---

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-Q

(Mark One)

|/x/ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|--- | ---------------------------------------------------------------------------------------

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001

OR

|/ / | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|--- | ----------------------------------------------------------------------------------------

FOR THE TRANSITION PERIOD FROM  TO

Commission File Number 000-31259

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Integrated Telecom Express, Inc.(Exact name of registrant as specified in its charter)

Delaware(State or other jurisdiction
of incorporation or organization)

77-0403748(I.R.S. Employer Identification Number)400 Race Street
San Jose, California(Address of principal executive offices)

95126(Zip Code)


(408) 792-0797(Registrant's telephone number, including area code)

N/A(Former name, former address and former fiscal year, if changed since last report)

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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 / /

The
number of shares outstanding of the Registrant's Common Stock as of August 10, 2001 was 42,714,279.

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INTEGRATED TELECOM EXPRESS, INC.        INDEX

|           |  |                                                                                              |  | Page No.
|---------- |  | -------------------------------------------------------------------------------------------- |  | --------
|Part I     |  | FINANCIAL INFORMATION (UNAUDITED)                                                            |  |         
|           |  |                                                                                              |  |         
|Item 1.    |  | Financial Statements                                                                         |  | 2       
|           |  | Condensed Balance Sheets as of June 30, 2001 and December 31, 2000                           |  | 2       
|           |  | Condensed Statements of Operations for the Three and Six Months Ended June 30, 2001 and 2000 |  | 3       
|           |  | Condensed Statements of Cash Flows for the Six Months Ended June 30, 2001 and 2000           |  | 4       
|           |  | Notes to Condensed Financial Statements                                                      |  | 5       
|Item 2.    |  | Management's Discussion and Analysis of Financial Condition and Results of Operations        |  | 9       
|           |  | Overview                                                                                     |  | 9       
|           |  | Results of Operations                                                                        |  | 12      
|           |  | Liquidity and Capital Resources                                                              |  | 16      
|           |  | Impact of Recent Accounting Pronouncements                                                   |  | 17      
|           |  | Risk Factors                                                                                 |  | 18      
|Item 3.    |  | Quantitative and Qualitative Disclosures About Market Risk                                   |  | 29      
|Part II    |  | OTHER INFORMATION                                                                            |  |         
|           |  |                                                                                              |  |         
|Item 4     |  | Submission of Matters to a Vote of Security Holders                                          |  | 30      
|Item 6.    |  | Exhibits and Reports on Form 8-K                                                             |  | 30      
|SIGNATURES |  | 31                                                                                          
|           |  | Exhibit Index                                                                                |  | 32      

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

INTEGRATED TELECOM EXPRESS, INC        Condensed Balance Sheets        (Unaudited, In Thousands)

|                                      |                                           | June 30, 2001                              |       | December 31, 2000 |        
|------------------------------------- | ----------------------------------------- | ------------------------------------------ | ----- | ----------------- | -------
|ASSETS:                               |                                          
|Current assets:                       |                                           |                                            |       |                   |        
|                                      | Cash and cash equivalents                 |                                            | $     | 127,993           |        
|                                      | Accounts receivables                      |                                            |       | 3,981             |        
|                                      | Inventories, net                          |                                            |       | 2,465             |        
|                                      | Prepaid expenses and other current assets |                                            |       | 2,255             |        
|                                      |                                           |                                            |       |                   |        
|                                      |                                           | Total current assets                       |       |                   | 136,694
|                                      | Property and equipment, net               |                                            |       | 12,481            |        
|                                      | Licenses, net                             |                                            |       | 4,754             |        
|                                      | Other assets                              |                                            |       | 4,531             |        
|                                      |                                           |                                            |       |                   |        
|                                      |                                           | Total assets                               |       | $                 | 158,460
|                                      |                                           |                                            |       |                   |        
|LIABILITIES AND STOCKHOLDERS' EQUITY: |                                          
|Current liabilities:                  |                                           |                                            |       |                   |        
|                                      | Accounts payable                          |                                            | $     | 5,655             |        
|                                      | Accrued expenses and other liabilities    |                                            |       | 2,073             |        
|                                      | Current portion of payable for licenses   |                                            |       | 1,975             |        
|                                      | Current portion under capital leases      |                                            |       | 1,539             |        
|                                      |                                           |                                            |       |                   |        
|                                      |                                           | Total current liabilities                  |       |                   | 11,242 
|Long term liabilities                 |                                           |                                            | 1,339 |                   |        
|                                      |                                           |                                            |       |                   |        
|                                      |                                           | Total liabilities                          |       |                   | 12,581 
|                                      |                                           |                                            |       |                   |        
|Stockholders' equity (*)              |                                           |                                            |       |                   |        
|                                      | Common stock                              |                                            |       | 42                |        
|                                      | Additional paid-in capital                |                                            |       | 228,486           |        
|                                      | Notes receivable from stockholders        |                                            |       | (367              | )      
|                                      | Deferred stock-based compensation         |                                            |       | (15,992           | )      
|                                      | Accumulated deficit                       |                                            |       | (66,290           | )      
|                                      |                                           |                                            |       |                   |        
|                                      |                                           | Total stockholders' equity                 |       |                   | 145,879
|                                      |                                           |                                            |       |                   |        
|                                      |                                           | Total liabilities and stockholders' equity |       | $                 | 158,460
|                                      |                                           |                                            |       |                   |        

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The
accompanying notes are an integral part of these financial statements.

2

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INTEGRATED TELECOM EXPRESS, INC.        Condensed Statements of Operations        (Unaudited, In Thousands, Except Per Share Data)

|                                                                                                           |                                                                                                               | For the Three Months Ended June 30, |         | For the Six Months Ended June 30, |  
|---------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------- | ----------------------------------- | ------- | --------------------------------- | -
|
|Net revenue                                                                                                |                                                                                                               | $                                   | 4,303   |                                   | $
|Cost of revenue (including stock-based compensation expense of $21, $59, $46 and $59)                      |                                                                                                               |                                     | 2,625   |                                   |  
|                                                                                                           |                                                                                                               |                                     |         |                                   |  
|Gross profit/(loss)                                                                                        |                                                                                                               |                                     | 1,678   |                                   |  
|                                                                                                           |                                                                                                               |                                     |         |                                   |  
|Operating expenses:                                                                                        |                                                                                                               |                                     |         |                                   |  
|                                                                                                           | Research and development (inclusive of stock-based compensation expense of $922, $2,676, $2,157 and $2,833)   |                                     |         | 6,342                             |  
|                                                                                                           | Sales and marketing (inclusive of stock-based compensation expense of $115, $1,256, $814 and $1,602)          |                                     |         | 1,177                             |  
|                                                                                                           | General and administrative (inclusive of stock-based compensation expense of $718, $3,191, $1,933 and $3,450) |                                     |         | 2,614                             |  
|                                                                                                           | Write-off of intangible assets                                                                                |                                     |         | 1,800                             |  
|                                                                                                           |                                                                                                               |                                     |         |                                   |  
|                                                                                                           | Total operating expenses                                                                                      |                                     |         | 11,933                            |  
|                                                                                                           |                                                                                                               |                                     |         |                                   |  
|Operating loss                                                                                             |                                                                                                               |                                     | (10,255 | )                                 |  
|Interest and other income, net                                                                             |                                                                                                               |                                     | 1,417   |                                   |  
|                                                                                                           |                                                                                                               |                                     |         |                                   |  
|Net loss                                                                                                   |                                                                                                               | $                                   | (8,838  | )                                 | $
|                                                                                                           |                                                                                                               |                                     |         |                                   |  
|Basic and diluted net loss per share                                                                       |                                                                                                               | $                                   | (0.21   | )                                 | $
|                                                                                                           |                                                                                                               |                                     |         |                                   |  
|Weighted average shares of common stock outstanding used in computing basic and diluted net loss per share |                                                                                                               | $                                   | 42,582  |                                   | $
|                                                                                                           |                                                                                                               |                                     |         |                                   |  

The
accompanying notes are an integral part of these financial statements.

3

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INTEGRATED TELECOM EXPRESS, INC.        Condensed Statements Of Cash Flows        (Unaudited, In Thousands)

|                                                                            |                                                       | Six Months Ended
June 30,                |        
|--------------------------------------------------------------------------- | ----------------------------------------------------- | ---------------------------------------- | -------
|
|Cash flows from operating activities                                        |                                                       |                                          |        
|Net loss                                                                    |                                                       | $                                        | (17,726
|Adjustments to reconcile net loss to net cash used by operating activities: |                                                       |                                          |        
|                                                                            | Depreciation and amortization                         |                                          |        
|                                                                            | Amortization of deferred stock-based compensation     |                                          |        
|                                                                            | Write-off of intangible assets                        |                                          |        
|                                                                            | Accrued Interest Income from stockholders             |                                          |        
|                                                                            | Changes in current assets and liabilities:            |                                          |        
|                                                                            |                                                       | Accounts receivable                      |        
|                                                                            |                                                       | Inventory                                |        
|                                                                            |                                                       | Receivable from related party            |        
|                                                                            |                                                       | Prepaid expenses and other current asset |        
|                                                                            |                                                       | Accounts payable                         |        
|                                                                            |                                                       | Accrued expenses and other liabilities   |        
|                                                                            |                                                       | Restricted cash                          |        
|                                                                            |                                                       | Other assets                             |        
|                                                                            |                                                       |                                          |        
|                                                                            | Net cash used in operating activities                 |                                          |        
|                                                                            |                                                       |                                          |        
|Cash flows from investing activities                                        |                                                       |                                          |        
|                                                                            | Purchases of property, equipment and licenses         |                                          |        
|                                                                            |                                                       |                                          |        
|                                                                            | Net cash used in investing activities                 |                                          |        
|                                                                            |                                                       |                                          |        
|Cash flows from financing activities                                        |                                                       |                                          |        
|                                                                            | Proceeds from issuance of common stock, net           |                                          |        
|                                                                            | Principal payments on capital lease                   |                                          |        
|                                                                            |                                                       |                                          |        
|                                                                            | Net cash provided by / (used in) financing activities |                                          |        
|                                                                            |                                                       |                                          |        
|Net increase in cash and cash equivalents                                   |                                                       |                                          | (21,080
|Cash and cash equivalents at beginning of period                            |                                                       |                                          | 149,073
|                                                                            |                                                       |                                          |        
|Cash and cash equivalents at end of period                                  |                                                       | $                                        | 127,993
|                                                                            |                                                       |                                          |        

The
accompanying notes are an integral part of these financial statements.

4

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NOTES TO CONDENSED FINANCIAL STATEMENTS

Nature of Operations

Integrated Telecom Express, Inc. ("ITeX" or the "Company") was incorporated in California in May 1995 and re-incorporated in Delaware
in May 1999. The Company designs and sells integrated circuit and software solutions to the broadband access communications equipment industry. The Company's products include integrated
circuits, software, production designs, network interface cards ("NIC"s) and test systems that enable communications equipment manufacturers to provide high-speed,
cost-effective, asymmetric digital subscriber line, or ADSL, equipment to communications service providers and their customers. The industry in which the Company operates is characterized
by rapid technological change and significant volatility of product prices.

United
Microelectronics Corporation ("UMC"), a public company in Taiwan, directly and indirectly owned 28.4% of the Company's outstanding common stock on June 30, 2001.

Unaudited Interim Financial Statement

The accompanying unaudited condensed financial statements as of June 30, 2001 and for the three months and six months ended June 30, 2001 and
2000 have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission for interim financial reporting. The unaudited condensed interim financial statements have been
prepared on the same basis as the annual financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly
the Company's financial position, results of operations and cash flows as of and for the three months and six months ended June 30, 2001 and 2000. These financial statements and notes thereto
are unaudited and should be read in conjunction with ITeX's audited financial statements for the fiscal year ended December 31, 2000 included in ITeX's Annual Report on
Form 10-K, as filed with the Securities and Exchange Commission on April 2, 2001. The balance sheet as of December 31, 2000 was derived from audited financial
statements, but does not include all disclosures required by generally accepted accounting principles. The results for the six months ended June 30, 2001 are not necessarily indicative of the
expected results for any other interim period or the year ending December 31, 2001. Certain prior period balances have been reclassified to conform to the current period presentation.

Management 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.

Concentrations of Credit Risk

Financial instruments that potentially subject the Company to significant concentration of credit risk consist principally of cash, cash equivalents,
short-term investments, and accounts receivable. The Company places its short-term investments in commercial paper, money market funds, government and
non-government debt securities and certificates of deposit. The Company is exposed to credit risk in the event of default by the issuing institutions to the extent of the amount recorded
on the balance sheet. The company primarily invests its cash with four financial institutions in the U.S. At times, the balances held in bank accounts may exceed federally insured limits.

The
Company performs ongoing credit evaluations of its customers' financial condition and, generally, requires no collateral from its customers. The Company also performs an analysis
of the expected collectibility of accounts receivable and makes an allowance for doubtful accounts receivable when necessary.

5

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Customer Concentrations

Two customers accounted for 53.3% and 17.2% of net revenue in the three months ended June 30, 2001 and two customers accounted for 32.2% and 15.4% of
net revenue in the six months ended June 30, 2001. Three customers accounted for 26.1%, 12.6% and 10.0% of net revenue in the three months ended June 30, 2000 and two customers accounted
for 29.0% and 10.1% of net revenue for the six months ended June 30, 2000. At June 30, 2001, two customers accounted for 48.3% and 35.0% of total accounts receivable.

Comprehensive Income

The Company has adopted Statement of Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income;" however, the effects
of the adoption were immaterial to all periods presented.

Business Segment

The Company operates in one reportable segment, the sale of products for the ADSL market, using one measurement of profitability for its business. The Company
sells primarily to original equipment manufacturers and companies in the communications industry.

Geographic Information

The Company has sales and marketing operations located in the United States, Taiwan and China, and derives revenue from the following geographic locations.

Three Months Ended

Six Months EndedJune 30,
2001

June 30,
2000

June 30,
2001

June 30,
2000(Unaudited)

(Unaudited)(In Thousands)Net revenue:AsiaKorea

$
1,416

$
4,162

$
6,824

$
4,921Taiwan


353


1,244


436


2,764Rest of Asia


135


461


219


893Total of Asia


1,904


5,867


7,479


8,578USA


2,399


3,720


2,232


4,916Europe





699


1,517


907Total

$
4,303

$
10,286

$
11,228

$
14,401Long-lived assets:USA

$
11,295

$
7,302

$
11,295

$
7,302Taiwan


1,182


109


1,182


109Others


4





4


Total

$
12,481

$
7,411

$
12,481

$
7,411


Transfers
between geographic areas are recorded at amounts generally above cost and in accordance with the rules and regulations of the respective governing tax authorities.
Long-lived assets of geographic areas are those assets used in the Company's operations in each area.

6

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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 ("SFAS 128"),
"Earnings Per Share", for all periods presented. In accordance with SFAS 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):

For the Three Months
ended June 30,

For the Six Months
ended June 30,2001

2000

2001

2000Numerator:Net loss applicable to common stockholders:

$
(8,838
)
$
(7,779
)
$
(17,726
)
$
(11,474
)Denominator:Weighted average shares used in computing basic and diluted, net loss per share applicable to common stockholders


42,582


23,598


42,548


23,488Basic and diluted net loss per share applicable to common stockholders

$
(0.21
)
$
(0.33
)
$
(0.42
)
$
(0.49
)Antidilutive securities including options, warrants, convertible preferred stock and restricted stock rights not included in loss per shares calculation


13,686


13,686


23,021


23,021


Financial Instruments

The Company invests its excess cash in commercial paper, money market funds, government and non-government debt securities and certificates of
deposits. The Company considers all highly liquid debt instruments with an original maturity or remaining maturity at date of purchase of three months or less to be cash equivalents. Cash equivalents
are recorded at cost, which approximates fair value.

Investments
with a remaining maturity at the time of purchase of over three months are classified as short-term investments. Under the Financial Accounting Standards
Board's Statement of Financial Accounting Standards No. 115 ("SFAS 115"), "Accounting for Certain Investments in Debt and Equity Securities", management classifies investments as
available-for-sale at the time of purchase and periodically reevaluates such designation.

As
of June 30, 2001 and December 31, 2000, all of the Company's investments in debt securities were classified as available-for-sale with any
changes in market value recorded as unrealized gains and losses in accumulated other comprehensive income until their disposition. Realized gains and losses and declines in value judged to be other
than temporary on available-for-sale securities are included in interest income. The cost of securities sold is based on the specific-identification method.

7

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Inventory

Inventory is stated at the lower of cost or market price, cost being determined using the average cost method. The components of inventory are as follows (in
thousands):

June 30, 2001

December 31, 2000(unaudited)Inventories:Raw material

$
207

$
374Work-in-progress


875


1,300Finished goods


1,383


4,393$
2,465

$
6,067


Write-off of Intangible Assets

During the six months ended June 30, 2001, the Company decided to discontinue the development of its ADSL Netchip. The Company had previously acquired
licenses for use in the development of the
Netchip. As the Company has no intention for alternative use of the technology, the licenses totaling $1.8 million have been written off.

Recent Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133 ("SFAS
No. 133"), "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for derivative instruments and requires recognition of
all derivatives as assets or liabilities in the balance sheet and measurement of those instruments at fair value. The statement is effective for fiscal years beginning after June 15, 2000. In
June 1999, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 137 ("SFAS 137"), "Accounting for Derivative Instruments and
Hedging ActivitiesDeferral of the Effective Date of FASB Statement No. 133." In June 2000, the FASB issued Statement of Financial Accounting Standards No. 138
("SFAS 138"), "Accounting for Certain Derivative Instruments and Certain Hedging Activitiesan Amendment of FASB Statement No. 133." The adoption of SFAS 133, as
amended by SFAS 137 and SFAS 138, in the six months ended June 30, 2001 did not have a material effect on the Company's financial condition or results of operations.

In
June 2001, the FASB issued Statement of Financial Accounting Standards No. 141 ("SFAS No. 141"), "Business Combinations." This standard eliminates the
pooling-of-interests method of accounting for business combinations, except for qualifying business combinations that were initiated prior to July 1, 2001, and applies
to all business combinations accounted for under the purchase method that are completed after June 30, 2001. The implementation of this standard is not expected to have a significant impact on
the Company's financial condition or results of operations.

In
June 2001, the FASB issued Statement of Financial Accounting Standards No. 142 ("SFAS No. 142"), "Goodwill and Other Intangible Assets." This standard
eliminates the amortization of goodwill, and requires goodwill to be reviewed at least annually for impairment, the useful lives of previously recognized intangible assets to be reassessed and the
remaining amortization periods to be adjusted accordingly. This standard is effective for fiscal years beginning after December 15, 2001. The implementation of this standard is not expected to
have a significant impact on the Company's financial condition or results of operations.

8

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

This Report contains certain forward-looking statements (as such term is defined in Section 27A of the Securities Act of 1933 and Section 21E of
the Securities Exchange Act of 1934) that are based on the beliefs of our management as well as assumptions made by and information currently available to our management. These forward-looking
statements include but are not limited to those statements identified in this report with an asterisk (*) symbol. Additional forward-looking statements may be identified by the words "anticipate",
"believe", "expect", "intend", "will" and similar expressions, as they relate to us or our management.

The
forward-looking statements contained herein reflect our judgment as of the date of this report with respect to future events, the outcome of which is subject to certain risks,
including the factors set forth under the heading "Risk Factors," which may have a significant impact on our business, operating results or financial condition. Investors are cautioned that these
forward-looking statements are inherently uncertain. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results or outcomes may
vary materially from those described herein. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of these forward-looking statements. We undertake no
obligation to update these forward-looking statements.

The
following discussion and analysis should be read in conjunction with the condensed financial statements and the notes thereto included in Item 1 of this Report and with the
audited financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2000, as filed with the SEC on April 2, 2001.

OVERVIEW

We design and sell integrated circuit and software solutions to the broadband access communications equipment industry. Our products include integrated
circuits, software, production designs, network interface cards, or "NIC"s, and test systems that enable communications equipment manufacturers to provide high-speed,
cost-effective, asymmetric digital subscriber line, or ADSL, equipment to communications service providers and their customers. Our software includes programs that enable the basic
function of our integrated circuits and production designs, and that provide access to the Internet, permitting equipment utilizing our solutions to communicate with telecommunication service
providers' central office equipment.

We
were incorporated in California in May 1995 as Integrated Technology Express, Inc. In early 1996, United Microelectronics Corporation contributed cash and licensed
technology to us in return for an equity interest. Our initial products included personal computer data interface and integrated circuits using analog and digital signals. In early 1997, we began to
develop integrated circuits and software solutions for the ADSL market. In late 1997, we sold our personal computer-related operations, changed our name to Integrated Telecom Express, Inc. and
focused our product development efforts exclusively on the ADSL market.

Subsequent
to the sale of our personal computer-related business and through 1998, we were a development stage company and had no product revenue. In April 1998, we licensed
certain ADSL technology from Alcatel Bell N.V. to complement our intellectual property. In the first quarter of 1999, we began shipping our production designs and development tools for our initial
ADSL products. In the third quarter of 1999, we began volume shipments of these products and recorded our first significant product revenue. Our production designs are complete sets of instructions
describing how to build an ADSL modem with our integrated circuits and software. Beginning in the fourth quarter of 1999, we

9

---

significantly increased our investment in operations, including research and development and sales and marketing.

We
sell our products primarily to manufacturers of customer premises equipment. We also sell Apollo-based NICs to manufacturers of telecommunications service providers' central office
equipment and personal computer original equipment manufacturers. Our revenue is currently derived from sales of our Apollo and SAM product families. Sales of Apollo chipset products represented 83.0%
and 66.3% of revenue in the six months ended June 30, 2000 and in the six months ended June 30, 2001, respectively. Sales of Apollo Three NICs accounted for 32.9% of our net revenue in
the six months ended June 30, 2001. We anticipate that our Apollo and SAM product families will continue to generate substantially all of our revenue for the foreseeable future.* To date, we
have derived a substantial portion of our revenue from a limited number of customers, and we expect to continue to rely on a limited number of customers.* During the six months ended June 30,
2000, Xpeed and Alcatel Bell N.V. accounted for 29.0% and 10.0% of our revenue. During the six months ended June 30, 2001, Alcatel Bell N.V. and Samsung Electronics Co., Ltd. accounted
for 32.2% and 15.4% of our revenue.

We
have focused our initial sales and marketing efforts on worldwide communications equipment manufacturers. We currently sell through our direct sales force, independent sales
representatives and distributors. Our sales personnel are based in San Jose, California; Round Rock, Texas; Taipei, Taiwan and Beijing, China. For the six months ended June 30, 2000, sales to
customers in Asia accounted for 55.5% of our revenue and our sales to customers in South Korea constituted 30.0% of our revenue. For the six months ended June 30, 2001, sales to customers in
Asia accounted for 66.6% of our revenue and our sales to customers in South Korea constituted 60.8% of our revenue. We estimate that of our sales to U.S. communications equipment manufacturers in the
six months ended June 30, 2000 and 2001, approximately 29.0% and 0% were ultimately intended to be used by service providers in the South Korean market. Combined with direct sales to South
Korea during the same periods, our estimated revenue exposure to the South Korean market during these periods was 59.1% and 60.8%. We anticipate that the geographic distribution of our revenue sources
will become increasingly diversified in the foreseeable future.* All revenue is denominated in U.S. dollars.

In
general, we require approximately six months to achieve volume shipments of our products after we first contact a customer, if volume shipments are achieved at all. This process
includes sale of our production design, customer board development, testing, field trials and qualification by service
providers and receipt of volume orders. As a result, a significant period of time may elapse between our sales efforts and our realization of revenue.* Our customers are not obligated by
long-term contracts to purchase our products and can generally cancel or reschedule orders on short notice.

Revenue
from product sales other than to distributors is recognized upon shipment if a signed purchase order exists, the fee is fixed or determinable, collection of resulting
receivables is reasonably assured and product returns are reasonably estimable. Revenue from shipments to distributors with the right of return is deferred until the distributor resells the inventory.
Upon shipment, we also provide for the estimated costs that may be incurred for product warranties. We develop and market personal NICs to the ADSL market in addition to the sale of integrated circuit
and software products. We outsource the manufacturing of these cards to a manufacturer in Taiwan, which incorporates our integrated circuits.

We
outsource the fabrication, packaging and testing of our integrated circuits. Therefore, a significant portion of our cost of revenue consists of payments to our manufacturers. Our
cost of revenue also includes expenses relating to our internal manufacturing operations as well as the amortization of fees for licensed technology. In April 1998, we licensed certain
technology from Alcatel Bell N.V., an unrelated third party, to develop, manufacture and distribute products. The terms of the agreement call for an initial licensing fee of $5 million with
additional royalties paid on sales of

10

---

products developed at rates ranging from 2.5% to 6%. Minimum royalties payable pursuant to the agreement total $3 million, of which the Company has paid $1,750,000. The licensing fee is
amortized over the estimated useful life of seven years with royalties expensed in the year incurred.

Research
and development expenses consist primarily of salaries and related personnel expenses, prototype development costs, fees paid to outside service providers and overhead
allocated to product development of our integrated circuits, software and underlying technologies. All research and development costs are expensed as incurred. Our research and development efforts are
periodically subject to significant, non-recurring costs and fees that can cause significant variability in our quarterly research and development expenses. We expect to increase our
research and development expenses as we continue to develop new products and enhance our core technologies.*

Sales
and marketing expenses consist primarily of salaries, commissions and related expenses for personnel engaged in sales, marketing, applications engineering support and customer
service functions as well as costs associated with promotional and other marketing expenses. We intend to expand our direct and indirect sales operations, both domestically and internationally.* In
addition, we expect sales and marketing expenses to increase as we expand our customer service and support organization.*

General
and administrative expenses include personnel and related costs associated with executive management, finance, accounting, human resources, information services and
facilities.

In
connection with the grant of stock options and equity compensation to our employees, technical advisors and directors, we have recorded deferred stock-based compensation expense of
$16.0 million as of June 30, 2001. Deferred stock-based compensation represents the difference between the grant price and the deemed fair value of our common stock options granted
during these periods. Deferred stock-based compensation expense for options granted is being amortized using the graded vesting method, in accordance with Financial Accounting Standards Board, or
FASB, Interpretation No. 28, over the vesting period of each respective option, which is generally four years. Under the graded vesting method, each option grant is separated into portions
based on its vesting terms, which results in acceleration of amortization expense for the overall award. Deferred stock-based compensation for options granted to non-employees is accounted
for in accordance with the provisions of Statement of Financial Accounting Standards, or SFAS, No. 123 and Emerging Issues Task Force 96-18. Deferred stock-based compensation is
presented as a reduction of stockholders' equity.

We
have recorded no provision for federal or state income taxes for any period since our inception because we have incurred losses in each period. Net operating loss carryforwards
will expire at various dates from 2003 through 2013 if they are not utilized.

We
experienced a net loss of $11.5 million for the six months ended June 30, 2000 and a net loss of $17.7 million for the six months ended June 30, 2001.
Our accumulated deficit as of June 30, 2001 was $66.3 million.

11

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RESULTS OF OPERATIONS

Three months ended June 30, 2001 Compared to Three months ended June 30, 2000

The following table sets forth, for the periods indicated, our statements of operations data as percentages of our revenue. Our results of operations are
reported as one reportable business segment.

For the Three months ended June 302001

2000Revenue

100
%
100
%Cost of revenue

61

56Gross profit

39

44Operating expenses:Research and development

147

58Sales and marketing

27

28General and administrative

61

38Write-off of intangible assets

42

Total operating expenses

277

124Operating loss

(238
)
(80
)Interest and other income, net

33

4Net loss

(205
)
(76
)


Net Revenue.Net revenue decreased from $10.3 million for the three months ended June 30, 2000 to
$4.3 million for the three months ended June 30, 2001. This decrease was primarily attributable to the current economic slowdown in the semiconductor and communications industries,
particularly in Asia and the United States. Revenue for the quarter ended June 30, 2001 included the benefit of a decrease in the reserve for sales returns and allowances of approximately
$585,000. The decrease in the reserve resulted from the application of the Company's standard accounting policies and was impacted by the significant drop in revenue experienced during the first and
second quarters of fiscal 2001. For the three months ended June 30, 2000, our Apollo Two chipsets accounted for 90.0% of our net revenue and all other products accounted for 10.0% of our net
revenue. For the three months ended June 30, 2001, Apollo Two chipsets accounted for 7.3% of our net revenue, Apollo Three chipsets accounted for
33.4% of our net revenue, Apollo Three NICs accounted for 55.3% of our net revenue and all other products accounted for 4.0% of our net revenue. Net revenue from customers outside of the United States
represented 63.8% and 44.2% of our revenue for the three months ended June 30, 2000 and for the three months ended June 30, 2001, respectively. We anticipate that the geographic
distribution of our revenue sources will become increasingly diversified in the foreseeable future.* Due to current market conditions, we anticipate that our net revenue will decline in fiscal 2001
compared to fiscal 2000.*

Cost of Revenue and Gross Profit.Cost of revenue decreased from $5.8 million for the three months ended
June 30, 2000 to $2.6 million for the three months ended June 30, 2001. This decrease was primarily due to the decrease in net revenue. License fee amortization was $429,000 and
$554,000 for the three months ended June 30, 2000 and 2001. Amortization of deferred stock based compensation was $59,000 and $21,000 for the three months ended June 30, 2000 and
June 30, 2001, respectively.

Our
gross profit was $4.5 million and $1.7 million in the three months ended June 30, 2000 and June 30, 2001, respectively. Gross profit, as a percentage
of net revenue decreased from 43.8% to

12

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39.0% for the three months ended June 30, 2000 and 2001, respectively. The decrease in gross margin from the three months ended June 30, 2000 to the three months ended June 30,
2001 was primarily attributable to pricing pressure in the industry and increasing sales of NICs, as a percentage of our total revenue, which have a lower gross margin than chipset sales.

Research and Development.Research and development expenses increased from $6.0 million for the three months
ended June 30, 2000 to $6.3 million for the three months ended June 30, 2001. The increase is primarily attributable to increases in compensation levels, payroll related expenses
associated with additional personnel, and facility expense. Amortization of deferred stock-based compensation related to research and development amounted to $2.7 million and $922,000 for the
three months ended June 30, 2000 and 2001. This decrease is primarily attributable to the cancellation of options due to the departure of certain former employees and the recent decline of our
stock price and its effect on the options granted to non-employees in 2001. We anticipate that our research and development expenses will be volatile in absolute dollars and as a
percentage of revenue in the future primarily due to the timing of non-recurring engineering expenses.*

Sales and Marketing.Sales and marketing expenses decreased from $2.9 million for the three months ended
June 30, 2000 to $1.2 million for the three months ended June 30, 2001. This decrease was primarily attributable to decreased compensation expense due to the departure of certain
former employees and decreased accrued sales commissions. Accrued sales commissions decreased proportionally with revenue. We expect sales and marketing expenses to increase in both absolute dollars
and as a percentage of revenue in the remainder of 2001 as we continue to moderately expand our sales and marketing personnel to capitalize on future business opportunities and as revenue is expected
to increase in the second half of fiscal 2001 compared to the first half of fiscal 2001.*
Amortization of deferred stock-based compensation related to sales and marketing activities amounted to $1.3 million and $115,000 for the three months ended June 30, 2000 and 2001. This
decrease is primarily attributable to the cancellation of options due to the departure of certain former employees and the recent decline of our stock price and its effect on the options granted to
non-employees in fiscal 2001.

General and Administrative.General and administrative expenses decreased from $3.9 million for the three months
ended June 30, 2000 to $2.6 million for the three months ended June 30, 2001. The decrease in general and administrative expense was primarily attributable to decreased payroll
related expense due to the departure of certain former employees. We expect general and administrative expenses to increase in both absolute dollars and as a percentage of revenue in the full fiscal
year 2001 due primarily to an expected decline in revenue in fiscal 2001 compared to fiscal 2000 and additional expenses associated with new office space in San Jose, California; Hsin-Chu, Taiwan; and
Beijing, China.* Amortization of deferred stock-based compensation related to general and administrative activities amounted to $3.2 million and $718,000 for the three months ended
June 30, 2000 and 2001. This decrease is primarily attributable to the cancellation of options due to the departure of certain former employees and the recent decline of our stock price and its
effect on the options granted to non-employees in fiscal 2001.

Write-off of Intangible Assets.During the three months ended June 30, 2001, the Company decided to discontinue
the development of its ADSL Netchip project. The Company had previously licensed certain technologies for use in the development of the ADSL Netchip. As the Company has no plans for alternative use of
the technologies, the value of licenses totaling $1.8 million have been written off.

Interest and Other Income, Net.Interest and other income, net increased from $442,000 for the three months ended
June 30, 2000 to $1.4 million for the three months ended June 30, 2001. The increase was primarily attributable to significantly higher cash balances due to our initial public
offering and concurrent private placement in August 2000. We anticipate that interest and other income, net

13

---

will increase in fiscal 2001 compared to fiscal 2000 due to higher average cash balances on hand.* However, interest income is expected to decline on a quarter-to-quarter basis
due to an anticipated lower level of market interest rates and a declining cash balance as we continue to fund our operations.*

Provision for Income Taxes.We have recorded significant net operating losses since inception and therefore did not
incur any significant tax liabilities in 2000 or the three months ended June 30, 2001. Net deferred tax assets are substantially derived from net operating loss carryforwards, research credits
and timing differences in depreciation and amortization expenses. Based on available objective evidence, management believes it is more likely than not that the net deferred tax assets will not be
fully realizable.* Accordingly, the Company has provided a full valuation allowance against its net deferred tax assets at June 30, 2000 and June 30, 2001.

Net Loss.Net loss increased from $7.8 million for the three months ended June 30, 2000 to
$8.8 million for the three months ended June 30, 2001. This increase was primarily attributable to the decrease in net revenue and significant growth in operating expenses.

Six months ended June 30, 2001 Compared to Six months ended June 30, 2000

The following table sets forth, for the periods indicated, our statements of operations data as percentages of our revenue. Our results of operations are
reported as one reportable business segment.

For the Six months ended June 302001

2000Revenue

100
%
100
%Cost of revenue

73

59Gross profit

27

41Operating expenses:Research and development

117

61Sales and marketing

31

30General and administrative

52

36Write-off of intangible assets

16

Total operating expenses

216

127Operating loss

(189
)
(86
)Interest and other income, net

31

6Net loss

(158
)
(80
)


Net Revenue.Net revenue decreased from $14.4 million for the six months ended June 30, 2000 to
$11.2 million for the six months ended June 30, 2001. This decrease was primarily attributable to the current economic slowdown in the semiconductor and communications industries,
particularly in Asia and the United States. Revenue for the six months ended June 30, 2001 included the benefit of a decrease in the reserve for sales returns and allowances of approximately
$585,000. The decrease in the reserve resulted from the application of the Company's standard accounting policies and was impacted by the significant drop in revenue experienced during the first and
second quarters of fiscal 2001. For the six months ended June 30, 2000, our Apollo Two chipsets accounted for 83.0% of our net revenue, and all other products accounted for 17.0% of our net
revenue. For the six months ended June 30, 2001, Apollo Two chipsets accounted for 33.9% of our net revenue, Apollo Three chipsets accounted
for 30.3% of our net revenue, Apollo Three NICs accounted for 32.9% of our net revenue and all other products accounted for 2.9% of our net revenue. Net revenue from customers outside of the

14

---

United States represented 65.9% and 80.1% of our revenue for the six months ended June 30, 2000 and for the six months ended June 30, 2001, respectively. We anticipate that the
geographic distribution of our revenue sources will be increasingly diversified in the foreseeable future.* Due to current market conditions, we anticipate that our net revenue will decline in fiscal
2001 compared to fiscal 2000.*

Cost of Revenue and Gross Profit.Cost of revenue decreased from $8.5 million for the six months ended
June 30, 2000 to $8.2 million for the six months ended June 30, 2001. This decrease was primarily attributable to the decrease in net revenue. License fee amortization was
$857,000 and $1.1 million for the six months ended June 30, 2000 and 2001. Amortization of deferred stock based compensation was $59,000 and $46,000 for the three months ended
June 30, 2000 and the three months ended June 30, 2001, respectively.

Cost
of revenue for the six months ended June 30, 2001 also includes a $608,000 charge related to purchase commitments. Based on current market conditions, the Company
estimated that demand for Apollo Two products was less than originally estimated when certain non-cancelable production orders were placed. As a result, reserves were established to cover
expected future losses related to these commitments.

Our
gross profit was $5.9 and $3.0 million in the six months ended June 30, 2000 and June 30, 2001, respectively. Gross profit, as a percentage of net revenue
decreased from 40.8% to 26.8% for the six months ended June 30, 2000 and 2001, respectively. The decrease in gross margin from the six months ended June 30, 2000 to the six months ended
June 30, 2001 was primarily attributable to pricing pressure in the industry, increasing sales of NICs, as a percentage of our total revenue, which have a lower gross margin than chipset sales,
and the effect of a $759,000 charge associated with a reserve for Apollo Two inventory.

Research and Development.Research and development expenses increased from $8.8 million for the six months ended
June 30, 2000 to $13.1 million for the six months ended June 30, 2001. The increase is primarily attributable to increases in compensation levels, payroll related expenses
associated with additional personnel, and facility expense. Amortization of deferred stock-based compensation related to research and development amounted to $2.8 and $2.2 million for the six
months ended June 30, 2000 and 2001. This decrease is primarily attributable to the cancellation of options due to the departure of certain former employees and the recent decline of our stock
price and its effect on the options granted to non-employees in fiscal 2001. We anticipate that our research and development expenses will be volatile in absolute dollars and as a
percentage of revenue in the future primarily due to the timing of non-recurring engineering expenses.*

Sales and Marketing.Sales and marketing expenses decreased from $4.3 million for the six months ended
June 30, 2000 to $3.4 million for the six months ended June 30, 2001. This decrease was primarily attributable to decreased compensation expense due to the departure of certain
former employees and decreased accrued sales commissions. Accrued sales commissions decreased proportionally with revenue. We expect sales and marketing expenses to increase in both absolute dollars
and as a percentage of revenue in the remainder of fiscal 2001 as we continue to moderately expand our sales and marketing personnel to capitalize on future business opportunities and as our revenue
is expected to increase in the second half of fiscal 2001 compared to the first half of fiscal 2001.* Amortization of deferred stock-based compensation related to sales and marketing activities
amounted to $1.6 million and $814,000 for the six months ended June 30, 2000 and 2001. This decrease is primarily attributable to the cancellation of options due to the departure of
certain former employees and the recent decline of our stock price and its effect on the options granted to non-employees in fiscal 2001.

General and Administrative.General and administrative expenses increased from $5.1 million for the six months
ended June 30, 2000 to $5.9 million for the six months ended June 30, 2001. The

15

---

increase in general and administrative expense was primarily attributable to increased compensation levels, one time payments to former executive officers and an increase in payroll related expenses
associated with additional personnel as we grew the infrastructure to support our business expansion and the higher facility expense. We expect general and administrative expenses to increase in both
absolute dollars and as a percentage of revenue in the full fiscal year 2001 due primarily to an expected decline in revenue in fiscal 2001 compared to fiscal 2000 and additional expenses associated
with new office space in San Jose, California; Hsin-Chu, Taiwan; and Beijing, China.* Amortization of deferred stock-based compensation related to general and administrative activities
amounted to $3.5 million and $1.9 million for the six months ended June 30, 2000 and 2001. This decrease is primarily attributable to the cancellation of options due to the
departure of certain former employees and the recent decline of our stock price and its effect on the options granted to non-employees in fiscal 2001.

Write-off of Intangible Assets.During the six months ended June 30, 2001, the Company decided to discontinue
the development of its ADSL Netchip project. The Company had previously licensed certain technologies for use in the development of the ADSL Netchip. As the Company has no plans for alternative use of
the technologies, the value of licenses totaling $1.8 million have been written off.

Interest and Other Income, Net.Interest and other income, net increased from $906,000 for the six months ended
June 30, 2000 to $3.5 million for the six months ended June 30, 2001. The increase was primarily attributable to significantly higher cash balances due to our initial public
offering and concurrent private placement in August 2000. We anticipate that interest and other income, net will increase in fiscal 2001 compared to fiscal 2000 due to higher average cash
balances on hand.* However, interest income is expected to decline on a quarter-to-quarter basis due to an anticipated lower level of market interest rates and a declining cash
balance as we continue to fund our operations.*

Provision for Income Taxes.We have recorded significant net operating losses since inception and therefore did not
incur any significant tax liabilities in 2000 or the six months ended June 30, 2001. Net deferred tax assets are substantially derived from net operating loss carryforwards, research credits
and timing differences in depreciation and amortization expenses. Based on available objective evidence, management believes it is more likely than not that the net deferred tax assets will not be
fully realizable.* Accordingly, the Company has provided a full valuation allowance against its net deferred tax assets at June 30, 2000 and June 30, 2001.

Net Loss.Net loss increased from $11.5 million for the six months ended June 30, 2000 to
$17.7 million for the six months ended June 30, 2001. This increase was primarily attributable to decrease in net revenue, significant growth in operating expenses, and a one time charge
of adverse purchase commitments.

LIQUIDITY AND CAPITAL RESOURCES

We have financed our operations and working capital requirements through the sale of common and preferred stock, as well as by a limited amount of capital
lease financing. We have also received additional funds from the exercise of stock options.

Cash
and cash equivalents were $34.3 million and $128.0 million at June 30, 2000 and 2001, respectively. The increase in cash and cash equivalents was primarily
due to the net proceeds from our initial public offering in the amount of $106.1 million and the concurrent private placement of common stock to NEC Corporation in the amount of approximately
$3.0 million in August 2000.

Cash
used in operating activities was $1.8 million and $13.9 million in the six months ended June 30, 2000 and June 30, 2001, respectively. The increase in
cash used was primarily attributable to an increase in net loss from $11.5 million to $17.7 million. Operating cash flows were reduced further by decreases in accounts payable and
accrued expenses of $9.8 million and increases in restricted cash

16

---

and other assets of $3.6 million. This was partially offset by decreases in accounts receivable and inventory of $7.2 million.

Cash
used in investing activities was $3.2 million and $7.0 million in the six months ended June 30, 2000 and 2001, respectively. During both periods, these cash
flows were due to purchases of property, equipment and licenses.

Cash
provided by (or used in) financing activities was $775,000 and $(237,000) in the six months ended June 30, 2000 and 2001, respectively. The decrease was primarily due to a
decrease from $1.3 million to $247,000 in proceeds from issuance of common stock due to stock option exercise and a decrease of principal payments under capital leases to $484,000.

As
of June 30, 2001, we had recorded liabilities for licenses and capital leases in the amount of $4.6 million. In addition, we have commitments to pay various royalties
to providers of intellectual property based on our future sales. We have also signed a 10-year lease agreement for our new principal executive office space in San Jose, California that
commits us to pay on average $291,000 per month for the duration of the lease, and a 5 year lease agreement for our new office space in Hsin-Chu Science-Based Industrial Park in
Taiwan that commits us to pay approximately $65,000 per month for the duration of the lease.

We
believe that our current cash, cash equivalents, and short-term investments will be sufficient to finance our working capital and capital expenditures for at least the
next 12 months.* Our management intends to invest any cash in excess of current operating requirements in short-term, interest-bearing investment-grade securities.* Our future
capital requirements will depend upon many factors, including revenue growth, management of working capital, the timing of research and product development efforts and the expansion of our marketing
and sales efforts.*

If
our existing cash balances and cash flows expected from future operations are not sufficient to meet our liquidity needs, we will need to raise additional funds. If adequate funds
are not available on acceptable terms or at all, we may not be able to take advantage of market opportunities, develop or enhance new products, pursue acquisitions that would complement our existing
product offerings or enhance our technical capabilities, execute our business plan or otherwise respond to competitive pressures. The issuance of additional equity securities may dilute our existing
stockholders.

IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133 ("SFAS
No. 133"), "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for derivative instruments and requires recognition of
all derivatives as assets or liabilities in the balance sheet and measurement of those instruments at fair value. The statement is effective for fiscal years beginning after June 15, 2000. In
June 1999, the FASB issued Statement of Financial Accounting Standards No. 137 ("SFAS 137"), "Accounting for Derivative Instruments and Hedging ActivitiesDeferral of
the Effective Date of FASB Statement No. 133." In June 2000, the FASB issued Statement of Financial Accounting Standards No. 138 ("SFAS 138"), "Accounting for Certain
Derivative Instruments and Certain Hedging Activitiesan Amendment of FASB Statement No. 133." The adoption of SFAS 133, as amended by SFAS 137 and SFAS 138, in
the six months ended June 30, 2001 did not have a material effect on the Company's financial condition or results of operations.

In
June 2001, the FASB issued Statement of Financial Accounting Standards No. 141 ("SFAS No. 141"), "Business Combinations." This standard eliminates the
pooling-of-interests method of accounting for business combinations, except for qualifying business combinations that were initiated prior to July 1, 2001, and applies to all business
combinations accounted for under the purchase method that are completed after June 30, 2001. The implementation of this standard is not expected to have a significant impact on the Company's
financial condition or results of operations.

In
June 2001, the FASB issued Statement of Financial Accounting Standards No. 142 ("SFAS No. 142"), "Goodwill and Other Intangible Assets." This standard
eliminates the amortization of goodwill, and requires goodwill to be reviewed at least annually for impairment, the useful lives of previously recognized intangible assets to be reassessed and the
remaining amortization periods to be adjusted accordingly. This standard is effective for fiscal years beginning after December 15, 2001. The implementation of this standard is not expected to
have a significant impact on the Company's financial condition or results of operations.

17

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RISK FACTORS

You should carefully consider the risks described below and all of the information contained in this report. 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.

Risks Relating To Our Business

WE COMMENCED OPERATIONS AS A SUPPLIER OF INTEGRATED CIRCUIT AND SOFTWARE SOLUTIONS IN LATE 1997, AND THEREFORE YOU WILL HAVE LIMITED HISTORICAL OPERATING DATA TO EVALUATE OUR
BUSINESS AND WE MAY NOT BE ABLE TO ACCURATELY PROJECT OUR FUTURE OPERATING RESULTS.

From May 1995 until December 1997, we designed integrated circuits for personal computers. In December 1997, we sold that business and
focused exclusively on the development of integrated circuit and software solutions for the broadband access communications equipment industry with an initial emphasis on products for the asymmetric
digital subscriber line, or ADSL, market. We began shipping products for the ADSL market in volume in the third quarter of 1999. Therefore, we have limited historical operating data that can be used
in evaluating our business and in projecting future operating results.

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

We incurred net losses of $17.7 million during the six months ended June 30, 2001. As of June 30, 2001, we had an accumulated deficit of
$66.3 million. We anticipate that we will incur net losses for the foreseeable future, and these losses may be substantial. We may not be able to generate sufficient revenue to achieve or
maintain profitability.

BECAUSE OUR OPERATING RESULTS WILL FLUCTUATE FROM QUARTER TO QUARTER, THE PRICE OF OUR STOCK MAY DECLINE.

Our operating results have fluctuated in the past and will fluctuate in the future on a quarterly and an annual basis due to a number of factors, many of which
are outside our control. Our results of operations may fluctuate due to factors such as:



Accordingly,
you should not rely upon period-to-period comparisons as indications of future performance. Fluctuations in our operating results may result in a
decline in the price of our stock.

18

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THE MARKET FOR ADSL INTEGRATED CIRCUIT AND SOFTWARE PRODUCTS IS HIGHLY COMPETITIVE, AND MANY OF OUR COMPETITORS ARE MORE ESTABLISHED AND HAVE GREATER RESOURCES THAN WE DO.

The market for ADSL integrated circuit and software products is highly competitive. Given our limited operating history in developing products for this market,
we may not have the financial resources, technical expertise or marketing and support capabilities to compete successfully. Our principal competitors include Alcatel Microelectronics, Analog
Devices, Inc., Centillium Communications, Inc., Conexant Systems, Inc., GlobeSpan, Inc., STMicroelectronics N.V. and Texas Instruments Incorporated. These competitors have
longer operating histories and presence in key markets, greater name recognition, larger installed customer bases and significantly greater financial, sales and marketing, manufacturing, distribution,
technical and other resources than we have. They may be able to introduce new technologies more rapidly, respond more quickly to changing customer requirements or devote greater resources to the
development, promotion and sale of their products than we can. Further, some of these competitors have captive manufacturing operations, and in the event of a manufacturing capacity shortage, these
competitors may be able to obtain products when we are unable to do so. In addition, we anticipate that new competitors will enter this market as ADSL becomes more widely deployed.

IF WE FAIL TO ENHANCE OUR EXISTING PRODUCTS OR TO DEVELOP AND INTRODUCE NEW PRODUCTS THAT MEET CHANGING CUSTOMER REQUIREMENTS AND KEEP PACE WITH TECHNOLOGICAL DEVELOPMENTS, WE
WILL NOT BE SUCCESSFUL IN SELLING OUR PRODUCTS AND OUR REVENUES WILL FLUCTUATE OR DECREASE.

The market for broadband access products is characterized by rapidly changing customer requirements and short product life cycles. Accordingly, our future
success will depend in large part upon our ability to:



UNCERTAINTIES IN THE TIMING OF PRODUCT TRANSITIONS MAY ADVERSELY IMPACT OUR BUSINESS.

In bringing new products to market, we must manage a number of product transitions. As these product transitions occur, we see declining demand and prices for
older products. Our ability to manage these transitions is affected by uncertainties that may result in excess inventories of older products, accelerated price erosion, or shortages of new products.
If we fail to successfully predict the direction and timing of product transitions, our business could be harmed.

For
example, the Company recently incurred significant charges for the write-off of obsolete inventory and unfavorable purchase commitments with respect to its Apollo Two product.

19

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IF WE CONTINUE TO RAPIDLY EXPAND OUR OPERATIONS AND IF WE FAIL TO MANAGE GROWTH EFFECTIVELY, OUR BUSINESS COULD BE HARMED.

We have rapidly expanded our operations, including the number of our employees and the geographical scope of our activities. We expect that significant further
expansion will be required to address potential growth in our customer base and market opportunities. If we are unable to manage growth effectively, we may not be able to take advantage of market
opportunities, develop or enhance our products or our technical capabilities, execute our business plan or otherwise respond to competitive pressures or unanticipated requirements. To effectively
manage the anticipated growth of our operations, we believe we must both enhance our internal operational, financial and management information controls, reporting systems and procedures and also
effectively manage multiple relationships with our customers, suppliers and other third parties.

We
have recently hired many new employees. Failure to properly train and integrate these new employees into our business may disrupt our operations. We may also have difficulties
successfully identifying and exploiting existing and potential market opportunities if our staffing is inadequate.

OUR REVENUE HAS BEEN AND WILL CONTINUE TO BE DERIVED FROM A LIMITED NUMBER OF PRODUCTS. IF ANY OF THESE PRODUCTS FAILS TO GAIN BROADER MARKET ACCEPTANCE, WE MAY NOT BE ABLE TO
GENERATE SUFFICIENT REVENUE.

For the six months ended June 30, 2000 and for the six months ended June 30, 2001, 83.0% and 66.3%, respectively, of our revenue was derived from
sales of our Apollo chipsets. In addition, for the same periods, sales of Apollo NICs accounted for 6.9% and 32.9% of our net revenue, respectively. We expect that our Apollo based products will
continue to represent a significant portion of our revenue in the foreseeable future. Therefore, we may not be able to generate sufficient revenue if these products fail to achieve broader market
acceptance or if they become obsolete.

BECAUSE OUR PRODUCTS ARE USED AS COMPONENTS OF OUR CUSTOMERS' PRODUCTS, IF COMMUNICATIONS EQUIPMENT MANUFACTURERS ARE NOT ABLE TO OBTAIN THE OTHER COMPONENTS USED IN THEIR
PRODUCTS, SALES OF OUR PRODUCTS WOULD BE HARMED.

Our customers incorporate our products into their equipment together with products from other suppliers. For example, our Apollo production designs require
electronic components and integrated circuits manufactured by other companies. Some of these components may be sole-sourced or in limited supply. Although alternative suppliers may be
available, some of their components have different attributes and may require a modification to our customers' equipment. Therefore, if our customers are unable to obtain the other required components
for their equipment, they could cancel orders or delay purchases of our products.

IF UNITED MICROELECTRONICS CORPORATION DOES NOT HAVE SUFFICIENT CAPACITY TO SATISFY OUR INTEGRATED CIRCUIT REQUIREMENTS, WE COULD EXPERIENCE SUBSTANTIAL DELAY OR INTERRUPTION
IN THE SHIPMENT OF OUR INTEGRATED CIRCUITS OR AN INCREASE IN COSTS, WHICH WOULD NEGATIVELY AFFECT OUR OPERATING RESULTS.

We do not own or operate a semiconductor fabrication facility and depend on United Microelectronics Corporation to manufacture all of our integrated circuits.
Most of our products are manufactured at a single facility, which increases the risk of a disruption in supply. We have executed a term sheet with United Microelectronics Corporation that states that
it guarantees us a minimum level of production capacity through 2003, provided that we use United Microelectronics Corporation to manufacture substantially all of our integrated circuits during this
period. Other than this term sheet,

20

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we do not have a long-term silicon wafer supply agreement with United Microelectronics Corporation that guarantees silicon wafer or product quantities. Furthermore, we do not have
long-term agreements that guarantee silicon wafer prices, delivery or lead times, as United Microelectronics Corporation manufactures our products on a purchase order basis. We provide
United Microelectronics Corporation with rolling forecasts of our production requirements; however, the ability of United Microelectronics Corporation to provide silicon wafers to us is limited by
United Microelectronics Corporation's available capacity. In addition, because many of United Microelectronics Corporation's customers have greater financial resources than we do and because many of
their customers may have greater capacity requirements than we do, United Microelectronics Corporation could choose to prioritize capacity for other customers or reduce or eliminate deliveries to us
on short notice. Accordingly, United Microelectronics Corporation may not allocate sufficient capacity to satisfy our requirements in excess of the minimum levels in the term sheet. In addition, the
manufacturing process for our products is highly complex, requiring precise production in a highly-controlled environment. Changes in the manufacturing processes or the inadvertent use of defective or
contaminated materials in the manufacturing of our products could harm our silicon wafer supplier's ability to achieve acceptable manufacturing yields. If our silicon wafer supplier manufactures our
products within its manufacturing specification limits and we do not achieve acceptable yields as a result of our design, our cost of revenue may increase. In addition, if our silicon wafer supplier
does not manufacture our products within its manufacturing specification limits, we may have difficulty obtaining adequate product supplies and product shipments may be delayed. This could ultimately
lead to a loss of sales of our products and harm our business.

BECAUSE OUR PRODUCTS ARE COMPONENTS OF OTHER EQUIPMENT, IF 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 equipment manufacturer to produce and deploy the equipment which incorporates our products. If the 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.

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
later be cancelled. Our inability to convert design wins into actual sales, or any cancellation of a purchase order, could have a negative impact on our financial condition and results of operations.

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OUR DEPENDENCE UPON THIRD PARTIES TO PACKAGE AND TEST SUBSTANTIALLY ALL OF OUR PRODUCTS REDUCES OUR CONTROL OF PRODUCT DELIVERY SCHEDULES AND QUALITY ASSURANCE.

Because third parties package and test substantially all of our products, we do not directly control our product delivery schedules and quality assurance. This
lack of control could result in product shortages and defects, which in turn could increase our packaging and testing costs or delay product delivery. We do not have long-term contracts
with the companies that package and test our products and we typically procure services from them on a per order basis. Therefore, we may not be able to obtain these services on acceptable terms, if
at all. If we are required to find and qualify alternative packagers and testers, we could experience delays in product shipments or a decline in product quality.

A MAJORITY OF OUR OUTSOURCED OPERATIONS ARE LOCATED IN TAIWAN, INCREASING THE RISK THAT A NATURAL DISASTER, LABOR STRIKE, WAR OR POLITICAL UNREST IN THAT COUNTRY WOULD DISRUPT
OUR OPERATIONS.

A majority of our outsourced operations are located in Taiwan. Events out of our control such as earthquakes, fires, floods or other natural disasters in
Taiwan or political unrest, war, labor strikes or work stoppages in Taiwan would disrupt our operations. The risk of earthquakes in Taiwan is significant because of its proximity to major earthquake
fault lines. An earthquake like the one that occurred in Taiwan in September 1999 could cause significant delays in shipments of our products unless and until we are able to shift our
outsourced operation. In addition, there is currently significant political tension between Taiwan and China, which could lead to hostilities. If any of these events occur, we may not be able to
obtain alternative capacity. Failure to secure alternative capacity could cause a delay in the shipment of our products, which would cause our revenue to fluctuate or decline.

BUSINESS INTERRUPTIONS COULD ADVERSELY AFFECT OUR BUSINESS

Our operations are vulnerable to interruption by fire, earthquake, power loss, telecommunications failure and other events beyond our control. We do not have a
detailed disaster recovery plan and do not have backup generators. Our facility in California is currently subject to electrical blackouts as a consequence of a shortage of available electrical power.
In the event these blackouts continue or increase in severity, they could disrupt the operations of our California-based operations, including design, research and development, sales, manufacturing
control, logistics, and general and administrative functions. Any such disruption could delay us from executing on our business plan, which 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. In addition, we do not carry sufficient business interruption insurance to
compensate us for losses that may occur and any losses or damages incurred by us could have a material adverse effect on our business.

WE DERIVE A SUBSTANTIAL AMOUNT OF OUR REVENUE FROM INTERNATIONAL SOURCES, AND OUR FAILURE TO ADDRESS THE DIFFICULTIES ASSOCIATED WITH SELLING OUR PRODUCTS OUTSIDE THE UNITED
STATES WOULD CAUSE OUR SALES TO DECLINE.

If we are unable to address difficulties associated with selling our products outside the United States, such as unexpected changes in regulatory requirements,
longer payment cycles and problems in collecting accounts receivable and reduced protection for intellectual property rights in foreign jurisdictions, our sales would decline and our business would be
harmed. Many of these difficulties are outside of our control. A substantial portion of our revenue is derived from customers located outside the United States. For the six months ended
June 30, 2000, sales to customers in Asia accounted for 55.5% of our revenue and our sales to customers in South Korea constituted 30.0% of our revenue. For the six months ended June 30,
2001, sales to customers in Asia accounted for 66.6% of our

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revenue and our sales to customers in South Korea constituted 60.8% of our revenue. We estimate that of our sales to U.S. communications equipment manufacturers in the six months ended June 30,
2000 and 2001, approximately 29.0% and 0% were ultimately intended for equipment for service providers in the South Korean market. Combined with direct sales to South Korea during the same periods,
our estimated revenue exposure to the South Korean market during these periods was 59.1% and 66.6%. We anticipate that a substantial portion of our revenue will continue to be derived from Asia for
the foreseeable future. We do not have any long-term commitments from our Asian customers and demand for our products in Asia may not continue at current levels. In addition, use of ADSL
technology in South Korea, and thus the demand for our products in South Korea, is related in part to a government-sponsored initiative encouraging deployment of ADSL. If alternative superior
technologies are developed, support for the initiative may be withdrawn, or demand from our customers in South Korea may decrease, and our business would be harmed.

BECAUSE DEVELOPMENT OF NEW PRODUCTS REQUIRES SUBSTANTIAL TIME AND EXPENSE, WE MAY NOT BE ABLE TO RECOVER OUR DEVELOPMENT COSTS AND ACHIEVE AN ADEQUATE RETURN ON INVESTMENT.

The development of new products requires substantial time and expense. Improvements to existing products or the introduction of new products by our competitors
or us may replace or provide lower cost alternatives to our existing products or render these products obsolete, unmarketable or inoperable. Therefore, we may not be able to recover the costs of the
development of our products or achieve an adequate return on investment.

For
example, the Company recently wrote-off $1.8 million in licensed technology originally purchased for the ADSL Netchip project that was terminated.

We
believe that our next-generation scalable ADSL modem, or SAM Two, products will form the basis of a future family of ADSL integrated circuit and software solutions.
However, we have not yet completed development of these products.

Even
if we complete development of our new products on a timely basis, these products may not achieve market acceptance or generate significant revenue. If our future products do not
achieve broad market acceptance, revenue from our existing products could be inadequate to cover our expenses and our operating results and reputation could be damaged.

BECAUSE THE LENGTHY SALES CYCLE OF OUR PRODUCTS MAKES IT DIFFICULT TO ACCURATELY PREDICT ACTUAL PRODUCT DEMAND, THE VOLUME OF PRODUCT SHIPPED MAY NOT CORRESPOND WITH OUR
PRODUCT FORECASTS. THEREFORE, WE MAY NOT BE ABLE TO RECOUP EXPENSES INCURRED IN ANTICIPATION OF SALES OF OUR PRODUCTS.

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, manufacturing, testing and qualification of prototypes incorporating our products. This process generally takes from three to six months, and may last longer. Our customer
purchase agreements generally contain no minimum purchase requirements and customers typically purchase our products pursuant to short-term purchase orders that may be canceled without
charge. Given this lengthy sales cycle, it is difficult to accurately predict when and in what volume sales to a particular customer will occur, if at all.

Therefore,
product revenue may not be commensurate with the level of expenses that we incur preparing for anticipated sales. If our forecasts prove to be inaccurate, our operating
results could be harmed. For example, if we purchase excess inventory, write-downs or write-offs could result. Conversely, if we fail to purchase a sufficient supply of some products,
revenue opportunities could be lost and our customer relationships could be harmed.

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BECAUSE PRICE COMPETITION, MATURING TECHNOLOGIES AND VOLUME PURCHASES BY LARGE CUSTOMERS MAY RESULT IN A DECREASE IN THE AVERAGE SELLING PRICE OF OUR PRODUCTS, THE GROSS
MARGINS FOR OUR PRODUCTS MAY DECLINE.

Price competition may harm the gross margins of our products. Furthermore, we anticipate that average selling prices of ADSL integrated circuits will continue
to decline as product technologies mature. Many of our competitors are larger institutions with greater resources. Therefore these competitors may be able to achieve greater economies of scale and may
be less vulnerable to price competition. In addition, we expect that the average selling prices of our products will decrease in the future due to the volume discounts that are provided to our large
customers. The decline in average selling prices will generally lead to a commensurate decline in our gross margins for these products unless manufacturing costs can be reduced at the same or greater
rates.

DELAY IN THE DEVELOPMENT OF RETAIL AND PERSONAL COMPUTER ORIGINAL EQUIPMENT MANUFACTURER SALES CHANNELS FOR ADSL MODEM DISTRIBUTION COULD LIMIT OUR SALES.

Our sales growth will depend in part on the development of retail and personal computer Original Equipment Manufacturer sales channels. Today, most
telecommunication service providers primarily support ADSL modems that they provide directly to their subscribers. We believe that telecommunication service providers will eventually support a more
significant number of ADSL modems purchased as a part of a personal computer, an integrated access device, a router or gateway product, or separately by subscribers. Any significant delay in
development of these new channels could limit sales of our products.

IF WE LOSE RIGHTS UNDER OUR AGREEMENT WITH UNITED MICROELECTRONICS CORPORATION, UNDER WHICH WE WERE EXTENDED CERTAIN LICENSES GRANTED BY THIRD PARTIES TO UNITED
MICROELECTRONICS CORPORATION, WE WOULD LOSE A COMPETITIVE ADVANTAGE AND OUR BUSINESS WOULD BE HARMED.

In August 1999, we entered into an agreement with United Microelectronics Corporation under which we were extended certain licenses granted by Texas
Instruments Incorporated to United Microelectronics Corporation in exchange for royalties, patent cross licenses and other obligations. This agreement grants us access to certain technology on
favorable terms. If United Microelectronics Corporation ceases to be our largest stockholder, we would lose rights under this agreement and consequently we would lose a competitive advantage in the
manufacture of our products. If we lose these rights, we may not be able to secure such licenses on reasonable terms, if at all.

THE MEASURES ON WHICH WE RELY TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS AFFORD ONLY LIMITED PROTECTIONS.

We rely on a combination of copyright, patent, trademark, trade secret and other intellectual property laws, non-disclosure agreements and other
measures to protect our intellectual property. These measures afford only limited protection, and we cannot be certain that these measures will adequately protect our intellectual property. Despite
our efforts to protect our intellectual property both under the laws of the United States and under the laws of foreign countries, unauthorized parties may copy aspects of our products or obtain and
use trade secrets or other information that we regard as proprietary. Our competitors may also independently develop the same or similar technologies without violating our intellectual property
rights.

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BECAUSE OUR INDUSTRY IS CHARACTERIZED BY FREQUENT LITIGATION OVER INTELLECTUAL PROPERTY RIGHTS, WE MAY BE REQUIRED TO INCUR SUBSTANTIAL EXPENSES AND DIVERT MANAGEMENT ATTENTION
AND RESOURCES IN DEFENDING INTELLECTUAL PROPERTY LITIGATION AGAINST US.

The industry in which we compete is characterized by numerous allegations of and lawsuits involving infringement of intellectual property rights. An
infringement claim could be asserted against us in the future. The defense of any such claim, regardless of its merit, could result in our incurring substantial expenses and diverting significant
management attention and other resources away from our operations. In the event of an adverse result in any future litigation or claim, we may be required to:



WE MAY INCUR SUBSTANTIAL EXPENSES AND DIVERT MANAGEMENT RESOURCES IN PROSECUTING OTHERS FOR THEIR UNAUTHORIZED USE OF OUR INTELLECTUAL PROPERTY RIGHTS.

The markets in which we compete are characterized by frequent litigation regarding patents and other intellectual property rights. We are aware of a
significant number of patents and patent applications relating to aspects of our technologies filed by, and issued to, third parties. Should any of our competitors file patent applications or obtain
patents that claim inventions also claimed by us, we may choose to participate in an interference proceeding to determine the right to a patent for these inventions because if we fail to enforce and
protect our intellectual property rights, our business would be harmed. Even if the outcome is favorable this proceeding could result in substantial cost to us and disrupt our business.

WE DEPEND ON A LIMITED NUMBER OF CUSTOMERS, AND THE LOSS OF, OR A SIGNIFICANT REDUCTION IN ORDERS FROM, ANY OF THEM COULD HARM OUR OPERATING RESULTS.

If we are not successful in maintaining relationships with our customers and obtaining new customers, our business and results of operations will suffer. We
sell our products primarily to communications equipment manufacturers. For the six months ended June 30, 2000, sales to two customers accounted for 29.0% and 10.1% of our revenue. For the six
months ended June 30, 2001, sales to two customers accounted for 32.2% and 10.1% of our revenue.

Other
than with Alcatel Bell N.V., we do not have long-term agreements with these customers relating to the sale of our products, 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 customers for a substantial portion of our revenue.

IF WE BECOME SUBJECT TO PRODUCT RETURNS AND PRODUCT LIABILITY CLAIMS RESULTING FROM DEFECTS IN OUR PRODUCTS, WE MAY FAIL TO ACHIEVE MARKET ACCEPTANCE OF OUR PRODUCTS AND OUR
BUSINESS COULD BE HARMED.

We develop complex products in an evolving marketplace. Despite testing by our customers and us, software or hardware defects may be found in existing or new
products. These defects could result in a

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delay in recognition or loss of revenue, loss of market share or failure to achieve market acceptance. Additionally, these defects could result in financial or other damages to our customers, cause us
to
incur significant warranty, support and repair costs and divert the attention of our engineering personnel from our product development efforts. In such circumstances, our customers could also seek
and obtain damages from us for their losses. A product liability claim brought against us, even if unsuccessful, would likely be time consuming and costly to defend.

WE MAY FAIL TO ATTRACT OR RETAIN KEY PERSONNEL.

Our success depends to a significant degree upon the continued contributions of our executive management team and our technical, product development,
marketing, sales and customer support personnel. The loss of key persons in those areas could harm our business. Competition for these people is particularly intense in Northern California and Taiwan
where we primarily operate. We do not have any life insurance or other insurance covering the loss of any of our key employees.

We
are currently searching for a new President and Chief Executive Officer and our Chairman of the Board of Directors is serving as our Interim Chief Executive Officer. If we are
unable to attract and retain a highly skilled executive to serve as our President and Chief Executive Officer, we may not be able to continue to execute our strategy or manage our growth, either of
which could harm our business and results of operations. In addition, we have recently assigned new or expanded roles to many of our current executive officers. If our management team fails to adapt
to these new roles, our business and results of operations could suffer.

Risks Relating To Our Industry

THE AVERAGE SELLING PRICES FOR OUR PRODUCTS ARE VOLATILE AND MAY DECLINE DURING INDUSTRY DOWNTURNS. THE CYCLICAL NATURE OF THE SEMICONDUCTOR INDUSTRY COULD CREATE FLUCTUATIONS
IN OUR OPERATING RESULTS, AS IT HAS FOR OTHER COMPANIES OPERATING IN THIS INDUSTRY.

The semiconductor industry has historically been cyclical, characterized by wide fluctuations in product supply and demand. From time to time, the industry has
also experienced significant downturns, often in connection with, or in anticipation of, maturing product cycles and declines in general economic conditions. For example, downturns of this type
occurred in 1997 and 1998, and a downturn is currently occurring in 2001. These downturns have been characterized by diminished product demand, production over-capacity and accelerated
decline of average selling prices, and in some cases have lasted for more than a year. When the semiconductor industry suffers a significant downturn, our results of operations will be adversely
affected.

IF THE ADSL TECHNOLOGY UPON WHICH OUR PRODUCTS ARE BASED DOES NOT ACHIEVE BROAD MARKET ACCEPTANCE, WE WOULD NOT BE ABLE TO SUSTAIN OR GROW OUR BUSINESS.

ADSL services compete with many different broadband access technologies including variants of digital subscriber line, or DSL, and other alternatives. The
introduction of new products or technologies by competitors or market acceptance of products based on alternative technologies could render our products less competitive or obsolete. If either of
these events occurs, we would be unable to sustain or grow our business. Examples of competing technologies include:



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If
these alternative technologies gain market share at the expense of ADSL, demand for our products would decrease, and we would be unable to sustain or grow our business.

CHANGES IN CURRENT OR FUTURE LAWS OR REGULATIONS, BOTH IN THE U.S. AND INTERNATIONALLY, COULD CAUSE SALES OF DIGITAL SUBSCRIBER LINE, AND SPECIFICALLY ADSL, PRODUCTS TO DECLINE
OR FAIL TO GROW AS ANTICIPATED.

The jurisdiction of the Federal Communications Commission extends to the entire U.S. communications industry, including our customers and their products and
services that incorporate our products. Future Federal Communications Commission regulations affecting the U.S. communications services industry, our customers or our products may harm our business.
For example, Federal Communications Commission regulatory policies that affect the availability of data and Internet services may impede our customers' penetration into some markets or affect the
prices that they can charge. The Federal Communications Commission has, from time to time, considered new policies affecting Internet services. This may cause sales of our products to decline. We face
similar risks from foreign regulatory agencies. Any delays in our ability to comply with domestic and foreign regulatory requirements may result in order cancellations or postponements of product
purchases by our customers, which would harm our business.

OUR STOCK MAY BE THINLY TRADED AND ITS PRICE MAY BE VOLATILE, WHICH COULD MAKE IT DIFFICULT FOR INVESTORS TO SELL THEIR SHARES.

The stock markets, and in particular the NASDAQ National Market, experience extreme price and volume fluctuations affecting the market prices of equity
securities of many technology companies. These fluctuations are often unrelated to the operating performance of the respective companies. We expect that the market price of our common stock will
fluctuate due to the factors described throughout this "Risk Factor" section as well as factors such as:



BECAUSE OF LIKELY FLUCTUATIONS IN THE PRICE OF OUR STOCK, WE MAY BE SUBJECT TO CLASS ACTION LITIGATION, WHICH COULD DISTRACT MANAGEMENT AND RESULT IN SUBSTANTIAL COSTS.

In the past, securities class action litigation has often been brought against companies following periods of volatility in the market price of their
securities. We may be the target of similar litigation in the future. Securities litigation could result in substantial costs and divert management's attention and resources from our operations and
sales of our products, which would have a negative impact on our business.

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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, in the public market, the
market price of our common stock could decline. These sales may make it more difficult for us to sell equity or equity securities in the future at a time and price that we deem appropriate.

PROVISIONS IN OUR CHARTER DOCUMENTS AND OUR ADOPTION OF A STOCKHOLDER RIGHTS PLAN MAY MAKE ACQUIRING CONTROL OF OUR COMPANY MORE DIFFICULT FOR A THIRD PARTY, WHICH COULD HARM
OUR STOCK'S MARKET PRICE OR REDUCE ANY PREMIUM OVER MARKET PRICE THAT AN ACQUIROR MIGHT OTHERWISE PAY.

Our certificate of incorporation and bylaws contain provisions that could make it harder for a third party to acquire us. These provisions include a classified
board of directors, limitations on actions by our stockholders by written consent, and eliminating cumulative voting in the election of our directors. Our board of directors has the right to issue
preferred stock without stockholder approval, which could be used to dilute the stock ownership of a potential hostile acquirer. In addition, our board of directors adopted a stockholder rights plan
on March 28, 2001, pursuant to which we declared a dividend of one right for each share of common stock held by stockholders of record as of May 11, 2001. Unless redeemed by us prior to
the time the rights are exercised, upon the occurrence of certain events, the rights will entitle the holders to receive upon exercise thereof, shares of our preferred stock, or shares of an acquiring
entity, having a value equal to twice the then-current exercise price of the right. The issuance of the rights could have the effect of delaying or preventing a change in control of us.
Although we believe these provisions and the stockholders rights plan provide for an opportunity to receive a higher bid by requiring potential acquirers to negotiate with our board of directors,
these provisions apply even if the offer may be considered beneficial by some stockholders.

BECAUSE OUR PRINCIPAL STOCKHOLDERS AND MANAGEMENT MAY BE ABLE 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.

As of August 10, 2001, our principal stockholders, executive officers, directors and their affiliates own or control approximately 44.0% of our common
stock. Accordingly, our principal stockholders, executive officers, 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 acquiror might otherwise pay.

WE MAY NEED TO RAISE ADDITIONAL CAPITAL IN THE FUTURE, AND IF WE ARE UNABLE TO SECURE ADEQUATE FUNDS ON TERMS ACCEPTABLE TO US, WE MAY BE UNABLE TO EXECUTE OUR BUSINESS PLAN.

If our existing cash balances and cash flows expected from future operations are not sufficient to meet our liquidity needs, we will need to raise additional
funds. If adequate funds are not available on acceptable terms or at all, we may not be able to take advantage of market opportunities, develop or enhance new products, pursue acquisitions that would
complement our existing product offerings or enhance our technical capabilities, execute our business plan or otherwise respond to competitive pressures or unanticipated requirements.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

The primary objective of our investment activities is to preserve principal while concurrently maximizing the income we receive from our investments without
significantly increasing risk. Some of the securities that we may invest in may be subject to market risk. This means that a change in prevailing interest rates may cause the principal amount of the
investment to fluctuate. For example, if we hold a security that was issued with a fixed interest rate at the then-prevailing rate and the prevailing interest rate later rises, the current
value of the principal amount of our investment will decline. To minimize this risk in the future, we intend to maintain our portfolio of cash equivalents and short-term investments in a
variety of securities, including commercial paper, money market funds, government and non-government debt securities and certificates of deposit, with book value approximating fair value
due to short maturity. In general, money market funds are not subject to market risk because the interest paid on such funds fluctuates with the prevailing interest rate. As of June 30, 2001,
all of our investments were in money market funds, bank checking or savings accounts, or bank certificates of deposit. A hypothetical 100 basis point increase in interest rates would result in no
decrease in the fair value of our available-for-sale securities as of June 30, 2001.

Foreign Currency Risk

We do not use foreign currency forward exchange contracts or purchased currency options to hedge local currency cash flows or for trading purposes. All sales
arrangements with international customers are currently denominated in U.S. dollars. We have branch operations in Taiwan and a sales office in Beijing, China, which are subject to currency
fluctuations. If the value of the New Taiwan dollar was to fluctuate significantly against the U.S. dollar, the impact on our financial results may be material.

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PART II. OTHER INFORMATION

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



John Cioffi

VOTED FOR: 25,400,457

VOTES WITHHELD: 135,971David Lam

VOTED FOR: 25,398,207

VOTES WITHHELD: 138,221Sena Reddy

VOTED FOR: 25,091,992

VOTES WITHHELD: 444,436


Immediately
following the above re-election of the three Class I directors, the Board of Directors consisted of the following individuals:

Class I Directors

Class II Directors

Class III DirectorsJohn Cioffi

Young Way Liu

Daniel (Wen Chi) ChenDavid Lam

Michael Callahan

Peter J. CourtureSena Reddy



Terry Guo




To
approve the Company's 2001 Director Option Plan, under which 500,000 shares will be reserved for issuance.

FOR: 25,039,272

AGAINST: 475,491

ABSTAIN: 21,665


To
approve an amendment to the Company's 2000 Stock Plan, which increases the shares reserved for the issuance thereunder by 1,600,000.

FOR: 24,810,945

AGAINST: 721,583

ABSTAIN: 3,900


To
ratify the appointment of PricewaterhouseCoopers LLP as independent accountants of the Company for the fiscal year ending December 31, 2001.

FOR: 25,450,008

AGAINST: 84,001

WITHHELD: 2,419


ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K



| |  | 10.1 |  | Commencement Date Memorandum, dated February 23, 2001, to that certain Lease Agreement between the Registrant and Granum Holdings, a California Limited Partnership.
| |  | ---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 10.2 |  | Settlement Agreement and Release, dated April 27, 2001, between the Registrant and Richard H. Forte.                                                                





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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.

|                      |  | INTEGRATED TELECOM EXPRESS, INC.
|--------------------- |  | --------------------------------
|Date: August 14, 2001 |  | By:                             

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INTEGRATED TELECOM EXPRESS, INC.        EXHIBIT INDEX

|EXHIBIT
NUMBER |  | EXHIBIT TITLE                                                                                                                                                        |  | 
|-------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | 
|10.1           |  | Commencement Date Memorandum, dated February 23, 2001, to that certain Lease Agreement between the Registrant and Granum Holdings, a California Limited Partnership. |  | 
|10.2           |  | Settlement Agreement and Release, dated April 27, 2001, between the Registrant and Richard H. Forte.                                                                 |  | 

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