<PAGE>
 
                                   FORM 10-Q

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE 
                        SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended:  June 29, 1997

                                       OR

[_]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE 
                        SECURITIES EXCHANGE ACT OF 1934

Commission file number:  0-22068

                     LEVEL ONE COMMUNICATIONS, INCORPORATED
 
State:     California                  I.R.S. Employer ID No.:  33-0128224
 
Address:   9750 Goethe Road, Sacramento, CA 95827
 
Telephone: (916) 855-5000


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 periods 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 Common Shares of the registrant outstanding on June 29, 1997, was
13,488,705.

                                       1
<PAGE>
 
                                     INDEX

<TABLE>
<CAPTION>
                                                                           PAGE
                                                                           ----
<S>                                                                        <C> 
PART I.   FINANCIAL INFORMATION
 
Item 1.   Financial Statements

             Consolidated Balance Sheets as of June 
             29, 1997, and December 30, 1996                                3
                                                   
             Consolidated Statements of Income for 
             the Six Months Ended June 29, 1997,
             and June 29, 1996                                              4
 
             Consolidated Statements of Cash Flows
             for the Six Months Ended June 29,
             1997, and June 29, 1996                                        5
 
             Notes to Financial Statements                                  6
 

Item 2.      Management's Discussion and Analysis of Financial
             Condition and Results of Operations                            8
 
PART II.     OTHER INFORMATION

Item 1.      Litigation                                                    14
 
Item 6.      Exhibits and Reports on Form 8-K                              14
                            
             Signatures                                                    S-1
</TABLE> 

                                       2
<PAGE>
 
                    LEVEL ONE COMMUNICATIONS, INCORPORATED
                          CONSOLIDATED BALANCE SHEETS
                     June 29, 1997, and December 29, 1996
 
<TABLE> 
<CAPTION> 
(in thousands except share amounts)                           JUNE 29, 1997            DEC. 29, 1996
                                                             ----------------         ---------------
                                                               (unaudited)       
<S>                                                          <C>                      <C>    
ASSETS                                                                           
 Current Assets:                                                                 
  Cash and cash equivalents                                          $ 16,435                $ 20,251
  Short-term investments                                               18,833                  10,211
  Accounts receivable, net of allowance for doubtful                   20,571                  18,279
    accounts of $156 and $156 for 1997 and 1996,                                 
    respectively                                                                 
  Inventories                                                          17,476                   9,990
  Deferred income tax benefits                                          2,182                   2,504
  Prepaid expenses                                                      2,152                   2,351
                                                             ----------------         ---------------  
                                                                                 
      Total current assets                                             77,649                  63,586
                                                                                 
  Property and equipment, net                                          27,324                  23,676
                                                                                 
  Long-term investments                                                 9,550                  12,440
  Foundry deposits                                                      8,000                   8,000
  Other assets                                                          4,227                   4,400
                                                             ----------------         ---------------  
      Total assets                                                   $126,750                $112,102
                                                             ================         ===============
                                                                                 
LIABILITIES AND SHAREHOLDERS' EQUITY                                             
 Current Liabilities:                                                            
  Current portion of capital lease obligations                       $  1,089                $  1,129
  Accounts payable                                                      8,838                   4,778
  Accrued payroll costs                                                 2,578                   1,985
  Income taxes payable                                                  3,016                   1,338
  Other accrued liabilities                                             2,858                   3,485
                                                             ----------------         ---------------  
          Total current liabilities                                    18,379                  12,715
                                                                                 
  Capital lease obligations, less current portion                       2,667                   3,194
  Deferred lease expense                                                  544                     612
                                                             ----------------         ---------------  
                                                                                 
          Total liabilities                                            21,590                  16,521
                                                                                 
 Shareholders' Equity:                                                           
  Common Stock, no par value                                           84,974                  83,203
          Authorized - 105,000,000 shares                                        
          Outstanding - 13,488,705 and 13,116,227                                
             shares for 1997 and 1996, respectively                              
 Unrealized gain on available-for-sale                                           
          securities, net of tax                                           12                      12
 Retained earnings                                                     20,174                  12,366
                                                             ----------------         ---------------  
                                                                                 
          Total shareholders' equity                                  105,160                  95,581
                                                             ----------------         ---------------  
                                                                                 
Total liabilities and shareholders' equity                           $126,750                $112,102
                                                             ================         ===============
</TABLE>

       THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.

                                       3
<PAGE>
 
                    LEVEL ONE COMMUNICATIONS, INCORPORATED
                       CONSOLIDATED STATEMENTS OF INCOME
                                  (unaudited)
 
 
(in thousands, except earnings per share)
<TABLE> 
<CAPTION> 
                                                     Three Months Ended                        Six Months Ended
                                              --------------------------------         ---------------------------------

                                              June 29, 1997      June 29, 1996         June 29, 1997       June 29, 1996
                                              -------------      -------------         -------------       -------------
<S>                                                 <C>                <C>                   <C>                 <C> 
Revenues                                            $32,642            $27,479               $62,749             $55,021
                                                                                                                 
Cost  of sales                                       13,566             11,521                26,466              23,109
                                                    -------            -------               -------             -------
                                                                                                                        
     Gross margin                                    19,076             15,958                36,283              31,912
                                                                                                                        
Research & development                                6,738              5,739                13,079              11,414
                                                                                                                        
Sales & marketing                                     4,754              3,989                 9,053               7,990
                                                                                                                        
General & administrative                              2,221              1,765                 4,023               3,531
                                                    -------            -------               -------             -------
                                                                                                                        
     Total operating expenses                        13,713             11,493                26,155              22,935
                                                    -------            -------               -------             -------
                                                                                                                        
Operating income                                      5,363              4,465                10,128               8,977
                                                                                                                        
Interest and other income, net                          492                349                   858                 741
                                                    -------            -------               -------             -------
                                                                                                                        
Income before provision for income taxes              5,855              4,814                10,986               9,718
                                                                                                                        
                                                                                                                        
Provision for income taxes                            1,932              1,590                 3,605               3,208
                                                    -------            -------               -------             -------
                                                                                                                        
Net income                                          $ 3,923            $ 3,224               $ 7,381             $ 6,510
                                                    =======            =======               =======             =======
                                                                                                                        
Earnings per Share                                  $  0.28            $  0.24               $  0.52             $  0.48
                                                    =======            =======               =======             =======
                                                                                                                        
Weighted Average Common                                                                                                 
   Shares Outstanding                                14,261             13,681                14,185              13,684 
                                                    =======            =======               =======             =======
</TABLE>

       The accompanying notes are an integral part of these statements.

                                       4

<PAGE>
 
                    LEVEL ONE COMMUNICATIONS, INCORPORATED
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (unaudited)

<TABLE> 
<CAPTION> 
                                                                        FOR SIX MONTHS ENDED
                                                                -----------------------------------
(in thousands)                                                    JUNE 29, 1997     JUNE 29, 1996
                                                                ----------------- -----------------
<S>                                                                   <C>               <C> 
Cash flows from operating activities:
       Net income                                                     $  7,380          $ 6,510
       Adjustments to reconcile net income to net cash                                  
         provided by operating activities:                                              
           Depreciation and amortization                                 4,516            3,277
       Changes in assets and liabilities:                                               
           Accounts receivable                                          (2,292)           1,814
           Inventories                                                  (7,486)           2,035
           Deferred tax assets                                             322              390
           Prepaid expenses                                                199              365
           Accounts payable and accrued liabilities                      5,704           (5,060)
           Deferred liabilities                                              0             (134)
           Deferred lease expense                                          (68)             (85)
                                                                      --------          -------
                                                                                        
       Net cash provided by operating activities                         8,275            9,112
                                                                      --------          -------
                                                                                        
Cash flows from investing activities:                                                   
       Purchase of short-term investments                              (30,341)          (1,400)
       Proceeds from sales and maturities of short-term                                 
           investments                                                  21,719            7,915
       Purchase of long-term investments                                (7,740)             (20)
       Proceeds from sales and maturities of long-term                                  
           investments                                                  10,630                0
       Capital expenditures                                             (7,888)          (1,955)
       Payments for related party notes receivable                           0           (1,025)
       Payments for foundry deposits and other assets                     (103)          (5,782)
                                                                      --------          -------
                                                                                        
           Net cash provided by (used in) investing activities         (13,723)          (2,267)
                                                                      --------          -------
                                                                                        
Cash flows from financing activities:                                                   
       Net principal payments under capital lease obligations             (567)            (532)
       Proceeds from issuance of stock, net of                                          
       repurchases and costs of issuance                                 2,199            1,825
                                                                      --------          -------
                                                                                        
           Net cash provided by (used in) financing activities           1,632            1,293
                                                                      --------          -------
                                                                                        
Net increase (decrease) in cash and cash equivalents                    (3,816)           8,138
Cash and cash equivalents at beginning of period                        20,251           21,627
                                                                      --------          ------- 
Cash and cash equivalents at end of period                            $ 16,435          $29,765
                                                                      ========          =======
 
SUPPLEMENTARY DISCLOSURE OF CASH AND NONCASH TRANSACTIONS
           Cash payments for:
           Interest                                                        295              179
           Income taxes                                                     80            2,052
</TABLE>

       The accompanying notes are an integral part of these statements.

                                       5
<PAGE>
 
                    LEVEL ONE COMMUNICATIONS, INCORPORATED

                   NOTES TO FINANCIAL STATEMENTS (UNAUDITED)



NOTE 1 - BASIS OF PRESENTATION

The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the six-month period ended June 29, 1997, are not
necessarily indicative of the results that may be expected for the year ending
December 28, 1997.  The information reported in this Form 10-Q should be read in
conjunction with the financial statements and footnotes contained in the
Company's Form 10-K filed with the Securities and Exchange Commission for the
year ended December 29, 1996, and subsequent filings with the Securities and
Exchange Commission.

NOTE 2 - EARNINGS PER SHARE

Net income per share is computed using the weighted average number of shares of
common stock outstanding, and the dilutive common equivalent shares outstanding
from stock options and warrants (using the treasury stock method).  Effective
December 28, 1997, the Company is required to adopt Financial Accounting
Standards Board No. 128, Earnings per Share.  Among other things, the new
standard will require replacement of primary EPS with basic EPS.  Basic EPS
would be computed by dividing reported earnings available to common stockholders
by weighted average shares outstanding.  No dilution for any potentially
dilutive securities would be included.  Fully diluted EPS, now called diluted
EPS, would still be required.  The Company has not quantified the effect of
applying the new standard.

                                       6
<PAGE>
 
NOTE 3 - INVENTORIES

Inventories, stated at the lower of cost (first in, first out) or market,
consist of:

<TABLE>
<CAPTION>
            --------------------------------------------------------
            (in thousands)       June 29, 1997     December 30, 1996
            --------------------------------------------------------
            <S>                    <C>             <C>      
            Raw materials          $  5,421        $     32
            Work-in-process           9,928           7,948
            Finished goods            2,127           2,010
                                   --------        --------
                                   $ 17,476        $  9,990
                                   ========        ========
</TABLE> 
 
NOTE 4 - PROPERTY AND EQUIPMENT
 
Property and equipment, net is comprised of the following:

<TABLE> 
<CAPTION>  
            --------------------------------------------------------------------
            (in thousands)                 June 29, 1997       December 30, 1996
            --------------------------------------------------------------------
            <S>                            <C>                 <C>  
            Machinery and equipment          $ 26,762                $ 25,254
            Furniture and fixtures             18,436                  11,899
            Leasehold improvements              3,327                   3,485
                                             --------                --------

                                             $ 48,525                $ 40,638
 
            Less - accumulated depreciation   (21,201)                (16,962)
                                             --------                 --------
                                
                                             $ 27,324                $ 23,676
                                             ========                ========
</TABLE>

                                       7
<PAGE>
 
                     LEVEL ONE COMMUNICATIONS, INCORPORATED
                                     _____

ITEM 2.

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

The following information should be read in conjunction with the unaudited
interim financial statements and the notes thereto included in Item 1 of this
Quarterly Report on Form 10-Q, and the Management's Discussion and Analysis of
Financial Condition and Results of Operations contained in the Company's Form
10-K filed with the Securities and Exchange Commission on March 31, 1997.

This report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended.  Actual results could differ materially from
those projected in the forward-looking statements as a result of the factors set
forth in "Factors that May Affect Future Results" and elsewhere in this Report.

REVENUES

Revenues increased 18.8% to $32.6 million in the second quarter of 1997 compared
to $27.5 million for the same quarter of 1996. Revenues increased 14% to $62.7
million in the first six months of 1997 compared to $55.0 million for the first
six months of 1996. The increases during the second quarter and first six months
of 1997 reflect unit sales growth due to the continued market acceptance of the
Company's products in both the networking and transmission markets, and the
broadening of the Company's customer base.

International sales were $10.8 million or 33.1% and $11.1 million or 40.4% of
sales, respectively, for the second quarter of 1997 and 1996, and $21.6 million
or 34% and $21.3 million or 39% of sales, respectively, for the first six months
of 1997 and 1996.  All sales are denominated in U.S. dollars, thereby
eliminating the impact of foreign currency exchange rate fluctuations on
revenues.

GROSS MARGIN

Gross margin is affected by several factors, including average selling prices,
the mix between older and newer products, test equipment utilization, foundry
manufacturing yields, timing of cost reductions and the mix between direct and
distributor sales.  Margin on domestic and international sales is similar. Gross
margin as a percentage of revenues in the second quarter of 1997  was 58.4%
versus 58.1% in the second quarter of 1996 and 57.2% in the first quarter of
1997. Gross margin as a percentage of revenues in the first six months of 1997
was 57.8%  versus 58.0% in the first six months of 1996.

RESEARCH AND DEVELOPMENT

                                       8
<PAGE>
 
Research and development expenses were $6.7 million or 20.6% of revenues in the
second quarter of 1997 versus $5.7 million, or 20.9% of  revenues in the second
quarter of 1996. Research and development expenses were $13.1 million or 20.8%
of revenues in the first six months of 1997 versus $11.4 million, or 20.7% of
revenues in the first six months of 1996. The research and development expense
increase in each period in 1997 is due to additions to the Company's design
engineering staff and related new product design expenses.

SALES AND MARKETING

Sales and marketing expenses were $4.7 million or 14.6% of revenues in the
second quarter of 1997 versus $4.0 million or 14.5% of revenues in the second
quarter of 1996. Sales and marketing expenses were $9.1 million or 14% of
revenues in the first six months of 1997 versus $8.0 million or 14.5% of
revenues in the first six months of 1996.  The increased dollar expenditures in
each period in 1997 are attributable to sales commissions associated with
increased revenues, and the expansion of the Company's sales and marketing
staffs.

GENERAL AND ADMINISTRATIVE

In the second quarter of 1997, general and administrative expenses were $2.2
million or 6.8% of revenues versus $1.8 million or 6.4% of revenues in the same
period of 1996. In the first six months of 1997, general and administrative
expenses were $4.0 million or 6.4% of revenues versus $3.5 million or 6.4% of
revenues in the same period of 1996.


LIQUIDITY AND CAPITAL RESOURCES

The Company's principal sources of liquidity as of June 29, 1997, consisted of
$35.3 million of cash, cash equivalents and short-term investments, and $10
million available under the Company's revolving line of credit.  At June 29,
1997, the Company had no outstanding balance under this line of credit.  Working
capital as of June 29, 1997, was $59.3 million.

During the first six months of 1997, the Company generated $8.3 million of cash
from operating activities, as compared to $9.1 million in the same period in
1996.  In both years, net cash generated from operations during the period was
primarily due to net income before depreciation and amortization expense.
Disparities in such line items as accounts receivable, accounts payable, capital
expenditures or foundry deposits reported in the first half of 1997 and 1996
reflect differences in timing, and not material changes in the Company's
operations.



FACTORS THAT MAY AFFECT FUTURE RESULTS

   The following factors may have an impact on the Company's business:

                                       9
<PAGE>
 
 Manufacturing Risks
 
  The Company does not manufacture the wafers used for its products. The
Company's wafers are manufactured by foundries located in the United States,
Europe and Asia. The Company depends upon these suppliers to produce wafers at
acceptable yields and to deliver them in a timely manner at competitive
prices. The Company may sustain an adverse impact on operating results from
problems with the cost, timeliness, yield and quality of wafer deliveries from
suppliers. From time to time, the available industry-wide foundry capacity can
fluctuate significantly. During periods of constrained supply, the Company may
experience difficulty in securing an adequate supply of wafers, and/or its
suppliers may increase wafer prices. The Company's operating results depend in
substantial part on its ability to maintain or increase the capacity available
from its existing or new foundries. In prior years, the Company has
experienced increased costs and delays in customer shipments as a result of a
foundry reducing shipments to the Company without prior notice, requiring the
Company to transfer products to a new foundry. Although the Company believes
that it has planned to meet customer demand, there can be no assurances that
unforeseen demand, current supplier interruptions or other changes will not
have a material impact on the Company's business.
 
  Manufacturing process technologies are subject to rapid change. Other
companies in the industry have experienced difficulty in migrating to new
manufacturing processes, and, consequently, have suffered reduced yields,
delays in product deliveries and increased expense levels. The Company's
business, financial condition and results of operations could be materially
adversely affected if any such transition is substantially delayed or
inefficiently implemented.
 
  The Company is also dependent upon third-party assembly companies that
package the semiconductor die. The Company depends upon these suppliers to
produce products in a timely manner and at competitive prices. The Company may
sustain an adverse financial impact from problems with the cost, timeliness,
yield and quality of product deliveries from these suppliers.
 
 Factors Affecting Annual and Quarterly Operating Results
 
  The semiconductor industry is characterized by rapid technological change,
intense competitive pressure and cyclical market patterns. The Company's
results of operations are affected by a wide variety of factors, including
general economic conditions, semiconductor industry environment, changes in
average selling prices, the timing of new product introductions (by the
Company and its customers), use of new technologies, the ability to safeguard
patents and intellectual property, and rapid change of demand for products.
The level of net revenues in any specific quarter can also be affected by the
level of orders placed during that quarter. The Company attempts to respond to
changes in market conditions as soon as possible; however, the rapidity of
their onset may make prediction of and reaction to such events difficult. Due
to the foregoing and other factors, past results, such as those described in
this Offering Circular, may not be predictive of future performance.
 
                                       10
<PAGE>
 
 Dependence on New Products
 
  The Company's future success depends on its ability to timely develop and
introduce new products which compete effectively. Because of the complexity of
its products, the Company may experience delays in completing development and
introduction of new products, and, as a result, not achieve the market share
anticipated for such products. The Company's strategy is to develop products
for the fastest growing segments of the communications market. The Company
conducts its own analysis of market trends and reviews forecasts and
information provided by industry analysts. Market conditions may change
rapidly as technology, economic, or user-preference conditions cause different
communications technologies to experience growth other than that forecast by
the Company or others. There can be no assurance that the Company will
successfully identify new product opportunities and bring new products to
market in a timely manner, that products or technologies developed by others
will not render the Company's products or technologies obsolete or
noncompetitive, or that the Company's products will be selected for design
into the products of its targeted customers. In addition, the average selling
price for any particular product tends to decrease over the product's life. To
offset such price decreases, the Company relies primarily on obtaining yield
improvements and corresponding cost reductions in the manufacture of existing
products and on introducing new products which incorporate advanced features
and other price/performance factors such that higher average selling prices
and higher margins are achievable relative to existing product lines. To the
extent that cost reductions and new product introductions with higher margins
do not occur in a timely manner, or the Company's products do not achieve
market acceptance, the Company's operating results could be adversely
affected.
 
 Management of Growth; Dependence on Key Personnel
 
  The Company is currently experiencing a period of significant growth which
has placed, and could continue to place, a significant strain on the Company's
personnel and other resources. The Company's ability to manage its growth
effectively will require continued expansion and refinement of the Company's
operational, financial and management and control systems as well as a
significant increase in the Company's development, testing, quality control,
marketing, logistics and service capabilities, any of which could place a
significant strain on the Company's resources. The Company's success also
depends to a significant extent upon the continued services of its key
personnel and its ability to attract and retain key technical, sales and
management personnel in the future. Competition for such personnel is intense
and there can be no assurance that the Company will be able to attract and
retain key technical, sales and management personnel in the future. If the
Company's management is unable to manage growth effectively, maintain the
quality and marketability of the Company's products and retain, hire and
integrate key personnel, the Company's business, financial condition and
results of operations could be materially adversely affected.
 
 Intellectual Property
 
  The Company relies upon patent, trademark, trade secret and copyright law to
protect its intellectual property. There can be no assurance that such
intellectual property rights can be successfully asserted or will not be
invalidated, circumvented or challenged. Litigation, regardless of its
outcome, could result in substantial cost and diversion of resources for the
Company. Any infringement claim or other litigation against or by the Company
could have a material effect on the Company's financial condition and results
of operations. In November 1995 the Company commenced infringement litigation
against a competitor.
 
 Semiconductor Industry
 
  The semiconductor industry has historically been cyclical and subject to
significant economic downturns at various times. The Company may experience
substantial period-to-period fluctuations in operating results due to general
semiconductor industry conditions, overall economic conditions or other
factors.
 
  In addition, the securities of many high technology companies have
historically been subject to extreme price and volume fluctuations, factors
which may affect the market price of the Company's Common Stock. As is common
in the semiconductor industry, the Company frequently ships more product in
the third month
 
                                      11
<PAGE>
 
of a quarter than in the other months. If a disruption in the Company's
production or shipping occurs near the end of a quarter, the Company's
revenues for that quarter could be adversely affected.
 
  The Company must order wafers and build inventory in advance of product
shipments. There is risk that the Company could produce excess or insufficient
inventories of particular products because the Company's markets are volatile
and subject to rapid technology and price changes. This inventory risk is
heightened because certain of the Company's customers place orders with long
lead times which may be subject to cancellation or rescheduling by that
customer. To the extent the Company produces excess or insufficient
inventories of particular products, the Company's revenues and earnings could
be adversely affected.
 
  Increased demand for semiconductor products may result in a reduction in the
availability of wafers from foundries. Such capacity limitations may adversely
affect the Company's ability to deliver products on a timely basis and affect
the Company's margins. Additionally, the Company believes that during periods
of strong demand and/or restricted semiconductor capacity, customers will
over-order to assure an adequate supply. Certain of the Company's customers
may cancel or postpone orders without notice if product becomes available
elsewhere.
 
  Shortages of components from other suppliers could cause the Company's
customers to cancel or delay programs incorporating the Company's products,
resulting in the cancellation or delay of orders for the Company's products.
 
 Intense Competition
 
  The semiconductor industry is intensely competitive. The Company's
competition consists of semiconductor companies and semiconductor divisions of
vertically integrated companies. In the transmission market, the Company's
principal competitors are Brooktree Corporation (a subsidiary of Rockwell
International, Inc.), Crystal Semiconductor, Inc. (a subsidiary of Cirrus
Logic, Inc.) ("Crystal"), Dallas Semiconductor, Inc., Lucent Technologies Inc.
("Lucent"), PMC-Sierra Inc. and Siemens A.G. In the networking market, the
Company's principal competitors are Advanced Micro Devices, Inc., Crystal,
Integrated Circuit Systems, Inc., Lucent, Micro Linear Corp., National
Semiconductor Corporation, Quality Semiconductor, Inc., Seeq Technologies,
Inc. and Texas Instruments, Incorporated. Many of these competitors have
longer operating histories, greater name recognition, access to larger
customer bases and significantly greater financial and other resources than
the Company with which to pursue engineering, manufacturing, marketing and
distribution of products.
 
  The ability of the Company to compete successfully in the rapidly evolving
area of high performance integrated circuit technology depends on factors both
within and outside of the Company's control. Such factors include, without
limitation, success in designing and manufacturing new products, implementing
new technologies, intellectual property programs, product quality,
reliability, price, efficiency of production, and general economic conditions.
There is no assurance that the Company will be able to compete successfully
against current and future competitors. Increased competition may result in
price reductions, reduced gross margins and loss of market share, any of which
may have a material adverse effect on the Company's business, financial
condition and results of operations.
 
 International Operations
 
  Due to its reliance on international sales and foreign third-party
manufacturing and assembly operations, the Company is subject to the risks of
conducting business outside of the United States including government
regulatory risks, political, social and economic instability, potential
hostilities and changes in diplomatic and trade relationships. There can be no
assurance that one or more of the foregoing factors will not have a material
adverse effect on the Company's business, financial condition or operating
results.
 
                                      12
<PAGE>
 
                          PART II - OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

   On November 28, 1995, the Company initiated a patent infringement suit
against Seeq Technologies, Inc. in United States District Court for the Northern
District of California. The suit relates to two Level One patents, No. 5,267,269
and No. 5,249,183, and to certain Seeq products used in Ethernet system
products. The suit seeks damages and injunctive relief. Seeq has denied the
allegations and may file a counter claim against the Company. Although the
Company does not believe such litigation will have a material impact on the
Company, litigation, regardless of its outcome, could result in substantial cost
and diversion of resources of the Company. See "Factors That May Affect Future
Results".

     In the course of business the Company is from time to time party to other
litigation.  In the opinion of the Company, any such litigation currently
pending is not likely to have a material impact on the Company's business.


ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

         Exhibits -  10.41    - Amendment to Deposit Agreement (confidential
                              treatment requested)
                     27.1     --Financial Data Schedule, June 29, 1997
         (b)  Reports on Form 8-K -  None.

                                       13
<PAGE>
 
                                   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.

                                    LEVEL ONE COMMUNICATIONS, INCORPORATED



Date:  August 12, 1997              By:  /s/ Robert S. Pepper
                                       ----------------------
                                    Robert S. Pepper, Ph.D.
                                    Chairman of the Board of Directors,
                                    President and Chief Executive Officer
                                    (Principal Executive Officer)


Date:  August 12, 1997              By: /s/ John Kehoe
                                       ---------------                  
                                    John Kehoe
                                    Vice President and Chief Financial
                                    Officer
                                    (Principal Financial Officer)

                                      S-1