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UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





---




FORM 10-Q





(Mark One)





xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE


SECURITIES EXCHANGE ACT OF 1934





For the quarterly period
ended June 30, 2002





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 No. 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)





---




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 42,627,112 shares of common stock outstanding as of August 9, 2002.





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##### Table of Contents

INTEGRATED TELECOM EXPRESS, INC.





INDEX





Page No.PART I    FINANCIAL INFORMATIONItem 1.

Financial Statements (Unaudited):Balance Sheets as of June 30, 2002 and December 31, 2001

3Statements of Operations for the Three Months and the Six Months Ended June 30, 2002 and 2001

4Statements of Cash Flows for the Six Months Ended June 30, 2002 and 2001

5Notes to Financial Statements

6Item 2.

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

13Item 3.

Quantitative and Qualitative Disclosures about Market Risk

20PART II    OTHER INFORMATIONItem 1.

Legal Proceedings

21Item 6.

Exhibits and Reports on Form 8-K

21Signatures

22




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##### Table of Contents

PART IFINANCIAL INFORMATION





Item 1.Financial Statements (Unaudited)





INTEGRATED TELECOM EXPRESS, INC.





BALANCE SHEETS


(In Thousands, Except Par Value)


(Unaudited)





June 30, 2002


December 31, 2001ASSETSCurrent assets:Cash and cash equivalents

$
112,532


$
119,278Accounts receivable, net of allowance for doubtful accounts of $90 and $141


25



1,515Inventories, net


52



1,819Prepaid expenses and other current assets


427



1,084Total current assets


113,036



123,696Property and equipment, net


273



8,877Licenses, net






2,903Other assets


2,660



2,660Total assets

$
115,969


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

$
1,463


$
2,348Accrued expenses and other liabilities


648



3,281Payable for licenses


750



1,250Current portion of obligations under capital leases


693



1,437Total current liabilities


3,554



8,316Long-term liabilities


767



482Total liabilities


4,321



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; 42,627 and 42,744 shares issued and outstanding


43



42Additional paid-in capital


216,880



223,726Deferred stock-based compensation


(5,506
)


(9,273
)Notes receivable from stockholders


(70
)


(361
)Accumulated deficit


(99,699
)


(84,796
)Total stockholders equity


111,648



129,338Total liabilities and stockholders equity

$
115,969


$
138,136





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




3




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##### Table of Contents

INTEGRATED TELECOM EXPRESS, INC.





STATEMENTS OF OPERATIONS


(In Thousands, Except Per Share Amounts)


(Unaudited)





For the Three Months Ended June 30,


For the Six Months Ended June 30,2002


2001


2002


2001Net revenue

$
1,233


$
4,303


$
5,256


$
11,228Cost of revenue


917



2,625



2,957



8,216Gross profit


316



1,678



2,299



3,012Operating expenses:Research and development


2,886



5,420



6,056



10,964Sales and marketing


668



1,062



1,208



2,621General and administrative


2,503



1,896



4,159



3,922Deferred stock-based compensation


(825
)


1,755



(2,892
)


4,904Impairment loss on assets


9,203



1,800



9,203



1,800Total operating expenses


14,435



11,933



17,734



24,211Loss from operations


(14,119
)


(10,255
)


(15,435
)


(21,199
)Other income (expenses), net:Interest income


533



1,537



1,097



3,581Other, net


(528
)


(120
)


(565
)


(108
)5



1,417



532



3,473Net loss

$
(14,114
)

$
(8,838
)

$
(14,903
)

$
(17,726
)Basic and diluted net loss per share

$
(0.33
)

$
(0.21
)

$
(0.35
)

$
(0.42
)Shares used in computing basic and diluted net loss per share


42,707



42,582



42,697



42,548








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




4




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##### Table of Contents

INTEGRATED TELECOM EXPRESS, INC.





STATEMENTS OF CASH FLOWS


(In Thousands)


(Unaudited)





For the Six Months Ended June 30,2002


2001Cash flows from operating activities:Net loss

$
(14,903
)

$
(17,726
)Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization


1,618



3,022Deferred stock-based compensation


(2,892
)


4,950Impairment loss on assets


9,203



1,800Loss on sales of assets


503



Changes in operating assets and liabilities:Accounts receivable


1,490



3,649Inventories


1,688



3,602Prepaid expenses and other current assets


648



200Other assets






(3,599
)Accounts payable


(885
)


(3,035
)Accrued expenses and other liabilities


(2,882
)


(6,755
)Net cash used in operating activities


(6,412
)


(13,892
)Cash flow from investing activities:Proceeds from sales of assets


418



Purchases of property, equipment and licenses


(121
)


(6,951
)Net cash provided by (used in) investing activities


297



(6,951
)Cash flows from financing activities:Principal payments on capital lease obligations


(744
)


(484
)Repayment of notes receivable from stockholders


58



Proceeds from issuance of common stock, net


55



247Net cash used in financing activities


(631
)


(237
)Net decrease in cash and cash equivalents


(6,746
)


(21,080
)Cash and cash equivalents at beginning of period


119,278



149,073Cash and cash equivalents at end of period

$
112,532


$
127,993Supplemental disclosure of non-cash financing activities:Repurchase of common stock for repayment of notes receivable from stockholders (see Note 3)

$
240


$









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




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##### Table of Contents

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 28.4% of the Companys outstanding common stock at June 30, 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, subject to approval and ratification by the Companys stockholders at a special meeting that would be held on a future date set by the Board of Directors. In connection with the proposed
liquidation, the Company expects to liquidate all assets, including its inventories, property and equipment and intellectual property. In addition, the Company may consider various legal alternatives to liquidating the Company, including bankruptcy
under Chapter 7 or Chapter 11 of the federal bankruptcy code.





On June 13, 2002, the Company and Real
Communications, Inc. entered into an Asset Purchase Agreement, pursuant to which Real Communications, Inc. agreed to purchase, subject to the terms and conditions of the Asset Purchase Agreement, some of the Companys assets for a cash purchase
price of $1.5 million (the Asset Sale). As certain of the Companys directors and officers may become stockholders of Real Communications, Inc., which may create potential conflicts of interest, the Asset Sale is subject to approval
and ratification by the Companys stockholders. The Asset Sale is also conditioned upon stockholder approval and ratification of the Plan of Complete Liquidation and Dissolution. The assets to be sold to Real Communications, Inc. consist of all
of the Companys intellectual property rights, as well as rights in the Companys customer information sufficient to permit Real Communications, Inc. to continue to support the Companys existing customers, rights in the
Companys Etherlink project, and certain related equipment, tools and inventories.





In consideration of the
Board of Directors decision to liquidate the Company, the Company evaluated the recoverability of its long-lived assets, including property and equipment and licenses, and determined that their carrying values were impaired. Accordingly, the
Company recorded an impairment loss of $9.2 million in the second quarter of 2002 to write down these long-lived assets to their estimated current fair values. See further details in Note 5 below.





The accompanying unaudited financial statements are presented on a going concern basis. 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.




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##### Table of Contents



INTEGRATED TELECOM EXPRESS, INC.





NOTES TO FINANCIAL STATEMENTS(Continued)







Unaudited Interim Financial Statements





The accompanying unaudited financial statements as of June 30, 2002 and for the three months and the six months ended June 30, 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 as of June 30, 2002, the results of its operations for the
three months and the six months ended June 30, 2002 and 2001, and its cash flows for the six months ended June 30, 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 and the six months ended June 30, 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.





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.




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##### Table of Contents



INTEGRATED TELECOM EXPRESS, INC.





NOTES TO FINANCIAL STATEMENTS(Continued)







In July 2002, the FASB issued Statement of Accounting Standards No.
146, Accounting for Costs Associated with Exit or Disposal Activities (SFAS 146). SFAS 146 nullifies the guidance of the Emerging Issues Task Force (EITF) in EITF Issue No. 94-3, Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). Under EITF Issue No. 94-3, an entity recognized a liability for an exit cost on the date that the entity committed
itself to an exit plan. In SFAS 146, the FASB acknowledges that an entitys commitment to a plan does not, by itself, create a present obligation to other parties that meets the definition of a liability and requires that a liability for a cost
that is associated with an exit or disposal activity be recognized when the liability is incurred. It also establishes that fair value is the objective for the initial measurement of the liability. SFAS 146 will be effective for exit or disposal
activities that are initiated after December 31, 2002. The Company expects that the adoption of SFAS 146 will not have any impact on its financial condition or results of operations.





2.    BALANCE SHEET DETAILS





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





June 30, 2002

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

$


$
16Finished goods


52


1,803$
52

$
1,819Other assets:Restricted cash

$
2,455

$
2,455Other


205


205$
2,660

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

$
396

$
925Customer deposits


87


1,500Deferred revenue





281Other


165


575$
648

$
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.




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##### Table of Contents



INTEGRATED TELECOM EXPRESS, INC.





NOTES TO FINANCIAL STATEMENTS(Continued)







3.    NOTES RECEIVABLE FROM STOCKHOLDERS





Notes receivable from stockholders consisted of full recourse loans to a former executive officer of the Company and a member of the
Companys Board of Directors, who used the loan proceeds to exercise stock options to purchase the Companys common stock. The aggregate balance of the principal and accrued interest on these loans was $361,000 as of December 31, 2001.





On June 28, 2002, the Company and the director entered into an Agreement to Prepay and Cancel Promissory Notes
(the Agreement), pursuant to which the loans to the director, including the principal balance of $262,000 and accrued interest of $36,222, were paid in full by a cash payment of $58,222 and a transfer of 150,000 shares of the
Companys common stock from the director to the Company. The 150,000 shares had an aggregate fair market value of $240,000 based on the prevailing trading price of $1.60 per share on the date immediately before the Agreement was executed. Under
the terms of the Agreement, the amount of the final settlement will be adjusted to reflect the actual liquidation proceeds if the Companys stockholders approve the proposed plan of liquidation. If the actual liquidation proceeds are greater
than $1.60 per share (the amount used to compute the directors initial cash payment to satisfy the loans), the Company will pay the director the excess amount. If the liquidation proceeds are less than $1.60 per share, the director will pay
the Company the shortfall amount. The settlement amount will be measured at each financial reporting date, and a receivable from or payable to the director will be recorded. Changes in the settlement amount will be recorded as other income or
expense.





As of June 30, 2002, the remaining balance of the notes receivable from stockholders was $70,000, which
represented the principal and accrued interest of the full recourse loan to a former executive officer of the Company. The loan, which is secured by 21,000 shares of the Companys common stock, bears interest at three-month LIBOR plus 2%,
adjustable on a quarterly basis, and its principal and accrued interest are due in June 2004.





4.    DEFERRED
STOCK-BASED COMPENSATION





Deferred stock-based compensation expenses were related to stock options granted to
the Companys employees and consultants under the following functions (in thousands):





For the Three Months Ended June 30,

For the Six Months Ended June
30,2002


2001

2002


2001(Unaudited)


(Unaudited)

(Unaudited)


(Unaudited)Research and development

$
(1,268
)

$
922

$
(2,629
)

$
2,157Sales and marketing


(114
)


115


(926
)


814General and administrative


557



718


663



1,933$
(825
)

$
1,755

$
(2,892
)

$
4,904





For the three months and the six months ended June 30, 2002, the
Company recorded a benefit of $825,000 and $2,892,000, respectively, from reversals of deferred stock-based compensation expense associated with unvested stock options canceled during the periods.




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INTEGRATED TELECOM EXPRESS, INC.





NOTES TO FINANCIAL STATEMENTS(Continued)







5.    IMPAIRMENT LOSS ON ASSETS





On April 18, 2002, the Companys Board of Directors deemed advisable the liquidation and dissolution of the Company and adopted a
Plan of Complete Liquidation and Dissolution. In consideration of the Board of Directors decision, the Company evaluated the recoverability of its long-lived assets, including property and equipment and licenses, in accordance with SFAS 144
and determined that their carrying values were impaired. Accordingly, the Company recorded an impairment loss of $9.2 million in the second quarter of 2002 to write down these long-lived assets to their estimated current fair values. The Company
estimated that the impaired assets had an aggregate fair value of $273,000 as of June 30, 2002. The fair value of these impaired assets was estimated based on the sales price of similar assets that were sold to third parties during the second
quarter of 2002, sales proceeds expected to be received from pending sale transactions, or other market value information that was readily available. To the extent that an impaired asset is not transferable and cannot be sold or in cases where the
Company is not expecting to locate any buyer, assets were fully written off.





6.    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, which was paid in full as of 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 in 2002 (in thousands):





Total Charges

Noncash Charges


Cash Payments
in 2001


Balance at December 31, 2001

Cash Payments in
2002


Balance at June 30, 2002(Unaudited)


(Unaudited)Workforce reduction

$
842

$



$
(743
)

$
99

$
(99
)

$
Closure of facility


1,489


(1,314
)


(175
)









$
2,331

$
(1,314
)

$
(918
)

$
99

$
(99
)

$





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##### Table of Contents



INTEGRATED TELECOM EXPRESS, INC.





NOTES TO FINANCIAL STATEMENTS(Continued)










7.    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 June 30,


For the Six Months Ended June
30,2002


2001


2002


2001(Unaudited)


(Unaudited)


(Unaudited)


(Unaudited)Numerator:Net loss

$
(14,114
)

$
(8,838
)

$
(14,903
)

$
(17,726
)Denominator:Shares used in computing basic and diluted net loss per share


42,707



42,582



42,697



42,548Basic and diluted net loss per share attributable to common stockholders

$
(0.33
)

$
(0.21
)

$
(0.35
)

$
(0.42
)Antidilutive securities including options, warrants, convertible preferred stock and restricted stock rights not
included in net loss per share calculation


12,628



13,686



12,628



13,686





8.    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 currently maintained with two 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 June 30, 2002, sales to five customers accounted for 18.0%, 14.6%, 13.9%, 13.6% and 12.2%, respectively, of net revenue; and for the six months ended June 30, 2002, sales to
one customer accounted for 51.2% of net revenue. For the three months ended June 30, 2001, sales to three customers accounted for 26.1%, 12.6% and 10.0%, respectively, of net revenue; and for the six months ended June 30, 2001, sales to two
customers accounted for 29.0% and 10.1%, respectively, of net revenue.





As of June 30, 2002, receivables from two
customers accounted for 69.9% and 15.2%, respectively, of the gross accounts receivable balance. As of June 30, 2001, receivables from two customers accounted for 48.3% and 35.0%, respectively, of the gross accounts receivable balance.




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##### Table of Contents



INTEGRATED TELECOM EXPRESS, INC.





NOTES TO FINANCIAL STATEMENTS(Continued)










9.    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 June 30,

For the Six Months Ended June
30,2002

2001

2002

2001(Unaudited)

(Unaudited)

(Unaudited)

(Unaudited)Asia:South Korea

$
369

$
1,416

$
1,353

$
6,824Taiwan


770


353


1,097


436Other Asian countries


11


135


59


2191,150


1,904


2,509


7,479United States


83


2,399


2,747


2,232Europe











1,517$
1,233

$
4,303

$
5,256

$
11,228





Substantially all of the Companys assets as of June 30, 2002
and December 31, 2001 were located in the United States.





10.    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 defendants
have filed motions to dismiss. 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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##### Table of Contents

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 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, subject to approval and ratification
by our stockholders at a special meeting that would be held on a future date set by the Board of Directors. In reaching its decision, the Board of Directors considered a number of factors, including our recent financial performance, prevailing
economic conditions and the unsuccessful efforts to sell or merge the Company. In connection with the proposed liquidation, we terminated the majority of our employees during May and June 2002 and retained a limited number of personnel necessary to
facilitate the liquidation process. Our headcount was 22 as of June 30, 2002, decreased from 81 prior to the Board of Directors decision to liquidate the Company. Furthermore, we expect to liquidate all assets, including our inventories,
property and equipment and intellectual property. In addition to the Plan of Complete Liquidation and Dissolution, we may consider various legal alternatives to liquidating the Company, including bankruptcy under Chapter 7 or Chapter 11 of the
federal bankruptcy code.





On June 13, 2002, we entered into an Asset Purchase Agreement with Real Communications,
Inc., pursuant to which Real Communications, Inc. agreed to purchase, subject to the terms and conditions of the Asset Purchase Agreement, some of our assets for a cash purchase price of $1.5 million (the Asset Sale). Some or all of the
following individuals may become stockholders of Real Communications, Inc.: Daniel Chen, the Chairman of our Board of Directors, Kenyon Mei, our Chief Operating Officer, and Jow Peng, our Vice President of Business Development. (Real Communications,
Inc. and the above mentioned individuals are referred to as Affiliated Purchasers). We believe that stockholder approval of the Asset Sale is not required by the Delaware General Corporation Law. Moreover, the members of the Affiliated
Purchasers who are on our Board of Directors did not participate in any deliberations of the Board of Directors regarding the proposed Asset Sale, and the proposed Asset Sale was approved by a majority of the non-management, non-affiliated
independent directors who have no relationship with the members of the Affiliated Purchasers who are on the Board of Directors. Nevertheless, because of the potential conflicts of interest of the Affiliated Purchasers, we expect to seek, and the
terms of the Asset Purchase Agreement provide that the Asset Sale is conditioned upon, stockholder approval. The terms of the Asset Purchase Agreement provide that the Asset Sale is also conditioned upon stockholders approval and ratification of the
Plan of Complete Liquidation and Dissolution. The assets to be sold to Real Communications, Inc. consist of all of our intellectual property rights, as well as rights in our customer information sufficient to permit Real




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Communications, Inc. to continue to support our existing customers, rights in our Etherlink project, and certain related equipment, tools and
inventories.





The accompanying unaudited financial statements are presented on a going concern basis. 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. Liquidation expenses may include, among others, employee severance and related costs, penalties for terminating facility lease, customer service obligations and legal and accounting fees.





Results of Operations





Net Revenue.    Net revenue for the second quarter of 2002 was $1.2 million, decreased by $3.1 million from the second quarter of 2001. Net revenue for the first six months of 2002 was $5.3 million,
decreased by $5.9 million from the first six months of 2001. The decrease in net revenue for the second quarter and the first six months of 2002 from the corresponding periods in 2001 was primarily due to continuing decrease in demand for our Apollo
products and severe pricing pressure in Asia. In addition, net revenue for the second quarter of 2002 was negatively impacted by our announcement of the proposed liquidation of the Company on April 19, 2002. Since we announced the proposed
liquidation, we have focused on liquidating all remaining inventories by selling them to existing customers at prices lower than that prior to the announcement, resulting in a further decline in the average selling price of our Apollo products
compared to prior quarters. The decrease in net revenue for the first six months of 2002 was partially offset by $2.7 million of revenue from sales of ADSL line testers, which were first introduced in the fourth quarter of 2001. We currently expect
to complete the sale of the remaining inventories before the end of the third quarter of 2002, and we expect that net revenue, if any, for the third quarter of 2002 will be substantially lower than that for the second quarter of 2002.





Cost of Revenue and Gross Margin.    Gross margin was 26% in the second quarter of 2002, compared to
39% in the second quarter of 2001. The decrease in gross margin was primarily attributable to the negative factors described above, including the severe pricing pressure in Asia and the further reduction in the average selling price subsequent to
our announcement of the proposed liquidation. Such decrease was partially offset by sales of inventories, which were previously written off, with a total sales price of approximately $240,000. As these inventories had been written off and had no
carrying value, the entire sales proceeds of these inventories contributed to the gross profit for the second quarter of 2002.





Gross margin was 44% in the first six months of 2002, compared to 27% in the first six months of 2001. The improvement in the gross margin was 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 $750,000 for the first six months in 2001, as compared to
royalties incurred for the first six months of 2002 in the total of $153,000. Furthermore, during the first quarter of 2001, we recorded a charge of $759,000, which was to provide reserve for adverse purchase commitments for our Apollo chipset
products at the time. No such provision was necessary in the first six months of 2002.





Research and
Development.Research and development expenses were $2.9 million for the second quarter of 2002 and $6.1 million for the first six months of 2002, decreased from $5.4 million and $11.0 million for the corresponding periods
in 2001. The decrease was primarily attributable to the restructuring in the fourth quarter of 2001 and the termination of substantially all research and development personnel and related activities subsequent to the Board of Directors
decision to liquidate the Company on April 18, 2002.





Comparing the second quarter of 2002 to the same period in
2001, compensation expenses, excluding severance, decreased by $1.1 million, professional fees and non-recurring engineering expenses decreased by $719,000 in total, and depreciation and facility expenses decreased by $1.0 million in total.
Comparing the first six months of 2002 to the same period in 2001, compensation expenses, excluding severance, decreased by $2.5 million, professional fees and non-recurring expenses decreased by $1.3 million in total, and depreciation and facility




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expenses decreased by $1.1 million in total. In addition, during the second quarter of 2002, we settled
a claim by a vendor in an amount which was $475,000 less than the accrual originally set up for that purpose. The decrease in expenses described above was partially offset by severance expense of $1.1 million related to employees terminated in the
second quarter of 2002.





Sales and Marketing.    Sales and marketing expenses were
$668,000 for the second quarter of 2002 and $1.2 million for the first six months of 2002, decreased from $1.1 million and $2.6 million for the corresponding periods in 2001. The decrease was primarily attributable to the decline in sales volume in
2002 compared to 2001 and the termination of the majority of the sales personnel and sales and marketing activities subsequent to the Board of Directors decision to liquidate the Company on April 18, 2002.





Comparing the second quarter of 2002 to the same period in 2001, compensation expenses, excluding severance, decreased by $181,000,
travel, promotion and tradeshow related expenses decreased by $202,000 in total, and depreciation and facility expenses decreased by $145,000 in total. Comparing the first six months of 2002 to the same period in 2001, compensation expenses,
excluding severance, decreased by $973,000, travel, promotion and tradeshow related expenses decreased by $256,000 in total, and depreciation and facility expenses decreased by $199,000 in total. The decrease in expenses described above was
partially offset by severance expense of $195,000 related to employees terminated in the second quarter of 2002.





General and Administrative.    General and administrative expenses were $2.5 million for the second quarter of 2002, increased from $1.9 million for the same period in 2001. The increase was partly due to
an increase in compensation expenses of $253,000 primarily related to the hiring of the new chief executive officer and the implementation of the executive bonus program, both of which were not in place until September 2001. The balance of the
increase was due to an increase in professional fees of $320,000 for legal and investment banking services performed in conjunction with our efforts to identify and evaluate various strategic alternatives.





General and administrative expenses were $4.2 million for the first six months of 2002, increased from $3.9 million for the same period in
2001. The increase was primarily due to an increase in professional fees of $359,000 for legal and investment banking services performed in conjunction with our efforts to identify and evaluate various strategic alternatives, partially offset by a
decrease in compensation expenses of $116,000, which was related to a severance payment to a former executive officer in the first quarter of 2001.





We currently expect that total operating expenses, excluding deferred stock-based compensation, will decrease from the current level, as we have terminated the majority of our personnel and our
activities are limited primarily to selling any of our remaining assets, preparing for the special meeting of stockholders and preparing to make distributions to our stockholders.





Deferred Stock-based Compensation.    For the second quarter and the first six months of 2002, we recorded a benefit of $825,000 and $2.9
million, respectively, from reversals of deferred stock-based compensation expense associated with unvested stock options canceled during the periods.





Impairment Loss on Assets.    In consideration of the Board of Directors decision to liquidate the Company, we determined that the carrying values of our long-lived
assets, including property and equipment and licenses, were impaired. Accordingly, we recorded an impairment loss of $9.2 million in the second quarter of 2002 to reflect the write-down of these assets to their estimated current fair values. During
the second quarter of 2001, we recorded an impairment loss of $1.8 million, as we discontinued certain research and development projects and determined that license fees and prepaid royalties related to the licensed technologies used in these
projects were impaired.





Other Income (Expenses), Net.    Other income (expenses), net,
for the second quarter and the first six months of 2002 decreased from the corresponding periods in 2001. The decrease was primarily due to a significant decrease in interest income, as the aggregate balance of cash and cash equivalents decreased
from $128.0 million at June 30, 2001 to $112.5 million at June 30, 2002 and interest rates declined steadily throughout 2001 and 2002. In addition, we recorded a loss on sales of assets of $503,000 related to computer and testing equipment sold
during the second quarter of 2002.




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Liquidity and Capital Resources





Cash and cash equivalents were $112.5 million as of June 30, 2002, compared to $119.3 million as of December 31, 2001. Net cash used in operating activities in the first
six months of 2002 was $6.4 million, which was primarily attributable to net loss before non-cash items of $6.5 million and a decrease in accounts payable and accrued liabilities of $3.8 million in total, partially offset by decreases in accounts
receivable of $1.5 million, inventories of $1.7 million and prepaid and other current assets of $648,000.





Proceeds from sales of assets in the first six months of 2002 were related to sales of computer and testing equipment subsequent to our Board of Directors decision to liquidate the Company on April 18, 2002. We currently
estimate that proceeds from future sales of the remaining assets, including intellectual property and equipment, approximate $1.6 million, which is principally related to the proposed Asset Sale to be approved by our stockholders. If the proposed
Asset Sale is not approved by our stockholders, there can be no assurance that we will receive an offer to purchase the remaining assets at a price comparable to the price offered by the Asset Sale, and there can be no assurance that the remaining
assets can be sold at all.





The outstanding balance of capital lease obligations at June 30, 2002 was $693,000,
which is expected to be paid in full as of December 31, 2002.





In connection with the proposed liquidation, we
expect to liquidate all of the remaining assets, including our inventories, property and equipment and intellectual property. 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, together with proceeds from future sales of the remaining assets, 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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In July 2002, the FASB issued Statement of Accounting Standards No. 146,
Accounting for Costs Associated with Exit or Disposal Activities (SFAS 146). SFAS 146 nullifies the guidance of the Emerging Issues Task Force (EITF) in EITF Issue No. 94-3, Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). Under EITF Issue No. 94-3, an entity recognized a liability for an exit cost on the date that the entity committed itself
to an exit plan. In SFAS 146, the FASB acknowledges that an entitys commitment to a plan does not, by itself, create a present obligation to other parties that meets the definition of a liability and requires that a liability for a cost that
is associated with an exit or disposal activity be recognized when the liability is incurred. It also establishes that fair value is the objective for the initial measurement of the liability. SFAS 146 will be effective for exit or disposal
activities that are initiated after December 31, 2002. We expect that the adoption of SFAS 146 will not have any impact on our financial condition or results of operations.





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 aggregate net value, if any, ultimately distributable to you under the Plan may be lower
or higher than the amount you would receive if you sold your shares of our common stock prior to the time we file the Certificate of Dissolution with the Delaware Secretary of State. 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 and are currently exploring all our options in this regard. 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.




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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. The defendants have filed
motions to dismiss. 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.





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 the 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. Additionally,
we could seek protection from creditors under the federal bankruptcy code. Any action of this type could delay or 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 THE 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.




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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. After this date, certificates representing our common
stock shall 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 shall be fixed on the basis of their respective stock holdings at the close
of business on this date, and, afterwards, any distributions made by us shall 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 MUCH 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.





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.




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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.





Item 3.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. The defendants have filed motions to dismiss. 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)  Exhibits





Exhibit Number

Description10.48

James G. Regel Amended and Restated Employment Agreement, dated May 16, 2002, between the Registrant and James G.
Regel.10.49

James E. Williams Amended and Restated Employment Agreement, dated May 16, 2002, between the Registrant and James E.
Williams.10.50

Addendum to Offer Letter, dated June 12, 2002, between the Registrant and Kenyon Mei.10.51

Addendum to Offer Letter, dated June 14, 2002, between the Registrant and James Stair.10.52

Asset Purchase Agreement, dated June 13, 2002, between the Registrant and Real Communications, Inc.99.1

Certification of Chief Executive Officer and Chief Financial Officer.





(b)Reports on Form 8-K





We filed Form 8-K dated April 19, 2002 with the Securities and Exchange Commission in connection with our Board of Directors
approval of the Plan of Complete Liquidation and Dissolution of the Company.




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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 WilliamsSenior Vice President of Finance and Chief Financial Officer (Principal Financial and Accounting Officer)





Date: August 13, 2002




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