECOND    THIRD    FOURTH     1998
                                                     -----    ------    -----    ------    ------
<S>                                                  <C>      <C>       <C>      <C>       <C>
Sales..............................................  $383      $275     $278      $264     $1,200
Cost of sales......................................   208       158      190       353        909
Special charges (see Note 3).......................    --        --       --       147        147
Net income (loss)..................................    21       (16)     (33)     (234)      (262)
</TABLE>
 
<TABLE>
<CAPTION>
                                                            1997 FISCAL QUARTERS
                                                     ----------------------------------
                                                     FIRST    SECOND    THIRD    FOURTH     1997
                                                     -----    ------    -----    ------    ------
<S>                                                  <C>      <C>       <C>      <C>       <C>
Sales..............................................  $388      $334     $321      $369     $1,412
Cost of sales......................................   199       169      173       203        744
Net income.........................................    56        50        4        16        126
</TABLE>
 
     Third quarter fiscal 1997 net income includes a $30 million charge ($19
million after tax) for the write-off of purchased research and development in
connection with the acquisition of Hi-Media.
 
                                      F-19
<PAGE>   116
 
                                  SCHEDULE II
                             SEMICONDUCTOR SYSTEMS
 
                       VALUATION AND QUALIFYING ACCOUNTS
             FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1997 AND 1998
                                 (IN MILLIONS)
 
<TABLE>
<CAPTION>
                                           BALANCE AT    NET CHARGE (CREDIT)                  BALANCE AT
                                           BEGINNING        TO COSTS AND                        END OF
DESCRIPTION                                 OF YEAR           EXPENSES          DEDUCTIONS       YEAR
- -----------                                ----------    -------------------    ----------    ----------
<S>                                        <C>           <C>                    <C>           <C>
Year ended September 30, 1996
  Allowance for doubtful accounts........     $12                $15               $ 2(a)        $ 25
  Inventory reserves.....................      28                 75                15(b)          88
Year ended September 30, 1997
  Allowance for doubtful accounts........      25                 (9)                6(a)          10
  Inventory reserves.....................      88                 (2)               20(b)          66
Year ended September 30, 1998
  Allowance for doubtful accounts........      10                  3                 4(a)           9
  Inventory reserves.....................      66                 67                27(b)         106
</TABLE>
 
- ---------------
(a) Primarily uncollectible accounts written off during the year.
 
(b) Inventory disposed of during the year.
 
                                      F-20
<PAGE>   117
 
                                [CONEXANT LOGO]
<PAGE>   118
 
                                    PART II
 
               INFORMATION NOT INCLUDED IN INFORMATION STATEMENT
 
   
<TABLE>
<CAPTION>
EXHIBIT
  NO.                             DESCRIPTION
- -------                           -----------
<C>       <S>
    *2    Form of Distribution Agreement
  *3.1    Certificate of Incorporation of the Company
  *3.2    By-Laws of the Company
  *4.1    Form of Restated Certificate of Incorporation of the Company
  *4.2    Form of Amended By-Laws of the Company
  *4.3    Specimen certificate for Company Common Stock, par value $1
          per share
  *4.4    Form of Rights Agreement by and between the Company and the
          rights agent named therein
 *10.1    Form of Conexant Systems, Inc. 1999 Long-Term Incentives
          Plan
 *10.2    Form of Conexant Systems, Inc. Directors Stock Plan
 *10.3    Form of Employee Matters Agreement
 *10.4    Form of Tax Allocation Agreement
 *10.6    Form of Conexant Systems, Inc. 1998 Stock Option Plan
  10.7    Form of Employment Agreement to be entered into between the
          Company and certain executives of the Company
   *21    Subsidiaries of the Company
   *27    Financial Data Schedule
</TABLE>
    
 
- ---------------
   
 * Previously filed
    
   
    
 
                                      II-1
<PAGE>   119
 
                                   SIGNATURE
 
     Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, as amended, the registrant has duly caused this registration statement
to be signed on its behalf by the undersigned, thereunto duly authorized.
 
   
                                          CONEXANT SYSTEMS, INC.
    
                                          By:     /s/ Dwight W. Decker
                                            ------------------------------------
                                              Name: Dwight W. Decker
                                              Title:   Chairman and Chief
                                                       Executive Officer
   
    

   
    
 
   
Date: December 1, 1998
    
 
                                      II-2
<PAGE>   120
 
                               INDEX TO EXHIBITS
 
   
<TABLE>
<CAPTION>
EXHIBIT
  NO.                             DESCRIPTION                           PAGE
- -------                           -----------                           ----
<C>       <S>                                                           <C>
    *2    Form of Distribution Agreement
  *3.1    Certificate of Incorporation of the Company
  *3.2    By-Laws of the Company
  *4.1    Form of Restated Certificate of Incorporation of the Company
  *4.2    Form of Amended By-Laws of the Company
  *4.3    Specimen certificate for Company Common Stock, par value $1
          per share
  *4.4    Form of Rights Agreement by and between the Company and the
          rights agent named therein
 *10.1    Form of Conexant Systems, Inc. 1999 Long-Term Incentives
          Plan
 *10.2    Form of Conexant Systems, Inc. Directors Stock Plan
 *10.3    Form of Employee Matters Agreement
 *10.4    Form of Tax Allocation Agreement
 *10.6    Form of Conexant Systems, Inc. 1998 Stock Option Plan
  10.7    Form of Employment Agreement to be entered into between the
          Company and certain executives of the Company
   *21    Subsidiaries of the Company
   *27    Financial Data Schedule
</TABLE>
    
 
- ---------------
   
 * Previously filed
    
   
    

<PAGE>   1
                                                                    Exhibit 10.7
                              EMPLOYMENT AGREEMENT

     AGREEMENT by and between Conexant Systems, Inc., a Delaware corporation
(the "Company") and _________ _________ (the "Executive"), dated as of the ___
day of _______, 199_.

     The Board of Directors of the Company (the "Board"), has determined that it
is in the best interests of the Company and its shareholders to assure that the
Company will have the continued dedication of the Executive, notwithstanding the
possibility, threat or occurrence of a Change of Control (as defined below) of
the Company. The Board believes it is imperative to diminish the inevitable
distraction of the Executive by virtue of the personal uncertainties and risks
created by a pending or threatened Change of Control and to encourage the
Executive's full attention and dedication to the Company currently and in the
event of any threatened or pending Change of Control, and to provide the
Executive with compensation and benefits arrangements upon a Change of Control
which ensure that the compensation and benefits expectations of the Executive
will be satisfied and which are competitive with those of other corporations.
Therefore, in order to accomplish these objectives, the Board has caused the
Company to enter into this Agreement.

     NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:

     1.   Certain Definitions. (a) The "Effective Date" shall mean the first
date during the Change of Control Period (as defined in Section 1(b)) on which a
Change of Control (as defined in Section 2) occurs. Anything in this Agreement
to the contrary notwithstanding, if a Change of Control occurs and if the
Executive's employment with the Company is terminated prior to the date on which
the Change of Control occurs, and if it is reasonably demonstrated by the
Executive that such termination of employment (i) was at the request of a third
party who has taken steps reasonably calculated to effect a Change of Control or
(ii) otherwise arose in connection with or anticipation of a Change of Control,
then for all purposes of this Agreement the "Effective Date" shall mean the date
immediately prior to the date of such termination of employment.

     (b)  The "Change of Control Period" shall mean the period commencing on the
date hereof and ending on the third anniversary of the date hereof; provided,
however, that commencing on the date one year after the date hereof, and on each
annual anniversary of such date (such date and each annual anniversary thereof
shall be hereinafter referred to as the "Renewal Date"), unless previously
terminated, the Change of Control Period shall be automatically extended so as
to terminate three years from such Renewal Date, unless at least 60 days prior
to the Renewal Date the Company shall give notice to the Executive that the
Change of Control Period shall not be so extended.


<PAGE>   2

     2.   Change of Control. For the purpose of this Agreement, a "Change of
Control" shall mean:

     (a)  The acquisition by any individual, entity or group (within the meaning
of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of
either (i) the then outstanding shares of common stock of the Company (the
"Outstanding Company Common Stock") or (ii) the combined voting power of the
then outstanding voting securities of the Company entitled to vote generally in
the election of directors (the "Outstanding Company Voting Securities");
provided, however, that for purposes of this subsection (a), the following
acquisitions shall not constitute a Change of Control: (i) any acquisition
directly from the Company, (ii) any acquisition by the Company, (iii) any
acquisition by any employee benefit plan (or related trust) sponsored or
maintained by the Company, Rockwell International Corporation or any corporation
controlled by the Company or Rockwell International Corporation or (iv) any
acquisition by any corporation pursuant to a transaction which complies with
clauses (i), (ii) and (iii) of subsection (c) of this Section 2; or

     (b)  Individuals who, as of the date hereof, constitute the Board (the
"Incumbent Board") cease for any reason to constitute at least a majority of the
Board; provided, however, that any individual becoming a director subsequent to
the date hereof whose election, or nomination for election by the Company's
shareholders, was approved by a vote of at least a majority of the directors
then comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but excluding, for this
purpose, any such individual whose initial assumption of office occurs as a
result of an actual or threatened election contest with respect to the election
or removal of directors or other actual or threatened solicitation of proxies or
consents by or on behalf of a Person other than the Board; or

     (c)  Consummation of a reorganization, merger or consolidation or sale or
other disposition of all or substantially all of the assets of the Company or
the acquisition of assets of another entity (a "Business Combination"), in each
case, unless, following such Business Combination, (i) all or substantially all
of the individuals and entities who were the beneficial owners, respectively, of
the Outstanding Company Common Stock and Outstanding Company Voting Securities
immediately prior to such Business Combination beneficially own, directly or
indirectly, more than 60% of, respectively, the then outstanding shares of
common stock and the combined voting power of the then outstanding voting
securities entitled to vote generally in the election of directors, as the case
may be, of the corporation resulting from such Business Combination (including,
without limitation, a corporation which as a result of such transaction owns the
Company or all or substantially all of the Company's assets either directly or
through one or more subsidiaries) in substantially the same proportions as their
ownership, immediately prior to such Business Combination, of the Outstanding
Company Common Stock and Outstanding Company Voting Securities, as the case may
be, (ii) no Person (excluding any employee benefit plan (or related trust) of
the Company, of Rockwell International Corporation or of such corporation
resulting from such Business Combination) beneficially owns, directly or
indirectly, 20% or more of, respectively, the then outstanding shares of common
stock of the corporation resulting from such Business Combination or the
combined voting power of the then outstanding voting securities of such
corporation except to the extent that such ownership existed



                                       2
<PAGE>   3


prior to the Business Combination and (iii) at least a majority of the members
of the board of directors of the corporation resulting from such Business
Combination were members of the Incumbent Board at the time of the execution of
the initial agreement, or of the action of the Board, providing for such
Business Combination; or

     (d)  Approval by the shareholders of the Company of a complete liquidation
or dissolution of the Company.

     3.   Employment Period. The Company hereby agrees to continue the Executive
in its employ, and the Executive hereby agrees to remain in the employ of the
Company subject to the terms and conditions of this Agreement, for the period
commencing on the Effective Date and ending on the third anniversary of such
date (the "Employment Period").

     4.   Terms of Employment. (a) Position and Duties. (i) During the
Employment Period, (A) the Executive's position (including status, offices,
titles and reporting requirements), authority, duties and responsibilities shall
be at least commensurate in all material respects with the most significant of
those held, exercised and assigned at any time during the 120-day period
immediately preceding the Effective Date and (B) the Executive's services shall
be performed at the location where the Executive was employed immediately
preceding the Effective Date or any office or location less than 35 miles from
such location.

     (ii) During the Employment Period, and excluding any periods of vacation
and sick leave to which the Executive is entitled, the Executive agrees to
devote reasonable attention and time during normal business hours to the
business and affairs of the Company and, to the extent necessary to discharge
the responsibilities assigned to the Executive hereunder, to use the Executive's
reasonable best efforts to perform faithfully and efficiently such
responsibilities. During the Employment Period it shall not be a violation of
this Agreement for the Executive to (A) serve on corporate, civic or charitable
boards or committees, (B) deliver lectures, fulfill speaking engagements or
teach at educational institutions and (C) manage personal investments, so long
as such activities do not significantly interfere with the performance of the
Executive's responsibilities as an employee of the Company in accordance with
this Agreement. It is expressly understood and agreed that to the extent that
any such activities have been conducted by the Executive prior to the Effective
Date, the continued conduct of such activities (or the conduct of activities
similar in nature and scope thereto) subsequent to the Effective Date shall not
thereafter be deemed to interfere with the performance of the Executive's
responsibilities to the Company.

     (b)  Compensation. (i) Base Salary. During the Employment Period, the
Executive shall receive an annual base salary ("Annual Base Salary"), which
shall be paid at a monthly rate, at least equal to twelve times the highest
monthly base salary paid or payable, including any base salary which has been
earned but deferred, to the Executive by the Company and its affiliated
companies in respect of the twelve-month period immediately preceding the month
in which the Effective Date occurs. During the Employment Period, the Annual
Base Salary shall be reviewed no more than 12 months after the last salary
increase awarded to the Executive prior to the Effective Date and thereafter at
least annually. Any increase in Annual Base Salary shall not serve to limit or
reduce any other obligation to the Executive under this Agreement. 


                                       3
<PAGE>   4


Annual Base Salary shall not be reduced after any such increase and the term
Annual Base Salary as utilized in this Agreement shall refer to Annual Base
Salary as so increased. As used in this Agreement, the term "affiliated
companies" shall include any company controlled by, controlling or under common
control with the Company.

     (ii) Annual Bonus. In addition to Annual Base Salary, the Executive shall
be awarded, for each fiscal year ending during the Employment Period, an annual
bonus (the "Annual Bonus") in cash at least equal to the Executive's highest
bonus under the Company's annual incentive plans for the last three full fiscal
years prior to the Effective Date (annualized in the event that the Executive
was not employed by the Company for the whole of such fiscal year) (the "Recent
Annual Bonus"). Each such Annual Bonus shall be paid no later than the end of
the third month of the fiscal year next following the fiscal year for which the
Annual Bonus is awarded, unless the Executive shall elect to defer the receipt
of such Annual Bonus.

     (iii) Incentive and Savings Plans. During the Employment Period, the
Executive shall be entitled to participate in all incentive and savings plans,
practices, policies and programs applicable generally to other peer executives
of the Company and its affiliated companies, but in no event shall such plans,
practices, policies and programs provide the Executive with incentive
opportunities (measured with respect to both regular and special incentive
opportunities, to the extent, if any, that such distinction is applicable) and
savings opportunities, in each case, less favorable, in the aggregate, than the
most favorable of those provided by the Company and its affiliated companies for
the Executive under such plans, practices, policies and programs as in effect at
any time during the 120-day period immediately preceding the Effective Date or
if more favorable to the Executive, those provided generally at any time after
the Effective Date to other peer executives of the Company and its affiliated
companies.

     (iv) Welfare Benefit Plans. During the Employment Period, the Executive
and/or the Executive's family, as the case may be, shall be eligible for
participation in and shall receive all benefits under welfare benefit plans,
practices, policies and programs provided by the Company and its affiliated
companies (including, without limitation, medical, prescription, dental,
disability, employee life, group life, accidental death and travel accident
insurance plans and programs) to the extent applicable generally to other peer
executives of the Company and its affiliated companies, but in no event shall
such plans, practices, policies and programs provide the Executive with benefits
which are less favorable, in the aggregate, than the most favorable of such
plans, practices, policies and programs in effect for the Executive at any time
during the 120-day period immediately preceding the Effective Date or, if more
favorable to the Executive, those provided generally at any time after the
Effective Date to other peer executives of the Company and its affiliated
companies.

     (v)  Expenses. During the Employment Period, the Executive shall be
entitled to receive prompt reimbursement for all reasonable expenses incurred by
the Executive in accordance with the most favorable policies, practices and
procedures of the Company and its affiliated companies in effect for the
Executive at any time during the 120-day period immediately preced-


                                       4
<PAGE>   5


ing the Effective Date or, if more favorable to the Executive, as in effect
generally at any time thereafter with respect to other peer executives of the
Company and its affiliated companies.

     (vi) Fringe Benefits. During the Employment Period, the Executive shall be
entitled to fringe benefits, including, without limitation, tax and financial
planning services, payment of club dues, and, if applicable, use of an
automobile and payment of related expenses, in accordance with the most
favorable plans, practices, programs and policies of the Company and its
affiliated companies in effect for the Executive at any time during the 120-day
period immediately preceding the Effective Date or, if more favorable to the
Executive, as in effect generally at any time thereafter with respect to other
peer executives of the Company and its affiliated companies.

     (vii) Office and Support Staff. During the Employment Period, the Executive
shall be entitled to an office or offices of a size and with furnishings and
other appointments, and to exclusive personal secretarial and other assistance,
at least equal to the most favorable of the foregoing provided to the Executive
by the Company and its affiliated companies at any time during the 120-day
period immediately preceding the Effective Date or, if more favorable to the
Executive, as provided generally at any time thereafter with respect to other
peer executives of the Company and its affiliated companies.

     (viii) Vacation. During the Employment Period, the Executive shall be
entitled to paid vacation in accordance with the most favorable plans, policies,
programs and practices of the Company and its affiliated companies as in effect
for the Executive at any time during the 120-day period immediately preceding
the Effective Date or, if more favorable to the Executive, as in effect
generally at any time thereafter with respect to other peer executives of the
Company and its affiliated companies.

     5.   Termination of Employment. (a) Death or Disability. The Executive's
employment shall terminate automatically upon the Executive's death during the
Employment Period. If the Company determines in good faith that the Disability
of the Executive has occurred during the Employment Period (pursuant to the
definition of Disability set forth below), it may give to the Executive written
notice in accordance with Section 12(b) of this Agreement of its intention to
terminate the Executive's employment. In such event, the Executive's employment
with the Company shall terminate effective on the 30th day after receipt of such
notice by the Executive (the "Disability Effective Date"), provided that, within
the 30 days after such receipt, the Executive shall not have returned to
full-time performance of the Executive's duties. For purposes of this Agreement,
"Disability" shall mean the absence of the Executive from the Executive's duties
with the Company on a full-time basis for 180 consecutive business days as a
result of incapacity due to mental or physical illness which is determined to be
total and permanent by a physician selected by the Company or its insurers and
acceptable to the Executive or the Executive's legal representative.

     (b)  Cause. The Company may terminate the Executive's employment during the
Employment Period for Cause. For purposes of this Agreement, "Cause" shall mean:




                                       5
<PAGE>   6
     (i)  the willful and continued failure of the Executive to perform
substantially the Executive's duties with the Company or one of its affiliates
(other than any such failure resulting from incapacity due to physical or mental
illness), after a written demand for substantial performance is delivered to the
Executive by the Board or the Chief Executive Officer of the Company which
specifically identifies the manner in which the Board or Chief Executive Officer
believes that the Executive has not substantially performed the Executive's
duties, or

     (ii) the willful engaging by the Executive in illegal conduct or gross
misconduct which is materially and demonstrably injurious to the Company.

     For purposes of this provision, no act or failure to act, on the part of
the Executive, shall be considered "willful" unless it is done, or omitted to be
done, by the Executive in bad faith or without reasonable belief that the
Executive's action or omission was in the best interests of the Company. Any
act, or failure to act, based upon authority given pursuant to a resolution duly
adopted by the Board or upon the instructions of the Chief Executive Officer or
a senior officer of the Company or based upon the advice of counsel for the
Company shall be conclusively presumed to be done, or omitted to be done, by the
Executive in good faith and in the best interests of the Company. The cessation
of employment of the Executive shall not be deemed to be for Cause unless and
until there shall have been delivered to the Executive a copy of a resolution
duly adopted by the affirmative vote of not less than three-quarters of the
entire membership of the Board at a meeting of the Board called and held for
such purpose (after reasonable notice is provided to the Executive and the
Executive is given an opportunity, together with counsel, to be heard before the
Board), finding that, in the good faith opinion of the Board, the Executive is
guilty of the conduct described in subparagraph (i) or (ii) above, and
specifying the particulars thereof in detail.

     (c)  Good Reason. The Executive's employment may be terminated by the
Executive for Good Reason. For purposes of this Agreement, "Good Reason" shall
mean:

     (i)  the assignment to the Executive of any duties inconsistent in any
respect with the Executive's position (including status, offices, titles and
reporting requirements), authority, duties or responsibilities as contemplated
by Section 4(a) of this Agreement, or any other action by the Company which
results in a diminution in such position, authority, duties or responsibilities,
excluding for this purpose an isolated, insubstantial and inadvertent action not
taken in bad faith and which is remedied by the Company promptly after receipt
of notice thereof given by the Executive;

     (ii) any failure by the Company to comply with any of the provisions of
Section 4(b) of this Agreement, other than an isolated, insubstantial and
inadvertent failure not occurring in bad faith and which is remedied by the
Company promptly after receipt of notice thereof given by the Executive;

     (iii) the Company's requiring the Executive to be based at any office or
location other than as provided in Section 4(a)(i)(B) hereof or the Company's
requiring the Executive to travel on Company business to a substantially greater
extent than required immediately prior to the Effective Date;


                                       6
<PAGE>   7


     (iv) any purported termination by the Company of the Executive's employment
otherwise than as expressly permitted by this Agreement; or

     (v)  any failure by the Company to comply with and satisfy Section 11(c) of
this Agreement.

     For purposes of this Section 5(c), any good faith determination of "Good
Reason" made by the Executive shall be conclusive.

     (d)  Notice of Termination. Any termination by the Company for Cause, or by
the Executive for Good Reason, shall be communicated by Notice of Termination to
the other party hereto given in accordance with Section 12(b) of this Agreement.
For purposes of this Agreement, a "Notice of Termination" means a written notice
which (i) indicates the specific termination provision in this Agreement relied
upon, (ii) to the extent applicable, sets forth in reasonable detail the facts
and circumstances claimed to provide a basis for termination of the Executive's
employment under the provision so indicated and (iii) if the Date of Termination
(as defined below) is other than the date of receipt of such notice, specifies
the termination date (which date shall be not more than thirty days after the
giving of such notice). The failure by the Executive or the Company to set forth
in the Notice of Termination any fact or circumstance which contributes to a
showing of Good Reason or Cause shall not waive any right of the Executive or
the Company, respectively, hereunder or preclude the Executive or the Company,
respectively, from asserting such fact or circumstance in enforcing the
Executive's or the Company's rights hereunder.

     (e)  Date of Termination. "Date of Termination" means (i) if the
Executive's employment is terminated by the Company for Cause, or by the
Executive for Good Reason, the date of receipt of the Notice of Termination or
any later date specified therein, as the case may be, (ii) if the Executive's
employment is terminated by the Company other than for Cause or Disability, the
Date of Termination shall be the date on which the Company notifies the
Executive of such termination and (iii) if the Executive's employment is
terminated by reason of death or Disability, the Date of Termination shall be
the date of death of the Executive or the Disability Effective Date, as the case
may be.

     6.   Obligations of the Company upon Termination. (a) Good Reason; Other
Than for Cause, Death or Disability. If, during the Employment Period, the
Company shall terminate the Executive's employment other than for Cause or
Disability or the Executive shall terminate employment for Good Reason:

     (i)  the Company shall pay to the Executive in a lump sum in cash within 30
days after the Date of Termination the aggregate of the following amounts:

               A.   the sum of (1) the Executive's Annual Base Salary through
          the Date of Termination to the extent not theretofore paid, (2) the
          product of (x) the higher of (I) the Recent Annual Bonus and (II) the
          Annual Bonus paid or payable, including any bonus or portion thereof
          which has been 


                                       7
<PAGE>   8


          earned but deferred (and annualized for any fiscal year consisting of
          less than twelve full months or during which the Executive was
          employed for less than twelve full months), for the most recently
          completed fiscal year during the Employment Period, if any (such
          higher amount being referred to as the "Highest Annual Bonus") and (y)
          a fraction, the numerator of which is the number of days in the
          current fiscal year through the Date of Termination, and the
          denominator of which is 365 and (3) any compensation previously
          deferred by the Executive (together with any accrued interest or
          earnings thereon) and any accrued vacation pay, in each case to the
          extent not theretofore paid (the sum of the amounts described in
          clauses (1), (2), and (3) shall be hereinafter referred to as the
          "Accrued Obligations"); and

               B.   the amount equal to the product of (1) [three] [two] and 
          (2) the sum of (x) the Executive's Annual Base Salary and (y) the 
          Highest Annual Bonus;


     (ii) for [three] [two] years after the Executive's Date of Termination, or
such longer period as may be provided by the terms of the appropriate plan,
program, practice or policy, the Company shall continue benefits to the
Executive and/or the Executive's family at least equal to those which would have
been provided to them in accordance with the plans, programs, practices and
policies described in Section 4(b)(iv) of this Agreement if the Executive's
employment had not been terminated or, if more favorable to the Executive, as in
effect generally at any time thereafter with respect to other peer executives of
the Company and its affiliated companies and their families, provided, however,
that if the Executive becomes reemployed with another employer and is eligible
to receive medical or other welfare benefits under another employer provided
plan, the medical and other welfare benefits described herein shall be secondary
to those provided under such other plan during such applicable period of
eligibility. For purposes of determining eligibility (but not the time of
commencement of benefits) of the Executive for retiree 


                                       8
<PAGE>   9


benefits pursuant to such plans, practices, programs and policies, the Executive
shall be considered to have remained employed until [three] [two] years after
the Date of Termination and to have retired on the last day of such period;

     (iii) the Company shall, at its sole expense as incurred, provide the
Executive with outplacement services the scope and provider of which shall be
selected by the Executive in his sole discretion; and

     (iv) to the extent not theretofore paid or provided, the Company shall
timely pay or provide to the Executive any other amounts or benefits required to
be paid or provided or which the Executive is eligible to receive under any
plan, program, policy or practice or contract or agreement of the Company and
its affiliated companies (such other amounts and benefits shall be hereinafter
referred to as the "Other Benefits").

     (b)  Death. If the Executive's employment is terminated by reason of the
Executive's death during the Employment Period, this Agreement shall terminate
without further obligations to the Executive's legal representatives under this
Agreement, other than for payment of Accrued Obligations and the timely payment
or provision of Other Benefits. Accrued Obligations shall be paid to the
Executive's estate or beneficiary, as applicable, in a lump sum in cash within
30 days of the Date of Termination. With respect to the provision of Other
Benefits, the term Other Benefits as utilized in this Section 6(b) shall
include, without limitation, and the Executive's estate and/or beneficiaries
shall be entitled to receive, benefits at least equal to the most favorable
benefits provided by the Company and affiliated companies to the estates and
beneficiaries of peer executives of the Company and such affiliated companies
under such plans, programs, practices and policies relating to death benefits,
if any, as in effect with respect to other peer executives and their
beneficiaries at any time during the 120-day period immediately preceding the
Effective Date or, if more favorable to the Executive's estate and/or the
Executive's beneficiaries, as in effect on the date of the Executive's death
with respect to other peer executives of the Company and its affiliated
companies and their beneficiaries.

     (c)  Disability. If the Executive's employment is terminated by reason of
the Executive's Disability during the Employment Period, this Agreement shall
terminate without further obligations to the Executive, other than for payment
of Accrued Obligations and the timely payment or provision of Other Benefits.
Accrued Obligations shall be paid to the Executive in a lump sum in cash within
30 days of the Date of Termination. With respect to the provision of Other
Benefits, the term Other Benefits as utilized in this Section 6(c) shall
include, and the Executive shall be entitled after the Disability Effective Date
to receive, disability and other benefits at least equal to the most favorable
of those generally provided by the Company and its affiliated companies to
disabled executives and/or their families in accordance with such plans,
programs, practices and policies relating to disability, if any, as in effect
generally with respect to other peer executives and their families at any time
during the 120-day period immediately preceding the Effective Date or, if more
favorable to the Executive and/or the Executive's family, as in effect at any
time thereafter generally with respect to other peer executives of the Company
and its affiliated companies and their families.


                                       9
<PAGE>   10


     (d)  Cause; Other than for Good Reason. If the Executive's employment shall
be terminated for Cause during the Employment Period, this Agreement shall
terminate without further obligations to the Executive other than the obligation
to pay to the Executive (x) his Annual Base Salary through the Date of
Termination, (y) the amount of any compensation previously deferred by the
Executive, and (z) Other Benefits, in each case to the extent theretofore
unpaid. If the Executive voluntarily terminates employment during the Employment
Period, excluding a termination for Good Reason, this Agreement shall terminate
without further obligations to the Executive, other than for Accrued Obligations
and the timely payment or provision of Other Benefits. In such case, all Accrued
Obligations shall be paid to the Executive in a lump sum in cash within 30 days
of the Date of Termination.

     7.   Non-exclusivity of Rights. Nothing in this Agreement shall prevent or
limit the Executive's continuing or future participation in any plan, program,
policy or practice provided by the Company or any of its affiliated companies
and for which the Executive may qualify, nor, subject to Section 12(f), shall
anything herein limit or otherwise affect such rights as the Executive may have
under any contract or agreement with the Company or any of its affiliated
companies. Amounts which are vested benefits or which the Executive is otherwise
entitled to receive under any plan, policy, practice or program of or any
contract or agreement with the Company or any of its affiliated companies at or
subsequent to the Date of Termination shall be payable in accordance with such
plan, policy, practice or program or contract or agreement except as explicitly
modified by this Agreement.

     8.   Full Settlement. The Company's obligation to make the payments
provided for in this Agreement and otherwise to perform its obligations
hereunder shall not be affected by any set-off, counterclaim, recoupment,
defense or other claim, right or action which the Company may have against the
Executive or others. In no event shall the Executive be obligated to seek other
employment or take any other action by way of mitigation of the amounts payable
to the Executive under any of the provisions of this Agreement and such amounts
shall not be reduced whether or not the Executive obtains other employment. The
Company agrees to pay as incurred, to the full extent permitted by law, all
legal fees and expenses which the Executive may reasonably incur as a result of
any contest (regardless of the outcome thereof) by the Company, the Executive or
others of the validity or enforceability of, or liability under, any provision
of this Agreement or any guarantee of performance thereof (including as a result
of any contest by the Executive about the amount of any payment pursuant to this
Agreement), plus in each case interest on any delayed payment at the applicable
Federal rate provided for in Section 7872(f)(2)(A) of the Internal Revenue Code
of 1986, as amended (the "Code").

     9.   Certain Additional Payments by the Company.

     (a)  Anything in this Agreement to the contrary notwithstanding and except
as set forth below, in the event it shall be determined that any payment or
distribution by the Company or its affiliates to or for the benefit of the
Executive (whether paid or payable or distributed or distributable pursuant to
the terms of this Agreement or otherwise, but determined without regard to any
additional payments required under this Section 9) (a "Payment") would be
subject to the excise tax imposed by Section 4999 of the Code or any interest or
penalties are incurred by 

                                       10
<PAGE>   11


the Executive with respect to such excise tax (such excise tax, together with
any such interest and penalties, are hereinafter collectively referred to as the
"Excise Tax"), then the Executive shall be entitled to receive an additional
payment (a "Gross-Up Payment") in an amount such that after payment by the
Executive of all taxes (including any interest or penalties imposed with respect
to such taxes), including, without limitation, any income taxes (and any
interest and penalties imposed with respect thereto) and Excise Tax imposed upon
the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment
equal to the Excise Tax imposed upon the Payments. Notwithstanding the foregoing
provisions of this Section 9(a), if it shall be determined that the Executive is
entitled to a Gross-Up Payment, but that the Payments do not exceed 110% of the
greatest amount (the "Reduced Amount") that could be paid to the Executive such
that the receipt of Payments would not give rise to any Excise Tax, then no
Gross-Up Payment shall be made to the Executive and the Payments, in the
aggregate, shall be reduced to the Reduced Amount.

     (b)  Subject to the provisions of Section 9(c), all determinations required
to be made under this Section 9, including whether and when a Gross-Up Payment
is required and the amount of such Gross-Up Payment and the assumptions to be
utilized in arriving at such determination, shall be made by Deloitte & Touche
LLP or such other certified public accounting firm as may be designated by the
Executive (the "Accounting Firm") which shall provide detailed supporting
calculations both to the Company and the Executive within 15 business days of
the receipt of notice from the Executive that there has been a Payment, or such
earlier time as is requested by the Company. In the event that the Accounting
Firm is serving as accountant or auditor for the individual, entity or group
effecting the Change of Control, the Executive shall appoint another nationally
recognized accounting firm to make the determinations required hereunder (which
accounting firm shall then be referred to as the Accounting Firm hereunder). All
fees and expenses of the Accounting Firm shall be borne solely by the Company.
Any Gross-Up Payment, as determined pursuant to this Section 9, shall be paid by
the Company to the Executive within five days of the receipt of the Accounting
Firm's determination. Any determination by the Accounting Firm shall be binding
upon the Company and the Executive. As a result of the uncertainty in the
application of Section 4999 of the Code at the time of the initial determination
by the Accounting Firm hereunder, it is possible that Gross-Up Payments which
will not have been made by the Company should have been made ("Underpayment"),
consistent with the calculations required to be made hereunder. In the event
that the Company exhausts its remedies pursuant to Section 9(c) and the
Executive thereafter is required to make a payment of any Excise Tax, the
Accounting Firm shall determine the amount of the Underpayment that has occurred
and any such Underpayment shall be promptly paid by the Company to or for the
benefit of the Executive.

     (c)  The Executive shall notify the Company in writing of any claim by the
Internal Revenue Service that, if successful, would require the payment by the
Company of the Gross-Up Payment. Such notification shall be given as soon as
practicable but no later than ten business days after the Executive is informed
in writing of such claim and shall apprise the Company of the nature of such
claim and the date on which such claim is requested to be paid. The Executive
shall not pay such claim prior to the expiration of the 30-day period following
the date on which it gives such notice to the Company (or such shorter period
ending on the date that any payment of taxes with respect to such claim is due).
If the Company notifies the Executive 

                                       11
<PAGE>   12


in writing prior to the expiration of such period that it desires to contest
such claim, the Executive shall:

     (i)  give the Company any information reasonably requested by the Company
relating to such claim,

     (ii) take such action in connection with contesting such claim as the
Company shall reasonably request in writing from time to time, including,
without limitation, accepting legal representation with respect to such claim by
an attorney reasonably selected by the Company,

     (iii) cooperate with the Company in good faith in order effectively to
contest such claim, and

     (iv) permit the Company to participate in any proceedings relating to such
claim;

provided, however, that the Company shall bear and pay directly all costs and
expenses (including additional interest and penalties) incurred in connection
with such contest and shall indemnify and hold the Executive harmless, on an
after-tax basis, for any Excise Tax or income tax (including interest and
penalties with respect thereto) imposed as a result of such representation and
payment of costs and expenses. Without limitation on the foregoing provisions of
this Section 9(c), the Company shall control all proceedings taken in connection
with such contest and, at its sole option, may pursue or forgo any and all
administrative appeals, proceedings, hearings and conferences with the taxing
authority in respect of such claim and may, at its sole option, either direct
the Executive to pay the tax claimed and sue for a refund or contest the claim
in any permissible manner, and the Executive agrees to prosecute such contest to
a determination before any administrative tribunal, in a court of initial
jurisdiction and in one or more appellate courts, as the Company shall
determine; provided, however, that if the Company directs the Executive to pay
such claim and sue for a refund, the Company shall advance the amount of such
payment to the Executive, on an interest-free basis and shall indemnify and hold
the Executive harmless, on an after-tax basis, from any Excise Tax or income tax
(including interest or penalties with respect thereto) imposed with respect to
such advance or with respect to any imputed income with respect to such advance;
and further provided that any extension of the statute of limitations relating
to payment of taxes for the taxable year of the Executive with respect to which
such contested amount is claimed to be due is limited solely to such contested
amount. Furthermore, the Company's control of the contest shall be limited to
issues with respect to which a Gross-Up Payment would be payable hereunder and
the Executive shall be entitled to settle or contest, as the case may be, any
other issue raised by the Internal Revenue Service or any other taxing
authority.

     (d)  If, after the receipt by the Executive of an amount advanced by the
Company pursuant to Section 9(c), the Executive becomes entitled to receive any
refund with respect to such claim, the Executive shall (subject to the Company's
complying with the requirements of Section 9(c)) promptly pay to the Company the
amount of such refund (together with any interest paid or credited thereon after
taxes applicable thereto). If, after the receipt by the Executive of an amount
advanced by the Company pursuant to Section 9(c), a determination is made that
the Ex-


                                       12
<PAGE>   13


ecutive shall not be entitled to any refund with respect to such claim and the
Company does not notify the Executive in writing of its intent to contest such
denial of refund prior to the expiration of 30 days after such determination,
then such advance shall be forgiven and shall not be required to be repaid and
the amount of such advance shall offset, to the extent thereof, the amount of
Gross-Up Payment required to be paid.

     10.  Confidential Information. The Executive shall hold in a fiduciary
capacity for the benefit of the Company all secret or confidential information,
knowledge or data relating to the Company or any of its affiliated companies,
and their respective businesses, which shall have been obtained by the Executive
during the Executive's employment by the Company or any of its affiliated
companies and which shall not be or become public knowledge (other than by acts
by the Executive or representatives of the Executive in violation of this
Agreement). After termination of the Executive's employment with the Company,
the Executive shall not, without the prior written consent of the Company or as
may otherwise be required by law or legal process, communicate or divulge any
such information, knowledge or data to anyone other than the Company and those
designated by it. In no event shall an asserted violation of the provisions of
this Section 10 constitute a basis for deferring or withholding any amounts
otherwise payable to the Executive under this Agreement.

     11.  Successors. (a) This Agreement is personal to the Executive and
without the prior written consent of the Company shall not be assignable by the
Executive otherwise than by will or the laws of descent and distribution. This
Agreement shall inure to the benefit of and be enforceable by the Executive's
legal representatives.

     (b)  This Agreement shall inure to the benefit of and be binding upon the
Company and its successors and assigns.

     (c)  The Company will require any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or substantially all of the
business and/or assets of the Company to assume expressly and agree to perform
this Agreement in the same manner and to the same extent that the Company would
be required to perform it if no such succession had taken place. As used in this
Agreement, "Company" shall mean the Company as hereinbefore defined and any
successor to its business and/or assets as aforesaid which assumes and agrees to
perform this Agreement by operation of law, or otherwise.

     12.  Miscellaneous. (a) This Agreement shall be governed by and construed
in accordance with the laws of the State of California, without reference to
principles of conflict of laws. The captions of this Agreement are not part of
the provisions hereof and shall have no force or effect. This Agreement may not
be amended or modified otherwise than by a written agreement executed by the
parties hereto or their respective successors and legal representatives.

     (b)  All notices and other communications hereunder shall be in writing and
shall be given by hand delivery to the other party or by registered or certified
mail, return receipt requested, postage prepaid, addressed as follows:


                                       13
<PAGE>   14


                  If to the Executive:





                  If to the Company:

                  Conexant Systems, Inc.
                  4311 Jamboree Road
                  Newport Beach, CA 92660-3095



                           Attention:  General Counsel



or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notice and communications shall be effective
when actually received by the addressee.

     (c)  The invalidity or unenforceability of any provision of this Agreement
shall not affect the validity or enforceability of any other provision of this
Agreement.

     (d)  The Company may withhold from any amounts payable under this Agreement
such Federal, state, local or foreign taxes as shall be required to be withheld
pursuant to any applicable law or regulation.

     (e)  The Executive's or the Company's failure to insist upon strict
compliance with any provision of this Agreement or the failure to assert any
right the Executive or the Company may have hereunder, including, without
limitation, the right of the Executive to terminate employment for Good Reason
pursuant to Section 5(c)(i)-(v) of this Agreement, shall not be deemed to be a
waiver of such provision or right or any other provision or right of this
Agreement.

     (f)  The Executive and the Company acknowledge that, except as may
otherwise be provided under any other written agreement between the Executive
and the Company, the employment of the Executive by the Company is "at will"
and, subject to Section 1(a) hereof, prior to the Effective Date, the
Executive's employment may be terminated by either the Executive or the Company
at any time prior to the Effective Date, in which case the Executive shall have
no further rights under this Agreement. From and after the Effective Date this
Agreement shall supersede any other agreement between the parties with respect
to the subject matter hereof.




                                       14
<PAGE>   15
     IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand
and, pursuant to the authorization from its Board of Directors, the Company has
caused these presents to be executed in its name on its behalf, all as of the
day and year first above written.


                                                     [Executive]



                                           CONEXANT SYSTEMS, INC.


                                           By:


                                       15


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