**UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549**

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**FORM 10-Q**

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(Mark One)

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

**For the quarterly period ended **June 30, 2001** or**

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

**For the transition period from ________to _________**

**Commission File Number 000-30649**

**CENTILLIUM COMMUNICATIONS, INC.**(Exact name of registrant as specified in its charter)



|**Delaware**                                                   | **94-3263530**                      
|-------------------------------------------------------------- | ------------------------------------
|(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification Number)

**47211 Lakeview BoulevardFremont, California     94538**(Address of principal executive offices including zip code)

**(510) 771-3700**(Registrant's telephone number, including area code)







Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [  ]

On July 31, 2001, approximately 34,299,078 shares of the Registrant's Common
Stock, $.001 par value, were outstanding.









**Centillium Communications, Inc.

                                TABLE OF CONTENTS**



|**PART I.   Financial Information**                                                                                          | **Page No.**
|---------------------------------------------------------------------------------------------------------------------------- | ------------
|                                                                                                                             |             
|Item 1.   Financial Statements
                  (unaudited)                                                                 |             
|                                                                                                                             |             
|Condensed Consolidated Balance Sheets as of
        
          June 30, 2001 and December 31, 2000                           | 3           
|                                                                                                                             |             
|Condensed Consolidated Statements of Operations
        
          for the three and six months ended June 30, 2001 and 2000 | 4           
|                                                                                                                             |             
|Condensed Consolidated Statements of Cash Flows
        
          for the six months ended June 30, 2001 and 2000           | 5           
|                                                                                                                             |             
|Notes to Condensed Consolidated Financial Statements                                                                         | 6           
|                                                                                                                             |             
|Item 2.   Management's Discussion and Analysis of Financial
                      Condition and Results of Operations        | 12          
|                                                                                                                             |             
|Item 3.   Quantitative and Qualitative Disclosures About Market Risk                                                         | 28          
|                                                                                                                             |             
|**PART II.  Other Information**                                                                                              |             
|                                                                                                                             |             
|Item 1.   Legal Proceedings                                                                                                  | 29          
|                                                                                                                             |             
|Item 2: Changes in Securities and Use of Proceeds                                                                            | 29          
|                                                                                                                             |             
|Item 3: Defaults Upon Senior Securities                                                                                      | 29          
|                                                                                                                             |             
|Item 4: Submission of Matters to a Vote of Security Holders                                                                  | 29          
|                                                                                                                             |             
|Item 5: Other Information                                                                                                    | 30          
|                                                                                                                             |             
|Item 6.   Exhibits and Reports on Form 8-K                                                                                   | 30          
|                                                                                                                             |             
|**Signatures**                                                                                                               | 31          

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**PART I.   FINANCIAL INFORMATION**

**ITEM 1.      FINANCIAL STATEMENTS**

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**CENTILLIUM COMMUNICATIONS, INC.

                      CONDENSED CONSOLIDATED BALANCE SHEETS

                                 (In thousands)**

`June 30,  December 31,
                                                            2001         2000
                                                        -----------  -----------
                                                        (unaudited)
                        ASSETS
Current assets:
  Cash and cash equivalents........................... $    79,306  $    71,240
  Short-term investments..............................      13,927       16,444
  Accounts receivable-net of allowance for doubtful
   accounts of $1,026 at June 30, 2001 and $932
   at December 31, 2000...............................       1,683       16,883
  Inventories.........................................      28,919        9,183
  Other current assets................................       1,606        1,552
                                                        -----------  -----------
    Total current assets..............................     125,441      115,302
Property and equipment, net...........................      10,552        8,355
Goodwill and other acquisition intangibles, net.......       7,727        3,200
Other assets..........................................         207        1,086
                                                        -----------  -----------
    Total assets...................................... $   143,927  $   127,943
                                                        ===========  ===========

         LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable.................................... $    11,672  $    13,133
  Accrued payroll & related expenses..................       3,167        2,578
  Accrued liabilities.................................       6,657        4,277
  Accrued taxes.......................................          39            8
  Deferred revenue....................................       2,916          200
  Long-term debt-current portion......................         284          367
                                                        -----------  -----------
    Total current liabilities.........................      24,735       20,563
Long-term debt........................................         111          221
Other liabilities.....................................         309          289
Commitments and contingencies

Stockholders' equity:
Common stock..........................................          34           33
Additional paid in capital............................     228,685      208,520
Stockholder note receivable...........................          --         (430)
Accumulated other comprehensive income................          15            8
Deferred compensation.................................     (16,010)     (21,521)
Accumulated deficit...................................     (93,952)     (79,740)
                                                        -----------  -----------
    Total stockholders' equity........................     118,772      106,870
                                                        -----------  -----------
    Total liabilities and stockholders' equity........ $   143,927  $   127,943
                                                        ===========  ===========`

See accompanying notes

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**CENTILLIUM COMMUNICATIONS, INC.

        CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

         (Unaudited, In Thousands Except Per Share Data)**

`Three Months Ended    Six Months Ended
                                              June 30,              June 30,
                                        --------------------  --------------------
                                           2001       2000       2001       2000
                                        --------- ----------  --------- ----------
Product revenues...................... $  46,371  $   9,752  $  78,026  $  14,475
Technology development revenues.......        --         --        200         --
                                        ---------  ---------  ---------  ---------
    Total net revenues................    46,371      9,752     78,226     14,475
Cost of revenues......................    23,315      5,963     39,486      9,446
                                        ---------  ---------  ---------  ---------
Gross profit..........................    23,056      3,789     38,740      5,029
                                        ---------  ---------  ---------  ---------
Operating expenses:
  Research and development............    13,745     12,865     28,017     18,882
  Sales and marketing.................     4,809      4,126      9,083      6,899
  General and administrative..........     4,178      4,162      7,663      6,924
  Amortization of goodwill and other
   acquisition-related intangibles....       821         --      1,642         --
  In-process research and development.        --         --      7,422         --
                                        ---------  ---------  ---------  ---------
    Total operating expenses..........    23,553     21,153     53,827     32,705
                                        ---------  ---------  ---------  ---------
Operating loss........................      (497)   (17,364)   (15,087)   (27,676)
Interest income.......................       956        757      2,139      1,116
Interest expense......................       (19)      (176)       (40)      (281)
Loss on non-current investment........      (990)        --       (990)        --
                                        ---------  ---------  ---------  ---------
Loss before provision for income taxes      (550)   (16,783)   (13,978)   (26,841)
Provision for income taxes............       205         --        234         --
                                        ---------  ---------  ---------  ---------
Net loss.............................. $    (755) $ (16,783) $ (14,212) $ (26,841)
                                        =========  =========  =========  =========

Basic and diluted net loss per share.. $   (0.02) $   (0.89) $   (0.43) $   (1.87)
                                        =========  =========  =========  =========
Weighted average common shares
   outstanding--basic and diluted.....    33,426     18,919     33,101     14,357
                                        =========  =========  =========  =========`

See accompanying notes

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**CENTILLIUM COMMUNICATIONS, INC.

                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

                           (Unaudited, In Thousands)**

`For the Six
                                                       Months Ended June 30,
                                                      ----------------------
                                                         2001        2000
                                                      ----------  ----------
Operating activities
Net loss............................................ $  (14,212) $  (26,841)
Adjustments to reconcile net loss to net cash used
 by operating activities:
  Amortization of deferred compensation.............      9,433      12,228
  Depreciation and amortization expense.............      2,132       1,626
  Amortization of goodwill and other acquisition
   related intangibles..............................      1,642          --
  Acquired in-process research and development......      7,422          --
  Loss on non-current investment....................        990          --
  Issuance of common stock for services and other...         --         155
  Amortization of warrants issued in conjunction             --          --
   with debt & other................................          1           5
  Accrued non-cash stock compensation expense.......         --       2,341
  Changes in operating assets and liabilities:
    Accounts receivable.............................     15,200      (7,245)
    Inventories.....................................    (19,736)     (1,170)
    Other current assets............................       (504)       (706)
    Other assets....................................       (111)         --
    Working capital line of credit..................         --         926
    Accounts payable................................     (1,462)      2,319
    Accrued payroll and related expenses............        589       1,000
    Deferred revenue................................      2,716         (22)
    Accrued liabilities.............................      2,250       2,808
    Other liabilities...............................         51         144
                                                      ----------  ----------
Net cash provided by (used in) operating activities.      6,401     (12,432)

Investing activities
Purchases of short-term investments.................    (18,431)    (11,096)
Sales and maturities of short-term investments......     20,955      25,245
Purchases of property and equipment.................     (3,736)     (3,595)
Purchases of intangibles and other long-term
 assets.............................................         --      (5,153)
Cash acquired in acquisition........................        258          --
                                                      ----------  ----------
Net cash provided by (used in) investing activities.       (954)      5,401

Financing activities
Principal payments on capital lease obligations.....         --        (110)
Principal payments on long term debt................       (257)       (253)
Proceeds from issuance of common stock, net.........      2,446      94,125
Proceeds from stockholders note receivable..........        430          --
                                                      ----------  ----------
Net cash provided by financing activities...........      2,619      93,762
                                                      ----------  ----------
Net increase in cash and cash equivalents...........      8,066      86,731
Cash and cash equivalents at beginning of period....     71,240       3,202
                                                      ----------  ----------
Cash and cash equivalents at end of period.......... $   79,306  $   89,933
                                                      ==========  ==========`

See accompanying notes

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**CENTILLIUM COMMUNICATIONS, INC.

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**1.  Nature of Business and Basis of Presentation
Nature of Operations**

Centillium Communications, Inc. ("Centillium" or "the
Company") was incorporated in California on February 21, 1997 for the purpose of
developing, producing, and marketing semiconductor devices for equipment
manufacturers serving the broadband communications markets. The Company focused
initially on developing products designed for the digital subscriber line (DSL)
central office and customer premise markets. In December 1999, the Company
reincorporated in Delaware. Our revenues currently are derived from the sale of
our DSL and Voice-over-Packet network products which include the CopperLite,
CopperFlite, Optimizer, and Entropia families of products.

Centillium has incurred significant losses since inception
and, as of June 30, 2001, had an accumulated deficit of approximately $94.0
million (unaudited) including a net loss for the six months ended June 30, 2001
of $14.2 million (unaudited).

Unaudited Interim Financial
Statements

The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation have been included. Operating results for the three and
six month periods ended June 30, 2001 are not necessarily indicative of the
results that may be expected for the year ended December 31, 2001.

The balance sheet as of December 31, 2000 has been derived
from the audited financial statements at that date but does not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements.

For further information, refer to the consolidated financial
statements and footnotes thereto for the year ended December 31, 2000 included
in the Company's Annual Report on Form 10-K (File No. 000-30649), filed with the
Securities and Exchange Commission on March 19, 2001.

Principles of Consolidation

The consolidated financial statements include all the
accounts of the Company and those of its wholly-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated.

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 from those estimates.

Customer Concentrations

Two customers accounted for 52% and 45% of product revenues
for the three months ended June 30, 2001 and four customers accounted for 24%,
17%, 14% and 11% of product revenues for the three months ended June 30, 2000.

Two customers accounted for 45% and 42% of product revenues for the six
months ended June 30, 2001 and three customers accounted for 26%, 20% and 14% of
product revenues for the six months ended June 30, 2000.

Contingent Matters

The semiconductor and telecommunications industries are
characterized by substantial litigation regarding patent and other intellectual
property rights. From time to time, the Company receives various inquiries or
claims in connection with these rights and may become party to associated
claims. In certain cases, management has accrued estimates of the amounts it
expects to pay upon resolution of such matters. Should the Company not be able
to secure the terms it expects, these estimates may change and will be
recognized in the period in which they are identified. Although the ultimate
outcome of such inquiries is not presently determinable, management believes
that the resolution of these matters will not have a material adverse effect on
the Company's financial position or results of operations.

Business Segment Information

The Company currently operates in one business segment, the
sale of products for the DSL market, which it sells primarily to original
equipment manufacturers and companies in the communication industries. The
Company has also developed and sold products for the emerging Voice-over-Packet
network markets and is developing products for the premise network markets.
Sales of our Voice-over-Packet network products were not material for the three
and six month periods ended June 30, 2001.

The Chief Executive Officer has been identified as the Chief Operating
Decision Maker (CODM) because he has final authority over resource allocation
decisions and performance assessment. The CODM does not receive discrete
financial information about the individual components.

Reclassifications

Certain prior year balances have been reclassified to conform
to current year presentation.

2.  Inventories

Inventories are stated at the lower of cost (first in, first
out) or market. The components of inventories are as follows (in thousands):

`June 30,  December 31,
                                       2001         2000
                                   -----------  -----------
                                    (unaudited)
  Work-in-process................ $     9,791  $     5,393
  Finished goods.................      19,128        3,790
                                   -----------  -----------
                                  $    28,919  $     9,183
                                   ===========  ===========`

3.  Acquisition

On January 5, 2001, the Company completed its acquisition of
vEngines, Inc. ("vEngines"). vEngines developed high-density voice processing
semiconductor products which bridge circuit switched voice and packet-based data
networks. This technology compresses voice traffic, converting it into digital
packets, which can then travel on data networks. vEngines' targeted customer
base included communications equipment manufacturers that provide carrier and
access voice gateways and remote access servers.

Under the terms of the purchase agreement, 813,915 shares of
the Company's common stock, with an aggregate value of approximately $17.1
million, were exchanged for all of the issued and outstanding capital stock of
vEngines. In addition, all of the outstanding options to purchase shares of
vEngines' capital stock were exchanged for options to purchase 58,628 shares of
our common stock with an aggregate fair value of approximately $1.2 million. The
Company valued the common stock and outstanding options exchanged in the
transaction as follows:



|Security Exchanged                      | Valuation Methodology             
|--------------------------------------- | ----------------------------------
|Common stock--not subject to repurchase | Fair value of Company's stock     
|Common stock--subject to repurchase     | Black-Scholes option pricing model
|Options                                 | Black-Scholes option pricing model

Including direct acquisition costs of approximately $523,000,
the aggregate purchase price of vEngines was approximately $18.8 million. The
acquisition has been accounted for using the purchase method of accounting.

Based on a review of a valuation performed by an independent
appraiser, the Company allocated the purchase price of vEngines as follows (in
thousands:

`In-process research and development..................... $   7,422
  Acquisition related deferred compensation...............     4,517
  Fair value of assets acquired and liabilities assumed...       730
  Assembled workforce.....................................       354
  Goodwill................................................     5,816
                                                            ---------
  Total................................................... $  18,839
                                                            =========`

The portion of the purchase price allocated to purchased in-
process research and development was $7.4 million and was valued based on net
cash flows over four years, discounted at a cost of capital of 25% to reflect
the uncertainty of the products' future use. The entire amount of $7.4 million
was expensed on acquisition because the technological feasibility of products
under development had not been established and no future alternative uses
existed. The specific products under development using vEngines technology have
been discontinued; however, certain aspects of the technologies have been
incorporated into the Company's Voice-over-Packet solutions.

The Company recorded acquisition-related purchase
consideration of $4.5 million in the three months ended March 31, 2001 as
unearned stock-based compensation, in accordance with Financial Accounting
Standards Board Interpretation No. 44, "Accounting for Certain Transactions
Involving Stock Compensation." This amount represents the portion of the
purchase consideration related to shares issued contingent on continued
employment of certain employee stockholders and the intrinsic value of stock
options assumed that become exercisable as future services are provided by
employees. The compensation is being recognized over the related employment
period, using the graded vesting method, which results in acceleration of
amortization expense for the overall award. A total of $665,000 and $1.3 million
of expense was recognized for the three and six months ended June 30, 2001 and
has been included in amortization of deferred compensation.

Goodwill and the assembled workforce are amortized on a
straight-line basis over their expected useful lives of four and two years,
respectively. The financial information for the three and six months ended June
30, 2001 include the results of operations for vEngines from January 6, 2001 to
the end of the reporting periods. Pro-forma results of operations have not been
presented because the pro-forma impact of the acquisition was not material to
the Company's results of operations and financial position for the three and six
month periods ended June 30, 2001 and 2000.

4.  Goodwill and Other Intangible Assets

Goodwill represents the excess of the purchase price paid
over the fair value of tangible and identifiable intangible net assets acquired
in business acquisitions. Identifiable intangible assets consist of the
assembled workforce. In the event that facts and circumstances indicate that the
carrying value of goodwill and intangible assets may be impaired, an evaluation
of recoverability would be performed. If an evaluation is required, the fair
value associated with the asset would be compared to the asset's carrying amount
to determine if a write-down may be required. No such impairment has been
indicated to date. Goodwill and other intangible assets are stated net of
accumulated amortization and are amortized on a straight-line basis over their
expected useful lives. Goodwill and other intangible assets are as follows (in
thousands):

`June 30,  December 31,
                                                    2001         2000
                                                -----------  -----------
                                                (unaudited)
  Goodwill.................................... $     7,472  $     1,657
  Other purchased intangibles.................       2,724        2,370
                                                -----------  -----------
                                                    10,196        4,027
  Less accumulated amortization...............      (2,469)        (827)
                                                -----------  -----------
  Goodwill and other intangible assets, net... $     7,727  $     3,200
                                                ===========  ===========`

5.  Net Loss Per Share and Comprehensive Net Loss

Basic and diluted net loss per common share is
presented in conformity with the Statement of Financial Accounting Standards No.
128, "Earnings Per Share" (FAS 128), for all periods presented. In accordance
with FAS 128, basic and diluted net loss per share have been computed using the
weighted average number of shares of common stock outstanding during the period,
less shares subject to repurchase. The following table presents the computation
of basic and diluted net loss per share (in thousands, except per share
amounts):

`Three Months Ended    Six Months Ended
                                               June 30,              June 30,
                                         --------------------  --------------------
                                            2001       2000       2001       2000
                                         ---------  ---------  ---------  ---------
  Net loss............................. $    (755) $ (16,783) $ (14,212) $ (26,841)
                                         =========  =========  =========  =========
  Basic and diluted:
  Weighted average shares of common
   stock outstanding...................    34,149     20,717     33,937     15,899
  Less weighted average shares
   subject to repurchase...............       723      1,798        836      1,542
                                         ---------  ---------  ---------  ---------
  Weighted average shares used in
   computing basic and diluted net
   loss per share......................    33,426     18,919     33,101     14,357
                                         =========  =========  =========  =========

  Basic and diluted net loss per share. $   (0.02) $   (0.89) $   (0.43) $   (1.87)
                                         =========  =========  =========  =========`

The Company has excluded all outstanding stock options and
shares subject to repurchase from the calculation of basic and diluted net loss
per share because these securities are antidilutive. As of June 30, 2001 and
2000, there were 10,084,652 and 6,461,742 of outstanding options to purchase
shares of common stock excluded from the calculation of basic and diluted net
loss per share.

Comprehensive Net Loss

The components of comprehensive net loss were as follows (in
thousands):

`Three Months Ended    Six Months Ended
                                               June 30,              June 30,
                                         --------------------  --------------------
                                            2001       2000       2001       2000
                                         ---------  ---------  ---------  ---------
Net loss............................... $    (755) $ (16,783) $ (14,212) $ (26,841)

Change in unrealized gain on
  available-for-sale investments.......        (5)        14          7         24
                                         ---------  ---------  ---------  ---------
   Total comprehensive net loss........ $    (760) $ (16,769) $ (14,205) $ (26,817)
                                         =========  =========  =========  =========`

6.  Provision for Income Taxes

Based on an estimated annual effective tax rate, the income
tax expense was $205,000 and $234,000 for the three and six month periods ended
June 30, 2001, respectively. The 2001 income tax expense differs from the
expected benefit derived by applying the applicable U.S. federal statutory rate
to the loss from operations primarily due to non-deductible acquisition related
items and amortization of deferred compensation partially offset by the benefit
of net operating loss carryforwards and research and development tax credits.

7.  Recent Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (FAS 133). FAS 133 establishes accounting
methods for derivative financial instruments and hedging activities related to
those instruments as well as other hedging activities. FAS 133 was adopted by
the Company as of January 1, 2001. Because the Company does not currently hold
any derivative instruments and does not engage in hedging activities, the
adoption of FAS 133 did not have a material impact on the Company's financial
position or results of operations.

In July 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (FAS) No. 141, "Business
Combinations," and FAS No. 142, "Goodwill and Other Intangible Assets." These
standards become effective for fiscal years beginning after December 15, 2001.
Beginning in the first quarter of 2002, goodwill and certain intangible assets
will no longer be amortized but will be subject to annual impairment tests.
Based on acquisitions completed as of June 30, 2001, application of the non-
amortization provisions of these rules is expected to result in an increase in
results of operations of approximately $3.2 million per year. The new rules also
require business combinations initiated after June 30, 2001 to be accounted for
using the purchase method of accounting, and that goodwill acquired after June
30, 2001 not be amortized. Goodwill existing at June 30, 2001 will continue to
be amortized through the end of fiscal 2001. During 2002, the company will test
goodwill for impairment under the new rules, applying a  fair-value-based test.



ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

Cautionary Statement

You should read the following discussion and analysis in
conjunction with our consolidated financial statements and the related notes
thereto included in our annual report on Form 10-K, filed with the Securities
and Exchange Commission on March 19, 2001. The information in this report is not
a complete description of our business or the risks associated with an
investment in our common stock. We urge you to carefully review and consider the
various disclosures made by us in this report and in our other reports filed
with the SEC. Our discussion contains forward-looking statements based upon
current expectations that involve risks and uncertainties, such as our plans,
objectives, expectations and intentions. Our actual results and the timing of
events could differ materially from those anticipated in these forward-looking
statements.

The section entitled "Risk Factors" set forth in this report,
and similar discussions in our other SEC filings, discuss some of the important
risk factors that may affect our business, results of operations and financial
condition. You should carefully consider those risks, in addition to the other
information in this report and in our other filings with the SEC, before
deciding to invest in our company or to maintain or increase your investment.

Results of Operations for the Three Months Ended
June 30, 2001 and 2000

Net Revenues. Our net revenues increased to $46.4
million for the three months ended June 30, 2001, compared to $9.8 million for
the three months ended June 30, 2000. The increase reflects increasing unit
shipments as our products gain market acceptance. Our major customers for the
three months ended June 30, 2001 were Sumitomo Electric Industries and NEC who
represented 52% and 45% of revenues, respectively. Revenues to international
customers, who were primarily located in Japan, comprised 97% of our revenues
for the three months ended June 30, 2001.

Cost of Revenues and Gross Profit. Cost of revenues
was $23.3 million for the three months ended June 30, 2001 resulting in a gross
margin of $23.1 million, or 50% of net revenues. This compares to a gross margin
of $3.8 million, or 39% of net revenues, for the three months ended June 30,
2000. The amortization of deferred compensation included in cost of goods sold
for the three months ended June 30, 2001 and June 30, 2000 was $189,000 and
$433,000, respectively. The increase in gross margin as a percentage of net
revenues was attributable to increased unit volume of shipments, whereby fixed
costs were absorbed over more units, resulting in proportionally lowerper unit fixed manufacturing costs. Our gross
margins in the future may be affected by competitive pricing strategies and the
future introduction of certain lower margin items.

Research and Development Expenses. Research and
development expenditures increased 7% to $13.7 million for the three months
ended June 30, 2001 as compared to $12.9 million for the three months ended June
30, 2000. The increase was primarily due to the addition of engineering
personnel, offset by a $1.2 million decrease in the amortization of deferred
compensation.

Sales and Marketing Expenses. Sales and marketing
expenditures increased 17% to $4.8 million for the three months ended June 30,
2001 as compared to $4.1 million for the three months ended June 30, 2000. The
increase was due to the addition of personnel and the associated payroll and
related costs, offset by an $858,000 decrease in the amortization of deferred
compensation.

General and Administrative Expenses. General and
administrative expenditures were $4.2 million for the three months ended June
30, 2001 and June 30, 2000, respectively, and remained materially unchanged.
However, increases in general and administrative payroll and related costs for
the three months ended June 30, 2001 were offset by a $1.3 million decrease in
the amortization of deferred compensation during the same period.

Amortization of Deferred Compensation. Amortization of deferred
compensation decreased by $3.6 million to $3.9 million for the three months
ended June 30, 2001 as compared to $7.5 million for the three months ended June
30, 2000. The decrease was primarily attributable to the use of the graded
vesting method of amortization, which resulted in accelerated amortization of
deferred compensation expense over the earlier periods of the awards. The
following table details the amount of deferred compensation included in expenses
(in thousands):

`Expenses
                            Excluding
                           Amortization
                           of Deferred
                           Compensation
                           and Non-Cash
                              Stock        Non-Cash    Amortization
                           Compensation     Stock      of Deferred     Total
                             Expense     Compensation  Compensation  Expenses
                           ------------  ------------  ------------  ---------
For the three months
 ended June 30, 2001
  Cost of revenues....... $     23,126  $         --  $        189  $  23,315
  Research and
   development...........       11,712            --         2,033     13,745
  Sales and marketing....        4,206            --           603      4,809
  General and
   administrative........        3,091            --         1,087      4,178
                           ------------  ------------  ------------  ---------
    Total................ $     42,135  $         --  $      3,912  $  46,047
                           ============  ============  ============  =========

For the three months
 ended June 30, 2000
  Cost of revenues....... $      5,530  $         --  $        433  $   5,963
  Research and
   development...........        7,266         2,391         3,208     12,865
  Sales and marketing....        2,665            --         1,461      4,126
  General and
   administrative........        1,677           100         2,385      4,162
                           ------------  ------------  ------------  ---------
    Total................ $     17,138  $      2,491  $      7,487  $  27,116
                           ============  ============  ============  =========`

Amortization of Goodwill and Other Acquisition-Related
Intangibles. For the three months ended June 30, 2001, the Company recorded
$821,000 in amortization of goodwill and other acquisition related intangibles
related to goodwill and intangibles acquired from Avio Digital and vEngines.
There were no comparable amounts for the three months ended June 30, 2000.

Loss on Non-Current Investment. Management monitors
and evaluates the realizable value of its non-current equity investment and if
events and circumstances indicate that the decline in value of this asset is
other-than-temporary, the Company records a charge to income. In June of 2001,
in connection with the ongoing evaluation of its non-current equity investment,
management recorded a non-cash charge of $990,000 to reflect impairment in the
value of this asset. There were no comparable amounts for the three months ended
June 30, 2001.

Interest Income. Interest income increased 26% to
$956,000 for the three months ended June 30, 2001 as compared to $757,000 for
the three months ended June 30, 2000. The increase was primarily due to larger
cash balances resulting from our initial public offering in May of 2000.

Interest Expense. Interest expense decreased 89% to
$19,000 for the three months ended June 30, 2001 as compared to $176,000 for the
three months ended June 30, 2000. The decrease was primarily due to the
termination of our revolving credit agreement ("Credit Agreement") with
Mitsubishi International Corporation, which was cancelled in June of 2000.

Provision for Income Taxes. Based on an estimated
annual effective tax rate, the income tax expense was $205,000 for the three
months ended June 30, 2001 compared to no income tax expense for the three
months ended June 30, 2000. The provision of income taxes in 2001 primarily
represents federal alternative minimum taxes based on projected U.S. taxable
income for the year. There is no tax benefit for 2000 primarily due to the
inability to recognize the benefit of losses incurred.

Results of Operations for the Six Months Ended June 30,
2001 and 2000

Net Revenues. Our net revenues increased to $78.2
million for the six months ended June 30, 2001 compared to $14.5 million for the
six months ended June 30, 2000. The increase reflects increasing unit shipments
as our products gain market acceptance. Our major customers for the six months
ended June 30, 2001 were Sumitomo Electric Industries and NEC, who represented
45% and 42% of net revenues, respectively. Revenues to international customers,
who were primarily located in Japan, comprised 89% of our revenues for the six
months ended June 30, 2001.

Cost of Revenues and Gross Profit. Cost of revenues
was $39.5 million for the six months ended June 30, 2001, resulting in a gross
margin of $38.7 million, or 50% of net revenues. This compares to a gross margin
of $5.0 million, or 35% of net revenues, for the six months ended June 30, 2000.
The amortization of deferred compensation included in cost of goods sold for the
six months ended June 30, 2001 and 2000 were $514,000 and $651,000,
respectively. The increase in gross margin as a percentage of net revenues was
attributable to increased unit volume of shipments, whereby fixed costs were
absorbed over more units, resulting in proportionally lower per unit fixedmanufacturing costs. Our gross margins in the
future may be affected by competitive pricing strategies and the future
introduction of certain lower margin items.

Research and Development Expenses. Research and
development expenditures increased 48% to $28.0 million for the six months ended
June 30, 2001 as compared to $18.9 million for the six months ended June 30,
2000. The increase was primarily due to the addition of engineering personnel,
offset by a $382,000 decrease in the amortization of deferred compensation.

Sales and Marketing Expenses. Sales and marketing
expenditures increased 32% to $9.1 million for the six months ended June 30,
2001 as compared to $6.9 million for the six months ended June 30, 2000. The
increase was due to the addition of personnel and the associated payroll and
related costs, offset by a $978,000 decrease in the amortization of deferred
compensation.

General and Administrative Expenses. General and
administrative expenditures increased 11% to $7.7 million for the six months
ended June 30, 2001 from $6.9 million for the six months ended June 30, 2000.
This increase was due to the addition of personnel and the associated payroll
and related costs, offset by a $1.3 million decrease in the amortization of
deferred compensation.

Amortization of Deferred Compensation.
Amortization of deferred compensation decreased to $9.4 million from $12.2
million for the six months ended June 30, 2001 and 2000, respectively. The
decrease was primarily attributable to the use of the graded vesting method of
amortization, which resulted in accelerated amortization of deferred
compensation expense over the earlier periods of the awards. The following table
details the amount of deferred compensation included in expenses (in thousands):

`Expenses
                            Excluding
                           Amortization
                           of Deferred
                           Compensation
                           and Non-Cash
                              Stock        Non-Cash    Amortization
                           Compensation     Stock      of Deferred     Total
                             Expense     Compensation  Compensation  Expenses
                           ------------  ------------  ------------  ---------
For the six months
 ended June 30, 2001
  Cost of revenues....... $     38,972  $         --  $        514  $  39,486
  Research and
   development...........       23,250            --         4,767     28,017
  Sales and marketing....        7,576            --         1,507      9,083
  General and
   administrative........        5,018            --         2,645      7,663
                           ------------  ------------  ------------  ---------
    Total................ $     74,816  $         --  $      9,433  $  84,249
                           ============  ============  ============  =========

For the six months
 ended June 30, 2000
  Cost of revenues....... $      8,795  $         --  $        651  $   9,446
  Research and
   development...........       11,342         2,391         5,149     18,882
  Sales and marketing....        4,414            --         2,485      6,899
  General and
   administrative........        2,881           100         3,943      6,924
                           ------------  ------------  ------------  ---------
    Total................ $     27,432  $      2,491  $     12,228  $  42,151
                           ============  ============  ============  =========`

Amortization of Goodwill and Other Acquisition-Related
Intangibles. In the six months ended June 30, 2001, the Company recorded
$1.6 million in amortization of goodwill and other acquisition related
intangibles, related to goodwill and intangibles acquired from Avio Digital and
vEngines. There were no comparable amounts for the six months ended June 30,
2000.

In-Process Research and Development Expense. In the
six months ended June 30, 2001, the Company recorded $7.4 million in charges for
research and development related to the acquisition of vEngines. The Company did
not consider products under development to have reached technological
feasibility and, therefore, charged therelated in-process research and development costs to operations upon
acquisition. There were no comparable amounts for the six months ended June 30,
2000.

Loss on Non-Current Investment. Management monitors
and evaluates the realizable value of its non-current equity investment and if
events and circumstances indicate that the decline in value of this asset is
other-than-temporary, the Company records a charge to income. In June of 2001,
in connection with the ongoing evaluation of its non-current equity investment,
management recorded a non-cash charge of $990,000 to reflect impairment in the
value of this asset. There were no comparable amounts for the six months ended
June 30, 2001.

Interest Income. Interest income increased 92% to $2.1
million for the six months ended June 30, 2001 as compared to $1.1 million for
the six months ended June 30, 2000. The increase was primarily due to larger
cash balances resulting from our initial public offering in May of 2000.

Interest Expense. Interest expense decreased 86% to
$40,000 for the six months ended June 30, 2001 as compared to $281,000 for the
six months ended June 30, 2000. The decrease was primarily due to the
termination of our revolving credit agreement ("Credit Agreement") with
Mitsubishi International Corporation, which was cancelled in June of 2000.

Provision for Income Taxes. Based on an estimated
annual effective tax rate, the income tax expense was $234,000 compared to no
income tax expense for the six months ended June 30, 2001 and 2000,
respectively. The provision for income taxes in 2001 primarily represents
federal alternative minimum taxes based on projected U.S. taxable income for the
year. There was no tax benefit for 2000 primarily due to the inability to
recognize the benefit of losses incurred.

Liquidity and Capital Resources

Since inception, we have financed our operations primarily
through private sales of approximately $55.8 million of convertible preferred
stock, net of offering costs, and through our initial public offering on May 24,
2000. Net proceeds to us as a result of the initial public offering, plus the
proceeds from a concurrent private placement of 600,000 shares, were
approximately $91.5 million. In addition, since inception we generated $5.3
million from the exercise of stock options, net of repurchases, and $1.8 million
from sales of our stock through our Employee Stock Purchase Plan.

Net cash generated from operating activities was $6.4 million
for the six months ended June 30, 2001, which consisted primarily of a net loss
of $14.2 million, offset by non-cash charges of $9.4 million for the
amortization of deferred compensation, $7.4 million of acquired in-process
research and development expense, $3.8 million of depreciation and amortization
expense and a write-down of $990,000 in non-current investments. Net cash
generated from operations also increased due to decreases in accounts receivable
of $15.2 million and increases in deferred revenues and accrued liabilities of
$2.7 million and $2.3 million, respectively. Net cash flows from operating
activities were offset by an increase in inventories by $19.7 million.
Management increased inventories to support anticipated sales volume, and
accounts receivable decreased due to improved collection efforts and timing of
payments from customers. In addition, accounts receivable decreased because a
larger percentage of revenues were shipped in earlier months of the second
quarter of 2001.

Net cash used in investing activities was $1.0 million for
the six months ended June 30, 2001, and was primarily related to proceeds from
the net maturities of short-term investments, offset by purchases of property
and equipment.

Cash generated from financing activities was $2.6 million for
the six months ended June 30, 2001, and was primarily related to the net
proceeds from employee stock option exercises and sale of stock through our
employee stock purchase plan, offset by principal payments on long term debt.

We expect to devote substantial capital resources to continue
our research and development efforts, to hire and expand our sales, support,
marketing, and product development organizations, to expand marketing programs,
to establish additional facilities worldwide and to fund other general corporate
activities. We currently anticipate that our current cash, cash equivalents, and
short-term investments will be sufficient to meet our anticipated cash needs for
working capital and capital expenditures for at least the next 18 months.



FACTORS THAT MAY AFFECT FUTURE RESULTS

You should carefully consider the risks described below
and all of the information contained in this Form 10-Q and on our Form 10-K,
filed with the Securities and Exchange Commission on March 19, 2001. If any of
the following risks actually occur, our business, financial condition and
results of operations could be harmed, the trading price of our common stock
could decline, and you may lose all or part of your investment in our common
stock.

WE HAVE A HISTORY OF LOSSES AND WE MAY NOT ACHIEVE OR
MAINTAIN PROFITABILITY.

We have not reported an operating profit for any year since
our incorporation and have experienced net losses of approximately $9.3 million,
$19.7 million, and $46.0 million for the years ended December 31, 1998, 1999,
and 2000, respectively. Additionally, we experienced a net loss of $14.2 million
for the six month period ending June 30, 2001.

A GENERAL ECONOMIC SLOWDOWN, AND A SLOWDOWN IN SPENDING IN
THE TELECOMMUNICATIONS INDUSTRY SPECIFICALLY, MAY NEGATIVELY AFFECT OUR BUSINESS
AND OPERATING RESULTS.

There have been announcements throughout the worldwide
telecommunications industry of current and planned reductions in component
inventory levels and equipment production volumes, and of delays in the build-
out of new infrastructure. Any of these trends, if continued, could result in
lower than expected demand for our products, which could have a material adverse
effect on our revenues and results of operations generally, and could cause the
market price of our common stock to decline.

SEVERAL COMPANIES IN THE DSL MARKET HAVE EXPERIENCED
SIGNIFICANT BUSINESS DIFFICULTIES DURING THE PAST YEAR, AND IF THERE IS
CONTINUED SOFTNESS IN DEMAND FOR DSL EQUIPMENT, OUR BUSINESS AND OPERATING
RESULTS MAY BE ADVERSELY AFFECTED.

Since mid-2000, a number of competitive local exchange
carriers (CLECs) that are in the business of installing and providing DSL
service have had difficulty in obtaining sufficient capital to build their
infrastructure and to introduce their services. In the first half of 2001,
Northpoint Communications and Rhythm NetConnections voluntarily filed for
bankruptcy under Chapter 11. In addition, Covad Communications has announced
plans to significantly scale back their operations and had their shares delisted
from the NASDAQ National Market. These companies have reduced their spending on
DSL equipment, which has resulted in lower than expected sales volume for DSL
equipment manufacturers such as Copper Mountain Networks and Lucent
Technologies, historically two of our major customers. In May of 2001, Nortel
Networks, historically one of our major customers, announced plans to exit the
DSL equipment business. A continued or further slowdown in sales of DSL
equipment will likely result in a decline, cancellation or delay in sales orders
for our products, which are components of DSL equipment. Any such decline,
cancellation or delay will negatively affect our business and operating results.

AN ECONOMIC SLOWDOWN IN JAPAN MAY ADVERSELY AFFECT OUR
BUSINESS AND OPERATING RESULTS.

Sales to customers located in Japan accounted for 87% of net
revenues for the six months ended June 30, 2001 and 31% of net revenues for the
year ended December 31, 2000. Any slowdown in the demand for our customers'
equipment in Japan may cause our revenues to decline. Moreover, major
fluctuations in currency exchange rates could materially affect our Japanese
customers' demand, thereby forcing them to reduce their orders, which could
adversely affect our operating results.

WE CONTINUE TO RAPIDLY EXPAND OUR OPERATIONS, AND OUR
FAILURE TO MANAGE OUR GROWTH COULD HARM OUR BUSINESS.

We have rapidly and significantly expanded our operations,
including increasing the number of our employees from 71 as of June 30, 1999 to
351 as of June 30, 2001. This expansion is placing a significant strain on our
managerial, operational and financial resources.

COMPETING DSL TECHNOLOGIES MAY BE DEPLOYED IN THE
JAPANESE MARKET, WHICH MAY ADVERSELY IMPACT THE DEMAND FOR OUR DSL PRODUCTS,
MARKET SHARE AND OPERATING RESULTS.

We have worked in partnership with local telecommunications
companies to develop the Annex C standard for the Japanese market and have been
able to achieve a dominant market share of DSL equipment purchases in Japan. In
June of 2001, certain service providers announced plans to deploy lower priced
competing DSL technologies in the Japanese market. If these competing
technologies are successful, we may lose our dominant position in the Japanese
market and our business and operating results may be adversely affected.

OUR EXECUTIVE OFFICERS AND KEY PERSONNEL ARE CRITICAL
TO OUR BUSINESS, AND THESE OFFICERS AND PERSONNEL MAY NOT REMAIN WITH US IN THE
FUTURE.

We depend upon the continuing contributions of our key
management, sales, customer support and product development personnel. The loss
of such personnel could seriously harm us. In addition, we have not obtained
key-man life insurance on any of our executive officers or key employees.

COMPETITION FOR QUALIFIED PERSONNEL IN THE
SEMICONDUCTOR AND TELECOMMUNICATIONS INDUSTRIES IS INTENSE, AND IF WE ARE NOT
SUCCESSFUL IN ATTRACTING AND RETAINING THESE PERSONNEL, WE WILL NOT BE ABLE TO
EXECUTE OUR BUSINESS PLAN.

Competition for qualified personnel in the semiconductor and
telecommunications industries is intense, and we may not be successful in
attracting and retaining personnel. Since June of 1999, we added 280 new
employees to our total work force, representing an increase of approximately
394%. We expect to add additional personnel in the near future, including
additional engineers, direct sales and marketing personnel. There may be only a
limited number of people with the requisite skills to serve in these positions,
and it may become increasingly difficult to hire these people. In addition, we
are actively searching for research and development engineers, who are in short
supply. Our business will be harmed if we encounter delays in hiring these
additional engineers. Also, competitors and others have in the past, and may in
the future, attempt to recruit our employees.

Furthermore, we rely, in part, on equity incentives to
attract and retain qualified personnel. The market price of our common stock has
fluctuated substantially since our initial public offering in May 2000. Some of
our employees have been granted options with exercise prices well above the
current market price of our common stock. It may be difficult to retain such
employees. We have, and may in the future, grant additional equity and/or cash
compensation to our employees as incentive to remain with our Company. In
addition, any perception by potential employees that our equity incentives are
less attractive could harm our ability to attract qualified employees.

WE DEPEND ON THIRD PARTIES TO MANUFACTURE, ASSEMBLE AND TEST
OUR PRODUCTS AND WE MAY NOT BE ABLE TO OBTAIN SUFFICIENT CAPACITY TO SUPPORT OUR
BUSINESS.

We do not own or operate a semiconductor fabrication
facility. We rely on Mitsubishi Electric, United Microelectronics Corporation
and Taiwan Semiconductor Manufacturing Co., Ltd to manufacture our products. In
addition, we generally do not have contracts with these foundries guaranteeing
the availability of capacity. We may experience delays in the future and we
cannot be sure that we will be able to obtain semiconductors within the time
frames and in the volumes required by us at an affordable cost or at all. Any
disruption in the availability of semiconductors or any problems associated with
the delivery, quality or cost of the fabrication, assembly and testing of our
products could significantly hinder our ability to deliver our products to our
customers and would result in a decrease in sales of our products.

WE DEPEND ON SOLE SOURCE SUPPLIERS FOR SEVERAL KEY
COMPONENTS OF OUR PRODUCTS.

We obtain certain parts, components and packaging used in the
delivery of our products from sole sources of supply. For example, we obtain
certain semiconductor wafers from Mitsubishi Electric and Taiwan Semiconductor
Manufacturing Co., Ltd. If we fail to obtain components in sufficient quantities
when required, and are unable to meet customer demand, our business could be
harmed, as our customers would consider purchasing products from our
competitors. We also rely on United Microelectronics Corporation to manufacture
our analog silicon wafers. Developing and maintaining these strategic
relationships with our vendors is critical for us to be successful. Any of our
sole source suppliers may:

- enter into exclusive arrangements with our competitors;
- stop selling their products or components to us at
commercially reasonable prices;
- refuse to sell their products or components to us at any
price; or
- be subject to production disruptions such as earthquakes.



WE RELY ON A CONTINUOUS POWER SUPPLY TO CONDUCT OUR
OPERATIONS, AND CALIFORNIA'S CURRENT ENERGY CRISIS COULD DISRUPT OUR OPERATIONS
AND INCREASE OUR EXPENSES.



California is in the midst of an energy crisis that could
disrupt our operations and increase our expenses. In the event of an acute power
shortage, that is, when power reserves for the state of California fall below
certain critical levels, California has on some occasions implemented, and may
in the future continue to implement, rolling blackouts throughout California. We
currently do not have backup generators or alternate sources of power in the
event of a blackout. If blackouts interrupt our power supply, we would be
temporarily unable to continue operations at our California facilities. Any such
interruption in our ability to continue operations at our facilities could
damage our reputation, harm our ability to retain existing customers and to
obtain new customers, and could result in lost revenue, any of which could
substantially harm our business and results of operations.

Furthermore, the deregulation of the energy industry
instituted in 1996 by the California state government has caused power prices to
increase. Under deregulation, utilities were encouraged to sell their plants,
which traditionally had produced most of California's power, to independent
energy companies that were expected to compete aggressively on price. Instead,
due in part to a shortage of supply, wholesale prices have significantly
increased over the past year. If wholesale prices continue to increase, the
operating expenses associated with our facilities located in California will
likely increase, which would harm our results of operations.

SALES OF OUR PRODUCTS DEPEND ON THE WIDESPREAD ADOPTION OF
BROADBAND ACCESS SERVICES, ESPECIALLY DSL. IF THE DEMAND FOR BROADBAND ACCESS
SERVICE DOES NOT INCREASE AS EXPECTED, WE MAY NOT BE ABLE TO GENERATE
SUBSTANTIAL SALES.



Sales of our products depend on the increased use and
widespread adoption of broadband access services, and DSL services in
particular, and the ability of telecommunications service providers to market
and sell broadband access services. Our business would be harmed, and our
results of operations and financial condition would be adversely affected, if
the use of broadband access services does not increase as anticipated. Certain
critical factors will likely continue to affect the development of the broadband
access service market. These factors include:

- inconsistent quality and reliability of service;
- lack of availability of cost-effective, high-speed
service;
- lack of interoperability among multiple vendors' network
equipment;
- congestion in service providers' networks;
- inadequate security; and
- slow deployment of new broadband services over DSL
lines.

RAPID CHANGES IN THE MARKET FOR DSL CHIP SETS MAY RENDER OUR
CHIP SETS OBSOLETE OR UNMARKETABLE.



The market for chip sets for DSL products is characterized
by:

- intense competition;
- rapid technological change;
- frequent new product introductions by our competitors;
- changes in customer demands; and
- evolving industry standards.

Any of these factors could make our products obsolete or
unmarketable. To compete, we must innovate and introduce new products. If we
fail to successfully introduce new products on a timely and cost-effective basis
that meet customer requirements and are compatible with evolving industry
standards, then our business, financial condition and results of operations will
be seriously harmed.

BECAUSE OTHER BROADBAND TECHNOLOGIES MAY COMPETE EFFECTIVELY
WITH DSL SERVICES, OUR PRODUCTS MAY NOT CAPTURE MARKET SHARE.



DSL services are competing with a variety of different
broadband data transmission technologies, including cable modems, satellite and
other wireless technologies. If any technology that is competing with DSL
technology is more reliable, faster, less expensive or has other advantages over
DSL technology, then the demand for our DSL products may decrease.

OUR MARKETS ARE HIGHLY COMPETITIVE AND MANY OF OUR
COMPETITORS ARE ESTABLISHED AND HAVE GREATER RESOURCES THAN WE HAVE.

The market for communications semiconductor and software
solutions is intensely competitive. Given our stage of development, there is a
substantial risk that we will not have the financial resources, technical
expertise or marketing and support capabilities to compete successfully. We
believe our principal competitors include, or will include, Alcatel
Microelectronics, Broadcom, GlobeSpan and Texas Instruments. In addition, a
number of other semiconductor companies, including Intel, have announced their
intent to enter the market segments adjacent to or addressed by our products.
These competitors have longer operating histories, greater name recognition,
larger installed customer bases and significantly greater financial, technical
and marketing resources than we have. They may be able to introduce new
technologies, respond more quickly to changing customer requirements or devote
greater resources to the development, promotion and sale of their products than
we can. Further, in the event of a manufacturing capacity shortage, these
competitors may be able to manufacture products when we are unable to do so.

BECAUSE OUR PRODUCTS ARE COMPONENTS OF OTHER EQUIPMENT, IF
BROADBAND EQUIPMENT MANUFACTURERS DO NOT INCORPORATE OUR PRODUCTS IN THEIR
EQUIPMENT, WE MAY NOT BE ABLE TO GENERATE SALES OF OUR PRODUCTS IN VOLUME
QUANTITIES.

Our products are not sold directly to the end-user; they are
components of other products. As a result, we rely upon equipment manufacturers
to design our products into their equipment. We further rely on the
manufacturing and deployment of the equipment to be successful. If equipment
that incorporates our products is not accepted in the marketplace, we may not
achieve sales of our products in volume quantities, which would have a negative
impact on our results of operations.

BECAUSE MANUFACTURERS OF COMMUNICATIONS EQUIPMENT MAY BE
RELUCTANT TO CHANGE THEIR SOURCES OF COMPONENTS, IF WE DO NOT ACHIEVE DESIGN
WINS WITH SUCH MANUFACTURERS, WE MAY BE UNABLE TO SECURE SALES FROM THESE
CUSTOMERS IN THE FUTURE.

Once a manufacturer of communications equipment has designed
a supplier's semiconductor into its products, the manufacturer may be reluctant
to change its source of semiconductors due to the significant costs associated
with qualifying a new supplier. Accordingly, our failure to achieve design wins
with equipment manufacturers which have chosen a competitor's semiconductor
could create barriers to future sales opportunities with these manufacturers.

A DESIGN WIN FROM A CUSTOMER IS NOT A GUARANTEE OF FUTURE
SALES TO THAT CUSTOMER.

Achieving a design win with a customer does not create a
binding commitment from that customer to purchase our products. Rather, a design
win is solely an expression of interest by potential customers in purchasing our
products and is not supported by binding commitments of any nature. Accordingly,
a customer can choose at any time to discontinue using our products in their
designs or product development efforts. Even if our products are chosen to be
incorporated into a customer's products, we still may not realize significant
revenues from that customer if their products are not commercially successful.
Therefore, we cannot be sure that any design win will result in purchase orders
for our products, or that these purchase orders will not be later cancelled. Our
inability to convert design wins into actual sales or any cancellation of a
purchase order could have a negative impact on our financial condition and
results of operations.

WE DEPEND ON A FEW CUSTOMERS AND IF WE LOSE ANY OF THEM
OUR SALES AND OPERATIONS WILL SUFFER.

We sell our DSL products primarily to network equipment
manufacturers. Our top two customers for the three months ended June 30, 2001
were Sumitomo Electric Industries and NEC, accounting for 52% and 45% of our
revenues, respectively. Our top five customers for the twelve months ended
December 31, 2000 were Lucent Technologies, Sumitomo Electric Industries, Copper
Mountain Networks, NEC and Nortel Networks accounting for 24%, 20%, 12%, 10% and
10%, of our revenues, respectively. We do not have formal long-term agreements
with these customers, but rather sell our products to them on an order-by-order
basis. We expect to continue to be dependent upon a relatively small number of
large customers in future periods, although the specific customers may vary from
period to period. If we are not successful in maintaining relationships with key
customers and winning new customers, our business and results of operations will
suffer.

WE DERIVE A SUBSTANTIAL AMOUNT OF OUR REVENUES FROM
INTERNATIONAL SOURCES, AND DIFFICULTIES ASSOCIATED WITH INTERNATIONAL OPERATIONS
COULD HARM OUR BUSINESS.

A substantial portion of our revenues have been derived from
customers located outside of the United States. For the six months ended June
30, 2001, 89% of our net revenues were to customers located in Asia. We may be
unable to successfully overcome the difficulties associated with international
operations. These difficulties include:

- staffing and managing foreign operations;
- changes in regulatory requirements;
- licenses, tariffs and other trade barriers;
- political and economic instability;
- obtaining governmental approvals for products; and
- complying with a wide variety of complex foreign laws and
treaties.

OUR FUTURE SUCCESS WILL DEPEND IN PART ON OUR ABILITY TO
PROTECT OUR PROPRIETARY RIGHTS AND THE TECHNOLOGIES USED IN OUR PRINCIPAL
PRODUCTS, AND IF WE DO NOT ENFORCE AND PROTECT OUR INTELLECTUAL PROPERTY, OUR
BUSINESS WILL BE HARMED.

We rely on a combination of patent, copyright and trademark
laws, trade secrets, confidentiality agreements and other contractual provisions
to protect our proprietary rights. However, these measures afford only limited
protection. Our failure to adequately protect our proprietary rights may
adversely affect us. Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to copy aspects of our products or to obtain
and use trade secrets or other information that we regard as proprietary.

BECAUSE THE SALES CYCLE FOR OUR PRODUCTS TYPICALLY LASTS UP
TO ONE YEAR, AND MAY BE SUBJECT TO DELAYS, IT IS DIFFICULT TO FORECAST SALES FOR
ANY GIVEN PERIOD.

If we fail to realize forecasted sales for a particular
period, our stock price could decline significantly. The sales cycle of our
products is lengthy and typically involves a detailed initial technical
evaluation of our products by our prospective customers, followed by the design,
construction and testing of prototypes incorporating our products. Only after
these steps are complete will we receive a purchase order from a customer for
volume shipments. This process generally takes from 9 to 12 months, and may last
longer. Given this lengthy sales cycle, it is difficult to accurately predict
when sales to a particular customer will occur. In addition, we may experience
unexpected delays in orders from customers, which may prevent us from realizing
forecasted sales for a particular period. Our products are typically sold to
equipment manufacturers, who incorporate our products in the products that they
in turn sell to consumers or to network service providers. As a result, any
delay by our customers, or by our customers' customers, in the manufacture or
distribution of their products, will result in a delay in obtaining orders of
our products.

BECAUSE OUR PRINCIPAL STOCKHOLDERS AND MANAGEMENT MAY HAVE
THE ABILITY TO CONTROL STOCKHOLDER VOTES, THE PREMIUM OVER MARKET PRICE THAT AN
ACQUIROR MIGHT OTHERWISE PAY MAY BE REDUCED AND ANY MERGER OR TAKEOVER MAY BE
DELAYED.

Our officers and directors and their affiliates own or
control approximately 26% of our common stock as of April 24, 2001. Accordingly,
our officers and directors and their affiliates, as a group, may have the
ability to control the election of a majority of the members of our board of
directors and the outcome of corporate actions requiring stockholder approval.
This concentration of ownership may have the effect of delaying, deferring or
preventing a change in control of us, or may impede a merger, consolidation,
takeover or other business combination involving us. This concentration of
ownership could also adversely affect our stock's market price or lessen any
premium over market price that an acquirer might otherwise pay.

THE LARGE NUMBER OF SHARES ELIGIBLE FOR PUBLIC SALE
COULD CAUSE OUR STOCK PRICE TO DECLINE.

If our stockholders sell substantial amounts of our common
stock, including shares issued upon the exercise of outstanding options, the
market price of our common stock could fall. These sales also might make it more
difficult for us to sell equity or equity securities in the future at a time and
price that we deem appropriate.

THIRD-PARTY CLAIMS REGARDING INTELLECTUAL PROPERTY MATTERS
COULD CAUSE US TO STOP SELLING OUR PRODUCTS OR PAY MONETARY DAMAGES.

There is a significant risk that third parties, including
current and potential competitors, will claim that our products, or our
customers' products, infringe on their intellectual property rights. The owners
of these intellectual property rights may bring infringement claims against us.
Any such litigation, whether or not determined in our favor or settled by us,
would be costly and divert the attention of our management and technical
personnel. Inquiries with respect to the coverage of our intellectual property
could develop into litigation. In the event of an adverse ruling for an
intellectual property infringement claim, we could be required to obtain a
license or pay substantial damages or have the sale of our products stopped by
an injunction. In addition, if a customer of our chip sets cannot acquire a
required license on commercially reasonable terms, that customer may choose not
to use our chip sets. We have obligations to indemnify our customers under some
circumstances for infringement of third-party intellectual property rights. From
time to time we receive letters from customers inquiring as to scope of these
indemnity rights. If any claims from third-parties required us to indemnify
customers under our agreements, the costs could be substantial and our business
could be harmed.

WE MAY BE REQUIRED TO OBTAIN LICENSES ON ADVERSE TERMS TO
SELL INDUSTRY STANDARD COMPLIANT CHIP SETS.

We have received correspondence, including a proposed
licensing agreement, from Amati Corporation (which was acquired by Texas
Instruments) stating that they believe that they own a number of patents that
are required to be compliant with the American National Standards Institute
(ANSI) standard specifications T1.413 and ITU-T recommended G.991.1/2. These
industry standards are based on the DMT line code. We have introduced products
that we believe are compliant with these industry standards, and we may be
required to obtain a license to these Amati Corporation patents. We are
currently evaluating the patents and proposed licensing terms. If these patents
are valid and essential to the implementation of products that are compliant
with this industry standard, then Amati Corporation may be required to offer us
a license on commercially reasonable, non-discriminatory terms. Because there
are currently no established terms for such a license, we may be unable to agree
with Amati Corporation on acceptable license terms. If these patents are valid,
but not essential to the implementation of products that are compliant with this
industry standard, and they apply to our products and we do not modify our
products so they become non-infringing, then Amati Corporation would not be
obligated to offer us a license on reasonable terms or at all. If we are not
able to agree on license terms and as a result fail to obtain a required
license, then we could be sued and potentially be liable for substantial
monetary damages or have the sale of our products stopped by an injunction.

We have also received correspondence from Alcatel requesting
to discuss the potential for a non-exclusive license from Alcatel permitting us
to utilize technology covered by Alcatel patents. We expect to review this
request with Alcatel and may be required to obtain licenses from Alcatel.

It is the opinion of management that the ultimate resolution
of these contingencies will not have a material adverse effect on the financial
condition, or results of operations of the Company. The Company could be subject
to claims similar to the Amati and Alcatel claims in the future.

IF WE DELIVER PRODUCTS WITH DEFECTS, OUR CREDIBILITY WILL BE
HARMED, AND THE SALES AND MARKET ACCEPTANCE OF OUR PRODUCTS WILL
DECREASE.

Our products are complex and have contained errors, defects
and bugs when introduced. If we deliver products with errors, defects or bugs,
our credibility and the market acceptance and sales of our products could be
harmed. Further, if our products contain errors, defects and bugs, then we may
be required to expend significant capital and resources to alleviate such
problems. Defects could also lead to product liability as a result of product
liability lawsuits against us or against our customers. We have agreed to
indemnify our customers in some circumstances against liability from defects in
our products. A successful product liability claim could seriously harm our
business, financial condition and results of operations.

WE MAY NEED TO RAISE ADDITIONAL CAPITAL WHICH MIGHT NOT BE
AVAILABLE OR WHICH, IF AVAILABLE, COULD BE ON TERMS ADVERSE TO OUR COMMON
STOCKHOLDERS.

We expect the net proceeds from our public offering will meet
our working capital and capital expenditure needs for at least eighteen months.
After that, we may need to raise additional funds, and we cannot be certain that
we will be able to obtain additional financing on favorable terms, if at all. We
may also require additional capital for the acquisition of businesses, products
and technologies that are complementary to ours. Further, if we issue equity
securities, the ownership percentage of our stockholders would be reduced, and
the new equity securities may have rights, preferences or privileges senior to
those existing holders of our common stock. If we cannot raise needed funds on
acceptable terms, we may not be able to develop or enhance our products, take
advantage of future opportunities or respond to competitive pressures or
unanticipated requirements, which could seriously harm our business, operating
results and financial condition.

OUR STOCK PRICE MAY CONTINUE TO BE VOLATILE.

The market price of our common stock has been extremely
volatile and will likely continue to fluctuate significantly in response to the
following factors, some of which are beyond our control:

- variations in our quarterly operating results;
- changes in financial estimates of our revenues and
operating results by securities analysts;
- changes in market valuations of integrated circuit
companies;
- announcements by us, our competitors, or others in
related market segments of significant contracts, acquisitions, strategic
partnerships, joint ventures or capital commitments;
- loss or decrease in sales to a major customer or failure
to complete significant transactions;
- loss or reduction in manufacturing capacity from one or
more of our key suppliers;
- additions or departures of key personnel;
- future sales of our common stock;
- stock market price and volume fluctuations attributable
to inconsistent or low trading volume levels of our stock;
- commencement of or involvement in litigation; and
- announcements by us or our competitors of key design wins
and product introductions.

WE MAY MAKE FUTURE ACQUISITIONS WHERE ADVISABLE AND
ACQUISITIONS INVOLVE NUMEROUS RISKS.



Our business is highly competitive, and as such, our growth
is dependent upon market growth, our ability to enhance our existing products
and our ability to introduce new products on a timely basis. One of the ways we
have addressed and may continue to address the need to develop new products is
through acquisitions of other companies. Acquisitions involve numerous risks,
including the following:

- difficulties in integration of the operations,
technologies, and products of the acquired companies;
- the risk of diverting management's attention from normal
daily operations of the business;
- potential difficulties in completing projects associated
with purchased in-process research and development;
- risks of entering markets in which we have no or limited
direct prior experience and where competitors in such markets have stronger
market positions; and
- the potential loss of key employees of the acquired
company.

Mergers and acquisitions of high-technology companies are
inherently risky, and no assurance can be given that our previous or future
acquisitions will be successful and will not materially adversely affect our
business, operating results or financial condition.



We must also maintain our ability to manage such growth
effectively. Failure to manage growth effectively and successfully integrate
acquisitions could harm our business and operating results.



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK



The primary objective of our investment activities is to
preserve principal while concurrently maximizing the income we receive from our
investments without significantly increasing risk. Some of the securities that
we may invest in may be subject to market risk. This means that a change in
prevailing interest rates may cause the principal amount of the investment to
fluctuate. For example, if we hold a security that was issued with a fixed
interest rate at the then-prevailing rate and the prevailing interest rate later
rises, the current value of the principal amount of our investment will decline.
To minimize this risk in the future, we intend to maintain our portfolio of cash
equivalents and short-term investments in a variety of securities, including
commercial paper, money market funds, government and non-government debt
securities and certificates of deposit. In general, money market funds are not
subject to market risk because the interest paid on such funds fluctuates with
the prevailing interest rate. As of June 30, 2001, all of our investments were
in money market funds, high quality commercial paper, auction rate preferred
stocks and government debt securities. A hypothetical 100 basis point increase
in interest rates would result in an approximate $96,000 decrease in the fair
value of our available-for-sale securities as of June 30, 2001.





PART II.  OTHER INFORMATION



ITEM 1. LEGAL PROCEEDINGS



None



ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS



None



ITEM 3. DEFAULTS UPON SENIOR SECURITIES



None



ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS



The Annual Meeting of Stockholders was held on June 12, 2001.
At that time, there were present in person or by proxy 26,587,608 shares
representing 78% of the 34,085,078 shares then outstanding and entitled to vote.
Stockholders elected two Directors nominated in the April 30, 2001 Proxy
Statement, incorporated herein by reference, to hold office for a term of three
years. Additionally, the stockholders ratified the proposal to confirm Ernst
& Young LLP as independent auditors of the Company for the year ending
December 31, 2001.



1. Results of stockholder voting are as follows:

|Election of Directors                                                                                                    | Votes For  | Votes Withheld
|------------------------------------------------------------------------------------------------------------------------ | ---------- | --------------
|Irwin Federman                                                                                                           | 26,534,608 | 53,000        
|Robert C. Hawk                                                                                                           | 26,231,415 | 356,193       
|                                                                                                                         |            |               
|2. Proposal to ratify the appointment of Ernst &Young LLP
as independent auditors for the year ending December 31, 2001:
|For                                                                                                                      | Against    | Abstain       
|26,563,009                                                                                                               | 18,824     | 5,775         





ITEM 5. OTHER INFORMATION



None





ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

None

(b) Reports on Form 8-K

None







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SIGNATURES



Pursuant to the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.



| |                                             
| | --------------------------------------------
| | CENTILLIUM COMMUNICATIONS, INC. (Registrant)

Dated: August 13, 2001

| |                                                                      |                    
| | -------------------------------------------------------------------- | -------------------
| | By:                                                                  | /s/ John W. Luhtala
| | John W. Luhtala                                                     
| | Chief Financial Officer
(Principal Financial and Accounting Officer)

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