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UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C. 20549





---




FORM 10-Q





(Mark One)


x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended March 31, 2002OR ̈

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from
 to





Commission File No. 000-31259





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INTEGRATED TELECOM EXPRESS, INC.


(Exact name of registrant as specified in its charter)





Delaware

77-0403748(State or other jurisdiction of incorporation or
organization)

(I.R.S. Employer Identification Number)400 Race Street, San Jose, California

95126(Address of principal executive offices)

(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)





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 registrant had 42,777,112 shares of common stock
outstanding as of May 9, 2002.





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INTEGRATED TELECOM EXPRESS, INC.





INDEX





Page No.PART I

FINANCIAL INFORMATIONItem 1.

Financial Statements (Unaudited):Balance Sheets as of March 31, 2002 and December 31, 2001

3Statements of Operations for the Three Months Ended March 31, 2002 and 2001

4Statements of Cash Flows for the Three Months Ended March 31, 2002 and 2001

5Notes to Financial Statements

6Item 2.

Managements Discussion and Analysis of Financial Condition and Results of Operations

11Item 3.

Quantitative and Qualitative Disclosures about Market Risk

16PART II

OTHER INFORMATIONItem 1.

Legal Proceedings

17Item 6.

Exhibits and Reports on Form 8-K

17Signatures

18




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PART IFINANCIAL INFORMATION





Item 1.    Financial Statements (Unaudited)





INTEGRATED TELECOM EXPRESS, INC.





BALANCE SHEETS


(In Thousands, Except Par Value)


(Unaudited)





March 31,    2002


December 31, 2001ASSETSCurrent assets:Cash and cash equivalents

$
117,648


$
119,278Accounts receivable, net of allowance for doubtful accounts of $135 and $141


224



1,515Inventories, net


620



1,819Prepaid expenses and other current assets


738



1,084Total current assets


119,230



123,696Property and equipment, net


8,088



8,877Licenses, net


2,692



2,903Other assets


2,660



2,660Total assets

$
132,670


$
138,136LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable

$
2,543


$
2,348Accrued expenses and other liabilities


1,206



3,281Payable for licenses


750



1,250Current portion of obligations under capital leases


1,014



1,437Total current liabilities


5,513



8,316Long-term liabilities


624



482Total liabilities


6,137



8,798Stockholders equity:Preferred stock, $0.001 par value; 5,000 shares authorized; no shares issued and outstanding






Common stock, $0.001 par value; 200,000 shares authorized; 42,777 and 42,744 shares issued and outstanding


43



42Additional paid-in capital


218,191



223,726Deferred stock-based compensation


(5,751
)


(9,273
)Notes receivable from stockholders


(365
)


(361
)Accumulated deficit


(85,585
)


(84,796
)Total stockholders equity


126,533



129,338Total liabilities and stockholders equity

$
132,670


$
138,136





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




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INTEGRATED TELECOM EXPRESS, INC.





STATEMENTS OF OPERATIONS


(In Thousands, Except Per Share Amounts)


(Unaudited)





For the Three Months Ended March 31,2002


2001Net revenue

$
4,023


$
6,925Cost of revenue


2,040



5,591Gross profit


1,983



1,334Operating expenses:Research and development


3,170



5,544Sales and marketing


540



1,559General and administrative


1,656



2,026Deferred stock-based compensation


(2,067
)


3,149Total operating expenses


3,299



12,278Loss from operations


(1,316
)


(10,944
)Interest and other income, net


527



2,056Net loss

$
(789
)

$
(8,888
)Basic and diluted net loss per share

$
(0.02
)

$
(0.21
)Shares used in computing basic and diluted net loss per share


42,688



42,469








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




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INTEGRATED TELECOM EXPRESS, INC.





STATEMENTS OF CASH FLOWS


(In Thousands)


(Unaudited)





For the Three Months Ended March 31,2002


2001Cash flows from operating activities:Net loss

$
(789
)

$
(8,888
)Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization


1,121



596Deferred stock-based compensation


(2,067
)


3,173Reserve for adverse purchase commitments






759Changes in operating assets and liabilities:Accounts receivable


1,291



4,728Inventories


1,199



1,778Prepaid expenses and other current assets


342



(78
)Other assets






(1,246
)Accounts payable


195



(5,559
)Accrued expenses and other liabilities


(2,433
)


(5,409
)Net cash used in operating activities


(1,141
)


(10,146
)Cash flow from investing activities:Purchases of property, equipment and licenses


(121
)


(1,848
)Net cash used in investing activities


(121
)


(1,848
)Cash flows from financing activities:Principal payments on capital lease obligations


(423
)


(385
)Proceeds from issuance of common stock, net


55



247Net cash used in financing activities


(368
)


(138
)Net decrease in cash and cash equivalents


(1,630
)


(12,132
)Cash and cash equivalents at beginning of period


119,278



149,073Cash and cash equivalents at end of period

$
117,648


$
136,941





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




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INTEGRATED TELECOM EXPRESS, INC.





NOTES TO FINANCIAL STATEMENTS





1.    THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





The Company





Integrated Telecom Express, Inc. (the Company, formerly
Integrated Technology Express, Inc.) was incorporated in California in May 1995 and reincorporated in Delaware in September 1999. The Company provides integrated circuit and software products to the broadband access communications equipment
industry. The Companys products include integrated circuits, software, production designs, network interface cards 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 28.3% of the Companys
outstanding common stock at March 31, 2002.





Recent Developments





On April 19, 2002, the Company announced that its Board of Directors deemed advisable the dissolution of the Company and approved a Plan of Complete Liquidation and Dissolution. The
Company expects to submit the Plan of Complete Liquidation and Dissolution to stockholders for approval at a special meeting of stockholders to be held on a future date set by the Board. In connection with the proposed liquidation, the Company
expects to liquidate all assets, including its inventories, property and equipment and intellectual property.





The accompanying
unaudited financial statements are presented on a going concern basis and do not reflect the potential impact of the proposed liquidation on the carrying values of the Companys assets and liabilities. Upon the approval of the proposed
liquidation by stockholders, the Company will adopt liquidation accounting in preparation of its financial statements, which will reflect the estimated net realizable value of its net assets and account for expenses necessary to complete the
proposed liquidation. Liquidation expenses may include, among others, employee severance and related costs, penalties for terminating the facility lease, customer service obligations and legal and accounting fees.





Unaudited Interim Financial Statements





The
accompanying unaudited financial statements as of March 31, 2002 and for the three months ended March 31, 2002 and 2001 have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission for interim financial
reporting. The unaudited 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 ended March 31, 2002 and 2001. These financial statements and notes thereto are unaudited and should be read in conjunction
with the audited financial statements for the year ended December 31, 2001 included in the Companys Annual Report on Form 10-K. The balance sheet as of December 31, 2001 was derived from the audited financial statements, but does not include
all disclosures required by generally accepted accounting principles. The results for the three months ended March 31, 2002 are not necessarily indicative of the expected results for any other interim period or the year ending December 31, 2002.
Certain prior period balances have been reclassified to conform to the current period presentation.




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INTEGRATED TELECOM EXPRESS, INC.





NOTES TO FINANCIAL STATEMENTS(Continued)





Management Estimates





The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.





Recent Accounting Pronouncements





In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 141, Business Combinations (SFAS
141) and Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS 142). SFAS 141 requires all business combinations to be accounted for using the purchase method of accounting and
is effective for all business combinations initiated after June 30, 2001. SFAS 142 requires goodwill intangible assets having indefinite lives to be reviewed annually for impairment under certain circumstances and written down when impaired, rather
than being amortized as previous standards required. SFAS 142 is effective for fiscal years beginning after December 15, 2001. The implementation of SFAS 141 and SFAS 142 did not have a significant impact on the Companys financial condition or
results of operations.





In October 2001, the FASB issued Statement of Accounting Standards No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets (SFAS 144). SFAS 144 supercedes Statement of Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of
(SFAS 121). However, it retains the fundamental provisions of SFAS 121 for (1) the recognition and measurement of the impairment of long-lived assets to be held and used and (2) the measurement of long-lived assets to be disposed of by
sale. SFAS 144 develops a single accounting model for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired assets and consequently amends Accounting Principles Board Opinion No. 30, Reporting Results
of Operations-Reporting the Effects of Disposal of a Division of a Business. Additionally, SFAS 144 expands the scope of discontinued operations to include all components of an entity with operations that (1) can be distinguished from the rest
of the entity and (2) will be eliminated from the ongoing operations of the entity in a disposal transaction. SFAS 144 is effective for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years. The implementation
of SFAS 144 did not have a significant impact on the Companys financial condition or results of operations.





2.    BALANCE
SHEET DETAILS





The following tables provide details of selected balance sheet items (in thousands):





March 31, 2002

December 31, 2001(Unaudited)Inventories, net:Work in progress

$
280

$
16Finished goods


340


1,803$
620

$
1,819




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INTEGRATED TELECOM EXPRESS, INC.





NOTES TO FINANCIAL STATEMENTS(Continued)





March 31, 2002


December 31, 2001(Unaudited)Property and equipment, net:Machinery and computer equipment

$
4,189


$
4,172Software


6,598



6,584Furniture and fixtures


362



360Leasehold improvements


3,986



3,89815,135



15,014Accumulated depreciation and amortization


(7,047
)


(6,137
)$
8,088


$
8,877Other assets:Restricted cash

$
2,455


$
2,455Other


205



205$
2,660


$
2,660Accrued expenses and other liabilities:Compensation and benefits

$
913


$
925Deferred revenue


115



281Customer deposits






1,500Other


178



575$
1,206


$
3,281





Restricted cash represents a security deposit in the form of a letter of credit
as required under the lease agreement for the Companys corporate headquarters in San Jose, California. The letter of credit is to be maintained until such time the Company has achieved six consecutive quarters of operational profitability.





3.    RESTRUCTURING EXPENSES





In November 2001, the Company announced a restructuring program to streamline operations and reduce costs. The restructuring program included a worldwide workforce reduction, restructuring of certain business
functions and closure of the facility in Hsin Chu, Taiwan, which was one of the Companys two research and development facilities. As a result of the workforce reduction, the Company terminated approximately 50 employees worldwide and recorded
a charge of $842,000 for severance and fringe benefits in the fourth quarter of 2001, of which $803,000 was paid as of March 31, 2002 and the balance will be paid in full by June 30, 2002. In connection with the closure of the Hsin Chu facility, the
Company recorded a charge of $1,489,000, of which $175,000 was the cost of terminating the office lease and $1,314,000 was the write-off of the facilitys leasehold improvements and other fixed assets. The office lease for the Hsin Chu facility
was terminated on March 31, 2002.





The following table summarizes the activities related to accrued restructuring expenses in
the fourth quarter of 2001 and the first quarter of 2002 (in thousands):




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INTEGRATED TELECOM EXPRESS, INC.





NOTES TO FINANCIAL STATEMENTS(Continued)





Total Charges

Noncash Charges


Cash Payments in 2001


Balance at December 31, 2001

Cash Payments in 2002


Balance at March 31, 2002(Unaudited)


(Unaudited)Workforce reduction

$
842

$



$
(743
)

$
99

$
(60
)

$
39Closure of facility


1,489


(1,314
)


(175
)









$
2,331

$
(1,314
)

$
(918
)

$
99

$
(60
)

$
39





4.    NET LOSS PER SHARE





The following table sets forth the computation of basic and diluted net loss per share for the period indicated (in thousands, except per share amounts):





For the Three Months Ended March 31,2002


2001(Unaudited)


(Unaudited)Numerator:Net loss

$
(789
)

$
(8,888
)Denominator:Shares used in computing basic and diluted net loss per share


42,688



42,469Basic and diluted net loss per share attributable to common stockholders

$
(0.02
)

$
(0.21
)Antidilutive securities including options, warrants, convertible preferred stock and restricted stock rights not included in net
loss per share calculation


15,339



14,211





5.    CONCENTRATIONS





Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash, cash equivalents and accounts receivable. Substantially all of
the Companys cash and cash equivalents are maintained with three major financial institutions in the United States. The Company limits its cash investments to those that are short-term and low risk. At times, deposits held with banks may
exceed federally insured limits.





Concentration of credit risk with respect to accounts receivable is generally limited due to
the Companys on-going evaluation of its customers credit worthiness and the established long-term relationship with certain customers. In addition, the Company generally requires a letter of credit to be established by customers in
foreign countries before shipment of products is made to these customers. For the three months ended March 31, 2002, sales to two customers accounted for 65.9% and 12.3%, respectively, of net revenue. For the three months ended March 31, 2001, sales
to four customers accounted for 23.7%, 20.8%, 14.4% and 13.5%, respectively, of net revenue. As of March 31, 2002, receivables from four customers accounted for 41.8%, 27.8%, 14.3% and 10.1%, respectively, of the gross accounts receivable balance.
As of March 31, 2001, a receivable from one customer accounted for 55.8% of the gross accounts receivable balance.





UMC
fabricates all of the Companys integrated circuits in Taiwan. The Company has developed a contingency plan with UMC to provide for the manufacture of its products in the event of a disruption in the operations of one or more of UMCs
fabrication facilities. However, any disruption may cause delay in production of the Companys integrated circuits and could adversely impact the Companys operating results.




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INTEGRATED TELECOM EXPRESS, INC.





NOTES TO FINANCIAL STATEMENTS(Continued)





6.    GEOGRAPHIC
INFORMATION





The Company operates in one business segment, which is to design, develop and sell integrated circuits and
software solutions to the broadband access communications equipment industry. The Companys net revenue was attributable to the following countries or regions (in thousands):





For the Three Months Ended March
31,2002

2001(Unaudited)

(Unaudited)Asia:South Korea

$
984

$
5,245Taiwan


327


108Other Asian countries


48


911,359


5,444United States


2,664


44Europe





1,437$
4,023

$
6,925





Substantially all of the Companys assets as of March 31, 2002 and December
31, 2001 were located in the United States.





7.    LEGAL PROCEEDINGS





In November 2001, a complaint captioned Richmon v. Integrated Telecom Express, Inc., No. 01-CV-10108 was filed in federal district court for the Southern District of New
York, on behalf of a putative class of persons who purchased the Companys common stock between August 18, 2000 and December 6, 2000. An amended complaint was filed in April 2002. The amended complaint generally alleges that various investment
bank underwriters engaged in improper and undisclosed activities related to the allocation of shares in the Companys initial public offering of securities and subsequently issued false and misleading analyst reports. The complaint brings
claims for violation of several provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934 against those underwriters and also against the Company and various of the Companys present and former officers and directors.
Similar lawsuits concerning more than 300 other companies initial public offerings have been filed and coordinated as In re Initial Public Offering Securities Litigation, No. 21 MC 92. The Company believes that the claims against the
Company are without merit and intend to defend this lawsuit vigorously. While the outcome of these claims is currently not determinable, the Company does not expect that the ultimate costs to resolve these claims will have a material adverse effect
on the Companys financial position, results of operations or cash flows.





In addition to the lawsuit mentioned
above, from time to time, the Company may become involved in litigation relating to claims arising from its ordinary course of business. The Company is not currently a party to any material legal proceedings of this nature.




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





This report,including without limitation the following discussion, 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) and information relating to us 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 in this report 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 in this report. 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. Our stockholders should carefully review the cautionary statements contained in this report, including those set forth under the heading Risk Factors.





The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and related notes included
in Item 1 of this report and with the audited financial statements and related notes and managements discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the year ended
December 31, 2001.





Overview





We provide integrated circuit and software products to the broadband access communications equipment industry. Our products include integrated circuits, software, production designs, network interface cards, or NICs, 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 reference 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 and reincorporated in Delaware in September 1999.





During March and April 2002, our Board
of Directors held a total of seven meetings to explore and discuss strategic alternatives. On April 18, 2002, our Board of Directors deemed advisable the liquidation and dissolution of the Company and adopted a Plan of Complete Liquidation and
Dissolution. In reaching its decision, the Board considered a number of factors, including our recent financial performance, prevailing economic conditions and the unsuccessful efforts to sell or merge the Company. We expect to submit the Plan of
Complete Liquidation and Dissolution to our stockholders for approval at a special meeting of stockholders to be held on a future date set by the Board.* In connection with the proposed liquidation, we expect to liquidate all assets, including our
inventories, property and equipment and intellectual property.*





The accompanying unaudited financial statements are presented
on a going concern basis and do not reflect the potential impact of the proposed liquidation on the carrying values of our assets and liabilities. Upon the approval of the proposed liquidation by stockholders, we will adopt liquidation accounting in
preparation of our financial statements, which will reflect the estimated net realizable value of our net assets and account for expenses necessary to complete the proposed liquidation.* We are currently evaluating the net realizable value of our
long-lived assets and expect to record a significant write-down from the current carrying value of these assets in the second quarter of 2002.* Liquidation expenses may include, among others, employee severance and related costs, penalties for
terminating facility lease, customer service obligations and legal and accounting fees.*




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Results of Operations





Net Revenue.    Net revenue was $4.0 million for the three months ended March 31, 2002, or the current quarter, compared to $6.9 million for the three months ended March 31, 2001, or the
comparable quarter. The decrease in revenue for the current quarter was primarily due to continuing decrease in demand of our Apollo products, including Apollo chipsets and Apollo-based NICs, and severe pricing pressure in Asia. Net revenue from
Apollo products decreased to $1.4 million in the current quarter from $6.9 million in the comparable quarter. Such decrease was partially offset by $2.6 million of revenue from sales of ADSL line testers, which was first introduced in the fourth
quarter of 2001. In connection with the proposed liquidation announced on April 19, 2002, we intend to sell all remaining inventories to our existing customers, and we do not expect to replenish our inventories after the existing inventories are
sold.* Therefore, we expect that our quarterly revenue, if any, in the future will be significantly lower than that in the current quarter.*





Cost of Revenue and Gross Margin.    Gross margin was 49% in the current quarter, compared to 19% in the comparable quarter. Gross margin in the current quarter was higher than the
historical average primarily due to the introduction of the ADSL line testers, which have higher gross margin than Apollo products. In addition, starting January 2002, we are no longer subject to the payment of minimum royalties as required by the
licensing agreement with Alcatel, and royalties incurred for licensed technologies will be based on a percentage of our revenue in accordance with the respective royalty agreements. Minimum royalty under the licensing agreement with Alcatel was $1.5
million for the entire year of 2001, or $375,000 for each quarter in 2001. Furthermore, the gross margin in the comparable quarter was negatively impacted by a charge of $759,000, which was to provide reserve for adverse purchase commitments for our
Apollo chipset products at the time. We currently do not have any material non-cancelable purchase commitments for any of our products. As discussed above, we intend to sell all remaining inventories to our existing customers in connection with the
proposed liquidation, and we expect that gross margin on future revenue will be significantly lower than that in the current quarter.*





Research and Development.    Research and development expenses were $3.2 million in the current quarter, decreased from $5.5 million in the comparable quarter. The decrease was primarily related to a decrease of
$1.4 million in compensation expenses, as well as decreases in non-recurring engineering expenses and consulting fees totaling $660,000, all of which were attributed to the restructuring in the fourth quarter of 2001.





Sales and Marketing.    Sales and marketing expenses were $540,000 in the current quarter, decreased from $1.6 million in the
comparable quarter. The decrease was primarily related to a decrease in compensation expenses, including sales commissions, as a result of the decrease in sales volume in the current quarter, as compared to the comparable quarter, and reduction in
headcount in 2001.





General and Administrative.    General and administrative expenses were $1.7
million in the current quarter, decreased from $2.0 million in the comparable quarter. The decrease was primarily related to a decrease in compensation expenses, as general and administrative expenses in the comparable quarter included a severance
payment to one former executive officer. Additionally, there was a reduction in headcount due to the restructuring in the fourth quarter of 2001.





In connection with the proposed liquidation, we expect to terminate the employment of the majority of our employees by the end of June 2002.* We have not yet finalized the severance arrangements for all employees.
However, operating expenses, excluding deferred stock-based compensation, in the second quarter of 2002 are likely to be higher than that in the current quarter primarily due to severance payments.*





Deferred Stock-based Compensation.    We recorded a benefit of $2.1 million from reversals of deferred stock-based
compensation expense associated with unvested stock options canceled during the current quarter. In connection with the proposed liquidation and anticipated termination of employees, we expect to record a benefit in the second quarter of 2002 from
the reversal of deferred stock-based compensation expense due to cancellation of unvested stock options.*




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Interest and Other Income, Net.    Interest and other income, net
was $527,000 in the current quarter, decreased from $2.1 million in the comparable quarter. The decrease was primarily due to a significant decrease in interest income, as the aggregate balance of cash and cash equivalents decreased from $136.9
million at March 31, 2001 to $117.6 million at March 31, 2002 and interest rates declined steadily throughout 2001.





Liquidity and Capital Resources





Cash and cash equivalents were $117.6 million as of March 31, 2002, compared to $119.3 million as of December 31, 2001. The
net decrease of $1.6 million was primarily due to net cash used in operating activities and payments of capital lease obligations. Net cash used in operating activities in the current quarter was $1.2 million, which was primarily attributable to net
loss before non-cash items of $1.8 million and a decrease in accrued liabilities of $2.4 million, partially offset by decreases in accounts receivable of $1.3 million, inventories of $1.2 million and prepaid and other current assets of $342,000.





In connection with the proposed liquidation, we expect to liquidate all assets, including our inventories, property and
equipment and intellectual property.* However, we expect that proceeds from sales of property and equipment and intellectual property are likely to be lower than the carrying values of these assets on the balance sheet as of March 31, 2002.* We also
expect to incur and pay liquidation expenses, in addition to payments of ongoing operating expenses and settlement of existing and potential obligations.* Liquidation expenses may include, among others, employee severance and related costs,
penalties for terminating facility lease, customer service obligations and legal and accounting fees.* As of December 31, 2001, future minimum lease payments for the remaining term of the facility lease of our corporate headquarters totaled
approximately $29.8 million. While we cannot currently make a precise estimate of these expenses, we believe that our current cash and cash equivalents will be sufficient to pay for the above expenditures.*





Impact of Recent Accounting Pronouncements





In
July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 141, Business Combinations (SFAS 141) and Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets (SFAS 142). SFAS 141 requires all business combinations to be accounted for using the purchase method of accounting and is effective for all business combinations initiated after June 30,
2001. SFAS 142 requires goodwill and other intangible assets having indefinite lives to be reviewed annually for impairment under certain circumstances and written down when impaired, rather than being amortized as previous standards required. SFAS
142 is effective for fiscal years beginning after December 15, 2001. The implementation of SFAS 141 and SFAS 142 did not have a significant impact on our financial condition or results of operations.





In October 2001, the FASB issued Statement of Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets
(SFAS 144). SFAS 144 supercedes Statement of Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of (SFAS 121). However, it retains the
fundamental provisions of SFAS 121 for (1) the recognition and measurement of the impairment of long-lived assets to be held and used and (2) the measurement of long-lived assets to be disposed of by sale. SFAS 144 develops a single accounting model
for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired assets and consequently amends Accounting Principles Board Opinion No. 30, Reporting Results of Operations-Reporting the Effects of Disposal of
a Division of a Business. Additionally, SFAS 144 expands the scope of discontinued operations to include all components of an entity with operations that (1) can be distinguished from the rest of the entity and (2) will be eliminated from the
ongoing operations of the entity in a disposal transaction. SFAS 144 is effective for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years. The implementation of SFAS 144 did not have a significant impact on
our financial condition or results of operations.




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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 plan to liquidate and
dissolve could be harmed, and you may lose all or part of your investment in our common stock. In addition, to the extent we continue our operations pending our liquidation and dissolution, we will continue to face the risks described under the
heading Risk Factors in our annual report on Form 10-K for the year ended December 31, 2001. If any of those risks actually occur, our business, financial condition and results of operation could be harmed. You should also carefully
consider those risks.





We Cannot Assure You of the Amount, If Any, of Any Distribution to Our Stockholders Under the Plan of
Complete Liquidation and Dissolution.





Liquidation and dissolution may not create value to our stockholders or result in any
remaining capital for distribution to our stockholders. We cannot assure you of the precise nature and amount of any distribution to our stockholders pursuant to our Plan of Complete Liquidation and Dissolution, or the Plan. Uncertainties as to the
precise net value of our non-cash assets and the ultimate amount of our liabilities make it impracticable to predict the aggregate net value, if any, ultimately distributable to our stockholders. The actual nature and amount of all distributions
will depend in part upon our ability to convert our remaining non-cash assets into cash. We may not be successful in selling our non-cash assets, in which case we may not generate meaningful cash, if any, to return to our stockholders.





The Proceeds from Any Sales of Our Non-cash Assets May Be Less Than Anticipated.





Sales of our non-cash assets will be made on terms approved by our Board of Directors and may be conducted by competitive bidding, public sales or privately negotiated sales. The prices
at which we will be able to sell our various non-cash assets will depend largely on factors beyond our control, including, without limitation, the condition of financial markets, the availability of financing to prospective purchasers of the assets,
regulatory approvals, public market perceptions, and limitations on transferability of certain non-cash assets. In addition, we may not obtain as high a price for a particular asset as we might secure if we were not in liquidation. Furthermore, many
of our non-cash assets, particularly our intellectual property, will decline in value over time, and we may not be able to consummate the sale of these assets in time to generate meaningful value which could be returned to our stockholders.





We May Not Be Able to Settle All of Our Obligations to Creditors.





We have certain current and future obligations to creditors. These include, without limitation, long-term contractual obligations associated with facilities leases and business
agreements with customers and other third parties. Among other things, the lease for our principal office has a term expiring in February 2011, and future minimum lease payments for the remaining term of this lease totaled approximately $29.8
million as of December 31, 2001. As part of the wind down process, we will attempt to settle our obligations with our creditors. We may not, however, succeed in doing so. If we cannot reach an agreement with a creditor concerning an obligation, that
creditor may choose to bring a lawsuit against us. Any litigation could delay or even prevent us from completing the Plan. Moreover, amounts required to settle our obligations will reduce the amount of remaining capital available for distribution to
stockholders.





We Will Continue to Incur Claims, Liabilities and Expenses Which Will Reduce the Amount Available for Distribution to Stockholders.





Claims, liabilities and expenses from operations (such as operating costs, salaries, income taxes, payroll and local taxes,
legal and accounting fees and miscellaneous office expenses) will continue to be incurred as we wind down. These expenses will reduce the amount of assets available for ultimate distribution to stockholders. If available cash and amounts received on
the sale of non-cash assets are not adequate to provide for our obligations, liabilities, expenses and claims, we may not be able to distribute meaningful cash, or any cash at all, to our stockholders.





In November 2001, a complaint captioned Richmon v. Integrated Telecom Express, Inc., No. 01-CV-10108 was filed in federal district court for the
Southern District of New York, on behalf of a putative class of persons who purchased our common stock between August 18, 2000 and December 6, 2000. An amended complaint was filed in April 2002. The amended complaint generally alleges that various
investment bank underwriters engaged in improper and undisclosed activities related to the allocation of shares in our initial public offering of securities and subsequently issued false and misleading analyst reports. The complaint brings claims
for violation of several provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934 against those underwriters and also against us and various of our present and former officers and directors. Similar lawsuits concerning more
than 300 other companies initial public offerings have been filed and coordinated as In re Initial Public Offering Securities Litigation, No. 21 MC 92. We believe that the claims against us are without merit and intend to defend this
lawsuit vigorously. Pendency of this litigation matter can be expected to result in expenses to us and the diversion of management time and other resources, the extent of which cannot be quantified with any reasonable accuracy given the stage of
this litigation matter. If these parties are successful in their claims against us, we may be liable for significant damages, which would substantially reduce, or eliminate, amounts available for distribution to our stockholders.




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Distribution of Assets, if Any, to Our Stockholders Could Be Delayed.





Although our Board of Directors has not established a firm timetable for distributions to our stockholders, the Board of Directors intends, subject to
contingencies inherent in winding down our business, to make such distributions as promptly as practicable. However, we are currently unable to predict the precise timing of any distribution pursuant to our wind down. The timing of distribution will
depend on and could be delayed by, among other things, the timing of sales of our non-cash assets, claim settlements with creditors and litigation matter described above. Additionally, a creditor could seek an injunction against the making of
distributions to our stockholders on the ground that the amounts to be distributed were needed to provide for the payment of our liabilities and expenses. Any action of this type could delay, substantially diminish, or eliminate the amount available
for distribution to our stockholders.





If We Fail to Create an Adequate Contingency Reserve for Payment of Our Expenses and Liabilities, Our
Stockholders could be Held Liable for Payment to Our Creditors of Each Such Stockholders Pro Rata Share of Amounts Owed to Creditors in Excess of the Contingency Reserve, up to the Amount Actually Distributed to Such Stockholder.





If the Plan is ratified and approved by the stockholders, we will file a Certificate of Dissolution with the State of
Delaware dissolving the Company. Pursuant to the Delaware General Corporation Law, we will continue to exist for three years after the dissolution becomes effective or for such longer period as the Delaware Court of Chancery shall direct, for
the purpose of prosecuting and defending suits against us and enabling us gradually to close our business, to dispose of our property, to discharge our liabilities and to distribute to our stockholders any remaining assets. Under the Delaware
General Corporation Law, in the event we fail to create an adequate contingency reserve for payment of our expenses and liabilities during this three-year period, each stockholder could be held liable for payment to our creditors of such
stockholders pro rata share of amounts owed to creditors in excess of the contingency reserve, up to the amount actually distributed to such stockholder.





However, the liability of any stockholder would be limited to the amounts previously received by such stockholder from us (and from any liquidating trust or trusts) in the dissolution. Accordingly, in such event a
stockholder could be required to return all distributions previously made to such stockholder. In such event, a stockholder could receive nothing from us under the Plan. Moreover, in the event a stockholder has paid taxes on amounts previously
received, a repayment of all or a portion of such amount could result in a stockholder incurring a net tax cost if the stockholders repayment of an amount previously distributed does not cause a commensurate reduction in taxes payable. There
can be no assurance that the contingency reserve established by us will be adequate to cover any expenses and liabilities.





Our Stock Transfer Books
Will Close on the Date We File the Certificate of Dissolution with the Delaware Secretary of State, After Which It Will Not Be Possible for Stockholders to Publicly Trade Our Stock.





We intend to close our stock transfer books and discontinue recording transfers of our common stock at the close of business on the date we file the Certificate of Dissolution with the
Delaware Secretary of State. Thereafter, certificates representing our common stock will not be assignable or transferable on our books except by will, intestate succession or operation of law. The proportionate interests of all of our stockholders
will be fixed on the basis of their respective stock holdings at the close of business on this date, and, afterwards, any distributions will be made solely to the stockholders of record at the close of business on this date, except as may be
necessary to reflect subsequent transfers recorded on our books as a result of any assignments by will, intestate succession or operation of law.





We
Do Not Expect to Recognize Material Revenue Following the Announcement of Our Intent to Wind Down.





Except for revenue
resulting from the sale of our remaining inventory, we do not expect to recognize much, if any, additional revenue. Furthermore, it may be difficult to collect receivables now that we have announced our intent to wind down.





We Will Continue to Incur the Expenses of Complying With Public Company Reporting Requirements.




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We have an obligation to continue to comply with the applicable reporting requirements of the
Securities Exchange Act of 1934, as amended, even though compliance with such reporting requirements is economically burdensome. In order to curtail expenses, we intend to, after filing our Certificate of Dissolution, seek relief from the Securities
and Exchange Commission from the reporting requirements under the Exchange Act. We anticipate that, if such relief were granted, we would continue to file current reports on Form 8-K to disclose material events relating to our liquidation and
dissolution along with any other reports that the Securities and Exchange Commission might require. However, the Securities and Exchange Commission may not grant any such relief.





If We Fail to Retain the Services of Certain Key Personnel, the Plan May Not Succeed.





The success of the Plan depends in large part upon our ability to retain the services of certain of our current officers. The retention of James Regel, our Chief Executive Officer, and James Williams, our Chief Financial Officer, and
certain other qualified personnel is particularly difficult under our current circumstances. Failure to retain these personnel could harm the implementation of the Plan. If we fail to retain these personnel, we will need to hire others to oversee
our liquidation and dissolution, which could involve substantial additional compensation expenses, if such other personnel are available at all.





Our
Stockholders Could Vote Against the Plan.





Our stockholders could vote against the Plan. If we do not obtain stockholder
approval of liquidation and dissolution, we would have to continue our business operations from a difficult position, in light of our announced intent to liquidate and dissolve. Among other things, a substantial majority of our employees will have
been terminated, and customer relationships will have been severely strained. Prospective employees, customers and other third parties may refuse to form relationships or conduct business with us if they have no confidence in our future.





Item3.    Quantitative and Qualitative Disclosures about Market Risk





There have
been no changes in financial market risk as discussed in our Annual Report on Form 10-K for the year ended December 31, 2001.




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PART IIOTHER INFORMATION





Item 1.    
Legal Proceedings





In November 2001, a complaint captioned Richmon v. Integrated Telecom Express,
Inc., No. 01-CV-10108 was filed in federal district court for the Southern District of New York, on behalf of a putative class of persons who purchased our common stock between August 18, 2000 and December 6, 2000. An amended complaint was filed
in April 2002. The amended complaint generally alleges that various investment bank underwriters engaged in improper and undisclosed activities related to the allocation of shares in our initial public offering of securities and subsequently issued
false and misleading analyst reports. The complaint brings claims for violation of several provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934 against those underwriters and also against us and various of our present and
former officers and directors. Similar lawsuits concerning more than 300 other companies initial public offerings have been filed and coordinated as In re Initial Public Offering Securities Litigation, No. 21 MC 92. We believe that the
claims against us are without merit and intend to defend this lawsuit vigorously.





In addition to the lawsuit mentioned
above, from time to time, we may become involved in litigation relating to claims arising from our ordinary course of business. We are not currently a party to any material legal proceedings of this nature.





Item 6.    
Exhibits and Reports on Form 8-K





(a) Reports on Form 8-K





We filed a report on Form 8-K on April 23, 2002, which stated that on April 18, 2002, our Board of Directors deemed advisable the dissolution of the
Company and approved a plan of complete liquidation and dissolution for which we will seek stockholder approval.




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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.By:

/s/    JAMES WILLIAMSJames Williams Senior Vice President of Finance and Chief
Financial Officer (Principal Financial and Accounting Officer)


Date: May15, 2002




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