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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001

OR

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

FOR THE TRANSITION PERIOD FROM  TO

Commission File Number 000-31259

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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(IRS Employer Identification Number)400 Race Street
San Jose, California 95126(Address of principal executive offices)

95126(Zip Code)


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

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

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

The
number of shares outstanding of the Registrant's Common Stock as of May 11, 2001 was 42,773,446.

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INTEGRATED TELECOM EXPRESS, INC.
INDEX

|           |  |                                                                                       |  | Page No.
|---------- |  | ------------------------------------------------------------------------------------- |  | --------
|Part I     |  | FINANCIAL INFORMATION (UNAUDITED)                                                     |  |         
|Item 1.    |  | Financial Statements                                                                  |  |         
|           |  | Condensed Balance Sheets as of March 31, 2001 and December 31, 2000                   |  | 3       
|           |  | Condensed Statements of Operations for the Three Months Ended March 31, 2001 and 2000 |  | 4       
|           |  | Condensed Statements of Cash Flows for the Three Months Ended March 31, 2001 and 2000 |  | 5       
|           |  | Notes to Condensed Financial Statements                                               |  | 6       
|Item 2.    |  | Management's Discussion and Analysis of Financial Condition and Results of Operations |  | 9       
|           |  | Overview                                                                              |  | 10      
|           |  | Results of Operations                                                                 |  | 12      
|           |  | Liquidity and Capital Resources                                                       |  | 15      
|           |  | Impact of Recent Accounting Pronouncements                                            |  | 15      
|           |  | Risk Factors                                                                          |  | 16      
|Item 3.    |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 26      
|Part II    |  | OTHER INFORMATION                                                                     |  | 27      
|Item 2.    |  | Changes in Securities and Use of Proceeds                                             |  | 27      
|Item 6.    |  | Exhibits and Reports on Form 8-K                                                      |  | 27      
|SIGNATURES |  | 28                                                                                   

2

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PART I FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

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

|                                      |                                           | March 31, 2001             |                                            | December 31, 2000 |        
|------------------------------------- | ----------------------------------------- | -------------------------- | ------------------------------------------ | ----------------- | -------
|
|ASSETS:                               |                                          
|Current assets:                       |                                           |                            |                                            |                   |        
|                                      | Cash and cash equivalents                 |                            | $                                          | 136,941           |        
|                                      | Accounts receivable                       |                            |                                            | 2,902             |        
|                                      | Inventories, net                          |                            |                                            | 4,289             |        
|                                      | Prepaid expenses and other current assets |                            |                                            | 2,539             |        
|                                      |                                           |                            |                                            |                   |        
|                                      |                                           | Total current assets       |                                            |                   | 146,671
|                                      | Property and equipment, net               |                            |                                            | 10,328            |        
|                                      | Licenses, net                             |                            |                                            | 6,101             |        
|                                      | Other assets                              |                            |                                            | 2,179             |        
|                                      |                                           |                            |                                            |                   |        
|                                      |                                           | Total assets               |                                            | $                 | 165,279
|                                      |                                           |                            |                                            |                   |        
|LIABILITIES AND STOCKHOLDERS' EQUITY: |                                          
|Current liabilities:                  |                                           |                            |                                            |                   |        
|                                      | Accounts payable                          |                            | $                                          | 3,132             |        
|                                      | Accrued expenses and other liabilities    |                            |                                            | 3,968             |        
|                                      | Current portion of payable for licenses   |                            |                                            | 2,475             |        
|                                      | Current portion under capital leases      |                            |                                            | 1,319             |        
|                                      |                                           |                            |                                            |                   |        
|                                      |                                           | Total current liabilities  |                                            |                   | 10,894 
|                                      | Long term liabilities                     |                            |                                            | 1,438             |        
|                                      |                                           |                            |                                            |                   |        
|                                      |                                           | Total liabilities          |                                            |                   | 12,332 
|                                      |                                           |                            |                                            |                   |        
|Stockholders' equity (*)              |                                           |                            |                                            |                   |        
|                                      | Common stock                              |                            |                                            | 42                |        
|                                      | Additional paid-in capital                |                            |                                            | 230,801           |        
|                                      | Notes receivable from stockholders        |                            |                                            | (537              | )      
|                                      | Deferred stock-based compensation         |                            |                                            | (19,906           | )      
|                                      | Accumulated deficit                       |                            |                                            | (57,453           | )      
|                                      |                                           |                            |                                            |                   |        
|                                      |                                           | Total stockholders' equity |                                            |                   | 152,947
|                                      |                                           |                            |                                            |                   |        
|                                      |                                           |                            | Total liabilities and stockholders' equity |                   | $      
|                                      |                                           |                            |                                            |                   |        

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

3

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

|                                                                               |                                                                                               | For the Three Months Ended March 31, |        
|------------------------------------------------------------------------------ | --------------------------------------------------------------------------------------------- | ------------------------------------ | -------
|
|Net revenue                                                                    |                                                                                               | $                                    | 6,925  
|Cost of revenue (inclusive of stock-based compensation expenses of $24 and $0) |                                                                                               |                                      | 5,591  
|                                                                               |                                                                                               |                                      |        
|Gross profit                                                                   |                                                                                               |                                      | 1,334  
|                                                                               |                                                                                               |                                      |        
|Operating expenses:                                                            |                                                                                               |                                      |        
|                                                                               | Research and development (inclusive of stock-based compensation expense of $1,235 and $157)   |                                      |        
|                                                                               | Sales and marketing (inclusive of stock-based compensation expense of $699 and $346)          |                                      |        
|                                                                               | General and administrative (inclusive of stock-based compensation expense of $1,215 and $259) |                                      |        
|                                                                               |                                                                                               |                                      |        
|Total operating expenses                                                       |                                                                                               |                                      | 12,278 
|                                                                               |                                                                                               |                                      |        
|Operating loss                                                                 |                                                                                               |                                      | (10,944
|Interest and other income, net                                                 |                                                                                               |                                      | 2,056  
|                                                                               |                                                                                               |                                      |        
|Net loss                                                                       |                                                                                               | $                                    | (8,888 
|                                                                               |                                                                                               |                                      |        
|Basic and diluted net loss per share                                           |                                                                                               | $                                    | (0.21  
|                                                                               |                                                                                               |                                      |        
|Shares used in computing basic and diluted net loss per share                  |                                                                                               |                                      | 42,469 
|                                                                               |                                                                                               |                                      |        

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

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

|                                                                            |                                                       | For the Three Months Ended
March 31,     |        
|--------------------------------------------------------------------------- | ----------------------------------------------------- | ---------------------------------------- | -------
|
|Cash flows from operating activities                                        |                                                       |                                          |        
|Net loss                                                                    |                                                       | $                                        | (8,888 
|Adjustments to reconcile net loss to net cash used by operating activities: |                                                       |                                          |        
|                                                                            | Depreciation and amortization                         |                                          |        
|                                                                            | Amortization of deferred stock-based compensation     |                                          |        
|                                                                            | Reserve for adverse purchase commitments              |                                          |        
|                                                                            | Accrued interest income from stockholders             |                                          |        
|                                                                            | Changes in current assets and liabilities:            |                                          |        
|                                                                            |                                                       | Accounts receivable                      |        
|                                                                            |                                                       | Inventory                                |        
|                                                                            |                                                       | Receivable from related party            |        
|                                                                            |                                                       | Prepaid expenses and other current asset |        
|                                                                            |                                                       | Accounts payable                         |        
|                                                                            |                                                       | Accrued expenses and other liabilities   |        
|                                                                            |                                                       | Other assets                             |        
|                                                                            |                                                       |                                          |        
|                                                                            | Net cash used in operating activities                 |                                          |        
|                                                                            |                                                       |                                          |        
|Cash flows from investing activities                                        |                                                       |                                          |        
|                                                                            | Purchases of property, equipment and licenses         |                                          |        
|                                                                            | Net cash used in investing activities                 |                                          |        
|                                                                            |                                                       |                                          |        
|Cash flows from financing activities                                        |                                                       |                                          |        
|                                                                            | Proceeds from issuance of common stock, net           |                                          |        
|                                                                            | Principal payments on capital lease                   |                                          |        
|                                                                            |                                                       |                                          |        
|                                                                            | Net cash provided by / (used in) financing activities |                                          |        
|                                                                            |                                                       |                                          |        
|Net decrease in cash and cash equivalents                                   |                                                       |                                          | (12,132
|Cash and cash equivalents at beginning of period                            |                                                       |                                          | 149,073
|                                                                            |                                                       |                                          |        
|Cash and cash equivalents at end of period                                  |                                                       | $                                        | 136,941
|                                                                            |                                                       |                                          |        

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

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NOTES TO FINANCIAL STATEMENTS

Nature of Operations

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

United
Microelectronics Corporation ("UMC"), a public company in Taiwan, directly and indirectly owned 28.3% of the Company's outstanding common stock at March 31, 2001.

Unaudited Interim Financial Statement

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

Management Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Concentrations of Credit Risk

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

The
Company performs ongoing credit evaluations of its customers' financial condition and, generally, requires no collateral from its customers. The Company also performs an analysis
of the

6

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expected collectibility of accounts receivable and makes an allowance for doubtful accounts receivable when necessary.

Customer Concentrations

Four customers accounted for 23.7%, 20.8%, 14.4% and 13.5% of revenue in the three months ended March 31, 2001. At March 31, 2001, one customer
accounted for 55.8% of total accounts receivable. Two customers accounted for 36.3% and 11.0% of revenue in the three months ended March 31, 2000. At March 31, 2000, three customers
accounted for 39.5%, 14.7% and 13.4% of total accounts receivable.

Comprehensive Income

The Company has adopted SFAS 130, "Reporting Comprehensive Income;" however, the effects of the adoption were immaterial to all periods presented and
comprehensive loss comprises only the accumulated loss.

Business Segments

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

Geographic Information

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

|                  |        | For the Three Months Ended
|----------------- | ------ | --------------------------
|
|
|Net revenue:      |        |                           
|                  | Asia   |                           
|                  |        | Korea                     
|                  |        | Taiwan                    
|                  |        | Rest of Asia              
|                  |        |                           
|                  |        | Total of Asia             
|                  | Europe |                           
|                  | USA    |                           
|                  |        |                           
|                  |        | Total                     
|                  |        |                           
|Long-term assets: |        |                           
|                  | USA    |                           
|                  | Taiwan |                           
|                  | Others |                           
|                  |        |                           
|                  |        | Total                     
|                  |        |                           

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

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Net Loss Per Share

Basic and diluted net loss per common share is presented in conformity with the Statement of Financial Accounting Standards No. 128, "Earnings Per
Share" (FAS 128), for all periods presented. In accordance with FAS 128, basic and diluted net loss per share have been computed using the weighted average number of shares of common
stock outstanding during the period, less shares subject to repurchase. The following table presents the computation of basic and diluted net loss per share (in thousands, except per share amounts):

|                                                                                                                                                         |  | For the Three Months Ended March 31, |       
|-------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------ | ------
|
|Numerator:                                                                                                                                               |  |                                      |       
|Net loss applicable to common stockholders                                                                                                               |  | $                                    | (8,888
|                                                                                                                                                         |  |                                      |       
|Denominator:                                                                                                                                             |  |                                      |       
|Weighted average shares used in computing basic and diluted net loss per share applicable to common stockholders                                         |  |                                      | 42,469
|                                                                                                                                                         |  |                                      |       
|Basic and diluted net loss per share applicable to common stockholders                                                                                   |  | $                                    | (0.21 
|                                                                                                                                                         |  |                                      |       
|Antidilutive securities including options, warrants, convertible preferred stock and restricted stock rights not included in loss per shares calculation |  |                                      | 14,211
|                                                                                                                                                         |  |                                      |       

Financial Instruments

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

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

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

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Inventory

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

|                 |                  | March 31, 2001 |       | December 31, 2000
|---------------- | ---------------- | -------------- | ----- | -----------------
|
|Inventories:     |                  |                |       |                  
|                 | Raw material     |                | $     | 76               
|                 | Work-in-progress |                |       | 2,027            
|                 | Finished goods   |                |       | 2,186            
|                 |                  |                |       |                  
|Inventories, net |                  | $              | 4,289 |                  
|                 |                  |                |       |                  

Unfavorable Purchase Commitments

Based on current market conditions and the transition progress from Apollo Two to Apollo Three products, the Company estimated that certain
non-cancelable production orders would result in obsolete inventory. Accordingly, the Company established a reserve for unfavorable purchase commitments, resulting in a charge of $759,000
for the three months ended March 31, 2001.

Recent Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133 ("SFAS
No. 133"), "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for derivative instruments and requires recognition of
all derivatives as assets or liabilities in the balance sheet and measurement of those instruments at fair value. The statement is effective for fiscal years beginning after June 15, 2000. In
June 1999, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 137 (SFAS 137), "Accounting for Derivative Instruments and
Hedging ActivitiesDeferral of the Effective Date of FASB Statement No. 133." In June 2000, the FASB issued SFAS 138, "Accounting for Certain Derivative Instruments
and Certain Hedging Activitiesan Amendment of FASB Statement No. 133." The Adoption of SFAS 133, as amended by SFAS 137 and SFAS 138, in the three months ended
March 31, 2001 did not have a material effect on the Company's financial condition or results of operations.

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

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

The
forward-looking statements contained herein reflect our judgment as of the date of this report with respect to future events, the outcome of which is subject to certain risks,
including the factors set forth under the heading "Risk Factors," which may have a significant impact on our business, operating results or financial condition. Investors are cautioned that these
forward-looking statements are inherently uncertain. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results or outcomes may
vary materially from those described herein. Although we believe that the expectations reflected in these forward-looking

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statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and
completeness of these forward-looking statements. We undertake no obligation to update these forward-looking statements.

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

OVERVIEW

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

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

We
sell our products to manufacturers of customer premises equipment and telecommunications service providers' central office equipment. Our revenue is currently derived from sales of
our Apollo and SAM product families. Sales of Apollo Two products represented 62.3% of revenue in the three months ended March 31, 2000 and 48.4% of revenue in the three months ended
March 31, 2001. We are currently managing the transition from Apollo Two to Apollo Three. We anticipate declining demand and prices for Apollo Two as our customers move their system designs to
our lower-cost Apollo Three or competing products.* We anticipate that our Apollo and SAM product families will continue to generate substantially all of our revenue for the foreseeable
future.* To date, we have derived a substantial portion of our revenue from a limited number of customers, and we expect to continue to rely on a limited number of customers.* During the three months
ended March 31, 2000, Victron, Inc. and Score Zap Ind. Co., Ltd. accounted for 36.3% and 11.0% of our revenue. During the three months ended March 31, 2001, Samsung
Electronics Co., Ltd., Alcatel Bell N.V., ACN Technologies Inc. and Daeyu Co., Ltd. accounted for 23.7%, 20.8%, 14.4%, and 13.5% of our revenue.

We
have focused our initial sales and marketing efforts on worldwide communications equipment manufacturers. We currently sell through our direct sales force, independent sales
representatives and

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distributors. Our sales personnel are based in Santa Clara, California; Round Rock, Texas; Beijing, China; and Taipei, Taiwan. For the three months ended March 31, 2000, sales to customers in
Asia accounted for 50.6% of our revenue and our sales to customers in South Korea constituted 16.0% of our revenue. For the three months ended March 31, 2001, sales to customers in Asia
accounted for 78.6% of our revenue and our sales to customers in South Korea constituted 75.7% of our revenue. We estimate that of our sales to U.S. communications equipment manufacturers in the three
months ended March 31, 2000 and 2001, approximately 36.3% and 0% were ultimately intended for equipment for service providers in the South Korean market. Combined with direct sales to South
Korea during the same periods, our estimated revenue exposure to the South Korean market during these periods was 52.3% and 75.7%. We anticipate that a substantial portion of our revenue will continue
to be derived from Asia for the foreseeable future.* All revenue is denominated in U.S. dollars.

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

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

We
outsource the fabrication, packaging and testing of our integrated circuits. Therefore, a significant portion of our cost of revenue consists of payments to our manufacturers. Our
cost of revenue also includes expenses relating to our internal operations as well as the amortization of fees for licensed technology. In April 1998, we licensed certain technology from
Alcatel, an unrelated third party, to develop, manufacture and distribute products. The terms of the agreement call for an initial licensing fee of $5 million with additional royalties paid on
sales of products developed at rates ranging from 2.5% to 6%. Minimum royalties payable pursuant to the agreement total $3 million, of which the Company has paid $1,250,000. The licensing fee
is amortized over the estimated useful life of seven years with royalties expensed in the year incurred.

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

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

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

In
connection with the grant of stock options and equity compensation to our employees, technical advisors and directors, we have recorded deferred stock-based compensation expense of
$19,906 million as of March 31, 2001. Deferred stock-based compensation represents the difference between the grant price and the deemed fair value of our common stock options granted
during these periods. Deferred stock-based compensation expense for options granted is being amortized using the graded vesting method, in accordance with Financial Accounting Standards Board, or
FASB, Interpretation No. 28, over the vesting period of each respective option, which is generally four years. Under the graded vesting method, each option grant is separated into portions
based on its vesting terms, which results in
acceleration of amortization expense for the overall award. Deferred stock-based compensation for options granted to non-employees is accounted for in accordance with the provisions of
Statement of Financial Accounting Standards, or SFAS, No. 123 and Emerging Issues Task Force 96-18. Deferred stock-based compensation is presented as a reduction of stockholders'
equity.

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

We
experienced a net loss of $(3,695) million for the three months ended March 31, 2000 and a net loss of $(8,888) million for the three months ended March 31, 2001. Our
accumulated deficit as of March 31, 2001 was $(57,453) million.

RESULTS OF OPERATIONS

Three Months Ended March 31, 2001 Compared to Three Months Ended March 31, 2000

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

|                               |                            | For the Three Months Ended
March 31 |   
|------------------------------ | -------------------------- | ----------------------------------- | --
|
|Revenue                        |                            | 100                                 | % 
|Cost of revenue                |                            | 81                                  |   
|                               |                            |                                     |   
|Gross profit                   |                            | 19                                  |   
|                               |                            |                                     |   
|Operating expenses:            |                            |                                     |   
|                               | Research and development   |                                     | 98
|                               | Sales and marketing        |                                     | 32
|                               | General and administrative |                                     | 47
|                               |                            |                                     |   
|                               |                            | Total operating expenses            |   
|                               |                            |                                     |   
|Operating loss                 |                            | (158                                | ) 
|Interest and other income, net |                            | 30                                  |   
|                               |                            |                                     |   
|Net loss                       |                            | (128                                | ) 
|                               |                            |                                     |   

Net Revenue.Net revenue increased from $4.1 million for the three months ended March 31, 2000 to
$6.9 million for the three months ended March 31, 2001. This increase was primarily attributable to growth in sales of Apollo Two chipsets, Apollo Three chipsets and Apollo Three NICs.

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For the three months ended March 31, 2000, our Apollo Two chipsets accounted for 62.3% of our net revenue. For the three months ended March 31, 2001, Apollo Two chipsets accounted for
48.4% of our net revenue, Apollo Three chipsets accounted for 28.4% of our net revenue, Apollo Three NICs
accounted for 20.9% of our net revenue and all other products accounted for 2.3% of our net revenue. Net revenue from customers outside of the United States represented 55.6% and 99.4% of our revenue
for the three months ended March 31, 2000 and for the three months ended March 31, 2001, respectively. We expect that net revenue generated from customers outside of the United States
will continue to account for a significant percentage of our net revenue.* Due to current market conditions, we anticipate that our net revenue will decline in fiscal 2001 compared to fiscal 2000.*

Cost of Revenue and Gross Profit.Cost of revenue increased from $2.8 million for the three months ended
March 31, 2000 to $5.6 million for the three months ended March 31, 2001. This increase was primarily attributable to growth in sales of Apollo Two chipsets, Apollo Three chipsets
and Apollo Three NICs and an increase in charges associated with deferred stock-based compensation expense. License fee amortization was $428,571 and $553,571 for the three months ended
March 31, 2000 and 2001. Amortization of deferred stock based compensation was $0 and $24,000 for the three months ended March 31, 2000 and the three months ended March 31, 2001,
respectively.

Cost
of revenue for the three months ended March 31, 2001 also includes a $759,000 charge related to purchase commitments outstanding as of March 31, 2001. Based on
current market conditions, the Company estimated that demand for Apollo Two products was less than originally estimated when certain non-cancelable production orders were placed. As a
result, reserves were established to cover expected future losses related to these commitments in both the three months ended December 31, 2000 and the three months ended March 31, 2001.

Our
gross profit was $1.4 and $1.3 million in the three months ended March 31, 2000 and March 31, 2001, respectively. The decrease in gross margin from the three
months ended March 31, 2000 to the three months ended March 31, 2001 was primarily attributable to pricing pressure in the industry, increasing sales of NICs, which have a lower gross
margin than chipset sales, as a percentage of our total revenue, and the effect of a $759,000 charge associated with a reserve for Apollo Two inventory.

Research and Development.Research and development expenses increased from $2.8 million for the three months
ended March 31, 2000 to $6.8 million for the three months ended March 31, 2001. The increase is primarily attributable to increases in compensation levels and payroll related
expenses associated with additional personnel as well as increased charges associated with deferred stock-based compensation and increased facility expense. Amortization of deferred stock-based
compensation related to research and development amounted to $157,000 and $1,235,000 for the three months ended March 31, 2000 and 2001. This increase is primarily attributable to options
granted to new and existing employees in fiscal 2000. We expect that amortization of deferred stock-based compensation will decline in absolute terms in the remainder of 2001 due to the departure of
certain former employees and the recent decline of our stock price and its effect on the options granted to non-employees.* We anticipate that our research and development expenses will
increase in absolute dollars in the future due to planned increases in personnel, consultants and material costs.* We further anticipate that our research and development expenses will increase as a
percentage of revenue in the remainder of 2001 as revenue is expected to decline in fiscal 2001 compared to fiscal 2000 and absolute research and development expenses will grow as we seek to maintain
our competitiveness by developing future generations of our products.*

Sales and Marketing.Sales and marketing expenses increased from $1.5 million for the three months ended
March 31, 2000 to $2.3 million for the three months ended March 31, 2001. This increase was primarily attributable to increased facility expense, compensation expense and accrued
sales commissions. Accrued sales commissions increased proportionally to revenue, which grew in the

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three months ended March 31, 2001 compared to the three months ended March 31, 2000. We expect sales and marketing expenses to increase in both absolute dollars and as a percent of
revenue in the remainder of 2001 as we continue to moderately expand our sales and marketing personnel to capitalize on future business opportunities, while revenue is expected to decline in fiscal
2001 compared to fiscal 2000.* Amortization of deferred stock-based compensation related to sales and marketing activities amounted to $346,000 and $699,000 for the three months ended March 31,
2000 and 2001. This increase is primarily attributable to options granted to new and existing employees in fiscal 2000. We expect that amortization of deferred stock-based compensation will decline in
absolute terms in the remainder of 2001 due to the departure of certain former employees and the recent decline of our stock price and its effect on the options granted to non-employees.*

General and Administrative.General and administrative expenses increased from $1.2 million for the three months
ended March 31, 2000 to $3.2 million for the three months ended March 31, 2001. The increase in general and administrative expense over the period was primarily attributable to
increased compensation levels, one time payments to former executive officers and an increase in payroll related expenses associated with additional personnel as we grew the infrastructure to support
our business expansion. Adding further to the increase was higher facility expense and increased charges associated with deferred stock-based compensation. We expect general and administrative
expenses to increase in both absolute dollars and as a percent of revenue in the full fiscal year 2001 due primarily to an expected decline in revenue in fiscal 2001 compared to fiscal 2000 and
additional expenses associated with new office space in San Jose, California; Hsin-Chu, Taiwan; and Beijing, China.* Amortization of deferred stock-based compensation related to general
and administrative activities amounted to $259,000 and $1,215,000 for the three months ended March 31, 2000 and 2001. This increase is primarily attributable to options granted to new and
existing employees in fiscal 2000. We expect that amortization of deferred stock-based compensation will decline in absolute terms in the remainder of 2001 due primarily to the departure of certain
former employees and the recent decline of our stock price and its effect on the options granted to non-employees.*

Interest and Other Income, Net.Interest and other income, net increased from $464,000 for the three months ended
March 31, 2000 to $2.1 million for the three months ended March 31, 2001. The increase was primarily attributable to significantly higher cash balances due to our initial public
offering and concurrent private placement in August 2000. We anticipate that interest and other income, net will increase in fiscal 2001 compared to fiscal 2000 due to higher average cash
balances on hand.* However, interest income is expected to decline on a quarter-to-quarter basis due to an anticipated lower level of market interest rates and a declining cash
balance as we fund our operations.*

Provision for Income Taxes.We have recorded significant net operating losses since inception and therefore did not
incur any significant tax liabilities in 2000 or the three months ended March 31, 2001.
Net deferred tax assets are substantially derived from net operating loss carryforwards, research credits and timing differences in depreciation and amortization expenses. Based on available objective
evidence, management believes it is more likely than not that the net deferred tax assets will not be fully realizable.* Accordingly, the Company has provided a full valuation allowance against its
net deferred tax assets at March 31, 2000 and March 31, 2001.

Net Loss.Net loss increased from $(3.7) million for the three months ended March 31, 2000 to $(8.8) million for
the three months ended March 31, 2001. This increase was primarily attributable to significant growth in operating expenses, including amortization of deferred stock-based compensation, offset
by gross profit generated by a moderate increase in sales volumes.

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LIQUIDITY AND CAPITAL RESOURCES

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

Cash
and cash equivalents were $35.2 million and $136.9 million at March 31, 2000 and 2001, respectively. The increase in cash and cash equivalents was primarily
due to the net proceeds from our initial public offering in the amount of $106.1 million and the concurrent private placement of common stock to NEC Corporation in the amount of approximately
$3.0 million in August 2000.

Cash
used in operating activities was $(2.3) million and $(10.1) million in the three months ended March 31, 2000 and 2001, respectively. The decrease in operating cash flows
was primarily attributable to an increase in net loss from $3.7 million to $8.9 million, a significant increase in other assets and a significant decrease in accounts payable, accrued
expenses and other liabilities, partly offset by a significant decrease in accounts receivable and inventory and a significant increase in amortization of deferred stock-based compensation.

Cash
used in investing activities was $(1.0) million and $(1.8) million in the three months ended March 31, 2000 and 2001, respectively. During both periods, these cash flows
were due to purchases of property, equipment and licenses.

Cash
provided by (or used in) financing activities was $84,000 and $(138,000) in the three months ended March 31, 2000 and 2001, respectively. The decrease was primarily due to
an increase from
$84,000 to $247,000 in proceeds from issuance of common stock due to stock option exercise, offset by an increase in principal payments under capital leases of $385,000.

As
of March 31, 2001, we had recorded liabilities for licenses and capital leases in the amount of $5.1 million. In addition, we have commitments to pay various
royalties to providers of intellectual property based on our future sales. We have also signed a 10-year lease agreement for our new principal executive office space in San Jose,
California that commits us to pay on average $291,000 per month for the duration of the lease, and a 5 year lease agreement for our new office space in Hsin-Chu Science-Based
Industrial Park in Taiwan that commits us to pay approximately $65,000 per month for the duration of the lease. While not yet committed, we anticipate small lease payments for sales office space in
various other planned sales offices, particularly in China.*

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

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

IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133 ("SFAS
No. 133"), "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for derivative instruments and requires recognition of
all derivatives as assets or liabilities in the balance sheet and measurement of those instruments at fair value. The statement is effective for fiscal years beginning after June 15, 2000. In
June 1999, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 137 (SFAS 137), "Accounting for Derivative Instruments and
Hedging ActivitiesDeferral of the Effective Date of FASB Statement No. 133." In June 2000, the FASB issued SFAS 138, "Accounting for Certain Derivative Instruments
and Certain Hedging Activitiesan Amendment of FASB Statement No. 133." The adoption of SFAS 133, as amended by SFAS 137 and SFAS 138, in the three months ended
March 31, 2001 did not have a material effect on the Company's financial condition or results of operations.

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RISK FACTORS

Risks Relating To Our Business

You should carefully consider the risks described below and all of the information contained in this report. If any of the following risks actually occur, our
business, financial condition and results of operations could be harmed, the trading price of our common stock could decline, and you may lose all or part of your investment in our common stock.

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

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

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

We
incurred net losses of $8.9 million during the three months ended March 31, 2001. As of March 31, 2001, we had an accumulated deficit of $(57.5) million. We
anticipate that we will incur net losses for the foreseeable future, and these losses may be substantial. We may not be able to generate sufficient revenue to achieve or maintain profitability.

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

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



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

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

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

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

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



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

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

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

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

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

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

For
the three months ended March 31, 2000 and for the three months ended March 31, 2001, 64.4% and 78.3% of our revenue was derived from sales of our Apollo chipsets. We
expect that our Apollo chipsets will continue to represent a significant portion of our revenue in the foreseeable future. Therefore, we may not be able to generate sufficient revenue if these
products fail to achieve broader market acceptance.

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

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

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

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

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

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

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

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

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

BUSINESS INTERRUPTIONS COULD ADVERSELY AFFECT OUR BUSINESS

Our
operations are vulnerable to interruption by fire, earthquake, power loss, telecommunications failure and other events beyond our control. We do not have a detailed disaster
recovery plan and do not have backup generators. Our facility in California is currently subject to electrical blackouts as a

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consequence of a shortage of available electrical power. In the event these blackouts continue or increase in severity, they could disrupt the operations of our California-based operations, including
design, research and development, sales, manufacturing control, logistics, and general and administrative functions. Any such disruption could delay us from executing on our business plan, which could
damage our reputation, harm our ability to retain existing customers and to obtain new customers, and could result in lost revenue, any of which could substantially harm our business and results of
operations. In addition, we do not carry sufficient business interruption insurance to compensate us for losses that may occur and any losses or damages incurred by us could have a material adverse
effect on our business.

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

If
we are unable to address difficulties associated with selling our products outside the United States, such as unexpected changes in regulatory requirements, longer payment cycles
and problems in collecting accounts receivable and reduced protection for intellectual property rights in foreign jurisdictions, our sales would decline and our business would be harmed. Many of these
difficulties are outside of our control. A substantial portion of our revenue is derived from customers located outside the United States. For the three months ended March 31, 2000, sales to
customers in Asia accounted for 50.6% of our revenue and our sales to customers in South Korea constituted 16.0% of our revenue. For the three months ended March 31, 2001, sales to customers in
Asia accounted for 78.6% of our revenue and our sales to customers in South Korea constituted 75.7% of our revenue. We estimate that of our sales to U.S. communications equipment manufacturers in the
three months ended March 31, 2000 and 2001, approximately 36.3% and 0% were ultimately intended for equipment for service providers in the South Korean market. Combined with direct sales to
South Korea during the same periods, our estimated revenue exposure to the South Korean market during these periods was 52.3% and 75.7%. We anticipate that a substantial portion of our revenue will
continue to be derived from Asia for the foreseeable future. We do not have any long-term commitments from our Asian customers and demand for our products in Asia may not continue to grow.
In addition, use of ADSL technology in South Korea, and thus the demand for our products in South Korea, is related in part to a government-sponsored initiative encouraging deployment of ADSL. If
alternative superior technologies are developed, support for the initiative may be withdrawn, or demand from our customers in South Korea may decrease, and our business would be harmed.

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

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

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

Even
if we complete development of our new Apollo and SAM products on a timely basis, these products may not achieve market acceptance and generate significant revenue. If our future
products

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do not achieve broad market acceptance, revenue from our existing products could be inadequate to cover our expenses and our operating results and reputation could be damaged.

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

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

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

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

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

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

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

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

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

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

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

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

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



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

The
markets in which we compete are characterized by frequent litigation regarding patents and other intellectual property rights. We are aware of a significant number of patents and
patent applications relating to aspects of our technologies filed by, and issued to, third parties. Should any of our competitors file patent applications or obtain patents that claim inventions also
claimed by us, we may choose to participate in an interference proceeding to determine the right to a patent for these

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inventions because if we fail to enforce and protect our intellectual property rights, our business would be harmed. Even if the outcome is favorable this proceeding could result in substantial cost
to us and disrupt our business.

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

If
we are not successful in maintaining relationships with our customers and obtaining new customers, our business and results of operations will suffer. We sell our products
primarily to communications equipment manufacturers. For the three months ended March 31, 2000, sales to two customers accounted for 36.3% and 11.0% of our revenue. For the three months ended
March 31, 2001, sales to four customers accounted for 23.7%, 20.8%, 14.4%, and 13.5% of our revenue.

Other
than with Alcatel Bell N.V., we do not have long-term agreements with these customers relating to the sale of our products, but rather sell our products to them on
an order-by-order basis. We expect to continue to be dependent upon a relatively small number of customers for a substantial portion of our revenue.

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

We
develop complex products in an evolving marketplace. Despite testing by our customers, and us software or hardware defects may be found in existing or new products. These defects
could result in a delay in recognition or loss of revenue, loss of market share or failure to achieve market acceptance. Additionally, these defects could result in financial or other damages to our
customers, cause us to incur significant warranty, support and repair costs and divert the attention of our engineering personnel from our product development efforts. In such circumstances, our
customers could also seek and obtain damages from us for their losses. A product liability claim brought against us, even if unsuccessful, would likely be time consuming and costly to defend.

WE MAY FAIL TO ATTRACT OR RETAIN KEY PERSONNEL.

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

Furthermore,
we completed a restructuring of our executive management team in February 2001, which included the resignations of three of our executive officers, including our former
President and Chief Executive Officer. We are currently searching for a new President and Chief Executive Officer, and our Chairman of the Board of Directors is serving as our Interim Chief Executive
Officer. If we are unable to attract and retain a highly skilled executive to serve as our President and Chief Executive Officer, we may not be able to continue to execute our strategy or manage our
growth, either of which could harm our business and results of operations. In addition, our Senior Vice President, Corporate Strategy and Product Planning resigned in April 2001. We have recently
assigned new or expanded roles to many of our current executive officers. If our management team fails to adapt to these new roles, our business and results of operations could suffer.

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Risks Relating To Our Industry

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

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

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

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



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

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

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

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

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



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

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

THE LARGE NUMBER OF SHARES ELIGIBLE FOR PUBLIC SALE COULD CAUSE OUR STOCK PRICE TO DECLINE.

If
our stockholders sell substantial amounts of our common stock, including shares issued upon the exercise of outstanding options, in the public market, the market price of our
common stock could decline. These sales might make it more difficult for us to sell equity or equity securities in the future at a time and price that we deem appropriate.

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

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

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BECAUSE OUR PRINCIPAL STOCKHOLDERS AND MANAGEMENT MAY BE ABLE TO CONTROL STOCKHOLDER VOTES, THE PREMIUM OVER MARKET PRICE THAT AN ACQUIROR MIGHT
OTHERWISE PAY MAY BE REDUCED AND ANY MERGER OR TAKEOVER MAY BE DELAYED.

As
of May 11, 2001, our principal stockholders, executive officers, directors and their affiliates own or control approximately 43.7% of our common stock. Accordingly, our
principal stockholders, executive officers, directors and their affiliates, as a group, may have the ability to control the election of a majority of the members of our board of directors and the
outcome of corporate actions requiring stockholder approval. This concentration of ownership may have the effect of delaying, deferring or preventing a change in control of us, or may impede a merger,
consolidation, takeover or other business combination involving us. This concentration of ownership could also adversely affect our stock's market price or lessen any premium over market price that an
acquiror might otherwise pay.

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

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

The primary objective of our investment activities is to preserve principal while concurrently maximizing the income we receive from our investments without
significantly increasing risk. Some of the securities that we may invest in may be subject to market risk. This means that a change in prevailing interest rates may cause the principal amount of the
investment to fluctuate. For example, if we hold a security that was issued with a fixed interest rate at the then-prevailing rate and the prevailing interest rate later rises, the current
value of the principal amount of our investment will decline. To minimize this risk in the future, we intend to maintain our portfolio of cash equivalents and short-term investments in a
variety of securities, including commercial paper, money market funds, government and non-government debt securities and certificates of deposit, with book value approximating fair value
due to short maturity. In general, money market funds are not subject to market risk because the interest paid on such funds fluctuates with the prevailing interest rate. As of March 31, 2001,
all of our investments were in money market funds, bank checking or savings accounts, or bank certificates of deposit. A hypothetical 100 basis point increase in interest rates would result in no
decrease in the fair value of our available-for-sale securities as of March 31, 2001.

Foreign Currency Risk

We do not use foreign currency forward exchange contracts or purchased currency options to hedge local currency cash flows or for trading purposes. All sales
arrangements with international customers are currently denominated in U.S. dollars. We have branch operations in Taiwan and a sales office in Beijing, China, which are subject to currency
fluctuations. At the present time, these foreign offices are limited in their operations and level of investment so the risk of currency fluctuations related to these offices is not expected to be
material.

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PART II OTHER INFORMATION

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

There are no material changes to our securities or use of proceeds from the disclosures provided in the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 2000, filed with the SEC on April 2, 2001 (File No. 000-31259).

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

A. Exhibits

|Exhibit
Number |  | Description                                                                                                                                                                                                                                                              
|-------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1            |  | Certificate of Designation of Rights, Preferences and Privileges of Series A Participating Preferred Stock of the Registrant.                                                                                                                                            
|4.1            |  | Preferred Stock Rights Agreement, dated as of April 4, 2001, between the Registrant and Fleet National Bank (incorporated herein by reference to Exhibit (4.6) to the Registrant's Registration Statement on Form 8-A (SEC
File No. 000-31259), filed on April 17, 2001).

B.
Reports on Form 8-K:



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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.

|                   |  | INTEGRATED TELECOM EXPRESS, INC.
|------------------ |  | --------------------------------
|Date: May 15, 2001 |  | By:                             

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