**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 **September 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 October 31, 2001, approximately 34,419,885 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                                                                                                                 |             
|                                                                                                                                               |             
|Condensed Consolidated Balance Sheets as of
        
          September 30, 2001 (Unaudited) and December 31, 2000                            | 3           
|                                                                                                                                               |             
|Condensed Consolidated Statements of Operations
        
          for the three and nine months ended September 30, 2001 and 2000 (Unaudited) | 4           
|                                                                                                                                               |             
|Condensed Consolidated Statements of Cash Flows
        
          for the nine months ended September 30, 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                                                                           | 28          
|                                                                                                                                               |             
|**PART II.  Other Information**                                                                                                                |             
|                                                                                                                                               |             
|Item 1.   Legal Proceedings                                                                                                                    | 28          
|                                                                                                                                               |             
|Item 2: Changes in Securities and Use of Proceeds                                                                                              | 28          
|                                                                                                                                               |             
|Item 3: Defaults Upon Senior Securities                                                                                                        | 28          
|                                                                                                                                               |             
|Item 4: Submission of Matters to a Vote of Security Holders                                                                                    | 28          
|                                                                                                                                               |             
|Item 5: Other Information                                                                                                                      | 28          
|                                                                                                                                               |             
|Item 6.   Exhibits and Reports on Form 8-K                                                                                                     | 28          
|                                                                                                                                               |             
|**Signatures**                                                                                                                                 | 29          

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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)**

`September 30,  December 31,
                                                            2001           2000
                                                        -------------  -----------
                                                        (unaudited)
                        ASSETS
Current assets:
  Cash and cash equivalents........................... $      75,209  $    71,240
  Short-term investments..............................        18,408       16,444
  Accounts receivable-net of allowance for doubtful
   accounts of $1,026 at September 30, 2001 and $932
   at December 31, 2000...............................         9,488       16,883
  Inventories.........................................        18,223        9,183
  Other current assets................................         2,577        1,552
                                                        -------------  -----------
    Total current assets..............................       123,905      115,302
Property and equipment, net...........................        11,565        8,355
Goodwill and other acquisition intangibles, net.......         6,905        3,200
Other assets..........................................           138        1,086
                                                        -------------  -----------
    Total assets...................................... $     142,513  $   127,943
                                                        =============  ===========

         LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable.................................... $       5,522  $    13,133
  Accrued payroll & related expenses..................         3,720        2,578
  Accrued liabilities.................................         9,808        4,277
  Accrued taxes.......................................           260            8
  Deferred revenue....................................           939          200
  Long-term debt-current portion......................           209          367
                                                        -------------  -----------
    Total current liabilities.........................        20,458       20,563
Long-term debt........................................           121          221
Other liabilities.....................................           319          289
Commitments and contingencies.........................

Stockholders' equity:
Common stock..........................................            34           33
Additional paid in capital............................       229,125      208,520
Stockholder note receivable...........................            --         (430)
Accumulated other comprehensive income................           100            8
Deferred compensation.................................       (12,406)     (21,521)
Accumulated deficit...................................       (95,238)     (79,740)
                                                        -------------  -----------
    Total stockholders' equity........................       121,615      106,870
                                                        -------------  -----------
    Total liabilities and stockholders' equity........ $     142,513  $   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    Nine Months Ended
                                              September 30,         September 30,
                                        --------------------  --------------------
                                           2001       2000       2001       2000
                                        --------- ----------  --------- ----------
Product revenues...................... $  46,804  $  17,658  $ 124,830  $  31,983
Technology development revenues.......        --         --        200        150
                                        ---------  ---------  ---------  ---------
    Total net revenues................    46,804     17,658    125,030     32,133
Cost of revenues......................    23,579     10,057     63,065     19,503
                                        ---------  ---------  ---------  ---------
Gross profit..........................    23,225      7,601     61,965     12,630
                                        ---------  ---------  ---------  ---------
Operating expenses:
  Research and development............    16,038     11,268     44,055     30,150
  Sales and marketing.................     4,763      4,405     13,846     11,304
  General and administrative..........     3,432      3,938     11,095     10,862
  Amortization of goodwill and other
   acquisition-related intangibles....       822        414      2,464        414
  In-process research and development.        --         --      7,422         --
                                        ---------  ---------  ---------  ---------
    Total operating expenses..........    25,055     20,025     78,882     52,730
                                        ---------  ---------  ---------  ---------
Operating loss........................    (1,830)   (12,424)   (16,917)   (40,100)
Interest income.......................       847      1,522      2,986      2,638
Interest expense......................       (17)       (30)       (57)      (311)
Loss on non-current investment........        --         --       (990)        --
                                        ---------  ---------  ---------  ---------
Loss before provision for income taxes    (1,000)   (10,932)   (14,978)   (37,773)
Provision for income taxes............       286         --        520         --
                                        ---------  ---------  ---------  ---------
Net loss.............................. $  (1,286) $ (10,932) $ (15,498) $ (37,773)
                                        =========  =========  =========  =========

Basic and diluted net loss per share.. $   (0.04) $   (0.35) $   (0.47) $   (1.89)
                                        =========  =========  =========  =========
Weighted average common shares
   outstanding--basic and diluted.....    33,782     31,334     33,328     20,023
                                        =========  =========  =========  =========`

See accompanying notes

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**CENTILLIUM COMMUNICATIONS, INC.

                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

                           (Unaudited, In Thousands)**

`For the Nine
                                                       Months Ended September 30,
                                                      --------------------------
                                                         2001          2000
                                                      ------------  ------------
Operating activities
Net loss............................................ $    (15,498) $    (37,773)
Adjustments to reconcile net loss to net cash
 provided by (used in) operating activities:
  Amortization of deferred compensation.............       12,759        19,352
  Depreciation and amortization expense.............        3,274         2,657
  Amortization of goodwill and other acquisition
   related intangibles..............................        2,464           414
  Acquired in-process research and development......        7,422            --
  Loss on non-current investment....................          990            --
  Issuance of common stock for services and other...           --           687
  Amortization of warrants issued in conjunction               --            --
   with debt & other................................            1             6
  Accrued non-cash stock compensation expense.......           --         1,809
  Changes in operating assets and liabilities:
    Accounts receivable.............................        7,395       (14,150)
    Inventories.....................................       (9,040)       (4,803)
    Other current assets............................       (1,475)         (794)
    Other assets....................................          (42)           --
    Working capital line of credit..................           --        (2,044)
    Accounts payable................................       (7,612)       10,398
    Accrued payroll and related expenses............        1,142         1,398
    Deferred revenue................................          739            78
    Accrued liabilities.............................        5,401         3,386
    Other liabilities...............................          282           216
                                                      ------------  ------------
Net cash provided by (used in) operating activities.        8,202       (19,163)

Investing activities
  Purchases of short-term investments...............      (26,439)      (23,071)
  Sales and maturities of short-term investments....       24,567        30,245
  Purchases of property and equipment...............       (5,891)       (5,393)
  Purchases of intangibles and other long-term
   assets...........................................           --        (5,166)
  Cash acquired in acquisition......................          258            --
                                                      ------------  ------------
Net cash used in investing activities...............       (7,505)       (3,385)

Financing activities
  Principal payments on capital lease obligations...           --          (158)
  Principal payments on long term debt..............         (322)         (383)
  Proceeds from issuance of common stock, net.......        3,164        93,980
  Proceeds from stockholders note receivable........          430            --
                                                      ------------  ------------
Net cash provided by financing activities...........        3,272        93,439
                                                      ------------  ------------
Net increase in cash and cash equivalents...........        3,969        70,891
Cash and cash equivalents at beginning of period....       71,240         3,202
                                                      ------------  ------------
Cash and cash equivalents at end of period.......... $     75,209  $     74,093
                                                      ============  ============`

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 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 September
30, 2001, had an accumulated deficit of approximately $95.2 million (unaudited) including a net loss
for the nine months ended September 30, 2001 of $15.5 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 nine month periods ended September 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 65% and 22% of product revenues for the three months
ended September 30, 2001 and three customers accounted for 34%, 18% and 14% of product revenues for
the three months ended September 30, 2000.

Two customers accounted for 52% and 35% of product revenues for the nine months ended September
30, 2001 and four customers accounted for 30%, 15%, 12% and 12% of product revenues for the nine
months ended September 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. Sales of our Voice-over-Packet network products were not material
for  the three and nine-month periods ended September 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):

`September 30, December 31,
                                       2001         2000
                                   -----------  -----------
                                   (unaudited)
  Work-in-process................ $    11,763  $     5,393
  Finished goods.................       6,460        3,790
                                   -----------  -----------
                                  $    18,223  $     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 $663,000 and $2 million of expense were recognized for the three and nine months ended September
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 nine months ended September 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 nine-month periods ended September 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 were 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):

`September 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...............      (3,291)        (827)
                                                -----------  -----------
  Goodwill and other intangible assets, net... $     6,905  $     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    Nine Months Ended
                                               September 30,         September 30,
                                         --------------------  --------------------
                                            2001       2000       2001       2000
                                         ---------  ---------  ---------  ---------
  Net loss............................. $  (1,286) $ (10,932) $ (15,498) $ (37,773)
                                         =========  =========  =========  =========
  Basic and diluted:
  Weighted average shares of common
   stock outstanding...................    34,351     32,904     34,075     21,562
  Less weighted average shares
   subject to repurchase...............       569      1,570        747      1,539
                                         ---------  ---------  ---------  ---------
  Weighted average shares used in
   computing basic and diluted net
   loss per share......................    33,782     31,334     33,328     20,023
                                         =========  =========  =========  =========

  Basic and diluted net loss per share. $   (0.04) $   (0.35) $   (0.47) $   (1.89)
                                         =========  =========  =========  =========`

The Company has excluded all outstanding stock options and shares subject to
repurchase from the calculation of diluted net loss per share because these securities are
antidilutive. As of September 30, 2001 and 2000, there were 10,132,624 and 6,695,694 of outstanding
options to purchase shares of common stock excluded from the calculation of diluted net loss per
share.

Comprehensive Net Loss

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

`Three Months Ended    Nine Months Ended
                                               September 30,         September 30,
                                         --------------------  --------------------
                                            2001       2000       2001       2000
                                         ---------  ---------  ---------  ---------
Net loss............................... $  (1,286) $ (10,932) $ (15,498) $ (37,773)

Change in unrealized gain on
  available-for-sale investments.......        85         21         92         45
                                         ---------  ---------  ---------  ---------
   Total comprehensive net loss........ $  (1,201) $ (10,911) $ (15,406) $ (37,728)
                                         =========  =========  =========  =========`

6.  Provision for Income Taxes

Based on an estimated annual effective tax rate, the income tax expense was
$286,000 and $520,000 for the three and nine-month periods ended September 30, 2001, respectively.
The 2001 income tax expense differs from the expected benefit that was derived by applying the
applicable U.S. federal statutory rate to the loss from operations.  This difference was primarily
due to non-deductible acquisition related items and the amortization of deferred compensation, which
was partially offset by the benefit of net operating loss carryforwards and research and development
tax credits.

7.  Recent Accounting Pronouncements

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.  We have not yet determined what effect this test will have on our
earnings and financial position.

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

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" that are made
pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements are generally preceded by words that imply a future state such as
"expected" or "anticipated" or imply that a particular future event or events
will occur such as "will."  Investors are cautioned that all forward-looking statements
involve risks and uncertainties and those actual results could be materially different from those
discussed in this report.

The section below entitled "Factors That May Affect Future Results" and similar
discussions in our other SEC reports filed with the SEC discuss some of the important risk factors
that may affect our business, results of operations and financial condition. Copies of our reports
filed with the SEC are available from us without charge and on the SEC's website at
www.sec.gov. 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 September 30, 2001
and 2000

Net Revenues. Our net revenues increased to $46.8 million for the three
months ended September 30, 2001, compared to $17.7 million for the three months ended September 30,
2000. The increase reflects increasing unit shipments as our products gain market acceptance. Our
major customers for the three months ended September 30, 2001 were Sumitomo Electric Industries and
NEC who represented 65% and 22% of revenues, respectively. Revenues to international customers, who
were primarily located in Japan, comprised 91% of our revenues for the three months ended September
30, 2001.

Cost of Revenues and Gross Profit. Cost of revenues was $23.6 million for
the three months ended September 30, 2001 resulting in a gross margin of $23.2 million, or 50% of
net revenues. This compares to a gross margin of $7.6 million, or 43% of net revenues, for the three
months ended September 30, 2000. The amortization of deferred compensation included in cost of goods
sold for the three months ended September 30, 2001 and September 30, 2000 was $157,000 and $413,000,
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 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 42% to $16.0 million for the three months ended September 30, 2001 as compared to $11.3
million for the three months ended September 30, 2000. The increase was primarily due to the
addition of engineering personnel and expenditures for software tools. The increases were offset by
a $1.2 million decrease in the amortization of deferred compensation.

Sales and Marketing Expenses. Sales and marketing expenditures increased
8% to $4.8 million for the three months ended September 30, 2001 as compared to $4.4 million for the
three months ended September 30, 2000. The increase was due to the addition of personnel and the
associated payroll and related costs, offset by a $941,000 decrease in the amortization of deferred
compensation.

General and Administrative Expenses. General and administrative
expenditures decreased 13% to $3.4 million for the three months ended September 30, 2001 as compared
to $3.9 million for the three months ended September 30, 2000. The decrease was primarily due to a
decrease in the amortization of deferred compensation of $1.4 million, offset by increases in
payroll and related costs and increases in other expenditures.

Amortization of Deferred Compensation. Amortization of deferred
compensation decreased by $3.8 million to $3.3 million for the three months ended September 30, 2001
as compared to $7.1 million for the three months ended September 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         Amortization
                                 Compensation     of Deferred        Total
                                   Expense        Compensation      Expenses
                                --------------   --------------  --------------
For the three months
 ended September 30, 2001
  Cost of revenues............ $       23,422   $          157  $       23,579
  Research and
   development................         14,272            1,766          16,038
  Sales and marketing.........          4,274              489           4,763
  General and
   administrative.............          2,518              914           3,432
                                --------------   --------------  --------------
    Total..................... $       44,486   $        3,326  $       47,812
                                ==============   ==============  ==============

For the three months
 ended September 30, 2000
  Cost of revenues............ $        9,644   $          413  $       10,057
  Research and
   development................          8,262            3,006          11,268
  Sales and marketing.........          2,975            1,430           4,405
  General and
   administrative.............          1,663            2,275           3,938
                                --------------   --------------  --------------
    Total..................... $       22,544   $        7,124  $       29,668
                                ==============   ==============  ==============`

Amortization of Goodwill and Other Acquisition-Related Intangibles. For
the three months ended September 30, 2001 and 2000, we recorded $822,000 and $414,000 in
amortization of goodwill and other acquisition related intangibles, related to goodwill and
intangibles acquired from the Avio Digital asset purchase and the vEngines acquisition.

Interest Income. Interest income decreased 44% to $847,000 for the three
months ended September 30, 2001 as compared to $1.5 million for the three months ended September 30,
2000. The decrease was primarily due to lower interest rates obtained on our cash, cash equivalents
and short-term investment portfolio and lower invested balances during the three months ended
September 30, 2001 as compared to the three months ended September 30, 2000.

Interest Expense. Interest expense decreased 43% to $17,000 for the three
months ended September 30, 2001 as compared to $30,000 for the three months ended September 30,
2000. The decrease was primarily due to lower outstanding balances on long-term debt for the three
months ended September 30, 2001 as compared to the three months ended September 30, 2000.

Provision for Income Taxes. Based on an estimated annual effective tax
rate, the income tax expense was $286,000 for the three months ended September 30, 2001 compared to
no income tax expense for the three months ended September 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 provision or benefit for 2000 primarily due to the inability to
recognize the tax benefit of losses incurred.

Reduction in Workforce.  In October 2001, as part of our effort to
become more efficient and to reduce expenses, we completed a reduction in workforce affecting
approximately 30 positions. As a result of the reduction in workforce, we expect to record
a charge of approximately $225,000 during the fourth quarter of 2001, primarily related to costs
incurred for employee severance. The quarterly reduction of payroll and related benefits expense
related to this reduction in workforce is approximately $615,000.

Results of Operations for the Nine Months Ended September 30, 2001 and
2000

Net Revenues. Our net revenues increased to $125.0 million for the nine
months ended September 30, 2001 compared to $32.0 million for the nine months ended September 30,
2000. The increase reflects increasing unit shipments as our products gain market acceptance. Our
major customers for the nine months ended September 30, 2001 were Sumitomo Electric Industries and
NEC, who represented 52% and 35% of net revenues, respectively. Revenues to international customers,
who were primarily located in Japan, comprised 90% of our revenues for the nine months ended
September 30, 2001.

Cost of Revenues and Gross Profit. Cost of revenues was $63.1 million for
the nine months ended September 30, 2001, resulting in a gross margin of $62.0 million, or 50% of
net revenues. This compares to a gross margin of $12.6 million, or 39% of net revenues, for the nine
months ended September 30, 2000. The amortization of deferred compensation included in cost of goods
sold for the nine months ended September 30, 2001 and 2000 was $671,000 and $1.1 million,
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 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 46% to $44.1 million for the nine months ended September 30, 2001 as compared to $30.2
million for the nine months ended September 30, 2000. The increase was primarily due to the addition
of engineering personnel, expenditures for software tools and increases in depreciation. These
increases were offset by a $2.4 million decrease in non-cash stock compensation and a $1.6 million
decrease in the amortization of deferred compensation.

Sales and Marketing Expenses. Sales and marketing expenditures increased
22% to $13.9 million for the nine months ended September 30, 2001 as compared to $11.3 million for
the nine months ended September 30, 2000. The increase was due to the addition of personnel and the
associated payroll and related costs, offset by a $1.9 million decrease in the amortization of
deferred compensation.

General and Administrative Expenses. General and administrative
expenditures increased 2% to $11.1 million for the nine months ended September 30, 2001 from $10.9
million for the nine months ended September 30, 2000. This increase was due to the addition of
personnel and the associated payroll and related costs, offset by a $2.7 million decrease in the
amortization of deferred compensation.

Amortization of Deferred Compensation. Amortization of deferred
compensation decreased to $12.8 million from $19.4 million for the nine months ended September 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 Nine months
 ended September 30, 2001
  Cost of revenues...... $     62,394  $         --  $        671  $     63,065
  Research and
   development..........       37,522            --         6,533        44,055
  Sales and marketing...       11,850            --         1,996        13,846
  General and
   administrative.......        7,536            --         3,559        11,095
                          ------------  ------------  ------------  ------------
    Total............... $    119,302  $         --  $     12,759  $    132,061
                          ============  ============  ============  ============

For the Nine months
 ended September 30, 200
  Cost of revenues...... $     18,439  $         --  $      1,064  $     19,503
  Research and
   development..........       19,602         2,391         8,157        30,150
  Sales and marketing...        7,389            --         3,915        11,304
  General and
   administrative.......        4,546           100         6,216        10,862
                          ------------  ------------  ------------  ------------
    Total............... $     49,976  $      2,491  $     19,352  $     71,819
                          ============  ============  ============  ============`

Amortization of Goodwill and Other Acquisition-Related Intangibles.  In
the nine months ended September 30, 2001 and 2000, we recorded $2.5 million and $414,000 in
amortization of goodwill and other acquisition related intangibles, related to goodwill and
intangibles acquired from the Avio Digital asset purchase and the vEngines acquisition.

In-Process Research and Development Expense. In the nine months ended
September 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 the related in-process research and
development costs to operations upon acquisition. There were no comparable amounts for the nine
months ended September 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.

Interest Income. Interest income increased 13% to $3.0 million for the
nine months ended September 30, 2001 as compared to $2.6 million for the nine months ended September
30, 2000. The increase was primarily due to larger monthly cash and short-term investment balances
maintained during the nine months ended September 30, 2001 as compared to the nine months ended
September 30, 2000, when our monthly balances increased subsequent to our initial public offering in
May of 2000. The increase in interest income was partially offset by lower interest rates obtained
on our cash and short-term investment portfolio during 2001 as compared to 2000.

Interest Expense. Interest expense decreased 82% to $57,000 for the nine
months ended September 30, 2001 as compared to $311,000 for the nine months ended September 30,
2000. The decrease was primarily due to the termination of our revolving credit agreement with
Mitsubishi International Corporation, in June of 2000.

Provision for Income Taxes. Based on an estimated annual effective tax
rate, the income tax expense was $520,000 for the nine months ended September 30, 2001 compared to
no income tax expense for the three months ended September 30, 2000.  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 our inception, we have financed our operations through a combination of
sales of equity securities and cash generated by operations.  At September 30, 2001, we had $93.6
million in cash, cash equivalents and short-term investments as compared to $87.7 million at
December 31, 2000.

Operating activities provided $8.2 million of cash for the nine months ended
September 30, 2001 primarily due to the net loss of  $15.5 million, offset by non-cash charges of
$12.8 million for the amortization of deferred compensation, $7.4 million of acquired in-process
research and development expense, $3.3 million of depreciation and amortization expense, $2.5
million of amortization of goodwill and other acquisition related intangibles and a write-down of
$990,000 in non-current investments. Net cash provided by operating activities also increased due to
decreases in accounts receivable of $7.4 million and an increase in accrued liabilities of $5.4
million, offset by an increase in inventories of $9.0 million and a decrease in accounts payable of
$7.6 million.

Net cash used in investing activities was $7.5 million for the nine months ended
September 30, 2001, and was primarily related to net purchases of short-term investments, and
purchases of property and equipment.

Cash generated from financing activities was $3.3 million for the nine months
ended September 30, 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 support our sales, marketing, and product development 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
12 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 $15.5 million for the nine-month period ending September 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.

In addition, the terrorist acts of September 11, 2001 and
subsequent terrorist activities have contributed to an uncertain economic environment and we cannot
predict the impact of these events, or of any related military action, on our customers or business.
Due to the general economic uncertainty, some companies may further reduce their budgets for
spending on information technology and communications equipment. As a consequence, our sales cycle
may become longer with some customers, and other prospective customers may postpone, reduce, or even
forego the purchase of our products and services, which could negatively affect our
revenues.

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) 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 2001, Northpoint Communications,
Rhythm NetConnections and Covad Communications voluntarily filed for bankruptcy under Chapter 11.
These companies have reduced their spending on DSL equipment, which has resulted in lower than
expected sales volume for DSL equipment manufacturers including some 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 88% of net revenues for the
nine months ended September 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.
Our sales have been historically denominated in US dollars and 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.

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 July 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.  In the third quarter of 2001, our Chief Financial Officer resigned and we have appointed
an interim chief financial officer while we search for a replacement.

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
September of 2000, we added a net of 136 new employees to our total work force, representing an
increase of approximately 58%. 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.
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 granted, and may 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 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.



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, and 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, 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.

FUTURE CONSOLIDATION IN THE TELECOMMUNICATIONS EQUIPMENT INDUSTRY MAY
INCREASE COMPETITION THAT COULD HARM OUR BUSINESS.

The markets in which we compete are characterized by increasing
consolidation both within the telecommunications equipment sector and by companies combining or
acquiring data communications assets and assets for delivering voice-related services.  We cannot
predict with certainty how industry consolidation will affect our competitors.  We may not be able
to compete successfully in an increasingly consolidated industry.  Increased competition and
consolidation in our industry may require that we reduce the prices of our products or result in a
loss of market share, which could materially adversely affect our business, financial condition and
results of operations.  Additionally, because we are now, and may in the future be, dependent on
certain strategic relationships with third parties in our industry, any additional consolidation
involving these parties could reduce the demand for our products and otherwise harm our business
prospects.

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 cancelled at a
future date. 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 September 30, 2001 were Sumitomo Electric Industries and
NEC, accounting for 65% and 22% 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 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.

OUR CUSTOMERS MAY DEMAND PREFERENTIAL TERMS OR DELAY OUR SALES CYCLE, WHICH
WOULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS.

Our customers are in most cases larger than us and are able to exert a
high degree of influence over us.  These customers may have sufficient bargaining power to demand
low prices and other terms and conditions that may materially adversely affect our business,
financial condition and results of operations.  In addition, prior to selling our products to such
customers, we must typically undergo lengthy product approval processes, often taking up to one
year.  Accordingly, we are continually submitting successive versions of our products as well as new
products to our customers for approval.  The length of the approval process can vary and is affected
by a number of factors, including customer priorities, customer budgets and regulatory issues
affecting telecommunication service providers.  Delays in the product approval process could
materially adversely affect our business, financial condition and results of operations.  While we
have been successful in the past in obtaining product approvals from our customers, such approvals
and the ensuing sales of such products may not continue to occur.  Delays can also be caused by late
deliveries by other vendors, changes in implementation priorities and slower than anticipated growth
in demand for the services that our products support.  A delay in, or cancellation of, the sale of
our products could adversely affect our results from operations or cause them to significantly vary
from quarter to quarter.

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 has been derived from customers located
outside of the United States. For the nine months ended September 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.



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 current cash, cash equivalents and short-term
investment balances to adequately meet our working capital and capital expenditure needs for at
least twelve 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;
- announcements by us or our competitors of key design wins and product
introductions;
- a decrease in the average selling price of our products; and
- ability to achieve cost reductions.

DUE TO OUR RECENT IMPLEMENTATION OF AN OPTION EXCHANGE PROGRAM, OUR
MANAGEMENT AND EMPLOYEES MAY HAVE A NEAR TERM INCENTIVE TO KEEP OUR STOCK PRICE LOW.

We recently filed a statement on Schedule TO with the Securities and
Exchange Commission relating to an offer to our employees, including our Chief Executive Officer,
our President and our other executive officers, to exchange outstanding "underwater" stock
options priced at $10 or higher for new options to be issued on a future date, currently expected to
be on or about May 20, 2002. The exercise price for the new options will be equal to the market
price of our common stock on the date of the grant. Since the relative value of the stock option
increases as the exercise price decreases, management and employees participating in the option
exchange would benefit from a lower market price for our common stock on May 20, 2002 (or such later
date the new options are granted).



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 cash and short-term 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 September 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 $183,000 decrease in the fair value of our available-for-sale
securities as of September 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-



None



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: November 13, 2001

| |                                                                              |                 
| | ---------------------------------------------------------------------------- | ----------------
| | By:                                                                          | /s/ Darrel Slack
| | Darrel Slack                                                                
| | Interim Chief Financial Officer
(Principal Financial and Accounting Officer)

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