<PAGE>

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

                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

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

                                   FORM 10-Q

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

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

                      For the quarter ended March 31, 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)

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

<TABLE>
       <S>                                   <C>
               Delaware                                 94-3263530
       (State of incorporation)              (IRS Employer Identification No.)
</TABLE>

              47211 Lakeview Boulevard, Fremont, California 94538
          (Address of principal executive offices, including ZIP code)

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

                                      NONE
              (Former name, former address and former fiscal year,
                         if changed since last report)

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

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

On April 30, 2001, approximately 34,090,748 shares of the Registrant's Common
Stock, $.001 par value, were outstanding.

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>

                        CENTILLIUM COMMUNICATIONS, INC.

                                     INDEX

<TABLE>
<CAPTION>
                                                                            Page
                                                                            No.
                                                                            ----
 <C>      <S>                                                               <C>
 PART I.  FINANCIAL INFORMATION...........................................    3
 Item 1.  Condensed Consolidated Balance Sheets as of March 31, 2001
           (unaudited) and December 31, 2000..............................    3
          Condensed Consolidated Statements of Operations for the Three
           Months Ended March 31, 2001 and 2000 (unaudited)...............    4
          Condensed Consolidated Statements of Cash Flows for the Three
           Months Ended March 31, 2001 and 2000 (unaudited)...............    5
          Notes to Condensed Consolidated Financial Statements
          (unaudited).....................................................    6

 Item 2.  Management's Discussion and Analysis of Financial Condition and
          Results of Operations...........................................   11

 Item 3.  Quantitative and Qualitative Disclosures About Market Risk......   21

 PART II. OTHER INFORMATION...............................................   22
 Item 1.  Legal Proceedings...............................................   22
 Item 2.  Changes in Securities and Use of Proceeds.......................   22
 Item 3.  Defaults Upon Senior Securities.................................   22
 Item 4.  Submission of Matters to a Vote of Security Holders.............   22
 Item 5.  Other Information...............................................   22
 Item 6.  Exhibits and Reports on Form 8-K................................   22

 Signature.................................................................  23
</TABLE>

                                       2
<PAGE>

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

                        CENTILLIUM COMMUNICATIONS, INC.

                     CONDENSED CONSOLIDATED BALANCE SHEETS
                                 (In Thousands)

<TABLE>
<CAPTION>
                                                        March 31,  December 31,
                                                          2001         2000
                                                       ----------- ------------
                                                       (unaudited)
                        ASSETS
                        ------

<S>                                                    <C>         <C>
Current assets:
  Cash and cash equivalents...........................  $ 73,881     $ 71,240
  Short-term investments..............................     9,082       16,444
  Accounts receivable--net of allowance for doubtful
   accounts of $729 at March 31, 2001 and $932 at
   December 31, 2000..................................    18,446       16,883
  Inventories.........................................    17,579        9,183
  Other current assets................................       907        1,552
                                                        --------     --------
    Total current assets..............................   119,895      115,302
Property and equipment, net...........................     8,968        8,355
Goodwill and other acquisition intangibles, net.......     8,548        3,200
Other assets..........................................     1,086        1,086
                                                        --------     --------
    Total assets......................................  $138,497     $127,943
                                                        ========     ========

<CAPTION>
         LIABILITIES AND STOCKHOLDERS' EQUITY
         ------------------------------------
<S>                                                    <C>         <C>
Current liabilities:
  Accounts payable....................................  $ 16,230     $ 13,133
  Accrued payroll & related expenses..................     2,779        2,578
  Accrued liabilities.................................     5,392        4,277
  Accrued taxes.......................................        39            8
  Deferred revenue....................................       172          200
  Long-term debt-current portion......................       304          367
                                                        --------     --------
    Total current liabilities.........................    24,916       20,563
Long-term debt........................................       153          221
Other liabilities.....................................       298          289
Commitments and contingencies

Stockholders' equity:
Common stock..........................................        34           33
Additional paid in capital............................   226,746      208,520
Stockholder note receivable...........................      (430)        (430)
Accumulated other comprehensive income................        20            8
Deferred compensation.................................   (20,043)     (21,521)
Accumulated deficit...................................   (93,197)     (79,740)
                                                        --------     --------
    Total stockholders' equity........................   113,130      106,870
                                                        --------     --------
    Total liabilities and stockholders' equity........  $138,497     $127,943
                                                        ========     ========
</TABLE>

                            See accompanying notes.


                                       3
<PAGE>

                        CENTILLIUM COMMUNICATIONS, INC.

                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                (Unaudited, In Thousands Except Per Share Data)

<TABLE>
<CAPTION>
                                                        For the Three Months
                                                           Ended March 31,
                                                        ----------------------
                                                           2001        2000
                                                        ----------  ----------
<S>                                                     <C>         <C>
Product revenues....................................... $   31,655  $    4,723
Technology development revenues........................        200         --
                                                        ----------  ----------
    Total net revenues.................................     31,855       4,723
Cost of revenues.......................................     16,171       3,483
                                                        ----------  ----------
Gross profit...........................................     15,684       1,240

Operating expenses:
  Research and development.............................     14,272       6,017
  Sales and marketing..................................      4,274       2,773
  General and administrative...........................      3,485       2,762
  Amortization of goodwill and other acquisition-
   related intangibles.................................        821         --
  In-process research and development..................      7,422         --
                                                        ----------  ----------
    Total operating expenses...........................     30,274      11,552
                                                        ----------  ----------
Operating loss.........................................    (14,590)    (10,312)
Interest income........................................      1,183         359
Interest expense.......................................        (21)       (105)
                                                        ----------  ----------
Loss before provision for income taxes.................    (13,428)    (10,058)
Provision for income taxes.............................         29         --
                                                        ----------  ----------
Net loss...............................................    (13,457)    (10,058)
Basic and diluted net loss per share................... $    (0.41) $    (1.03)
                                                        ==========  ==========
Weighted average common shares outstanding--basic and
 diluted...............................................     32,775       9,808
                                                        ==========  ==========
</TABLE>


                            See accompanying notes.

                                       4
<PAGE>

                        CENTILLIUM COMMUNICATIONS, INC.

                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                           (Unaudited, In Thousands)

<TABLE>
<CAPTION>
                                                          For the Three
                                                     Months Ended March 31,
                                                     ------------------------
                                                        2001         2000
                                                     -----------  -----------
<S>                                                  <C>          <C>
Operating activities
Net loss............................................ $   (13,457) $   (10,058)
Adjustments to reconcile net loss to net cash used
 by operating activities:
  Amortization of deferred compensation.............       5,521        4,741
  Depreciation and amortization expense.............       1,097          749
  Amortization of goodwill and other acquisition
   related intangibles..............................         821
  Acquired in-process research and development......       7,422          --
  Issuance of common stock for services and other...         --             5
  Amortization of warrants issued in conjunction
   with debt & other................................           1            2
  Changes in operating assets and liabilities:
    Accounts receivable.............................      (1,563)      (1,717)
    Inventories.....................................      (8,396)           4
    Other current assets............................         195         (551)
    Other assets....................................         --           (42)
    Working capital line of credit..................         --           817
    Accounts payable................................       3,096          877
    Accrued payroll and related expenses............         201          102
    Deferred revenue................................         (28)           3
    Accrued liabilities.............................         985          251
    Other liabilities...............................          40           72
                                                     -----------  -----------
Net cash used in operating activities...............      (4,065)      (4,745)

Investing activities
Purchases of short-term investments.................     (10,581)      (3,329)
Sales and maturities of short-term investments......      17,955       16,755
Purchases of property and equipment.................      (1,117)
Purchases of intangibles and other long-term
 assets.............................................         --        (1,535)
Cash acquired in acquisition........................         258          --
                                                     -----------  -----------
Net cash generated from investing activities........       6,515       11,891

Financing activities
Principal payments on capital lease obligations.....         --           (54)
Principal payments on long term debt................        (195)        (128)
Proceeds from issuance of common stock, net.........         386        1,497
Proceeds from issuance of preferred stock, net......         --           --
                                                     -----------  -----------
Net cash provided by financing activities...........         191        1,315
Net increase in cash and cash equivalents...........       2,641        8,461
Cash and cash equivalents at beginning of period....      71,240        3,202
                                                     -----------  -----------
Cash and cash equivalents at end of period.......... $    73,881  $    11,663
                                                     ===========  ===========
</TABLE>

                            See accompanying notes.

                                       5
<PAGE>

                        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 market. 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 March
31, 2001, had an accumulated deficit of approximately $93.2 million (unaudited)
including a net loss for the year ended December 31, 2000 of $46.0 million.

 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
months period ended March 31, 2001 are not necessarily indicative of the
results that may be expected for the year ended December 31, 2001.

   The balance sheet at 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

   Three customers accounted for 39%, 35% and 16% of product revenues in the
three months ended March 31, 2001 and three customers accounted for 39%, 27%
and 12% of product revenues in the three months ended March 31, 2000.

                                       6
<PAGE>

                        CENTILLIUM COMMUNICATIONS, INC.

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


 Inventories

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

<TABLE>
<CAPTION>
                                                          March 31, December 31,
                                                            2001        2000
                                                          --------- ------------
      <S>                                                 <C>       <C>
      Work-in-process...................................   $ 8,854     $5,393
      Finished goods....................................     8,725      3,790
                                                           -------     ------
                                                           $17,579     $9,183
                                                           =======     ======
</TABLE>

 Acquisition

   On January 5, 2001, the Company completed its acquisition of vEngines, Inc.
("vEngines"). vEngines develops 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
includes 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:

<TABLE>
<CAPTION>
         Security Exchanged                Valuation Methodology
         ------------------          ----------------------------------
<S>                                  <C>
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
</TABLE>

   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):

<TABLE>
      <S>                                                               <C>
      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
                                                                        =======
</TABLE>


                                       7
<PAGE>

                        CENTILLIUM COMMUNICATIONS, INC.

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


   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 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 of expense was
recognized in the first quarter of 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 months ended March 31, 2001 includes the
results of operations for vEngines from January 6, 2001. 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 months and periods ended March 31, 2001 and
2000.

 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 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):

<TABLE>
<CAPTION>
                                                         March 31,  December 31,
                                                           2001         2000
                                                        ----------- ------------
                                                        (unaudited)
      <S>                                               <C>         <C>
      Goodwill.........................................   $ 7,472      $1,657
      Other purchased intangibles......................     2,724       2,370
                                                          -------      ------
                                                           10,196       4,027
      Less accumulated amortization....................    (1,648)       (827)
                                                          -------      ------
      Goodwill and other intangible assets, net........   $ 8,548      $3,200
                                                          =======      ======
</TABLE>

                                       8
<PAGE>

                        CENTILLIUM COMMUNICATIONS, INC.

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


 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.

 Net Loss Per Share

   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):

<TABLE>
<CAPTION>
                                                              Three Months
                                                             Ended March 31,
                                                            ------------------
                                                              2001      2000
                                                            --------  --------
      <S>                                                   <C>       <C>
      Net loss............................................  $(13,457) $(10,058)
                                                            --------  --------
      Basic and diluted:
      Weighted average shares of common stock
       outstanding........................................    33,725    11,027
      Less weighted average shares subject to repurchase..       950     1,219
      Weighted average shares used in computing basic and
       diluted net loss per share.........................    32,775     9,808
                                                            --------  --------
      Basic and diluted net loss per share................  $  (0.41) $  (1.03)
                                                            ========  ========
</TABLE>

 Comprehensive Net Loss

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

<TABLE>
<CAPTION>
                                                         Three Months Ended
                                                              March 31,
                                                         --------------------
                                                           2001       2000
                                                         ---------  ---------
     <S>                                                 <C>        <C>
     Net loss........................................... $ (13,457) $ (10,058)
     Change in unrealized gain on available-for-sale
      investments.......................................        12         35
     Total comprehensive net loss....................... $ (13,455) $ (10,023)
</TABLE>

 Provision for Income Taxes

   Based on an estimated annual effective tax rate, the income tax expense was
$29,000 for the three months ended March 31, 2001. 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, amortization of deferred compensation and
foreign losses partially offset by the benefit of net operating loss
carryforwards and research and development tax credits.

                                       9
<PAGE>

                        CENTILLIUM COMMUNICATIONS, INC.

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


 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 products for the emerging voice over data network markets and is
developing for products for the premise network markets. Sales of our voice
over data network products were not material for the three months ended March
31, 2001 or 2000.

   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.

 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.

   On February 14, 2001, the Financial Accounting Standards Board issued a
limited revision of its September 7, 1999 exposure Draft, "Business
Combinations and Intangible Assets", that proposes to significantly change the
accounting for goodwill acquired in a purchase business combination. Under the
revised proposal, goodwill would not be amortized but would be reviewed for
impairment, using a complex methodology different from the original proposal,
when an event occurs indicating the potential for impairment. Goodwill
impairment charges would be presented as a separate line item within the
operating section of the income statement. The nonamortization approach would
apply to previously recorded goodwill as well as goodwill arising from
acquisitions completed after the application of the new standard. Amortization
of the remaining book value of goodwill would cease and the new impairment-only
approach would apply. The FASB expects to release the final statement in June
2001. The provisions of the proposed statement are to be applied at the
beginning of the first fiscal quarter following its issuance for all entities.

 Reclassifications

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

                                       10
<PAGE>

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 on
Form 10-K (File No. 000-30649), 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 March 31, 2001 and 2000

   Net Revenues. Our net revenues increased to $31.9 million for the three
months ended March 31, 2001 compared to $4.7 million for the three months ended
March 31, 2000. The increase reflects increasing unit shipments as our products
gain market acceptance. Our major customers for the three months ended March
31, 2001 were NEC, Sumitomo Electric Industries, and Xpeed Networks who
represented 39%, 35%, and 16% of revenues, respectively. Revenues to
international customers, who were primarily located in Japan, comprised 77% of
our revenues for the three months ended March 31, 2001.

   Cost of Revenues and Gross Profit. Cost of revenues was $16.2 million in the
three months ended March 31, 2001 resulting in a gross margin of $15.7 million
or 49% of net revenues. This compares to a gross margin of $1.2 million or 26%
of net revenues for the three months ended March 31, 2000. The amortization of
deferred compensation included in cost of goods sold for the three months ended
March 31, 2001 was $325,000. The increase in gross margin was attributable to
increased unit volume of shipments, whereby fixed costs were absorbed over more
units, resulting in proportionally lower per 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 137% to $14.3 million for the three months ended March 31, 2001 as
compared to $6.0 million for the three months ended March 31, 2000. The
increase was primarily due to the addition of engineering personnel and an
increase of $793,000 in the amortization of deferred compensation.

   Sales and Marketing Expenses. Sales and marketing expenditures increased 54%
to $4.3 million for the three months ended March 31, 2001 as compared to $2.8
million for the three months ended March 31, 2000. The increase was due to the
addition of personnel and the associated payroll and related costs.

   General and Administrative Expenses. General and administrative expenditures
increased 25% to $3.5 million for the three months ended March 31, 2001 from
$2.8 million for the three months ended March 31, 2000. This increase was due
to the addition of personnel and the associated payroll and related costs.

                                       11
<PAGE>

   Amortization of Deferred Compensation. Amortization of deferred compensation
increased from $4.7 million for the three months ended March 31, 2000 to $5.5
million for the three months ended March 31, 2001. The increase was primarily
attributable to amortization of unearned stock-based compensation of $665,000
for the three months ended March 31, 2001 related to acquisition-related
purchase consideration in the vEngines acquisition. The following table details
the amount of deferred compensation included in expenses (in thousands):

<TABLE>
<CAPTION>
                          Expenses Excluding
                            Amortization of
                         Deferred Compensation   Non-Cash   Amortization of
                          and Non-Cash Stock      Stock        Deferred
                         Compensation Expense  Compensation  Compensation   Total Expenses
                         --------------------- ------------ --------------- --------------
<S>                      <C>                   <C>          <C>             <C>
For the three months
 ended March 31, 2001
  Cost of revenues......        $15,846            $--          $  325         $16,171
  Research and
   development..........         11,538             --           2,734          14,272
  Sales and marketing...          3,370             --             904           4,274
  General and
   administrative.......          1,927             --           1,558           3,485
                                -------            ---          ------         -------
    Total...............        $32,681            $--          $5,521         $38,202

For the three months
 ended March 31, 2000
  Cost of revenues......        $ 3,265            $--          $  218         $ 3,483
  Research and
   development..........          4,071              5           1,941           6,017
  Sales and marketing...          1,749             --           1,024           2,773
  General and
   administrative.......          1,204             --           1,558           2,762
                                -------            ---          ------         -------
    Total...............        $10,289            $ 5          $4,741         $15,035
                                =======            ===          ======         =======
</TABLE>

   Amortization of Goodwill and Other Acquisition-Related Intangibles. In the
first three months of 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 March 31, 2000.

   In Process Research and Development Expense. In the first three months of
2001, the Company recorded $7.4 million in charges for in process research and
development related to the acquisition vEngines. The Company does not consider
products under development to have reached technological feasibility and,
therefore, charged the related in process research and development costs to
operations upon acquisition. There were no comparable amounts for the three
months ended March 31, 2000.

   Interest Income. Interest income increased 230% to $1.2 million in the three
months ended March 31, 2001 as compared to $359,000 for the three months ended
March 31, 2000. The increase was primarily due to larger cash balances
resulting from our initial public offering in May 2000.

   Interest Expense. Interest expense decreased 80% to $21,000 in the three
months ended March 31, 2001 as compared to $105,000 for the three months ended
March 31, 2000. The decrease was primarily due to the termination of the
revolving credit agreement ("Credit Agreement") with Mitsubishi International
Corporation.

   Provision for income taxes. Based on an estimated annual effective tax rate,
the income tax expense was $29,000 compared to a zero income tax expense for
the three months ended March 31, 2001 and 2000, respectively. The 2001 taxes
are primarily federal alternative minimum taxes based on projected U.S. taxable
income for the year. There is a tax expense of zero for 2000 primarily due to
the inability to recognize the benefit of losses incurred.

                                       12
<PAGE>

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 $4.2 million from the
exercise of stock options, net of repurchases, and $801,000 from sales of our
stock through our Employee Stock Purchase Plan.

   Net cash used from operations was $4.1 million for the three months ended
March 31, 2001, primarily due to the net loss of $13.5 million and increases in
inventories and accounts receivable of $8.4 million and $1.6 million,
respectively. These cash outflows were partially offset by increases in
accounts payable and other accrued liabilities of $4.3 million. Management
increased inventories to support anticipated sales growth, and accounts
receivable increased due to higher net revenues and timing of payments from
customers.

   Net cash generated from investing activities was $6.5 million for the three
months ended March 31, 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 $191,000 for three months ended
March 31, 2001, and was primarily related to the net proceeds from employee
stock option exercises, 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 the net proceeds from our initial public offering,
together with 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 12 months.

                                       13
<PAGE>

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, WE EXPECT FUTURE 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 $13.5 million
for the three month period ending March 31, 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 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 January 2000, Northpoint Communications voluntarily filed
for bankruptcy under Chapter 11. In addition, both Covad Communications and
Rhythm NetConnections have announced plans to significantly scale back their
operations for this year. 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 Nortel Networks,
historically two of our major customers. A continued or further slowdown in
sales of DSL equipment will likely result in a decline or delay in sales orders
for our products, which are components of DSL equipment. Any such decline 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 74% of net revenues for
the three months ended March 31, 2001 and 31% of net revenues for the year
ended December 31, 2000. Any slowdown in the demand for our customers'
equipment may cause our revenues to decline. Given the risk that Japan may be
entering into a recession, sales to our Japan customers may decline. Moreover,
major fluctuations in currency exchange rates could materially affect our Japan
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 in June 1999 to 317 as of March
31, 2001. This expansion is placing a significant strain on our managerial,
operational and financial resources.

                                       14
<PAGE>

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 246 new
employees to our total work force, representing an increase of approximately
346%. 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. Furthermore, competitors and others have in the past, and
may in the future, attempt to recruit our employees.

WE DEPEND ON THIRD PARTY FOUNDRIES 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 Corporation 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
Corporation. 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.

                                       15
<PAGE>

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, and our current insurance does not provide coverage for
any damages we or our customers may suffer as a result of any interruption in
our power supply. 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 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; and

   .  inadequate security.

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.

                                       16
<PAGE>

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,
Analog Devices, Conexant Systems, GlobeSpan, Lucent Microelectronics, and Texas
Instruments. In addition, a number of other semiconductor companies, including
IBM and 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; rather 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

                                       17
<PAGE>

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 and 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 three customers for three months ended March 31, 2001 were NEC, Sumitomo
Electric Industries and Xpeed Networks, accounting for 39%, 35% and 16% of our
revenues, respectively. Our top 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 three months ended March 31,
2001, 77% 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.

                                       18
<PAGE>

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.

                                       19
<PAGE>

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.

   In addition, in October 2000, we 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 in the first half of year 2001 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 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 one year. 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.

                                       20
<PAGE>

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 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

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<PAGE>

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 March 31, 2001, all of our investments were in money
market funds, high quality commercial paper, government and non-government
debt securities and auction rate preferred stock. A hypothetical 100 basis
point increase in interest rates would result in an approximate $68,000
decrease in the fair value of our available-for-sale securities as of March
31, 2001.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

   None

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

   On May 24, 2000, we issued 4.0 million shares of our common stock in a
registered underwritten initial public offering and 600,000 shares of our
common stock in a concurrent private placement at a price of $19.00 per share.
On June 5, 2000, we sold an additional 600,000 shares pursuant to the
underwriters' overallotment option granted in connection with our initial
public offering. Net proceeds from these offerings were $91.5 million and are
being used for general working capital purposes and selected asset purchases.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

   None

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

   None

ITEM 5. OTHER INFORMATION

   None

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

   (a) Exhibits

   None

   (b) Reports on Form 8-K

   On January 19, 2001 the Company filed a report on Form 8-K relating to its
acquisition of vEngines, Inc.

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<PAGE>

                                   SIGNATURE

   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.

Date: May 15, 2001

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

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