CONEXANT SPINCO INC, S-1, 2000-11-13

CONEXANT SPINCO INC
S-1, 2000-11-13

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 13, 2000

REGISTRATION STATEMENT NO. 333-
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

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

FORM S-1

REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------

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

<TABLE>
<S> <C> <C>
DELAWARE 3674 33-0933937
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
INCORPORATION OR
ORGANIZATION)
</TABLE>

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

4000 MACARTHUR BOULEVARD
NEWPORT BEACH, CALIFORNIA 92660-3095
(949) 483-4600
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------

BALAKRISHNAN S. IYER
SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
CONEXANT SPINCO, INC.
4000 MACARTHUR BOULEVARD
NEWPORT BEACH, CALIFORNIA 92660-3095
(949) 483-4600
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------

COPIES TO:

<TABLE>
<S> <C>
PETER R. KOLYER, ESQ. CHRISTOPHER L. KAUFMAN, ESQ.
CHADBOURNE & PARKE LLP CHARLES K. RUCK, ESQ.
30 ROCKEFELLER PLAZA LATHAM & WATKINS
NEW YORK, NEW YORK 10112 135 COMMONWEALTH DRIVE
(212) 408-5100 MENLO PARK, CALIFORNIA 94025
(650) 328-4600
</TABLE>

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

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this registration statement.

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), check the following box. [ ]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]

If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
------------------------

CALCULATION OF REGISTRATION FEE

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED PRICE(1)(2) REGISTRATION FEE
------------------------------------------------------------------------------------------------------
<S> <C> <C>
Class A common stock, par value $.01 per share (including
the associated preferred share purchase rights)........... $100,000,000 $26,400
------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------
</TABLE>

(1) Includes shares that the underwriters will have the option to purchase
solely to cover over-allotments, if any.
(2) Estimated solely for the purpose of determining the registration fee
pursuant to Rule 457(o) promulgated under the Securities Act.

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

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE
ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE> 2

THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE
MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT
AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY
THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT
PERMITTED.

SUBJECT TO COMPLETION, DATED , 2001

CONEXANT SPINCO, INC.

Class A Common Stock
------------------

Conexant Spinco, Inc. is offering shares of its Class A common
stock. This is our initial public offering and no public market currently exists
for our shares. We anticipate that the initial public offering price will be
between $ and $ per share.

We have applied to list our Class A common stock on the Nasdaq National
Market under the symbol " ".

We are currently a wholly-owned subsidiary of Conexant Systems, Inc. Upon
completion of this offering, Conexant will own all outstanding shares of our
Class B common stock, representing approximately % of the outstanding
shares of our common stock and approximately % of the total voting power of
all outstanding shares of our common stock, assuming the underwriters do not
exercise their over-allotment option. Conexant has announced that it intends,
within several months following consummation of this offering, to distribute to
its shareowners all shares of our common stock owned by Conexant.

INVESTING IN OUR CLASS A COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 8.

<TABLE>
<CAPTION>
UNDERWRITING
DISCOUNTS PROCEEDS
PRICE TO AND TO
PUBLIC COMMISSIONS SPINCO
-------- ------------- -----------
<S> <C> <C> <C>
Per Share............................................ $ $ $
Total................................................ $ $ $
</TABLE>

We have granted the underwriters the right to purchase up to an
additional shares of Class A common stock to cover over-allotments.

The underwriters expect to deliver the shares to purchasers on
, 2001.

The Securities and Exchange Commission and state securities regulators have
not approved or disapproved these securities, or determined if this prospectus
is truthful or complete. Any representation to the contrary is a criminal
offense.

Joint Book-Running Managers

CREDIT SUISSE FIRST BOSTON MORGAN STANLEY DEAN WITTER
------------------------

The date of this prospectus is , 2001.
<PAGE> 3

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 8
Special Note Regarding Forward-Looking
Statements.......................... 21
Our Separation from Conexant.......... 22
Use of Proceeds....................... 24
Dividend Policy....................... 24
Capitalization........................ 25
Dilution.............................. 26
Selected Consolidated Financial
Data................................ 28
Unaudited Pro Forma Condensed Combined
Financial Information............... 30
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 34
Business.............................. 46
</TABLE>

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Management............................ 57
Arrangements Between Conexant and
Spinco Relating to the Separation... 68
Principal Securityholder.............. 74
Description of Capital Stock.......... 74
Shares Eligible for Future Sale....... 83
Material United States Federal Tax
Consequences to Non-United States
Holders............................. 84
Underwriters.......................... 87
Notice to Canadian Residents.......... 90
Legal Matters......................... 91
Experts............................... 91
Where You Can Find More Information... 92
Glossary of Technical Terms........... 93
Index to Financial Statements......... F-1
</TABLE>

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

You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information that is different
from that contained in this prospectus. We are offering to sell, and seeking
offers to buy, these securities only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of our Class A common stock.

Until , 2001, 25 days after the date of this prospectus, all
dealers that buy, sell or trade our Class A common stock, whether or not
participating in this offering, may be required to deliver a prospectus. This is
in addition to the dealers' obligation to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.

In this prospectus, the terms "Spinco", "we", "our" and "us" refer to
Conexant Spinco, Inc. and our subsidiaries except where it is clear that such
terms mean only Conexant Spinco, Inc. Additionally, the term "Conexant" refers
to Conexant Systems, Inc.

In this prospectus, unless the context otherwise indicates, references to
us for periods prior to the completion of our separation from Conexant include
the Internet infrastructure business of Conexant. On December 31, 1998, Rockwell
International Corporation separated its semiconductor systems business by
transferring substantially all of the operations, assets and liabilities
relating to its semiconductor systems business to Conexant. References to us and
the Internet infrastructure business for periods prior to December 31, 1998 are
references to the Internet infrastructure business when it was part of the
semiconductor systems business of Rockwell. Although we currently anticipate
that our separation from Conexant will take place in January 2001, unless the
context otherwise indicates, the description of our company in this prospectus
assumes that the agreements between us and Conexant related to the separation
are effective and that the separation has occurred.

Our logo, AutoBaud(TM), AccessRunner(TM) and AnyPort(TM) are trademarks of
Conexant Spinco, Inc. Other brands, names and trademarks contained in this
prospectus are the property of their respective owners.

Unless otherwise indicated, all information in this prospectus assumes no
exercise of the underwriters' over-allotment option.

2
<PAGE> 4

PROSPECTUS SUMMARY

YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED
INFORMATION REGARDING OUR COMPANY AND THE CLASS A COMMON STOCK BEING SOLD IN
THIS OFFERING AND OUR COMBINED FINANCIAL STATEMENTS AND ACCOMPANYING NOTES
APPEARING ELSEWHERE IN THIS PROSPECTUS. FOR YOUR CONVENIENCE, A GLOSSARY OF
TECHNICAL TERMS USED IN THIS PROSPECTUS APPEARS ON PAGE 93.

OUR BUSINESS

We design, develop and sell semiconductor system solutions and products for
some of the highest growth segments of the broadband communications market,
including broadband access, multi-service access and wide area network, or WAN,
transport. Our broad product portfolio allows us to provide network
infrastructure original equipment manufacturers, or OEMs, with system-level
semiconductor solutions including multi-service access and high-speed digital
subscriber line, or DSL, products used in a variety of network access platforms.
We also provide an extensive family of communications solutions and products
that support the aggregation, transmission and switching of data, video and
voice from the edge of the network to the optical backbone. These products are
used in a variety of network equipment, including high-speed routers,
asynchronous transfer mode, or ATM, switches, optical switches, add-drop
multiplexers and digital cross-connect systems.

Our products enable network infrastructure OEMs to design products with
enhanced bandwidth, reliability and scalability, which we believe allows them to
achieve lower system cost and reduce time-to-market of their products. We
believe the breadth and depth of our product portfolio, combined with our rich
heritage of over three decades in communications and semiconductor systems
engineering, provide us with a competitive advantage in selling our products to
leading network infrastructure OEMs. We have expertise in signal, packet and
transmission processing, which require analog, mixed signal and digital signal
processing, as well as related systems and software expertise. We use our
system-level design and integration expertise to offer complete semiconductor
system solutions and to integrate onto one device multiple functions previously
performed by two or more semiconductor devices. As a result, we believe our
customers can accelerate their design and production cycles, reduce the power
consumption and size of their products and enhance the bandwidth and features of
their systems. Our business is fabless, which means that we outsource all of our
manufacturing needs and do not own or operate any semiconductor manufacturing
facilities. We believe this allows us to focus our resources on the design,
development and marketing of our products, minimize operating infrastructure and
capital requirements and maintain flexibility in operations.

We form strategic relationships with leading network infrastructure OEMs to
define and develop new products. In the past we have successfully collaborated
with leading OEMs, such as Cisco Systems, Inc., Nortel Networks Corporation,
Lucent Technologies, Inc. and Alcatel Data Networks, S.A., in new product
introductions and the definition of long-term product development plans. We
believe our strong customer relationships with these established market leaders,
as well as emerging market leaders, such as Juniper Networks, Inc., Redback
Networks, Inc., Sycamore Networks, Inc. and Tellium, Inc., provide us with a
foundation for successfully competing in the design of semiconductor solutions
for the next generation of network infrastructure equipment.

We are a wholly-owned subsidiary of Conexant Systems, Inc. We own and
operate the Internet infrastructure business formerly owned and operated by
Conexant as its Network Access Division. On , 2001, Conexant
separated its Internet infrastructure business from its personal networking
business by transferring to us substantially all of the operations, assets and
liabilities relating to the Internet infrastructure business.

BENEFITS OF OUR SEPARATION FROM CONEXANT

We believe we will realize several benefits from our separation from
Conexant, including the following:

Greater Strategic Focus. We expect to have a sharper focus on the Internet
infrastructure business and strategic opportunities as a result of our
management team focusing only on our businesses.

3
<PAGE> 5

Increased Speed and Responsiveness. As an independent company, we believe
we will be able to make decisions more quickly, deploy resources more rapidly
and efficiently and operate with more agility than when we were a part of
Conexant.

Focused Incentives and Greater Accountability for Employees. We expect to
strengthen the motivation of our employees and the focus of our management
through the implementation of incentive compensation programs tied to the market
performance of our Class A common stock.

Direct Access to Capital Markets and Growth through Acquisitions. As a
separate company, we expect to be able to issue debt or equity securities to
fund our growth internally or through potential acquisitions of complementary
businesses.

OUR RELATIONSHIP WITH CONEXANT

Upon completion of this offering, Conexant will own all outstanding shares
of our Class B common stock, representing approximately % of the outstanding
shares of our common stock and approximately % of the total voting power of
all outstanding shares of our common stock, or approximately % and %,
respectively, if the underwriters fully exercise their over-allotment option.
Conexant has announced that it intends, within several months following
consummation of this offering, to distribute to its shareowners all shares of
our common stock owned by Conexant. The distribution by Conexant is subject to a
number of conditions, including receipt of a private letter ruling from the IRS
confirming that the distribution will qualify as a tax-free distribution.
Conexant will, in its sole discretion, determine the timing, structure and all
terms of the distribution. Conexant is not obligated to complete the
distribution, and the distribution may not occur by the anticipated time or at
all.

We have entered into agreements with Conexant providing for the separation
of our business from Conexant, including:

- a separation and distribution agreement that provides, among other
things, for the principal corporate transactions required to effect the
separation of our business from Conexant, this offering and the proposed
distribution;

- an employee matters agreement that provides, among other things, for the
allocation of assets, liabilities and responsibilities relating to our
current and former employees and their participation in our stock and
other benefit plans and Conexant's stock and other benefit plans;

- a tax allocation agreement that provides, among other things, for the
allocation of tax liabilities and responsibilities between Conexant and
us during the period in which we are included in Conexant's consolidated
tax group;

- a joint technology and marketing agreement that provides, among other
things, for cooperation between Conexant and us with respect to common
product standards and features and joint marketing arrangements; and

- a transition services agreement that provides, among other things, for
Conexant to provide services to us, including the manufacture, assembly
and test of our products, that Conexant provided to our business prior to
the separation.

The agreements relating to our separation from Conexant were made in the
context of a parent-subsidiary relationship and were entered into in the overall
context of our separation from Conexant. The terms of these agreements may be
more or less favorable than those we could have negotiated with unaffiliated
third parties. For more information about the separation agreements, see
"Arrangements Between Conexant and Spinco Relating to the Separation".
------------------------

We were incorporated in Delaware in October 2000. Our executive offices are
located at 4000 MacArthur Boulevard, Newport Beach, California 92660-3095. Our
telephone number is (949) 483-4600, and our Internet address is
http://www. .com. The information on our Internet site is not part of
this prospectus.

4
<PAGE> 6

THE OFFERING

Class A common stock
offered....................... shares

Common stock to be outstanding
immediately after the
offering:
Class A common stock........ shares
Class B common stock........ shares

Voting rights:
Class A common stock........ One vote per share
Class B common stock........ Five votes per share

Each share of our Class A common stock and Class B common stock also
includes an associated preferred share purchase right. See "Description of
Capital Stock -- Rights Plan".

Use of proceeds............... We will use approximately $ million of
the net proceeds of this offering to repay an
intercompany loan from Conexant and to pay a
dividend to Conexant. We expect to use the
balance of the net proceeds of this offering
for working capital and general corporate
purposes.

Proposed Nasdaq National
Market symbol............... " "

The number of shares of our Class A common stock to be outstanding after
the offering excludes additional shares of Class A common stock we may issue
under the following plans and arrangements:

- an aggregate of shares reserved for issuance under our 2001
Long-Term Incentives Plan, Directors Stock Plan, Retirement Savings Plan,
2001 Employee Stock Purchase Plan and 2001 Non-Qualified Employee Stock
Purchase Plan; and

- shares reserved for issuance under our 2001 Stock Option Plan to holders
of options to purchase Conexant common stock outstanding at the time of
the distribution:

- granted before January 1, 2001, which will be adjusted so that
following Conexant's distribution of our common stock to its
shareowners, each option holder will hold options to purchase Conexant
common stock and options to purchase our Class A common stock; and

- granted after December 31, 2000 to our employees, which will be
converted into options to purchase our Class A common stock.

As of the date of this prospectus it is not possible to determine how
many shares of Class A common stock may be issuable as a result of these
adjustments. The exact number of shares will be determined at the time of
the distribution. As of , 2000, there were outstanding options
to purchase shares of Conexant common stock with a weighted
average exercise price of $ per share.

5
<PAGE> 7

SUMMARY FINANCIAL DATA

The following summary financial data should be read together with our
consolidated financial statements and related notes thereto, "Selected
Consolidated Financial Data", "Unaudited Pro Forma Condensed Combined Financial
Information" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere in this prospectus. The historical
financial information presented below may not be indicative of our future
performance and does not reflect the results of operations and financial
position we would have had if we had operated as a separate, stand-alone entity
during the periods and as of the date presented.

<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
---------------------------------------------------------
1996(1) 1997 1998 1999 2000(1)
-------- -------- -------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Net revenues....................... $107,380 $192,836 $143,270 $277,613 $ 579,206
Gross margin....................... 69,198 116,782 59,928 150,010 345,560
Research and development........... 16,076 45,700 72,639 86,546 136,237
Selling, general and
administrative................... 12,927 25,158 37,243 43,613 81,997
Amortization of intangible
assets........................... -- 5,252 5,252 5,255 143,171
Purchased in-process research and
development...................... 87,120 -- -- -- 191,348
Special charges(2)................. -- -- 3,600 2,200 --
Operating income (loss)............ (46,925) 40,672 (58,806) 12,396 (207,193)
Net income (loss).................. (59,040) 27,881 (31,627) 12,449 (232,811)
Net income (loss) per share, basic
and diluted...................... $ $ $ $ $
Shares used in computing net income
(loss) per share, basic and
diluted..........................
</TABLE>

<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 2000
--------------------------------------------
PRO FORMA
ACTUAL PRO FORMA(3) AS ADJUSTED(4)
---------- ------------ --------------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA
Cash and cash equivalents........................... $ 8,079
Working capital(5).................................. 182,406
Total assets........................................ 1,739,361
Shareholder's net investment........................ 1,608,395
</TABLE>

<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
-----------------------------------------------------
1996 1997 1998 1999 2000
------- ------- -------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA(6)
Adjusted operating income (loss)....... $40,195 $45,924 $(49,954) $19,851 $127,326
Adjusted net income (loss)............. 28,080 31,111 (26,172) 17,057 87,787
Adjusted net income (loss) per share,
basic and diluted.................... $ $ $ $ $
As a percentage of net revenues:
Adjusted operating income (loss)..... 37.4% 23.8% (34.9)% 7.2% 22.0%
Adjusted net income (loss)........... 26.2% 16.1% (18.3)% 6.1% 15.2%
</TABLE>

6
<PAGE> 8

related intangible assets and in fiscal 1996 and 2000 we recorded charges of
$87.1 million and $191.3 million, respectively, related to purchased
in-process research and development. On , 2001 in connection
with our separation from Conexant, Conexant transferred to us all of the
capital stock of Brooktree, Microcosm, Maker, Applied Telecom, HotRail,
Novanet and NetPlane.

(2) Special charges of $3.6 million in fiscal 1998 and $2.2 million in fiscal
1999 represent costs of restructuring actions taken by Conexant related to
our operations, including employee severance and costs under a voluntary
early retirement program. Special charges in fiscal 1998 include $1.7
million of costs associated with the disposal of property and equipment.

(3) Pro forma amounts reflect our separation from Conexant as if it had occurred
on September 30, 2000. On , 2001, Conexant loaned $
million to us to provide us with working capital until the completion of
this offering. In the separation, Conexant retained substantially all of our
accounts payable and accounts receivable.

(4) Pro forma as adjusted amounts give effect to the following actions as though
these actions had been taken as of September 30, 2000:

- our sale of shares of Class A common stock in this offering at the
initial public offering price of $ per share and after deducting
estimated underwriting discounts and commissions and estimated offering
expenses; and

- payment of approximately $ million to Conexant to repay an intercompany
loan from Conexant and to pay a dividend to Conexant.

(5) Working capital consists of current assets, including cash, less current
liabilities, including short-term debt.

(6) Adjusted operating income (loss), adjusted net income (loss) and adjusted
net income (loss) per share exclude the amortization of intangible assets,
the write-off of purchased in-process research and development and special
charges. These measures of earnings are not in accordance with, or an
alternative for, generally accepted accounting principles and may not be
consistent with measures used by other companies. However, we believe these
measures of earnings provide a better understanding of our underlying
operating results and we use these measures internally to evaluate our
underlying operating performance. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Results of
Operations -- Adjusted Earnings".

7
<PAGE> 9

RISK FACTORS

YOU SHOULD CAREFULLY CONSIDER AND EVALUATE ALL OF THE INFORMATION IN THIS
PROSPECTUS, INCLUDING THE RISK FACTORS LISTED BELOW. ANY OF THESE RISKS COULD
MATERIALLY AND ADVERSELY AFFECT OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, WHICH IN TURN COULD MATERIALLY AND ADVERSELY AFFECT THE PRICE OF OUR
CLASS A COMMON STOCK.

RISKS RELATED TO OUR BUSINESS

OUR OPERATING RESULTS DEPEND ON OUR ABILITY TO DEVELOP AND INTRODUCE NEW
AND ENHANCED PRODUCTS IN A TIMELY AND COST-EFFECTIVE MANNER.

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

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

- our ability to define new products accurately;

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

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

- market acceptance of our products.

Furthermore, we are required to continually evaluate expenditures for planned
product development and to choose among alternative technologies based on our
expectations of future market growth.

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

THE DEMAND FOR OUR PRODUCTS DEPENDS ON CONTINUED GROWTH IN THE MARKET FOR
NETWORK INFRASTRUCTURE COMMUNICATIONS EQUIPMENT, WHICH IN TURN DEPENDS
PRIMARILY ON CAPITAL SPENDING LEVELS OF COMMUNICATIONS SERVICE PROVIDERS.

Our sales are dependent on the market for network infrastructure
communications equipment manufactured and sold by our customers. Growth of
demand in this market has in the past and may in the future fluctuate
significantly based on numerous factors, including:

- capital spending levels of communications service providers;

- the lack of industry standards;

- the rate of adoption of alternative technologies;

- changes in regulation of communications services; and

- general economic conditions.

We cannot assure you of the rate, or extent to which, the network
infrastructure communications equipment market will grow, if at all. Any
decrease in the growth of the network infrastructure communications equipment
market could result in slower growth or a decline in demand for our products,
which could have a material adverse effect on our operating results.

8
<PAGE> 10

BECAUSE WE DEPEND ON A FEW SIGNIFICANT CUSTOMERS FOR A SUBSTANTIAL PORTION
OF OUR REVENUES, THE LOSS OF A KEY CUSTOMER COULD SERIOUSLY HARM OUR
BUSINESS.

We have derived a substantial portion of our revenues in the past from
sales to a relatively small number of customers. Sales to OEMs Cisco and Lucent
accounted for approximately 15% and 12%, respectively, of our revenues in fiscal
2000. Sales to manufacturing subcontractors Solectron Corporation and ACT
Manufacturing, Inc. accounted for approximately 12% and 11%, respectively, of
our revenues in fiscal 2000. Sales to distributor Avnet, Inc. accounted for
approximately 17% of our revenues in fiscal 2000. We believe a substantial
portion of our products sold to Solectron, ACT and Avnet are in turn sold to
leading OEMs, including Cisco and Lucent. We expect that a small number of OEM
customers will continue to account for a substantial portion of our revenues in
fiscal 2001 and in the future. As a result, the loss of any significant
customer, which could occur at any time, could have a material adverse effect on
our business, financial condition and results of operations.

IF NETWORK INFRASTRUCTURE OEMS DO NOT DESIGN OUR PRODUCTS INTO THEIR
EQUIPMENT, WE WILL HAVE DIFFICULTY SELLING THOSE PRODUCTS. MOREOVER, A
DESIGN WIN FROM A CUSTOMER DOES NOT GUARANTEE FUTURE SALES TO THAT
CUSTOMER.

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

WE MAY NOT BE ABLE TO ATTRACT AND RETAIN QUALIFIED PERSONNEL NECESSARY FOR
THE DESIGN, DEVELOPMENT AND SALE OF OUR PRODUCTS. OUR SUCCESS COULD BE
NEGATIVELY AFFECTED IF KEY PERSONNEL LEAVE.

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

We may have particular difficulty attracting and retaining key personnel
during periods of poor operating performance given the significant use of
equity-based compensation by our competitors and us. If our stock performs
poorly relative to that of our competitors, employees and potential employees
may be more likely to accept employment with those competitors. The loss of the
services of one or more of our key employees, including Raouf Y. Halim, our
Chief Executive Officer, or certain key design and technical personnel, or our
inability to attract, retain and motivate qualified personnel could have a
material adverse effect on our ability to operate our business and our financial
condition and results of operations.

WE ARE SUBJECT TO INTENSE COMPETITION AND COULD LOSE BUSINESS TO OUR
COMPETITORS.

The semiconductor industry in general and the markets in which we compete
in particular are intensely competitive. We compete worldwide with a number of
U.S. and international semiconductor companies that are both larger and smaller
than us in terms of resources and market share. The high growth, high margin
segments of the communications semiconductor market in which we compete are
attracting new competitors. We currently face intense competition in our markets
and expect that this competition will continue. This

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competition has resulted, and we expect will continue to result, in declining
average selling prices for some of our products. We also anticipate that
additional competitors, including companies with greater resources than ours,
will enter our markets as a result of:

- growth opportunities in communications semiconductors;

- the trend toward global expansion by foreign and domestic competitors;
and

- technological and public policy changes.

Moreover, customers for some of our products compete with us in other product
markets.

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

- time-to-market;

- product performance;

- level of integration within a single semiconductor device and among
several semiconductor devices;

- price and total system cost;

- compliance with industry standards;

- design and engineering capabilities;

- strategic relationships with customers;

- customer support;

- new product innovation; and

- quality.

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

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

- longer operating histories and presence in key markets;

- greater name recognition;

- established relationships with key customers; and

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

As a result, these competitors may be able to adapt more quickly to new or
emerging technologies and changes in customer requirements or may be able to
devote greater resources to the development, promotion and sale of their
products than we can. We cannot assure you that we will be able to compete
successfully against current and potential competitors or that competition will
not have a material adverse effect on our business, financial condition and
results of operations.

Current and potential competitors also have established or may establish
financial or strategic relationships among themselves or with our existing or
potential customers, resellers or other third parties. These relationships may
affect our customers' purchasing decisions. Accordingly, it is possible that new
competitors or alliances among competitors could emerge, allowing our
competitors to rapidly acquire significant market share. Many of our competitors
have also combined with each other and consolidated their businesses.
Consolidations by industry participants are creating entities with increased
market share, customer base, technology and marketing expertise in markets in
which we compete. We expect this consolidation trend to continue, as
acquisitions may enable competing semiconductor suppliers to augment technical
capabilities or to achieve faster time-to-market for their products than would
be possible solely through internal development. In addition, many network
infrastructure OEMs are consolidating with each other, resulting in increased
competition for sales to the remaining OEM customers or the loss of sales to
acquired customers.

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These developments may significantly and adversely affect our current markets,
the markets we are seeking to serve and our ability to compete successfully in
those markets.

WE MAY NOT BE ABLE TO KEEP ABREAST OF THE RAPID TECHNOLOGICAL CHANGES IN
OUR MARKETS.

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

- rapid technological developments;

- evolving industry standards;

- changes in customer requirements; and

- frequent new product introductions and enhancements.

The lengthy design cycles of our products may make us particularly
vulnerable to rapid technological change. Our products could become obsolete
sooner than anticipated because of a faster than anticipated change in one or
more of the technologies related to our products or in market demand for
products based on a particular technology, particularly due to the introduction
of new technology that represents a substantial advance over current technology.
Currently accepted industry standards are also subject to change, which may
contribute to the obsolescence of our products. These events could have a
material adverse effect on our business, financial condition and results of
operations.

SINCE WE DEPEND ON THIRD PARTIES TO MANUFACTURE, ASSEMBLE AND TEST OUR
PRODUCTS, WE MAY BE UNABLE TO OBTAIN AN ADEQUATE SUPPLY OF PRODUCTS TO MEET
OUR CUSTOMERS' NEEDS.

We do not own or operate any facilities for the manufacture of
semiconductors, known as wafer fabrication facilities. We obtain a substantial
majority of our semiconductor fabrication from outside wafer fabrication
facilities, known as foundries. Taiwan Semiconductor Manufacturing Corporation,
or TSMC, and United Microelectronics Corporation, or UMC, are the principal
suppliers of our complementary metal oxide semiconductor, or CMOS, products. A
smaller percentage of our products requires specialized manufacturing processes,
such as gallium arsenide, or GaAs, silicon germanium, or SiGe, and bipolar CMOS,
or BiCMOS. These products are supplied primarily by Conexant. There are
significant risks associated with our reliance on third-party wafer fabrication
facilities, including:

- the lack of ensured wafer supply, potential wafer shortages and higher
wafer prices;

- limited control over delivery schedules, quality assurance and control,
manufacturing yields and production costs; and

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

Third-party foundries may allocate their limited capacity to the production
requirements of other customers that are larger and better financed than we. If
we choose to use a new foundry, it typically takes several months to complete
the qualification process before we can begin shipping products from the new
foundry.

Most of our products are not manufactured at more than one wafer
fabrication facility at a given time. The wafer fabrication facilities we use
may experience financial difficulties or suffer damage or destruction to their
facilities, particularly since many of them are located in earthquake zones. If
these events or any other disruption of wafer fabrication capacity occur, we may
not have a second manufacturing source available, in particular for products
using the specialized GaAs, SiGe and BiCMOS semiconductor manufacturing
processes. We may therefore experience difficulties or delays in securing an
adequate supply of our products, which could impair our ability to meet our
customers' needs and have a material adverse effect on our operating results.

In addition, the highly complex and technologically demanding nature of
semiconductor manufacturing has caused foundries to experience from time to time
lower than anticipated manufacturing yields,

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<PAGE> 13

particularly in connection with the introduction of new products and the
installation and start-up of new process technologies. Lower than anticipated
manufacturing yields may affect our ability to fulfill our customers' demands
for our products on a timely and cost-effective basis.

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

OUR SUCCESS DEPENDS ON OUR ABILITY TO EFFECT SUITABLE INVESTMENTS,
ALLIANCES OR ACQUISITIONS.

Although we invest significant resources in research and development
activities, the complexity and rapidity of technological changes make it
impractical for us to pursue development of all technological solutions on our
own. We have made investments and acquisitions and entered into alliances that
complement our existing product offerings, augment our market coverage or
enhance our technological capabilities and will continue to review investment,
alliance and acquisition prospects on an ongoing basis. However, we cannot
assure you that we will be able to identify and consummate suitable investment,
alliance or acquisition transactions in the future. We compete for acquisitions
with other interested parties that may have greater financial resources and more
valuable capital stock to use as acquisition currency than we have.

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

- issuances of equity securities dilutive to our existing shareholders;

- large one-time write-offs;

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

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

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

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

Any of these events could materially adversely affect our business, financial
condition and results of operations and the price of our Class A common stock.

In fiscal 2000 we incurred a net loss of $232.8 million, primarily due to
charges totaling $191.3 million for the write-off of purchased in-process
research and development and amortization expenses of $143.2 million for
acquisition-related intangible assets resulting from the six acquisitions
completed in fiscal 2000. In addition, as a result of these acquisitions, we
expect to record amortization expense related to goodwill and intangible assets
in excess of $295 million annually for five years.

WE MAY HAVE DIFFICULTY INTEGRATING COMPANIES WE ACQUIRE.

We completed the following six acquisitions in fiscal 2000: Microcosm
Communications Limited, Maker Communications, Inc., Applied Telecom, Inc.,
HotRail Inc., Novanet Semiconductor Ltd. and NetPlane Systems, Inc. We evaluate
acquisitions on an ongoing basis and we may make additional acquisitions in the
future. Integrating acquired organizations and their products and services may
be expensive, time-consuming and a strain on our resources. We could face
several challenges integrating current and future acquisitions, including:

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

- the impairment of relationships with employees and customers;

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

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

- the inability to maintain brand recognition of acquired businesses;

- the inability to maintain corporate controls, procedures and policies;
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<PAGE> 14

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

- the potential unknown liabilities associated with acquired businesses.

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

OUR OPERATING RESULTS MAY BE NEGATIVELY AFFECTED BY SUBSTANTIAL QUARTERLY
AND ANNUAL FLUCTUATIONS AND MARKET DOWNTURNS.

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

- changes in demand for network infrastructure equipment;

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

- our gain or loss of significant customers;

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

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

- availability and cost of products from our suppliers;

- new product and technology introductions by competitors;

- changes in the mix of products produced and sold;

- intellectual property disputes;

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

- the timing and extent of product development costs; and

- general economic conditions.

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

WE OPERATE IN THE HIGHLY CYCLICAL SEMICONDUCTOR INDUSTRY, WHICH IS SUBJECT
TO SIGNIFICANT DOWNTURNS.

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

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

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BECAUSE OF THE LENGTHY SALES CYCLES OF MANY OF OUR PRODUCTS, WE MAY INCUR
SIGNIFICANT EXPENSES BEFORE WE GENERATE ANY REVENUES RELATED TO THOSE
PRODUCTS.

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

UNCERTAINTIES INVOLVING THE ORDERING AND SHIPMENT OF OUR PRODUCTS COULD
ADVERSELY AFFECT OUR BUSINESS.

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

OUR MANAGEMENT TEAM IS SUBJECT TO A VARIETY OF DEMANDS FOR ITS ATTENTION
AND RAPID GROWTH COULD FURTHER STRAIN OUR MANAGEMENT AND OTHER RESOURCES.

We currently face a variety of challenges, including establishing the
infrastructure and systems necessary for us to operate as an independent public
company, integrating our recent acquisitions and managing the recent rapid
expansion of our business. Our recent growth and expansion, as well as our
product development activities, have increased our number of employees and the
responsibilities of our management team. As we expand, we may further strain our
management and other resources. Our failure to meet these challenges as a result
of insufficient resources could have a material adverse effect on our business,
financial condition and results of operations.

WE MAY BE SUBJECT TO CLAIMS OF INFRINGEMENT OF THIRD-PARTY INTELLECTUAL
PROPERTY RIGHTS OR DEMANDS THAT WE LICENSE THIRD-PARTY TECHNOLOGY, WHICH
COULD RESULT IN SIGNIFICANT EXPENSE AND LOSS OF OUR INTELLECTUAL PROPERTY
RIGHTS.

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

- pay substantial damages;

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

- discontinue the use of infringing technology;

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

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

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

WE MAY NOT BE SUCCESSFUL IN PROTECTING OUR INTELLECTUAL PROPERTY RIGHTS,
WHICH MAY HARM OUR ABILITY TO COMPETE.

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

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

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

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

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

WE MAY BE UNABLE TO OBTAIN CAPITAL FOR OUR BUSINESS WHEN WE NEED IT.

In the past, our capital needs have been satisfied by Conexant. After the
consummation of this offering, Conexant will no longer provide funds to finance
our working capital or other cash requirements. We believe that cash flows from
operations and the proceeds of this offering will be sufficient to satisfy our
research and development, capital expenditure, working capital and other
financing requirements for the next twelve months. However, we cannot assure you
that this will be the case or that we will have access to alternative sources of
capital on favorable terms or at all.

WE DO NOT HAVE AN OPERATING HISTORY AS AN INDEPENDENT COMPANY.

We do not have an operating history as an independent company. The
historical financial information we have included in this prospectus has been
derived from Conexant's consolidated financial statements and does not reflect
what our financial position, results of operations and cash flows would have
been had we been a separate, stand-alone entity during the periods presented.
Conexant did not account for us, and we were not operated, as a single
stand-alone entity for the periods presented. In addition, the historical
information is not necessarily indicative of what our results of operations,
financial position and cash flows will be in the future. For example, following
our separation from Conexant, changes occurred in our cost structure, funding
and operations, including changes in our tax structure, increased costs
associated with reduced economies of scale, increased marketing expenses related
to establishing a new brand identity and increased costs associated with
becoming a public, stand-alone company. We cannot assure you that we will be
profitable on an ongoing basis as a stand-alone company. Until the distribution,
and in some cases even after the distribution, we may rely on Conexant for
various transitional services, as described under "Arrangements Between Conexant
and Spinco Relating to the Separation -- Transition Services Agreement".

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WE ARE SUBJECT TO THE RISKS OF DOING BUSINESS INTERNATIONALLY.

In fiscal 2000, approximately 25% of our total sales were to customers
located outside the United States, primarily in European and Asia-Pacific
countries. In addition, we have design centers, sales offices, employees and
suppliers located outside the United States, including foundries located in the
Asia-Pacific region. Our international sales and operations are subject to a
number of risks inherent in selling our products and operating our business
internationally. These include, but are not limited to, risks regarding:

- local economic and political conditions;

- disruptions of capital and trading markets;

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

- changes in legal or regulatory requirements;

- difficulty in obtaining distribution and sales support;

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

- currency exchange rate fluctuations;

- tax laws; and

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

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

RISKS RELATED TO OUR SEPARATION FROM CONEXANT, THE SECURITIES MARKETS
AND OWNERSHIP OF OUR COMMON STOCK

THE TRANSITIONAL SERVICES PROVIDED TO US BY CONEXANT MAY NOT BE SUFFICIENT
TO MEET OUR NEEDS, AND WE MAY PAY INCREASED COSTS TO REPLACE THESE SERVICES
AFTER OUR AGREEMENTS WITH CONEXANT EXPIRE.

Conexant currently supports our operations. We are establishing our own
infrastructure and systems and expect to have them substantially established
prior to the consummation of this offering. However, during a transition period
following this offering, Conexant has agreed to provide services to us,
including services related to:

- the manufacture, assembly and test of our products;

- product development and product support;

- information technology systems;

- human resources and employee benefits administration;

- buildings and facilities;

- insurance; and

- other administrative functions.

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These services may not be provided at the same level as when we were part
of Conexant and may not be sufficient to satisfy our needs as a separate public
company. We also lease and sublease office space from Conexant. These
transitional service and leasing arrangements generally have a term of one to
two years following the consummation of this offering. After the expiration of
these various arrangements, we may not be able to replace the transitional
services or enter into appropriate leases in a timely manner or on terms and
conditions, including cost, as favorable as those we will receive from Conexant.

We entered into these arrangements with Conexant in the context of a
parent-subsidiary relationship as part of our separation from Conexant. As a
result, some of these arrangements may include prices, terms and conditions that
are more or less favorable than agreements that are negotiated at arms-length.
For more information about these arrangements, see "Arrangements Between
Conexant and Spinco Relating to the Separation".

WE WILL BE CONTROLLED BY CONEXANT AS LONG AS IT OWNS SHARES REPRESENTING A
MAJORITY OF THE VOTING POWER OF OUR COMMON STOCK, AND OUR OTHER
SHAREHOLDERS WILL BE UNABLE TO AFFECT THE OUTCOME OF SHAREHOLDER VOTING
DURING THAT TIME.

After the completion of this offering, Conexant will own all outstanding
shares of our Class B common stock, representing approximately % of the
outstanding shares of our common stock and approximately % of the total
voting power of all outstanding shares of our common stock. As long as Conexant
owns shares representing a majority of the voting power of all classes of our
common stock, Conexant will be able to elect our entire board of directors and
to remove any director, with or without cause, without calling a special
meeting. Investors in this offering will not be able to affect the outcome of
any shareholder vote prior to the planned distribution of our stock by Conexant
to Conexant's shareowners. As a result, Conexant will control all matters
affecting us, including:

- the composition of our board of directors and, through it, any
determination with respect to our business strategy and policies,
including the appointment and removal of officers;

- the allocation of business opportunities that may be suitable for both us
and Conexant;

- any determinations with respect to mergers or other business
combinations;

- our acquisition or disposition of assets; and

- changes to the agreements providing for our separation from Conexant.

Subject to Conexant's lock-up agreement with the underwriters discussed
under "Underwriters", Conexant is not prohibited from selling a controlling
interest in us to a third party.

WE MAY HAVE POTENTIAL BUSINESS CONFLICTS OF INTEREST WITH CONEXANT WITH
RESPECT TO OUR PAST AND ONGOING RELATIONSHIPS THAT COULD HARM OUR BUSINESS.

Conflicts of interest may arise between Conexant and us in a number of
areas relating to our past and ongoing relationships, including:

- labor, tax, employee benefit, indemnification and other matters arising
from our separation from Conexant;

- intellectual property matters;

- employee retention and recruiting;

- mergers or other business combinations involving us;

- sales or distributions by Conexant of all or any portion of its ownership
interest in us;

- the nature, quality, timeliness and pricing of transitional services
between us and Conexant; and

- business opportunities that may be attractive to both Conexant and us.

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In addition to Conexant's substantial ownership of our common stock prior
to the distribution, some of our directors are officers or directors of
Conexant. Our restated certificate of incorporation includes provisions relating
to the allocation of business opportunities that may be suitable for both us and
Conexant based on the relationship to the companies of the individual to whom
the opportunity is presented and the method by which it was presented. Our
restated certificate of incorporation also includes provisions limiting
challenges to the enforceability of contracts between Conexant and us.

We may not be able to resolve any potential conflicts with Conexant, and
even if we do, prior to the distribution the resolution may be less favorable
than if we were dealing with an unaffiliated party. While we are controlled by
Conexant, Conexant may require us to amend our agreements with them on terms
less favorable to us than the current terms.

OUR BUSINESS MAY SUFFER IF CONEXANT DOES NOT COMPLETE ITS DISTRIBUTION OF
OUR COMMON STOCK.

Conexant has announced that it intends, within several months following the
consummation of this offering, to distribute to its shareowners all of the
shares of our common stock that it owns. The distribution is subject to the
satisfaction or waiver by Conexant of the conditions set forth in the separation
and distribution agreement, including receipt by Conexant of a favorable private
letter ruling from the IRS to the effect that the distribution will qualify as a
tax-free distribution for U.S. federal income tax purposes. Moreover, Conexant
is not obligated to complete the distribution and the distribution may not occur
in a timely manner or at all. We therefore may not obtain the benefits we expect
as a result of the distribution, including greater strategic focus, increased
speed and responsiveness, focused incentives and greater accountability for
employees, direct access to capital markets to fund our growth and the other
benefits described under "Our Separation From Conexant". In addition, until the
distribution occurs, the risks discussed above relating to Conexant's control of
us and the potential business conflicts of interest between Conexant and us will
continue to be relevant to our shareholders.

SOME OF OUR DIRECTORS AND EXECUTIVE OFFICERS MAY HAVE CONFLICTS OF INTEREST
BECAUSE OF THEIR OWNERSHIP OF CONEXANT COMMON STOCK OR THEIR POSITIONS WITH
CONEXANT.

Some of our directors and executive officers have a substantial amount of
their personal financial portfolios in Conexant common stock and options to
purchase Conexant common stock and some of our directors are officers or
directors of Conexant. Ownership of Conexant common stock by our directors and
executive officers or service as both a director of ours and as a director or
officer of Conexant could create, or appear to create, potential conflicts of
interest when directors and officers are faced with decisions that could have
different implications for Conexant and us. For information regarding our
directors and officers and their ownership of Conexant common stock, see
"Management -- Executive Officers and Directors" and "Management -- Stock
Ownership of Directors and Executive Officers".

OUR SECURITIES HAVE NO PRIOR MARKET, AND WE CANNOT ASSURE YOU THAT OUR
STOCK PRICE WILL NOT DECLINE AFTER THIS OFFERING.

Before this offering, there has not been a public market for our Class A
common stock, and an active public market for our Class A common stock may not
develop or be sustained after this offering. The market price of our Class A
common stock could be subject to significant fluctuations after this offering.
Among the factors that could affect our stock price are:

- quarterly variations in our operating results;

- changes in revenue or earnings estimates or publication of research
reports by analysts;

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

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

- strategic moves by us or our competitors, such as acquisitions or
restructurings;

- actions by institutional shareholders or by Conexant, prior to its
distribution of our common stock;
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- general financial and other market conditions; and

- domestic and international economic factors unrelated to our performance.

The stock markets in general, and the markets for high technology stocks in
particular, have experienced extreme volatility that has often been unrelated to
the operating performance of particular companies. These broad market
fluctuations may adversely affect the trading price of our Class A common stock.
In particular, we cannot assure you that you will be able to resell your shares
at or above the initial public offering price, which was determined by
negotiations between the representatives of the underwriters and us. See
"Underwriters" for a discussion of the factors considered in determining the
initial public offering price.

SUBSTANTIAL SALES OF COMMON STOCK, INCLUDING SALES BY INDEX FUNDS, MAY
OCCUR IN CONNECTION WITH THE DISTRIBUTION, WHICH COULD CAUSE OUR STOCK
PRICE TO DECLINE.

Substantially all of the shares of our common stock distributed by Conexant
will be eligible for immediate resale in the public market. We are unable to
predict whether significant amounts of our common stock will be sold in the open
market in anticipation of, or following, the distribution. We are also unable to
predict whether there will be a sufficient number of buyers willing to buy our
common stock at that time.

A portion of Conexant's common stock is held by index funds tied to the
Standard & Poor's 500 Index and the Nasdaq-100 Index. If our stock is not
included in these indices at the time of Conexant's distribution of our common
stock, these index funds will be required to sell our stock. Any sales of
substantial amounts of our common stock in the public market, or the perception
that such sales might occur, whether as a result of the distribution or
otherwise, could adversely affect the market price of our common stock. See
"Shares Eligible for Future Sale".

THE VALUE OF OUR CLASS A COMMON STOCK MAY BE ADVERSELY AFFECTED BY THE
DISPROPORTIONATE VOTING RIGHTS OF OUR CLASS B COMMON STOCK.

The holders of our Class A common stock and our Class B common stock have
substantially identical rights except that holders of Class A common stock are
entitled to one vote per share while holders of Class B common stock are
entitled to five votes per share on all matters to be voted on by shareholders.
Although our restated certificate of incorporation provides for the automatic
conversion of our Class B common stock into Class A common stock in connection
with the distribution, this automatic conversion will not occur if prior to that
time Conexant's equity ownership has been reduced below 80% as a result of
additional issuances of our Class A common stock. In that event, Conexant may
elect to distribute its Class B common stock to Conexant's shareowners. The
different voting rights of our Class A common stock and Class B common stock
could adversely affect the value of the Class A common stock to the extent that
investors or any potential future purchasers of our common stock view the
superior voting rights of the Class B common stock to have additional value. The
existence of two separate classes of our common stock also could result in less
liquidity for either class of common stock than would be the case if there were
only one class of common stock.

PROVISIONS IN OUR ORGANIZATIONAL DOCUMENTS AND RIGHTS PLAN AND DELAWARE LAW
MAY MAKE IT DIFFICULT FOR SOMEONE TO ACQUIRE CONTROL OF US.

Our restated certificate of incorporation, our amended bylaws, our rights
plan and the Delaware General Corporation Law contain several provisions that
would make more difficult an acquisition of control of our company in a
transaction not approved by our board of directors, including transactions in
which shareholders might otherwise receive a premium for their shares over then
current prices, and that may limit the ability of shareholders to approve
transactions that they may deem to be in their best interests. Our restated
certificate of incorporation and amended bylaws include provisions, some of
which do not apply to

19
<PAGE> 21

Conexant or will not become effective until Conexant owns less than a majority
of the total voting power of all classes of our common stock, such as:

- a provision authorizing our board of directors to issue shares of our
preferred stock in one or more series without further authorization of
our shareholders;

- a fair price provision, as described under "Description of Capital
Stock -- Our Restated Certificate of Incorporation and Amended Bylaws";

- a prohibition on shareholder action by written consent;

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

- a requirement that a supermajority vote be obtained to remove a director
for cause or to amend or repeal specified provisions of our restated
certificate of incorporation or amended bylaws;

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

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

Our rights agreement gives our shareholders rights that would substantially
increase the cost of acquiring us in a transaction not approved by our board of
directors. In addition, we have outstanding our Class B common stock, which
entitles the holder of those shares to five votes per share on all matters
presented to a shareholder vote.

In addition, Section 203 of the Delaware General Corporation Law provides
that a corporation shall not engage in any business combination with any
interested shareholder during the three-year period following the time that the
shareholder becomes an interested shareholder. The restrictions of Section 203
generally make it more difficult for a person who would be an interested
shareholder to effect various business combinations with a corporation during
this three-year period. The provisions of Section 203 provide that the
shareholder approval requirement may be avoided if a majority of the directors
then in office approved either the business combination or the transaction that
resulted in the shareholder becoming an interested shareholder. Section 203 does
not apply to Conexant's ownership of our common stock.

OUR ABILITY TO ENGAGE IN ACQUISITIONS AND OTHER STRATEGIC TRANSACTIONS
USING OUR STOCK IS SUBJECT TO LIMITATIONS BECAUSE OF THE FEDERAL INCOME TAX
REQUIREMENTS FOR A TAX-FREE DISTRIBUTION.

For the distribution of our stock by Conexant to qualify as tax-free to
Conexant and its shareowners, Conexant must own at least 80% of the voting power
of our voting stock at the time of the distribution. Although our two classes of
common stock provide us with some flexibility to issue additional stock for
acquisitions or other purposes, under our agreements with Conexant we may not
issue additional stock prior to the distribution if it would reduce Conexant's
voting power below this 80% threshold.

In addition, for the distribution of our stock by Conexant to qualify as
tax-free to Conexant, there must not be a change in ownership of 50% or more in
either the voting power or value of either our stock or Conexant's stock that is
considered to be part of a plan or a series of related transactions related to
Conexant's intended distribution of our stock to its shareowners. For this
purpose, a change in ownership may include the issuance of our common stock or
Conexant's common stock in acquisitions and other similar strategic transactions
or for compensation of employees and others. If there is a direct or indirect
acquisition of our stock or Conexant's stock by one or more persons during the
four-year period beginning two years prior to and ending two years after the
distribution, it will be presumed to be part of a plan or a series of related
transactions related to Conexant's intended distribution of our stock and the
distribution will be taxable to Conexant unless the presumption is successfully
rebutted. Under our agreements with Conexant we may not issue additional stock
prior to the distribution if it would reduce Conexant's economic ownership of
our outstanding common stock below 50.1%.

20
<PAGE> 22

For the above reasons, our agreements with Conexant limit our ability to
use our stock for acquisitions and other similar strategic transactions or for
compensation of employees and others. Many of our competitors have issued their
stock to complete acquisitions, to expand their product offerings and speed the
development of new technology, and to attract and retain employees and other key
personnel. Therefore, these competitors may have a significant competitive
advantage over us.

WE MAY BE RESPONSIBLE FOR FEDERAL INCOME TAX LIABILITIES THAT RELATE TO THE
PROPOSED DISTRIBUTION OF SHARES OF OUR COMMON STOCK BY CONEXANT.

The distribution of shares of our common stock by Conexant to its
shareowners is conditioned upon receipt of a tax ruling from the IRS to the
effect that the distribution will qualify as a tax-free distribution for U.S.
federal income tax purposes. The tax ruling has been requested but not yet
received. While the tax ruling generally is binding on the IRS, the continuing
validity of such a tax ruling is subject to factual representations and
assumptions made in Conexant's request. We are not aware of any facts or
circumstances that would cause such representations and assumptions to be
untrue.

The tax allocation agreement between us and Conexant provides that we will
be responsible for any taxes imposed on Conexant, Spinco or Conexant shareowners
as a result of either:

- the failure of the distribution by Conexant of its shares of our common
stock to qualify as a tax-free distribution for U.S. federal income tax
purposes, or

- the subsequent disqualification of the distribution by Conexant of its
shares of our common stock as a tax-free transaction to Conexant for U.S.
federal income tax purposes,

if the failure or disqualification is attributable to specific post-distribution
actions by or in respect of us, our subsidiaries or our shareholders, including
any change of ownership of 50% or more in the voting power or value of our
stock. The process for determining whether a change of ownership has occurred
under the tax rules is complex. If we do not carefully monitor our compliance
with these rules we might inadvertently cause or permit a change of ownership to
occur, triggering our obligation to indemnify Conexant pursuant to the tax
allocation agreement. In addition, our obligation to indemnify Conexant in the
event that a change of ownership causes the distribution not to be tax-free
could discourage or prevent a third party from making a proposal to acquire our
company.

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

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that involve risks and
uncertainties. Forward-looking statements relate to future events or our future
financial performance and are subject to known and unknown risks, uncertainties
and other factors that may cause our actual results, as well as those of the
markets we serve, levels of activity, performance, achievements and prospects to
be materially different from those expressed or implied by such forward-looking
statements. These risks, uncertainties and other factors include, among others,
those identified in "Risk Factors", "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and elsewhere in this prospectus.
We use words such as "anticipates", "believes", "plans", "expects", "future",
"intends", "may", "will", "should", "estimates", "predicts", "potential",
"continue" and similar expressions or the negative of such terms to identify
these forward-looking statements. This prospectus also contains forward-looking
statements attributed to third parties relating to their estimates regarding the
growth of our markets. Although we believe that the expectations reflected in
the forward-looking statements are reasonable, we cannot guarantee future
results, levels of activity, performance or achievements. We are under no duty
to update any of the forward-looking statements after the date of this
prospectus.

21
<PAGE> 23

OUR SEPARATION FROM CONEXANT

On September 13, 2000, Conexant announced a plan to create a separate
company comprised of Conexant's Internet infrastructure business. We were
incorporated in Delaware in October 2000 in preparation for our separation from
Conexant and we are currently a wholly-owned subsidiary of Conexant. Although we
currently anticipate our separation from Conexant will take place in January
2001, unless the context otherwise indicates, the description of our company in
this prospectus assumes that the agreements between us and Conexant related to
the separation are effective and that the separation has occurred.

BENEFITS OF THE SEPARATION

We believe we will realize several benefits from our separation from
Conexant, including the following:

Greater Strategic Focus. We expect to have a sharper focus on the
Internet infrastructure business and strategic opportunities as a result of our
management team focusing only on our businesses. We will also have greater
ability to modify business processes to better fit the needs of our customers,
business units and employees.

Increased Speed and Responsiveness. Since our company will be
independent, we believe we will be able to make decisions more quickly, deploy
resources more rapidly and efficiently and operate with more agility than when
we were a part of a more diverse organization. In addition, we expect to enhance
our responsiveness to customers and partners.

Focused Incentives and Greater Accountability for Employees. We expect
the motivation of our employees and the focus of our management will be
strengthened by incentive compensation programs tied to the market performance
of our Class A common stock. The separation will enable us to offer our
employees compensation directly linked to the performance of the Internet
infrastructure business, which we expect to enhance our ability to attract and
retain qualified personnel.

Direct Access to Capital Markets and Growth Through Acquisitions. As a
separate company, we expect to be able to issue debt or equity securities to
fund our growth internally or through potential acquisitions of complementary
businesses.

SEPARATION AND TRANSITION ARRANGEMENTS

We and Conexant have entered into agreements providing for the separation
of our business from Conexant, including:

- a separation and distribution agreement;

- an employee matters agreement;

- a tax allocation agreement;

- a joint technology and marketing agreement; and

- a transition services agreement.

The agreements relating to our separation from Conexant were made in the
context of a parent-subsidiary relationship and were entered into in the overall
context of our separation from Conexant. The terms of these agreements may be
more or less favorable than those we could have negotiated with unaffiliated
third parties. For more information regarding the separation arrangements, see
"Arrangements Between Conexant and Spinco Relating to the Separation".

THE DISTRIBUTION BY CONEXANT OF OUR COMMON STOCK

Upon completion of this offering, Conexant will own all the outstanding
shares of our Class B common stock, representing approximately % of the
outstanding shares of our common stock and approximately
22
<PAGE> 24

% of the total voting power of all outstanding shares of our common stock.
Conexant has announced that it intends, within several months following
consummation of this offering, to distribute to its shareowners all shares of
our common stock owned by Conexant. However, Conexant is not obligated to
complete the distribution, and we cannot assure you whether or when it will
occur. See "Risk Factors -- Risks Related to Our Separation from Conexant, the
Securities Markets and Ownership of Our Common Stock -- Our business may suffer
if Conexant does not complete its distribution of our common stock."

Conexant has advised us that it would not complete the distribution if its
board of directors determines that the distribution is no longer in the best
interest of Conexant and its shareowners. Conexant has further advised us that
it currently expects that the principal factors that it would consider in
determining whether and when to complete the distribution include:

- the issuance by the IRS of a ruling that the distribution will qualify as
a tax-free distribution for U.S. federal income tax purposes;

- the absence of any court orders or regulations prohibiting or restricting
the completion of the distribution;

- the market prices of our common stock and Conexant's common stock; and

- other conditions affecting the businesses of Spinco or Conexant.

23
<PAGE> 25

USE OF PROCEEDS

We estimate that the net proceeds from the sale of the shares of
Class A common stock offered by us at an assumed initial public offering price
of $ per share will be approximately $ million after deducting
estimated underwriting discounts and commissions and estimated offering
expenses. If the underwriters' over-allotment option is exercised in full, we
estimate that the net proceeds of the offering will be approximately $
million.

We will pay approximately $ million of the net proceeds of this
offering to Conexant to repay an intercompany loan from Conexant and to pay a
dividend to Conexant. We expect to use the balance of the net proceeds of this
offering for working capital and general corporate purposes. We will retain
broad discretion in the allocation of the net proceeds of this offering. We may
use a portion of the net proceeds for product development or selling and
marketing, or to acquire or invest in complementary businesses, technologies,
product lines or products. Pending such uses, we will invest the net proceeds of
this offering in short to medium term investments in interest bearing investment
grade securities.

DIVIDEND POLICY

We currently intend to retain any future earnings to fund the development
and growth of our business. Therefore, except for the dividend to be paid to
Conexant in connection with this offering, we do not anticipate paying any cash
dividends in the foreseeable future. Any determination as to the declaration and
payment of dividends will be at the sole discretion of our board of directors.

24
<PAGE> 26

CAPITALIZATION

The following table sets forth our capitalization as of September 30, 2000.
Our capitalization is presented:

- on an actual basis;

- on a pro forma basis to reflect our separation from Conexant as if it had
occurred on September 30, 2000, the $ million loan from Conexant
to us at the time of the separation and the retention by Conexant of
substantially all of our accounts payable and accounts receivable; and

- on a pro forma as adjusted basis to reflect our receipt and application
of the estimated net proceeds from the sale of shares of Class
A common stock in this offering at an assumed price of $ per
share.

This information should be read in conjunction with our consolidated
financial statements and notes thereto, "Selected Consolidated Financial Data"
and "Unaudited Pro Forma Condensed Combined Financial Information" included
elsewhere in this prospectus.

<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 2000
--------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------ --------- -----------
(IN MILLIONS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Payable to Conexant......................................... $ -- $ $
Shareholders' equity:
Preferred stock, no par value, shares
authorized, no shares issued and outstanding, actual,
pro forma and pro forma as adjusted.................... --
Class A common stock, $.01 par value, shares
authorized, no shares issued and outstanding actual and
pro forma; shares issued and outstanding, pro
forma as adjusted...................................... --
Class B common stock, $.01 par value, shares
authorized, no shares issued and outstanding, actual;
shares issued and outstanding, pro forma and
pro forma as adjusted.................................. --
Additional paid-in capital................................ --
Accumulated other comprehensive income.................... (7)
Conexant's net investment................................. 1,615
------ -------- --------
Total shareholders' equity........................ 1,608
------ -------- --------
Total capitalization......................... $1,608 $ $
====== ======== ========
</TABLE>

The number of shares of our Class A common stock to be outstanding after the
offering excludes additional shares of Class A common stock we may issue under
the following plans and arrangements:

- an aggregate of shares available for issuance under our 2001
Long-Term Incentives Plan, Directors Stock Plan, Retirement Savings Plan,
2001 Employee Stock Purchase Plan and 2001 Non-Qualified Employee Stock
Purchase Plan; and

- shares reserved for issuance under our 2001 Stock Option Plan to holders
of options to purchase Conexant common stock outstanding at the time of
the distribution:

- granted after December 31, 2000 to our employees, which will be
converted into options to purchase our Class A common stock.

As of the date of this prospectus it is not possible to determine how
many shares of Class A common stock may be issuable as a result of these
adjustments. The exact number of shares will be determined at the time of
the distribution. As of , 2000, there were outstanding
options to purchase shares of Conexant common stock with a
weighted average exercise price of $ per share.

25
<PAGE> 27

DILUTION

As of September 30, 2000, our historical net tangible book value was
approximately $262.6 million, or $ per share of common stock. Pro forma net
tangible book value per share is determined by dividing our pro forma tangible
net worth, which is total tangible assets less total liabilities after giving
effect to the retention of substantially all of our accounts receivable and
accounts payable by Conexant at the time of our separation as though such
retention had occurred as of September 30, 2000 and the payment to Conexant of
an aggregate of $ million, by the number of shares of common stock outstanding
immediately before this offering. Dilution in pro forma net tangible book value
per share represents the difference between the amount per share paid by
purchasers of shares of Class A common stock in this offering and the pro forma
net tangible book value per share of our common stock immediately afterwards,
after giving effect to our sale of shares of Class A common stock in this
offering at the initial public offering price of $ per share and after
deducting estimated underwriting discounts and commissions and estimated
offering expenses.

Our pro forma as adjusted net tangible book value at September 30, 2000
would have been approximately $ million, or $ per share. This represents an
immediate increase in pro forma net tangible book value of $ per share to our
existing shareholder and an immediate dilution in pro forma net tangible book
value of $ per share to new investors purchasing shares of Class A common stock
in this offering. The following table illustrates this dilution per share:

<TABLE>
<S> <C> <C>
Initial public offering price per share..................... $
Pro forma net tangible book value per share as of September
30, 2000.................................................. $
Increase per share attributable to new investors............
----
Net tangible book value per share after this offering....... $
----
Dilution in pro forma net tangible book value per share to
new investors............................................. $
====
</TABLE>

The discussion and table above assume no exercise of options outstanding
under our stock plans and no issuance of shares reserved for future issuance
under our stock plans. As of September 30, 2000, there were no options
outstanding to purchase shares of our common stock. To the extent that any
options are granted and exercised, there will be further dilution to new
investors.

The following table sets forth, as of September 30, 2000 on the pro forma
as adjusted basis described above, the differences between the number of shares
of common stock purchased from us, the total price paid and average price per
share paid by our existing shareholder and by the new investors in this offering
at the initial public offering price of $ per share, before deducting
estimated underwriting discounts and commissions and estimated offering
expenses.

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
----------------- -------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
------ ------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholder..................... % $ % $
New investors............................ $
------ ------ ------- -------
Total.......................... 100.0% $ 100.0%
====== ====== ======= =======
</TABLE>

Conexant paid a nominal amount in consideration for our common stock.
Accordingly, the cash consideration related to the existing shareholder is
reported as zero in the above table.

If the underwriters' option to purchase additional shares is exercised in
full, the following will occur:

- the number of shares of common stock held by our existing shareholder
will decrease to approximately % of the total number of shares of
common stock outstanding; and

- the number of shares held by new investors will be increased to shares
or approximately % of the total number of shares of our common stock
outstanding after this offering.

26
<PAGE> 28

The number of shares of our Class A common stock to be outstanding after
the offering excludes additional shares of Class A common stock we may issue
under the following plans and arrangements:

- an aggregate of shares available for issuance under our 2001 Long-Term
Incentives Plan, Directors Stock Plan, Retirement Savings Plan, 2001
Employee Stock Purchase Plan and 2001 Non-Qualified Employee Stock
Purchase Plan; and

- shares reserved for issuance under our 2001 Stock Option Plan to holders
of options to purchase Conexant common stock outstanding at the time of
the distribution:

- granted after December 31, 2000 to our employees, which will be
converted into options to purchase our Class A common stock.

As of the date of this prospectus it is not possible to determine how
many shares of Class A common stock may be issuable as a result of these
adjustments. The exact number of shares will be determined at the time of
the distribution. As of , 2000, there were outstanding
options to purchase shares of Conexant common stock with a
weighted average exercise price of $ per share.

27
<PAGE> 29

SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated financial data presented below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our consolidated financial statements and the
notes thereto appearing elsewhere in this prospectus. Our consolidated statement
of operations data for the years ended September 30, 1998, 1999 and 2000 and our
consolidated balance sheet data as of September 30, 1999 and 2000 have been
derived from our audited consolidated financial statements included in this
prospectus, which have been audited by Deloitte & Touche LLP, whose opinion is
included in this prospectus. Our consolidated statement of operations data for
the years ended September 30, 1996 and 1997 and our consolidated balance sheet
data as of September 30, 1996, 1997 and 1998 have been derived from our
unaudited consolidated financial statements, which are not presented in this
prospectus. The historical financial information presented below may not be
indicative of our future performance and does not reflect the results of
operations and financial position we would have had if we had operated as a
separate, stand-alone entity during the periods and as of the dates presented.

<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------------------------------
1996(1) 1997 1998 1999 2000(1)
-------- -------- -------- -------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Net revenues................................ $107,380 $192,836 $143,270 $277,613 $ 579,206
Cost of goods sold.......................... 38,182 76,054 83,342 127,603 233,646
-------- -------- -------- -------- ----------
Gross margin................................ 69,198 116,782 59,928 150,010 345,560
Operating Expenses:
Research and development.................. 16,076 45,700 72,639 86,546 136,237
Selling, general and administrative....... 12,927 25,158 37,243 43,613 81,997
Amortization of intangible assets......... -- 5,252 5,252 5,255 143,171
Purchased in-process research and
development............................ 87,120 -- -- -- 191,348
Special charges(2)........................ -- -- 3,600 2,200 --
-------- -------- -------- -------- ----------
Total operating expenses............... 116,123 76,110 118,734 137,614 552,753
-------- -------- -------- -------- ----------
Operating income (loss)..................... (46,925) 40,672 (58,806) 12,396 (207,193)
Other income, net........................... 490 326 115 342 1,433
-------- -------- -------- -------- ----------
Income (loss) before provision for income
taxes..................................... (46,435) 40,998 (58,691) 12,738 (205,760)
Provision (benefit) for income taxes........ 12,605 13,117 (27,064) 289 27,051
-------- -------- -------- -------- ----------
Net income (loss)........................... $(59,040) $ 27,881 $(31,627) $ 12,449 $ (232,811)
======== ======== ======== ======== ==========
Net income (loss) per share, basic and
diluted(3)................................ $ $ $ $ $
Shares used in computing net income (loss)
per share, basic and diluted..............
Unaudited pro forma net income (loss) per
share, basic and diluted(3)............... $
Shares used in computing unaudited pro forma
net income (loss) per share, basic and
diluted...................................
</TABLE>

<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
----------------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Cash and cash equivalents................... $ -- $ -- $ -- $ 315 $ 8,079
Working capital(4).......................... 50,087 68,038 39,723 118,869 182,406
Total assets................................ 83,677 116,678 94,415 193,176 1,739,361
Shareholder's net investment................ 67,332 103,246 74,744 162,431 1,608,395
</TABLE>

<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
----------------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA(5)
Adjusted operating income (loss)............ $ 40,195 $ 45,924 $(49,954) $ 19,851 $ 127,326
Adjusted net income (loss).................. 28,080 31,111 (26,172) 17,057 87,787
Adjusted net income (loss) per share, basic
and diluted............................... $ $ $ $ $
As a percentage of net revenues:
Adjusted operating income (loss).......... 37.4% 23.8% (34.9)% 7.2% 22.0%
Adjusted net income (loss)................ 26.2% 16.1% (18.3)% 6.1% 15.2%
</TABLE>

28
<PAGE> 30

---------------
(1) In September 1996, Conexant acquired Brooktree Corporation and in fiscal
2000, Conexant completed the following acquisitions related to our business:
Microcosm Communications Limited in January, Maker Communications, Inc. in
March, Applied Telecom, Inc. in April, HotRail, Inc. in June, and Novanet
Semiconductor Ltd. and NetPlane Systems, Inc. in September. As a result of
these acquisitions, during fiscal 2000 we recorded $143.2 million in
amortization of goodwill and other acquisition-related intangible assets and
in fiscal 1996 and 2000 we recorded charges of $87.1 million and $191.3
million, respectively, related to purchased in-process research and
development. On , 2001 in connection with our separation from
Conexant, Conexant transferred to us all of the capital stock of Brooktree,
Microcosm, Maker, Applied Telecom, HotRail, Novanet and NetPlane.

(3) For a discussion of computation of net income (loss) per share and pro forma
net income (loss) per share, see note 2 of our notes to consolidated
financial statements.

(4) Working capital consists of current assets, including cash, less current
liabilities, including short-term debt.

(5) Adjusted operating income (loss), adjusted net income (loss) and adjusted
net income (loss) per share exclude the amortization of intangible assets,
the write-off of purchased in-process research and development and special
charges. These measures of earnings are not in accordance with, or an
alternative for, generally accepted accounting principles and may not be
consistent with measures used by other companies. However, we believe these
measures of earnings provide a better understanding of our underlying
operating results and we use these measures internally to evaluate our
underlying operating performance. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Results of
Operations -- Adjusted Earnings".

29
<PAGE> 31

UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL INFORMATION

The following unaudited pro forma condensed combined financial information
gives effect to our separation from Conexant, this offering and the acquisition
of four significant businesses completed during fiscal 2000. The unaudited pro
forma condensed combined balance sheet as of September 30, 2000 has been
prepared as if our separation from Conexant and this offering each had occurred
on September 30, 2000. The unaudited pro forma condensed combined statement of
operations for fiscal 2000 has been prepared as if the four acquisitions, our
separation from Conexant and this offering each had occurred on October 1, 1999.

The four significant businesses acquired in fiscal 2000 were Microcosm,
Maker, HotRail and Novanet. Our historical financial information set forth below
has been derived from, and is qualified by reference to, our audited
consolidated financial statements included in this prospectus, and should be
read in conjunction with those financial statements and the notes thereto. The
historical financial information for Microcosm, Maker, HotRail and Novanet for
the periods set forth in the unaudited pro forma condensed combined statement of
operations has been derived from unaudited financial information not included
herein.

Each of the acquisitions was accounted for under the purchase method of
accounting. Total consideration for the acquisitions was 21.8 million shares of
Conexant common stock and options to purchase 3.4 million shares. The total
value of the consideration, based upon the market value of the common stock
issued and the estimated fair value of the assumed options at the time of the
acquisitions, was approximately $1.5 billion. The value of the consideration was
allocated to the assets and liabilities acquired, including identified
intangible assets of $277.7 million and in-process research and development, or
IPRD, of $189.3 million, based upon estimated fair values. The fair values of
the identified intangible assets and IPRD were based upon independent
appraisals. The excess of the value of the consideration over the net assets
acquired was allocated to goodwill.

Upon completion of the acquisitions, we recorded charges totaling $189.3
million for the fair value of the IPRD, because the technological feasibility of
the products under development had not been established and no future
alternative uses existed. These non-recurring charges are reflected in our
consolidated statement of operations for fiscal 2000. The unaudited pro forma
condensed combined statement of operations does not give effect to any synergies
which may be realized as a result of the acquisitions. Additionally, except for
the charges for IPRD and as indicated in the notes hereto, the unaudited pro
forma condensed combined statement of operations does not reflect any
non-recurring charges incurred as a result of these acquisitions.

The unaudited pro forma condensed combined financial information should be
read in conjunction with other information included in this prospectus,
including "Management's Discussion and Analysis of Financial Condition and
Results of Operations", our consolidated financial statements and the notes
thereto, "Selected Consolidated Financial Data", and the historical financial
statements and the notes thereto of Microcosm, Maker, HotRail and Novanet. The
unaudited pro forma condensed combined balance sheet is not intended to
represent what our financial position would actually have been had these events
occurred on September 30, 2000, or to project our financial position for any
future date. Similarly, the unaudited pro forma condensed combined statement of
earnings is not intended to represent what our operating results would actually
have been for the periods indicated or to project our operating results for any
future period. The pro forma condensed combined statement of operations does not
include the incremental costs of services received from Conexant under the
transition services agreement. The pro forma adjustments are based upon
currently available information and assumptions that management believes are
reasonable.

30
<PAGE> 32

UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF SEPTEMBER 30, 2000
(IN THOUSANDS)

<TABLE>
<CAPTION>
HISTORICAL ADJUSTMENTS FOR ADJUSTMENTS FOR PRO FORMA
SPINCO THE SEPARATION PRO FORMA THE OFFERING AS ADJUSTED
---------- --------------- ---------- --------------- -----------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........ $ 8,079 $ (1) $ $ (2) $
(2)
Receivables, net................. 118,728 (1) --
Inventories, net................. 79,250 -- 79,250 -- 79,250
Deferred income taxes............ 19,454 -- 19,454 -- 19,454
Other current assets............. 20,996 -- 20,996 -- 20,996
---------- --------- ---------- -------- ----------
Total current assets..... 246,507
Marketable securities.............. 3,295 -- 3,295 -- 3,295
Property, plant and equipment,
net.............................. 31,162 -- 31,162 -- 31,162
Goodwill and intangible assets,
net.............................. 1,345,782 -- 1,345,782 -- 1,345,782
Other assets....................... 112,615 -- 112,615 -- 112,615
---------- --------- ---------- -------- ----------
Total assets............. $1,739,361 $ $ $ $
========== ========= ========== ======== ==========
LIABILITIES AND SHAREHOLDER'S NET
INVESTMENT
Current liabilities:
Accounts payable................. $ 10,294 $ (1) $ $ -- $
Payable to Conexant Systems,
Inc........................... -- (1) (2)
Deferred revenue................. 28,081 -- 28,081 -- 28,081
Accrued compensation and
benefits...................... 19,243 -- 19,243 -- 19,243
Other current liabilities........ 6,483 -- 6,483 -- 6,483
---------- --------- ---------- -------- ----------
Total current
liabilities............ 64,101 --
Long-term liabilities.............. 487 -- 487 -- 487
Deferred income taxes.............. 66,378 -- 66,378 -- 66,378
---------- --------- ---------- -------- ----------
Total liabilities........ 130,966 --
---------- --------- ---------- -------- ----------
Commitments and contingencies...... -- -- -- -- --
Shareholder's net investment:
Preferred stock, no par value.... -- -- -- -- --
Common stock:
Class A common stock, $.01 par
value....................... -- -- -- (2)
Class B common stock, $.01 par
value....................... -- (1) (2)
Additional paid-in capital....... -- (1) (2)
Conexant's net investment........ 1,615,502 (1) (2)
Accumulated other comprehensive
income........................ (7,107) -- (7,107) -- (7,107)
---------- --------- ---------- -------- ----------
Total shareholder's net
investment.................... 1,608,395
---------- --------- ---------- -------- ----------
Total liabilities and
shareholder's net
investment............. $1,739,361 $ $ $ $
========== ========= ========== ======== ==========
</TABLE>

See accompanying notes to Unaudited Pro Forma Condensed Combined Financial
Information.

31
<PAGE> 33

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 2000
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
HISTORICAL HISTORICAL HISTORICAL HISTORICAL HISTORICAL PRO FORMA
SPINCO(3) MICROCOSM(3) MAKER(3) HOTRAIL(3) NOVANET(3) ADJUSTMENTS PRO FORMA
---------- ------------ ---------- ---------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues........................ $ 579,206 $ 973 $ 7,829 $ -- $ -- $ -- $ 588,008
Cost of goods sold.................. 233,646 284 2,726 -- -- -- 236,656
--------- ------- -------- -------- ------- --------- ---------
Gross margin........................ 345,560 689 5,103 -- -- -- 351,352
Operating Expenses:
Research and development.......... 136,237 1,030 2,988 7,329 3,602 -- 151,186
Selling, general and
administrative.................. 81,997 659 2,565 3,179 3,312 -- 91,712
Amortization of intangible
assets.......................... 143,171 -- -- -- -- 142,294(4) 285,465
Purchased in-process research and
development..................... 191,348 -- -- -- -- -- 191,348
Acquisition-related costs......... -- -- 16,337 6,000 -- -- 22,337
--------- ------- -------- -------- ------- --------- ---------
Total operating expenses...... 552,753 1,689 21,890 16,508 6,914 142,294 742,048
--------- ------- -------- -------- ------- --------- ---------
Operating loss...................... (207,193) (1,000) (16,787) (16,508) (6,914) (142,294) (390,696)
Other income (expense), net......... 1,433 24 1,314 (1,071) (58) -- 1,642
--------- ------- -------- -------- ------- --------- ---------
Loss before provision for income
taxes............................. (205,760) (976) (15,473) (17,579) (6,972) (142,294) (389,054)
Provision (benefit) for income
taxes............................. 27,051 -- 45 -- -- (11,591)(5) 15,505
--------- ------- -------- -------- ------- --------- ---------
Net loss............................ $(232,811) $ (976) $(15,518) $(17,579) $(6,972) $(130,703) $(404,559)
========= ======= ======== ======== ======= ========= =========
Net loss per share, basic and
diluted........................... $ $ (6)
========= =========
Shares used in computing net loss
per share, basic and diluted......
========= =========
</TABLE>

See accompanying notes to Unaudited Pro Forma Condensed Combined Financial
Information.

32
<PAGE> 34

NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

The following pro forma adjustments are reflected in the unaudited pro forma
condensed combined balance sheet as of September 30, 2000 and the unaudited pro
forma condensed combined statement of operations for the year then ended.

(1) Reflects our separation from Conexant as if it had occurred on September 30,
2000. On , 2001, Conexant loaned $ million to us to provide
us with working capital until the completion of this offering. In the
separation, Conexant retained substantially all of our accounts payable and
accounts receivable.

(2) Reflects the net proceeds of this offering and the subsequent payment of
approximately $ million to Conexant to repay an intercompany loan from
Conexant and to pay a $ million dividend.

(3) Our historical results of operations for the year ended September 30, 2000
include the results of Microcosm (acquired in January 2000), Maker (acquired
in March 2000), HotRail (acquired in June 2000) and Novanet (acquired in
September 2000) for the periods subsequent to the completion of the
respective acquisitions. The historical results of operations of each of the
acquired companies represent their results of operations for the period from
October 1, 1999 to the respective dates of completion of the acquisitions.

(4) Reflects the amortization of identified intangible assets over their
estimated useful lives (an average of five years) and amortization of
goodwill over five years.

(5) Reflects the tax benefit resulting from the amortization of identified
intangible assets.

(6) Unaudited pro forma basic and diluted net loss per share are computed by
dividing net loss for each period by the sum of the common
shares outstanding plus approximately shares of common stock
issued in this offering, the proceeds of which will be used to pay the
$ million dividend to Conexant, based on an initial public offering price
of $ per share, reduced by the estimated per share offering costs.

33
<PAGE> 35

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial condition and results of
operations should be read together with our consolidated financial statements
and the notes thereto included elsewhere in this prospectus.

OVERVIEW

We design, develop and sell semiconductor system solutions and products for
some of the highest-growth areas in the broadband communications market,
including broadband access, multi-service access and WAN transport. Our revenue
has grown from $107 million in fiscal 1996 to $579 million in fiscal 2000.
During this period, the ongoing build-out and upgrade of both public and private
communications networks to support increased Internet traffic and the
convergence of data and voice services generated increasing demand for the
network communications equipment produced by our customers. Our broad product
portfolio allows us to provide network infrastructure OEMs with system-level
semiconductor solutions including multi-service access and high-speed DSL
products used in a variety of network access platforms, including remote access
concentrators, voice gateways, digital loop carriers, DSL access multiplexers,
and integrated access devices. We also provide an extensive family of
communications solutions that support the aggregation, transmission, and
switching of data, video and voice from the edge of the network to the optical
backbone, including T/E carrier, ATM and synchronous optical network/synchronous
digital hierarchy, or SONET/SDH, products, and network processors. These
products are used in a variety of network equipment including high-speed
routers, ATM switches, optical switches, add-drop multiplexers, and digital
cross-connect systems.

We market and sell our products directly to network infrastructure OEMs and
indirectly through electronic components distributors. We also sell to
third-party electronic manufacturing service providers who build systems and
subsystems for network infrastructure OEMs. We have derived a substantial
portion of our revenues in the past from sales to a relatively small number of
customers. Sales to OEMs Cisco and Lucent accounted for approximately 15% and
12%, respectively, of our revenues in fiscal 2000. Sales to manufacturing
subcontractors Solectron and ACT accounted for approximately 12% and 11%,
respectively, of our revenues in fiscal 2000. Sales to distributor Avnet
accounted for approximately 17% of our revenues in fiscal 2000. We believe a
substantial portion of our products sold to Solectron, ACT and Avnet are in turn
sold to leading OEMs, including Cisco and Lucent. We expect a small number of
OEM customers will continue to account for a substantial portion of our revenues
for fiscal 2001 and in the future. In fiscal 2000, approximately 25% of our
total sales were to customers located outside the United States, primarily in
European and Asia-Pacific countries.

Our products are components of network infrastructure equipment. As a
result, we rely on network infrastructure OEMs to select our products from among
alternative offerings to be designed into their equipment. These "design wins"
are an integral part of the long sales cycle for our products. Our customers may
need six months or longer to test and evaluate our products and an additional
six months or more to begin volume production of equipment that incorporates our
products. We believe our close relationships with leading network infrastructure
OEMs facilitate early adoption of our products during development of their
products, enhance our ability to obtain design wins and encourage adoption of
our technology by the 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. In addition, our operating results may be negatively
affected by substantial quarterly and annual fluctuations and market downturns
due to a number of factors, such as changes in demand for network infrastructure
equipment, the timing of receipt, reduction or cancellation of significant
orders by our customers, the gain or loss of significant customers, market
acceptance of our products and our customers' products, our ability to develop,
introduce and market new products and technologies on a timely basis,
availability and cost of products from our suppliers, new product and technology
introductions by competitors, changes in the mix of products produced and sold,
intellectual property disputes, the effects of competitive pricing pressures,
including decreases in average selling prices of our products, the timing and
extent of product development costs and general economic conditions. In the

34
<PAGE> 36

past, average selling prices of established products have generally declined
over time. Recently, our overall average selling prices have increased
moderately due to changes in our product mix and our introduction of new and
higher-priced products. We cannot be sure that we will continue to maintain our
average selling prices in the future and we expect our ability to do so will be
challenged by increased competition.

We believe strategic acquisitions are an important element in maintaining
our competitive and technological position as a leading provider of system-level
semiconductor solutions to network infrastructure OEMs. During fiscal 2000, we
completed six acquisitions with an aggregate value of $1.6 billion to accelerate
development efforts and fill technology gaps in our product portfolio. In
January 2000, we acquired Microcosm, a technology leader in the field of fiber
optic communications. In March 2000, we acquired Maker, a company that develops
and markets programmable network processors, software solutions and development
tools. In June 2000, we acquired HotRail, a developer of high-speed switching,
interconnect and scalable processing solutions for networking systems. We also
completed the acquisitions of Applied Telecom and NetPlane, each engaged in the
development of communications software, and Novanet, focused on optical
networking product development. Each of these acquisitions was treated as a
purchase for financial accounting purposes and our results of operations reflect
operation of these businesses after the date of acquisition. We evaluate
opportunities for other strategic acquisitions from time to time, and we may
make additional acquisitions in the future.

BASIS OF PRESENTATION

We are a wholly-owned subsidiary of Conexant. On September 13, 2000,
Conexant announced its plan to make us an independent, publicly-traded company.
Conexant has announced that it intends, within several months following
consummation of this offering, to distribute to its shareowners all shares of
our common stock owned by Conexant.

Our consolidated financial statements include the assets, liabilities,
operating results, and cash flows of Conexant's Internet infrastructure
business, including subsidiaries which have been contributed by Conexant. Our
consolidated financial statements have been prepared using Conexant's historical
bases in the assets and liabilities and the historical operating results of the
Internet infrastructure business during each respective period. The consolidated
financial statements also include allocations to us of Conexant's corporate
expenses, including research and development, legal, accounting, treasury, human
resources, real estate, information systems, customer service, sales, marketing,
engineering, and other corporate services provided by Conexant, including
executive salaries and other costs. The expense allocations have been determined
on bases that Conexant and we considered to be reasonable reflections of the
utilization of the services provided to us or the benefit received by us.
Expenses were allocated based on specific identification, relative revenues or
costs, manufacturing capacity utilization or headcount.

We have entered into agreements with Conexant providing for the separation
of our business. These agreements generally provide for, among other things, the
transfer from Conexant to us of assets and the assumption by us of liabilities
relating to the Internet infrastructure business, the allocation and licensing
of intellectual property between us and Conexant and various interim and ongoing
relationships between us and Conexant. The agreements relating to our separation
from Conexant were made in the context of a parent-subsidiary relationship and
were entered into in the overall context of our separation from Conexant. The
terms of these agreements may be more or less favorable than those we could have
negotiated with unaffiliated third parties. In addition, as part of Conexant, we
benefited from various economies of scale including shared global administrative
functions and facilities and volume purchase discounts. We expect our costs will
increase as a result of the loss or renegotiation of these arrangements,
although the amount of the cost increase is not determinable at this time. We
must also negotiate new or revised agreements with various third parties as a
separate, stand-alone entity. Such agreements relate to manufacturing capacity,
facilities, intellectual property and other goods and services essential to our
business. We cannot assure you that the terms we will be able to negotiate will
be as favorable as those that we enjoyed as part of Conexant.

The financial information presented in this prospectus is not indicative of
our financial position, results of operations or cash flows in the future, nor
is it necessarily indicative of what our financial position, results of

35
<PAGE> 37

operations or cash flows would have been had we been a separate, stand-alone
entity for the periods presented.

RESULTS OF OPERATIONS

YEARS ENDED SEPTEMBER 30, 1998, 1999 AND 2000

The following table sets forth our results of operations expressed as a
percentage of net revenues:

<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------
1998 1999 2000
----- ----- -----
<S> <C> <C> <C>
Net revenues................................................ 100.0% 100.0% 100.0%
Cost of goods sold.......................................... 58.2 46.0 40.3
----- ----- -----
Gross margin................................................ 41.8 54.0 59.7
Operating Expenses:
Research and development.................................. 50.7 31.2 23.5
Selling, general and administrative....................... 26.0 15.7 14.2
Amortization of intangible assets......................... 3.7 1.9 24.7
Purchased in-process research and development............. -- -- 33.0
Special charges........................................... 2.5 0.8 --
----- ----- -----
Total operating expenses............................... 82.9 49.6 95.4
----- ----- -----
Operating income (loss)..................................... (41.1) 4.5 (35.7)
Other income, net........................................... 0.1 0.1 0.2
----- ----- -----
Income (loss) before provision for income taxes............. (41.0) 4.6 (35.5)
Provision (benefit) for income taxes........................ (18.9) 0.1 4.7
----- ----- -----
Net income (loss)........................................... (22.1) 4.5 (40.2)
===== ===== =====
Adjusted operating income (loss)............................ (34.9)% 7.2% 22.0%
Adjusted net income (loss).................................. (18.3)% 6.1% 15.2%
</TABLE>

Net Revenues

<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------------------------
1998 CHANGE 1999 CHANGE 2000
-------- ------ -------- ------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net revenues............................. $143,270 93.8% $277,613 108.6% $579,206
</TABLE>

We generally recognize revenues from product sales directly to customers
and to certain distributors at the time of shipment. We provide for warranty
costs, sales returns and other allowances at the time of shipment based on prior
experience. We sell some of our products to electronic components distributors
under agreements allowing for price protection and/or a right of return on
unsold products. We defer the recognition of revenue on sales to these
distributors until the products are sold by the distributors.

During fiscal 1999 and 2000, demand for our products increased due to the
need for network infrastructure equipment to support the ongoing build-out and
upgrade of both public and private communications networks. We achieved
compounded annual revenue growth of more than 100% over this two-year period.

In fiscal 2000, we experienced strong revenue growth across each of our
product areas. Demand increased for our optical networking, ATM, network
processor and T/E carrier products, used in network infrastructure equipment for
metropolitan and optical backbone networks. We also experienced greater demand
for our high-speed DSL products, used by network infrastructure OEMs in DSL
access multiplexers, integrated access devices and other products for the
delivery of symmetrical DSL, or SDSL, services. Demand from network
infrastructure OEMs for our AnyPort family of multi-service access processors
also increased.

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<PAGE> 38

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

Gross Margin

<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------------------------------
1998 CHANGE 1999 CHANGE 2000
------- ------ -------- ------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Gross margin.............................. $59,928 150.3% $150,010 130.4% $345,560
Percent of revenues....................... 41.8% 54.0% 59.7%
</TABLE>

Gross margin represents net revenues less cost of goods sold. Our cost of
goods sold consists predominantly of manufactured inventories, royalties and
other intellectual property costs, and warranty and sustaining engineering
expenses related to products sold. In the past, Conexant has manufactured a
substantial portion of our products, and assembled and tested most of our
products, which we have purchased at Conexant's actual cost. Consequently, in
periods of lower utilization of Conexant's manufacturing facilities, our unit
costs have increased. Our cost of goods sold also includes allocations from
Conexant of manufacturing cost variances, process engineering, and other
manufacturing costs which are not included in the unit costs of our inventories,
but are expensed as incurred.

Our improved gross margins in fiscal 2000 principally reflect the continued
shift in our product mix toward higher-margin products, such as optical
networking, T/E carrier, ATM and high-speed DSL products. Our gross margin was
also favorably affected by lower unit costs from Conexant and outside foundries.

The gross margin improvement we achieved during fiscal 1999 reflects a
shift to products with higher margins and improved product costs, partially
offset by price declines in our AnyPort multi-service access processor family.
Gross margins in fiscal 1998 were adversely affected by an inventory write-off
of $9.7 million and by higher unit costs resulting from a lower overall
utilization at Conexant's manufacturing facilities during that year. The gross
margin improvement in fiscal 1999 reflects the positive impact of higher
utilization at Conexant's manufacturing facilities, as well as lower outside
foundry costs.

In fiscal 2000, approximately 45% of our cost of goods sold represented the
value of products supplied by Conexant, which are charged to us at Conexant's
actual cost. Under the transition services agreement, Conexant has agreed to
provide fabrication, assembly and test capacity to us for a two-year period.
Through December 31, 2001 the pricing will be at cost. To the extent we use
these services subsequent to December 31, 2001, the pricing is subject to
negotiation. Our cost of goods purchased from Conexant will continue to be
affected by the utilization of Conexant's wafer fabrication and other
facilities, and other factors within Conexant's control. In addition, our costs
will be affected by the extent of our use of outside foundries and the pricing
we are able to obtain. During periods of high industry demand for wafer
fabrication capacity, we may have to pay higher prices to secure wafer
fabrication capacity.

Research and Development

<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------------------------
1998 CHANGE 1999 CHANGE 2000
------- ------ ------- ------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Research and development................... $72,639 19.1% $86,546 57.4% $136,237
Percent of revenues........................ 50.7% 31.2% 23.5%
</TABLE>

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

37
<PAGE> 39

include allocated costs for shared R&D services performed by Conexant,
principally in the areas of advanced semiconductor process development, design
automation and advanced package development for the benefit of each of
Conexant's businesses.

The increase in R&D expenses for fiscal 2000 compared to fiscal 1999
primarily reflects higher headcount and personnel related costs as we added over
350 engineers. We made significant investments in the development of next
generation high-density, low-power multi-service access processors, multiport
ADSL and G.shdsl chipsets, and the expansion of our T/E carrier portfolio. Other
development efforts were targeted toward a number of broadband optical
networking products, including cross-point switches, broadband access
multiplexers and high-speed, very short reach converters. The increase also
resulted in part from the addition of the Maker, Microcosm, HotRail and Applied
Telecom R&D teams, which focus their development efforts on network processors,
optical networking transceivers, high speed switching and interconnect products,
and software solutions and development tools, respectively. The increase also
reflected higher costs for the pre-production evaluation and testing of new
semiconductor devices, increased depreciation associated with new design tool
purchases, and higher allocated costs for shared R&D services performed by
Conexant.

Similarly, the increase in R&D expenses for fiscal 1999 compared to fiscal
1998 reflected the ongoing internal expansion of our R&D teams, focusing on
development of higher-density multi-service access processors, high-speed DSL
products, and the expansion of our optical networking portfolio. Fiscal 1999 R&D
expenses were also affected by higher allocated costs for shared R&D performed
by Conexant, reflecting the expansion of Conexant's process development, design
automation and advanced package development efforts.

We expect our fiscal 2001 R&D expenses to increase from the fiscal 2000
amounts as we continue to invest in semiconductor system solutions and products
for key high growth market opportunities. Under the transition services
agreement, Conexant will continue to perform various R&D services for us at cost
through December 31, 2001. To the extent we use these services subsequent to
December 31, 2001, the pricing is subject to negotiation.

Selling, General and Administrative

<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------------------------
1998 CHANGE 1999 CHANGE 2000
------- ------ ------- ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Selling, general and administrative................. $37,243 17.1% $43,613 88.0% $81,997
Percent of revenues................................. 26.0% 15.7% 14.2%
</TABLE>

Our selling, general and administrative, or SG&A, expenses include
personnel costs, sales representative commissions, advertising, and other
marketing costs. Our SG&A expenses also include allocated general and
administrative expenses from Conexant for a variety of shared functions,
including legal, accounting, treasury, human resources, real estate, information
systems, customer service, sales, marketing, engineering and other corporate
services.

The increase in SG&A expenses for fiscal 2000 compared to fiscal 1999 was
due primarily to increased personnel related costs resulting from the continued
worldwide expansion of our sales and marketing organizations to support recent
and anticipated future revenue growth. The increase also reflected higher sales
representative commissions driven by our revenue growth and the addition of the
selling, marketing and administrative teams of the businesses we acquired during
fiscal 2000. In addition, allocated general and administrative costs increased
as a result of the continued development of Conexant's corporate infrastructure
to support both Conexant's and our recent growth.

The increase in SG&A expenses in fiscal 1999 compared to fiscal 1998 was
due mainly to higher selling costs associated with the continued expansion of
our worldwide sales organization to support our revenue growth, and higher
allocated general and administrative costs from Conexant, partially offset by
lower product marketing and advertising expenses.

38
<PAGE> 40

We expect to increase our SG&A expenses subsequent to our separation from
Conexant as we develop our independent sales and marketing teams, negotiate our
own purchase and supply arrangements, implement our own information systems
infrastructure and build the corporate resources required to operate as an
independent public company. Under the transition services agreement, Conexant
will continue to perform various services for us at cost through December 31,
2001. To the extent we use these services subsequent to December 31, 2001, the
pricing is subject to negotiation. In addition, until we can rely solely on our
own infrastructure, we will incur duplicative costs for certain functions.

Amortization of Intangible Assets

Amortization of intangible assets was $143.2 million for fiscal 2000,
compared with $5.3 million annually in fiscal years 1999 and 1998. In connection
with the six acquisitions completed in fiscal 2000, we recorded an aggregate of
nearly $1.5 billion of identified intangible assets and goodwill. These assets
are being amortized over their estimated lives, principally five years,
increasing our amortization expense by approximately $137.9 million in fiscal
2000. We expect to record amortization expense related to goodwill and
intangible assets in excess of $295 million annually for five years. As a result
of this increased amortization expense, we expect to incur net losses from
operations for several quarters following this offering. We may make other
business acquisitions in the future, and the completion of any business
acquisitions may result in further increases in the level of amortization
expense. In addition, the terms of the acquisition agreements relating to our
fiscal 2000 acquisitions provide for additional consideration payable under
earn-outs and under indemnity, escrow or holdback provisions. The additional
consideration, when paid, will result in additional goodwill, further increasing
amortization expense. The aggregate amount of such consideration is
approximately $150 million, based on the closing price of Conexant's common
stock on November 7, 2000, but is subject to further increases based upon
changes in the market price of Conexant's common stock.

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

Purchased In-Process Research and Development

In connection with our fiscal 2000 acquisitions, we recorded charges
totaling $191.3 million for the fair value of purchased in-process research and
development, or IPRD. The fair values allocated to the intangible assets
acquired, including the IPRD, were based upon independent appraisals.

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

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

39
<PAGE> 41

businesses. A summary of the IPRD charges related to our fiscal 2000
acquisitions follows. For further discussion of our IPRD charges, see note 3 to
our consolidated financial statements included elsewhere in this prospectus.

<TABLE>
<CAPTION>
ACQUISITION CONSIDERATION IPRD CHARGE
----------- ------------- -----------
(IN MILLIONS)
<S> <C> <C>
Maker....................................................... $ 979.6 $118.5
Microcosm................................................... 103.8 27.4
HotRail..................................................... 349.8 26.1
Novanet..................................................... 93.6 17.3
NetPlane.................................................... 79.8 2.0
Applied Telecom............................................. 15.1 --
-------- ------
Total..................................................... $1,621.7 $191.3
======== ======
</TABLE>

Special Charges

Special charges of $2.2 million in 1999 and $3.6 million in 1998 reflect
restructuring actions taken by Conexant related to our operations. The fiscal
1998 charge of $3.6 million consisted of $1.9 million for employee severance and
costs under a voluntary early retirement program, or VERP, offered to salaried
employees in connection with a workforce reduction, and $1.7 million of costs
associated with the disposal of property and equipment. The fiscal 1999 special
charges of $2.2 million represent additional costs under the VERP. Under the
terms of the separation agreement, Conexant will retain liability for future
payments under the VERP.

Provision for Income Taxes

Our provision for income taxes was $27.1 million for fiscal 2000 compared
to $0.3 million for fiscal 1999. Exclusive of the non-deductible charges for
IPRD and amortization of intangible assets resulting from our recently-completed
acquisitions, the effective tax rate for fiscal 2000 was approximately 32% of
pretax income. This rate reflects the positive impact of the state and federal
research and experimentation tax credits available to us, partially offset by
the impact of foreign income taxed at rates higher than domestic rates. We
anticipate that our effective tax rate, exclusive of the non-deductible charges
for IPRD and amortization of intangible assets, will be approximately 32% for
fiscal 2001.

Our effective tax rate in fiscal 1999 was approximately 2%, compared to a
benefit of 46% in fiscal 1998. Our effective tax rates for these years reflect
the significant research and development credits we generated, and our net loss
in fiscal 1998.

We entered into a tax allocation agreement with Conexant that allocates tax
liabilities between Conexant and us during the period we are included in
Conexant's consolidated group. Generally, we will pay an amount to Conexant
equal to the amount of tax we would have paid if we had filed separate tax
returns.

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<PAGE> 42

Adjusted Earnings

Adjusted operating income (loss), adjusted net income (loss) and adjusted
net income (loss) per share exclude the amortization of intangible assets, the
write-off of purchased in-process research and development and special charges.
These measures of earnings are not in accordance with, or an alternative for,
generally accepted accounting principles and may not be consistent with measures
used by other companies. However, we believe these measures of earnings provide
a better understanding of our underlying operating results and we use these
measures internally to evaluate our underlying operating performance. Adjusted
net income (loss) and adjusted net income (loss) per share is calculated as
follows:

<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------------------
1998 1999 2000
----------- ---------- ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net income (loss).......................................... $(31,627) $12,449 $(232,811)
Amortization of intangible assets.......................... 5,252 5,255 143,171
Purchased in-process research and development.............. -- -- 191,348
Special charges............................................ 3,600 2,200 --
Tax benefit................................................ (3,397) (2,847) (13,921)
-------- ------- ---------
Adjusted net income (loss)................................. $(26,172) $17,057 $ 87,787
======== ======= =========
Adjusted net income (loss) per share,
basic and diluted........................................ $ $ $
Shares used in computing adjusted net income (loss) per
share, basic and diluted.................................
As a percentage of net revenues:
Adjusted operating income (loss)......................... (34.9)% 7.2% 22.0%
Adjusted net income (loss)............................... (18.3)% 6.1% 15.2%
</TABLE>

41
<PAGE> 43

QUARTERLY RESULTS OF OPERATIONS

The following tables present our operating results for each of the eight
fiscal quarters in the period ended September 30, 2000, in dollars and as a
percentage of revenues. The information for each of these quarters is unaudited
and has been prepared on the same basis as the audited consolidated financial
statements included in this prospectus. In the opinion of management, all
necessary adjustments, which consist only of normal and recurring accruals as
well as the write-off of purchased in-process research and development and the
fiscal 1999 special charge, have been included to fairly present the unaudited
quarterly results. This data should be read together with our consolidated
financial statements and the notes thereto included in this prospectus. The
historical financial information presented below may not be indicative of our
future performance and does not reflect the results of operations we would have
had if we had operated as a separate, stand-alone entity during the periods
presented.

<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------------------------
DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1998 1999 1999 1999 1999 2000 2000 2000
-------- -------- -------- --------- -------- --------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues........................... $ 41,728 $47,021 $82,601 $106,263 $118,546 $ 125,224 $155,268 $180,168
Cost of goods sold..................... 21,215 20,955 34,684 50,749 56,635 55,675 54,705 66,631
-------- ------- ------- -------- -------- --------- -------- --------
Gross margin........................... 20,513 26,066 47,917 55,514 61,911 69,549 100,563 113,537
Operating Expenses:
Research and development............. 18,198 19,697 21,167 27,484 28,003 30,928 35,052 42,254
Selling, general and
administrative..................... 10,484 8,246 10,948 13,935 17,547 18,218 20,380 25,852
Amortization of intangible assets.... 1,314 1,314 1,314 1,313 1,307 22,853 51,458 67,553
Purchased in-process research and
development........................ -- -- -- -- -- 145,900 26,100 19,348
Special charges...................... 2,200 -- -- -- -- -- -- --
-------- ------- ------- -------- -------- --------- -------- --------
Total operating expenses........... 32,196 29,257 33,429 42,732 46,857 217,899 132,990 155,007
-------- ------- ------- -------- -------- --------- -------- --------
Operating income (loss)................ (11,683) (3,191) 14,488 12,782 15,054 (148,350) (32,427) (41,470)
Other income (expense), net............ (50) 292 43 57 95 17 632 689
-------- ------- ------- -------- -------- --------- -------- --------
Income (loss) before provision for
income taxes......................... (11,733) (2,899) 14,531 12,839 15,149 (148,333) (31,795) (40,781)
Provision (benefit) for income taxes... (266) (66) 330 291 5,723 15,817 13,847 (8,336)
-------- ------- ------- -------- -------- --------- -------- --------
Net income (loss)...................... $(11,467) $(2,833) $14,201 $ 12,548 $ 9,426 $(164,150) $(45,642) $(32,445)
======== ======= ======= ======== ======== ========= ======== ========
Net income (loss) per share, basic
and diluted.......................... $ $ $ $ $ $ $ $
Shares used in computing net income
(loss) per share.....................
Adjusted operating income.............. $ (8,169) $(1,877) $15,802 $ 14,095 $ 16,361 $ 20,403 $ 45,131 $ 45,431
Adjusted net income (loss)............. (9,295) (2,021) 15,013 13,360 10,239 1,779 27,004 48,765
Adjusted net income (loss) per share,
basic and diluted.................. $ $ $ $ $ $ $ $
</TABLE>

<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------------------------------
DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1998 1999 1999 1999 1999 2000 2000 2000
-------- -------- -------- --------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AS A PERCENTAGE OF NET REVENUES:
Net revenues..................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold............... 50.8 44.6 42.0 47.8 47.8 44.5 35.2 37.0
----- ----- ----- ----- ----- ------ ----- -----
Gross margin..................... 49.2 55.4 58.0 52.2 52.2 55.5 64.8 63.0
Operating Expenses:
Research and development....... 43.6 41.9 25.6 25.9 23.6 24.7 22.7 23.5
Selling, general and
administrative............... 25.1 17.5 13.3 13.1 14.8 14.5 13.1 14.3
Amortization of intangible
assets....................... 3.2 2.8 1.6 1.2 1.1 18.2 33.1 37.5
Purchased in-process research
and development.............. -- -- -- -- -- 116.5 16.8 10.7
Special charges................ 5.3 -- -- -- -- -- -- --
----- ----- ----- ----- ----- ------ ----- -----
Total operating expenses..... 77.2 62.2 40.5 40.2 39.5 174.0 85.7 86.0
----- ----- ----- ----- ----- ------ ----- -----
Operating income (loss).......... (28.0) (6.8) 17.5 12.0 12.7 (118.5) (20.9) (23.0)
Other income (expense), net...... (0.1) 0.6 0.1 0.1 0.1 0.0 0.4 0.4
----- ----- ----- ----- ----- ------ ----- -----
Income (loss) before provision
for income taxes............... (28.1) (6.2) 17.6 12.1 12.8 (118.5) (20.5) (22.6)
Provision (benefit) for income
taxes.......................... (0.6) (0.2) 0.4 0.3 4.8 12.6 8.9 (4.6)
----- ----- ----- ----- ----- ------ ----- -----
Net income (loss)................ (27.5)% (6.0)% 17.2% 11.8% 8.0% (131.1)% (29.4)% (18.0)%
===== ===== ===== ===== ===== ====== ===== =====
Adjusted operating income
(loss)......................... (19.6)% (4.0)% 19.1% 13.3% 13.8% 16.3% 29.1% 25.2%
Adjusted net income (loss)....... (22.3)% (4.3)% 18.2% 12.6% 8.6% 1.4% 17.4% 27.1%
</TABLE>

42
<PAGE> 44

Our revenues increased each quarter during fiscal 1999 and 2000, driven by
the need for network infrastructure equipment to support the ongoing build-out
and upgrade of both public and private communications networks. Our gross
margins as a percentage of revenues generally increased during this period from
49.2% in the quarter ended December 31, 1998 to 63.0% in the quarter ended
September 30, 2000. Our R&D expense increased during fiscal 1999 and 2000, but
generally declined as a percentage of revenues, primarily as a result of the
growth in our revenues. Our SG&A expense generally increased, but declined as a
percentage of revenues during the four quarters of fiscal 1999 primarily as a
result of the growth in our revenues. Amortization of intangible assets
increased during the last three quarters of fiscal 2000 as a result of the six
acquisitions we completed during that year. Purchased in-process research and
development charges were incurred during those quarters as a result of those
acquisitions.

The historical quarterly financial information set forth above presents our
results of operations while we were part of Conexant. We expect to incur
increased costs associated with becoming an independent public company, as well
as reduced economies of scale. Our historical quarterly results of operations
therefore are not necessarily indicative of our future performance and do not
reflect the results we would have achieved had we been an independent company
during the periods presented.

In the past, our quarterly operating results have fluctuated, and we expect
these fluctuations to continue. Future operating results are likely to vary
depending on a number of factors, many of which are outside our control. Changes
in the overall demand for network infrastructure equipment, our product mix, the
timing of new product introductions, the timing of receipt, reduction or
cancellation of significant orders by our customers, and other factors can have
a significant impact on our revenues and our gross margins. In addition, the
availability and pricing of wafer fabrication and assembly and test capacity can
affect our gross margins and the timing of our shipments. The foregoing factors
are difficult to forecast, and these, as well as other factors, could have a
material adverse effect on our quarterly or annual operating results.
Significant quarterly fluctuations in our results of operations will cause
significant fluctuations in our liquidity and working capital, including our
cash and cash equivalents, accounts receivable, inventories, deferred revenues,
and other elements of working capital.

LIQUIDITY AND CAPITAL RESOURCES

Historically, Conexant has managed cash on a centralized basis. Cash
receipts associated with our business were periodically transferred to Conexant,
and Conexant provided funds to cover our disbursements. Our cash and cash
equivalents at September 30, 2000 and 1999 totaled $8.1 million and $315,000,
respectively, representing cash balances held by certain of our subsidiaries.
Our working capital at September 30, 2000 was approximately $182.4 million,
compared to $118.9 million at September 30, 1999.

On , 2001, Conexant transferred to us the assets and
liabilities which relate to our business, except for substantially all of our
accounts receivable and accounts payable, which Conexant retained. We will use
approximately $ million of the net proceeds of the offering to repay a
loan from Conexant and to pay a dividend of $ million to Conexant. We
expect to use the balance of the net proceeds of the offering for working
capital and general corporate purposes.

Cash provided by operating activities was $38.4 million for fiscal 2000,
compared to cash used in operating activities of $57.7 million for fiscal 1999
and cash provided by operating activities of $8.9 million for fiscal 1998.
Fiscal 2000 operating cash flows reflect the Company's net loss of $232.8
million offset by non-cash charges (depreciation and amortization, IPRD and
other) of $327.0 million, and a net working capital increase of approximately
$55.8 million. Cash used in operating activities for fiscal 1999 resulted from a
build-up in accounts receivable and inventories, which more than offset our net
income. Cash provided by operating activities for fiscal 1998 reflected
decreases in working capital which exceeded our net loss.

The fiscal 2000 working capital increase included a $44.4 million increase
in accounts receivable, principally due to higher sales. The receivables
increase reflected the strong sales volume experienced near the end of the
fiscal fourth quarter. The working capital change also included a $28.3 million
build-up in inventories to support increased sales volume. The working capital
increase reflected an $11.3 million increase in accrued expenses and current
liabilities and a $17.6 million increase in deferred revenues, partially offset

43
<PAGE> 45

by a $3.5 million decrease in accounts payable, and other working capital
changes. Before the effect of working capital changes, operating cash flow
increased to $94.2 million for fiscal 2000, compared to $8.3 million for fiscal
1999 and $(24.0) million for fiscal 1998.

Investing activities used $70.2 million of cash during fiscal 2000,
compared to $17.3 million for fiscal 1999. Capital expenditures totaled $16.1
million during fiscal 2000, principally for design and test facilities and
general corporate infrastructure. In addition, we made investments in, or
advances to, businesses totaling $80.0 million, including a $75.0 million
advance to a wafer supplier and approximately $5.0 million for investments in
early-stage communications technology companies, partially offset by acquired
cash balances of $12.7 million from the six businesses we acquired. Cash used in
investing activities during fiscal 1999 consisted of routine capital
expenditures of $9.8 million and a $7.5 million investment in a communications
technology company. Cash used in investing activities during fiscal 1998
consisted of $12.0 million for routine capital expenditures.

Our financing activities consisted of net transfers from Conexant in the
amount of $39.6 million in fiscal 2000, $75.2 million in fiscal 1999 and $3.1
million in fiscal 1998, principally representing increased investment by
Conexant to support the increased levels of receivables and inventory necessary
for our growth.

We believe that cash flows from operations and the proceeds of this
offering will be sufficient to satisfy our anticipated future research and
development, capital expenditure, working capital and other financing
requirements for at least the next twelve months. We continue to evaluate
acquisition opportunities to extend our technology portfolio and design
expertise and to expand our product offerings. In order to complete any such
acquisitions, we may seek to obtain borrowings or issue additional shares of our
common stock. There can be no assurance that financing for acquisitions will be
available to us on favorable terms, or at all.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our financial instruments include cash and cash equivalents and marketable
debt securities. Our main investment objectives are the preservation of
investment capital and the maximization of after-tax return on our investment
portfolio. Consequently, we invest with only high-credit-quality issuers and
limit the amount of credit exposure to any one issuer.

Our cash and cash equivalents are not subject to significant interest rate
risk due to the short maturities of these instruments and, as of September 30,
2000, their carrying value approximates fair value. Our marketable debt
securities (consisting of commercial paper, corporate bonds and government
securities) principally have remaining terms of one year or less. Consequently,
such securities are not subject to significant interest rate risk. All of our
marketable debt securities are classified as available for sale and, as of
September 30, 2000, there were no material unrealized gains or losses on these
securities.

We do not expect that changes in foreign currency exchange rates will have
a material effect on our financial position or results of operations, as the
majority of our revenues are denominated in U.S. dollars, and the effect of any
significant remaining foreign currency exposures may be offset by using hedging
strategies, including foreign currency forward exchange contracts, to manage our
foreign exchange risk. As of September 30, 2000 we had no obligations under any
forward exchange contracts. We limit our use of derivative financial instruments
to specific risk management strategies, and we do not use these instruments for
speculative or trading purposes.

IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, or SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities" which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. SFAS 133 requires that
an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
Derivatives that are not hedges must be adjusted to fair value through earnings.
If the derivative is a hedge, depending on the nature of the hedge, changes in
fair value of derivatives will either

44
<PAGE> 46

offset against the change in fair value of the hedged assets, liabilities or
firm commitments through earnings, or be recognized in other comprehensive
income until the hedged item is recognized in earnings. The change in a
derivative's fair value related to the ineffective portion of a hedge, if any,
will generally be immediately recognized in earnings. Implementation of SFAS 133
is required as of the beginning of fiscal year 2001 and will not have a material
effect on our financial position or results of operations.

In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, or SAB 101, "Revenue Recognition in Financial
Statements". SAB 101 provides guidance on applying generally accepted accounting
principles to revenue recognition issues in financial statements. We believe
that the adoption of SAB 101 will not have a material effect on our financial
position or results of operations.

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

45
<PAGE> 47

BUSINESS

We design, develop and sell semiconductor system solutions and products for
some of the highest growth segments of the broadband communications markets,
including broadband access, multi-service access and WAN transport. Our products
enable network infrastructure OEMs to design products with enhanced bandwidth,
reliability and scalability, which we believe allows them to achieve lower
system cost and reduce their time-to-market. We believe the breadth and depth of
our product portfolio, combined with our rich heritage of over three decades in
communications and semiconductor systems engineering, provide us with a
competitive advantage in selling our products to leading network infrastructure
OEMs. Our business is fabless, which means that we outsource all of our
manufacturing needs and do not own or operate any semiconductor manufacturing
facilities. We believe this allows us to focus our resources on the design,
development and marketing of our products, minimize operating infrastructure and
capital requirements and maintain flexibility in operations.

INDUSTRY BACKGROUND

During the past decade there has been dramatic growth in the number of
Internet users. This growth is expected to continue, increasing from
approximately 240 million worldwide Internet users in 1999 to approximately 602
million in 2003, according to estimates from International Data Corporation.
This growing population of Internet users is demanding more bandwidth-intensive
data, video and voice applications and services, increasing the volume of data
transmitted over communications networks. According to Ryan Hankin & Kent,
Internet traffic volume in North America is expected to increase from 350,000
trillion bytes, or terabytes, per month at the end of 1999 to over 15,000,000
terabytes per month in 2003. The traditional communications infrastructure was
originally designed exclusively for circuit-switched voice-based telephone
calls. As a result, the substantial increase in data traffic and the deployment
of bandwidth-intensive applications and services has resulted in data traffic
congestion and reduced reliability of this infrastructure. We expect this data
traffic congestion to continue. In response to these dynamics, communications
service providers, or carriers, are making significant investments to upgrade
the network infrastructure.

To address the needs of carriers, network infrastructure OEMs must develop
and deliver increasingly high bandwidth systems. Carriers must also incorporate
features such as quality of service, security and voice-over-Internet Protocol,
as well as support multiple protocols such as Internet Protocol, SONET and ATM.
OEMs encounter intense pressure to bring equipment solutions with these features
to market faster than their competitors.

Semiconductors play a critical role in allowing network infrastructure OEMs
to meet their performance, functionality and time-to-market needs.
Semiconductors are instrumental in enabling network infrastructure OEMs to offer
improved bandwidth, speed, reliability, flexibility, power efficiency, size,
scalability and adherence to industry standards. In addition to these general
requirements that all network equipment must satisfy, equipment designed for one
of the three segments of the communications network -- access, aggregation and
transport -- have more specific semiconductor requirements.

- Access encompasses the "last mile" of network infrastructure between a
service provider and the end user, which is typically a residence or
business. For access applications, semiconductors must provide reliable,
high-speed connectivity capable of aggregating or disaggregating data,
video and voice.

- Aggregation includes the infrastructure that aggregates diverse traffic
and prepares it for transport within various networks. For aggregation
applications, semiconductors must perform the higher-level functions that
segment, classify and direct an unstructured stream of data into packets
or cells and prepare those packets or cells for forwarding through the
transport layer of the network. Semiconductors also reverse this process
to prepare data for delivery to the "last mile" of the network.

- Transport includes the infrastructure required to transmit and switch
data, video and voice throughout metropolitan area and long-haul
networks. For transport applications, semiconductors must provide
physical layer functionality, traffic management, and switching and
routing functionality.

46
<PAGE> 48

These features and applications require signal conversion and processing
capabilities that are best addressed by highly integrated mixed-signal devices
that combine analog and digital functions with high performance digital
circuitry and application software.

Historically, leading network infrastructure OEMs designed many of the
semiconductor components used in their equipment. However, in recent years, OEMs
have increasingly concentrated on their core competencies of system design,
integration and marketing. At the same time, independent semiconductor companies
have expanded their capabilities and role in developing the semiconductors used
in these systems. These developments have led to increased outsourcing by OEMs
of the semiconductor content of their equipment. We believe that this trend will
accelerate as the demand for bandwidth increases, policy-based features and
standards proliferate and specialization becomes more critical to achieving
time-to-market delivery. To succeed in this environment, independent
communications semiconductor companies must not only provide basic integrated
circuit design services, but must increasingly provide greater system-level
expertise and broader analog and digital design capabilities.

THE SPINCO APPROACH

We design, develop and sell semiconductor system solutions and products for
some of the highest growth segments of the broadband communications markets,
including broadband access, multi-service access and WAN transport. We have
expertise in signal, packet and transmission processing, which require analog,
mixed signal and digital signal processing, as well as related systems and
software expertise. We believe the breadth and depth of our product portfolio,
combined with our rich heritage of over three decades in communications and
semiconductor systems engineering, provide us with a competitive advantage in
selling our products to leading network infrastructure OEMs.

We offer integrated semiconductor system solutions and products that meet
the size, power and functionality needs of network infrastructure OEMs. Our
products enable OEMs to design products with enhanced bandwidth, reliability and
scalability at a lower system cost and reduce their time-to-market. As a result,
communications service providers who deploy our customers' networking equipment
may offer broadband services with features that differentiate their services
from their competitors at an affordable price to the end user. We use our
system-level design and integration expertise to offer complete semiconductor
system solutions and to integrate onto one device multiple functions previously
performed by two or more semiconductor devices. As a result, we believe our
customers can accelerate their design and production cycles, reduce the power
consumption and size of their products and enhance the bandwidth and features of
their systems. For example, our WAN transport products provide customers with a
comprehensive semiconductor and software solution that includes physical layer
functionality at the fiber level, as well as switching and network processing
functionalities in the upper layers of high-performance communications systems.

We form strategic relationships with leading network infrastructure OEMs to
define and develop new products. In the past we have successfully collaborated
with leading OEMs, such as Cisco, Nortel, Lucent and Alcatel, in new product
introductions and the definition of long-term product development plans. We
believe our strong customer relationships with these established market leaders,
as well as emerging market leaders such as Juniper, Redback, Sycamore and
Tellium, provide us with a foundation for successfully competing in the design
of semiconductor system solutions and products for the next generation of
network infrastructure equipment.

STRATEGY

Our business strategy is to extend our leadership position in providing
semiconductor systems to leading network infrastructure OEMs. Key elements of
our strategy include the following:

FOCUS ON HIGH GROWTH, HIGH MARGIN MARKET OPPORTUNITIES

We identify rapidly growing broadband communications markets and, within
those markets, focus on high margin opportunities. The markets for products
performing packet processing, transmission processing

47
<PAGE> 49

and signal processing currently command high margins due to the complexity of
the products and the shortage of relevant engineering expertise and experience.
We have built substantial technological competencies and have extensive
experience and design expertise in analog, digital and mixed signal processing,
systems architecture and applications support to address these opportunities. We
intend to continue to pursue the development of high growth, high margin
applications.

FORM STRATEGIC RELATIONSHIPS WITH ESTABLISHED AND EMERGING INDUSTRY-LEADING
OEMS

We identify and selectively establish strategic relationships with current
and emerging market leaders in the network infrastructure equipment industry to
develop next generation products. We have an extensive history of working
closely with our customers' research and development teams to understand
emerging markets, technologies and standards, and we invest our resources in
product development in those areas. Recent examples of joint development and
close working relationships with our key customers include our development with
Cisco of dynamic packet transport technology and 10 Gbps very short reach
interconnect technology and our development with Alcatel of the industry's
leading 3.2 Gbps 68x68 cross-point switch used in emerging optical cross-connect
systems. We believe our close relationships with leading network infrastructure
OEMs facilitate early adoption of our products during development of their
products, enhance our ability to obtain design wins and encourage adoption of
our technology by the industry.

In addition, we actively participate in the development and implementation
of the next generation of broadband communication standards through our
involvement in various industry working groups and in collaborations with our
key customers.

CAPITALIZE ON THE BREADTH AND DEPTH OF OUR TECHNOLOGY PORTFOLIO

We build on the breadth and depth of our product portfolio to increase our
share of the silicon content in our customers' products by offering solutions
that integrate information receipt, processing and transmission. We use our
extensive portfolio of physical layer devices together with our network
processing and communications software expertise to offer our customers
integrated system-level solutions. We believe that integration increases
performance and lowers system cost. In addition, integration gives OEMs the
opportunity to source integrated semiconductor solutions from one provider,
rather than purchasing individual solutions from multiple vendors that they must
integrate themselves. For example, we provide an integrated access device
solution that integrates data and voice over DSL. Our solution includes a
network processor, protocol controllers, physical layer devices and control and
routing software.

PURSUE STRATEGIC ACQUISITIONS

We pursue select strategic acquisitions in high growth markets. This
strategy allows us to strengthen and complement our existing technologies,
products and engineering capabilities to better address our current markets and
to accelerate our entry into other high growth markets. We view strategic
acquisitions as an important element in maintaining our competitive and
technological position as a leading provider of system-level semiconductor
solutions to network infrastructure OEMs. In fiscal 2000, we completed six
strategic acquisitions.

OPERATE AS A FABLESS SEMICONDUCTOR COMPANY

We operate as a fabless semiconductor company and outsource all of our
manufacturing needs. This allows us to focus our resources on the design,
development and marketing of our products while minimizing operating
infrastructure and capital requirements. As a result, we maintain maximum
flexibility in operations so that we can more rapidly adapt to changes in our
customers' needs and our target markets.

CORE TECHNOLOGY COMPETENCIES

Communication of all types of information across communications networks
requires signal, packet and transmission processing, whether the communications
medium is copper wire, optical fiber or wireless. We have extensive expertise in
signal, packet and transmission processing. These three competencies are the

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<PAGE> 50

foundations for developing advanced processor architectures, communications and
media processing algorithms and protocols, and signal conversion techniques.

Signal processing involves both signal conversion and digital signal
processing techniques that enable the conversion of information in the form of
data, video, voice, audio and images between analog and digital representations.
Packet processing involves the actual bundling or segmenting of information and
data in a specific way that enables transmission across a given communications
medium. Specific elements of packet processing include destination and origin
information, the specific data to be transmitted and error detection and
correction capabilities. Transmission processing involves the transport
management and receipt of information and data across communications media,
including copper wire, optical fiber and wireless links.

SIGNAL PROCESSING

We have expertise in digital signal processing algorithm development and
implementation. In addition, our portfolio of digital signal processors,
RISC-based processors and co-processors enable high performance, high density
and low power solutions serving multi-service and broadband access applications.
These core processors enable our products to implement a wide range of narrow
and broadband modem modulations, echo cancellers, speech coders and
communications protocols. Our portfolio of analog signal conversion devices
facilitates signal transmission over copper wires over a wide range of signal
amplitudes and frequencies.

PACKET PROCESSING

Our family of network processors are software-programmable and provide
advanced switching and routing capabilities for ATM, packet-over-SONET, frame
relay and multi-protocol label switching applications. These cell, frame and
packet processing engines, which span the spectrum of performance from 1 - 2
Mbps (T1/E1) to 655 - 2,400 Mbps (OC-12/48) data transmission rates, incorporate
real-time control and management capabilities to support scalable systems.

TRANSMISSION PROCESSING

Our portfolio of physical layer communications devices which perform
transmission processing functions is among the broadest in the industry and
spans the entire spectrum from 1 - 2 Mbps (T1/E1) to 10 Gbps (OC-192) data
transmission rates. We possess a set of building block core devices that perform
mapping, framing, multiplexing and de-multiplexing, clock and data recovery,
amplification and high speed switching functionality, as well as expertise in
multi-rate line coding, echo cancellation and line equalization technologies
which serve as the foundation for these physical layer devices.

To enable signal processing, packet processing and transmission processing
within Internet infrastructure equipment we have assembled a broad portfolio of:

- core semiconductor device architectures, including digital signal
processors, mixed signal devices and programmable protocol engines, as
well as analog signal processing capabilities;

- highly optimized signal processing algorithms and communications
protocols; and

- critical software drivers and application software to perform the
requisite signal, packet and transmission processing tasks required in
all wireline communications systems.

Our device architectures are developed in a broad array of semiconductor
fabrication processes, including digital CMOS, BiCMOS, SiGe and GaAs. Several of
our products are assembled using advanced multi-chip packaging techniques. Our
products provide network infrastructure OEMs with highly integrated, low power
and low cost solutions covering the full spectrum of wireline communications
from narrowband multi-services access to broadband 10 Gbps optical-based
networks.

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<PAGE> 51

PRODUCTS

Our broad portfolio of semiconductor products supports network
infrastructure OEMs as they continue upgrading and expanding global
communications networks. These semiconductor products facilitate the
transportation of data, video and voice over a wide variety of communications
networks. Our portfolio includes more than 100 products. The following
illustration depicts the various types of network infrastructure equipment, and
the services they support, that incorporate our multi-service access, WAN
transport and broadband access products.

[Graphics inserted]

BROADBAND ACCESS PRODUCTS

We have developed one of the industry's broadest lines of multi-megabit DSL
transceivers for high bit-rate DSL, or HDSL, SDSL, symmetrical high bit-rate
DSL, or SHDSL, and asymmetrical DSL, or ADSL, connectivity in commercial
applications. Our HDSL products facilitate deployments of high-speed T/E
transmission lines by eliminating the need for repeaters and other line
conditioning equipment. Our family of SDSL products provides incumbent and
competitive local exchange carriers the ability to deliver Internet access at
various rates and to support telecommuting and branch office functions.
Additionally, we have developed a low-power, multi-port DSL product utilizing
the next generation DSL standard called G.shdsl, which enables simultaneous
voice and data communications for worldwide DSL applications. This variable rate
product is compatible with pre-existing transport systems based on the
prevailing 2B1Q modulation standard.

In October 1999, we announced a technology alliance with Lucent aimed at
simplifying and speeding SDSL service deployments and interoperability. Our
newly patented AutoBaud algorithms embedded in our SDSL semiconductor products
are designed to simplify the connection set-up process between network equipment
operating at any one of a dozen line rates that SDSL technology supports by
avoiding time-consuming manual line qualification. AutoBaud allows network
service providers to automatically qualify and determine the maximum data rate
supported by a line, alleviating the need for in field installation and thereby
reducing the total cost of implementation.

Our AccessRunner central-office ADSL modem device set offers full-rate and
G.lite functionality with extended reach and full compliance with industry
standards. These products support downstream data rates of up to 8 Mbps
(full-rate) and 1.5 Mbps (G.lite) and upstream data rates of up to 1 Mbps
(full-rate) and 512 Kbps (G.lite).

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<PAGE> 52

Our current research and development efforts in the broadband access area
include developing the industry's highest density, lowest power central office
products and expanding our portfolio to include very high speed DSL, or VDSL,
products that support downstream data rates up to 50 Mbps to deliver integrated
digital television and high-speed Internet access to residential customers over
twisted copper wire. In addition, we are a leader in developing voice-over-DSL
in products compatible with the industry's most widely used gateways and
integrated access devices.

MULTI-SERVICE ACCESS PRODUCTS

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

In July 2000, we announced that we and Cisco each contributed key
technologies toward the new V.92 modem specification. The V.92 specification
provides a number of features including QuickConnect, which allows users to more
rapidly connect with their ISP, and modem-on-hold, which enables users to
suspend and re-activate their dial-up connection to receive or initiate another
call without having to re-dial. The V.92 specification also includes a
capability called pulse code modulation, or PCM, upstream, which boosts the
upstream data rates from the user to the ISP to reduce transfer times for large
files and e-mail attachments sent by the user.

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

WIDE AREA NETWORK (WAN) TRANSPORT PRODUCTS

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

Our T1/E1 and T3/E3 carrier solutions enable digital communications over
twisted copper wire and include dual, triple and quad framers and line interface
units, or LIUs, for 1.5 Mbps to 45 Mbps data transmission as well as
multi-channel high-level data link channel, or HDLC, protocol controllers.

We also provide broadband internetworking products, including ATM physical
layer and segmentation and reassembly, or SAR, devices supporting 155 and 622
Mbps applications. As our customers move toward greater levels of product
integration, our ATM technology is being increasingly combined with our T/E
carrier chipsets, HDLC devices, multi-service access processors and DSL products
to create complete system-level solutions.

For the WAN core we are aggressively building a broad portfolio of
end-to-end transmission products used in fiber-optic network equipment. Our
portfolio of optical networking physical layer solutions spans the entire
spectrum of transceiver products, from 155 Mbps (OC-3) to 10 Gbps (OC-192)
speeds, in support of SONET/SDH applications. Some of our optical networking
products include laser drivers, transimpedance amplifiers, post amplifiers,
clock and data recovery circuits, serializers and deserializers, cross-point
switches and broadband access multiplexers.

Our physical and link layer products are complemented by our high
performance network processors, which are designed to offer advanced switching
and routing capabilities normally performed by complex application specific
integrated circuits, or ASICs. These software-programmable integrated circuits
are also

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<PAGE> 53

designed to combine the real-time control and management capabilities of an
embedded processor to support scalable system designs. The advanced capabilities
offered by network processors include multi-protocol switching to enable
integrated LAN/WAN systems, multi-layer programmable switching and routing
capabilities to support policy-based traffic management, and programmable
quality of service for traffic prioritization across disparate networks.

We offer a comprehensive set of software subsystems that support
next-generation, carrier-class network infrastructure equipment. These software
subsystems span the technologies of IP, ATM, MPLS and voice-over-ATM. In
addition to protocol systems, we also offer several software infrastructure
modules that improve OEMs' time-to-market. Combined with extensive documentation
and software tooling, we have a suite of software systems that has been used by
a number of OEMs and deployed in a number of networks worldwide.

Technology alliances and strategic acquisitions are a critical component of
our WAN transport strategy. In September 1999, we announced a 68x68 cross-point
switch used in emerging optical cross-connect systems, jointly developed with
Alcatel's Optical Networking Division, which reduces the number of integrated
circuits and power consumption requirements of high bandwidth, fiber optic
communications systems by 30% while increasing data transmission speeds to more
than 200 Gbps.

In November 1999, we announced that we would collaborate with Cisco to
define a new low-cost interface for interconnecting co-located gigabit switches
and terabit routers, dense wavelength division multiplexing, or DWDM, terminals,
and SONET/SDH add-drop multiplexors at 10 Gbps (OC-192) data rates. In August
2000, we and Cisco demonstrated the industry's first 10 Gbps very short reach
interconnection at the National Fiber Optics Engineers Conference in Denver,
Colorado. We have also been selected as a principal semiconductor supplier in
Cisco's dynamic packet transport, or DPT, Partner program and will help to
promote the emerging spatial reuse protocol technology as an open industry
standard for packet-optimized transport solutions.

During fiscal 2000, we completed six acquisitions to accelerate development
efforts and fill technology gaps in our WAN transport product portfolio. In
January 2000, we acquired Microcosm, a technology leader in the field of fiber
optic communications. In March 2000, we acquired Maker, a company that develops
and markets programmable network processors, software solutions and development
tools. In April 2000, we completed the acquisition of Applied Telecom, a company
engaged in the development of communications software. In June 2000, we acquired
HotRail, a developer of high-speed switching, interconnect and scalable
processing solutions for networking systems. In September 2000, we also
completed the acquisitions of NetPlane, a company engaged in the development of
communications software, and Novanet, a company focused on optical networking
product development.

Our goal is to provide complete semiconductor and software solutions that
address multiple levels of functionality for WAN transport devices. The
following chart summarizes the depth and breadth of our WAN transport product
portfolio:

<TABLE>
<CAPTION>
FRAMERS/ NETWORK
TRANSMISSION SPEEDS PHYS MAPPERS PROCESSORS SWITCH FABRIC
------------------- ---- -------- ---------- -------------
<S> <C> <C> <C> <C>
OC 768 -- 40 Gbps......................... L L L L
OC 192 -- 10 Gbps......................... -- L L L
OC 48 -- 2.4 Gbps......................... -- L L L
OC 12 -- 622 Mbps......................... -- -- -- L
OC 3 -- 155 Mbps.......................... -- -- --
DS3/E3 -- 34 to 45 Mbps................... -- -- --
T1/E1/xDSL -- 1 to 4 Mbps................. -- -- --
</TABLE>

-- Current Product (Products shipped today to multiple customers)
L Investment Area (Products in various stages of development)

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<PAGE> 54

Current research and development initiatives in the WAN transport area are
centered on: expanding our family of access and transport network processors, 10
Gbps cross-point switches and 40 Gbps transceivers; integrating framing/mapping
functionality; and developing a scalable switch fabric.

CUSTOMERS

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

We selectively engage in strategic relationships with customers and
continue to seek relationships with current and emerging market leaders in the
network infrastructure market. See "-- Strategy -- Form Strategic Relationships
with Established and Emerging Industry-Leading OEMs".

Sales to OEMs Cisco and Lucent accounted for approximately 15% and 12%,
respectively, of our revenues in fiscal 2000. Sales to manufacturing
subcontractors Solectron and ACT accounted for approximately 12% and 11%,
respectively, of our revenues in fiscal 2000. Sales to distributor Avnet
accounted for approximately 17% of our revenues in fiscal 2000. We believe a
substantial portion of our products sold to Solectron, ACT and Avnet are in turn
sold to leading OEMs, including Cisco and Lucent. No other customer accounted
for more than 10% of our total sales in fiscal 2000. See "Risk Factors -- Risks
Related to Our Business -- Because we depend on a few significant customers for
a substantial portion of our revenues, the loss of a key customer could
seriously harm our business."

SALES, MARKETING AND TECHNICAL SUPPORT

We have a worldwide sales, marketing and technical support organization
comprised of approximately 300 employees as of September 30, 2000, with 11
domestic and 18 international sales offices. Our marketing, sales and field
applications engineering teams, augmented by 19 electronic component
distributors and 25 sales representatives, focus on marketing and selling
communication semiconductor solutions to worldwide suppliers of network
infrastructure equipment.

Many of our products have lengthy sales cycles. We maintain close working
relationships with our customers throughout these lengthy product sales cycles.
We provide broad-based technical support to customers through field application
engineers, product application engineers and technical marketing personnel. We
believe that providing comprehensive product service and support is critical to
shortening our customers' design cycles and maintaining a competitive position
in the network infrastructure market. See "Risk Factors -- Risks Related to Our
Business -- Because of the lengthy sales cycles of many of our products, we may
incur significant expenses before we generate any revenues related to those
products."

OPERATIONS AND MANUFACTURING

We outsource the fabrication, assembly and testing of our semiconductor
products. We use CMOS process technology for the majority of our products and
BiCMOS, SiGe and GaAs process technologies for certain high speed mixed-signal
devices. TSMC and UMC are our principal suppliers of CMOS products. A smaller
percentage of our products requires specialized manufacturing processes, such as
GaAs, SiGe and BiCMOS. These products are supplied primarily by Conexant. In
fiscal 2000, Conexant supplied approximately 45% of our total wafer production
volume. Under the transition services agreement, we have a two-year wafer supply
arrangement with Conexant.

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<PAGE> 55

In fiscal 2000, Conexant provided approximately 50% of the assembly and
test services for our products. Under the transition services agreement,
Conexant has agreed to continue to provide us assembly and test services for two
years. We have qualified and utilize other third-party subcontractors as a
second source for the assembly and testing of our products and have agreements
with assembly and test providers such as Amkor Group and Advanced Semiconductor
Engineering, Inc.

We qualify each of our foundry and assembly providers. This qualification
process consists of a detailed technical review of process performance, design
rules, process models, tools and support, as well as an on-site audit and
analysis of the subcontractor's quality system and manufacturing capability. We
also participate in quality and reliability monitoring through each stage of the
production cycle by reviewing electrical and parametric data from our foundry
and assembly providers. We closely monitor wafer foundry production for overall
quality, reliability and yield levels.

RESEARCH AND DEVELOPMENT

At September 30, 2000, we had approximately 800 employees and independent
contractors engaged in research and development. We perform research and product
development activities at our headquarters in Newport Beach, California and at
17 design centers throughout the world.

Our success will depend to a substantial degree upon our ability to develop
and introduce in a timely fashion new products and enhancements to our existing
products that meet changing customer requirements and emerging industry
standards. We have made and plan to continue to make substantial investments in
research and development and to participate in the formulation of industry
standards. In addition, we actively collaborate with technology leaders to
define and develop next-generation technologies.

We spent approximately $72.6 million, $86.5 million and $136.2 million in
fiscal 1998, 1999 and 2000, respectively, on research and development
activities, representing 51%, 31% and 24%, respectively, of our revenues for
those periods.

COMPETITION

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

Within WAN transport, we compete primarily with Applied Micro Circuits
Corporation, IBM Microelectronics Division, Intel Corporation, Lucent
(Microelectronics Group), Motorola Inc., PMC-Sierra, Inc., TranSwitch
Corporation and Vitesse Semiconductor Corporation. In broadband access, our
principal competitors include Analog Devices, Inc., Centillium Communications,
Inc., GlobeSpan, Inc., Infineon Technologies A.G., Intel Corporation, Metalink
Ltd., Texas Instruments Incorporated and Tioga Technologies, Ltd. Our key
competitors in multi-service access products include Analog Devices, Inc. and
Texas Instruments Incorporated.

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

- time-to-market;

- product performance;

- level of integration;

- price and total system cost;

- compliance with industry standards;

- design and engineering capabilities;

- strategic relationships with customers;

- customer support; and

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<PAGE> 56

- new product innovation and quality.

We believe we compete favorably with respect to each of these factors.

BACKLOG

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

INTELLECTUAL PROPERTY

In connection with the separation, Conexant transferred to us specifically
identified intellectual property and other categories of intellectual property
used exclusively in or related exclusively to our business. The separation and
distribution agreement also includes royalty-free cross licenses by each of
Conexant and Spinco to the other of rights to use intellectual property of the
licensor. We own or license numerous U.S. and foreign patents and patent
applications related to our business. We intend to initiate federal and
international trademark applications seeking registered protection of our new
name and logo. In addition, we own a number of other trademarks only applicable
to our products. Our management believes that intellectual property, including
patents, patent applications and licenses, and trademarks are of material
importance to us. In addition to protecting our proprietary technologies and
processes, we are seeking to strengthen our intellectual property portfolio to
enhance our ability to obtain cross-licenses of intellectual property from
others, whether to obtain access to intellectual property we do not possess or
to resolve potential intellectual property claims against us, without the need
to make financial payments. We also generally enter into confidentiality
agreements with our employees and strategic partners and generally control
access to and distribution of documentation and other proprietary information.
Various claims of patent infringement have in the past been made against us. See
"-- Legal Proceedings" and "Risk Factors -- Risks Related to Our Business -- We
may be subject to claims of infringement of third-party intellectual property
rights or demands that we license third-party technology, which could result in
significant expense and loss of our intellectual property rights."

Pursuant to the separation and distribution agreement with Conexant, we
will assume all liabilities in respect of intellectual property matters related
to current and former operations of the Internet infrastructure business, except
that Conexant will retain liability for the Townshend and Holtz litigation
matters described under "-- Legal Proceedings".

SEASONALITY; CYCLICALITY

In addition, our operating results are subject to substantial quarterly and
annual fluctuations due to a number of factors, such as demand for network
infrastructure equipment, the timing of receipt, reduction or cancellation of
significant orders, the gain or loss of significant customers, market acceptance
of our products and our customers' products, our ability to develop, introduce
and market new products and technologies on a timely basis, availability and
cost of products from our suppliers, new product and technology introductions by
competitors, changes in the mix of products produced and sold, intellectual
property disputes, the effects of competitive pricing pressures, including
decreases in average selling prices of our products, and the timing and extent
of product development costs.

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<PAGE> 57

EMPLOYEES

As of September 30, 2000, we had approximately 1,500 full-time employees,
of whom approximately 800 were engineers, and approximately 50 independent
contractors. Our employees are not covered by any collective bargaining
agreements and we have not experienced a work stoppage in the past five years.

We believe our future success will depend in large part on our ability to
continue to attract, retain, train and motivate highly skilled and dedicated
technical, marketing and management personnel. The competition for these human
resources is intense, particularly for engineering personnel with networking,
software and semiconductor design expertise and technical support personnel with
system-level expertise.

PROPERTIES

At September 30, 2000, we occupied our headquarters located in Newport
Beach, California, 17 design centers and 29 sales offices, some of which share
space with each other or with Conexant. These facilities had an aggregate floor
space of approximately 490,000 square feet, all of which is leased. In the
opinion of management, our properties have been well maintained, are in sound
operating condition and contain all the equipment and facilities necessary to
operate at present levels. A summary of floor space of our leased facilities at
September 30, 2000 is as follows:

<TABLE>
<CAPTION>
TYPE OF FACILITY AREA
---------------- ----------------
(IN SQUARE FEET)
<S> <C>
Headquarters................................................ 193,000
Sales Offices............................................... 32,000
Design Centers.............................................. 265,000
-------
Total............................................. 490,000
=======
</TABLE>

Through our design centers we provide design engineering and product
application support and after-sales service to our customers. The design centers
are strategically located around the world to be in close proximity to our OEM
customers and to take advantage of key technical and engineering talent
worldwide.

Our corporate headquarters are located near major earthquake fault lines.

LEGAL PROCEEDINGS

We are not presently involved in any material legal proceedings. However,
we are subject to litigation from time to time in the ordinary course of our
business, and we may in the future become subject to litigation that will have a
material adverse affect on our business. In addition, pursuant to our separation
and distribution agreement with Conexant, we agreed to assume responsibility for
all current and future litigation, including intellectual property proceedings,
against Conexant or its subsidiaries in respect of the Internet infrastructure
business, although Conexant agreed to retain liability in connection with the
pending patent infringement action by Klaus Holtz relating to Conexant's modem
products utilizing the V.42bis standard for data compression. Conexant recently
settled the outstanding litigation with Brent Townshend claiming unfair
competition, misappropriation of trade secrets, breach of contract and breach of
confidence, as well as patent infringement, relating to Conexant's 56 Kbps modem
products utilizing the V.90 standard. In connection with the settlement, we will
issue to Townshend $15 million in value of our Class A common stock, based on
the offering price set forth on the cover of this prospectus. Conexant will
reimburse us for the $15 million in value and will retain all other liability in
connection with the settlement. Under the terms of the settlement, we will be
granted a perpetual, royalty-free, non-exclusive, non-transferable worldwide
license to Townshend's voiceband modem technology, patents and trade secrets and
any new patents on voiceband modem technology filed prior to October 18, 2005.
Conexant also has agreed to indemnify and hold us harmless for any damages or
losses which may arise out of the Townshend and Holtz proceedings.

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MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The following table sets forth the names, ages and positions of our
executive officers and directors as of the date of this prospectus. The
background of each person listed in the table is described below. Those
individuals named below who are currently officers or employees of Conexant,
other than Mr. Decker, will resign from all their positions with Conexant prior
to the consummation of this offering.

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Dwight W. Decker........... 50 Chairman of the Board
Raouf Y. Halim............. 40 Chief Executive Officer and Director
Balakrishnan S. Iyer....... 44 Senior Vice President and Chief Financial Officer and
Director
Thomas A. Stites........... 45 Senior Vice President, Communications
Bradley W. Yates........... 41 Senior Vice President, Human Resources
Donald R. Beall............ 61 Director
Richard M. Bressler........ 70 Director
Jerre L. Stead............. 57 Director
</TABLE>

---------------
(a) Member of the Audit Committee.
(b) Member of the Board Composition Committee.
(c) Member of the Compensation and Management Development Committee.
(d) Member of the Technology, Environmental and Social Responsibility Committee.

Dwight W. Decker is Chairman of our board of directors. Mr. Decker is
Chairman of the Board and Chief Executive Officer of Conexant (communications
semiconductors), a position he has held since December 1998. He served as Senior
Vice President of Rockwell International Corporation (electronic controls and
communications) and President, Rockwell Semiconductor Systems from July 1998 to
December 1998; Senior Vice President of Rockwell and President, Rockwell
Semiconductor Systems and Electronic Commerce from March 1997 to July 1998;
President, Rockwell Semiconductor Systems from October 1995 to March 1997;
President, Telecommunications of Rockwell from June 1995 to October 1995; and
Vice President and 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.

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

Balakrishnan S. Iyer is our Senior Vice President and Chief Financial
Officer and a director. Mr. Iyer has served as Senior Vice President and Chief
Financial Officer of Conexant since December 1998 and Senior Vice President and
Chief Financial Officer of Rockwell Semiconductor Systems from October 1998 to
December 1998. From January 1997 to October 1998, he was Senior Vice President
and Chief Financial Officer of VLSI Technology, Inc. (semiconductors) and from
April 1993 to December 1996, he was Vice President and Corporate Controller of
VLSI Technology, Inc. Prior thereto, Mr. Iyer was Corporate Controller of
Cypress Semiconductor Corporation. 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.

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<PAGE> 59

Thomas A. Stites will be our Senior Vice President, Communications prior to
completion of this offering. Mr. Stites has served as Senior Vice President,
Communications of Conexant since January 1999. From 1992 to December 1998, he
was Vice President, Communications of Advanced Micro Devices. Mr. Stites
received a B.A. in journalism from the University of Colorado.

Bradley W. Yates will be our Senior Vice President, Human Resources prior
to completion of this offering. Mr. Yates has served as Senior Vice President,
Human Resources of Conexant since January 2000. He was Vice President, Human
Resources of Siebel Systems, Inc. from September 1999 to December 1999; Vice
President, Human Resources of AT&T Wireless Services' Los Angeles Cellular
partnership with Bell South Corporation from September 1996 to September 1999;
and Vice President, Human Resources for AT&T Global Information Solutions'
Americas Region from January 1994 to September 1996. Mr. Yates received an M.S.
in strategic human resource management from the University of Dayton and a B.S.
in business administration from San Diego State University.

Donald R. Beall will be a director of our company prior to completion of
this offering. Mr. Beall is retired 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. Mr. Beall is
also Chairman of the Executive Committee of the Board of Directors of Rockwell.
Mr. Beall is a director of ArvinMeritor, Inc., Conexant and the Procter & Gamble
Company. He is a trustee of California Institute of Technology, a member of the
Foundation Board of Trustees at the University of California -- Irvine and an
Overseer of the Hoover Institution. He is also a member of The Business Council
and numerous professional, civic and entrepreneurial organizations.

Richard M. Bressler will be a director of our company prior to completion
of this offering. He 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. Mr. Bressler was
Chairman of the El Paso Natural Gas Company (natural gas operations) from
October 1990 through December 1993. He has been a director of Conexant since
October 1998 and will resign as a Conexant director at the time he becomes a
director of our company. Mr. Bressler is active in a number of business and
civic organizations.

Jerre L. Stead will be a director of our company prior to completion of
this offering. Mr. Stead has been a director of Conexant since October 1998. He
is retired Chairman of the Board and Chief Executive Officer of Ingram Micro
Inc. (computer technology products and services). Mr. Stead served as Chairman
of the Board and Chief Executive Officer of Ingram Micro from August 1996 to
March 2000. Mr. Stead served as Chief Executive Officer and Chairman of the
Board of LEGENT Corporation (software development) from 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. He is a director of
Armstrong World Industries, Inc. and Thomas & Betts Corporation. Mr. Stead is
Chairman of the Board of the Center of Ethics and Values at Garrett Seminary on
the Northwestern University campus.

CLASSIFIED BOARD

Our restated certificate of incorporation provides that the Board of
Directors will be divided into three classes. The term of office of directors
assigned to Class I will expire at the annual meeting of shareholders in 2002
and at each third succeeding annual meeting after that. The term of office of
directors assigned to Class II will expire at the annual meeting of shareholders
in 2003 and at each third succeeding annual meeting after that. The term of
office of directors assigned to Class III will expire at the annual meeting of
shareholders in 2004 and at each third succeeding annual meeting after that. We
expect to hold our first annual meeting of shareholders in February 2002.
Messrs. Bressler and Halim will serve as Class I Directors,

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Messrs. Iyer and Stead will serve as Class II Directors, and Messrs. Beall and
Decker will serve as Class III Directors.

Unless otherwise indicated, (i) the business address for each director is
Conexant Spinco, Inc., 4000 MacArthur Boulevard, Newport Beach, California
92660-3095 and (ii) each director is a citizen of the United States.

COMMITTEES OF THE BOARD OF DIRECTORS

The standing committees of our board of directors will include an Audit
Committee, a Compensation and Management Development Committee, or Compensation
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, among other things:

- review the audit plans and the scope and effect, among other things, of
audits of our company by our independent public accountants and internal
auditors;

- select and recommend to the board of directors independent public
accountants for us, subject to approval of our shareholders, and review
and approve their fees;

- review our quarterly and annual financial statements before their
release;

- review the adequacy of our system of internal controls and
recommendations of the independent public accountants with respect to
those controls; and

- monitor compliance by our employees with our standards of business
conduct policies.

The principal functions of the Compensation Committee will be to:

- evaluate the performance of our senior executives and plans for
management succession and development;

- consider the design and competitiveness of our compensation plans and
review and approve senior executive compensation; and

- administer our stock-based and other 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 our
Directors Stock Plan.

The principal functions of the Board Composition Committee are:

- to consider and recommend to the board of directors qualified candidates
for election as our directors;

- to prepare and submit to the board of directors for adoption the
Committee's selection criteria for director nominees; and

- to assess the performance of the board of directors and report thereon to
the board of directors.

The Technology, Environmental and Social Responsibility Committee reviews,
assesses and monitors our science and technological activities and our 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.

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COMPENSATION OF DIRECTORS

Our non-employee directors will receive a retainer at the rate of $30,000
per year for service on our board of directors, payable to initial non-employee
directors effective upon the consummation of this offering. Under the Directors
Stock Plan, each non-employee director will be granted an option to purchase
shares of our Class A common stock effective upon election as a
director or, for the initial non-employee directors, effective upon the
consummation of this offering. Following completion of one year of service on
our board of directors, each non-employee director will be granted an option to
purchase shares of our Class A common stock immediately after each
annual meeting of our shareholders. Under the terms of our 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 our common stock on Nasdaq on the date each retainer payment would otherwise
be made in cash. See "-- Benefit Plans Following the Offering -- Directors Stock
Plan".

HISTORICAL COMPENSATION OF EXECUTIVE OFFICERS

The following table sets forth information concerning the annual and
long-term compensation for services rendered in all capacities to Conexant and
its subsidiaries for the fiscal years noted of the individual who will serve as
our chief executive officer and the other four most highly compensated
individuals who will serve as our executive officers, referred to collectively
as the named executive officers, in each case, based on their employment by
Conexant or an affiliate of Conexant at September 30, 2000. The compensation
described in this table was paid by Conexant or an affiliate of Conexant. The
services rendered to Conexant were, in some cases, in capacities not equivalent
to those to be provided to us and this table does not reflect the compensation
to be paid to executive officers in the future.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
ALL OTHER
ANNUAL COMPENSATION LONG-TERM COMPENSATION COMPENSATION(2)
----------------------------------------- ------------------------------------ ---------------
AWARDS PAYOUTS
------------------------ ---------
RESTRICTED STOCK LONG-TERM
NAME AND OTHER ANNUAL STOCK OPTIONS INCENTIVE
PRINCIPAL POSITION(1) YEAR SALARY BONUS COMPENSATION AWARDS (SHARES)(3) PAYOUTS
--------------------- ---- -------- -------- ------------ ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Raouf Y. Halim,
Chief Executive Officer.... 2000
1999
1998
Balakrishnan S. Iyer,
Senior Vice President and
Chief Financial Officer.... 2000
1999
Thomas A. Stites,
Senior Vice President,
Communications............. 2000
1999
Bradley W. Yates,
Senior Vice President,
Human Resources............ 2000
</TABLE>

---------------
(1) The positions reflected in the table are the positions to be held by the
named executive officers with us at the time of the consummation of this
offering and were not necessarily the positions held by the named executive
officers with Conexant during the period or periods covered by the table.

(2) Amounts contributed or accrued for the named executive officers under the
Conexant Retirement Savings Plan and the related supplemental savings plan.

(3) References to "stock options" relate to awards of options under the Conexant
1999 Long-Term Incentives Plan.

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<PAGE> 62

Prior to the consummation of this offering, we will enter into change of
control employment agreements with each of . Each employment agreement becomes
effective upon a "change of control" of Spinco. 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 us without
"cause" or if the executive terminates his or her own employment for "good
reason", the executive is entitled to severance benefits equal to a multiple of
his or her annual compensation, including bonus, and continuation of other
benefits for a number of years equal to the multiple. The multiple is three for
and two for the other executives, or 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 Internal Revenue Code on these 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.

OPTION GRANTS

The following table shows all grants of options to purchase Conexant common
stock granted to the named executive officers during fiscal 2000, which are
reflected in the Summary Compensation Table above.

<TABLE>
<CAPTION>
OPTION GRANTS
--------------------------------------------------------- POTENTIAL REALIZABLE
NUMBER OF PERCENTAGE OF VALUE AT ASSUMED ANNUAL
SECURITIES TOTAL OPTIONS RATES OF STOCK
UNDERLYING GRANTED TO APPRECIATION FOR OPTION
OPTIONS CONEXANT EXERCISE OR TERM
GRANTED EMPLOYEES IN BASE PRICE EXPIRATION ------------------------
NAME (SHARES) FISCAL 2000 (PER SHARE) DATE 5% 10%
---- ---------- ------------- ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Raouf Y. Halim
Balakrishnan S. Iyer
Thomas A. Stites
Bradley W. Yates
</TABLE>

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

As set forth in the employee matters agreement, Conexant options
outstanding at the time of the distribution that were granted prior to January
1, 2001 will be adjusted so that following the distribution, each holder will
hold options to purchase Conexant common stock and options to purchase our
common stock with adjustments in order to provide equivalent value to each
option holder after giving effect to the distribution. Conexant options held by
our employees at the time of the distribution that were granted after December
31, 2000 will be replaced with options to purchase shares of our common stock
with the number of shares covered thereby and the exercise price per share to be
determined pursuant to a formula designed to provide equivalent value to each
option holder after giving effect to the distribution. See "Arrangements Between
Conexant and Spinco Relating to the Separation -- Employee Matters Agreement".

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<PAGE> 63

AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END VALUES

The following table shows (i) aggregate exercises by the named executive
officers during fiscal 2000 of options to purchase Conexant common stock granted
under the Conexant option plans and (ii) unexercised options to purchase
Conexant common stock granted to the named executive officers in fiscal 2000 and
prior years under the Conexant option plans and held by them at September 30,
2000.

<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS HELD AT IN-THE-MONEY OPTIONS AT
SHARES SEPTEMBER 30, 2000 SEPTEMBER 30, 2000(1)
ACQUIRED VALUE ---------------------------- ----------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Raouf Y. Halim
Balakrishnan S. Iyer
Thomas A. Stites
Bradley W. Yates
</TABLE>

---------------
(1) The value of unexercised options is based on the difference between the
exercise price and the closing price ($41 7/8) of Conexant common stock on
the Nasdaq National Market system on September 29, 2000, the last trading
day of fiscal 2000.

BENEFIT PLANS FOLLOWING THE OFFERING

The following are descriptions of certain benefit plans that are expected
to provide benefits to our employees and directors following consummation of
this offering.

2001 LONG-TERM INCENTIVES PLAN

Prior to the consummation of this offering, our board of directors will
adopt, and Conexant as our sole shareholder will approve, our 2001 Long-Term
Incentives Plan, or the 2001 LTIP. The 2001 LTIP permits grants to be made from
time to time as nonqualified stock options, incentive stock options and
restricted stock.

Administration. The 2001 LTIP will be administered by the Compensation
Committee, consisting of two or more members of our board of directors who are
not eligible to participate in the 2001 LTIP. In order to meet the requirements
of Section 162(m) of the Internal Revenue Code and the rules under Section 16 of
the Securities Exchange Act of 1934, as amended, all grants under the 2001 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 Internal
Revenue 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 2001 LTIP
will be selected from time to time by the Compensation Committee in its sole
discretion from among our employees and those of our subsidiaries and
individuals who perform consulting, contracting or other services for us or one
of our subsidiaries who hold positions of significant responsibility with us or
a subsidiary of ours or whose performance or potential contribution, in the
judgment of the Compensation Committee, will benefit our future success.

Shares Subject to 2001 LTIP. The 2001 LTIP authorizes the issuance or
delivery of an aggregate of shares of our Class A common stock,
provided that no more than shares will be available for grants of
restricted stock. Shares of our Class A common stock subject to the unexercised
or undistributed portion of any terminated or forfeited grant under the 2001
LTIP will be available for further awards.

Stock Options and Restricted Stock. The 2001 LTIP authorizes grants of
stock options, which may be either incentive stock options eligible for special
tax treatment or nonqualified stock options, and restricted stock. Incentive
stock options and restricted stock may be granted only to employees, including
officers and directors who are employees, of us and our subsidiaries. Under the
2001 LTIP, no person will receive, in any

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<PAGE> 64

one calendar year, grants which over any three-year period exceed an annual
average of (i) stock options, whether nonqualified stock options or
incentive stock options, and (ii) shares of restricted stock.

Under the provisions of the 2001 LTIP authorizing the grant of stock
options:

- the option price may not be less than the fair market value of the shares
of our common stock at the date of grant;

- the aggregate fair market value, determined as of the date the option is
granted, of the shares of our 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;

- stock options generally may not be exercised prior to one year nor after
ten years from the date of grant; and

- at the time of exercise of a stock option the option price must be paid
in full in cash or in shares of our common stock or in a combination of
cash and shares of our common stock.

Under the 2001 LTIP, the Compensation Committee may also grant shares of
our Class A common stock subject to restrictions on transfer and such other
restrictions on incidents of ownership as the Compensation Committee may
determine, referred to as "restricted stock". During the restricted period,
shares of restricted stock have all the attributes of outstanding shares of our
Class A 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 our Class A 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 2001 LTIP will be evidenced by an award agreement
between us and the 2001 LTIP participant setting forth the terms and conditions
applicable to the grants, as determined by the Compensation Committee consistent
with the terms of the 2001 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 2001 LTIP participant's
employment with us or any of our 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 2001 LTIP participant's employment is terminated for cause, all
grants made to the 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 2001 LTIP upon the
prerequisites that 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 us or our subsidiaries,
including earnings per share, revenue, net income, stock price and total
shareholder return.

Under the 2001 LTIP, stock options and restricted stock may not be granted
after December 31, 2011.

Tax Matters. The following is a brief summary of the material federal
income tax consequences of benefits under the 2001 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 us or the optionee. An
optionee will not realize taxable income, and we 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 our Class A common
stock acquired 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
our Class A 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 our Class A common stock will be
treated as long-term capital gain or loss. Capital losses of individuals
are deductible only against capital gains and a

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<PAGE> 65

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 our Class A
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, we 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 us or the
optionee. Upon the exercise of a nonqualified stock option, the optionee
will realize ordinary income, and we will be entitled to a deduction, equal
to the excess of the fair market value of the shares of our Class A common
stock acquired at the time of exercise over the option exercise price.

(c) Restricted Stock. An employee normally will not realize taxable
income in connection with an award of restricted stock, and we will not be
entitled to a deduction, until the termination of the restrictions. Upon
termination of the restrictions, the employee will realize ordinary income
in an amount equal to the fair market value of the shares of our Class A
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. We will be entitled to a
deduction in the same amount and at the same time as the employee realizes
income.

Amendment, Suspension or Termination of 2001 LTIP. Our board of directors
may at any time amend, suspend or discontinue the 2001 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 our Class A 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 our Class A common stock then remaining
subject to the 2001 LTIP and the maximum number of shares that may be issued to
a 2001 LTIP participant, including those that are covered by outstanding grants,
will, in the event of an increase in the number of outstanding shares of our
Class A common stock, be proportionately increased and the price for each share
then covered by an outstanding grant will be proportionately reduced. In the
event the change in the outstanding shares of our Class A common stock is a
reduction in the number of outstanding shares of our Class A common stock, the
number of shares of our Class A common stock then remaining subject to the 2001
LTIP and the maximum number of shares that may be issued to a 2001 LTIP
participant, including those that are covered by outstanding grants, will 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 2001 LTIP as the result of any
transaction affecting the securities subject to the 2001 LTIP.

2001 STOCK OPTION PLAN

Prior to the consummation of this offering our board of directors will
adopt and Conexant as our sole shareholder will approve our 2001 Stock Option
Plan, or the 2001 Plan. The 2001 Plan covers nonqualified stock options and
incentive stock options to purchase shares of our Class A common stock resulting
from adjustments to certain Conexant options outstanding at the time of the
distribution. See "Arrangements Between Conexant and Spinco Relating to the
Separation -- Employee Matters Agreement".

Administration. The Compensation Committee will administer the 2001 Plan.
In addition, our board of directors has authority to perform all functions of
the Compensation Committee under the 2001 Plan.

Participation. The persons to whom grants are made under the 2001 Plan are
holders of Conexant options outstanding at the time of the distribution who
receive Spinco options as a result of adjustments to the Conexant options
pursuant to the terms of the employee matters agreement.

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<PAGE> 66

Shares Subject to 2001 Plan. The 2001 Plan authorizes the issuance of the
aggregate number of shares of our Class A common stock necessary to provide for
the exercise of all Spinco options outstanding on the date of the distribution
as a result of adjustments to outstanding Conexant options pursuant to the terms
of the employee matters agreement, as may be adjusted under the 2001 Plan. The
number of shares of our Class A common stock that will be subject to such
options will depend on the ratio between the respective market values of our
Class A common stock and Conexant common stock at the time of the distribution.
See "Arrangements Between Conexant and Spinco Relating to the
Separation -- Employee Matters Agreement".

Stock Options. The 2001 Plan authorizes the issuance to 2001 Plan
participants of Spinco options, which may be either incentive stock options
eligible for special tax treatment or nonqualified stock options. Under the
provisions of the 2001 Plan authorizing the issuance of stock options, the
exercise price and the number of shares of our Class A common stock issuable
upon exercise of such options will be determined pursuant to the adjustments to
Conexant options as set forth under "Arrangements Between Conexant and Spinco
Relating to the Separation -- Employee Matters Agreement". Each stock option
will otherwise have substantially the same terms and conditions as the
corresponding Conexant option which was adjusted, except that references to
Conexant will be changed to refer to Spinco. The 2001 Plan also contains
specific provisions applicable only to certain options which correspond to the
terms of the relevant Conexant option plan under which the corresponding
Conexant option was originally granted.

No stock options may be granted under the 2001 Plan after the date of the
distribution.

Tax Matters. The material Federal income tax consequences of receipt of
incentive stock options and non-qualified stock options under the 2001 Plan
under present law and regulations are as described for incentive stock options
and non-qualified stock options under the 2001 LTIP. See "-- 2001 Long-Term
Incentives Plan -- Tax Matters".

Amendment, Suspension or Termination of 2001 Plan. The Compensation
Committee may at any time amend, suspend or terminate the 2001 Plan or Spinco
options subject to the 2001 Plan. In the event any change in shares of our Class
A common stock occurs, our board of directors may make appropriate amendments to
or adjustments in the 2001 Plan or Spinco options subject to the 2001 Plan,
including changes in the number of shares of our Class A common stock which may
be issued under the 2001 Plan and the number of shares of our Class A common
stock and exercise price per share of our Class A common stock subject to Spinco
options. Except for amendments and adjustments in the event of changes in shares
of our Class A common stock, our board of directors and the Compensation
Committee may not, however, without the consent of the person affected, cancel
or reduce an outstanding Spinco option other than as provided for or
contemplated in the option agreement, or without the approval of shareholders,
increase the number of shares of our Class A common stock that may be issued
under the 2001 Plan or reduce the option exercise price of any Spinco option.

DIRECTORS STOCK PLAN

Prior to the consummation of the offering our board of directors will adopt
and Conexant as our sole shareholder will approve our Directors Stock Plan. An
aggregate of shares of our Class A common stock may be issued under the
Directors Stock Plan, subject to appropriate adjustment in the event of any
change in or affecting shares of our Class A common stock, including but not
limited to stock dividends, stock splits and recapitalizations.

Participation. Participation in the Directors Stock Plan will be limited
to directors who are not employees of Spinco 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 our Class A common stock.
Restricted shares, if elected, would be held by Spinco until ten days after the
recipient retires from our 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 our conflict of interest policies, death,
disability or other circumstances our board of directors determines not to be

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adverse to the best interests of Spinco. 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 Stock Plan grants of options to
purchase shares of our Class A common stock will be made to each
non-employee director effective upon election as a director, or, for the initial
non-employee directors, effective upon consummation of this offering. Following
completion of one year of service on the Board by a non-employee director,
grants of options to purchase shares of our Class A common stock will be
made annually to such non-employee director immediately following each Annual
Meeting of Shareholders. The purchase price of the shares subject to the option
will be one hundred percent (100%) of the fair market value of our Class A
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 our Class A common stock
valued at their fair market value on the date of exercise, or a combination of
both.

Options granted under the Directors Stock 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 Stock 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 our 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 expire at the
earlier of five years from the date of retirement or the expiration date
specified in the options. The Directors Stock Plan permits the Compensation
Committee to make determinations as to exercisability upon other termination of
an optionee's membership on our board of directors.

Administration and Amendment. The Compensation Committee will administer
the Directors Stock Plan. Our board of directors may amend the Directors Stock
Plan in any respect, provided that no amendment may be made without shareholder
approval that would materially:

- increase the maximum number of shares of our Class A common stock
available for delivery under the Directors Stock Plan (other than
adjustments to reflect changes in or affecting shares of our Class A
common stock),

- increase the benefits accruing to participants under the Directors Stock
Plan, or

- modify the requirements as to eligibility for participation in the
Directors Stock Plan.

Our board of directors also has authority to terminate the Directors Stock Plan
at any time.

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 we 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 Stock Plan are that upon the exercise of an option, the optionee
realizes ordinary income, and Spinco is entitled to a deduction, equal to the
excess of the fair market value of the shares acquired at the time of exercise
over the option exercise price.

EMPLOYEE STOCK PURCHASE PLANS

Prior to the consummation of this offering, we will adopt, and Conexant as
our sole shareholder will approve, an employee stock purchase plan to be
qualified under Section 423 of the Internal Revenue Code and a non-qualified
employee stock purchase plan for anticipated implementation during fiscal 2001.
Participation in the stock purchase plans is expected to be available to all
full-time employees of Spinco in the United States and all salaried employees at
our international locations, to the extent permitted by local law. Participants
may elect to have up to 10% of their total compensation withheld for quarterly
purchases of our Class A common stock at a price equal to 85% of the lesser of
the fair market value thereof at the beginning

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or end of each quarter. It is anticipated that an aggregate of shares of our
Class A common stock will initially be authorized for issuance pursuant to the
stock purchase plans.

STOCK OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS

All of our common stock is currently owned by Conexant, and thus none of
our officers and directors owns any of our common stock. To the extent our
directors and officers own shares of Conexant common stock at the time of the
distribution, they will participate in the distribution on the same terms as
other holders of Conexant common stock.

The following table sets forth the number of shares of Conexant common
stock beneficially owned on , 2000 by each director, each named executive
officer and all of our directors, director nominees and executive officers as a
group. The total number of shares of Conexant common stock, 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 13(d)(1) under the Exchange Act,
outstanding as of , 2000, was .

<TABLE>
<CAPTION>
CONEXANT COMMON STOCK
--------------------------------
NAME SHARES(1) PERCENT OF CLASS(2)
---- --------- -------------------
<S> <C> <C>
Donald R. Beall............................................. %
Richard M. Bressler.........................................
Dwight W. Decker............................................
Jerre L. Stead..............................................
Raouf Y. Halim..............................................
Balakrishnan S. Iyer........................................
Thomas A. Stites............................................
Bradley W. Yates............................................
All of the above and other executive officers as a group (
persons)..................................................
</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.

With the exception of Wells Fargo Bank, N.A., as trustee under the Rockwell
Savings Plan, which held approximately 9.8% of the outstanding shares of
Conexant common stock as of September 29, 2000, there are no persons known to us
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 our voting securities
outstanding as of the date of the distribution.

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ARRANGEMENTS BETWEEN CONEXANT
AND SPINCO RELATING TO THE SEPARATION

Although we currently anticipate that our separation from Conexant will
take place in January 2001, unless the context otherwise indicates, the
description of our company in this prospectus assumes that the agreements
between us and Conexant related to the separation are effective and that the
separation has occurred. Prior to the consummation of this offering, we and
Conexant entered into various agreements which govern the separation and various
interim and ongoing relationships between Conexant and us, including the
following:

- a separation and distribution agreement;

- an employee matters agreement;

- a tax allocation agreement;

- a joint technology and marketing agreement; and

- a transition services agreement.

The agreements relating to our separation from Conexant were made in the
context of a parent-subsidiary relationship and were entered into in the overall
context of our separation from Conexant. The terms of these agreements may be
more or less favorable than those we could have negotiated with unaffiliated
third parties. The following summarizes the material terms of these agreements.
However, you should read the complete agreements which have been filed as
exhibits to the registration statement of which this prospectus is a part.

SEPARATION AND DISTRIBUTION AGREEMENT

The separation and distribution agreement between Conexant and us provides
for, among other things, the principal corporate transactions required to effect
the separation of our business from Conexant, this offering and the proposed
distribution, and certain other agreements governing the relationship between
Conexant and us with respect to or in consequence of the separation, this
offering and the anticipated distribution.

The Separation. The separation and distribution agreement provides for the
transfer from Conexant to us of specifically identified assets and other
categories of assets used exclusively in or related exclusively to our business.
The separation and distribution agreement also provides generally for the
assumption by us of liabilities of Conexant related to our business. Conexant
retained substantially all of our accounts receivable and accounts payable at
the time of our separation.

Conditions to Offering. The following are some of the material conditions
to the consummation of this offering, any of which may be waived by Conexant:

- the registration statement containing this prospectus must be effective;

- our common stock must be listed on the Nasdaq National Market;

- our restated certificate of incorporation, amended bylaws and rights
agreement must be adopted and in full force and effect;

- all conditions to our obligations and the obligations of the underwriters
under the underwriting agreement must be met or waived;

- Conexant must be satisfied that it will own at least 80.1% of the total
voting power of all outstanding shares of our common stock following the
completion of this offering and must be satisfied that the distribution
will qualify as a tax-free distribution;

- no legal restraints must exist preventing the separation, this offering
or the distribution, and no litigation seeking to restrain or challenge
the separation, this offering or the distribution must be pending; and

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- the separation must have occurred and the separation and distribution
agreement must not have been terminated.

The Distribution. Conexant has announced that it intends, within several
months following consummation of this offering, to distribute to its shareowners
all shares of our common stock owned by Conexant. We will jointly prepare an
information statement with Conexant and send it to Conexant's shareowners before
the distribution. The information statement will inform Conexant shareowners
about the distribution and our company. Conexant may, in its sole discretion,
change the distribution date or decide not to complete the distribution at all.
Conexant intends to consummate the distribution only if, among other things, the
following conditions are met, any of which may be waived by Conexant:

- the IRS must issue a favorable private letter ruling confirming that the
distribution will qualify as a tax-free distribution for U.S. federal
income tax purposes;

- Conexant's board of directors must give final approval of the
distribution;

- all material consents required to effect the distribution must be
received;

- all required government approvals must be in effect;

- shares of our common stock to be distributed in the distribution must be
listed on the Nasdaq National Market; and

- there must be no legal restraint preventing the distribution and no
litigation seeking to restrain or challenge the distribution.

Even if all the conditions have been satisfied, the distribution may be
abandoned by Conexant's board of directors, in its sole discretion, without the
approval of Conexant shareowners, at any time prior to the distribution.

Certain Payments to Conexant. The separation and distribution agreement
provides that Conexant will make a loan to us shortly before the separation in
the amount of $ million to provide funds for operations prior to
completion of this offering. Within three business days after completion of this
offering, we will pay to Conexant from the net proceeds of the offering the
principal amount of the loan from Conexant, plus accrued interest, and a
dividend.

Intellectual Property Matters. In the separation, Conexant transferred to
us specifically identified intellectual property and other categories of
intellectual property used exclusively in or related exclusively to the Internet
infrastructure business. The separation and distribution agreement also includes
royalty-free cross licenses by each of Conexant and Spinco to the other of
rights to use intellectual property of the licensor.

Conexant Name. The separation and distribution agreement provides that
after the separation, Conexant will continue to have all rights in and to the
name "Conexant" and all derivatives thereof, except for limited rights of use
granted to us. We will change the names of our subsidiaries to eliminate the
name "Conexant" and all its derivatives.

Liabilities. In addition, under the separation and distribution agreement,
we have generally assumed all liabilities, including those relating to
intellectual property matters, to the extent they relate to current and former
operations of our business. We also assumed responsibility for all current and
future litigation, including intellectual property proceedings, against Conexant
or its subsidiaries to the extent relating to our business, except for the
Townshend and Holtz litigation matters, for which Conexant agreed to retain
liability. See "Business -- Legal Proceedings". Conexant also generally agreed
to retain all liabilities relating to environmental matters arising prior to the
separation.

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Indemnification. Under the terms of the separation and distribution
agreement, we generally will be obligated to indemnify and defend Conexant and
its affiliates and representatives for all damages, liabilities or actions
arising out of or in connection with:

- our business, including our former operations;

- the liabilities assumed by us as part of the separation;

- the breach by us of the separation and distribution agreement or any
ancillary agreement; and

- any material untrue statements or omissions in this prospectus and the
registration statement of which it is a part and in any information
statement provided to shareowners of Conexant in connection with the
distribution, except to the extent based upon or arising from information
provided by Conexant expressly for use therein.

Conexant generally will be obligated to indemnify and defend us and our
affiliates and representatives for all damages, liabilities or actions arising
out of or in connection with:

- Conexant's business, including with respect to its former operations,
other than our businesses;

- Conexant's liabilities, other than liabilities assumed by us as part of
the separation; and

- the breach by Conexant of the separation and distribution agreement or
any ancillary agreement.

Auditing Practices. So long as Conexant is required to consolidate our
results of operations and financial position, we and Conexant have agreed that:

- we will use the same independent accounting firm used by Conexant, unless
Conexant otherwise consents;

- we will use reasonable commercial efforts to enable our auditors to date
their opinion on our audited annual financial statements on the same date
as Conexant's auditors date their opinion on Conexant's financial
statements;

- we and Conexant will exchange all relevant information needed to prepare
financial statements;

- we will grant Conexant's internal auditors access our records; and

- we and Conexant will notify each other of any change in accounting
principles.

Registration Rights. Conexant cannot freely sell our shares without
registration under the Securities Act. We have granted Conexant registration
rights relating to those shares. Conexant will be able to require us to register
under the Securities Act not less than 10% of the shares of our common stock
owned by Conexant not more than once every twelve months. In addition, we have
granted Conexant piggyback registration rights so that whenever we propose to
register any of our securities under the Securities Act we will generally be
required to notify Conexant and include in the registration all shares of our
stock that Conexant requests to be included. Registration expenses incurred in
connection with the exercise of demand registration rights will generally be
paid by Conexant, while expenses incurred in connection with the exercise of
piggyback registration rights will be allocated base on the relative number of
shares registered. The demand registration rights will remain in effect with
respect to the shares covered by the agreement until the earlier of December 31,
2010 or completion of the distribution and the piggyback registration rights
will remain in effect until completion of the distribution.

Expenses. We will generally pay the costs and expenses related to this
offering and Conexant will generally pay the costs and expenses related to the
distribution.

No Solicitation or Hire. We and Conexant have agreed not to solicit,
recruit or hire employees of, or individuals providing contracting services to,
the other party for two years after the distribution date without the prior
written approval of the chief executive officers or the senior vice presidents
for human resources of both parties. These restrictions do not apply in the case
of individuals not employed by, or providing contracting services to, either
party for at least six months prior to the hiring.

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EMPLOYEE MATTERS AGREEMENT

The employee matters agreement allocates assets, liabilities, and
responsibilities relating to our current and former employees and their
participation in our stock and other benefit plans and the stock and other
benefit plans that Conexant currently sponsors and maintains.

The employee matters agreement generally requires us to establish benefit
plans on terms and conditions comparable to those contained in Conexant benefit
plans prior to the separation. Once established, we may modify or terminate our
benefit plans in accordance with the terms of the plans and our policies. None
of our benefit plans provide benefits that overlap with benefits under the
corresponding Conexant benefit plan at the time of the consummation of this
offering. Each of our benefit plans will provide that all service, compensation
and other benefit determinations that, as of the separation, were recognized
under the corresponding Conexant benefit plan will be taken into account under
that Spinco benefit plan.

Each of our benefit plans assumed liabilities relating to our current and
former employees under the corresponding Conexant benefit plan.

The employee matters agreement provides for adjustment of outstanding
options to purchase Conexant common stock, or Conexant options, granted under
the Conexant 1998 Stock Option Plan, the Conexant 1999 Long-Term Incentives
Plan, the Conexant 2000 Non-Qualified Stock Plan and the Conexant Directors
Stock Plan, as well as several other stock option plans in respect of businesses
recently acquired by us and Conexant, which we refer to collectively as the
Conexant option plans.

All Conexant options outstanding at the time of the distribution that were
granted prior to January 1, 2001 will be adjusted so that following the
distribution, each option holder will hold options to purchase shares of
Conexant common stock and options to purchase our Class A common stock, or
Spinco options. 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 (i) 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 Conexant and Spinco
options immediately after the distribution is equal to the aggregate economic
value of the Conexant options immediately prior to the distribution and (ii) for
each resulting option, the ratio of the exercise price to the fair market value
of the underlying stock remains the same immediately before and immediately
after the distribution.

Conexant options held by employees of the Internet infrastructure business
at the time of the distribution that were granted after December 31, 2000 will
be replaced with Spinco options. The number of shares the Spinco options cover
and their exercise price per share will be determined using a formula designed
to cause (i) the economic value of such Spinco options (i.e., the difference
between the aggregate fair market value of the shares of our Class A 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 Conexant 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.

Conexant options held by Conexant's employees at the time of the
distribution that were granted after December 31, 2000 will remain Conexant
options, but the number of shares they cover and the exercise price per share
will be adjusted using a formula designed to cause (i) the economic value of
such Conexant options (i.e., the difference between the aggregate fair market
value of the shares of Conexant 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 market value of Conexant common stock resulting from the distribution,
and (ii) the ratio of the exercise price to the fair market value of the
underlying Conexant common stock to remain the same immediately before and
immediately after the distribution.

The employee matters agreement allows our employees to continue to
participate in Conexant's Retirement Savings Plan until the distribution date.
We will establish, as of the distribution date, a separate retirement savings
plan for our employees. As soon as the necessary legal approvals have been
obtained, Conexant will arrange to have all of the account balances for our
employees transferred from Conexant's

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Retirement Savings Plan to our retirement savings plan. Following this transfer,
our employees generally will not be entitled to have their account balances
distributed to them until they no longer work for us, except as otherwise
permitted by our retirement savings plan or applicable law.

TAX ALLOCATION AGREEMENT

We have entered into a tax allocation agreement with Conexant that
allocates tax liabilities between Conexant and us during the period in which we
are included in Conexant's consolidated group. In general, we will be included
in Conexant's consolidated group for federal income tax purposes for so long as
Conexant owns at least 80% of the total voting power and value of our
outstanding stock. Generally, we will pay an amount to Conexant during that
period equal to the amount of taxes we would have paid if we had filed separate
federal, state and local tax returns. However, we could be liable for any income
tax liability that is incurred but not discharged by Conexant or another member
of Conexant's consolidated group.

The tax allocation agreement also allocates the liability for any taxes
that may arise in connection with separating our business from Conexant. The tax
allocation agreement provides, in general, that Conexant will be responsible for
any such taxes. However, we will be responsible for any taxes imposed on
Conexant, Spinco or Conexant shareowners as a result of either:

- the failure of the distribution by Conexant of its shares of our common
stock to qualify as a tax-free distribution for U.S. federal income tax
purposes or

- the subsequent disqualification of the distribution by Conexant of its
shares of our common stock as a tax-free transaction to Conexant for U.S.
federal income tax purposes,

if the failure or disqualification is attributable to specific post-distribution
actions by or in respect of us, our subsidiaries or our shareholders, including
any change of ownership of 50% or more in either the voting power or value of
our stock. The process for determining whether a change of ownership has
occurred under the tax rules is complex. If we do not carefully monitor our
compliance with these rules we might inadvertently cause or permit a change of
ownership to occur, triggering our obligation to indemnify Conexant under the
tax allocation agreement. In addition, our obligation to indemnify Conexant in
the event that a change of ownership causes the distribution not to be tax-free
could discourage or prevent a third party from making a proposal to acquire our
company.

In addition, we and Conexant have agreed not to take any action
inconsistent with the representations made to the IRS in connection with the
request for the tax ruling regarding the tax-free nature of the distribution,
except as required by law, unless the other party has given its prior written
consent or, in certain circumstances, a supplemental ruling permitting such
action is obtained. We and Conexant will indemnify each other with respect to
any tax liability resulting from our respective failures to comply with such
representations. If we are required to pay any of the taxes described in the two
preceding paragraphs, the payment would have a material adverse effect on our
financial position, results of operations and cash flow.

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 Spinco,
Conexant and their respective subsidiaries to the IRS for all federal taxes of
the consolidated group relating to periods through the date of distribution.

JOINT TECHNOLOGY AND MARKETING AGREEMENT

The joint technology and marketing agreement provides for our collaboration
with Conexant on standards in our voiceband modem business. The collaboration
includes representation on industry standards boards and coordinated
introduction of pre-standard features through an intercompany committee
comprised of product development engineers and general managers. We also will
jointly promote differentiated end-to-end connectivity solutions by entering
into voluntary marketing alliances to provide joint advertising, branding and
channel programs. The agreement provides for similar collaboration on standards
and coordination of introduction of pre-standard features in our respective DSL
businesses. In addition, the agreement provides for field of use restrictions on
voiceband modem technology limiting us to infrastructure applications and

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limiting Conexant to client applications. We may also create procedures and
mechanisms to share intellectual property and design tools.

TRANSITION SERVICES AGREEMENT

Under the transition services agreement, Conexant has agreed to provide us
services which prior to the offering have been provided to us by Conexant,
including services related to:

- manufacture, assembly and test of our products;

- product development and product support;

- information technology systems;

- human resources and employee benefits administration;

- buildings and facilities;

- insurance; and

- other administrative functions.

These services generally will be provided for a term of one to two years after
consummation of this offering.

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PRINCIPAL SECURITYHOLDER

Prior to this offering, all of the outstanding shares of our common stock
will be owned by Conexant. After this offering, Conexant will own shares
of Class B common stock representing approximately % of the outstanding shares
of our common stock and approximately % of the total voting power of all
outstanding shares of our common stock, or approximately % and %,
respectively, if the underwriters exercise their over-allotment option in full.
Except for Conexant, we are not aware of any person or group that will
beneficially own more than 5% of the outstanding shares of our common stock
following the offering. None of our executive officers, directors or director
nominees currently owns any shares of our common stock, but those who own shares
of Conexant common stock will be treated on the same terms as other holders of
Conexant common stock in any distribution by Conexant. See "Management -- Stock
Ownership of Directors and Executive Officers" for a description of the
ownership of Conexant common stock by our directors and executive officers.

DESCRIPTION OF CAPITAL STOCK

The following description of our capital stock includes a summary of
certain provisions of our restated certificate of incorporation and our amended
bylaws. This description is subject to the detailed provisions of, and is
qualified by reference to, our restated certificate of incorporation, as
amended, and our amended bylaws, copies of which have been filed as exhibits to
the registration statement of which this prospectus is a part.

We are authorized to issue (1) shares of Class A common stock, par value
$.01 per share, (2) shares of Class B common stock, par value $.01 per share
and (3) shares of preferred stock, without par value, of which our board of
directors has designated shares as Series A Junior Participating Preferred
Stock for issuance in connection with the exercise of our preferred share
purchase rights. For a more detailed discussion of our preferred share purchase
rights and how they relate to our common stock, see "-- Rights Plan". The
authorized shares of our Class A common stock, Class B common stock and
preferred stock will be available for issuance without further action by our
shareholders, unless such action is required by applicable law or the rules of
any stock exchange or automated quotation system on which our securities may be
listed or traded. If the approval of our shareholders is not required, our board
of directors may determine not to seek shareholder approval.

Certain of the provisions described under this section entitled
"Description of Capital Stock" could have the effect of discouraging
transactions that might lead to a change of control of Spinco. Our restated
certificate of incorporation and amended bylaws:

- establish a classified board of directors, whereby our directors are
elected for staggered terms in office so that only one-third of our
directors stand for election in any one year;

- require shareholders to provide advance notice of any shareholder
nominations of directors or any proposal of new business to be considered
at any meeting of shareholders. The advance notice procedure does not
apply to Conexant prior to the date on which Conexant ceases to
beneficially own an aggregate of at least a majority of the voting power
of the then outstanding shares of Class A common stock and Class B common
stock, or trigger date;

- after the trigger date, require a supermajority vote to remove a director
or to amend or repeal certain provisions of our restated certificate of
incorporation or amended bylaws; and

- after the trigger date, preclude shareholders from calling a special
meeting of shareholders.

COMMON STOCK

Our restated certificate of incorporation permits us to issue up to
shares of our Class A common stock and up to shares of our
Class B common stock. Conexant holds all outstanding shares of our Class B
common stock.

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Dividends. Holders of Class A common stock and Class B common stock will
share, equally on a per share basis, in all dividends declared by our board of
directors from time to time; provided that with respect to stock dividends,
holders of shares of Class A common stock will receive only shares of Class A
common stock and holders of shares of Class B common stock will receive only
shares of Class B common stock. Dividends may not be paid on Class A common
stock and Class B common stock unless all accrued dividends on preferred stock,
if any, have been paid or set aside. In the event of our liquidation,
dissolution or winding up, the holders of Class A common stock and Class B
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 preferred stock. See "Dividend
Policy".

We may not subdivide or combine shares of either class of our common stock
without at the same time proportionally subdividing or combining shares of the
other class.

Voting. Each share of Class A common stock entitles its holder to one vote
on all matters submitted to a vote of our shareholders for each share
outstanding in the holder's name and each share of Class B common stock entitles
its holder to five votes on all matters submitted to a vote of our shareholders
for each share outstanding in the holder's name. No holder of common stock will
be entitled to cumulate votes in voting for directors.

Conversion. Shares of Class B common stock are convertible into shares of
Class A common stock upon the occurrence of the following events:

- Automatically if, prior to a tax-free distribution of our shares by
Conexant or the Class B transferee referred to at the end of this
paragraph, such shares are transferred to a person other than Conexant or
one of its subsidiaries or the Class B transferee or one of its
subsidiaries. However, shares of Class B common stock representing more
than a 50% equity interest in our outstanding shares of common stock
transferred by Conexant in a single transaction to one unrelated person
will not automatically convert into shares of Class A common stock upon
such disposition. Any shares of Class B common stock retained by Conexant
following any such transfer of Class B common stock to an unrelated
person will automatically convert into shares of Class A common stock
upon such transfer. We refer to any such unrelated person as the Class B
transferee.

- Automatically if, prior to a tax-free distribution of our shares by
Conexant or the Class B transferee, another entity acquires more than 50%
of the voting power of Conexant or the Class B transferee in a merger,
consolidation or tender offer.

- Automatically (1) upon the closing of any transaction prior to a tax-free
distribution of our shares by Conexant or the Class B transferee after
which Conexant's or the Class B transferee's ownership of our common
stock falls below 50% of the aggregate number of our outstanding shares
of common stock, including both shares of Class A common stock and Class
B common stock, unless our independent directors determine prior to any
such transaction that such automatic conversion is not in our interests
or the interests of our public shareholders, and (2) in any event if,
prior to a tax-free distribution, Conexant or the Class B transferee owns
less than 30% of the aggregate number of our outstanding shares of common
stock, including both shares of Class A common stock and Class B common
stock. This provision is intended to ensure that Conexant or the Class B
transferee retains voting control only if it has a substantial economic
interest in us.

- Automatically immediately prior to a tax-free distribution of our shares
by Conexant or the Class B transferee if at such time Conexant or the
Class B transferee beneficially owns 80% or more of our economic value,
unless, prior to a tax-free distribution, Conexant or the Class B
transferee delivers to us the written advice of counsel to the effect
that (1) the conversion could adversely affect the ability of Conexant or
the Class B transferee to obtain a favorable ruling from the IRS that a
distribution would qualify as a tax-free transaction under the Code, (2)
the IRS has adopted a general non-ruling policy on tax-free spin-offs and
that the conversion could adversely affect the status of a distribution
as a tax-free transaction under the Code, or (3) the conversion will
otherwise create a significant risk of

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material adverse tax consequences to Conexant or its shareowners or to
the Class B transferee and its shareholders.

- Automatically upon the fifth anniversary of a tax-free distribution of
our shares by Conexant or the Class B transferee unless prior to a
tax-free distribution, Conexant or the Class B transferee delivers to us
the written advice of counsel to the effect that (1) the conversion could
adversely affect the ability of Conexant or the Class B transferee to
obtain a favorable ruling from the IRS that a distribution would qualify
as a tax-free transaction under the Code, (2) the IRS has adopted a
general non-ruling policy on tax-free spin-offs and that the conversion
could adversely affect the status of a distribution as a tax-free
transaction under the Code, or (3) the conversion will otherwise create a
significant risk of material adverse tax consequences to Conexant or its
shareowners or to the Class B transferee and its shareholders. If we
receive the written advice of counsel, approval of the conversion will be
submitted to a vote of our shareholders as soon as practicable after the
fifth anniversary of a tax-free distribution of our shares by Conexant or
the Class B transferee. Approval of the conversion will require the
approval of a majority of the shares of both Class A common stock and
Class B common stock present and voting together as a single class, with
each share entitled to one vote for such purpose. However, if Conexant or
the Class B transferee delivers to us prior to the fifth anniversary of a
tax-free distribution the written advice of counsel to the effect that
such vote could adversely affect the status of a distribution as a
tax-free transaction under the Code, including the ability to obtain a
favorable ruling from the IRS, such vote will not be held and no
conversion will take place.

Subject to the provisions for automatic conversion described above, holders
of our Class B common stock may voluntarily convert their shares into Class A
common stock at any time, except that following a tax-free distribution of
shares of Class B common stock, no voluntary conversion of shares of Class B
common stock may occur.

Shares of Class B common stock will not be automatically converted into
shares of Class A common stock:

- in any transfer effected in connection with a distribution of shares of
Class B common stock to shareowners of Conexant or the shareholders of
the Class B transferee in a transaction intended to qualify as a tax-free
distribution if immediately prior to such distribution Conexant or the
Class B transferee holds a greater than 80% voting interest, but less
than 80% economic interest in us, or

- in any transfer following a tax-free distribution.

Following a tax-free distribution and subject to the conversion provisions
described above, shares of Class B common stock will be transferable as Class B
common stock, subject to applicable laws.

Prior to a tax-free distribution and for so long as Conexant or any of its
subsidiaries or the Class B transferee or any of its subsidiaries owns any
shares of Class B common stock, shares of Class A common stock acquired by
Conexant or any of its subsidiaries or the Class B transferee or any of its
subsidiaries will be automatically converted into shares of Class B common
stock.

All conversions will be effected on a one-for-one basis.

Mergers and Reorganizations. All holders of shares of Class A common stock
and Class B common stock are entitled to receive equally on a per share basis
the same kind and amount of consideration in the event of any merger,
reorganization or consolidation of us with any other company.

Liquidation. All holders of shares of Class A common stock and Class B
common stock are entitled to receive equally on a per share basis all assets
available for distribution to shareholders.

Other Rights. Our restated certificate of incorporation provides that,
unless otherwise determined by our board of directors, no holder of shares of
Class A common stock or Class B common stock will have any right to purchase or
subscribe for any stock of any class which we may issue or sell.

ChaseMellon Shareholder Services, L.L.C. is the transfer agent and
registrar for our common stock.

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PREFERRED STOCK

Our restated certificate of incorporation permits us to issue up to
shares of our preferred stock in one or more series and with rights and
preferences that may be fixed or designated by our board of directors without
any further action by our shareholders. Our board of directors has designated
shares of our preferred stock as Series A Junior Participating Preferred
Stock for issuance in connection with the exercise of our preferred share
purchase rights. The powers, preferences, rights and qualifications, limitations
and restrictions of the preferred stock of any other series will be fixed by the
certificate of designation relating to such series, which will specify the terms
of the preferred stock, including:

- the terms on which dividends, if any, will be paid;

- the terms on which the shares may be redeemed, if at all;

- the terms of any retirement or sinking fund for the purchase or
redemption of the shares of the series;

- the liquidation preference, if any;

- the terms and conditions, if any, on which the shares of the series shall
be convertible into, or exchangeable for, shares of any other class or
classes of capital stock;

- the restrictions on the issuance of shares of the same series or any
other class or series; and

- the voting rights, if any, of the shares of the series.

Although our board of directors has no intention at the present time of
doing so, it could issue a series of preferred stock that could, depending on
the terms of such series, impede the completion of a merger, tender offer or
other takeover attempt.

For a description of the Series A Junior Participating Preferred Stock, see
"-- Rights Plan".

OUR RESTATED CERTIFICATE OF INCORPORATION AND AMENDED BYLAWS

Our restated certificate of incorporation and amended bylaws contain
various provisions intended to promote the stability of our shareholder base and
render unsolicited or hostile attempts to acquire control of us more difficult.

Classified Board of Directors. Our restated certificate of incorporation
provides that the number of directors is fixed by our board of directors. Other
than directors elected by the holders of any series of preferred stock or any
other series or class of stock except common stock, our directors are divided
into three classes. Each class consists as nearly as possible of an equal number
of directors. Currently, the terms of office of the three classes of directors
expire, respectively, at our annual meetings in 2002, 2003 and 2004. The term of
the successors of each class of directors expires three years from the year of
election. Directors elected by shareholders at an annual meeting of shareholders
will be elected by a plurality of all votes cast.

Fair Price Provision. Our restated certificate of incorporation contains a
fair price provision pursuant to which a business combination, as defined in our
restated certificate of incorporation, between us or one of our subsidiaries and
an interested shareholder, as defined in our restated certificate of
incorporation, requires approval by the affirmative vote of the holders of not
less than 80%, or 50.1% prior to the trigger date, of the voting power of all of
our outstanding capital stock entitled to vote generally in the election of
directors, voting together as a single class, unless the business combination is
approved by at least two-thirds of the continuing directors, as defined in our
restated certificate of incorporation, or certain fair price criteria and
procedural requirements specified in the fair price provision are met. If either
the requisite approval of our board of directors or the fair price criteria and
procedural requirements are met, the business combination would be subject to
the voting requirements otherwise applicable under the Delaware General
Corporation Law, which for most types of business combinations currently would
be the affirmative vote of the holders of a majority of all of our outstanding
shares of stock entitled to vote thereon. After the trigger date, 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% of the voting power of all of our

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outstanding capital stock entitled to vote generally in the election of
directors, 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 Delaware General Corporation Law would require
the affirmative vote of the holders of a majority of the outstanding shares of
our capital stock entitled to vote thereon.

Specific Meetings; Written Consent. Our restated certificate of
incorporation and amended bylaws provide that after the trigger date a special
meeting of shareholders may be called only by a resolution adopted by a majority
of the entire board of directors. After the trigger date, shareholders are not
permitted to call, or to require that the board of directors call, a special
meeting of shareholders. Moreover, the business permitted to be conducted at any
special meeting of shareholders is limited to the business brought before the
meeting pursuant to the notice of the meeting given by us. In addition, our
certificate provides that after the trigger date any action taken by our
shareholders must be effected at an annual or special meeting of shareholders
and may not be taken by written consent instead of a meeting. Our amended bylaws
establish an advance notice procedure for shareholders to nominate candidates
for election as directors or to bring other business before meetings of our
shareholders. The advance notice procedure does not apply to Conexant prior to
the trigger date.

Our restated certificate of incorporation provides that after the trigger
date the affirmative vote of at least 80% of the voting power of all of our
outstanding capital stock entitled to vote generally in the election of
directors, voting together as a single class, would be required to amend or
repeal the provisions of our restated certificate of incorporation with respect
to:

- the election of directors;

- the right to call a special shareholders meeting;

- the right to act by written consent;

- amending our restated certificate of incorporation or amended bylaws; or

- the right to adopt any provision inconsistent with the preceding
provisions.

In addition, our restated certificate of incorporation provides that our board
of directors may make, alter, amend and repeal our amended bylaws and that the
amendment or repeal by shareholders of any of our amended bylaws after the
trigger date would require the affirmative vote of at least 80% of the voting
power described above, voting together as a single class.

CORPORATE OPPORTUNITY AND CONFLICT OF INTEREST POLICIES

Our restated certificate of incorporation contains provisions to address
some potential conflicts of interest between Spinco and Conexant. In general,
these provisions recognize that we and Conexant and our and their subsidiaries
may engage in the same or similar activities and lines of business and may have
an interest in the same corporate opportunities. These provisions recognize that
we and Conexant and our and their subsidiaries will continue to have contractual
and business relations with each other even after the distribution.

CORPORATE OPPORTUNITY POLICY

Our restated certificate of incorporation provides that Conexant will have
the right to engage in the same or similar business activities or lines of
business as our company.

Neither Conexant nor any of its officers or directors will be liable to us
or our shareholders for any breach of fiduciary duty by reason of these
activities. In addition, if Conexant learns of a potential transaction or matter
that may be a corporate opportunity for both Conexant and our company, Conexant
will have no duty to communicate or offer that opportunity to us. Conexant will
not be liable to us or our shareholders because Conexant pursues or acquires
that corporate opportunity for itself, directs that corporate opportunity to
another person or entity or does not present that corporate opportunity to us.

If one of our directors or officers who is also a director or officer of
Conexant learns of a potential transaction or matter that may be a corporate
opportunity for both our company and Conexant, our restated

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certificate of incorporation requires that our director or officer act in a
manner consistent with the following three-part policy:

- A corporate opportunity offered to any person who is a director but not
an officer of our company and who is also an officer, whether or not a
director, of Conexant will belong to Conexant, unless the opportunity is
expressly offered to that person primarily in his or her capacity as a
director of our company, in which case the opportunity will belong to our
company.

- A corporate opportunity offered to any person who is an officer, whether
or not a director, of our company and who is also a director but not an
officer of Conexant will belong to our company, unless the opportunity is
expressly offered to that person primarily in his or her capacity as a
director of Conexant, in which case the opportunity will belong to
Conexant.

- A corporate opportunity offered to any other person who is either an
officer of both our company and Conexant or a director of both our
company and Conexant will belong to Conexant or to our company, as the
case may be, if the opportunity is expressly offered to the person
primarily in his or her capacity as an officer or director of Conexant or
of our company, respectively. Otherwise, the opportunity will belong to
Conexant.

Under our restated certificate of incorporation, any corporate opportunity
that belongs to Conexant or to our company pursuant to the foregoing policy will
not be pursued by the other party, or directed by the other to another person or
entity, unless and until Conexant or our company, as the case may be, determines
not to pursue the opportunity. If the party to whom the corporate opportunity
belongs does not, however, within a reasonable period of time, begin to pursue,
or thereafter continue to pursue, such opportunity diligently and in good faith,
the other party may pursue such opportunity, or direct it to another person or
entity.

A director or officer of our company who follows the three-part policy
above will be considered to have acted in good faith and fully to have satisfied
his or her fiduciary duties to our company and our shareholders with respect to
that opportunity.

CONFLICT OF INTEREST POLICY

Our restated certificate of incorporation provides that no contract,
agreement, arrangement or transaction between

- our company and Conexant,

- our company and any entity in which one or more of our directors has a
financial interest, referred to as a related entity, or

- our company and one or more of the directors or officers of our company,
Conexant or any related entity

will be voidable solely because (1) Conexant, any related entity or any one or
more of the officers or directors of our company, Conexant or any related entity
are parties to it, (2) any of those directors or officers are present at or
participate in the meeting of our board of directors or committee of the board
which authorizes the contract, agreement, arrangement, transaction, or (3) their
votes are counted for that purpose, if one of the following three requirements
is met:

- the material facts of the transaction are disclosed or known to our board
of directors or the committee of our board that authorizes the
transaction, and our board of directors or that committee in good faith
approves the transaction by a majority vote of the disinterested
directors on our board or that committee, even if the disinterested
directors are less than a quorum;

- the material facts of the transaction are disclosed or known to the
holders of our capital stock entitled to vote on the transaction, and the
transaction is specifically approved by the vote of the holders of a
majority of our then outstanding capital stock not owned by Conexant or
the related entity, voting together as a single class; or

- the transaction is fair to us as of the time it is approved by our board
of directors, a committee of our board or our shareholders.
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RIGHTS PLAN

Each outstanding share of our Class A common stock and Class B common stock
also evidences one preferred share purchase right. Each preferred share purchase
right entitles the registered holder to purchase from us one one-hundredth of a
share of Series A junior participating preferred stock, at $ , subject to
adjustment. The description and terms of the preferred share purchase rights are
set forth in our rights agreement.

Until the earlier to occur of (1) 10 days following a public announcement
that a person or group of affiliated or associated persons, other than Conexant,
has acquired beneficial ownership of 15% or more of the voting power of all of
our outstanding capital stock, or an "Acquiring Person", or (2) 10 business
days, or such later date as may be determined by our 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 15% or more of the voting power of all of our
outstanding capital stock, preferred share purchase rights will be attached to
common stock and will be owned by the registered owners of common stock.

The rights agreement provides that, until the preferred share purchase
rights are no longer attached to the common stock, or until the earlier
redemption or expiration of the preferred share purchase rights:

- the preferred share purchase rights will be transferred with and only
with common stock;

- certificates representing Class A common stock and Class B common stock
and statements in respect of shares of Class A common stock and Class B
common stock registered in book-entry or uncertificated form will contain
a notation incorporating by reference the terms of the preferred share
purchase rights; and

- the transfer of any shares of Class A common stock and Class B common
stock will also constitute the transfer of the associated preferred share
purchase rights.

As soon as practicable following the date the preferred share purchase rights
are no longer attached to the common stock, separate certificates evidencing
preferred share purchase rights will be mailed to holders of record of common
stock as of the close of business on the date the preferred share purchase
rights are no longer attached to the common stock and the separate certificates
alone will evidence preferred share purchase rights.

In addition, the rights agreement provides that in connection with the
issuance or sale of our common stock following the date the rights separate from
the common stock and prior to the earlier of (1) the date the preferred share
purchase rights are redeemed and (2) the date the preferred share purchase
rights expire, (a) we will, with respect to common stock issued or sold pursuant
to the exercise of stock options or under any employee plan or arrangement in
existence prior to the date the rights separate from the common stock, or upon
the exercise, conversion or exchange of securities, notes or debentures, under
the terms thereof issued by us and in existence prior to the date the rights
separate from the common stock, and (b) we may, in any other case, if deemed
necessary or appropriate by the board of directors, issue certificates
representing the appropriate number of preferred share purchase rights in
connection with such issuance or sale. We will not be obligated to issue any of
these certificates if, and to the extent that, we are advised by counsel that
the issuance of those certificates would create a significant risk of material
adverse tax consequences to us or the person to whom such certificate would be
issued or would create a significant risk that the stock options or employee
plans or arrangements would fail to qualify for otherwise available special tax
treatment. In addition, no certificate will be issued if, and to the extent
that, appropriate adjustments otherwise have been made instead of the issuance
thereof.

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Preferred share purchase rights will not be exercisable until the trigger
date. Preferred share purchase rights will expire on , 2011, unless this
expiration date is extended or unless preferred share purchase rights are
earlier redeemed by us, in each case, as described below.

The purchase price payable, and the number of shares of Series A junior
preferred stock or other securities or property issuable, upon exercise of the
preferred share purchase rights will be subject to adjustment from time to time
to prevent dilution upon the occurrence of the following events:

- in the event of a stock dividend on, or a subdivision, combination or
reclassification of, Series A junior preferred stock;

- upon the grant to holders of shares of Series A junior preferred stock of
rights or warrants to subscribe for or purchase shares of Series A junior
preferred stock at a price, or securities convertible into shares of
Series A junior preferred stock with a conversion price, less than the
then current market price of the shares of Series A junior preferred
stock; or

- upon the distribution to holders of shares of Series A junior preferred
stock of evidences of indebtedness or assets, excluding regular periodic
cash dividends or dividends payable in shares of Series A junior
preferred stock, or of subscription rights or warrants, other than those
referred to above.

The number of outstanding preferred share purchase rights and the number of
one one-hundredth of a share of Series A junior preferred stock issuable upon
exercise of each preferred share purchase right will also be subject to
adjustment in the event of a stock split of common stock or a stock dividend on
common stock payable in common stock or subdivisions, consolidations or
combinations of common stock occurring, in any such case, prior to the date the
preferred share purchase rights are no longer attached to the common stock.

We cannot redeem shares of Series A junior preferred stock purchasable upon
exercise of preferred share purchase rights. Each share of Series A 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 common stock whenever such dividend is
declared. In the event of liquidation, the holders of Series A 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 common stock. Each share of Series A junior preferred stock will
have 100 votes, voting together with common stock. In the event of any merger,
consolidation or other transaction in which shares of common stock are
exchanged, each share of Series A junior preferred stock will be entitled to
receive 100 times the amount received per share of common stock. These rights
will be protected by customary antidilution provisions.

Because of the nature of the Series A junior preferred stock's dividend,
liquidation and voting rights, the value of each one-hundredth interest in a
share of Series A junior preferred stock purchasable upon exercise of each
preferred share purchase right should approximate the value of one share of
common stock.

In the event that, at any time after a person has become an acquiring
person, we are acquired in a merger or other business combination transaction or
50% or more of our consolidated assets or earning power is sold, proper
provision will be made so that each holder of a preferred share purchase right
will thereafter have the right to receive, upon the exercise thereof at the then
current exercise price of a preferred share purchase 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 a
preferred share purchase right. In the event that any person becomes an
acquiring person, proper provision shall be made so that each holder of a
preferred share purchase right, other than preferred share purchase rights
beneficially owned by the acquiring person, which will thereafter be void, will
thereafter have the right to receive upon exercise, instead of shares of Series
A junior preferred stock, that number of shares of common stock having a market
value of two times the exercise price of a preferred share purchase right.

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 voting power of all of our outstanding capital
stock, our board of directors may exchange preferred share purchase rights,
other than preferred share

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purchase rights owned by such person or group, which will have become void after
such person became an acquiring person, for common stock or Series A junior
preferred stock, in whole or in part, at an exchange ratio of one share of
common stock, or one one-hundredth of a share of Series A junior preferred
stock, or of a share of another series of preferred stock having equivalent
rights, preferences and privileges, per preferred share purchase right, subject
to adjustment.

Generally, no adjustment in the purchase price will be required until
cumulative adjustments require an adjustment of at least 1%. No fractional
shares of Series A junior preferred stock will be issued, other than fractions
which are integral multiples of one one-hundredth of a share of Series A junior
preferred stock, which may, at our election, be evidenced by depository
receipts. Instead, an adjustment in cash will be made based on the market price
of Series A 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 15% or more of the voting power of
all of our outstanding capital stock, our board of directors may redeem
preferred share purchase rights in whole, but not in part, at a price of $.01
per preferred share purchase right. The redemption of preferred share purchase
rights may be made effective at the time, on the basis and with the conditions
that our board of directors may determine, in its sole discretion. Immediately
upon any redemption of preferred share purchase rights, the right to exercise
preferred share purchase rights will terminate and the only right of the holders
of preferred share purchase rights will be to receive the redemption price.

The terms of preferred share purchase rights may be amended by our board of
directors without the consent of the holders of preferred share purchase rights,
including an amendment to decrease the threshold at which a person becomes an
acquiring person from 15% to not less than 10%, except that from and after the
time that any person becomes an acquiring person no amendment may adversely
affect the interests of the holders of preferred share purchase rights.

Until a preferred share purchase right is exercised, the holder thereof
will have no rights as a shareholder of Spinco, including, without limitation,
the right to vote or to receive dividends.

The foregoing summary of the material terms of preferred share purchase
rights is qualified by reference to the rights agreement, a copy of which is
filed as an exhibit to the registration statement of which this prospectus is a
part.

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SHARES ELIGIBLE FOR FUTURE SALE

Prior to the offering, there has been no public market for our Class A
common stock and we cannot predict the effect, if any, that the sale or
availability for sale of shares of additional Class A common stock will have on
the market price of the common stock. Future sales of substantial amounts of
common stock in the public market, or the perception that such sales could
occur, could materially and adversely affect the market price of our Class A
common stock and could impair our future ability to raise capital through an
offering of our equity securities.

All of the shares of our Class A common stock sold in this offering
will be freely tradable without restriction under the Securities Act, except for
any shares that may be acquired by an affiliate of us, as that term is defined
in Rule 144 under the Securities Act. Persons who may be deemed to be affiliates
generally include individuals or entities that control, are controlled by, or
are under common control with us and may include our directors and officers, as
well as our significant shareholders, if any.

Conexant may, in its sole discretion, upon conditions determined by its
board to be favorable to it and its shareowners, distribute to its shareowners
our common stock that it owns. We do not expect that Conexant will consummate
the distribution unless it receives a private letter ruling from the IRS
confirming that the distribution will be tax-free to Conexant and its
shareowners. Shares of our common stock distributed to Conexant shareowners in
the distribution generally will be freely transferable, except for shares of
common stock received by persons who may be deemed to be affiliates of us.
Persons who are affiliates will be permitted to sell the shares of common stock
that are issued in this offering or that they receive in the distribution only
through registration under the Securities Act, or under an exemption from
registration, such as the one provided by Rule 144.

The shares of our Class B common stock held by Conexant are deemed
"restricted securities" as defined in Rule 144, and may not be sold other than
through registration under the Securities Act or under an exemption from
registration, such as the one provided by Rule 144 promulgated under the
Securities Act. Conexant and our directors and executive officers have agreed
not to offer or sell any shares of our common stock, subject to exceptions, for
a period of 180 days after the date of this prospectus, without the prior
written consent of Credit Suisse First Boston Corporation and Morgan Stanley &
Co. Incorporated on behalf of the underwriters. See "Underwriters". Pursuant to
the registration rights included in the separation and distribution agreement
described above we may be obligated to register shares of our common stock for
sale by Conexant.

We have reserved shares of our Class A common stock for issuance under
our option plans. We currently expect to file one or more registration
statements under the Securities Act at or about the time of the completion of
this offering to register shares reserved for issuance under our option plans,
other than the 2001 Plan. Shares issued pursuant to awards after the effective
dates of such registration statements, other than shares issued to affiliates,
generally will be freely tradable without further registration under the
Securities Act. We also currently expect to file one or more registration
statements at or about the time of the distribution to register shares of our
stock that may be issued under our 2001 Plan upon exercise of options issued by
us upon adjustment of Conexant options. Shares issued pursuant to such options
will also be freely tradable without registration under the Securities Act after
the effective dates of such registration statements.

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MATERIAL UNITED STATES FEDERAL TAX CONSEQUENCES
TO NON-UNITED STATES HOLDERS

We have been advised by Chadbourne & Parke LLP, counsel to Spinco, that the
following discussion sets forth the material U.S. federal income, estate and
withholding tax considerations applicable to non-United States Holders, as
defined below, arising from the ownership and disposition of our common stock,
but does not purport to be a complete analysis of all the potential tax
considerations relating thereto.

For purposes of this summary, a non-United States Holder is generally a
beneficial owner of our common stock who is an individual, corporation, estate
or trust and who is not (1) a citizen or resident of the United States, (2) a
corporation created or organized in or under the laws of the United States, or
of any political subdivision thereof, or (3) an estate or trust the income of
which is subject to U.S. federal income tax regardless of its source.

This summary is for general information and applies only to non-United
States Holders that hold our common stock as a capital asset. It does not
address all aspects of U.S. federal taxation that may be applicable to a
particular holder in light of such holder's particular circumstances. In
addition, this discussion does not address the U.S. federal tax consequences to
holders subject to special provisions of U.S. federal tax law, such as holders
who acquired our common stock through the exercise of employee stock options or
otherwise as compensation for services, tax-exempt organizations, financial
institutions, insurance companies, broker-dealers, persons holding our common
stock through a partnership or other entity that is treated as a "pass-through
entity" for U.S. federal income tax purposes, persons having a "functional
currency" other than the United States dollar, persons holding our common stock
as part of a straddle, wash sale, hedging or conversion transaction and holders
of our common stock that own, whether directly, indirectly or by attribution,
10% or more of the outstanding shares of our common stock.

This summary is based on current provisions of the Internal Revenue Code,
the current and proposed Treasury regulations promulgated under the Internal
Revenue Code, and judicial and administrative interpretations of each as of the
date of this prospectus, all of which are subject to change, possibly on a
retroactive basis. No advance ruling has been or will be sought or obtained from
the IRS regarding the tax consequences of the ownership and disposition of our
Class A common stock.

HOLDERS ARE URGED TO CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE UNITED
STATES FEDERAL, STATE AND LOCAL AND FOREIGN INCOME AND ESTATE TAX CONSEQUENCES
OF THE OWNERSHIP OF OUR COMMON STOCK.

DISPOSITION OF OUR COMMON STOCK

Subject to the discussion below, a non-United States Holder generally will
not be required to pay U.S. federal income tax on gain, if any, recognized on
the sale or exchange of shares of our common stock, unless (1) the gain is
effectively connected with a trade or business of the non-United States Holder
in the United States, and where a tax treaty applies, is attributable to a
permanent establishment maintained by the non-United States Holder in the United
States, (2) in the case of a non-United States Holder who is an individual and
who holds our common stock as a capital asset, such holder is present in the
United States for 183 days or more in the taxable year of disposition, and other
conditions are satisfied, or (3) the non-United States Holder is subject to tax
pursuant to the provisions of the Internal Revenue Code applicable to certain
United States expatriates.

An individual non-United States Holder who falls under clause (1) or (3)
above will, unless an applicable treaty provides otherwise, be taxed on his or
her net gain derived from the sale under regular graduated U.S. federal income
tax rates. An individual non-United States Holder who falls under clause (2)
above will be subject to a flat 30% tax on the gain derived from the exchange or
sale, which may be offset by certain United States source capital losses
(notwithstanding the fact that he or she is not considered a resident of the
United States).

A non-United States Holder that is a foreign corporation falling under
clause (1) above will be taxed on its gain under regular graduated U.S. federal
income tax rates and may be subject to an additional branch profits tax equal to
30% of its effectively connected earnings and profits within the meaning of the
Internal

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Revenue Code for the taxable year, as adjusted for certain items, unless it
qualifies for a lower rate under an applicable income tax treaty.

DIVIDENDS

In the event that dividends are paid on shares of our common stock,
dividends paid to a non-United States Holder of our common stock will be subject
to withholding of U.S. federal income tax at a 30% rate or such lower rate as
may be specified by an applicable income tax treaty. However, if (1) dividends
are effectively connected with the conduct of a trade or business by the
non-United States Holder within the United States and, where a tax treaty
applies, are attributable to a U.S. permanent establishment of the non-United
States Holder and (2) an IRS Form W-8ECI is filed with the payer, the dividends
are not subject to withholding tax, but instead are subject to U.S. federal
income tax on a net basis at applicable graduated individual or corporate rates.
A non-United States Holder who provides an IRS Form W-8ECI must also provide its
U.S. taxpayer identification number under Treasury Regulations effective
December 31, 2000 (the "Final Withholding Tax Regulations"). Any such
effectively connected dividends received by a foreign corporation may, in some
circumstances, be subject to an additional branch profits tax at a rate of 30%
or such lower rate as may be specified by an applicable income tax treaty.

In order to claim the benefits of a lower treaty rate, the Final
Withholding Tax Regulations provide that a non-United States Holder must comply
with certification procedures, or, in the case of payments made outside the
United States with respect to an offshore account, specified documentary
evidence procedures, directly or through an intermediary to obtain the benefits
of a reduced rate under an income tax treaty. A non-United States Holder
generally certifies its entitlement to benefits under a treaty by providing an
IRS Form W-8BEN, which under the Final Withholding Tax Regulations must also
include the United States Holder's U.S. taxpayer identification number. In
addition, where dividends are paid to a non-United States Holder that is a
partnership or other pass-through entity, persons holding an interest in the
entity generally will need to provide the certification.

A non-United States Holder of our common stock eligible for a reduced rate
of U.S. withholding tax pursuant to an income tax treaty may obtain a refund of
any excess amounts withheld by filing an appropriate claim for refund with the
IRS.

INFORMATION REPORTING AND BACKUP WITHHOLDING

Under Treasury regulations, we must report annually to the IRS and to each
non-United States Holder the amounts of dividends paid to such holder and the
tax withheld with respect to such dividends, regardless of whether withholding
was required. Copies of the information returns reporting such dividends and
withholding may also be made available to tax authorities in the country where
the non-United States Holder resides under the provisions of an applicable
income tax treaty.

A backup withholding tax is imposed at the rate of 31% on certain payments
to persons that fail to furnish specified identifying information to the payer.
Under the Final Withholding Tax Regulations, dividends paid after December 31,
2000 to a non-United States Holder generally will be subject to withholding tax
at a 31% rate unless specified certification procedures, or in the case of
payments made outside the United States with respect to an offshore account,
specified documentary evidence procedures, are complied with, directly or
through an intermediary. A non-United States Holder generally certifies its
non-U.S. status by providing an IRS Form W-8BEN. The Final Withholding Tax
Regulations provide specified presumptions as to whether withholding is required
unless we receive certification from the holder of the non-United States
Holder's non-U.S. status.

Payment of the proceeds of the sale or other disposition of our common
stock by or through a U.S. office of a broker is subject to both backup
withholding and information reporting unless the beneficial owner provides the
payer with its name and address and certifies under penalties of perjury that it
is a non-United States Holder, or otherwise establishes an exemption. In
general, backup withholding and information reporting will not apply to a
payment of the proceeds of a sale or other disposition of our common stock by or
through a foreign office of a broker. If, however, such broker is, for U.S.
federal income tax purposes, a U.S.

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person, a controlled foreign corporation or a foreign person that derives 50% or
more of its gross income for certain periods from the conduct of a trade or
business in the United States, or a foreign partnership in specified
circumstances, such payments will be subject to information reporting but not
backup withholding, unless (1) such broker has documentary evidence in its
records that the beneficial owner is a non-United States Holder and certain
other conditions are met or (2) the beneficial owner otherwise establishes an
exemption.

Any amount withheld under the backup withholding rules generally will be
allowed as a refund or a credit against such holder's U.S. federal income tax
liability provided the required information is furnished in a timely manner to
the IRS.

FEDERAL ESTATE TAX

Our common stock held by an individual non-United States Holder at the time
of death will be included in such holder's gross estate for U.S. federal estate
tax purposes regardless of such holder's residence, unless an applicable estate
tax treaty provides otherwise.

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UNDERWRITERS

Under the terms and subject to the conditions contained in an underwriting
agreement dated the date of this prospectus, the underwriters named below, for
whom Credit Suisse First Boston Corporation and Morgan Stanley & Co.
Incorporated are acting as representatives, have severally agreed to purchase,
and we have agreed to sell to them, severally, the number of shares of Class A
common stock indicated below:

<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
---- ---------
<S> <C>
Credit Suisse First Boston Corporation......................
Morgan Stanley & Co. Incorporated...........................
Total.............................................
</TABLE>

The underwriters are offering the shares of Class A common stock subject to
their acceptance of the shares from us and subject to prior sale. The
underwriting agreement provides that the obligations of the several underwriters
to pay for and accept delivery of the shares of Class A common stock offered by
this prospectus are subject to the approval of legal matters by their counsel
and to other conditions. The underwriters are obligated to take and pay for all
of the shares of Class A common stock offered by this prospectus, other than
those covered by the underwriters' over-allotment option described below, if any
such shares are taken.

The underwriters initially propose to offer part of the shares of Class A
common stock directly to the public at the initial public offering price listed
on the cover page of this prospectus and part to other dealers at a price that
represents a concession not in excess of $ a share under the public offering
price. Any underwriter may allow, and the dealers may reallow, a concession not
in excess of $ a share to other underwriters or to certain dealers. After
the initial offering of the shares of Class A common stock, the offering price
and other selling terms may from time to time be varied by the representatives.

We have granted to the underwriters an option, exercisable for 30 days from
the date of this prospectus, to purchase up to an aggregate of
additional shares of Class A common stock at the initial public offering price
listed on the cover page of this prospectus, less underwriting discounts and
commissions. The underwriters may exercise this option solely for the purpose of
covering over-allotments, if any, made in connection with this offering of
shares of Class A common stock. To the extent this over-allotment option is
exercised, each underwriter will become obligated to purchase about the same
percentage of additional shares of Class A common stock as the number listed
next to each underwriter's name in the preceding table bears to the total number
of shares of Class A common stock listed next to the names of all underwriters
in the preceding table. If the underwriters' option is exercised in full, the
total price to the public would be $ , the total underwriters'
discounts and commissions would be $ and total proceeds to Spinco would
be $ .

The underwriters have informed us that they do not intend sales to
discretionary accounts to exceed five percent of the total number of shares of
Class A common stock offered by them.

We have applied for quotation of our Class A common stock on the Nasdaq
National Market under the symbol " ".

At our request, the underwriters have reserved for sale at the initial
public offering price up to shares of Class A common stock to
customers, business associates and other persons with strategic or other
relationships designated by us. We cannot assure that any of the reserved shares
will be purchased. The number of shares of Class A common stock available for
sale to the general public in this offering will be reduced to the extent these
persons purchase the reserved shares. Any reserved shares not so purchased will
be offered by the underwriters to the general public on the same terms as the
other shares offered in this prospectus.

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Each of Spinco, Conexant and directors and officers of Spinco has agreed
that, without the prior written consent of Credit Suisse First Boston
Corporation and Morgan Stanley & Co. Incorporated on behalf of the underwriters,
he, she or it will not, during the period ending 180 days after the date of this
prospectus:

- offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, lend, or otherwise transfer or dispose of,
directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock; or

- enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of common
stock;

whether any such transaction described above is to be settled by delivery of
common stock or such other securities, in cash or otherwise.

The restrictions described in the previous paragraph do not apply to:

- the sale of shares to the underwriters;

- the issuance by us of shares of our Class A common stock upon the
exercise of an option or a warrant or the conversion of a security
outstanding on the date of this prospectus of which the underwriters have
been advised in writing;

- the granting by us of stock options pursuant to adjustments to be made to
Conexant options in connection with the distribution, and the issuance by
us of shares of common stock upon the exercise of any such options;

- the granting of stock options or shares of restricted stock pursuant to
our existing employee benefit plans, provided that such options do not
become exercisable and such shares of restricted stock do not vest during
such 180-day period;

- the issuance by us of shares of common stock pursuant to our existing
employee stock purchase plans;

- the issuance by us of shares of common stock pursuant to our or
Conexant's savings plans;

- the issuance by us of shares of our Class A common stock having a value
of up to $15 million, based on the offering price set forth on the cover
of this prospectus, pursuant to the settlement agreement with Brent
Townshend;

- transactions by any person other than us relating to shares of common
stock or other securities acquired in the open market or other
transactions after the completion of this offering; or

- transactions in shares of Conexant's common stock.

In order to facilitate this offering, the underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the Class
A common stock. Specifically, the underwriters may over-allot in connection with
this offering, creating a short position in the Class A common stock for their
own account. In addition, to cover over-allotments or to stabilize the price of
the Class A common stock, the underwriters may bid for, and purchase, shares of
Class A common stock in the open market. Finally, the underwriting syndicate may
reclaim selling concessions allowed to an underwriter or a dealer for
distributing the Class A common stock in this offering if the syndicate
repurchases previously distributed shares of Class A common stock in
transactions to cover syndicate short positions, in stabilization transactions
or otherwise. Any of these activities may stabilize or maintain the market price
of the Class A common stock above independent market levels. The underwriters
are not required to engage in these activities, and may end any of these
activities at any time.

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A prospectus in electronic format may be made available on the web sites
maintained by one or more of the underwriters participating in this offering.
The representatives may agree to allocate a number of shares to underwriters for
sale to their online brokerage account holders. Internet distributions will be
allocated by the underwriters that will make internet distributions on the same
basis as other allocations. Credit Suisse First Boston Corporation may effect an
on-line distribution through its affiliate, DLJdirect, Inc., an on-line
broker/dealer, as a selling group member.

From time to time, certain of the underwriters have engaged in transactions
with and have provided, and may continue to provide, investment banking and
other services to each of Spinco and Conexant. Credit Suisse First Boston
Corporation and Morgan Stanley & Co. Incorporated each currently provides
investment banking services to Conexant. An affiliate of Credit Suisse First
Boston Corporation is the administrative agent, the collateral agent and a
lender to Conexant under its existing bank credit facility.

We and the underwriters have agreed to indemnify each other against
specified liabilities, including liabilities under the Securities Act. We have
generally agreed to pay the costs and expenses relating to this offering.

PRICING OF THE OFFERING

Prior to this offering, there has been no public market for the shares of
Class A common stock. The initial public offering price for the shares of Class
A common stock offered by this prospectus was determined by negotiations between
the representatives and us. In determining the initial public offering price of
the Class A common stock, the representatives will consider, among other things
and in addition to prevailing market conditions:

- our sales, earnings and our other financial and operating information in
recent periods;

- our capital structure;

- estimates of our business potential and earnings prospects;

- an overall assessment of our management; and

- the consideration of the above factors in relation to market valuations
of companies in related businesses.

The estimated initial public offering price range set forth on the cover page of
this preliminary prospectus is subject to change as a result of market
conditions and other factors.

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NOTICE TO CANADIAN RESIDENTS

RESALE RESTRICTIONS

The distribution of Class A common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of Class A common stock are effected. Accordingly, any resale of Class A
common stock in Canada must be made in accordance with applicable securities
laws which will vary depending on the relevant jurisdiction, and which may
require resales to be made in accordance with available statutory exemptions or
pursuant to a discretionary exemption granted by the applicable Canadian
securities regulatory authority. Purchasers are advised to seek legal advice
prior to any resale of Class A common stock.

REPRESENTATIONS OF PURCHASERS

Each purchaser of Class A common stock in Canada who receives a purchase
confirmation will be deemed to represent to us and the dealer from whom such
purchase confirmation is received that

- the purchaser is entitled under applicable provincial securities laws to
purchase Class A common stock without the benefit of a prospectus
qualified under such securities laws;

- where required by law, the purchaser is purchasing as principal and not
as agent; and

- the purchaser has reviewed the text above under "Resale Restrictions".

RIGHTS OF ACTION (ONTARIO PURCHASERS)

The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.

ENFORCEMENT OF LEGAL RIGHTS

All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be possible
for Canadian purchasers to effect service of process within Canada upon the
issuer or such persons. All or a substantial portion of the assets of the issuer
and such persons may be located outside of Canada and, as a result, it may not
be possible to satisfy a judgment against the issuer or such persons in Canada
or to enforce a judgment obtained in Canadian courts against the issuer or such
persons outside of Canada.

NOTICE TO BRITISH COLUMBIA RESIDENTS

A purchaser of Class A common stock to whom the Securities Act (British
Columbia) applies is advised that the purchaser is required to file with the
British Columbia Securities Commission a report within ten days of the sale of
any Class A common stock acquired by such purchaser pursuant to this offering.
Such report must be in the form attached to British Columbia Securities
Commission Blanket Order BOR #95/17, a copy of which may be obtained from us.
Only one such report must be filed in respect of Class A common stock acquired
on the same date and under the same prospectus exemption.

TAXATION AND ELIGIBILITY FOR INVESTMENT

Canadian purchasers of Class A common stock should consult their own legal
and tax advisors with respect to the tax consequences of an investment in Class
A common stock in their particular circumstances and with respect to the
eligibility of Class A common stock for investment by the purchaser under
relevant Canadian legislation.

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LEGAL MATTERS

The validity of the issuance of the shares of Class A common stock offered
by this prospectus will be passed upon for us by Chadbourne & Parke LLP, New
York, New York. Certain legal matters will be passed upon for the underwriters
by Latham & Watkins, Menlo Park, California.

EXPERTS

The consolidated financial statements of Conexant Spinco, Inc. as of
September 30, 1999 and 2000 and for each of the three years in the period ended
September 30, 2000, included in this prospectus and the related financial
statement schedule included elsewhere in the registration statement have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
reports appearing herein and elsewhere in the registration statement, and have
been so included in reliance upon the reports of such firm given upon their
authority as experts in accounting and auditing.

The consolidated financial statements of Maker Communications, Inc.
included in this prospectus have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.

The consolidated financial statements of HotRail, Inc. as of June 29, 2000
and for the period from July 1, 1999 through June 29, 2000, included in this
prospectus have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report appearing herein, and have been so included in reliance
upon the report of such firm given upon their authority as experts in accounting
and auditing.

The financial statements of HotRail, Inc. as of June 30, 1999 and 1998 and
for each of the two years in the period ended June 30, 1999 included in this
prospectus have been so included in reliance on the report (which contains an
explanatory paragraph relating to HotRail, Inc.'s ability to continue as a going
concern as described in Note 1 to the financial statements) of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.

The consolidated financial statements of Microcosm Communications Limited
as of December 31, 1999 and for the period January 1, 1999 to December 31, 1999,
included in this prospectus have been audited by Deloitte & Touche, chartered
accountants and registered auditors, as stated in their report appearing herein,
and are included in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.

The consolidated financial statements of Novanet Semiconductor Ltd. as of
September 30, 2000 and for the nine months ended September 30, 2000 included in
this prospectus have been audited by Goldstein Sabo & Tevet, independent
auditors, as stated in their report appearing herein, and are included in
reliance upon the reports of such firm given upon their authority as experts in
accounting and auditing.

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WHERE YOU CAN FIND MORE INFORMATION

We have filed with the Securities and Exchange Commission, Washington, D.C.
20549, a registration statement on Form S-1 under the Securities Act with
respect to the Class A common stock offered hereby. This prospectus does not
contain all of the information set forth in the registration statement and the
exhibits and schedules to the registration statement. Some items are omitted in
accordance with the rules and regulations of the SEC. For further information
about Spinco and our Class A common stock, reference is made to the registration
statement and the exhibits and any schedules to the registration statement.
Statements contained in this prospectus as to the contents of any contract or
other document referred to are not necessarily complete and in each instance, if
the contract or document is filed as an exhibit, reference is made to the copy
of the contract or other documents filed as an exhibit to the registration
statement, each statement being qualified in all respects by such reference. A
copy of the registration statement, including the exhibits and schedules to the
registration statement, may be read and copied at the SEC's Public Reference
Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Information on the
operation of the Public Reference Room may be obtained by calling the SEC at
1-800-SEC-0330. In addition, the SEC maintains an Internet site at
http://www.sec.gov, from which interested persons can electronically access the
registration statement, including the exhibits and any schedules to the
registration statement.

As a result of this offering, we will become subject to the full
informational requirements of the Exchange Act. We will fulfill our obligations
with respect to those requirements by filing periodic reports and other
information with the SEC. We intend to furnish our shareholders with annual
reports containing consolidated financial statements certified by an independent
public accounting firm. We also maintain an Internet site at http://www. .com.
Our Internet site and the information contained therein or connected thereto are
not intended to be incorporated into this prospectus or the registration
statement of which it forms a part.

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

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GLOSSARY OF TECHNICAL TERMS

A/D MUX -- Add/Drop Multiplexer. Infrastructure equipment that can add or
drop specific portions of a communications signal from a stream without
multiplexing or demultiplexing the entire signal.

ATM -- Asynchronous Transfer Mode. A method of data transfer in which the
information is organized into short, fixed-length packets called cells, and the
recurrence of cells containing information from an individual user is not
necessarily periodic.

ASIC -- Application Specific Integrated Circuit. A semiconductor device
design for a specific application, typically incorporating multiple functions
into a single device and thereby reducing system size, cost and power
consumption.

BACKBONE -- The part of the communications network which carries the
heaviest traffic. It is one basis for design of the overall network service and
may be the more permanent part of the network. The primary trunk carrying voice
or data traffic between switches. Also defined as those transmission facilities
that interconnect lower speed distribution channels for transport throughout the
network.

BICMOS -- Bi-polar Complementary Metal Oxide Semiconductor. An integrated
circuits manufacturing process which provides higher performance than other
traditional silicon-based process technologies.

BROADBAND -- A generic term that describes a physical communication path or
channel significantly wider than voice grade channels, supporting the high speed
digital transmission of data, video or voice between two terminals. The term has
evolved to specify 1.5 Mbps and higher data rates.

BYTE -- A data unit of eight bits.

COMPETITIVE LOCAL EXCHANGE CARRIER or CLEC -- A business authorized by the
Telecommunications Act of 1996 that can deliver alternative dial-tone and other
services using incumbent local exchange carrier facilities.

CMOS -- Complementary Metal Oxide Semiconductor. An integrated circuits
manufacturing technology known for requiring less power than other methods.

DIGITAL LOOP CARRIER or DLC -- Network transmission equipment used to
provide pair gain on a local loop. The digital loop carrier system derives
multiple channels, typically 64-Kbps voice-grade, from a single four-wire
distribution cable running from the central office to a remote site.

DSL -- Digital Subscriber Line. A generic name for a family of digital
transmission services offered by ILECs and CLECs that uses the existing copper
wire in the local loop to provide access to and from the network at high speed
data rates.

- ADSL or Asymmetrical DSL -- high speed asymmetric access over twisted
pair at data rates of 1.5 to 8 Mbps downstream and 16 to 800 Kbps
upstream depending on line distance from the central office.

- HDSL or High bit-rate DSL -- high speed symmetric access over twisted
pair at data rates of up to 1.5 Mbps for both downstream and upstream
communications.

- SDSL or Symmetrical DSL -- high speed symmetric access over twisted
pair at data rates of up to 4 Mbps for both downstream and upstream
communications.

- SHDSL or Symmetrical High bit-rate DSL -- high speed symmetric access
over twisted pair at data rates of up to 2.3 Mbps for both downstream
and upstream communications.

- G.shdsl -- A next generation global DSL technology which supports
variable rate, simultaneous data and voice communications over twisted
pair at downstream and upstream rates of up to 4 Mbps.

- VDSL or Very high bit-rate DSL -- next generation high speed
asymmetric access over twisted pair at data rates from 12.9 to 52.8
Mbps.

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DIGITAL SUBSCRIBER LINE ACCESS MULTIPLEXER or DSLAM -- Infrastructure
equipment that aggregates signals from different forms of DSL access lines at
the central office for transport to the Internet or segments of the wide area
network.

DIGITAL SIGNAL PROCESSOR -- A semiconductor device designed for performing
computational intensive tasks involving the processing of various formats
including images, sound, video and voice.

DWDM -- Dense Wavelength Division Multiplexing equipment. Infrastructure
equipment that multiplexes signals, hence increasing system bandwidth by
transmitting at different wave lengths through a single fiber.

E1 -- European Digital Signal Level 1, 2.048 Mbps.

E3 -- Also known as CEPT3, the 34.368 Mbps rate used by European CEPT
carriers.

ECHO CANCELLATION -- A full-duplex transmission technique requiring the
receiver to cancel out its own transmitted signal which occupies the same
frequency band as the receiver.

FRAD -- Frame Relay Access Device, also referred to as a Frame Relay
Assembler/Disassembler. Responsible for framing data with header and trailer
information prior to presentation on the frame to a Frame Relay switch.

FRAME RELAY -- A packet mode interface to high speed networks designed to
provide high speed data transmission, very low network delay and efficient use
of network bandwidth.

FRAMERS -- Process serial bit stream signals and establishing a reference
such that time slots or elements within a frame can be identified. In addition
to identifying the frame, framer devices process control bits inserted into a
frame for the purpose of network maintenance and administration. Typical network
protocols requiring framing include PDH with DS1/DS3 framing formats and optical
networking SONET/SDH with STS-n framing formats.

GATEWAY -- Infrastructure equipment that provides entry points and exit
points between two similar communication networks.

HDLC -- High-Level Data Link Control. Layer 2 full-duplex protocol.

INTEGRATED ACCESS DEVICE or IAD -- Infrastructure equipment which supports
data, video and voice streams over a single high capacity circuit.

INTERNET -- A collection of networks interconnected by a set of routers
which allows them to function as a single, large virtual network. The Internet
is the largest such network in the world, using a common protocol and allowing
millions of users to share information all over the planet.

IP -- Internet Protocol. Part of the TCP/IP family of communications
protocols. IP contains the Internet address of the source and destination of the
IP packet. Routers in the Internet operate at the IP level to route messages
across the network.

ISDN -- Integrated Services Digital Network. An international standard that
defines a digital end-to-end network operating at 1544 Mbps or slower for the
U.S. and 2.048 Mbps or slower for Europe. Both versions support image, data,
video and voice simultaneously.

ISP -- Internet Service Provider. Any of a number of companies that sell
Internet access to individuals or organizations.

ITU -- International Telecommunications Union. An organization established
by the United Nations and having as its membership virtually every government in
the world.

KBPS -- Kilobits per second. Thousand bits per second, a measure of
transmission speed.

MAC -- Media Access Controller. The lower half of the data link layer that
contains specifications for accessing the physical portion of the network,
scheduling and routing data transmissions.

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MAPPING -- Insertion of PDH signals into similar rate SONET/SDH signals for
the purpose of transporting plesiochronous signals over synchronous networks.
For example, a DS1 can be mapped into a SONET VT1.5 or an E1 can be mapped into
SDH VC12. Demapping is a reverse process.

MBPS -- Megabits per second. Million bits per second, a measure of
transmission speed.

MODEM -- A type of computer equipment that links computers via telephone
lines and enables the transmission of data. Derived from the words "modulate"
and "demodulate", because a modem converts, or modulates, transmission signals
from digital to analog for transmission over analog telecommunications lines,
and then converts them back, or demodulates the signals from analog to digital.

MODULATION -- The process of varying some characteristic of an electrical
carrier wave as the information to be transmitted on that carrier wave varies.

MULTIPLEXING -- Sending several signals over a single line and separating
them at the other end, a function within a layer that interleaves the
information from multiple connections into one connection.

NETWORK PROCESSORS -- Flexible, highly-integrated, scalable and
programmable processors that make it possible to add new functions to a switch,
router or other core network equipment at virtually any time through software,
rather than hardware, modifications.

OC-N -- Optical Carrier (n). A fundamental unit in the Synchronous Optical
Network (SONET) hierarchy. A SONET channel is composed of the transport overhead
and the synchronous payload envelope. "OC" indicates an optical signal and "n"
represents increments of 51.84 Mbps. Therefore, OC 3 represents 155 Mbps, OC 12
represents 622 Mbps, OC 48 represents 2.4 Gbps and OC 192 represents 10 Gbps.

PCM -- Pulse Code Modulation. The technique by which a signal is
periodically sampled and each sample is then quantitized and transmitted as a
signal binary code.

PDH -- Plesiochronous Digital Hierarchy (plesiochronous means nearly
synchronous). Developed to carry digitized voice over copper wire more
efficiently. A discrete set of fixed rates is available, namely n x DS 0 (DS 0
is a 64 Kbps rate), and then the next levels in the respective multiplex
hierarchies. For example, 24 channels at 64 Kbps equates to a T-1 or 1.5 Mbps
rate.

PHY -- Physical layer. The first of seven layers of the Open Systems
Interconnection (OSI) reference model, which is an architectural model of data
communications protocols that subdivides overall data-communications processes
into seven functional layers: (1) physical, (2) link, (3) network, (4)
transport, (5) session, (6) presentation and (7) application. Each layer
performs a specific data-communications task with increasing levels of
sophistication. The physical layer governs hardware connections and byte-stream
encoding for transmission. PHY devices interface directly with the physical
medium (e.g., copper wire, coaxial cable or fiber optic lines) and perform the
most basic bit transmission functions such as clock speed, data encoding scheme
and control symbols used in a given network.

PROTOCOL -- A set of formats and rules for exchanging communications and
assuring end-to-end data integrity of links, circuits, sessions and application
processes.

REMOTE ACCESS CONCENTRATOR or RAC -- Infrastructure equipment that provides
modem as well as ISDN access between the circuit switched network and an
Internet service provider Point of Presence (PoP).

RISC -- Reduced Instruction Set Computer. A microprocessor architecture
that favors the speed at which individual instructions execute over the
robustness of the instruction set.

SDH -- Synchronous Digital Hierarchy. International ITU standard for
optical communication.

SONET -- Synchronous Optical Network. An ANSI standard for transmitting
information over optical fiber. Used or accepted in the United States and
Canada, it is a variation of the SDH international standard.

95
<PAGE> 97

SWITCH FABRIC -- The internal interconnect architecture used by a switching
device, which redirects the data coming in on one of its ports out to another of
its ports.

T1 -- The 1.544 Mbps trunking standard in the Bell digital hierarchy; a
physical transmission standard consisting of two twisted wire pairs and related
equipment capable of carrying a 1.5444 Mbps DS-1 signal; a standard for digital
transmission in North America.

T3 -- The 45 Mbps trunking standard in the Bell digital hierarchy. Prior to
the establishment of the SONET standards, this was as fast as standardized
transmissions in the public network could go.

TCP/IP -- Protocols derived from the Internet and widely used in high-speed
data networking.

TERABIT -- A million megabits.

TRANSCEIVER -- A device or piece of equipment that combines both the
function of a transmitter and receiver, thereby providing both output and input
interfaces in a single solution.

V.42BIS -- Data compression protocols for voice-band modems.

V.90 and V.92 -- 56 Kbps, 2-wire, full-duplex modem standards.

VPN -- Virtual Private Network. A secure method of transmitting data. These
types of networks are becoming increasingly popular for Internet users, enabling
mission critical information to be safely transmitted.

VOICE-OVER-DSL or VODSL -- Sending voice transmissions over DSL-based
networks instead of traditional circuit-switched networks.

VOICE-OVER-IP or VOIP -- Converting voice transmissions to packets of data,
then transmitting them over a packet or IP network such as the Internet.

WAN -- Wide-Area Network. A communications network which services an area
without geographic limitations as compared to a local area network (LAN) which
supports an office or campus environment.

XDSL -- A generic term that encompasses ADSL, HDSL, SDSL, SHDSL, G.shdsl
and VDSL technologies which all provide for a form of high speed transmission
over the existing copper plant in the local loop.

96
<PAGE> 98

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CONEXANT SPINCO, INC.:
Independent Auditors' Report.............................. F-3
Consolidated Balance Sheets as of September 30, 1999 and
2000................................................... F-4
Consolidated Statements of Operations for the years ended
September 30, 1998, 1999 and 2000...................... F-5
Consolidated Statements of Cash Flows for the years ended
September 30, 1998, 1999 and 2000...................... F-6
Consolidated Statements of Shareholder's Net Investment
for the years ended September 30, 1998, 1999 and
2000................................................... F-7
Notes to Consolidated Financial Statements................ F-8

MAKER COMMUNICATIONS, INC.:
Report of Independent Public Accountants.................. F-26
Consolidated Balance Sheets as of December 31, 1998 and
1999................................................... F-27
Consolidated Statements of Operations for the years ended
December 31, 1997, 1998 and 1999....................... F-28
Consolidated Statements of Stockholders' Equity (Deficit)
for the years ended December 31, 1997, 1998 and 1999... F-29
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1998 and 1999....................... F-30
Notes to Consolidated Financial Statements................ F-31

HOTRAIL, INC.:
Independent Auditors' Report.............................. F-42
Balance Sheet as of June 29, 2000......................... F-43
Statements of Operations for the period July 1, 1999
through June 29, 2000.................................. F-44
Statements of Shareholders' Equity (Deficiency) for the
period July 1, 1999 through June 29, 2000.............. F-45
Statements of Cash Flows for the period July 1, 1999
through June 29, 2000.................................. F-46
Notes to Financial Statements............................. F-47
Report of Independent Accountants......................... F-54
Balance Sheets as of June 30, 1998 and 1999............... F-55
Statements of Operations for the years ended June 30, 1998
and 1999............................................... F-56
Statements of Cash Flows for the years ended June 30, 1998
and 1999............................................... F-57
Statement of Shareholders' Equity/(Deficit)............... F-58
Notes to Financial Statements............................. F-59

MICROCOSM COMMUNICATIONS LIMITED:
Statement of Directors' Responsibilities.................. F-67
Auditors' Report.......................................... F-68
Profit and Loss Account for the year ended December 31,
1999................................................... F-69
Balance Sheet as of December 31, 1999..................... F-70
Cash Flow Statement for the year ended December 31,
1999................................................... F-71
Notes to the Accounts..................................... F-72
</TABLE>

F-1
<PAGE> 99

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
NOVANET SEMICONDUCTOR LTD.:
Independent Auditors' Report.............................. F-79
Consolidated Balance Sheets as of December 31, 1999 and
September 30, 2000..................................... F-80
Consolidated Statements of Operations for the year ended
December 31, 1999 and the nine months ended September
30, 2000............................................... F-81
Consolidated Statements of Changes in Shareholders' Equity
(Capital Deficiency)................................... F-82
Consolidated Statements of Cash Flows for the year ended
December 31, 1999 and the nine months ended September
30, 2000............................................... F-83
Notes to Consolidated Financial Statements................ F-84
</TABLE>

F-2
<PAGE> 100

INDEPENDENT AUDITORS' REPORT

To The Board of Directors and Shareholder of
Conexant Spinco, Inc.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
the Company and its subsidiaries at September 30, 2000 and 1999, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended September 30, 2000, in conformity with generally
accepted accounting principles in the United States of America.

Costa Mesa, California
November 9, 2000

The basic financial statements include the effect of a Separation and
Distribution Agreement which is to be consummated between Conexant Spinco, Inc.
and Conexant Systems, Inc. on or about January 1, 2001. The above opinion is in
the form which will be signed by Deloitte & Touche LLP upon consummation of the
Separation and Distribution Agreement, which is described in Note 1 of the notes
to financial statements and assuming that from November 9, 2000 to the date of
such consummation, no other events will have occurred that would affect the
accompanying financial statements and notes thereto.

Deloitte & Touche LLP
Costa Mesa, California
November 9, 2000

F-3
<PAGE> 101

CONEXANT SPINCO, INC.

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

<TABLE>
<CAPTION>
SEPTEMBER 30, PRO FORMA
---------------------- SEPTEMBER 30,
1999 2000 2000
-------- ---------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................ $ 315 $ 8,079 $
Receivables, net of allowance of $835 (1999) and
$1,367 (2000)..................................... 68,327 118,728
Inventories, net..................................... 49,582 79,250 79,250
Deferred income taxes................................ 26,961 19,454 19,454
Other current assets................................. 104 20,996 20,996
-------- ---------- ----------
Total current assets.............................. 145,289 246,507
Marketable securities.................................. -- 3,295 3,295
Property, plant and equipment, net..................... 14,824 31,162 31,162
Goodwill and intangible assets, net.................... 24,649 1,345,782 1,345,782
Other assets........................................... 8,414 112,615 112,615
-------- ---------- ----------
Total assets...................................... $193,176 $1,739,361 $
======== ========== ==========

LIABILITIES AND SHAREHOLDER'S NET INVESTMENT
Current liabilities:
Accounts payable..................................... $ 7,884 $ 10,294 $ --
Payable to Conexant Systems, Inc..................... -- --
Deferred revenue..................................... 10,468 28,081 28,081
Accrued compensation and benefits.................... 5,735 19,243 19,243
Other current liabilities............................ 2,333 6,483 6,483
-------- ---------- ----------
Total current liabilities......................... 26,420 64,101
Long-term liabilities.................................. 302 487 487
Deferred income taxes.................................. 4,023 66,378 66,378
-------- ---------- ----------
Total liabilities................................. 30,745 130,966
-------- ---------- ----------
Commitments and contingencies (Notes 6 and 7).......... -- -- --
Shareholder's net investment:
Preferred stock, no par value, shares
authorized, none outstanding...................... -- -- --
Common stock:
Class A, $.01 par value, shares
authorized, none outstanding.................... -- --
Class B, $.01 par value, shares
authorized, none outstanding (actual) and
outstanding (pro forma)............... -- --
Conexant Systems, Inc.'s net investment................ 162,431 1,615,502
Accumulated other comprehensive income................. -- (7,107) (7,107)
-------- ---------- ----------
Total shareholder's net investment................ 162,431 1,608,395
-------- ---------- ----------
Total liabilities and shareholder's net
investment...................................... $193,176 $1,739,361 $
======== ========== ==========
</TABLE>

See accompanying notes to consolidated financial statements.
F-4
<PAGE> 102

CONEXANT SPINCO, INC.

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

<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------------
1998 1999 2000
-------- -------- ---------
<S> <C> <C> <C>
Net revenues.............................................. $143,270 $277,613 $ 579,206
Cost of goods sold........................................ 83,342 127,603 233,646
-------- -------- ---------
Gross margin.............................................. 59,928 150,010 345,560
Operating expenses:
Research and development................................ 72,639 86,546 136,237
Selling, general and administrative..................... 37,243 43,613 81,997
Amortization of intangible assets....................... 5,252 5,255 143,171
Purchased in-process research and development........... -- -- 191,348
Special charges......................................... 3,600 2,200 --
-------- -------- ---------
Total operating expenses............................. 118,734 137,614 552,753
-------- -------- ---------
Operating income (loss)................................... (58,806) 12,396 (207,193)
Other income, net......................................... 115 342 1,433
-------- -------- ---------
Income (loss) before provision (benefit) for income
taxes................................................... (58,691) 12,738 (205,760)
Provision (benefit) for income taxes...................... (27,064) 289 27,051
-------- -------- ---------
Net income (loss)......................................... $(31,627) $ 12,449 $(232,811)
======== ======== =========
Net income (loss) per share, basic and diluted............ $ $ $
======== ======== =========
Shares used in computing net income (loss) per share,
basic and diluted.......................................
======== ======== =========
Unaudited pro forma net income (loss) per share, basic and
diluted................................................. $
=========
Shares used in computing unaudited pro forma net income
(loss) per share, basic and diluted.....................
=========
</TABLE>

See accompanying notes to consolidated financial statements.
F-5
<PAGE> 103

CONEXANT SPINCO, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------------
1998 1999 2000
-------- -------- ---------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income (loss)....................................... $(31,627) $ 12,449 $(232,811)
Adjustments required to reconcile net income (loss) to
net cash provided by (used in) operations:
Depreciation......................................... 5,889 6,325 6,820
Amortization of intangible assets.................... 5,252 5,255 143,171
Deferred income taxes................................ (7,114) (17,668) (14,432)
Purchased in-process research and development........ -- -- 191,348
Special charges...................................... 3,600 2,200 --
Other non-cash charges (credits)..................... -- (258) 101
Changes in assets and liabilities, net of
acquisitions:
Receivables........................................ 21,660 (44,660) (44,360)
Inventories........................................ 9,546 (32,788) (28,297)
Accounts payable................................... 348 7,525 (3,490)
Accrued expenses and other current liabilities..... (3,101) (2,101) 11,263
Other.............................................. 4,443 6,057 9,064
-------- -------- ---------
Net cash provided by (used in) operating
activities......................................... 8,896 (57,664) 38,377
-------- -------- ---------
Cash Flows From Investing Activities:
Capital expenditures.................................... (12,021) (9,759) (16,099)
Sale of marketable securities........................... -- -- 13,195
Cash balances of acquired businesses.................... -- -- 12,701
Investments in and advances to businesses............... -- (7,500) (80,030)
-------- -------- ---------
Net cash used in investing activities................ (12,021) (17,259) (70,233)
-------- -------- ---------
Cash Flows From Financing Activities:
Net transfers and advances from Conexant Systems,
Inc.................................................. 3,125 75,238 39,620
-------- -------- ---------
Net cash provided by financing activities............ 3,125 75,238 39,620
-------- -------- ---------
Net increase in cash and cash equivalents............... -- 315 7,764
Cash and cash equivalents at beginning of period........ -- -- 315
-------- -------- ---------
Cash and cash equivalents at end of period.............. $ -- $ 315 $ 8,079
======== ======== =========
</TABLE>

See accompanying notes to consolidated financial statements.
F-6
<PAGE> 104

CONEXANT SPINCO, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDER'S NET INVESTMENT
(IN THOUSANDS)

<TABLE>
<CAPTION>
CONEXANT ACCUMULATED TOTAL
SYSTEMS, INC. OTHER SHAREHOLDER'S
NET COMPREHENSIVE NET
INVESTMENT INCOME INVESTMENT
------------- ------------- -------------
<S> <C> <C> <C>
Balance at October 1, 1997........................... $ 103,246 $ -- $ 103,246
Net loss and comprehensive loss...................... (31,627) -- (31,627)
Net transfers from Conexant Systems, Inc............. 3,125 -- 3,125
---------- ------- ----------
Balance at September 30, 1998........................ 74,744 -- 74,744
Net income and comprehensive income.................. 12,449 -- 12,449
Net transfers from Conexant Systems, Inc............. 75,238 -- 75,238
---------- ------- ----------
Balance at September 30, 1999........................ 162,431 -- 162,431
Net loss............................................. (232,811) -- (232,811)
Foreign currency translation adjustment.............. -- (7,107) (7,107)
----------
Comprehensive loss................................. (239,918)
Contribution of acquired businesses.................. 1,639,476 -- 1,639,476
Net transfers from Conexant Systems, Inc............. 46,406 -- 46,406
---------- ------- ----------
Balance at September 30, 2000........................ $1,615,502 $(7,107) $1,608,395
========== ======= ==========
</TABLE>

See accompanying notes to consolidated financial statements.
F-7
<PAGE> 105

CONEXANT SPINCO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

On September 13, 2000, Conexant Systems, Inc. ("Conexant") announced a plan
to create an independent publicly-traded company, Conexant Spinco, Inc.
("Spinco" or the "Company"), comprised of Conexant's Internet infrastructure
business. Conexant intends to separate the Internet infrastructure business
through a two-step process. The first step will consist of an initial public
offering of Class A common stock of Spinco targeted for January 2001. After
completion of Spinco's initial public offering, Conexant will own approximately
% of Spinco's outstanding common stock. In the second step, Conexant
intends, within several months after Spinco's initial public offering, subject
to the satisfaction of certain conditions, to distribute to Conexant's
shareholders (the "distribution") all of the shares of Spinco's common stock
owned by Conexant.

Spinco was incorporated in Delaware in October 2000 and is a wholly-owned
subsidiary of Conexant. On December 31, 1998, Rockwell International Corporation
("Rockwell") distributed all the outstanding shares of Conexant (formerly named
Rockwell Semiconductor Systems, Inc.) to shareholders of Rockwell in a tax-free
spin-off. As a result, Conexant became an independent publicly-traded company
owning and operating Rockwell's former semiconductor systems business. The
accompanying consolidated financial statements of Spinco report the operations
that comprise Conexant's Internet infrastructure business. For periods prior to
Conexant's spin-off from Rockwell, the accompanying consolidated financial
statements of Spinco report the operations that comprised the Internet
infrastructure business as part of Rockwell's semiconductor systems business.
References to Conexant prior to January 1, 1999 include the semiconductor
systems business of Rockwell.

Conexant and Spinco entered into a Separation and Distribution Agreement
(the "separation agreement") (see Note 11) and Conexant transferred to Spinco on
January , 2001 (the "separation date") the Conexant-owned assets and
liabilities which related to Conexant's Internet infrastructure business, except
for certain assets and liabilities retained by Conexant (the "separation")
(Notes 9 and 11). Prior to the separation, Spinco recapitalized its common stock
into Class A common stock having one vote per share and Class B common stock
having five votes per share. Shares of Class A common stock will be sold to the
public in the offering. Conexant was issued shares of Class B
common stock in exchange for its shares of Spinco common stock. The issuance of
the Class B common stock resulted in a recapitalization of the Company, at which
time Spinco began accumulating retained earnings.

At the time of the separation, Conexant loaned to Spinco $ million to
support Spinco's operations from the separation date to the completion of the
initial public offering. From the proceeds of the initial public offering,
Spinco must repay the loan, including interest at a rate of percent, and
intends to pay a dividend to Conexant of $ million. In addition,
Conexant retained Spinco's accounts payable and accounts receivable as of the
separation date.

Basis of presentation

The consolidated financial statements of Spinco have been prepared in
accordance with accounting principles generally accepted in the United States of
America and include the assets, liabilities, operating results, and cash flows
of Conexant's Internet infrastructure business, including subsidiaries which
will be contributed by Conexant, and have been prepared using Conexant's
historical bases in the assets and liabilities and the historical operating
results of the Internet infrastructure business during each respective period.
Management believes the assumptions underlying the consolidated financial
statements are reasonable. However, the financial information included herein
may not reflect the consolidated financial statements, operating results,
changes in shareholder's net investment and cash flows of Spinco in the future
or what they would have been had Spinco been a separate stand-alone entity
during the periods presented. All accounts and transactions among Spinco's
entities have been eliminated in consolidation.

F-8
<PAGE> 106
CONEXANT SPINCO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Conexant uses a centralized approach to cash management and the financing
of its operations. Cash deposits from Spinco are transferred to Conexant on a
regular basis, and are netted against Conexant's net investment. As a result,
none of Conexant's cash, cash equivalents or debt at the corporate level have
been allocated to Spinco in the consolidated financial statements. Cash and cash
equivalents in the financial statements represents amounts held by Spinco's
foreign operations and at certain subsidiaries. Changes in Conexant's net
investment represent funding from Conexant for working capital, acquisition or
capital expenditure requirements after giving effect to Spinco's transfers to or
from Conexant of its cash flows from operations.

The consolidated financial statements include allocations of certain
Conexant expenses for research and development, legal, accounting, treasury,
human resources, real estate, information technology, distribution, customer
service, sales, marketing, engineering, and other corporate services provided by
Conexant including executive salaries and other costs (see Note 11). The expense
allocations have been determined on bases that Conexant and Spinco considered to
be reasonable reflections of the utilization of services provided or the benefit
received by Spinco. As more fully described in Note 11, the allocation methods
include specific identification, relative revenues or costs, or headcount.
Management believes that the expenses allocated to Spinco are representative of
the operating expenses it would have incurred had it been operated on a stand-
alone basis. Following the separation, Spinco will perform these functions using
its own resources or purchased services, including services obtained from
Conexant pursuant to a transition services agreement.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Fiscal year: Spinco maintains a fifty-two/fifty-three week fiscal year
cycle ending on the Friday closest to September 30. To conform the Spinco's
fiscal year ends, a fifty-third week must be added every sixth or seventh fiscal
year. Fiscal years 1998, 1999 and 2000 comprised 53 weeks, 52 weeks, and 52
weeks, and ended on October 2, October 1 and September 29, respectively. For
convenience, the accompanying financial statements have been shown as ending on
the last day of the calendar month.

Use of estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ materially from
those estimates.

Risks and uncertainties: Spinco operates in a rapidly changing environment
that involves a number of risks, some of which are beyond the Company's control
and could have a material adverse effect on Spinco's business, operating
results, and financial condition. These risks include variability and
uncertainty of revenues and operating results, technological change,
competition, intellectual property litigation, management of growth, access to
manufacturing capacity and customer concentration.

F-9
<PAGE> 107
CONEXANT SPINCO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Concentrations: Financial instruments that potentially subject Spinco to
concentration of credit risk consist principally of cash equivalents and trade
receivables. Spinco invests cash through high-credit quality financial
institutions. The Company's trade receivables primarily are derived from sales
to manufacturers of communications network infrastructure equipment. Spinco
performs ongoing credit evaluations of its customers' financial condition and
requires collateral, such as letters of credit and bank guarantees, whenever
deemed necessary. The following individual customers accounted for 10% or more
of net revenue:

<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------
1998 1999 2000
------ ------ ------
<S> <C> <C> <C>
Customer A.................................................. -- -- 17%
Customer B.................................................. -- -- 15%
Customer C.................................................. -- 31% 12%
Customer D.................................................. 37% 22% 12%
Customer E.................................................. -- -- 11%
Customer F.................................................. -- 10% --
</TABLE>

The following individual customers accounted for 10% or more of total
accounts receivable:

<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30,
--------------
1999 2000
----- -----
<S> <C> <C>
Customer A.................................................. 18% 13%
Customer B.................................................. -- 36%
Customer C.................................................. 45% --
Customer F.................................................. 19% --
</TABLE>

The Company does not own or operate manufacturing, assembly or test
facilities and relies on third-parties, including Conexant, for the manufacture,
assembly and test of its products. Spinco currently purchases semiconductor
products under an agreement with a third party that guarantees a level of
production capacity. To satisfy any remaining requirements Spinco also relies on
other third party suppliers with whom it does not have fixed arrangements.
Allocations by these suppliers of wafer manufacturing, assembly and test
capacity to the Company depend on the Company's needs and capacity availability
during periods of capacity shortages. A significant reduction in allocation from
these suppliers could adversely affect the Company's results of operations.

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

Recapitalization: Prior to the initial public offering, Spinco will
recapitalize its common stock into Class A common stock having one vote per
share and Class B common stock having five votes per share. Shares of Class A
common stock will be sold to the public in the offering. Conexant will be issued
shares of Class B common stock in exchange for its shares of
Spinco common stock. The exchange for Class B common stock has been treated as a
stock split in the accompanying financial statements.

Net income (loss) per share: After giving effect to the recapitalization
described in Note 2, Spinco has outstanding shares of common
stock, all of which are owned by Conexant. Basic and diluted

F-10
<PAGE> 108
CONEXANT SPINCO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

net income (loss) per share have been computed by dividing the net income (loss)
for each period presented by the common shares.

Net income (loss) per share amounts do not give effect to any adjustments
to Conexant stock options granted before January 1, 2001 to become Conexant
stock options and Spinco stock options and any conversions of Conexant stock
options granted after December 31, 2000 held by Spinco employees to become
Spinco stock options only. The actual number of Spinco stock options to be
issued upon adjustment of Conexant stock options will not be determined until
the individual employee options are converted into Spinco stock options at the
distribution. See Note 9 to the consolidated financial statements for a
description of how Conexant stock options will be converted into Spinco stock
options at the distribution.

Unaudited pro forma net income (loss) per share: As discussed in Note 1,
Spinco intends to pay a dividend to Conexant using a portion of the proceeds of
the initial public offering. Unaudited pro forma basic and diluted net income
(loss) per share includes the effect of such dividend and has been computed by
dividing net income (loss) for each period by the sum of the
common shares outstanding plus approximately shares of common
stock issued in the initial public offering, the proceeds of which will be used
to pay the $ million dividend, based on an initial public offering price
of $ per share, reduced by the estimated per share offering costs.

Unaudited pro forma balance sheet: The unaudited pro forma balance sheet as
of September 30, 2000 gives effect to the assumed dividend discussed above as
though it had been declared and was payable as of that date. The unaudited pro
forma balance sheet also gives effect to the issuance of shares
of Spinco's Class B common stock to Conexant, the $ million loan from
Conexant to Spinco and the retention of Spinco's accounts payable and accounts
receivable by Conexant at the time of separation as though the separation had
occurred as of September 30, 2000.

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

Marketable securities: Spinco's marketable securities consist of commercial
paper, corporate bonds, and government securities, principally having remaining
terms of two years or less, which Spinco classifies as available-for-sale. At
September 30, 2000 there were no material unrealized gains or losses on these
securities.

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

Property, plant and equipment: Property is stated at cost. Depreciation is
based on estimated useful lives (5 years for machinery and equipment; and the
shorter of the remaining terms of the leases or the estimated economic useful
lives of leasehold improvements). Significant renewals and betterments are
capitalized and replaced units are written off. Maintenance and repairs, as well
as renewals of a minor amount, are charged to expense.

Goodwill and intangible assets: Goodwill and other intangible assets result
principally from business acquisitions. Spinco accounts for business
acquisitions by assigning the purchase price to tangible and intangible assets
and liabilities, including research and development projects which have not yet
reached technological feasibility and have no alternative future use (purchased
in-process research and development).

F-11
<PAGE> 109
CONEXANT SPINCO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Assets acquired and liabilities assumed are recorded at their fair values; the
appraised value of purchased in-process 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 2 to 10 years.

Impairment of long-lived assets: The Company continually monitors events or
changes in circumstances that could indicate that the carrying amount of
long-lived assets, including intangible assets, may not be recoverable.
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. At September 30, 2000, 1999, and
1998 management determined that no impairments existed.

Foreign currency translation and remeasurement: Results from foreign
operations are subject to exchange rate fluctuations and foreign currency
transaction costs. In accordance with the provisions of SFAS No. 52, "Foreign
Currency Translation," the assets and liabilities of subsidiaries located
outside the United States are translated into U.S. dollars at the rates of
exchange in effect at the balance sheet dates. Income and expense items are
translated at the average exchange rates prevailing during the period. Gains and
losses resulting from foreign currency transactions are recognized currently in
income, and those resulting from translation of foreign subsidiary financial
statements are accumulated as a separate component of shareholder's net
investment.

Derivative Financial Instruments: The Company may use various financial
instruments, including foreign currency forward exchange contracts, to manage
and reduce risk to the Company by generating cash flows which offset the cash
flows of certain transactions in foreign currencies or underlying financial
instruments in relation to their amount and timing. The Company's derivative
financial instruments are used as risk management tools and are not for
speculative or trading purposes. As of September 30, 2000 Spinco had no
obligations under any forward exchange contracts.

Research and development: Research and development costs, other than
software development costs, are expensed as incurred. Software development costs
are capitalized following attainment of technological feasibility. However, no
development costs which qualify for capitalization were incurred during any of
the periods presented.

Stock-Based Compensation: The Company accounts for employee stock-based
compensation in accordance with the provisions of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and
related interpretations.

Income Taxes: Historically, Spinco's results of operations have been
included in Conexant's (or Rockwell's) consolidated federal and state income tax
returns. The provision for income taxes is calculated as if Spinco had filed
separate tax returns as an independent company. The provision (benefit) for
income taxes is determined in accordance with SFAS No. 109, "Accounting For
Income Taxes." Deferred tax assets and liabilities are determined based on the
temporary differences between the financial reporting and tax bases of assets
and liabilities, applying enacted statutory tax rates in effect for the year in
which the differences are expected to reverse. Future tax benefits are
recognized in the statement of operations only to the extent that the
realization of such benefits is considered to be more likely than not. The
balance of income taxes currently payable (or refundable) has been included in
Conexant's net investment in the accompanying balance sheets.

Comprehensive income (loss): Comprehensive income (loss) shown in the
accompanying consolidated statement of shareholder's net investment consists of
the Company's net income (loss) and foreign currency translation adjustments.
The foreign currency translation adjustments are not recorded net of any tax
benefit or expense as the Company does not expect to realize any significant tax
benefit or expenses from these items.

F-12
<PAGE> 110
CONEXANT SPINCO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The balance of accumulated other comprehensive income at September 30, 2000
consists of accumulated foreign currency translation adjustments.

Segment Information: Spinco operates in one business segment, designing,
developing and marketing semiconductor products for manufacturers of
communications network infrastructure equipment (see Note 12).

Supplemental Cash Flow: Conexant issued an aggregate of 23.5 million shares
of its common stock and assumed options to purchase 3.7 million shares of its
common stock with an aggregate value of $1.6 billion during fiscal 2000 in
conjunction with the acquisitions of six businesses complementary to Spinco's
operations (Note 3). Under the terms of the separation agreement, Conexant will
contribute its interests in these acquired entities to Spinco.

The Company paid no interest during its fiscal years 2000, 1999 or 1998.
All income tax payments were made by Conexant.

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

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

In March 2000, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 44 ("FIN 44") "Accounting for Certain Transactions Involving
Stock Compensation", which addresses certain accounting issues which arose under
the previously-established accounting principles relating to stock-based
compensation. The adoption of this interpretation did not have a material effect
on Spinco's financial position or results of operations (see Note 3).

3. ACQUISITIONS

During fiscal 2000, Conexant completed the acquisition of six businesses
related to Spinco's business. Conexant contributed these acquired businesses to
Spinco in connection with the separation.

In March 2000, Conexant completed its acquisition of Maker Communications,
Inc. ("Maker"), a fabless semiconductor company that develops and markets
high-performance programmable network processors, software solutions, and
development tools. Consideration for the acquisition of Maker consisted of 12.7
million shares of Conexant common stock and options to purchase an additional
1.6 million shares of Conexant common stock, based upon an exchange ratio of
0.66 of a share of Conexant common stock for each

F-13
<PAGE> 111
CONEXANT SPINCO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

share of Maker common stock. The total value of the consideration for the
acquisition of Maker was approximately $979.6 million.

In June 2000, Conexant acquired HotRail, Inc. ("HotRail"), a fabless
semiconductor company developing advanced, integrated complementary metal-oxide
semiconductor ("CMOS") technologies for high-speed switching, interconnect and
scalable processing for networking systems. Consideration for the acquisition
consisted of 5.9 million shares of Conexant common stock and options to purchase
an additional 1.3 million shares. The total value of such consideration was
approximately $349.8 million. In addition, Conexant may deliver up to an
additional 652,000 shares, initially held in escrow pending satisfaction of
contingent indemnification obligations, upon the expiration of an escrow period
in fiscal 2001. To the extent additional consideration is paid by Conexant,
Conexant's net investment in Spinco will increase.

During fiscal 2000, Conexant also completed the acquisitions of Microcosm
Communications Limited ("Microcosm") in January, Novanet Semiconductor Ltd.
("Novanet") and NetPlane Systems, Inc. ("NetPlane") in September, and Applied
Telecom, Inc. ("Applied Telecom") in April, each engaged in the development and
sale of semiconductors and related software products for internet infrastructure
applications. Aggregate consideration for these acquisitions consisted of $7.4
million in cash, 4.9 million shares of Conexant common stock, and options to
purchase approximately 0.7 million shares of Conexant common stock. The
aggregate value of such consideration was approximately $292.3 million. Certain
of the acquisitions include provisions under which the former shareholders could
receive additional consideration of up to $119.4 million, payable in a
combination of Conexant common stock and cash, if certain performance and
technology goals are achieved and upon the expiration of an escrow period.
Conexant may be required to issue up to an additional 0.4 million shares of
common stock initially held back for the payment of contingent indemnification
obligations, upon the expiration of indemnification periods. To the extent
additional consideration is paid by Conexant, Conexant's net investment in
Spinco will increase.

The acquisitions have been recorded under the purchase method of
accounting. The value of the consideration for each acquisition has been
allocated among the assets and liabilities acquired, including identified
intangible assets and in-process research and development ("IPRD"), based upon
estimated fair values. The excess of the value of the consideration over the net
assets acquired is allocated to goodwill. In connection with five of the
transactions, an aggregate of $191.3 million was allocated to IPRD, and expensed
(as a charge not deductible for tax purposes) immediately upon completion of the
acquisitions, because the technological feasibility of products under
development had not been established and no future alternative uses existed.

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

The projects were then classified as developed technology, IPRD completed,
IPRD to-be-completed, or future development. The estimated future cash flows for
each were discounted to approximate fair value. Discount rates were derived from
a weighted average cost of capital analysis, adjusted upward to reflect
additional risks inherent in the development process, including the probability
of achieving technological success and market acceptance. The IPRD charge
includes only the fair value of IPRD completed. The fair value assigned to
developed technology is included in identifiable intangible assets, and the fair
values assigned to IPRD to-be-completed and future development are included in
goodwill. The Company believes
F-14
<PAGE> 112
CONEXANT SPINCO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

the amounts determined for IPRD, as well as developed technology, are
representative of fair values and do not exceed the amounts an independent party
would pay for these projects.

The total charge for IPRD for the acquisition of Maker (which Conexant
agreed to acquire in December 1999) was $118.5 million. IPRD projects relating
to seven product families, directed toward the development of high-performance
programmable communications processors and applications software, were
identified and valued. Maker's IPRD projects ranged from 55% to 92% complete and
averaged approximately 75% complete, with aggregate estimated costs to complete
all of the projects of $5.7 million. The IPRD projects principally are expected
to be completed within 12 months of the acquisition date. The average discount
rates used were 30% for IPRD projects and 20% for developed technology, which
reflect the specific risks associated with each of the intangible assets. The
weighted average cost of capital was estimated at 18%.

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

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

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

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

F-15
<PAGE> 113
CONEXANT SPINCO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

<TABLE>
<CAPTION>
SHARES OF GOODWILL AND
CONEXANT TOTAL VALUE OF IDENTIFIED
COMMON STOCK CONSIDERATION INTANGIBLE
TRANSACTION ISSUED(1) (1) IPRD ASSETS
----------- ------------ -------------- -------- ------------
<S> <C> <C> <C> <C>
Maker............................. 12,651 $979,591 $118,500 $888,923
HotRail........................... 5,866 349,843 26,100 334,380
Microcosm......................... 1,523 103,827 27,400 86,798
Novanet........................... 1,802 93,621 17,317 76,386
NetPlane.......................... 1,502 79,764 2,031 70,185
Applied Telecom................... 121 15,079 -- 14,735
</TABLE>

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

Consideration for the fiscal 2000 acquisitions consisted of Conexant common
stock issued and stock options assumed (aggregate value $1.6 billion) and cash
of $7.4 million. The net assets of the acquired businesses totaled $48.4
million, including liabilities of $13.9 million. For acquisitions completed
after the effective date of FIN 44, the intrinsic value of unvested options
assumed by Conexant (an aggregate of $19.5 million) was recorded as deferred
compensation and will be charged to expense over the remaining vesting period of
the options.

The results of operations of the acquired companies are included in the
consolidated financial statements from the dates of acquisition. The pro forma
statement of operations data below assumes that each of the companies had been
acquired at the beginning of each period presented. This pro forma data includes
amortization of goodwill and identified intangibles from that date. However, the
impact of the charges for IPRD has been excluded. This pro forma data is
presented for informational purposes only, and is not necessarily indicative of
the results of future operations nor of the results that would have been
achieved had the acquisitions taken place at the beginning of fiscal 1999.

<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
----------------------
1999 2000
--------- ---------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Net revenues................................................ $ 305,766 $ 600,758
Net loss.................................................... (278,179) (208,181)
Net loss per share, basic and diluted....................... $ $
</TABLE>

4. SUPPLEMENTAL FINANCIAL STATEMENT DATA

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

<TABLE>
<CAPTION>
1999 2000
------- -------
<S> <C> <C>
Raw material................................................ $ 5,529 $ 4,646
Work-in-process............................................. 37,097 51,986
Finished goods.............................................. 6,956 22,618
------- -------
Inventories, net....................................... $49,582 $79,250
======= =======
</TABLE>

Total inventories, net have been presented above inclusive of allowances
for excess and obsolete inventories of approximately $12.7 million and $15.8
million at September 30, 2000 and 1999, respectively.

F-16
<PAGE> 114
CONEXANT SPINCO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

<TABLE>
<CAPTION>
1999 2000
-------- --------
<S> <C> <C>
Machinery and equipment..................................... $ 26,665 $ 48,912
Leasehold improvements...................................... 109 715
Construction in progress.................................... 4,714 3,598
-------- --------
Total cost................................................ 31,488 53,225
Less accumulated depreciation and amortization.............. (16,664) (22,063)
-------- --------
Property, plant and equipment, net..................... $ 14,824 $ 31,162
======== ========
</TABLE>

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

<TABLE>
<CAPTION>
LIFE IN YEARS 1999 2000
------------- -------- ----------
<S> <C> <C> <C>
Goodwill......................................... 5 $ -- $1,167,727
Developed technology............................. 5 - 8.5 33,084 286,104
Other intangible assets.......................... 2 - 10 8,748 52,305
-------- ----------
Total cost..................................... 41,832 1,506,136
Less accumulated amortization.................... (17,183) (160,354)
-------- ----------
Goodwill and intangible assets, net............ $ 24,649 $1,345,782
======== ==========
</TABLE>

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

<TABLE>
<CAPTION>
1999 2000
------ --------
<S> <C> <C>
Advance payment to vendor................................... $ -- $ 75,000
Investments, at cost........................................ 7,500 12,530
Deferred compensation....................................... -- 20,969
Other....................................................... 914 4,116
------ --------
Other assets.............................................. $8,414 $112,615
====== ========
</TABLE>

The $75.0 million advance payment was paid to a wafer supplier under an
agreement for foundry capacity. An additional $75.0 million was paid in October
2000. The entire $150.0 million amount of the advance payments will be repaid
upon the termination of the agreement, or earlier if certain conditions are met.
Investments consist of equity interests in three early stage technology
companies, which are accounted for under the cost method, as the Company has
less than 20% of the voting rights and does not exercise significant influence.

F-17
<PAGE> 115
CONEXANT SPINCO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

5. INCOME TAXES

The components of the provision (benefit) for income taxes for the three
years ended September 30, 2000 are as follows (in thousands):

<TABLE>
<CAPTION>
1998 1999 2000
-------- -------- --------
<S> <C> <C> <C>
Current:
United States.................................... $(15,887) $ 14,220 $ 33,527
Foreign.......................................... 693 1,149 4,340
State and local.................................. (4,756) 2,588 3,616
-------- -------- --------
Total current................................. (19,950) 17,957 41,483
-------- -------- --------
Deferred:
United States.................................... (6,014) (12,872) (6,104)
Foreign.......................................... (152) 51 (4,340)
State and local.................................. (948) (4,847) (3,988)
-------- -------- --------
Total deferred................................ (7,114) (17,668) (14,432)
-------- -------- --------
Provision (benefit) for income taxes............... $(27,064) $ 289 $ 27,051
======== ======== ========
</TABLE>

The provision (benefit) for income taxes differs from the U.S. federal
statutory tax rate for the three years ended September 30, 2000 as follows (in
thousands):

<TABLE>
<CAPTION>
1998 1999 2000
-------- ------- --------
<S> <C> <C> <C>
U.S. federal statutory tax at 35%................... $(20,542) $ 4,458 $(72,016)
State taxes, net of federal effects................. (3,708) (1,469) (241)
Foreign income taxes in excess of (less than)
U.S. ............................................. (199) 178 19,130
Research and development credits.................... (2,727) (2,980) (6,680)
Nondeductible goodwill.............................. -- -- 35,323
Nondeductible IPRD.................................. -- -- 51,321
Other............................................... 112 102 214
-------- ------- --------
Provision (benefit) for income taxes................ $(27,064) $ 289 $ 27,051
======== ======= ========
</TABLE>

The provision (benefit) for income taxes was calculated based upon the
following components (in thousands):

<TABLE>
<CAPTION>
1998 1999 2000
-------- ------- ---------
<S> <C> <C> <C>
United States (loss) income........................ $(60,809) $ 9,817 $(151,104)
Foreign income..................................... 2,118 2,921 (54,656)
-------- ------- ---------
Total income (loss) before provision (benefit) for
income taxes..................................... $(58,691) $12,738 $(205,760)
======== ======= =========
</TABLE>

F-18
<PAGE> 116
CONEXANT SPINCO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Deferred income tax assets and liabilities included in the balance sheet at
September 30, 2000 and 1999 consist of the tax effects of temporary differences
related to the following (in thousands):

<TABLE>
<CAPTION>
1999 2000
------- --------
<S> <C> <C>
Accrued compensation and benefits........................... $ 3,557 $ 2,015
Inventories................................................. 8,899 8,865
Product returns and allowances.............................. 4,194 1,836
Deferred U.S. distributor revenues.......................... 5,090 5,737
Research and development credits............................ 4,902 --
Other -- net................................................ 319 1,001
------- --------
Current deferred income taxes............................... $26,961 $ 19,454
======= ========
Retirement benefits and deferred compensation............... $ 2,396 $ 350
Property, plant and equipment............................... (569) (1,475)
Intangible assets........................................... (5,950) (95,722)
Net operating losses........................................ -- 17,628
Research and development credits............................ -- 12,726
Other -- net................................................ 100 115
------- --------
Long-term deferred income taxes............................. $(4,023) $(66,378)
======= ========
</TABLE>

Spinco's deferred income tax assets at September 30, 2000 include a
deferred tax asset of $6.8 million, representing net operating losses arising
from the exercise of Conexant stock options by Spinco employees during the
fiscal year, which has been accounted for as an increase in Conexant's net
investment in Spinco. Tax benefits from the exercise of Conexant stock options
by Spinco employees approximated $50.2 million and $4.9 million for fiscal years
2000 and 1999, respectively.

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

The research and development credits and the net operating losses shown
above are calculated as if Spinco had filed separate tax returns. These tax
attributes include certain amounts that are retained by Conexant and will not be
available to be utilized in the separate tax returns of Spinco subsequent to the
distribution.

Spinco has entered into a tax allocation agreement with Conexant that
allocates tax liabilities between Conexant and Spinco during the period in which
Spinco is included in Conexant's consolidated group. Generally, Spinco will pay
an amount to Conexant equal to the amount of taxes Spinco would have paid if
Spinco had filed separate tax returns.

F-19
<PAGE> 117
CONEXANT SPINCO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

6. COMMITMENTS

Conexant leases certain facilities and equipment under non-cancelable
operating leases. Rental expense allocated to Spinco based upon relative costs
or specific identification was approximately $3.4 million, $3.1 million, and
$4.4 million during fiscal years 1998, 1999, and 2000, respectively. In the
separation, Spinco assumed certain leases held by Conexant and will sublease
certain properties from Conexant. Spinco's future minimum obligations under
operating leases, including leases assumed from Conexant as of September 30,
2000, are as follows (in thousands):

<TABLE>
<CAPTION>
FISCAL YEAR
-----------
<S> <C>
2001........................................................ $ 3,993
2002........................................................ 3,361
2003........................................................ 3,025
2004........................................................ 2,729
2005........................................................ 1,314
Thereafter.................................................. 667
--------
Total future minimum payments.......................... $ 15,089
========
</TABLE>

In addition, Conexant will provide office space at its Newport Beach,
California campus to Spinco under a short-term lease for a monthly rent of
approximately $450,000. The lease has an initial term of six months, and may be
extended at Spinco's option for two successive six-month periods through August
2002.

7. CONTINGENCIES

In connection with the separation, Spinco will assume responsibility for
all contingent liabilities and current and future litigation (including
intellectual property proceedings) against Conexant or its subsidiaries in
respect of the historical operations of Spinco. Conexant will remain responsible
for the recently settled federal action by Brent Townshend against Conexant, and
for pending patent infringement action by Klaus Holtz relating to Conexant's
modem products utilizing the V.42bis standard for data compression, and for all
liabilities in respect of environmental matters arising prior to the
distribution. In connection with Conexant's settlement of the Townshend matter,
Spinco will issue $15 million in value of Class A common stock, based upon the
initial public offering price; this amount will be reimbursed by Conexant.

The outcome of litigation cannot be predicted with certainty and some
lawsuits, claims or proceedings may be disposed of unfavorably to Spinco. Many
intellectual property disputes have a risk of injunctive relief and there can be
no assurance that a license will be granted. Injunctive relief could have a
material adverse effect on the financial condition or results of operations of
Spinco. The Company is not a party to any litigation which management believes
would have a material adverse effect on Spinco's financial condition or results
of operations.

8. CAPITAL STOCK

Spinco was incorporated in Delaware in October 2000, and is a wholly-owned
subsidiary of Conexant. Spinco's authorized capital consists of shares of
preferred stock, no par value, of which shares are designated as Series A
Junior Participating Preferred Stock for issuance in connection with the
exercise of our preferred share purchase rights, and and shares of
Class A Common Stock, $.01 par value and Class B common stock, $.01 par value,
respectively. There are no shares of preferred stock issued or outstanding.

Prior to the initial public offering, Spinco will recapitalize its common
stock into Class A common Stock having one vote per share and Class B common
stock having five votes per share. Shares of Class A common

F-20
<PAGE> 118
CONEXANT SPINCO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

stock will be sold to the public in the offering. Conexant will be issued
shares of Class B common stock in exchange for its shares of Spinco
common stock.

Holders of Class A common stock and Class B common stock are entitled to
share, equally on a per share basis, in all dividends declared by the board of
directors from time to time; provided that with respect to stock dividends,
holders of shares of Class A common stock will receive only shares of Class A
common stock and holders of shares of Class B common stock will receive only
shares of Class B common stock. Each holder of Spinco's Class A common stock is
entitled to one vote for each such share outstanding in such holder's name and
each holder of Spinco's Class B common stock is entitled to five votes for each
such share outstanding in such holder's name. Shares of Class B common stock are
automatically convertible into shares of Class A common stock upon the
occurrence of certain events, including the completion of the distribution.

Each outstanding share of Class A common stock and Class B common stock
also evidences one Preferred Share Purchase Right (a "Right"). The holder of a
Right may, in certain takeover-related circumstances, become entitled to
purchase from the Company 1/100th of a share of Series A Junior Participating
Preferred Stock at a price of $ , subject to adjustment. Also, in
certain takeover-related circumstances, each Right (other than those held by an
acquiring person) will generally be exercisable for shares of common stock or
stock of the acquiring person having a market value of twice the exercise price.
In certain events, each Right may be exchanged by the Company for one share of
common stock or 1/100th of a share of Junior Preferred Stock. The Rights will
expire on , 2011, unless extended or earlier redeemed at a
redemption price of $.01 per Right, subject to adjustment. Until a Right is
exercised, the holder, as such, will have no voting, dividend or other rights as
a shareholder of the Company.

9. EMPLOYEE STOCK PLANS

Employee Stock Option Plans

Conexant has stock option plans under which Spinco employees and directors
may be granted options to purchase common stock. Options are generally granted
at not less than the fair market value at grant date, generally vest over a four
years and expire eight to ten years after the grant date. During fiscal 2000,
Conexant also assumed stock option plans in connection with the acquisitions of
six businesses which became part of Spinco.

A summary of stock options held by Spinco employees under Conexant's stock
option plans follows (shares in thousands):

<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE
CONEXANT EXERCISE
SHARES PRICE
--------- --------
<S> <C> <C>
Outstanding, October 1, 1998................................ -- $ --
Issued with spin-off from Rockwell.......................... 2,218 8.07
Granted during period....................................... 4,670 11.82
Exercised................................................... (245) 7.18
Cancelled................................................... (212) 9.05
------ ------
Outstanding, September 30, 1999............................. 6,431 10.80
Granted during period....................................... 11,023 52.64
Outstanding options of acquired companies................... 3,704 11.66
Exercised................................................... (1,849) 6.99
Cancelled................................................... (483) 44.16
------ ------
Outstanding, September 30, 2000............................. 18,826 $35.03
====== ======
Exercisable................................................. 2,083 $ 8.76
====== ======
</TABLE>

F-21
<PAGE> 119
CONEXANT SPINCO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table summarizes Conexant stock options held by Spinco
employees at September 30, 2000 (shares in thousands):

<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
----------------------------------- --------------------
AVERAGE WEIGHTED WEIGHTED
NUMBER OF REMAINING AVERAGE NUMBER OF AVERAGE
RANGE OF CONEXANT CONTRACTUAL EXERCISE CONEXANT EXERCISE
EXERCISE PRICES SHARES LIFE (YEARS) PRICE SHARES PRICE
--------------- --------- ------------ -------- --------- --------
<S> <C> <C> <C> <C> <C>
$ 0.07 - $ 9.40 6,127 8.0 $ 7.80 1,829 $ 6.96
$ 9.63 - $ 36.27 2,394 9.3 24.49 211 18.18
$36.45 - $ 36.50 5,239 9.8 36.50 -- --
$36.65 - $ 84.31 4,116 9.3 62.85 43 38.72
$84.50 - $121.68 950 9.4 108.55 -- --
------ --- ------- ----- ------
$ 0.07 - $121.68 18,826 9.0 $ 35.03 2,083 $ 8.76
====== === ======= ===== ======
</TABLE>

Long-term Incentives Plan

Prior to the distribution, Spinco intends to establish a long-term
incentives plan for eligible Spinco employees. Conexant options granted before
January 1, 2000 are expected to be adjusted to become Spinco stock options and
Conexant stock options at the distribution. The exercise price of the Conexant
options and the Spinco options will be adjusted using a formula. The adjustments
to Conexant options will be done in such a manner that (1) the aggregate
intrinsic value of the options immediately before and after the exchange are the
same, (2) the ratio of the exercise price per option to the market value per
share is not reduced, and (3) the vesting provisions and option period of the
replacement Spinco options are the same as the original vesting terms and option
period of the Conexant options. It is currently unknown how many Spinco options
will result from these adjustments to Conexant options.

Conexant stock options held by Spinco employees granted after December 31,
2000 are expected to be converted into Spinco stock options. The exercise price
and number of shares of the resulting Spinco options will be adjusted using a
formula such that the (i) the aggregate intrinsic value of the options
immediately before and after the conversion are the same; (ii) the ratio of the
exercise price per options to the market value per share is not reduced; and
(iii) the vesting and option period of the resulting Spinco options are the same
as the original vesting terms and option period of the Conexant options.

Under Conexant's long-term incentives plan, shares of common stock are
reserved for issuance as restricted stock, at no cost to key employees.
Compensation expense, equal to the fair market value on the date of the grant,
is recognized as the granted shares vest over a period of one to four years.
Certain Spinco employees participate in the Conexant long-term incentives plan.
Spinco employees who have Conexant restricted stock grants will participate in
the distribution with all Conexant shareholders; however, the Spinco shares
received will be subject to the same restrictions and vesting provisions as the
original Conexant restricted stock grant. Compensation expense recognized in the
accompanying consolidated financial statements for restricted stock grants
totaled $331,000 (2000) and $4.1 million (1999).

Directors Stock Plan

Spinco intends to adopt a directors stock plan, under which shares of
common stock are issued to members of its Board of Directors at an exercise
price equal to the fair market value on the date of grant and that will vest
over 48 months.

F-22
<PAGE> 120
CONEXANT SPINCO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Employee Stock Purchase Plan

Under Conexant's employee stock purchase plan, eligible Spinco employees
have been able to contribute up to 10% of their compensation to purchase shares
of Conexant common stock at 85% of the lower of the fair market value on the
first or the last day of each six-month offering period. Prior to the
separation, Spinco intends to establish an identical employee stock purchase
plan for eligible Spinco employees.

Retirement Savings Plan

Conexant sponsors a 401(k) retirement savings plan under which eligible
U.S. Spinco employees may contribute, on a pre-tax basis or after tax basis,
between 1% and 15% (between 1% and 17% subsequent to fiscal 1999) of their total
annual wages from the Company (as defined), subject to a maximum aggregate
annual contribution imposed by the Internal Revenue Code. Conexant sponsors a
"stock match" program under which Conexant matches contributions dollar for
dollar up to specified levels, and may make an additional variable matching
contribution that at fiscal year-end, based on Conexant's performance. All
shares of the Company's common stock accumulated for employees' accounts under
the retirement savings plan vest immediately. Conexant matching contributions
are allocated on a basis of relative cost in the accompanying consolidated
financial statements. Spinco recognized expenses of $3.2 million, $1.4 million
and $1.0 million during fiscal years 2000, 1999, and 1998, respectively. Prior
to the completion of the initial public offering, Spinco intends to establish a
retirement savings plan.

Accounting for Stock-based Compensation

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

Pro forma information regarding net income (loss) and earnings per share is
required by SFAS 123. This information is required to be determined as if Spinco
had accounted for stock-based awards to its employees under the fair value
method of that Statement. Had compensation cost for option awards under
Conexant's stock option plans been determined based on the fair value at the
grant date for awards in fiscal 2000 and 1999 consistent with the provisions of
SFAS No. 123, the Company's net income (loss) and earnings (loss) per share
would have been the pro forma amounts indicated below (in thousands, except per
share data):

<TABLE>
<CAPTION>
1999 2000
------ ---------
<S> <C> <C>
Pro forma net income (loss)............................. $7,471 $(282,402)
Net income (loss) per share, basic and diluted.......... $ $
</TABLE>

Conexant granted no options in fiscal 1998. For purposes of pro forma
disclosures under SFAS 123, the estimated fair value of the options is assumed
to be amortized to expense over the options' vesting period. The fair value of
the options granted in fiscal 1999 and 2000 reported below has been estimated at
the date of grant using the Black-Scholes option pricing model with the
following assumptions:

<TABLE>
<CAPTION>
1999 2000
----- ------
<S> <C> <C>
Risk-free interest rate..................................... 5.9% 5.9%
Expected volatility......................................... 60% 60%
Dividend yield.............................................. -- --
Expected life (years)....................................... 4.5 4.5
Weighted-average fair value of options granted.............. $6.35 $28.29
</TABLE>

The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. Because

F-23
<PAGE> 121
CONEXANT SPINCO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Conexant options held by Spinco employees and directors have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
the opinion of management, the existing models do not necessarily provide a
reliable single measure of the fair value of these options.

10. SPECIAL CHARGES

In the fourth quarter of 1998, Conexant restructured its business,
including certain actions related to Spinco. The fiscal 1998 charge of $3.6
million consisted of $1.9 million for employee severance and costs under a
voluntary early retirement program ("VERP") offered to certain salaried
employees in connection with a workforce reduction, and $1.7 million of costs
associated with the disposal of certain property and equipment. The fiscal 1999
special charges of $2.2 million represent additional costs under the VERP. Under
the terms of the employee matters agreement with Conexant, Conexant will retain
all liabilities for future payments under the VERP.

11. RELATED PARTY TRANSACTIONS

Spinco's costs and expenses include allocations from Conexant for research
and development, legal, accounting, treasury, human resources, real estate,
information systems, customer service, sales, marketing, engineering, and other
Conexant corporate services including executive salaries and other costs. These
allocations have been determined on bases that Conexant and Spinco considered to
be reasonable reflections of the utilization of services provided or the benefit
received by Spinco. The allocation methods include specific identification,
relative revenues or costs, manufacturing capacity utilization, or headcount.
Allocated costs included in the accompanying consolidated statements of
operations follow (in thousands).

<TABLE>
<CAPTION>
1998 1999 2000
------- ------- --------
<S> <C> <C> <C>
Cost of goods sold................................... $31,257 $21,199 $ 27,784
Research and development............................. 16,688 22,348 31,522
Selling and marketing................................ 14,909 19,074 32,102
General and administrative........................... 8,550 13,527 26,981
------- ------- --------
$71,404 $76,148 $118,389
======= ======= ========
</TABLE>

At the separation date, Spinco and Conexant entered into a transition
services agreement which outlines certain services related to research and
development, selling and marketing, and general and administrative services to
be performed on behalf of Spinco by Conexant through December 31, 2001. Under
the terms of the agreement, Conexant will provide such services to Spinco at
cost. To the extent Spinco uses these services subsequent to December 31, 2001
the pricing is subject to negotiation.

Historically, Spinco has outsourced all of its product manufacturing to
Conexant and other third parties. Products manufactured by Conexant for Spinco
have been recorded in the consolidated financial statements at Conexant's actual
manufacturing cost. Cost of goods sold includes costs of Conexant-manufactured
products totaling $42.8 million, $63.0 million, and $98.8 million for fiscal
years 1998, 1999, and 2000, respectively. Under the transition services
agreement, Conexant will continue to provide fabrication, assembly, and test
capacity to Spinco at cost through December 31, 2001. To the extent Spinco uses
these services subsequent to December 31, 2001 the pricing is subject to
negotiation.

In connection with the separation from Conexant, Spinco and Conexant also
entered into an employee matters agreement and a joint technology and marketing
agreement. The employee matters agreement allocates assets, liabilities, and
responsibilities relating to current and former employees of the Internet
infrastructure business and their participation in the benefit plans, including
stock plans, that Conexant currently sponsors and maintains and requires Spinco
to establish benefit plans on terms and conditions

F-24
<PAGE> 122
CONEXANT SPINCO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

comparable to Conexant benefit plans prior to the separation. The joint
technology and marketing agreement provides for, among other things, cooperation
on common standards and features and joint marketing arrangements.

12. SEGMENT AND OTHER INFORMATION

Spinco operates in one segment, designing, developing and marketing
semiconductor products for manufacturers of communications network
infrastructure equipment. Geographical revenue information is based on the
destination of the sales. Long-lived assets consist of property, plant and
equipment. Long-lived assets information is based on the physical location of
the property or the assets at the end of each fiscal year.

Net Revenues by Geographic Area of Destination

<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------
1998 1999 2000
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
United States...................................... $112,874 $227,794 $437,110
Asia-Pacific....................................... 12,139 30,880 75,135
Europe............................................. 11,564 10,857 46,327
Other.............................................. 6,693 8,082 20,634
-------- -------- --------
Total net revenues............................ $143,270 $277,613 $579,206
======== ======== ========
</TABLE>

No foreign country represented 10% or more of net revenues for any of the
years presented.

Net Long-Lived Assets by Geographic Area

<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------
1999 2000
------- ----------
(IN THOUSANDS)
<S> <C> <C>
United States............................................... $46,219 $1,335,624
Europe...................................................... 577 68,924
Other....................................................... 1,091 85,011
------- ----------
Total net long-lived assets............................ $47,887 $1,489,559
======= ==========
</TABLE>

No foreign country represented 10% or more of net long-lived assets for any
of the years presented.

F-25
<PAGE> 123

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholders and Board of Directors of
Maker Communications, Inc. and subsidiary:

We have audited the accompanying consolidated balance sheets of Maker
Communications, Inc. (a Delaware corporation) and subsidiary as of December 31,
1998 and 1999 and the related consolidated statements of operations,
stockholders' equity (deficit) and cash flows for each of the three years in the
period ended December 31, 1999. These financial statements are the
responsibility of Maker Communications, Inc.'s management. Our responsibility is
to express an opinion on these financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Maker
Communications, Inc. and subsidiary as of December 31, 1998 and 1999 and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999 in conformity with accounting principles
generally accepted in the United States.

ARTHUR ANDERSEN LLP

Boston, Massachusetts
January 18, 2000

F-26
<PAGE> 124

MAKER COMMUNICATIONS, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1999

<TABLE>
<CAPTION>
1998 1999
--------- --------
(IN THOUSANDS, EXCEPT
SHARE AND PER SHARE
AMOUNTS)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 13,615 $20,485
Marketable securities..................................... -- 24,640
Accounts receivable, net of reserve of $90 at December 31,
1998 and 1999.......................................... 932 2,359
Inventory................................................. 296 610
Prepaid expenses and other current assets................. 106 883
-------- -------
Total current assets................................... 14,949 48,977
Marketable Securities, noncurrent........................... -- 12,000
Property and Equipment, net................................. 952 1,793
Other Assets................................................ 56 123
-------- -------
Total assets........................................... $ 15,957 $62,893
======== =======
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current Liabilities:
Current portion of note payable to a bank................. $ 308 $ --
Accounts payable.......................................... 412 733
Accrued expenses.......................................... 1,820 2,416
Deferred revenue.......................................... 181 324
-------- -------
Total current liabilities.............................. 2,721 3,473
Note Payable to a Bank, less current portion................ 642 --
Convertible Note Payable (Note 6)........................... 500 --
Commitments and Contingencies (Note 9)
Redeemable Preferred Stock, at redemption value (Note 7).... 23,440 --
Stockholders' Equity (Deficit) (Note 8):
Preferred stock, $0.01 par value --
Authorized -- 0 and 1,000,000 shares at December 31,
1998 and 1999, respectively...........................
Issued and outstanding -- No shares.................... -- --
Junior convertible preferred stock, $0.01 par value --
Authorized -- 3,154,000 and 0 shares at December 31,
1998 and 1999, respectively...........................
Issued and outstanding -- 3,154,000 and 0 shares at
December 31, 1998 and 1999, respectively.............. 32 --
Common stock, $0.01 par value --
Authorized -- 17,174,670 and 100,000,000 shares at
December 31, 1998 and 1999, respectively..............
Issued and outstanding -- 5,882,490 and 18,888,641
shares at December 31, 1998 and 1999, respectively.... 59 189
Additional paid-in capital................................ 68 68,540
Accumulated deficit....................................... (11,505) (9,309)
-------- -------
Total stockholders' equity (deficit).............. (11,346) 59,420
-------- -------
Total liabilities, redeemable preferred stock and
stockholders' equity (deficit)................... $ 15,957 $62,893
======== =======
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.
F-27
<PAGE> 125

MAKER COMMUNICATIONS, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999

<TABLE>
<CAPTION>
1997 1998 1999
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Revenues:
Product................................................... $ 1,231 $ 6,309 $13,454
Software and maintenance.................................. 543 1,385 2,230
------- ------- -------
Total revenues......................................... 1,774 7,694 15,684
Cost of Revenues............................................ 1,031 3,238 5,099
------- ------- -------
Gross profit........................................... 743 4,456 10,585
Operating Expenses:
Research and development.................................. 2,727 4,171 5,936
Selling and marketing..................................... 883 2,078 2,732
General and administrative................................ 751 1,299 1,557
Litigation................................................ 462 1,118 --
Acquisition costs......................................... -- -- 200
------- ------- -------
Total operating expenses............................... 4,823 8,666 10,425
------- ------- -------
Income (loss) from operations.......................... (4,080) (4,210) 160
Interest Income............................................. 212 538 2,195
Other Expenses, net......................................... (33) (82) (68)
------- ------- -------
Income (loss) before income taxes...................... (3,901) (3,754) 2,287
Provision for Income Taxes.................................. -- -- 91
------- ------- -------
Net income (loss)...................................... $(3,901) $(3,754) $ 2,196
======= ======= =======
Net Income (Loss) per Share:
Basic..................................................... $ (0.72) $ (0.66) $ 0.16
======= ======= =======
Diluted................................................... $ (0.72) $ (0.66) $ 0.12
======= ======= =======
Weighted Average Common Shares Outstanding:
Basic..................................................... 5,383 5,647 14,039
======= ======= =======
Diluted................................................... 5,383 5,647 19,083
======= ======= =======
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.
F-28
<PAGE> 126

MAKER COMMUNICATIONS, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999

<TABLE>
<CAPTION>
JUNIOR CONVERTIBLE
PREFERRED STOCK COMMON STOCK
---------------------- ---------------------- ADDITIONAL TOTAL
NUMBER $0.01 NUMBER $0.01 PAID-IN ACCUMULATED STOCKHOLDERS'
OF SHARES PAR VALUE OF SHARES PAR VALUE CAPITAL DEFICIT EQUITY (DEFICIT)
---------- --------- ---------- --------- ---------- ----------- ----------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1996.................. 3,154,000 $ 32 5,378,174 $ 54 $ 1 $ (3,758) $ (3,671)
Offering costs related
to the issuance of
Class B redeemable
convertible
preferred stock..... -- -- -- -- -- (62) (62)
Conversion of note
payable into common
stock............... -- -- 20,866 -- -- -- --
Exercise of employee
stock options....... -- -- 3,360 -- -- -- --
Net loss.............. -- -- -- -- -- (3,901) (3,901)
---------- ---- ---------- ---- ------- -------- --------
Balance, December 31,
1997.................. 3,154,000 32 5,402,400 54 1 (7,721) (7,634)
Offering costs related
to the issuance of
Class C redeemable
convertible
preferred stock..... -- -- -- -- -- (30) (30)
Exercise of employee
stock options....... -- -- 480,090 5 67 -- 72
Net loss.............. -- -- -- -- -- (3,754) (3,754)
---------- ---- ---------- ---- ------- -------- --------
Balance, December 31,
1998.................. 3,154,000 32 5,882,490 59 68 (11,505) (11,346)
Conversion of Class B
redeemable
convertible
preferred stock into
common stock........ -- -- 3,416,575 34 10,215 -- 10,249
Conversion of Class C
redeemable
convertible
preferred stock into
common stock........ -- -- 1,137,858 11 4,995 -- 5,006
Conversion of junior
convertible
preferred stock into
common stock........ (3,154,000) (32) 3,154,000 32 -- -- --
Conversion of
convertible note
payable into common
stock............... -- -- 125,000 1 499 -- 500
Common stock issued
during initial
public offering and
concurrent private
placement........... -- -- 4,352,500 44 51,610 -- 51,654
Exercise of employee
stock options....... -- -- 828,618 8 1,153 -- 1,161
Repurchase and
cancellation of
common stock........ -- -- (8,400) -- -- -- --
Net income............ -- -- -- -- -- 2,196 2,196
---------- ---- ---------- ---- ------- -------- --------
Balance, December 31,
1999.................. -- $ -- 18,888,641 $189 $68,540 $ (9,309) $ 59,420
========== ==== ========== ==== ======= ======== ========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.
F-29
<PAGE> 127

MAKER COMMUNICATIONS, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999

<TABLE>
<CAPTION>
1997 1998 1999
------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss)......................................... $(3,901) $(3,754) $ 2,196
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities --
Depreciation and amortization........................... 211 410 715
Issuance of convertible note payable in settlement of
litigation............................................ -- 500 --
Changes in operating assets and liabilities --
Accounts receivable.................................. (125) (602) (1,427)
Inventory............................................ (96) (146) (314)
Prepaid expenses and other current assets............ (229) 144 (777)
Accounts payable..................................... 119 209 321
Accrued expenses..................................... 445 1,276 596
Deferred revenue..................................... (4) 127 143
------- ------- --------
Net cash provided by (used in) operating
activities....................................... (3,580) (1,836) 1,453
Cash Flows from Investing Activities:
Purchase of marketable securities......................... -- -- (61,327)
Proceeds from sale or maturity of marketable securities... -- -- 24,687
Purchase of property and equipment........................ (587) (659) (1,556)
Decrease (increase) in other assets....................... (93) 43 (67)
------- ------- --------
Net cash used in investing activities.............. (680) (616) (38,263)
Cash Flows from Financing Activities:
Borrowings under note payable to a bank................... 436 689 450
Payments on note payable to a bank........................ -- (174) (1,400)
Net proceeds from initial public offering and concurrent
private placement of common stock....................... -- -- 51,654
Net proceeds from issuance of Class B redeemable
convertible preferred stock............................. 10,098 89 --
Net proceeds from issuance of Class C redeemable
convertible preferred stock............................. -- 4,526 450
Proceeds from exercise of stock options................... -- 72 1,161
Redemption of Class A redeemable preferred stock.......... -- -- (8,635)
------- ------- --------
Net cash provided by financing activities.......... 10,534 5,202 43,680
------- ------- --------
Net increase in cash and cash equivalents.......... 6,274 2,750 6,870
Cash and Cash Equivalents, beginning of year................ 4,591 10,865 13,615
------- ------- --------
Cash and Cash Equivalents, end of year...................... $10,865 $13,615 $ 20,485
======= ======= ========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for interest.................... $ 129 $ 65 $ 42
======= ======= ========
Cash paid during the year for income taxes................ $ -- $ 4 $ 72
======= ======= ========
Supplemental Disclosure of Noncash Financing Activities:
Conversion of note payable into common stock and Class A
redeemable preferred stock.............................. $ 34 $ -- $ --
======= ======= ========
Conversion of note payable into common stock.............. $ -- $ -- $ 500
======= ======= ========
Conversion of junior convertible preferred stock into
common stock............................................ $ -- $ -- $ 32
======= ======= ========
Conversion of Class B redeemable convertible preferred
stock into common stock................................. $ -- $ -- $ 10,249
======= ======= ========
Conversion of Class C redeemable convertible preferred
stock into common stock................................. $ -- $ -- $ 5,006
======= ======= ========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.
F-30
<PAGE> 128

MAKER COMMUNICATIONS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999

(1) NATURE OF OPERATIONS

Maker Communications, Inc. (Maker), a Delaware corporation, was founded in
1994. Maker is a fabless semiconductor company that develops and markets
high-performance programmable communications processors, development tools and
application software for use in communications systems equipment. Maker sells
its products to telecommunications and data networking vendors based primarily
in North America.

In 1998, Maker established a wholly owned subsidiary, Maker Communications
Securities Corporation, which is a qualified Massachusetts securities
corporation.

On December 18, 1999, Maker entered into an Agreement and Plan of Merger
with Conexant Systems, Inc. (Conexant), whereby Maker will be merged with and
into Conexant. Holders of Maker common stock would receive 0.66 of a share of
Conexant common stock for each share of Maker common stock. Consummation of the
merger is subject to customary conditions to closing, including the approval of
the stockholders of Maker and certain regulatory approvals. The merger will be
accounted for as a "purchase" transaction for accounting and financial reporting
purposes and is intended to qualify as a tax-free reorganization for federal
income tax purposes. The merger is expected to close in March 2000.

(2) SIGNIFICANT ACCOUNTING POLICIES

The accompanying consolidated financial statements reflect the application
of certain significant accounting policies as described in this note and
elsewhere in the accompanying consolidated financial statements and notes.

(a) Principles of Consolidation

The accompanying consolidated financial statements include the accounts of
Maker and its wholly owned subsidiary. All significant intercompany balances
have been eliminated in consolidation.

(b) Initial Public Offering

Maker completed its initial public offering (the Offering) of 3,852,500
shares of its common stock in May 1999, including 502,500 shares issued in
connection with the exercise of the underwriters' over-allotment option on the
Offering date. These shares were offered to the public at $13 per share, which
net of Offering expenses and the $0.91 per share underwriting discount, resulted
in net proceeds of $45,609,000. In addition. Maker sold 500,000 shares of common
stock in a concurrent private placement that was not underwritten at a price of
$12.09 pen share, resulting in net proceeds of $6,045,000. Concurrent with the
Offering, all of the Class A redeemable preferred stock was redeemed, resulting
in cash payments totaling $8,635,000, and all Class B convertible preferred
stock, Class C convertible preferred stock and junior convertible preferred
stock were all converted into an aggregate of 7,708,433 shares of common stock
on the date of the Offering. Proceeds from the Offering were used to repay bank
debt of $1,243,000 in May 1999.

Revenue derived from the sale of processors is recognized upon shipment.
Provisions are made at that time for any applicable warranty costs expected to
be incurred. Revenue from software license agreements is recognized upon
execution of a license agreement and delivery of the software, provided that the
fee is fixed or determinable and deemed collectible by management. Revenue from
software maintenance agreements is recognized ratably over the term of the
maintenance period, which is typically one year. Amounts collected or billed
prior to satisfying the above revenue recognition criteria are reflected as
deferred revenue. Maker recognizes software revenue in accordance with the
provisions of Statement of Position (SOP) No. 97-2, Software Revenue
Recognition.
F-31
<PAGE> 129
MAKER COMMUNICATIONS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(d) Net Income (Loss) per Share

Basic net income (loss) per share is calculated using the weighted average
number of common shares outstanding. Diluted net income (loss) per share is
computed on the basis of the weighted average number of common shares
outstanding and the effect of dilutive securities using the Treasury stock
method. The following table sets forth the computation of basic and diluted net
income (loss) per share, including a reconciliation of basic and diluted
weighted average shares outstanding (in thousands, except per share amounts)

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Net income (loss)..................................... $(3,901) $(3,754) $ 2,196
======= ======= =======
Basic weighted average common shares outstanding...... 5,383 5,647 14,039
Effect of dilutive securities:
Stock options....................................... -- -- 2,265
Convertible note.................................... -- -- 40
Convertible preferred stock......................... -- -- 2,739
------- ------- -------
Diluted weighted average common shares outstanding.... 5,383 5,647 19,083
======= ======= =======
Basic net income (loss) per share..................... $ (0.72) $ (0.66) $ 0.16
------- ------- -------
Diluted net income (loss) per share................... $ (0.72) $ (0.66) $ 0.12
======= ======= =======
</TABLE>

Options to purchase a weighted total of 492,000 and 1,503,000 common shares
have been excluded from the computation of diluted weighted average shares
outstanding for the years ended December 31, 1997 and 1998, respectively, since
their effect is antidilutive, as Maker has recorded a net loss for those
periods. For the year ended December 31, 1999, options to purchase a weighted
total of 66,000 common shares were excluded from the computation of diluted
weighted average shares outstanding because the exercise prices of such options
were greater than the average fair market value of Maker's common stock and,
therefore, would be antidilutive.

(e) Cost of Revenues

Cost of revenues includes the cost of purchasing fully assembled, tested
and packaged communications processors from Maker's independent foundries,
production related expenses, warranty, and quality assurance for those products,
as well as costs of personnel associated with supporting Maker's customers. Cost
of revenues also includes software costs, consisting of the cost of media on
which it is delivered, which amounts are not significant.

(f) Cash Equivalents and Marketable Securities

Maker classifies short-term, highly liquid investments with original
maturity dates of 90 days or less as cash equivalents and all investments with
original maturity dates greater than 90 days as marketable securities.
Marketable securities with remaining maturities of less than one year as of the
balance sheet date are classified as current.

At December 31, 1999, all of Maker's cash equivalents and marketable
securities were in commercial paper, corporate bonds and government securities
and were classified as held-to-maturity. Held-to-maturity securities represent
those securities for which Maker has the intent and ability to hold to maturity
and are stated at cost, adjusted for amortization of premiums and discounts.

F-32
<PAGE> 130
MAKER COMMUNICATIONS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

A summary of held-to-maturity securities at amortized cost, which
approximates market value, by balance sheet caption is as follows (in
thousands):

<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
DECEMBER 31, AVERAGE DECEMBER 31, AVERAGE
1998 MATURITY 1999 MATURITY
------------ -------- ------------ ---------
<S> <C> <C> <C> <C>
Cash equivalents.................... $9,051 -- $14,452 --
Marketable securities, current...... -- -- 24,640 3 months
Marketable securities, noncurrent... -- -- 12,000 18 months
------ -------
Total held-to-maturity securities... $9,051 $51,092
====== =======
</TABLE>

(g) Inventory

Inventory, which consists of finished goods, is stated at the lower of cost
(first-in, first-out) or market.

(h) Property and Equipment

Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Maker provides for depreciation and amortization using the
straight-line method to allocate the cost of property and equipment over their
estimated useful lives, as follows:

<TABLE>
<CAPTION>
ESTIMATED
ASSET CLASSIFICATION USEFUL LIFE
-------------------- -------------
<S> <C>
Computer equipment.......................................... 3 years
Computer software........................................... 3 years
Leasehold improvements...................................... Life of lease
Furniture and fixtures...................................... 5 years
</TABLE>

Property and equipment at December 31, 1998 and 1999 consisted of the
following (in thousands):

<TABLE>
<CAPTION>
1998 1999
------ ------
<S> <C> <C>
Computer equipment.......................................... $1,236 $2,207
Computer software........................................... 422 873
Leasehold improvements...................................... 48 139
Furniture and fixtures...................................... 53 96
------ ------
1,759 3,315
Less -- Accumulated depreciation and amortization........... 807 1,522
------ ------
$ 952 $1,793
====== ======
</TABLE>

(i) Software Development Costs

In accordance with Statement of Financial Accounting Standards (SFAS) No.
86, Accounting for the Costs of Computer Software to Be Sold, Leased or
Otherwise Marketed, Maker has evaluated the establishment of technological
feasibility of its various products during the development phase. Due to the
dynamic changes in the market, Maker has concluded that it cannot determine
technological feasibility until the development phase of the project is nearly
complete. The time period during which costs could be capitalized from the point
of reaching technological feasibility until the time of general product release
is very short and, consequently, the amounts that could be capitalized are not
material to Maker's financial position or results of operations. Therefore,
Maker charges all research and development expenses to operations in the period
incurred.

F-33
<PAGE> 131
MAKER COMMUNICATIONS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(j) Income Taxes

Maker accounts for income taxes in accordance with the provisions of SFAS
No. 109, Accounting for Income Taxes. This statement requires Maker to recognize
a current tax asset or liability for current taxes payable or refundable and to
record a deferred tax asset or liability for the estimated future tax effects of
temporary differences and carryforwards to the extent that they are realizable.
A deferred tax provision or benefit results from the net change in deferred tax
assets and liabilities during the year. A deferred tax valuation allowance is
required if it is more likely than not that all or a portion of the recorded
deferred tax assets will not be realized.

(k) Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and use
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.

(l) Concentration of Credit Risk

Maker has no significant off-balance-sheet concentrations of credit risk,
such as foreign exchange contracts, option contracts or other foreign hedging
arrangements. Financial instruments that potentially subject Maker to
concentrations of credit risk are principally cash equivalents, marketable
securities, accounts receivable, accounts payable, notes payable and redeemable
preferred stock. Concentration of credit risk with respect to accounts
receivable is limited to certain customers to whom Maker makes substantial
sales. Maker performs periodic credit evaluations of its customers and generally
does not require collateral. At December 31, 1998 and 1999, Maker had $90,000 in
allowances for estimated losses.

The following table summarizes the number of customers that individually
comprise greater than 10% of the total accounts receivable and their aggregate
percentage of Maker's total accounts receivable.

<TABLE>
<CAPTION>
PERCENT OF
TOTAL
NUMBER OF ACCOUNTS
CUSTOMERS RECEIVABLE
--------- ----------
<S> <C> <C>
December 31, 1998........................................... 3 58%
December 31, 1999........................................... 4 52%
</TABLE>

(m) Fair Value of Financial Instruments

Financial instruments consist principally of cash and cash equivalents,
marketable securities, accounts receivable, accounts payable, notes payable and
redeemable preferred stock. The estimated fair value of these instruments
approximates their carrying value.

(n) Stock-Based Compensation

SFAS No. 123, Accounting for Stock-Based Compensation, requires the
measurement of the fair value of stock options or warrants to be included in the
consolidated statement of operations or disclosed in the notes to consolidated
financial statements. Maker has determined that it will account for stock-based
compensation for employees under the intrinsic-value-based method of Accounting
Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees,
and elect the disclosure-only alternative under SFAS No. 123.

F-34
<PAGE> 132
MAKER COMMUNICATIONS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(o) Comprehensive Income

In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 130, Reporting Comprehensive Income. Maker does not have any components of
comprehensive income besides its reported net income (loss).

(3) ACCRUED EXPENSES

Accrued expenses at December 31, 1998 and 1999 consisted of the following
(in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1998 1999
------ ------
<S> <C> <C>
Payroll and related costs................................... $ 520 $ 937
Professional fees........................................... 156 345
Production costs............................................ 231 128
Other 913 1,006
------ ------
$1,820 $2,416
====== ======
</TABLE>

(4) INCOME TAXES

As of December 31, 1999, Maker has net operating loss carryforwards of
approximately $5,947,000 available to reduce future federal and state income
taxes, if any. Maker also has available federal tax credits of approximately
$492,000 expiring through 2011. If not utilized, these carryforwards expire at
various dates through 2019. If substantial changes in Maker's ownership should
occur, as defined by Section 382 of the Internal Revenue Code (the Code), there
could be annual limitations on the amount of carryforwards that can be realized
in future periods. Maker has completed several financings since its inception
and has incurred an ownership change as defined under the Code. Maker does not
believe that this change in ownership will have a material impact on its ability
to utilize its net operating loss and tax credit carryforwards.

Net deferred tax assets consist of the following (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1998 1999
------ ------
<S> <C> <C>
Net operating loss carryforwards............................ $3,507 $2,395
Nondeductible expenses and reserves......................... 550 743
------ ------
4,057 3,138
Less -- Valuation allowance................................. 4,057 3,138
------ ------
$ -- $ --
====== ======
</TABLE>

Due to the uncertainty surrounding Maker's ability to utilize its net
operating loss carryforwards, Maker has provided a full valuation allowance
against its otherwise recognizable deferred tax asset at December 31, 1998 and
1999. For the year ended December 31, 1999, Maker recorded a provision for
income taxes currently payable in the amount of $91,000 for minimum federal and
state tax liabilities.

(5) NOTES PAYABLE TO A BANK

(a) Working Capital Line of Credit

Maker has a working capital line of credit with a bank, whereby it can
borrow up to $2,500,000. Borrowings bear interest at the bank's prime rate (8.5%
at December 31, 1999) plus 0.25%. The line of credit

F-35
<PAGE> 133
MAKER COMMUNICATIONS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

is collateralized by substantially all assets of Maker. The line of credit
expires in February 2000. Maker had no borrowings under the working capital line
of credit as of December 31, 1998 and 1999.

(b) Capital Expenditure Line of Credit

Maker had borrowings under a modified equipment line-of-credit facility
with the same bank. Borrowings were payable over a 30- to 39-month period and
bore interest at the bank's prime rate (8.5% at December 31, 1999) plus 0.25% to
prime plus 1.0%. In 1999, Maker borrowed an additional $450,000 under its
existing equipment line-of-credit facility. On February 3, 1999, Maker entered
into a loan modification agreement with the bank that provided Maker with an
additional $1,000,000 of borrowing availability under its capital expenditure
line of credit. As of December 31, 1999, Maker had $1,000,000 available under
the modified equipment line of credit. All borrowings under the equipment line
of credit were collateralized by substantially all assets of Maker. Under these
agreements, Maker is required to comply with certain restrictive covenants. As
of December 31, 1998 and 1999, Maker was in compliance with all such covenants.
In connection with Maker's initial public offering in May 1999, all outstanding
amounts under its capital expenditure line of credit were repaid and Maker had
no borrowings under this line as of December 31, 1999.

(6) CONVERTIBLE NOTE PAYABLE

In July 1998, Maker issued a $500,000 convertible note payable to LSI Logic
Corporation (LSI), which accrued interest at an annual rate of 6.5%. All
principal and interest was due on June 30, 2001. Upon the occurrence of certain
events, LSI had the ability to convert the principal of the note into fully paid
and nonassessable shares of common stock of Maker at the lesser of $4.00 per
share, subject to certain dilutive events, as defined, or the subsequent sale
price per share of common stock issued by Maker in which the aggregate gross
proceeds received by Maker is at least $1,000,000. In April 1999, LSI notified
Maker of its intention to convert the note to 125,000 shares of Maker's common
stock, which occurred prior to the closing of Maker's initial public offering.

(7) REDEEMABLE PREFERRED STOCK

(a) Class A Redeemable Preferred Stock

In September 1996, Maker authorized the issuance of up to 5,380,000 shares
of Class A redeemable preferred stock, $0.01 par value and issued 5,359,134
shares at $1.605 per share resulting in net proceeds of approximately
$8,537,000. In October 1997, Maker issued an additional 20,866 shares of Class A
redeemable preferred stock at $1.605 per share in exchange for the conversion of
a note payable to a stockholder in the amount of approximately $34,000. These
shares were nonvoting, nonconvertible and had dividend rights superior to junior
convertible preferred stock, Class B redeemable convertible preferred stock,
Class C redeemable convertible preferred stock and common stock. The Class A
redeemable preferred stock had a liquidation preference of $1.605 per share plus
all declared but unpaid dividends. In May 1999, in connection with Maker's
initial public offering, the Class A redeemable preferred stock was redeemed for
approximately $8,635,000.

(b) Class B Redeemable Convertible Preferred Stock

In October 1997, Maker authorized the issuance of up to 3,416,670 shares of
Class B redeemable convertible preferred stock, $0.01 par value, and issued
3,386,675 shares at $3.00 per share, resulting in net proceeds of approximately
$10,098,000. In July 1998, Maker issued an additional 29,000 shares, resulting
in net proceeds of approximately $89,000. These shares were convertible into
common stock at the rate of one share of common stock for each share of
preferred stock, adjustable for certain dilutive events. These shares had
dividend rights superior to junior convertible preferred stock and common stock
and similar to the Class C redeemable convertible preferred stock. The Class B
redeemable convertible preferred stock had a

F-36
<PAGE> 134
MAKER COMMUNICATIONS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

liquidation preference of $3.00 per share plus all declared but unpaid
dividends. Conversion was automatic upon the closing of Maker's initial public
offering of common stock, which occurred in May 1999. All outstanding shares of
Class B redeemable convertible preferred stock were converted into 3,416,575
shares of common stock.

In December 1998, Maker authorized the issuance of up to 1,138,000 shares
of Class C redeemable convertible preferred stock and issued 1,035,586 shares at
$4.40 per share resulting in net proceeds of approximately $4,526,000. In
January 1999, Maker sold an additional 102,272 shares of Class C redeemable
convertible preferred stock at $4.40 per share, resulting in net proceeds to
Maker of approximately $450,000. These shares were convertible into common stock
at the rate of one share of common stock for each share of preferred stock,
adjustable for certain dilutive events. These shares had dividend rights
superior to junior convertible preferred stock and common stock and similar to
Class B redeemable convertible preferred stock. The Class C redeemable
convertible preferred stock had a liquidation preference of $4.40 per share plus
all declared but unpaid dividends. Conversion was automatic upon the closing of
Maker's initial public offering of common stock in May 1999. All outstanding
shares of Class C redeemable convertible preferred stock were converted into
1,137,858 shares of common stock.

(8) STOCKHOLDERS' EQUITY (DEFICIT)

(a) Junior Convertible Preferred Stock

The junior convertible preferred stock was subordinate to Class A
redeemable preferred stock and Class B convertible preferred stock and Class C
convertible preferred stock and superior to common stock with regard to
liquidation. Junior convertible preferred stock was optionally redeemable by
Maker at a price of $0.005 per share subsequent to the redemption of the Class A
redeemable preferred stock. Each share of junior convertible preferred stock
could, at the option of the holder, be converted to one share of common stock,
as adjusted for certain events. Voting rights were provided to junior
convertible preferred stock in proportion to the number of shares of common
stock that would be received upon conversion.

Conversion occurred automatically upon the completion of Maker's initial
public offering. All outstanding shares of junior convertible preferred stock
were converted into 3,154,000 shares of common stock.

(b) Stock Plans

1996 Option Plan

During 1996, the board of directors approved the 1996 Stock Option Plan
(the 1996 Plan). The board of directors has reserved 3,876,000 shares of common
stock for issuance under the 1996 Plan. Options issued under the 1996 Plan may
be either incentive stock options or nonqualified stock options at the
discretion of the board of directors. Options may be granted to key employees,
officers, consultants and advisers of Maker. Options expire up to 10 years from
the date of grant or as determined by the board of directors. Options vest over
a term to be established by the board of directors at the date of grant. Under
the 1996 Plan, at the option of the board of directors, certain option grants
may be immediately exercisable but are subject to a right to repurchase at cost
at the option of the board of directors, pursuant to the vesting schedule of
such grant. In addition, upon a change in control of Maker, as defined, the
exercisability of options due to vest during the following 12-month period are
automatically accelerated. Upon the effectiveness of Maker's 1999 Incentive
Stock Plan, no further options were granted under the 1996 Plan.

F-37
<PAGE> 135
MAKER COMMUNICATIONS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

1999 Incentive Stock Plan

In April 1999, the board of directors approved the 1999 Incentive Stock
Plan (1999 Plan) permitting the grant of stock options, which may be either
incentive stock or nonqualified options and stock awards. This plan became
effective upon the closing of Maker's initial public offering in May 1999. The
maximum number of shares of Maker's common stock available for stock options and
stock awards granted under the 1999 Plan is 2,600,000 plus annual cumulative
increases on each January 1, beginning in 2000 equal to (a) 5% of Maker's issued
and outstanding common stock calculated on a fully diluted basis or (b) a lesser
amount, as determined by the board of directors.

Options designated as incentive stock options may be granted only to
employees of Maker. Non-qualified options may be granted to any officer,
employee, consultant or director of Maker. No option designated as an incentive
stock option shall be granted to any employee of Maker or any subsidiary if such
employee owns, immediately prior to the grant of an option, stock representing
more than 10% of the combined voting power of all classes of stock of Maker,
unless the purchase price for the stock under such option is at least 110% of
its fair market value at the time the option is granted and the option, by its
terms, is not exercisable more than five years from the date it is granted.

The maximum number of shares of Maker's common stock with respect to which
an option or options may be granted to any employee in any calendar year shall
not exceed 500,000 shares, taking into account shares subject to options granted
and terminated, or repriced, during such calendar year. Options granted under
the 1999 Incentive Plan will vest as determined by the board of directors. Upon
a change in control of Maker, the exercisability of options due to vest during
the 12-month period following the change in control are automatically
accelerated.

1999 Non-Employee Director Plan

In January 1999, the board of directors adopted a Director Option Plan
(Director Plan) pursuant to which 125,000 shares of common stock have been
reserved for future issuance, plus annual increases such that the total number
of shares subject to issuance shall be (i) 125,000 on January 1 of each year or
(ii) a lesser amount determined by the board of directors. The Director Plan
provides that each nonemployee director will automatically be granted an option
to purchase 20,000 shares on the date which such person first becomes a
nonemployee director. In addition, each nonemployee director will automatically
be granted an option to purchase 15,000 shares on the date two days after Maker
announces its fiscal year-end earnings of each year, if on such date that
director will have served on the board of directors for at least the preceding
six months. Each option has a term of up to 10 years and vests over a term
determined by the board of directors at the time of grant. In addition, upon a
change in control of Maker, as defined, all unvested options shall vest
immediately.

1999 Employee Stock Purchase Plan

In April 1999, the board of directors approved the Maker 1999 Employee
Stock Purchase Plan (the Stock Purchase Plan). This plan became effective upon
the closing of Maker's initial public offering. The Stock Purchase Plan is
intended to provide a means whereby eligible employees may purchase, on a
quarterly basis, common stock of Maker through payroll deductions. Such payroll
deductions cannot amount to less than 1% nor more than 10% of the participant's
regular compensation and cannot exceed $25,000 or 3,000 shares per year. The
purchase price of shares of Maker common stock under the Stock Purchase Plan is
the lower of 85% of the fair market value of a share of common stock for the
first business day of the relevant purchase period or 85% of such value for the
relevant exercise date. 400,000 shares of Maker common stock have been reserved
for issuance under the Stock Purchase Plan. During 1999, no shares were issued
under Maker's Stock Purchase Plan. Maker will account for the Stock Purchase
Plan in accordance with APB

F-38
<PAGE> 136
MAKER COMMUNICATIONS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

No. 25 and, accordingly, no compensation cost will be recognized under the Stock
Purchase Plan. Maker will elect the "disclosure only" alternative under SFAS No.
123.

The following table summarizes option activity under the stock plans:

<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES EXERCISE PRICE PRICE
--------- -------------- --------
<S> <C> <C> <C>
Outstanding, December 31,1996.................. 812,950 $ .05 - $ .16 $ .08
Granted...................................... 1,163,100 .16 - .30 .17
Exercised.................................... (3,360) .05 .05
Canceled..................................... (44,620) .05 - .16 .09
--------- -------------- ------
Outstanding, December 31, 1997................. 1,928,070 .05 - .30 .13
Granted...................................... 1,782,250 .30 - 3.75 2.03
Exercised.................................... (480,090) .05 - 1.00 .15
Canceled..................................... (611,980) .05 - .30 .16
--------- -------------- ------
Outstanding, December 31, 1998................. 2,618,250 .05 - 3.75 1.42
Granted...................................... 1,060,250 4.40 - 29.25 16.82
Exercised.................................... (828,618) .05 - 8.50 1.40
Canceled..................................... (188,700) .16 - 3.75 1.31
--------- -------------- ------
Outstanding, December 31, 1999................. 2,661,182 $ .05 - $29.25 $ 7.57
========= ============== ======
Exercisable, December 31, 1999................. 379,255 $ .05 - $ 8.50 $ 1.33
========= ============== ======
Exercisable, December 31, 1998................. 263,530 $ .05 - $ 3.75 $ 0.16
========= ============== ======
Exercisable, December 31, 1997................. 264,530 $ .05 - $ .16 $ .07
========= ============== ======
</TABLE>

The following table summarizes information relating to currently
outstanding and exercisable options as of December 31, 1999.

<TABLE>
<CAPTION>
OUTSTANDING
---------------------------------------------------- EXERCISABLE
WEIGHTED AVERAGE ----------------------------
RANGE OF NUMBER OF REMAINING CONTRACTUAL WEIGHTED AVERAGE NUMBER OF WEIGHTED AVERAGE
EXERCISE PRICES SHARES LIFE (YEARS) EXERCISE PRICE SHARES EXERCISE PRICE
--------------- --------- --------------------- ---------------- --------- ----------------
<S> <C> <C> <C> <C> <C>
$ 0.05 223,240 6.79 $ 0.05 117,360 $0.05
0.16 133,092 7.30 0.16 43,592 0.16
0.30 347,925 8.20 0.30 73,765 0.30
0.75 235,000 8.47 0.75 60,000 0.75
2.00 - 2.75 471,300 8.71 2.73 11,800 2.51
3.75 - 4.40 305,750 8.94 3.95 52,550 4.24
8.50 - 9.50 243,625 5.59 8.95 20,188 8.50
13.00 - 18.31 55,000 5.56 15.41 -- --
19.72 - 29.25 646,250 6.27 22.12 -- --
--------- -------
2,661,182 379,255
========= =======
</TABLE>

F-39
<PAGE> 137
MAKER COMMUNICATIONS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

For purposes of the pro forma disclosures required by SFAS No. 123, the
fair value of each option grant under Maker's stock option plans and the fair
value of employee purchase rights under Maker's Stock Purchase Plan were
estimated on the date of grant using the Black-Scholes option pricing model. The
assumptions used and the weighted average information for the years ended
December 31, 1997, 1998 and 1999 are as follows:

<TABLE>
<CAPTION>
STOCK
STOCK OPTION PLANS PURCHASE
----------------------------------------------- PLAN
1997 1998 1999 1999
------------- ------------- ------------- ---------
<S> <C> <C> <C> <C>
Risk-free interest rates............. 5.89 - 6.46% 4.47 - 5.49% 4.90 - 6.04% 6.02%
Expected dividend yield.............. -- -- -- --
Expected life........................ 4 years 4 years 4 years .25 years
Expected volatility.................. 60% 60% 60% 60%
Weighted average fair value of
options granted.................... $.09 $1.02 $8.71 $6.05
Weighted-average remaining
contractual life of options
outstanding........................ 9.27 years 9.13 years 7.47 years --
</TABLE>

Had compensation expense from Maker's stock option plans and Stock Purchase
Plan been determined consistent with SFAS No. 123, net income (loss) and net
income (loss) per share would have been approximately as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
1997 1998 1999
---------- ---------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net income (loss):
As reported............................................... $(3,901) $(3,754) $2,196
Pro forma................................................. (3,929) (3,967) 672
Net income (loss) per share:
Basic --
As reported............................................ $ (0.72) $ (0.66) $ 0.16
Pro forma.............................................. (0.73) (0.70) 0.05
Diluted --
As reported............................................ $ (0.72) $ (0.66) $ 0.12
Pro forma.............................................. (0.73) (0.70) 0.04
</TABLE>

(9) COMMITMENTS AND CONTINGENCIES

(a) Litigation

In February 1997, LSI filed a lawsuit against Maker. During July 1998,
Maker and LSI reached a settlement agreement under which Maker paid LSI a lump
sum of $200,000 and issued a $500,000 convertible note, as discussed in Note 6.
Maker has included in a separate line item in its consolidated statement of
operations the legal and settlement costs associated which the LSI litigation.
Maker is not currently involved in any litigation that, in management's opinion,
would have a material adverse effect on its business, operating results or
financial condition.

F-40
<PAGE> 138
MAKER COMMUNICATIONS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(b) Leases

Maker has operating leases for various facilities and equipment expiring at
various dates through February 2005. In November 1999, Maker entered into a new
facilities lease, whereby it issued to the lessor a letter of credit in the
amount of $267,000 as a security deposit. Future minimum lease payments under
the operating leases at December 31, 1999 are as follows (in thousands):

Rent expense under operating leases totaled approximately $200,000,
$278,000, and $381,000 for the years ended December 31, 1997, 1998 and 1999,
respectively.

(10) EMPLOYEE BENEFIT PLAN

Maker has a 401(k) savings and profit-sharing plan (the Plan). All
employees are immediately eligible to participate upon the attainment of age 21.
The Plan is intended to qualify as a defined contribution plan in accordance
with Section 401(k) of the Internal Revenue Code. Participants may defer up to
15% of their compensation under the Plan. Maker may make discretionary
profit-sharing contributions to the Plan. Participants vest in Maker's
contributions ratably over five years. No discretionary contributions were made
in 1997, 1998 or 1999.

(11) SEGMENT, SIGNIFICANT CUSTOMER AND SUPPLIER INFORMATION

Maker operates in one industry segment, communications processors, and
derives substantially all of its revenues from U.S. customers. Maker had a total
of three customers whose revenue represented a significant percentage of total
revenue in certain or all years, as follows:

<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
--------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Customer A.................................................. 32% 29% 30%
Customer B.................................................. 23 16 14
Customer C.................................................. -- 13 --
Customer D.................................................. -- -- 10
</TABLE>

Maker currently outsources substantially all manufacturing, assembly and
test of communications processors to one outside foundry.

F-41
<PAGE> 139

INDEPENDENT AUDITORS' REPORT

To the Board of Directors of
HotRail, Inc.:

We have audited the accompanying balance sheet of HotRail, Inc. (a
development stage company) as of June 29, 2000, and the related statements of
operations, shareholders' equity (deficiency) and cash flows for the period July
1, 1999 through June 29, 2000. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits. The statements of shareholder's
equity for the years ended June 30, 1999 and 1998 have been audited by other
auditors whose report, dated November 3, 1999 expressed an unqualified opinion
on those statements and contains an explanatory paragraph relating to HotRail,
Inc.'s ability to continue as a going concern.

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

In our opinion, such financial statements present fairly, in all material
respects, the financial position of HotRail, Inc. at June 29, 2000, and the
results of its operations and its cash flows for the period July 1, 1999 through
June 29, 2000 in conformity with accounting principles generally accepted in the
United States of America.

DELOITTE & TOUCHE LLP

Costa Mesa, California
November 9, 2000

F-42
<PAGE> 140

HOTRAIL, INC.
(A DEVELOPMENT STAGE COMPANY)

BALANCE SHEET
AS OF JUNE 29, 2000

<TABLE>
<S> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 7,436,000
Prepaid expenses.......................................... 58,000
Other current assets...................................... 198,000
------------
Total current assets................................... 7,692,000
Property and Equipment, net................................. 1,971,000
Other Assets................................................ 14,000
------------
$ 9,677,000
============

LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 360,000
Accrued and other current liabilities..................... 778,000
Conexant transaction costs payable........................ 6,003,000
Notes payable, current.................................... 666,000
Capital lease obligations, current........................ 332,000
------------
Total current liabilities.............................. 8,139,000
Notes Payable............................................... 164,000
Capital Lease Obligations................................... 575,000
------------
Total liabilities...................................... 8,878,000
------------
Commitments (Note 5)
Shareholders' Equity:
Series A convertible preferred stock, no par value,
liquidation preference $1.00 per share; 7,465,887
shares authorized, 7,200,887 shares issued and
outstanding............................................ 7,094,000
Series B convertible preferred stock, no par value,
liquidation preference $1.31 per share; 11,800,000
shares authorized, 11,800,000 shares issued and
outstanding............................................ 15,407,000
Series C convertible preferred stock, no par value,
liquidation preference $2.20 per share; 6,000,000
shares authorized, 5,454,545 shares issued and
outstanding............................................ 11,947,000
Common stock, no par value; 60,000,000 shares authorized,
7,000,453 shares issued and outstanding................ 626,000
Paid-in capital........................................... 502,000
Deficit accumulated during the development stage.......... (34,777,000)
------------
Total shareholders' equity............................. 799,000
------------
$ 9,677,000
============
</TABLE>

See accompanying notes to financial statements.
F-43
<PAGE> 141

HOTRAIL, INC.
(A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF OPERATIONS
FOR THE PERIOD JULY 1, 1999 THROUGH JUNE 29, 2000 AND
CUMULATIVE FROM AUGUST 16, 1993 (INCEPTION) THROUGH
JUNE 29, 2000 (UNAUDITED)

<TABLE>
<CAPTION>
CUMULATIVE
FROM
AUGUST 16,
1993
(INCEPTION)
THROUGH
PERIOD ENDED JUNE 29,
JUNE 29, 2000
2000 (UNAUDITED)
------------ ------------
<S> <C> <C>
Net Revenues................................................ $ -- $ 1,644,000
Cost of Net Revenues........................................ 978,000
------------ ------------
Gross Profit................................................ 666,000
Operating Expenses:
Research and development.................................. 10,412,000 21,569,000
General and administrative................................ 3,086,000 6,656,000
Legal and other costs associated with acquisition by
Conexant............................................... 6,003,000 6,003,000
------------ ------------
Total operating expenses............................... 19,501,000 34,228,000
------------ ------------
Loss from Operations........................................ (19,501,000) (33,562,000)
Write Down of Fixed Assets.................................. (1,091,000) (1,091,000)
Interest Expense, net....................................... (40,000) (124,000)
------------ ------------
Net Loss.................................................... $(20,632,000) $(34,777,000)
============ ============
</TABLE>

See accompanying notes to financial statements.
F-44
<PAGE> 142

HOTRAIL, INC.
(A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
FOR THE PERIOD JULY 1, 1999 THROUGH JUNE 29, 2000 AND
CUMULATIVE FROM AUGUST 16, 1993 (INCEPTION) THROUGH
JUNE 29, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK
---------------------------------------------------------------------------
SERIES A SERIES B SERIES C
---------------------- ------------------------ -----------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- ---------- ---------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock to
founders at $0.003 per share in
September 1993 (unaudited)........ $ $ $
Issuance of common stock at $0.083
per share in September 1994
(unaudited).......................
Issuance of common stock at $0.138
per share in January 1995
(unaudited).......................
Issuance of common stock at an
average price of $0.021 per share,
net of issuance costs of $19,000
in April 1997 (unaudited).........
Compensation resulting from stock
issuances (unaudited).............
Net loss, inception through June
30, 1997 (unaudited)..............
--------- ---------- ---------- ----------- --------- -----------
BALANCES, JUNE 30, 1997............
Issuance of common stock at $0.099
per share in September 1997.......
Issuance of warrants for preferred
stock in March 1998...............
Net loss...........................
--------- ---------- ---------- ----------- --------- -----------
BALANCES, JUNE 30, 1998............
Issuance of warrants for preferred
stock in April through June
1999..............................
Compensation related to stock
options...........................
Net loss...........................
--------- ---------- ---------- ----------- --------- -----------
BALANCES, JUNE 30, 1999............
Reclassification of Series A
convertible preferred stock issued
at $1.00 per share, net of
issuance costs of $107,000 in
October 1997 through January
1998.............................. 7,200,887 7,094,000
Reclassification of Series B
convertible preferred stock issued
at $1.31 per share, net of
issuance costs of $16,000 in
November 1998 through June 1999... 6,791,305 8,880,000
Issuance of Series B convertible
stock at $1.31 per share, net of
issuance costs of $34,000 in July
1999.............................. 4,945,718 6,445,000
Issuance of Series C convertible
preferred stock at $2.20 per
share, net of issuance costs of
$53,000 in February and March
2000.............................. 5,454,545 11,947,000
Issuance of warrants for common
stock in September 1999...........
Compensation expense related to
stock options
Issuance of options for common
stock for service in July 1999
through June 2000.................
Issuance of Series B preferred
stock by exercise of warrants..... 62,977 82,000
Issuance of common stock by
exercise of warrants..............
Issuance of common stock by
exercise of options...............
Net loss...........................
--------- ---------- ---------- ----------- --------- -----------
BALANCES, JUNE 29, 2000............ 7,200,887 $7,094,000 11,800,000 $15,407,000 5,454,545 $11,947,000
========= ========== ========== =========== ========= ===========

<CAPTION>
DEFICIT
ACCUMULATED
COMMON STOCK DURING THE SHAREHOLDERS'
-------------------- PAID-IN DEVELOPMENT EQUITY
SHARES AMOUNT CAPITAL STAGE (DEFICIENCY)
--------- -------- -------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Issuance of common stock to
founders at $0.003 per share in
September 1993 (unaudited)........ 3,013,435 $ 10,000 $ $ $ 10,000
Issuance of common stock at $0.083
per share in September 1994
(unaudited)....................... 602,687 50,000 50,000
Issuance of common stock at $0.138
per share in January 1995
(unaudited)....................... 361,612 50,000 50,000
Issuance of common stock at an
average price of $0.021 per share,
net of issuance costs of $19,000
in April 1997 (unaudited)......... 910,057
Compensation resulting from stock
issuances (unaudited)............. 56,000 56,000
Net loss, inception through June
30, 1997 (unaudited).............. (163,000) (163,000)
--------- -------- -------- ------------ ------------
BALANCES, JUNE 30, 1997............ 4,887,791 166,000 (163,000) 3,000
Issuance of common stock at $0.099
per share in September 1997....... 1,606,535 159,000 159,000
Issuance of warrants for preferred
stock in March 1998............... 118,000 118,000
Net loss........................... (3,642,000) (3,642,000)
--------- -------- -------- ------------ ------------
BALANCES, JUNE 30, 1998............ 6,494,326 443,000 (3,805,000) (3,362,000)
Issuance of warrants for preferred
stock in April through June
1999.............................. 19,000 19,000
Compensation related to stock
options........................... 11,000 11,000
Net loss........................... (10,340,000) (10,340,000)
--------- -------- -------- ------------ ------------
BALANCES, JUNE 30, 1999............ 6,494,326 473,000 (14,145,000) (13,672,000)
Reclassification of Series A
convertible preferred stock issued
at $1.00 per share, net of
issuance costs of $107,000 in
October 1997 through January
1998.............................. 7,094,000
Reclassification of Series B
convertible preferred stock issued
at $1.31 per share, net of
issuance costs of $16,000 in
November 1998 through June 1999... 8,880,000
Issuance of Series B convertible
stock at $1.31 per share, net of
issuance costs of $34,000 in July
1999.............................. 6,445,000
Issuance of Series C convertible
preferred stock at $2.20 per
share, net of issuance costs of
$53,000 in February and March
2000.............................. 11,947,000
Issuance of warrants for common
stock in September 1999........... 9,000 9,000
Compensation expense related to
stock options 137,000 137,000
Issuance of options for common
stock for service in July 1999
through June 2000................. 356,000 356,000
Issuance of Series B preferred
stock by exercise of warrants..... 82,000
Issuance of common stock by
exercise of warrants.............. 71,000 31,000 31,000
Issuance of common stock by
exercise of options............... 435,127 122,000 122,000
Net loss........................... (20,632,000) (20,632,000)
--------- -------- -------- ------------ ------------
BALANCES, JUNE 29, 2000............ 7,000,453 $626,000 $502,000 $(34,777,000) $ 799,000
========= ======== ======== ============ ============
</TABLE>

See accompanying notes to financial statements.
F-45
<PAGE> 143

HOTRAIL, INC.
(A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF CASH FLOWS
FOR THE PERIOD JULY 1, 1999 THROUGH JUNE 29, 2000 AND
CUMULATIVE FROM AUGUST 16, 1993 (INCEPTION) THROUGH
JUNE 29, 2000 (UNAUDITED)

<TABLE>
<CAPTION>
CUMULATIVE
FROM
AUGUST 16,
1993
(INCEPTION)
PERIOD ENDED THROUGH
JUNE 29, JUNE 29,
2000 2000
------------ ------------
(UNAUDITED)
<S> <C> <C>
Cash Flows From Operating Activities:
Net loss.................................................. $(20,632,000) $(34,777,000)
Reconciliation of net loss to net cash used in operating
activities:
Depreciation and amortization.......................... 1,542,000 3,056,000
Stock compensation..................................... 137,000 204,000
Options and warrants issued for services............... 365,000 446,000
Write-down of fixed assets............................. 1,091,000 1,091,000
Changes in current assets and liabilities:
Prepaid expenses and other current assets.............. 90,000 (237,000)
Accounts payable....................................... (324,000) 360,000
Accrued and other current liabilities.................. 451,000 778,000
Conexant transactions costs payable.................... 6,003,000 6,003,000
------------ ------------
Net cash used in operating activities................ (11,277,000) (23,076,000)
------------ ------------
Cash Flows From Investing Activities:
Purchases of property and equipment....................... (911,000) (5,911,000)
------------ ------------
Cash Flows From Financing Activities:
Proceeds from issuance of Series A convertible preferred
stock.................................................. 6,744,000
Proceeds from issuance of Series B convertible preferred
stock.................................................. 6,445,000 15,325,000
Proceeds from issuance of Series C convertible preferred
stock.................................................. 11,947,000 11,947,000
Proceeds from issuance of common stock.................... 269,000
Proceeds from notes payable............................... 2,654,000
Repayments on notes payable............................... (665,000) (1,824,000)
Proceeds from sales leaseback............................. 985,000 985,000
Repayments of capital leases.............................. (262,000) (262,000)
Proceeds from related party notes payable................. 100,000
Repayments on related party notes payable................. (100,000)
Proceeds from convertible secured promissory notes
payable................................................ 350,000
Proceeds from exercise of options......................... 122,000 122,000
Proceeds from exercise of warrants........................ 113,000 113,000
------------ ------------
Net cash provided by financing activities.............. 18,685,000 36,423,000
------------ ------------
Net Increase in Cash and Cash Equivalents................... 6,497,000 7,436,000
Cash and Cash Equivalents, beginning of year................ 939,000
------------ ------------
Cash and Cash Equivalents, end of year...................... $ 7,436,000 $ 7,436,000
============ ============
Supplemental Cash Flow Information -- Interest paid......... $ 194,000 $ 345,000
============ ============
Supplemental Schedule of Noncash Investing and Financing
Activities:
Purchase of property and equipment under capital lease
obligations............................................... $ 121,000 $ 184,000
============ ============
Conversion of convertible secured promissory notes payable
to Series A convertible preferred stock................... $ -- $ 350,000
============ ============
</TABLE>

See accompanying notes to financial statements.
F-46
<PAGE> 144

HOTRAIL, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD JULY 1, 1999 THROUGH JUNE 29, 2000 AND
CUMULATIVE FROM AUGUST 16, 1993 (INCEPTION) THROUGH
JUNE 29, 2000 (UNAUDITED)

1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES

The Company -- HotRail, Inc. (the Company), formerly Poseidon Technology,
Inc., was incorporated in California on August 16, 1993. The Company designs and
develops high-speed switching and interconnectivity solutions for the Internet
infrastructure. Previously, the Company designed and developed high performance,
low cost symmetrical microprocessor core logic and chip sets for the WinNT and
UNIX PC server and workstation environments. From inception through 1997, the
Company built custom Pentium-based multi-processing boards, and it is no longer
involved in this effort. Since the change in business model, the Company has
been principally involved in research and development, market analysis and other
business planning activities. The Company has had no revenue from product sales
of its current product and since inception has incurred net losses. At June 29,
2000, the Company was considered to be in development stage; accordingly, the
Company's statements of operations should not be regarded as typical for normal
operating periods.

Effective June 29, 2000, the Company completed a merger agreement with
Conexant Systems, Inc. (Conexant). Under the terms of the merger agreement,
holders of the Company's preferred capital stock shall convert all shares of the
Company's preferred stock into the Company's common stock, each outstanding
share of the Company's common stock will be exchanged for a fractional share
(0.20585695) of Conexant common stock and all outstanding options and warrants
to purchase shares of capital stock of the Company, whether vested or unvested,
will be assumed by Conexant with all rights with respect to the Company common
stock thereupon converted at the same exchange ratio into rights with respect to
Conexant common stock. The Company incurred legal, accounting and other costs in
connection with the merger with Conexant of $6,003,000.

Basis of Presentation -- The accompanying financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America.

Use of Estimates -- The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.

Revenue Recognition -- Revenue from product sales is generally recognized
at the time the product is shipped, with provisions established for estimated
product returns. Upon shipment, the Company also provides for the estimated
costs that may be incurred from product warranties and post-sale customer
support. Revenue recognized for the period from inception to June 30, 1998 is
from discontinued products. The Company has had no revenue from sales of its
current product.

Cash Equivalents -- The Company considers all highly liquid debt
instruments having a maturity of three months or less on the date of purchase to
be cash equivalents.

Concentration of Credit Risk -- The Company's financial instruments that
are exposed to concentrations of credit risk consist primarily of cash and cash
equivalents. Cash is deposited with high credit quality financial institutions.
Cash equivalents consist of money market funds.

Property and Equipment -- Property and equipment are stated at cost, less
accumulated depreciation. Depreciation is computed using the straight-line
method over estimated useful lives of assets, which range from three to five
years.

F-47
<PAGE> 145
HOTRAIL, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE PERIOD JULY 1, 1999 THROUGH JUNE 29, 2000 AND
CUMULATIVE FROM AUGUST 16, 1993 (INCEPTION) THROUGH
JUNE 29, 2000 (UNAUDITED)

Stock-Based Compensation -- The Company accounts for its employee stock
option plan in accordance with the provisions of Accounting Principles Board
(APB) Opinion No. 25. In October 1995, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards (SFAS) No. 123, Accounting
for Stock-Based Compensation which established fair value based method of
accounting for employee stock option plans. The Company provides additional pro
forma disclosures as prescribed under SFAS No. 123.

Comprehensive Income (Loss) -- The Company adopted SFAS No. 130, Reporting
Comprehensive Income during fiscal 1999. SFAS No. 130 establishes standards for
reporting comprehensive income and its components in a financial statement that
is displayed with the same prominence as other financial statements.
Comprehensive income, as defined, includes all changes in equity (net assets)
during a period from nonowner sources. Examples of items to be included in
comprehensive income, which are excluded from net income, include foreign
currency translation adjustments and unrealized gain (loss) on
available-for-sale securities. The Company has no items of other comprehensive
income for each of the periods presented.

2. RECENT ACCOUNTING PRONOUNCEMENTS

Derivative Instruments and Hedging Activities -- SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities establishes methods of
accounting for derivative financial instruments and hedging activities related
to those instruments as well as other hedging activities, and is effective for
fiscal years beginning after June 15, 2000 and accordingly is effective for the
Company in its next fiscal year. The adoption of SFAS 133 by the Company did not
have a material effect on the Company's financial statements.

3. PROPERTY AND EQUIPMENT

Property and equipment at June 29, 2000 consist of the following:

<TABLE>
<S> <C>
Purchased software.......................................... $ 3,642,000
Computer equipment.......................................... 2,049,000
Office equipment and fixtures............................... 228,000
-----------
Total....................................................... 5,919,000
Accumulated depreciation.................................... (3,948,000)
-----------
Property and equipment, net................................. $ 1,971,000
===========
</TABLE>

Long lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. If the
fair value is less than the carrying amount of the asset, a loss is recognized
for the difference. During the period ended June 29, 2000, the Company recorded
a charge of $1,091,000 to reduce the net book value of certain computer
equipment and purchased software which was no longer being used as the Company
changed its business focus to the design and development of high-speed switching
and interconnectivity solutions for the Internet infrastructure. Accumulated
depreciation at June 29, 2000 includes $1,091,000 of asset impairment and asset
write off charges related to this change in business focus.

F-48
<PAGE> 146
HOTRAIL, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE PERIOD JULY 1, 1999 THROUGH JUNE 29, 2000 AND
CUMULATIVE FROM AUGUST 16, 1993 (INCEPTION) THROUGH
JUNE 29, 2000 (UNAUDITED)

4. NOTES PAYABLE

The Company has notes payable with unrelated parties collateralized by
equipment with a net book value of $1,527,000. The notes bear interest at a
stated per annum rate of 7.47% and are repayable through April 2002.

Minimum payments due under the notes payable are as follows as of June 29:

5. COMMITMENTS

Capital Leases -- The Company has capital leases for equipment with
unrelated parties, including capital leases which the Company entered during the
period ended June 29, 2000, in sale leaseback transactions. The sale leaseback
transactions were for certain computer equipment at an aggregate selling price
of $985,000 which was the Company's net book value of such assets.

Minimum payments due under capital lease obligations are as follows as of
June 29:

<TABLE>
<S> <C>
2001........................................................ $ 407,000
2002........................................................ 407,000
2003........................................................ 212,000
----------
1,026,000
Less amounts representing interest.......................... (119,000)
----------
Present value of future minimum payments.................... 907,000
Less current portion........................................ 332,000
----------
Long-term portion of capital lease obligations.............. $ 575,000
==========
</TABLE>

Operating Leases -- The Company rents office space and equipment under
operating leases. Future minimum lease payments are as follows as of June 29:

Rent expense was $515,000 and $1,107,000 (unaudited) for the period ended
June 29, 2000 and for the period from August 16, 1993 (inception) to June 29,
2000, respectively.

6. CONVERTIBLE PREFERRED STOCK AND WARRANTS

Under the Company's articles of incorporation, the Company's preferred
stock is issuable in series, and the Company's Board of Directors is authorized
to determine the rights, preferences and terms of each series. As discussed in
Note 1, under terms of a voting agreement in connection with the merger of the
Company with Conexant, holders of the Company's preferred capital stock shall
convert all shares of the Company's preferred stock into the Company's common
stock on a one-for-one basis. Immediately preceding the merger

F-49
<PAGE> 147
HOTRAIL, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE PERIOD JULY 1, 1999 THROUGH JUNE 29, 2000 AND
CUMULATIVE FROM AUGUST 16, 1993 (INCEPTION) THROUGH
JUNE 29, 2000 (UNAUDITED)

with Conexant, amounts, terms and liquidation values of Series A, Series B, and
Series C convertible preferred stock were as follows:

<TABLE>
<CAPTION>
SHARES
SHARES ISSUED AND LIQUIDATION
SERIES NET AMOUNT AUTHORIZED OUTSTANDING VALUE
------ ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
A............................... $ 7,094,000 7,465,887 7,200,887 $ 7,201,000
B............................... 15,407,000 11,800,000 11,800,000 15,458,000
C............................... 11,947,000 6,000,000 5,454,545 12,000,000
----------- ---------- ---------- -----------
$34,448,000 25,265,887 24,455,432 $34,659,000
=========== ========== ========== ===========
</TABLE>

During the period ended June 29, 2000 issuances of Series A and B preferred
stock were reclassified to stockholders' equity due to the lapse of certain
liquidation preferences.

Voting -- Each share of preferred stock carries a number of votes equal to
the number of shares of common stock then issuable upon its conversion into
common stock. The preferred stock will generally vote together with the common
stock and not as a separate class.

Dividend -- The holders of Series A, Series B and Series C shall be
entitled to receive, out of any funds legally available therefore, noncumulative
dividends at the rate of $0.10, $.0131, and $0.22 per share, for the Series A,
Series B and Series C, respectively, prior and in preference to any payment of
any dividend on the common stock in each calendar year.

Warrants -- In September 1999, the Company issued warrants to purchase
45,000 shares of common stock at $0.45 per share for services rendered to the
Company. The warrants expire in August 2002. Based on the Black-Scholes model,
the fair market value of the warrants at the date of grant was $9,000, which was
recorded as general and administrative expenses. The Company has reserved 45,000
shares of common stock for the exercise of these warrants.

In April 1999 and May 1999, the Company issued warrants to purchase 28,626
shares of Series B preferred stock at $1.31 per share in connection with bridge
loan financing. The warrants expire in April and May 2004. The fair market value
at the dates of grant was $19,000, which was recorded as debt issue costs. This
amount was amortized to interest expense over the term of the loan. The Company
has reserved 28,626 shares of Series B convertible preferred stock for the
exercise of the warrants.

In March 1998, the Company issued warrants to purchase 15,000 shares of
common stock at $0.30 per share in connection with certain consulting services.
These warrants expire in April 2001. Based on the Black-Scholes model, the fair
market value of the warrants at the date of grant was not material. The Company
has reserved 15,000 shares of common stock for the exercise of these warrants.

In March 1998, the Company issued warrants to purchase 140,000 shares of
Series A at $1.00 per share in connection with certain equipment financing. The
warrants expire in December 2003. The fair market value of the warrants at the
date of grant was $56,000, which was recorded as debt issue costs. The Company
has reserved 140,000 shares of Series A convertible preferred stock for the
exercise of these warrants.

In October 1997, the Company issued warrants to purchase 125,000 shares of
Series A at $1.00 per share in connection with certain consulting services. The
warrants expire in October 2002. The fair market value of the warrants at the
date of grant was $62,000. this amount was expensed in fiscal 1998. The Company
has reserved 125,000 shares of Series A convertible preferred stock for the
exercise of these warrants.

F-50
<PAGE> 148
HOTRAIL, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE PERIOD JULY 1, 1999 THROUGH JUNE 29, 2000 AND
CUMULATIVE FROM AUGUST 16, 1993 (INCEPTION) THROUGH
JUNE 29, 2000 (UNAUDITED)

7. STOCK OPTION PLANS

The 1997 Stock Option Plan (the 1997 Plan), which expires in 2007,
authorizes the Board of Directors to grant incentive stock options and
nonstatutory stock options to employees, directors and consultants. In June
1999, the shareholders of the Company approved an increase in common shares for
the Plan from 2,700,000 to 3,525,000. In February 2000 and June 2000, the
shareholders of the Company approved increases in the common shares for the Plan
of 1,000,000 and 278,324, respectively, for a cumulative number of shares
available under the Plan of 4,800,324.

Under the Plan, incentive stock options are granted at a price that is not
to be less than 100% of the fair market value of the Company's common stock, as
determined by the Board of Directors, on the date of grant. Nonqualified stock
options are granted at a price that is not to be less than 85% of the fair
market value of the common stock, as determined by the Board of Directors, on
the date of grant.

Generally, options granted under the Plan are exercisable for a period of
ten years after the date of grant, and shares subject to options vest at a rate
of 1/4th on the first anniversary of the grant date of the option, and an
additional 1/48 of the shares upon completion of each succeeding full month of
continuous employment thereafter. Options granted to individuals who own 10% or
more of the Company's voting stock on the date of grant are exercisable for a
period of five years after the date of grant. The Board of Directors may
terminate the Plan at any time at its discretion.

The 2000 Equity Plan (the 2000 Plan) authorizes the Board of Directors to
grant incentive stock options and nonstatutory stock options, stock warrants,
restricted stock and stock bonuses to employees, directors, service providers
and strategic partners. At June 29, 2000, there were 2,300,000 shares authorized
for grant under the 2000 Plan. The Board of Directors may terminate the 2000
Plan at any time.

Under the 2000 Plan, incentive stock option, warrants, restricted stock and
stock bonuses are granted at a price that is not to be less than 100% of the
fair market value of the Company's common stock, as determined by the Board of
Directors, on the date of grant. Nonqualified stock options are granted at a
price that is not to be less than 85% of the fair market value of the common
stock, as determined by the Board of Directors, on the date of grant. The
options, warrants, restricted stock or stock bonuses may be exercisable
immediately or maybe exercisable within the times or upon the events set forth
in the grant agreement up to 10 years from the date of grant; options granted to
individuals who own 10% or more of the Company's voting stock on the date of the
grant are exercisable for a period of five years after the date of grant.

The following summarizes activity under the 1997 and 2000 Plans:

<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
OPTIONS OPTIONS PRICE
AVAILABLE OUTSTANDING PER SHARE
---------- ----------- ---------
<S> <C> <C> <C>
Balance at July 1, 1999................... 958,400 2,556,000 $0.24
Shares authorized for grant............... 3,578,324
Granted................................... (4,995,737) 4,995,737 2.69
Exercised................................. (394,177) 0.25
Canceled.................................. 799,411 (799,411)
---------- ---------
Balance at June 29, 2000.................. 340,398 6,358,149 $2.08
========== =========
</TABLE>

F-51
<PAGE> 149
HOTRAIL, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE PERIOD JULY 1, 1999 THROUGH JUNE 29, 2000 AND
CUMULATIVE FROM AUGUST 16, 1993 (INCEPTION) THROUGH
JUNE 29, 2000 (UNAUDITED)

Additional information regarding options outstanding as of June 29, 2000 is
as follows:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------- OPTIONS EXERCISABLE
WEIGHTED ----------------------
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
-------- ----------- ------------ -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.10 995,000 5.29 $0.10 948,228 $0.10
$0.20 45,000 7.67 0.20 26,250 0.20
$0.30 393,020 8.15 0.30 186,811 0.30
$0.45 881,701 8.95 0.45 212,505 0.45
$0.65 140,000 9.54 0.65 50,000 0.65
$1.05 901,175 8.82 1.05 272,807 1.05
$2.50 316,300 9.88 2.50 2,250 2.50
$4.00 2,685,953 9.98 4.00 34,125 4.00
--------- ---------
6,358,149 8.81 $2.08 1,732,976 $0.41
========= =========
</TABLE>

The Company has elected to continue to follow the provisions of APB No. 25,
Accounting for Stock Issued to Employees for financial reporting purposes and
has adopted the disclosure-only provisions of SFAS No. 123. In accordance with
the provisions of SFAS No. 123, the fair value of each option is estimated using
the following assumptions used for grants during the period ended June 29, 2000:
dividend yield and volatility of 60% for all periods, risk-free interest rate of
6.370% for the period ended June 29, 2000 and expected term of four years. Had
compensation cost for the Company's stock option plans been determined based on
the fair market value at the grant date for awards in 2000 consistent with the
provisions of SFAS No. 123, the Company's net loss for the period ended June 29,
2000 and for the period from inception through June 29, 2000 would have been
increased to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
PERIOD ENDED THROUGH
JUNE 29, 2000 JUNE 29, 2000
------------- -------------
(UNAUDITED)
<S> <C> <C>
Net loss:
As reported................................... $(20,632,000) $(34,777,000)
============ ============
Pro forma..................................... $(20,869,000) $(35,014,000)
============ ============
</TABLE>

The above pro forma disclosures are not necessarily representative of the
effects on reported net income or loss for future years.

8. INCOME TAXES

No provision for federal or state income taxes has been recorded for the
period ended June 29, 2000 as the Company had incurred net operating losses.

F-52
<PAGE> 150
HOTRAIL, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE PERIOD JULY 1, 1999 THROUGH JUNE 29, 2000 AND
CUMULATIVE FROM AUGUST 16, 1993 (INCEPTION) THROUGH
JUNE 29, 2000 (UNAUDITED)

Deferred tax assets (liabilities) at June 29, 2000 relate to the following:

<TABLE>
<S> <C>
Net operating loss and credit carryforwards................. $8,505,000
Less valuation allowance.................................... (8,505,000)
----------
$ --
==========
</TABLE>

Management believes that, based on a number of factors, the available
objective evidence creates sufficient uncertainty regarding the realizability of
the deferred tax assets such that a full valuation allowance has been recorded.
These factors include the Company's history of losses, recent increases in
expense levels, the fact that the market in which the Company competes is
intensely competitive and characterized by rapidly changing technology, the lack
of carryback capacity to realize deferred tax assets, and the uncertainty
regarding market acceptance of the Company's products. Based on the currently
available evidence, management is unable to assert that it is more likely than
not that the Company will generate sufficient taxable income to realize the
Company's deferred tax assets. The Company will continue to assess the
realizability of the deferred tax assets based on actual and forecasted
operating results.

At June 29, 2000, the Company had net operating loss carryforwards for
federal and state income tax purposes of approximately $18,368,000 which expire
2014 through 2020. At June 29, 2000, the Company had research and development
credit carryforwards of approximately $1,002,000 to reduce future taxable
income.

For federal and state tax purposes, a portion of the Company's net
operating loss carryforwards may be subject to certain limitations on annual
utilization in cases of a change in ownership, as defined by federal and state
tax law.

* * * * * *

F-53
<PAGE> 151

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders of
HotRail, Inc. (formerly Poseidon Technology, Inc.)

In our opinion, the accompanying balance sheets and the related statements
of operations, of shareholders' equity/(deficit) and of cash flows present
fairly, in all material respects, the financial position of HotRail, Inc. (a
company in the development stage) at June 30, 1998 and 1999, and the results of
its operations and its cash flows for each of the two years in the period ended
June 30, 1999 in conformity with accounting principles generally accepted in the
United States of America. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which 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, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations
since inception that raises substantial doubt about its ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 1. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.

/s/ PricewaterhouseCoopers LLP

San Jose, California
November 3, 1999

F-54
<PAGE> 152

HOTRAIL, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)

BALANCE SHEETS

<TABLE>
<CAPTION>
JUNE 30,
---------------------------
1998 1999
----------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 3,118,000 $ 939,000
Prepaid expenses and other current assets................. 503,000 346,000
----------- ------------
Total current assets.............................. 3,621,000 1,285,000
Property and equipment, net................................. 2,325,000 3,554,000
Other assets................................................ 51,000 32,000
----------- ------------
Total assets...................................... $ 5,997,000 $ 4,871,000
=========== ============

LIABILITIES, CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS'
DEFICIT
Current liabilities:
Accounts payable.......................................... $ 1,095,000 $ 684,000
Accrued liabilities....................................... 108,000 232,000
Other current liabilities................................. 18,000 95,000
Notes payable, current.................................... 361,000 682,000
Capital lease obligations, current........................ -- 21,000
----------- ------------
Total current liabilities......................... 1,582,000 1,714,000
Notes payable............................................... 683,000 813,000
Capital lease obligations................................... -- 42,000
----------- ------------
2,265,000 2,569,000
----------- ------------
Commitments (Note 5)
Convertible Preferred Stock:
Convertible Series A Preferred Stock, no par value
7,465,887 shares authorized; 7,200,887 shares issued
and outstanding at June 30, 1998 and 1999; Liquidation
preference and redemption value of $7,201,000.......... 7,094,000 7,094,000
Convertible Series B Preferred Stock, no par value
10,250,000 shares authorized; 6,791,305 shares issued
and outstanding at June 30, 1999; Liquidation
preference and redemption value of $8,897,000.......... -- 8,880,000
----------- ------------
Total convertible preferred stock................. 7,094,000 15,974,000
----------- ------------
Shareholders' deficit:
Common Stock, no par value:
50,000,000 shares authorized; 6,494,326 shares issued
and outstanding at June 30, 1998 and 1999.............. 443,000 473,000
Deficit accumulated during the development stage.......... (3,805,000) (14,145,000)
----------- ------------
Total shareholders' deficit....................... (3,362,000) (13,672,000)
----------- ------------
Total liabilities, convertible preferred stock and
shareholders' deficit........................... $ 5,997,000 $ 4,871,000
=========== ============
</TABLE>

The accompanying notes are an integral part of these financial statements.
F-55
<PAGE> 153

HOTRAIL, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
---------------------------
1998 1999
----------- ------------
<S> <C> <C>
Net revenues................................................ $ 231,000 $ --
Cost of net revenues........................................ 153,000 --
----------- ------------
Gross profit................................................ 78,000 --
----------- ------------
Operating expenses:
Research and development.................................. 2,178,000 8,590,000
General and administrative................................ 1,626,000 1,605,000
----------- ------------
Total operating expenses.......................... 3,804,000 10,195,000
----------- ------------
Loss from operations........................................ (3,726,000) (10,195,000)
Interest (expense) income, net.............................. 84,000 (145,000)
----------- ------------
Net loss.................................................... $(3,642,000) $(10,340,000)
=========== ============
</TABLE>

The accompanying notes are an integral part of these financial statements.
F-56
<PAGE> 154

HOTRAIL, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
---------------------------
1998 1999
----------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(3,642,000) $(10,340,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 328,000 1,155,000
Stock compensation..................................... -- 11,000
Warrants issued for services........................... 62,000 19,000
Changes in current assets and liabilities:
Prepaid expenses and other current assets............ (358,000) 176,000
Accounts payable..................................... 986,000 (411,000)
Accrued liabilities.................................. (44,000) 124,000
Other current liabilities............................ 18,000 77,000
----------- ------------
Net cash used in operating activities............. (2,650,000) (9,189,000)
----------- ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment........................ (2,468,000) (2,321,000)
----------- ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Series A Convertible Preferred
Stock.................................................. 6,744,000 --
Proceeds from issuance of Series B Convertible Preferred
Stock.................................................. -- 8,880,000
Proceeds from issuance of Common Stock.................... 159,000 --
Proceeds from notes payable............................... 1,081,000 1,451,000
Repayments on notes payable............................... (159,000) (1,000,000)
Proceeds from related party notes payable................. 100,000 --
Repayments on related party notes payable................. (100,000) --
Proceeds from convertible secured promissory notes
payable................................................ 350,000 --
----------- ------------
Net cash provided by financing activities......... 8,175,000 9,331,000
----------- ------------
Net increase in cash and cash equivalents................... 3,057,000 (2,179,000)
Cash and cash equivalents at beginning of period............ 61,000 3,118,000
----------- ------------
Cash and cash equivalents at end of period.................. $ 3,118,000 $ 939,000
=========== ============

SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid............................................. $ 21,000 $ 130,000
=========== ============

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Purchase of property and equipment under capital lease
obligations............................................ $ -- $ 63,000
=========== ============
Conversion of convertible secured promissory notes payable
to Series A Convertible Preferred Stock................ $ 350,000 $ --
=========== ============
</TABLE>

The accompanying notes are an integral part of these financial statements.
F-57
<PAGE> 155

HOTRAIL, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)

STATEMENT OF SHAREHOLDERS' EQUITY/(DEFICIT)

<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
COMMON STOCK DURING THE TOTAL
--------------------- DEVELOPMENT SHAREHOLDERS'
SHARES AMOUNT STAGE EQUITY/(DEFICIT)
--------- -------- ------------ ----------------
<S> <C> <C> <C> <C>
Balance at June 30, 1997................ 4,887,791 $166,000 $ (163,000) $ 3,000
Issuance of Common Stock at $0.099 per
share in September 1997............... 1,606,535 159,000 -- 159,000
Issuance of warrants for Preferred Stock
in March 1998......................... -- 118,000 -- 118,000
Net loss................................ -- -- (3,642,000) (3,642,000)
--------- -------- ------------ ------------
Balance at June 30, 1998................ 6,494,326 443,000 (3,805,000) (3,362,000)
Issuance of warrants for Preferred Stock
in April through June 1999............ -- 19,000 -- 19,000
Compensation related to stock options... -- 11,000 -- 11,000
Net loss................................ -- -- (10,340,000) (10,340,000)
--------- -------- ------------ ------------
Balance at June 30, 1999................ 6,494,326 $473,000 $(14,145,000) $(13,672,000)
========= ======== ============ ============
</TABLE>

The accompanying notes are an integral part of these financial statements.
F-58
<PAGE> 156

HOTRAIL, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)

NOTES TO FINANCIAL STATEMENTS

NOTE 1 -- THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES:

The Company

HotRail, Inc. (the "Company"), formerly Poseidon Technology, Inc., was
incorporated in California on August 16, 1993. The Company designs and develops
high performance, low cost symmetrical microprocessor core logic and chip sets
for the WinNT and UNIX PC server and workstation environments. From inception
through 1997, the Company built custom Pentium-based multi-processing boards,
and it is no longer involved in this effort. Since the change in business model,
the Company has been principally involved in research and development, market
analysis and other business planning activities. The Company has had no revenue
from product sales of its current product and since inception has incurred net
losses. At June 30, 1999, the Company was considered to be in development stage;
accordingly, the Company's statements of operations should not be regarded as
typical for normal operating periods.

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America, requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.

The accompanying financial statements have been prepared assuming the
Company will continue as a going concern which contemplates continuity of
operations, realization of assets and liquidation of liabilities in the ordinary
course of business. Subsequent to June 30, 1999, the Company received additional
equity funding to be used for working capital purposes and to fund operating
activities. Management does not believe this additional funding will be
sufficient to provide for the working capital needs of the Company through June
30, 2000. In order to continue to fund operating activities, management will
need to obtain additional capital from investors or a strategic partner. If
management is unable to obtain such additional capital, it may be required to
liquidate assets in satisfaction of liabilities. Management currently intends to
raise additional capital in fiscal 2001.

Revenue recognition

Revenue from product sales is recognized at the time the product is
shipped, with provisions established for estimated product returns. Revenue
recognized for the period from inception to June 30, 1998 is from discontinued
products. The Company has had no revenue from sales of its current product.

Cash equivalents

The Company considers all highly liquid debt instruments having a maturity
of three months or less on the date of purchase to be cash equivalents.

Concentration of credit risk

The Company's financial instruments that are exposed to concentrations of
credit risk consist primarily of cash and cash equivalents. Cash is deposited
with high credit quality financial institutions. Cash equivalents consisted of
money market funds.

F-59
<PAGE> 157
HOTRAIL, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

Property and equipment

Property and equipment are stated at cost, less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, which range from three to five years.

Stock based compensation

The Company accounts for its employee stock option plan in accordance with
the provisions of Accounting Principles Board Opinion No. 25. In October 1995,
the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123, "Accounting for Stock Based Compensation" ("FAS
123") which established fair value based method of accounting for employee stock
option plans. The Company provides additional pro forma disclosures as
prescribed under FAS 123.

Comprehensive income (loss)

The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income," ("SFAS 130") during fiscal 1999. SFAS 130
establishes standards for reporting comprehensive income and its components in a
financial statement that is displayed with the same prominence as other
financial statements. Comprehensive income, as defined, includes all changes in
equity (net assets) during a period from non-owner sources. Examples of items to
be included in comprehensive income, which are excluded from net income, include
foreign currency translation adjustments and unrealized gain/loss on
available-for-sale securities. The Company has no items of other comprehensive
income for each of the periods presented.

Reclassification

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

NOTE 2 -- RECENT ACCOUNTING PRONOUNCEMENTS:

Derivative instruments and hedging activities

In June 1998, the FASB issued SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes methods of accounting
for derivative financial instruments and hedging activities related to those
instruments as well as other hedging activities, and is effective for fiscal
years beginning after June 15, 1999. The Company is currently determining the
additional disclosures, if any, that may be required under this pronouncement.

NOTE 3 -- PROPERTY AND EQUIPMENT:

Property and equipment is comprised of the following:

<TABLE>
<CAPTION>
JUNE 30,
-------------------------
1998 1999
---------- -----------
<S> <C> <C>
Purchased software................................. $1,833,000 $ 3,190,000
Computer equipment................................. 662,000 1,691,000
Office equipment and fixtures...................... 184,000 182,000
---------- -----------
2,679,000 5,063,000
Less: Accumulated depreciation..................... (354,000) (1,509,000)
---------- -----------
$2,325,000 $ 3,554,000
========== ===========
</TABLE>

F-60
<PAGE> 158
HOTRAIL, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 4 -- NOTES PAYABLE:

The Company entered into notes payable with unrelated parties
collateralized by equipment with a net book value of $3,054,000. The notes bear
interest at a stated per annum rate of 7.47% and are repayable through April,
2002.

Minimum payments due under the notes payable are as follows:

<TABLE>
<CAPTION>
YEAR ENDING
JUNE 30,
-----------
<S> <C>
2000................................................... $ 682,000
2001................................................... 656,000
2002................................................... 157,000
----------
$1,495,000
==========
</TABLE>

NOTE 5 -- COMMITMENTS:

Capital leases

The Company entered into capital leases for equipment with an unrelated
party.

Minimum payments due under capital lease obligations are as follows:

<TABLE>
<CAPTION>
YEAR ENDING
JUNE 30,
-----------
<S> <C>
2000................................................... $ 29,000
2001................................................... 29,000
2002................................................... 28,000
--------
86,000
Less: Amounts representing interest.................... (23,000)
--------
Present value of future minimum payments............... 63,000
Less: Current portion.................................. (21,000)
--------
Long-term portion of capital lease obligation.......... $ 42,000
========
</TABLE>

Operating lease

In June 1999, the Company entered into an operating lease which expires in
July 2002. Future minimum lease payments are as follows:

<TABLE>
<CAPTION>
YEAR ENDING
JUNE 30,
-----------
<S> <C>
2000................................................... $ 383,000
2001................................................... 403,000
2002................................................... 423,000
----------
$1,209,000
==========
</TABLE>

Rent expense was $223,000, $322,000 and $592,000 for the years ended June
30, 1998 and 1999 and for the period from June 1, 1993 (date of inception) to
June 30, 1999, respectively.

F-61
<PAGE> 159
HOTRAIL, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 6 -- CONVERTIBLE PREFERRED STOCK AND WARRANTS:

Under the Company's Articles of Incorporation, the Company's preferred
stock is issuable in series and the Company's Board of Directors is authorized
to determine the rights, preferences and terms of each series. At June 30, 1999,
the amounts, terms and liquidation values of Series A and Series B convertible
preferred stock are as follows:

<TABLE>
<CAPTION>
SHARES
SHARES ISSUED AND LIQUIDATION
SERIES NET AMOUNT AUTHORIZED OUTSTANDING VALUE
------ ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
A............................... $ 7,094,000 7,465,887 7,200,887 $ 7,201,000
B............................... 8,880,000 10,250,000 6,791,305 8,897,000
----------- ---------- ---------- -----------
$15,974,000 17,715,887 13,992,192 $16,098,000
=========== ========== ========== ===========
</TABLE>

Dividend

The holders of Series A Preferred Stock (the "Series A") and Series B
Preferred Stock ("Series B") (collectively, "Preferred Stock") shall be entitled
to receive, out of any funds legally available therefor, noncumulative dividends
at a rate of $0.10 and $0.131 per share for the Series A and Series B,
respectively, prior and in preference to any payment of any dividend on the
Common Stock in each calendar year, (the "Preferred Stock Dividend Preference").

Liquidation

In the event of any liquidation, dissolution or winding up of the Company,
including a consolidation or merger in which its shareholders do not retain a
majority of the voting power in the surviving corporation, a sale of
substantially all assets or a sale by the Company's shareholders of at least a
majority of the voting power in one or a series of related transactions, the
holders of the Series A and Series B will be entitled to receive an amount equal
to $1.00 and $1.31 per share, respectively, plus an amount equal to all declared
but unpaid dividends thereon, (the "Preferred Preference Amount").

After the full liquidation preference on all outstanding shares of
Preferred Stock has been paid or set apart, the holders of the common stock, in
the aggregate, will be entitled to receive an amount equal to 40% of the total
Preferred Preference Amount paid to the holders of the Preferred Stock, plus an
amount equal to all declared but unpaid dividends thereon, (the "Common
Preference Amount"). Any remaining funds and assets of the Company legally
available for distribution to shareholders will be distributed pro rata among
the holders of the Common Stock and the Preferred Stock (on an as-converted
basis).

If the Company has insufficient assets to permit payment of the Preferred
Preference Amount in full to all Preferred shareholders, then the assets of the
Company will be distributed ratably to the holders of the Preferred Stock in
proportion to the Preferred Preference Amount each such holder would otherwise
be entitled to receive. If the Company has insufficient assets to permit payment
of the Common Preference Amount in full to all common shareholders after payment
in full of the Preferred Preference Amount, then the remaining assets of the
Company, after payment of the Preferred Preference Amount, will be distributed
ratably to the holders of the Common Stock in proportion to the Common
Preference Amount each such holder would otherwise be entitled to receive.

Conversion

The holders of the Preferred Stock shall have the right to convert the
Preferred Stock into shares of Common Stock at any time. The initial conversion
rate for the Preferred Stock shall be 1-for-1.

F-62
<PAGE> 160
HOTRAIL, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

The Preferred Stock shall automatically be converted into Common Stock, at
the then applicable conversion rate (a) upon the closing of an underwritten
public offering of shares of Common Stock of the Company at a public offering
price of not less than $3.00 per share for a total public offering price of not
less than $7,500,000 (before payment of underwriters' discounts and
commissions), or (b) with respect to each series of Preferred Stock, (i) in the
event there remain outstanding less than 300,000 shares of such series of
Preferred Stock outstanding or (ii) upon the written consent of holders of
majority of the shares of such series of Preferred Stock then outstanding.

Voting

Each share of Preferred Stock carries a number of votes equal to the number
of shares of Common Stock then issuable upon its conversion into Common Stock.
The Preferred Stock will generally vote together with the Common Stock and not
as a separate class.

Warrants

In April 1999 and May 1999, the Company issued warrants to purchase 28,626
shares of Series B at $1.31 per share in connection with bridge loan financing.
The warrants expire in April and May 2004. The fair market value of the warrants
at the dates of grant were $19,000, which was recorded as debt issue costs. This
amount was amortized to interest expense over the term of the loan. The Company
has reserved 28,626 shares of Series B Convertible Preferred Stock for the
exercise of the warrants.

In March 1998, the Company issued warrants to purchase 15,000 shares of
Common Stock at $0.30 per share in connection with certain consulting services.
These warrants expire in April 2001. Based on the Black-Scholes model, the fair
market value of the warrants at the date of grant was not material. The Company
has reserved 15,000 shares of Common Stock for the exercise of these warrants.

In March 1998, the Company issued warrants to purchase 140,000 shares of
Series A at $1.00 per share in connection with certain equipment financing. The
warrants expire in December 2003. The fair market value of the warrants at the
date of grant was $56,000, which was recorded as debt issue costs. This amount
will be amortized to interest expense over the three year period that the note
will be repaid. The Company has reserved 140,000 shares of Series A Convertible
Preferred Stock for the exercise of these warrants.

In October 1997, the Company issued warrants to purchase 125,000 shares of
Series A at $1.00 per share in connection with certain consulting services. The
warrants expire in October 2002. The fair market value of the warrants at the
date of grant was $62,000. This amount was expensed in fiscal 1998. The Company
has reserved 125,000 shares of Series A Convertible Preferred Stock for the
exercise of these warrants.

NOTE 7 -- STOCK OPTION PLAN:

The 1997 Stock Option Plan (the "Plan"), which expires in 2007, authorizes
the Board of Directors to grant incentive stock options and nonstatutory stock
options to employees, directors and consultants. In June 1999, the shareholders
of the Company approved an increase in common shares for the Plan from 2,700,000
to 3,525,000.

Under the Plan, incentive stock options are granted at a price that is not
to be less than 100% of the fair market value of the Company's Common Stock, as
determined by the Board of Directors, on the date of grant. Nonqualified stock
options are granted at a price that is not to be less than 85% of the fair
market value of the Common Stock, as determined by the Board of Directors, on
the date of grant.

F-63
<PAGE> 161
HOTRAIL, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

an additional 1/48th of the shares upon completion of each succeeding full month
of continuous employment thereafter. Options granted to individuals who own 10%
or more of the Company's voting stock on the date of grant are exercisable for a
period of five years after the date of grant. The Board of Directors may
terminate the Plan at any time at their discretion.

The following table summarizes activity under the Plans:

<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
OPTIONS OPTIONS PRICE
AVAILABLE OUTSTANDING PER SHARE
---------- ----------- ---------
<S> <C> <C> <C>
Shares authorized for grant.................... 2,700,000 -- $ --
Granted........................................ (2,185,000) 2,185,000 0.14
Cancelled...................................... 300,000 (300,000) 0.11
---------- ---------
Balance at June 30, 1998......................... 815,000 1,885,000 0.14
Shares authorized for grant.................... 825,000 -- --
Granted........................................ (1,346,600) 1,346,600 0.38
Cancelled...................................... 665,000 (665,000) 0.28
---------- ---------
Balance at June 30, 1999......................... 958,400 2,566,600 $ 0.24
========== =========
</TABLE>

The options outstanding and currently exercisable by exercise price at June
30, 1999 are as follows:

<TABLE>
<CAPTION>
OPTIONS CURRENTLY
OPTIONS OUTSTANDING EXERCISABLE
-------------------------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE AVERAGE NUMBER AVERAGE
EXERCISE OF SHARES CONTRACTUAL EXERCISE OF SHARES EXERCISE
PRICES OUTSTANDING LIFE IN YEARS PRICE EXERCISABLE PRICE
-------- ----------- ------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 0.10 1,247,500 7.57 $ 0.10 745,380 $ 0.10
0.20 85,000 8.65 0.20 28,125 0.20
0.30 602,500 8.79 0.30 60,262 0.30
$ 0.45 631,600 9.60 0.45 800 0.45
--------- -------
2,566,600 8.39 $ 0.24 834,567 $ 0.12
========= =======
</TABLE>

At June 30, 1998, approximately 516,146 outstanding options were
exercisable. The weighted average exercise prices for exercisable options was
$0.10 at June 30, 1998.

F-64
<PAGE> 162
HOTRAIL, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

The Company has elected to continue to follow the provisions of APB No. 25,
"Accounting for Stock Issued to Employees," for financial reporting purposes and
has adopted the disclosure-only provisions of SFAS No. 123 ("SFAS 123"). In
accordance with the provisions of SFAS 123, the fair value of each option is
estimated using the followings assumptions used for grants during the years
ended June 30, 1998 and 1999; dividend yield and volatility of 0% for all
periods, risk free interest rate of 4.47% to 6.00% for the years ended June 30,
1998 and 1999 and expected term of 5 years. Had compensation cost for the
Company's stock option plans been determined based on the fair market value at
the grant date for awards in 1998 and 1999 consistent with the provisions of
SFAS 123, the Company's net loss for the years ended June 30, 1998 and 1999 and
for the period from inception through June 30, 1999 would have been increased to
the pro forma amounts indicated below:

<TABLE>
<CAPTION>
PERIOD FROM
JUNE 1, 1993
(INCEPTION)
YEAR ENDED JUNE 30, THROUGH
------------------------- JUNE 30,
1998 1999 1999
---------- ----------- ------------
<S> <C> <C> <C>
Net loss:
As reported................................ $3,642,000 $10,340,000 $14,145,000
========== =========== ===========
Pro forma.................................. $3,655,000 $10,435,000 $14,253,000
========== =========== ===========
</TABLE>

The above pro forma disclosures are not necessarily representative of the
effects on reported net income or loss for future years.

NOTE 8 -- INCOME TAXES:

No provision for federal or state income taxes has been recorded for the
years ended June 30, 1999 and 1998 as the Company had incurred net operating
losses.

Deferred tax assets (liabilities) relate to the following:

<TABLE>
<CAPTION>
JUNE 30,
--------------------------
1998 1999
----------- -----------
<S> <C> <C>
Net operating loss and credit carryforwards....... $ 1,601,000 $ 6,054,000
Less: Valuation allowance......................... (1,601,000) (6,054,000)
----------- -----------
$ -- $ --
=========== ===========
</TABLE>

At June 30, 1999, the Company had net operating loss carryforwards for
federal and state income tax purposes of approximately $13,595,000 which expire
2000 through 2019. At June 30, 1999, the Company had research and development
credit carryforwards of approximately $624,000 to reduce future taxable income.

F-65
<PAGE> 163
HOTRAIL, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 9 -- SUBSEQUENT EVENT:

In August 1999, the Company amended its articles of incorporation to
authorize the increase of 1,550,000 shares of Series B preferred stock to a
total of 11,800,000.

Subsequent to June 30, 1999, the Company issued 4,945,718 shares of Series
B convertible preferred stock at $1.31 per share for aggregate proceeds of
$6,479,000. The Series B convertible preferred stock is subject to certain
rights, privileges, and preferences similar to those of Series B described in
Note 6.

In July, August and September 1999, the Company entered into additional
leases with independent finance companies. Minimum future payments under these
leases total $1,295,000. The leases expire through March 2003.

F-66
<PAGE> 164

MICROCOSM COMMUNICATIONS LIMITED

STATEMENT OF DIRECTORS' RESPONSIBILITIES

The directors are responsible for the preparation of the financial
statements, which give a true and fair view of the state of affairs of the
company at the year end and of the profit or loss of the company for that
period. In preparing those financial statements, the directors are required to:

- select suitable accounting policies and then apply them consistently;

- make judgements and estimates that are reasonable and prudent;

- state whether applicable accounting standards have been followed; and

- prepare the financial statements on the going concern basis, unless it is
inappropriate to presume that the company will continue in business.

The directors are responsible for keeping proper accounting records,
safeguarding the assets of the company and for taking reasonable steps for the
prevention and detection of fraud and other irregularities.

F-67
<PAGE> 165

AUDITORS' REPORT TO THE DIRECTORS OF

MICROCOSM COMMUNICATIONS LIMITED

We have audited the financial statements on pages F-69 to F-78 which have
been prepared under the accounting policies set out on pages F-72 and F-73.

RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS

As described on page F-67, the company's directors are responsible for the
preparation of financial statements. It is our responsibility to form an
independent opinion, based on our audit, on those statements and to report our
opinion to you.

BASIS OF OPINION

We conducted our audit in accordance with United States auditing standards.
An audit includes examination, on a test basis, of evidence relevant to the
amounts and disclosures in the financial statements. It also includes an
assessment of the significant estimates and judgements made by the directors in
the preparation of the financial statements, and of whether the accounting
policies are appropriate to the company's circumstances, consistently applied
and adequately disclosed.

We planned and performed our audit so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance that the financial statements
are free from material misstatement, whether caused by fraud or other
irregularity or error. In forming our opinion we also evaluated the overall
adequacy of the presentation of information in the financial statements.

OPINION

In our opinion the company's financial statements have been properly
prepared in accordance with the accounting policies set out on pages F-72 and
F-73.

DELOITTE & TOUCHE
Chartered Accountants and
Registered Auditors
Bristol, United Kingdom
November 8, 2000

F-68
<PAGE> 166

MICROCOSM COMMUNICATIONS LIMITED

PROFIT AND LOSS ACCOUNT
YEAR ENDED 31 DECEMBER 1999

<TABLE>
<CAPTION>
1999
NOTES L
----- ----------
<S> <C> <C>
TURNOVER.................................................... 2 3,014,658
Cost of sales............................................... (939,140)
----------
GROSS PROFIT................................................ 2,075,518
Administration expenses..................................... (3,229,505)
----------
OPERATING LOSS.............................................. 3 (1,153,987)
Interest receivable and similar income...................... 6 45,865
Interest payable and similar charges........................ 7 (23,548)
----------
LOSS ON ORDINARY ACTIVITIES BEFORE TAXATION................. (1,131,670)
Tax on loss on ordinary activities.......................... 8 --
----------
RETAINED LOSS FOR THE YEAR.................................. 15 (1,131,670)
Retained loss brought forward............................... (367,124)
----------
RETAINED LOSS CARRIED FORWARD............................... 15 (1,498,794)
==========
</TABLE>

All the above results derive from continuing operations of the company.

The company has no recognised gains and losses other than the loss above and
therefore, no separate statement of total recognised gains and losses has been
presented.

F-69
<PAGE> 167

MICROCOSM COMMUNICATIONS LIMITED

BALANCE SHEET
AT 31 DECEMBER 1999

<TABLE>
<CAPTION>
1999
-----------------------
NOTES L L
----- --------- ----------
<S> <C> <C> <C>
FIXED ASSETS
Tangible assets............................................. 9 823,165
CURRENT ASSETS
Stocks...................................................... 10 447,033
Debtors..................................................... 11 845,230
Cash at bank and in hand.................................... 1,896,230
---------
3,188,493
CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR.............. 12 (642,930)
---------
NET CURRENT ASSETS.......................................... 2,545,563
----------
TOTAL ASSETS LESS CURRENT LIABILITIES....................... 3,368,728
CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR..... 13 (146,366)
----------
NET ASSETS.................................................. 3,222,362
==========
CAPITAL AND RESERVES
Called up share capital..................................... 14 1,615
Share premium reserve....................................... 15 4,719,541
Profit and loss account..................................... 15 (1,498,794)
----------
TOTAL SHAREHOLDERS' FUNDS................................... 16 3,222,362
==========
SHAREHOLDERS' FUNDS ARE ATTRIBUTABLE TO:
Equity shareholders' funds.................................. (45,814)
Non-equity shareholders' funds.............................. 3,268,176
----------
3,222,362
==========
</TABLE>

These financial statements were approved by the Board of Directors on November
8, 2000.

Signed on behalf of the Board of Directors

J G Steele
Director

F-70
<PAGE> 168

MICROCOSM COMMUNICATIONS LIMITED

CASH FLOW STATEMENT
YEAR ENDED 31 DECEMBER 1999

<TABLE>
<CAPTION>
1999
-----------------------
NOTES L L
----- --------- ----------
<S> <C> <C> <C>
NET CASH OUTFLOW FROM OPERATING ACTIVITIES.................. 17 (1,670,209)

RETURNS ON INVESTMENTS AND SERVICING OF FINANCE
Interest received........................................... 45,865
Interest paid............................................... (851)
Interest element of finance lease rental payments........... (22,607)
---------

NET CASH INFLOW FROM RETURNS ON INVESTMENTS AND
SERVICING OF FINANCE...................................... 22,407

CAPITAL EXPENDITURE
Payments to acquire tangible fixed assets................... (233,397)
----------

NET CASH OUTFLOW BEFORE FINANCING........................... (1,881,199)

FINANCING
Issue of ordinary share capital............................. 51,827
Issue of preference share capital........................... 3,268,176
Capital element of finance lease payments................... (69,621)
Capital repayment of director's loan........................ (64,742)
---------
NET CASH INFLOW FROM FINANCING.............................. 3,185,640
----------
INCREASE IN CASH IN THE YEAR................................ 18 1,304,441
==========
</TABLE>

F-71
<PAGE> 169

MICROCOSM COMMUNICATIONS LIMITED

NOTES TO THE ACCOUNTS
YEAR ENDED 31 DECEMBER 1999

1. ACCOUNTING POLICIES

The following accounting policies have been applied consistently in dealing
with items which are considered material in relation to the company's financial
statements.

BASIS OF ACCOUNTING

The financial statements are prepared in accordance with applicable UK
generally accepted accounting practices ('GAAP'), which differ in certain
respects from US GAAP. No significant differences between UK and US GAAP have
been identified with respect to these accounts. These financial statements are
drawn up to a date other than the financial year end and do not purport to
relate to the company's financial year.

RESEARCH AND DEVELOPMENT

Research and development expenditure, including the costs of staff employed
to perform research activities, is charged to the profit and loss account as
incurred.

TURNOVER

Turnover, which excludes valued added tax and trade discounts, represents
the invoiced value of goods and services supplied.

TANGIBLE FIXED ASSETS

The recorded cost of fixed assets is the purchase cost, together with any
incidental costs of acquisition.

Depreciation is calculated so as to write off the cost of tangible fixed
assets less their estimated residual values, on a straight-line basis over their
expected useful economic lives. The principal useful economic lives are
considered to be:

<TABLE>
<S> <C>
Computer equipment................................. 4 years
Fixtures and fittings.............................. 4 years
Leasehold improvements............................. term of the lease
Office equipment................................... 4 years
Plant and machinery................................ 4 years
</TABLE>

FOREIGN CURRENCIES

Assets and liabilities expressed in foreign currencies are translated into
sterling at rates of exchange ruling at the end of the financial period.

STOCKS

Stocks are stated at the lower of cost and net realisable value.

PENSION COSTS

The company makes contributions on behalf of one of its directors into a
defined contribution pension scheme. Contributions are charged to the profit and
loss account as they are incurred.

F-72
<PAGE> 170
MICROCOSM COMMUNICATIONS LIMITED

NOTES TO THE ACCOUNTS (CONTINUED)
YEAR ENDED 31 DECEMBER 1999

DEFERRED TAXATION

Provision is made for deferred taxation using the liability method, on all
material timing differences, to the extent that it is probable that a liability
or asset will crystallise.

FINANCE AND OPERATING LEASES

Costs in respect of operating leases are charged on a straight-line basis
over the lease term. Leasing agreements which transfer to the group
substantially all the benefits and risks of ownership of an asset are treated as
if the asset had been purchased outright. The assets are included in fixed
assets and the capital element of the leasing commitments is shown as
obligations under the finance leases. The lease rentals are treated as
consisting of capital and interest elements. The capital element is applied to
reduce the outstanding obligations and the interest element is charged against
profit on a straight-line basis. Assets held under finance leases are
depreciated over the shorter of the extendable lease terms and the useful lives
of equivalent owned assets.

2. TURNOVER

A geographical analysis of turnover has not been disclosed as, in the
opinion of the directors, it would be seriously prejudicial to the interests of
the business.

3. OPERATING LOSS

Operating loss is stated after charging:

<TABLE>
<CAPTION>
1999
L
---------
<S> <C>
Auditors' remuneration -- audit............................. 4,650
Depreciation of tangible owned fixed assets................. 139,648
Depreciation of tangible assets held under finance leases... 49,626
Operating lease rentals
-- plant and machinery.................................... 61,399
-- other.................................................. 84,427
Research and development expenditure........................ 1,926,751
Loss on foreign exchange.................................... 111,656
=========
</TABLE>

4. DIRECTORS' EMOLUMENTS

<TABLE>
<CAPTION>
1999
L
------
<S> <C>
Aggregate emoluments........................................ 95,897
Company pension contributions to defined contribution
scheme.................................................... 3,516
------
99,413
======
</TABLE>

Retirement benefits are accruing to one director under a defined
contribution scheme.

F-73
<PAGE> 171
MICROCOSM COMMUNICATIONS LIMITED

NOTES TO THE ACCOUNTS (CONTINUED)
YEAR ENDED 31 DECEMBER 1999

5. STAFF NUMBERS AND COSTS

The average number of persons employed by the company (including executive
directors) during the year, analysed by category, were as follows:

<TABLE>
<CAPTION>
1999
NO.
----
<S> <C>
Sales and marketing......................................... 6
Research and development.................................... 23
Executive directors......................................... 2
Administration.............................................. 8
--
39
==
</TABLE>

The aggregate payroll costs of these persons were as follows:

<TABLE>
<CAPTION>
L
---------
<S> <C>
Wages and salaries........................................ 1,428,987
Social security costs..................................... 130,178
Other pension costs....................................... 10,439
---------
1,569,604
=========
</TABLE>

6. INTEREST RECEIVABLE AND SIMILAR INCOME

<TABLE>
<CAPTION>
1999
L
------
<S> <C>
Bank interest receivable.................................... 45,865
======
</TABLE>

7. INTEREST PAYABLE AND SIMILAR CHARGES

<TABLE>
<CAPTION>
1999
L
------
<S> <C>
Repayable within five years, not by instalments:
-- on bank loans and overdrafts........................... 851
-- on finance leases...................................... 22,697
------
23,548
======
</TABLE>

8. TAXATION

The company has no liability to corporation tax for the year ended 31
December 1999 and no potential liability to deferred taxation.

F-74
<PAGE> 172
MICROCOSM COMMUNICATIONS LIMITED

NOTES TO THE ACCOUNTS (CONTINUED)
YEAR ENDED 31 DECEMBER 1999

9. TANGIBLE FIXED ASSETS

<TABLE>
<CAPTION>
FIXTURES LEASEHOLD
COMPUTER AND IMPROVE- OFFICE PLANT AND
EQUIPMENT FITTINGS MENT EQUIPMENT MACHINERY TOTAL
L L L L L L
--------- -------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
COST
At 1 January 1999..................... 131,389 9,754 -- 7,650 478,099 626,892
Additions............................. 137,873 55,198 11,337 6,645 267,128 478,181
------- ------ ------ ------ ------- ---------
At 31 December 1999................... 269,262 64,952 11,337 14,295 745,227 1,105,073
------- ------ ------ ------ ------- ---------
DEPRECIATION
At 1 January 1999..................... 45,913 1,786 -- 1,451 43,484 92,634
Charge for the year................... 41,627 10,670 472 3,180 133,325 189,274
------- ------ ------ ------ ------- ---------
At 31 December 1999................... 87,540 12,456 472 4,631 176,809 281,908
------- ------ ------ ------ ------- ---------
NET BOOK VALUE
AT 31 DECEMBER 1999................... 181,722 52,496 10,865 9,664 568,418 823,165
======= ====== ====== ====== ======= =========
</TABLE>

The net book value of tangible fixed assets includes an amount of L416,467
in respect of assets held under finance leases. Depreciation charged on these
assets during the year was L49,626.

10. STOCKS

<TABLE>
<CAPTION>
1999
L
-------
<S> <C>
Work in progress........................................... 64,090
Finished goods............................................. 382,943
-------
447,033
=======
</TABLE>

11. DEBTORS

<TABLE>
<CAPTION>
1999
L
-------
<S> <C>
Trade debtors.............................................. 606,224
Prepayments and accrued income............................. 184,224
Other debtors.............................................. 54,782
-------
845,230
=======
</TABLE>

12. CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR

<TABLE>
<CAPTION>
1999
L
-------
<S> <C>
Obligations under finance leases........................... 146,514
Trade creditors............................................ 220,431
Taxation and social security............................... 50,857
Other creditors and accruals............................... 225,128
-------
642,930
=======
</TABLE>

F-75
<PAGE> 173
MICROCOSM COMMUNICATIONS LIMITED

NOTES TO THE ACCOUNTS (CONTINUED)
YEAR ENDED 31 DECEMBER 1999

13. CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR

<TABLE>
<CAPTION>
1999
L
-------
<S> <C>
Obligations under finance leases........................... 146,366
-------
</TABLE>

The future minimum payments to which the company is committed under finance
leases are as follows:

<TABLE>
<CAPTION>
L
-------
<S> <C>
In one year or less........................................ 146,514
Between one and two years.................................. 146,366
-------
292,880
=======
</TABLE>

Hire purchase contracts and finance lease liabilities are secured on the
assets to which they relate.

14. CALLED UP SHARE CAPITAL

<TABLE>
<CAPTION>
1999
L
-------
<S> <C>
AUTHORISED
150 million Ordinary shares of 0.0333p each................ 49,950
996,000 "A" ordinary shares of 0.0333p each................ 332
776,100 Preference shares of 0.0333p each.................. 258
-------
50,540
=======
</TABLE>

<TABLE>
<CAPTION>
L
-----
<S> <C>
ALLOTTED, CALLED UP AND FULLY PAID
3,078,080 Ordinary shares of 0.0333p each................... 1,025
996,000 "A" ordinary shares of 0.0333p each................. 332
776,100 Preference shares of 0.0333p each................... 258
-----
1,615
=====
</TABLE>

RIGHTS ATTACHED TO SHARES

Dividends

The company will pay dividends on the "A" ordinary shares, the ordinary
shares and the preference shares pari passu as if they constituted one class of
shares.

Capital repayment

On a return of capital, the shareholders will be paid on each share in the
following order:

Firstly preference shares, the amount to be repaid being the subscription
price per share plus any dividends which have been declared but not paid.

'A' ordinary shares, ordinary and preference shares would then be paid any
surplus as if the shares were the same class.

Voting rights

The classes of shares rank pari passu.

F-76
<PAGE> 174
MICROCOSM COMMUNICATIONS LIMITED

NOTES TO THE ACCOUNTS (CONTINUED)
YEAR ENDED 31 DECEMBER 1999

Redemption of preference shares

The company will redeem the preference shares, in each case redeeming a
pro-rata proportion of shares held by each of the investors, paying $6.6578 per
share and any arrears or accruals of dividend, together with a premium equal to
10% of the subscription price per annum, calculated from the date of issue until
the date of redemption. The dates of redemption are 258,700 each at 31 July
2005, 2006 and 2007. The preference shares may be redeemed earlier in blocks of
not less than 50,000, if all preference shareholders agree in such proportions
as the preference shareholders as a class agree.

Conversion of preference shares

The preference shares shall be convertible into ordinary shares in
accordance with the Articles of Association at the option of each shareholder.

POST BALANCE SHEET EVENT

On 6 January 2000 the entire issued share capital was acquired by Conexant
Systems Inc. At the same time all outstanding share options in Microcosm
Communications Limited were converted to equivalent options in Conexant Systems
Inc and all outstanding "A" ordinary shares and preference shares were converted
into ordinary shares.

15. RESERVES

<TABLE>
<CAPTION>
SHARE PROFIT
PREMIUM AND LOSS
ACCOUNT ACCOUNT TOTAL
L L L
--------- ---------- ----------
<S> <C> <C> <C>
At 1 January 1999............... 1,400,151 (367,124) 1,033,027
Shares issued................... 3,319,390 -- 3,319,390
Loss for the year............... -- (1,131,670) (1,131,670)
--------- ---------- ----------
AT 31 DECEMBER 1999............. 4,719,541 (1,498,794) 3,220,747
========= ========== ==========
</TABLE>

16. RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS

<TABLE>
<CAPTION>
1999
L
----------
<S> <C>
Loss for the year........................................ (1,131,670)
Net proceeds of issue of share capital................... 3,320,003
----------
Net addition to shareholders' funds...................... 2,188,333
Opening shareholders' funds.............................. 1,034,029
----------
CLOSING SHAREHOLDERS' FUNDS.............................. 3,222,362
==========
</TABLE>

F-77
<PAGE> 175
MICROCOSM COMMUNICATIONS LIMITED

NOTES TO THE ACCOUNTS (CONTINUED)
YEAR ENDED 31 DECEMBER 1999

17. RECONCILIATION OF OPERATING LOSS TO NET CASH FLOW FROM OPERATING ACTIVITIES

<TABLE>
<CAPTION>
1999
L
----------
<S> <C>
OPERATING LOSS........................................... (1,153,987)
Depreciation............................................. 189,274
Increase in stocks....................................... (234,967)
Increase in debtors...................................... (438,020)
Decrease in creditors.................................... (32,509)
----------
NET CASH OUTFLOW FROM OPERATING LOSS..................... (1,670,209)
==========
</TABLE>

18. RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET FUNDS

<TABLE>
<CAPTION>
1999
L
---------
<S> <C>
Increase in cash in the year.............................. 1,304,441
Cash inflow from increase in debt and lease financing..... 134,363
---------
Change in net funds resulting from cash flows............. 1,438,804
New finance leases........................................ (244,784)
---------
Movement in net funds in the year......................... 1,194,020
Net funds at 1 January 1999............................... 409,330
---------
NET FUNDS AT 31 DECEMBER 1999............................. 1,603,350
=========
</TABLE>

19. ANALYSIS OF CHANGES IN NET FUNDS

<TABLE>
<CAPTION>
AT AT
1 JANUARY NON-CASH 31 DECEMBER
1999 CASH FLOWS CHANGES 1999
L L L L
--------- ---------- -------- -----------
<S> <C> <C> <C> <C>
Cash at bank and in hand...................... 591,789 1,304,441 -- 1,896,230
Debt due within one year...................... (64,742) 64,742 -- --
Finance lease................................. (117,717) 69,621 (244,784) (292,880)
-------- --------- -------- ---------
409,330 1,438,804 (244,784) 1,603,350
======== ========= ======== =========
</TABLE>

20. FINANCIAL COMMITMENTS

At 31 December 1999 the company had annual commitments under
non-cancellable operating leases as follows:

<TABLE>
<CAPTION>
LAND AND
BUILDINGS OTHER
L L
--------- -------
<S> <C> <C>
Operating leases which expire:
-- between one and two years........................... -- 245,262
-- between two and five years.......................... 166,790 88,162
------- -------
166,790 333,424
======= =======
</TABLE>

21. CONTROLLING PARTY

The controlling party of the company is Gary Steele, who is a director of
the company.

22. SUBSEQUENT EVENT

On 6 January 2000 the entire share capital of the company was acquired by
Conexant Systems Inc., a company incorporated in the USA. As of this date
Conexant Systems Inc. became the ultimate parent company and controlling party.

F-78
<PAGE> 176

NOVANET SEMICONDUCTOR LTD.

INDEPENDENT AUDITORS' REPORT

To the Shareholders and Board of Directors
Novanet Semiconductor Ltd.

We have audited the accompanying consolidated balance sheets of Novanet
semiconductor Ltd. and subsidiary as of December 31, 1999 and September 30,
2000, and the related consolidated statements of operations, changes in
shareholders' equity and cash flows for the year ended December 31, 1999 and for
the 9 months period ended September 30, 2000. These financial statements are the
responsibility of the Company's Board of Directors and management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

We conducted our audits in accordance with auditing standards generally
accepted in Israel and in the United States (such auditing standards are
substantially identical) , including those prescribed by the Israeli Auditors
(Mode of Performance) Regulations, 1973. Those standards require that we plan
and perform the audit to obtain reasonable assurance that 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 the Company's Board of Directors and management,
as well as evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Novanet
semiconductor Ltd. and subsidiary as of December 31, 1999 and September 30,
2000, and the consolidated results of their operations and their cash flows for
the year ended December 31, 1999 and for the 9 months period ended September 30,
2000, in conformity with accounting principles generally accepted in Israel and
in the United States (as applicable to these financial statements, such
accounting principles do not differ in any material respects).

/s/ GOLDSTEIN SABO TEVET
--------------------------------------
GOLDSTEIN SABO TEVET
CERTIFIED PUBLIC ACCOUNTANTS (ISR.)

Tel-Aviv, Israel
October 24, 2000

F-79
<PAGE> 177

NOVANET SEMICONDUCTOR LTD.

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------ -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (Note 3)........................ $1,885 $ 2,609
Accounts receivable....................................... 216 226
------ --------
Total current assets.............................. 2,101 2,835
Fixed assets, net (Note 4).................................. 1,257 1,130
------ --------
$3,358 3,965
====== ========
LIABILITIES
Current liabilities:
Short term credit (Note 5)................................ $ 763 $ 5,169
Trade payables............................................ 328 476
Other current liabilities................................. 184 1,004
------ --------
Total current liabilities......................... 1,275 6,649
Accrued severance pay, net of amounts funded (Note 6)....... 15 33
------ --------
1,290 6,682
Commitments and contingent liabilities (Note 7)

SHAREHOLDER'S EQUITY (Note 8)
Ordinary shares NIS 0.01 par value, authorized
3,130,000, outstanding as of December
31, 1999 -- 600,100 and as of September 30,
2000 -- 1,069,434......................................... $ 2 $ 3
Additional paid-in capital.................................. 7,618 10,723
Unearned portion of compensatory stock options.............. (43) (1,544)
Deficit..................................................... (5,509) (11,899)
------ --------
2,068 (2,717)
------ --------
$3,358 $ 3,965
====== ========
</TABLE>

<TABLE>
<S> <C>
------------------------------------ ------------------------------------
Director Director
</TABLE>

See notes to consolidated financial statements
F-80
<PAGE> 178

NOVANET SEMICONDUCTOR LTD.

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)

<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED PERIOD ENDED
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------ -------------
<S> <C> <C>
Research and development costs:
Expenses.................................................. $2,910 $3,330
Less royalty-bearing participations from the Government of
Israel................................................. 903 --
------ ------
Research and development costs, net....................... 2,007 3,330
Selling, general and administrative expenses (Note 10)...... 1,591 3,023
------ ------
Operating loss.............................................. 3,598 6,353
Financial and other (income) expenses, net.................. (84) 37
------ ------
Net loss.......................................... $3,514 $6,390
====== ======
</TABLE>

See notes to consolidated financial statements
F-81
<PAGE> 179

NOVANET SEMICONDUCTOR LTD.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(CAPITAL DEFICIENCY)
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
ORDINARY RETAINED
NIS 0.01 PAR VALUE ADDITIONAL UNEARNED EARNINGS
------------------ PAID-IN COMPENSATORY (ACCUMULATED
SHARES AMOUNT CAPITAL STOCK OPTION DEFICIT) TOTAL
--------- ------ ---------- ------------ ------------ -------
<S> <C> <C> <C> <C> <C> <C>
BALANCE -- DECEMBER 31, 1998... 600,100 $2 $ 4,000 $ (1,995) $ 2,007
Issuance of option (Note
8(a))........................ $ 3,500 $ 3,500
Issuance of options to
employees.................... $ 118 $ (118) --
Amortization of share options
(Note 8(b)).................. $ 75 $ 75
Net loss....................... $ (3,514) $(3,514)
--------- -- ------- ------- -------- -------
BALANCE -- DECEMBER 31, 1999... 600,100 $2 $ 7,618 $ (43) $ (5,509) $ 2,068
========= == ======= ======= ======== =======
Issuance of share Capital...... 469,334 $1 $ 792 $ 793
Issuance of option............. $ 418 $ 418
Issuance of option to
employees.................... $ 1,895 $(1,895) --
Amortization of share
options...................... $ 394 $ 394
Net loss....................... $ (6,390) $(6,390)
--------- -- ------- ------- -------- -------
BALANCE -- SEPTEMBER 30,
2000......................... 1,069,434 $3 $10,723 $(1,544) $(11,899) $(2,717)
========= == ======= ======= ======== =======
</TABLE>

See notes to consolidated financial statements
F-82
<PAGE> 180

NOVANET SEMICONDUCTOR LTD.

CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED PERIOD ENDED
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------ -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. (3,514) (6,390)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 494 470
Accrued severance pay.................................. (3) 18
Compensation related to share options.................. 75 394
Changes in:
Accounts receivable.................................. 326 (10)
Trade payables....................................... (140) 128
Other liabilities.................................... (102) 820
------- -------
Net cash used in operating activities............. (2,864) (4,570)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets.................................. (672) (223)
Disposal of Marketable securities, Net.................... 91 --
------- -------
Net cash used in investing activities............. (581) (223)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of share capital................................. -- 792
Issuance of options....................................... 3,500 419
Increase (Decrease) in short term bank credit............. 63 (63)
Increase (Decrease) in due to Ericsson.................... 700 (700)
Payment for purchase of fixed assets...................... (529) (100)
Increase in due to Conexant............................... -- 5,169
------- -------
Net cash provided by financing activities......... 3,734 5,517
------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 289 724
Cash and cash equivalents at beginning of period............ 1,596 1,885
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 1,885 $ 2,609
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Noncash transactions:
Purchase of fixed assets through financing by
suppliers............................................. $ 100 $ 120
</TABLE>

F-83
<PAGE> 181

NOVANET SEMICONDUCTOR LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)

NOTE 1 -- GENERAL

Novanet Semiconductor is a fabless Semiconductor innovator of high-speed
PHY (Physical Layer) solutions for the Internet Infrastructure and Telecom
markets. The Company acquired its core engineering team, the foundations for its
Hi-PHY(TM) technology and additional IP from Novacom Technologies Ltd.
(hereinafter Novacom) together with Ericsson Components AB
(hereinafter -- Ericsson) as a strategic partner. Novanet Semiconductor launched
its operations in April 1998. From September 22, 2000 the Company is a wholly
owned subsidiary of Conexant Systems Inc. (hereinafter -- Conexant) (see Note 13
below). From definition to final testing, Novanet's R&D team performs all stages
of design and development, including chip architecture, chip design and
simulation, circuit design and layout (including Place & Route), verification,
tape-out and testing.

As a result of the acquisition of its shares by Conexant, as discussed in
Note 13 below, the Company changed its annual reporting period from periods
ending on December 31 of each year to periods ending on September 30.
Accordingly, the current reporting period, which ends on September 30, 2000, is
a period of 9 months.

NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES

(A) BASIS OF PREPARATION:

The consolidated financial statements include the accounts of Novanet
semiconductor Ltd. and its subsidiary (collectively the "Company"). The
subsidiary is Novanet semiconductor, Inc. which was formed in 1998 and is
located in the United States. All material inter-company balances and
transactions have been eliminated.

(B) ESTIMATES:

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expense during the reporting
period. Actual results may differ from those estimates.

The functional currency of the company is the US dollar. Most materials and
components purchased and marketing expenses incurred are either paid for in US
dollars or in New Israeli Shekels ("NIS") where cost is linked to changes in the
dollar/NIS exchange rate. A significant portion of the Company's expenses are
incurred in Israel and paid for in NIS. Foreign currency gains and losses
included in operations from transactions not denominated in US dollars were not
material.

(D) CASH EQUIVALENTS:

All highly liquid investments purchased with a maturity of three months or
less are considered to be cash equivalents.

F-84
<PAGE> 182
NOVANET SEMICONDUCTOR LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)

(E) FIXED ASSETS:

Fixed assets are stated at cost less accumulated depreciation and are
depreciated over their estimated useful lives on a straight-line basis.

Annual rates of depreciation are as follows:

<TABLE>
<CAPTION>
%
------
<S> <C> <C>
Computers and peripheral equipment............... 33
Office furniture and equipment................... 6 - 15 (mainly 6%)
Improvement in rented property................... 7
</TABLE>

(F) FAIR VALUE OF FINANCIAL INSTRUMENTS:

Statement of Financial Accounting Standards No. 107 of the financial
Accounting Standards Board in the U.S.A., "Disclosures about Fair Value of
Financial Instruments" requires the Company to disclose estimated fair value for
its financial instruments. The carrying amounts reported in the balance sheets
for cash and cash equivalents, accounts receivable, accounts payable and accrued
expenses approximate fair value because of the short-term duration of those
items.

(G) RESEARCH AND DEVELOPMENT:

Research and development costs are expensed as incurred. Grants received
from the Government of Israel through the Ministry of Industry and Trade, Office
of the Chief Scientist (the "Chief Scientist") for approved research and
development programs are recognized upon the time the costs related to a
particular project are incurred.

NOTE 3 -- CASH AND CASH EQUIVALENTS

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------ -------------
<S> <C> <C>
Cash............................................... $1,259 $2,609
Short term deposits................................ 626 --
------ ------
$1,885 $2,609
====== ======
</TABLE>

NOTE 4 -- FIXED ASSETS

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------ -------------
<S> <C> <C>
Computers and peripheral equipment................. $1,845 $2,180
Office furniture and equipment..................... 37 44
Improvement in rented property..................... 15 16
------ ------
1,897 2,240
Less -- accumulated depreciation................... 640 1,110
------ ------
$1,257 $1,130
====== ======
</TABLE>

F-85
<PAGE> 183
NOVANET SEMICONDUCTOR LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)

NOTE 5 -- SHORT TERM CREDIT

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------ -------------
<S> <C> <C>
Due to Conexant (a)................................ -- $5,169
Due to Ericsson (b)................................ $700 --
Short term bank credit............................. 63 --
---- ------
$763 $5,169
==== ======
</TABLE>

---------------
(a) Under the terms of the acquisition of the Company's shares by Conexant,
as discussed in Note 13 below, Conexant furnished the Company with a
loan. The terms of the loan and its maturity dates have not as yet been
fixed.

(b) On November 1999, the Company entered into an agreement with Ericsson,
under which Ericsson provided the Company with a loan of $700,000,
secured by a promissory note issued by the Company.

Following the agreement with Conexant, the Company repaid the loan. The
Company also repaid a loan of US$0.7 million it had received from other
shareholders during the period ended September 30, 2000.

NOTE 6 -- SEVERANCE PAY

Israeli law requires payment of severance pay in certain circumstances. The
Company's severance pay liability to its Israeli employees, based upon the
number of years of service and the latest monthly salary, is partly covered by
regular deposits with severance pay funds, recognized pension funds and by
purchase of managers' insurance policies.

The amounts accrued and the portions funded with severance pay funds
composed as follows:

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------ -------------
<S> <C> <C>
Accrued severance pay.............................. $15 $33
Less amounts funded................................ -- --
--- ---
Unfunded balance................................... $15 $33
=== ===
</TABLE>

The Company may only make withdrawals from the funds for the purpose of
paying severance pay. The severance pay liabilities covered by the pension funds
and by purchase of insurance policies are not reflected in the above amounts as
the severance pay liabilities have been irrevocably transferred to the pension
funds.

NOTE 7 -- COMMITMENTS AND CONTINGENT LIABILITIES

ROYALTIES:

The Company is committed to pay royalties to the Government of Israel on
sales of products in which the Government participates by way of research and
development grants, up to the amount of the grants received for certain
projects. The royalty rates are between 3% - 5% of revenues. The maximum royalty
payable by the Company on future sales approximates $1,317,000 at September 30,
2000.

NOTE 8 -- SHAREHOLDERS' EQUITY

(A) ERICSSON INVESTMENT AGREEMENT:

On June 25, 1998, an agreement (hereinafter -- "Investment Agreement") was
signed with Ericsson whereby Ericsson undertook to invest in the Company, the
sum of US.$7.5 million, in consideration for the

F-86
<PAGE> 184
NOVANET SEMICONDUCTOR LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)

right to acquire shares in the Company that will comprise 40% of the Company's
issued share capital. The option may be exercised at any time, up to 30 days
before a public offering of the Company.

Under the terms of the agreement to acquire the Company's shares, as
discussed in Note 13, on September 22, 2000, Ericsson exercised all the options
it held for 426,667 shares in the Company.

(B) COMPENSATORY STOCK OPTIONS:

The Company granted its employees options, which may be exercised for its
ordinary shares, for total consideration of US$1,455,074 (in the event of full
exercise).

All of the options held by the above employees will confer on them, if
exercised in full, some 12.36% of the shares of Novanet. The granting of options
contained compensation expenses of US $ 2,013,000, which is amortized over a
period of 3 years. In 2000, wage expenses of US$394,000 were recorded against
capital reserves in respect of this compensation.

Pursuant to the agreement with Conexant, as discussed in Note 13, when the
employees exercise their options, they will receive 1.8878 shares of Conexant
instead of each one share of the Company.

The Company applies Accounting Principles Board Opinion No. 25 ("APB 25")
in accounting for stock-based compensation to employees and, accordingly,
recognizes compensation expense for the difference between the fair value of the
underlying ordinary shares and the exercise price of the option at the date of
grant. Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation ("SFAS 123"), issued in October 1995, requires the use
of the fair value based method of accounting for stock options. Under this
method, compensation cost is measured at the grant date based on the fair value
of the options granted and is recognized over the vesting period. SFAS 123,
however, allows the Company to continue to measure the compensation cost of
employees in accordance with APB 25, but requires the Company to disclose pro
forma information regarding net income and per share data determined as if the
Company had accounted for its employee share options under the fair value method
of that statement.

Pro forma net income data had the Company adopted the fair value method of
SFAS 123 is as follows:

<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------ -------------
<S> <C> <C>
Pro forma:
Net loss......................................... $3,674 $6,656
====== ======
</TABLE>

The weighted average fair value of the options granted during 1999 and 2000
in applying the fair value method was estimated at $6.44 and $30.52,
respectively, using the Black-Scholes pricing model with the following
assumptions:

<TABLE>
<CAPTION>
1999 GRANT 2000 GRANT
---------- ----------
<S> <C> <C>
Dividend yield........................................ 0 0
Volatility............................................ 40% 40%
Risk-free interest rate............................... 5.5% 6.5%
Expected life......................................... 10 10
</TABLE>

F-87
<PAGE> 185
NOVANET SEMICONDUCTOR LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)

NOTE 9 -- MONETARY BALANCES IN NONDOLLAR CURRENCIES

<TABLE>
<CAPTION>
DECEMBER 31, 1999 SEPTEMBER 30, 2000
---------------------------------- ----------------------------------
ISRAELI CURRENCY(A) OTHER ISRAELI CURRENCY(A) OTHER
-------------------- NONDOLLAR -------------------- NONDOLLAR
UNLINKED LINKED CURRENCIES UNLINKED LINKED CURRENCIES
--------- ------- ---------- --------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Assets -- current................ $843 -- -- $ 255 -- --
Liabilities -- current........... 259 -- -- 1,421 -- --
</TABLE>

(One) The above does not include balances in Israeli currency linked to the
dollar.

NOTE 10 -- SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED PERIOD ENDED
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------ -------------
<S> <C> <C>
Selling............................................ $ 761 $ 437
General and administrative......................... 830 2,586
------ ------
$1,591 $3,023
====== ======
</TABLE>

NOTE 11 -- TAXES ON INCOME

(A) TAX BENEFITS UNDER THE LAW FOR ENCOURAGEMENT OF CAPITAL INVESTMENTS, 1959:

The Company's production facilities have been granted "approved enterprise"
status under the above law. The Company participates in the Alternative Benefits
Program and, accordingly, income from its approved enterprise will be tax exempt
for a period of two years and will be subject to reduced tax rate of 25% during
the next five years, commencing in the first year in which the approved
enterprise first generates taxable income. The period of benefits did not start
yet.

In the event of distribution of cash dividends from income which will be
tax exempt as above, the Company would have to pay the 25% tax in respect of the
amount distributed (the amount distributed for this purpose includes the amount
of the company tax that applies as a result of the distribution).

The entitlement to the above benefits is conditional upon the Company's
fulfilling the conditions stipulated by the above law, regulations published
thereunder and the certificate of approval for the specific investments in
approved enterprises. In the event of failure to comply with these conditions,
the benefits may be canceled and the Company may be required to refund the
amount of the benefits, in whole or in part, with the addition of linkage
differences to the Israeli CPI and interest.

(B) MEASUREMENT OF RESULTS FOR TAX PURPOSES UNDER THE INCOME TAX (INFLATIONARY
ADJUSTMENTS) LAW, 1985 (THE "INFLATIONARY ADJUSTMENTS LAW"):

Under this law, results for tax purposes are measured on a real
basis -- adjusted to the increase in the Israeli CPI. These financial statements
are presented in dollars. The difference between the change in the Israeli CPI
and in the exchange rate of the dollar, both on annual and cumulative bases,
will cause a difference between taxable income and income reflected in these
financial statements.

The Company is an "industrial company" as defined by this law and as such
is entitled to certain tax benefits, mainly accelerated depreciation as
prescribed by regulations published under the Inflationary Adjustments Law and
the right to claim public issuance expenses as a deduction for tax purposes.

F-88
<PAGE> 186
NOVANET SEMICONDUCTOR LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)

(D) TAXATION OF NON-ISRAELI SUBSIDIARIES:

Non-Israeli subsidiaries are taxed according to tax laws in their countries
of residence.

(E) TAXES ON INCOME INCLUDED IN THE INCOME STATEMENTS:

Following is a reconciliation of the theoretical tax expense, assuming all
income is taxed at the regular tax rate applicable to Israeli companies, and the
actual tax expense:

<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED PERIOD ENDED
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------ -------------
<S> <C> <C>
Loss before taxes on income(a)............................. $(3,514) $(6,390)
======= =======
Theoretical tax benefit on the above amount at 36%......... (1,265) (2,300)
Increase in taxes resulting from:
Temporary differences for which deferred taxes were not
Provided.............................................. 1,107 1,975
Permanent differences, including difference between
Israeli CPI-Adjusted tax returns and dollar-adjusted
financial statements -- Net........................... 158 325
------- -------
Actual tax expense....................................... -- --
======= =======
(a) As follows:
Taxable in Israel................................... (3,172) (6,183)
Taxable outside of Israel........................... (342) (207)
------- -------
(3,514) (6,390)
======= =======
</TABLE>

NOTE 12 -- TRANSACTIONS WITH RELATED PARTIES

<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED PERIOD ENDED
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------ -------------
<S> <C> <C>
Salaries and employees benefit..................... $169 $138
Selling, general and administrative expenses to
Novacom.......................................... 240 19
</TABLE>

On April 28, 1998, the company and Novacom entered into a Managerial
Services Agreement. Under the agreement, Novacom provides certain services to
the Company, including accounting, bookkeeping, secretarial services, managerial
services, office supplies, cars leasing, office area and food. Novacom will be
an independent contractor and no employer/employee or principal-agent
relationship will exist between Novacom and/or its employees and Novanet. The
consideration in respect of each of the Managerial Services will be calculated
as provided in the agreement, plus VAT, if applicable, and Novacom will not be
entitled, to any further or additional payment whatsoever. The term of the
agreement is one year that automatically extends for one-year periods, unless
either party notifies the other party at least three months prior to the end of
period. The Management believes the allocation method used is reasonable. This
agreement was cancelled upon the acquisition of the Company by Conexant, as
discussed in Note 13 below.

NOTE 13

On July 19, 2000, an agreement was signed between the Company's
shareholders and Conexant. The closing date of the agreement was September 22,
2000. From this date henceforth, Conexant wholly owns the Company.

F-89
<PAGE> 187
NOVANET SEMICONDUCTOR LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)

This agreement stipulated, inter alia, the following provisions:

1. Ericsson committed to exercise the options it held by the closing
date.

2. In consideration for all of the Company's shares and share options,
the shareholders and employees of the Company would receive shares and
share options in Conexant, as well as additional cash amounts on certain
dates and subject to certain conditions stipulated in the agreement.

3. On the closing date, the Company will repay the loans furnished by
the previous shareholders.

On the closing date, the Company granted its employees a bonus totaling
US$12,000,000. Of this amount, US$300,000 is to be returned by employees, if
certain conditions are not fulfilled. The Company also bore the payment of
various expenses related to the transaction, at a sum reaching US$303,000.

For execution of the transaction, a pre-ruling was obtained from the
Israeli Income Tax Authority.

F-90
<PAGE> 188

CONEXANT SPINCO, INC.
<PAGE> 189

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the registrant in connection
with the sale and distribution of the securities being registered. All amounts
are estimated except the commission registration fee, the NASD filing fee and
the Nasdaq original listing fee.

<TABLE>
<CAPTION>
AMOUNT**
--------
<S> <C>
Commission registration fee................................. $
NASD filing fee............................................. $
Nasdaq original listing fee................................. $
*Blue Sky qualification fee and expenses.................... $
*Printing and engraving expenses............................ $
*Accounting fees and expenses............................... $
*Legal fees and expenses.................................... $
*Transfer agent and registrar fee........................... $
*Miscellaneous expenses..................................... $
--------
*Total............................................ $
</TABLE>

---------------
* Estimated

** To be filed by amendment.

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

The Delaware General Corporation Law permits Delaware corporations to
eliminate or limit the monetary liability of directors for breach of their
fiduciary duty of care, subject to certain limitations. Our restated certificate
of incorporation provides that our directors are not liable to Spinco or its
shareholders for monetary damages for breach of fiduciary duty as a director,
except for liability (1) for any breach of the director's duty of loyalty to
Spinco or its shareholders, (2) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (3) for willful or
negligent violation of the laws governing the payment of dividends or the
purchase or redemption of stock or (4) for any transaction from which a director
derived an improper personal benefit.

The Delaware General Corporation Law provides for indemnification of
directors, officers, employees and agents subject to certain limitations. Our
amended bylaws and the appendix thereto provide for the indemnification of our
directors, officers, employees and agents to the extent permitted by Delaware
law. Our directors and officers are insured against certain liabilities for
actions taken in such capacities, including liabilities under the Securities
Act.

II-1
<PAGE> 190

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a) Exhibits

<TABLE>
<C> <S>
*1.1 Form of Underwriting Agreement.
*2.1 Form of Separation and Distribution Agreement between
Conexant and Spinco.
*2.2 Form of Employee Matters Agreement between Conexant and
Spinco.
*2.3 Form of Tax Allocation Agreement between Conexant and
Spinco.
*2.4 Form of Joint Technology and Marketing Agreement between
Conexant and Spinco.
3.1 Certificate of Incorporation of Spinco.
3.2 Bylaws of Spinco.
*3.3 Restated Certificate of Incorporation of Spinco.
*3.4 Amended Bylaws of Spinco.
*4.1 Specimen certificate for Class A Common Stock, par value
$.01 per share.
*4.2 Specimen certificate for Class B Common Stock, par value
$.01 per share.
*4.3 Rights Agreement by and between Spinco and ChaseMellon
Shareholder Services, L.L.C., as rights agent.
*5 Opinion of Chadbourne & Parke LLP.
*10.1 2001 Long-Term Incentives Plan.
*10.2 Directors Stock Plan.
*10.3 2001 Stock Option Plan.
*10.4.1 Form of Employment Agreement to be entered into between
Spinco and certain key executives of Spinco.
*10.4.2 Schedule identifying executives of Spinco who will be party
to an Employment Agreement in the form set forth as Exhibit
10.4.1 to this Registration Statement.
*21 Subsidiaries of Spinco.
23.1 Consents of Deloitte & Touche LLP, independent auditors, and
Deloitte & Touche, chartered accountants and registered
auditors.
23.2 Consent of Arthur Andersen LLP, independent public
accountants.
23.3 Consent of PricewaterhouseCoopers LLP, independent
accountants.
23.4 Consent of Goldstein Sabo & Tevet, independent auditors.
*23.5 Consent of Chadbourne & Parke LLP, contained in their
opinion filed as Exhibit 5 to this Registration Statement.
24 Power of Attorney authorizing certain persons to sign this
Registration Statement on behalf of certain directors and
officers of Spinco (included on page II-5).
*27 Financial Data Schedule.
</TABLE>

---------------
* To be filed by amendment.

(b) Financial Statement Schedules
Schedule II Valuation and Qualifying Accounts

II-2
<PAGE> 191

ITEM 17. UNDERTAKINGS.

A. The Registrant hereby undertakes to provide the Underwriters at the
closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.

B. Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described above, or otherwise, the
Registrant has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.

C. The undersigned Registrant hereby undertakes that:

(1) for purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective; and

(2) for the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and this offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.

II-3
<PAGE> 192

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF NEWPORT BEACH, STATE OF
CALIFORNIA, ON THE 13TH DAY OF NOVEMBER, 2000.

CONEXANT SPINCO, INC.

By: /s/ RAOUF Y. HALIM
------------------------------------
Raouf Y. Halim
Chief Executive Officer

II-4
<PAGE> 193

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below on this Registration Statement hereby constitutes and appoints
Raouf Y. Halim and Balakrishnan S. Iyer, and each of them singly, his true and
lawful attorneys-in-fact and agents, with full power to them and each of them
(including full power of substitution and resubstitution) (1) to sign for him
and in his name and in the capacity or capacities indicated below any and all
amendments (including post-effective amendments) and supplements to this
Registration Statement to be filed by Conexant Spinco, Inc. (the "Company") with
the Securities and Exchange Commission (the "Commission") and (2) any subsequent
registration statement to be filed by the Company pursuant to Section 462(b)
under the Securities Act of 1933, and to file the same, with all exhibits
thereto and all other documents in connection therewith, with the Commission,
granting unto said attorneys-in-fact and agents and each of them, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in connection therewith, as fully to all intents and purposes as they
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their or his or her substitute
or substitutes, may lawfully do or cause to be done by virtue hereof.

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED ON THE 13TH DAY OF NOVEMBER, 2000 BY THE
FOLLOWING PERSONS IN THE CAPACITIES INDICATED:

<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>

/s/ RAOUF Y. HALIM Chief Executive Officer
--------------------------------------------------- (principal executive officer) and Director
Raouf Y. Halim

/s/ DWIGHT W. DECKER Director
---------------------------------------------------
Dwight W. Decker

/s/ BALAKRISHNAN S. IYER Chief Financial Officer
--------------------------------------------------- (principal financial and accounting
Balakrishnan S. Iyer officer) and Director
</TABLE>

II-5
<PAGE> 194

INDEPENDENT AUDITORS' REPORT ON SCHEDULE

To The Board of Directors and Shareholder of
Conexant Spinco, Inc.

We have audited the accompanying consolidated balance sheets of Conexant
Spinco, Inc. (a wholly-owned subsidiary of Conexant Systems, Inc.) and
subsidiaries (the "Company") as of September 30, 2000 and 1999, and the related
consolidated statements of operations, cash flows and shareholder's net
investment for each of the three years in the period ended September 30, 2000
and have issued our report thereon dated November 9, 2000 included elsewhere in
this Registration Statement. Our audits also included the financial statement
schedule listed in Item 16 of this Registration Statement. This financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits. In our opinion,
such financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.

Costa Mesa, California
November 9, 2000

Deloitte & Touche LLP
Costa Mesa, California
November 9, 2000

II-6
<PAGE> 195

SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)

<TABLE>
<CAPTION>
ADDITIONS
--------------------
BALANCE AT CHARGED BALANCE AT
BEGINNING TO COSTS AND END OF
DESCRIPTION OF YEAR EXPENSES OTHER DEDUCTIONS YEAR
----------- ---------- ------------ ----- ---------- ----------
<S> <C> <C> <C> <C> <C>
Year ended September 30, 2000
Allowance for doubtful accounts.......... $ 835 $ 276 $301 $ 45 $ 1,367
Allowance for excess and obsolete
inventory............................. 15,814 (1,256) 313 2,171 12,700
Year ended September 30, 1999
Allowance for doubtful accounts.......... $ 908 $ (73) $ -- $ -- $ 835
Allowance for excess and obsolete
inventory............................. 11,082 5,857 -- 1,125 15,814
Year ended September 30, 1998
Allowance for doubtful accounts.......... $ 999 $ -- $ -- $ 91 $ 908
Allowance for excess and obsolete
inventory............................. 1,248 9,834 -- -- 11,082
</TABLE>

II-7
<PAGE> 196

EXHIBIT INDEX

<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED PAGE
-------------
<C> <S> <C>
*1.1 Form of Underwriting Agreement.
*2.1 Form of Separation and Distribution Agreement between
Conexant and Spinco.
*2.2 Form of Employee Matters Agreement between Conexant and
Spinco.
*2.3 Form of Tax Allocation Agreement between Conexant and
Spinco.
*2.4 Form of Joint Technology and Marketing Agreement between
Conexant and Spinco.
3.1 Certificate of Incorporation of Spinco.
3.2 Bylaws of Spinco.
*3.3 Restated Certificate of Incorporation of Spinco.
*3.4 Amended Bylaws of Spinco.
*4.1 Specimen certificate for Class A Common Stock, par value
$.01 per share.
*4.2 Specimen certificate for Class B Common Stock, par value
$.01 per share.
*4.3 Rights Agreement by and between Spinco and ChaseMellon
Shareholder Services, L.L.C., as rights agent.
*5 Opinion of Chadbourne & Parke LLP.
*10.1 2001 Long-Term Incentives Plan.
*10.2 Directors Stock Plan.
*10.3 2001 Stock Option Plan.
*10.4.1 Form of Employment Agreement to be entered into between
Spinco and certain key executives of Spinco.
*10.4.2 Schedule identifying executives of Spinco who will be party
to an Employment Agreement in the form set forth as Exhibit
10.4.1 to this Registration Statement.
*21 Subsidiaries of Spinco.
23.1 Consents of Deloitte & Touche LLP, independent auditors, and
Deloitte & Touche, chartered accountants and registered
auditors.
23.2 Consent of Arthur Andersen LLP, independent public
accountants.
23.3 Consent of PricewaterhouseCoopers LLP, independent
accountants.
23.4 Consent of Goldstein Sabo & Tevet, independent auditors.
*23.5 Consent of Chadbourne & Parke LLP, contained in their
opinion filed as Exhibit 5 to this Registration Statement.
24 Power of Attorney authorizing certain persons to sign this
Registration Statement on behalf of certain directors and
officers of Spinco (included on page II-5).
*27 Financial Data Schedule.
</TABLE>

---------------
* To be filed by amendment.