<PAGE>

--------------------------------------------------------------------------------

                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

                                   FORM 10-K

(MARK ONE)
[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934 [NO FEE REQUIRED]

For the fiscal year ended April 2, 2000.

OR
[_]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

For the transition period from          to         .

                        Commission File Number: 0-28157

                     ____________________________________

                              Virata Corporation
            (Exact name of Registrant as specified in its charter)

                      __________________________________

       Delaware                                            77-0521696
(State of Incorporation)                      (IRS Employer Identification No. )

        2933 Bunker Hill Lane, Suite 201, Santa Clara, California 95054
         (Address of principal executive offices, including zip code)

      Registrant's telephone number, including area code: (408) 566-1000

          Securities Registered Pursuant To Section 12(b) Of The Act:

    Title of each class             Name of each exchange on which registered
    -------------------             -----------------------------------------
          None                                         None

          Securities Registered Pursuant To Section 12(g) Of The Act:
                        Common Stock, $0.001 par value.

     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 _____
                                              ---

     Indicate by a check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]

     The aggregate market value of the voting stock held by non-affiliates of
the Registrant, as of  May 15, 2000, was approximately $825.0 million (based
upon the closing price for shares of the Registrant's Common Stock as reported
by the Nasdaq National Market for the last trading date prior to that date).
Shares of Common Stock held by each executive officer, director and holder of 5%
or more of the outstanding Common Stock have been excluded in that such persons
may be deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.

     On June 1, 2000, approximately 46,928,820 shares of the Registrant's
Common Stock, $0.001 par value, were outstanding.

                     Documents Incorporated by Reference:

     Portions of the Definitive Proxy Statement for Registrant's 2000 Annual
Meeting of Stockholders are incorporated by reference into Part III hereof.
<PAGE>

                               TABLE OF CONTENTS


<TABLE>
<CAPTION>
                                                                                          Page
                                                                                         Number
                                                                                         ------
<S>                                                                                      <C>
PART I.
   Item 1     Business                                                                        3
   Item 2     Properties                                                                     26
   Item 3     Legal Proceedings                                                              26
   Item 4     Submission Of Matters To A Vote Of Security Holders                            27

PART II.
   Item 5     Market For Registrant's Common Stock And Related Stockholder Matters           28
   Item 6     Selected Financial Data                                                        28
   Item 7     Management's Discussion and Analysis of Results of Operations and
              Financial Condition                                                            30
   Item 7a    Quantitative and Qualitative Disclosures About Market Risk                     42
   Item 8     Financial Statements and Supplementary Data                                    43
   Item 9     Changes In and Disagreements With Accountants On Accounting and
              Financial Disclosure                                                           64

PART III.
   Item 10    Directors and Executive Officers of the Registrant                             65
   Item 11    Executive Compensation                                                         65
   Item 12    Security Ownership of Certain Beneficial Owners and Management                 65
   Item 13    Certain Relationships and Related Transactions                                 65

PART IV.
   Item 14    Exhibits, Financial Statement, Schedules and Reports on Form 8-K               66

Signatures                                                                                   68
</TABLE>

                                       2
<PAGE>

PART I

ITEM 1 - Business.

     In addition to historical information, this Annual Report on Form 10-K
contains forward-looking statements that involve risks and uncertainties. Our
actual results could differ significantly from the results discussed in these
forward-looking statements. Factors that could contribute to such differences
include those discussed below and in "Risk Factors," and "Management's
Discussion and Analysis of Financial Condition and Results of Operations," as
well as those discussed elsewhere in this Annual Report.


Introduction

     Virata Corporation ("Virata", "we", or "the Company") provides
communications processors combined with integrated software modules to
manufacturers of equipment utilizing digital subscriber line, or DSL,
technologies. These "integrated software on silicon" product solutions enable
our customers to develop a diverse range of equipment, including modems,
gateways, routers, fixed wireless receivers and base stations targeted at the
voice and high-speed data network access, or broadband, market. We believe our
systems expertise, products and support services enable equipment manufacturers
to simplify product development, reduce the time it takes for products to reach
the market and focus resources on product differentiation and enhancement. We
outsource the manufacturing of our semiconductors, which allows us to focus our
resources on the design, development and marketing of our products. As of April
2, 2000 we have licensed our software to 67 companies. These customers have
developed, or are developing, 118 designs of which 33 are currently shipping.

     Our predecessor company, Virata Limited, was formed in 1993 as Advanced
Telecommunications Modules Limited, a corporation organized in the United
Kingdom, as a spin-out from the Olivetti Research Laboratories (now AT&T
Laboratories). Until 1995, we were a development-stage company focused primarily
on product development. From our first production revenue shipment in April 1995
through March 1996, we focused on developing and delivering ATM-based, board-
level systems primarily for local area network applications. In mid-1996, we
began licensing our software suite and selling our semiconductors to developers
of broadband access products. In September 1997, we ceased development of our
systems products and focused exclusively on expanding our software offering and
developing additional semiconductors for the broadband marketplace with a focus
on the digital subscriber line, or DSL, market. In February 1998, the
predecessor company changed its name to Virata Limited. In July 1998, the
predecessor company completed its acquisition of RSA Communications, Inc.
("RSA"), a corporation organized in North Carolina. RSA was subsequently renamed
to Virata Raleigh Corporation. On November 16, 1999, we completed a
reorganization of Virata Limited and the initial public offering ("IPO") of
Virata Corporation incorporated in Delaware. On February 10, 2000, we completed
the acquisition of D2 Technologies Inc., a provider of digital voice and
telephony software solutions. On April 27, 2000 we completed the acquisition of
Inverness Systems Ltd., a provider of networking software solutions.


Industry Background

     The amount of data being carried over the Internet and private
communications networks has grown dramatically in recent years. This tremendous
growth in data traffic is expected to continue as the number of users accessing
networks increases and as businesses and consumers demand richer content and
more complex applications for activities such as telecommuting, electronic
commerce and interactive media. These activities require the transmission of
large amounts of data which, in turn, requires high-speed, broadband data access
services for end users to obtain data reliably and within practical time
constraints.

     To meet the demand for high-speed, broadband data transmission, network
service providers continue to install high-bandwidth fiber optic transmission
equipment, high-speed switches and core routers in the Internet backbone and in
interoffice networks. While this network backbone is capable of delivering data
at very high speeds, an access bottleneck exists between the telephone
companies' central offices and the end users' premises. The copper line
connections between the telecommunications service provider's central office and
the end user are commonly known as the local loop, or the last mile. The last
mile infrastructure was originally designed for low-speed analog voice traffic
rather than high-speed digital data transmission. As a result, access to the
Internet and private communications networks over the copper wire infrastructure
of the last mile has typically been limited to data transmission rates of up to
56 Kbps using standard dial-up analog modems, or 128 Kbps using

                                       3
<PAGE>

integrated services digital network, or ISDN, modems. At these rates, several
minutes may be required to access a media rich website, and several hours may be
required to transfer or download large files.

     In an effort to provide greater bandwidth in the local loop, network
service providers are deploying higher speed access services, such as frame
relay or T1/E1. However, the historical pricing structure has limited such
services to larger businesses. The passage of the Federal Telecommunications Act
of 1996 started to change this historical pricing structure, and the merger of
AT&T and TCI completed in 1999 accelerated this change. The Federal
Telecommunications Act intensified the competitive environment by requiring
incumbent local exchange carriers, or ILECs, to lease portions of their
networks, including the local loop, to other telecommunications service
providers. These changes in competitive structures coincided with the maturation
of DSL technology, enabling high-bandwidth data networking over the existing
local loop copper infrastructure. As a result, a number of US companies,
including SBC, Covad Communications, MCI WorldCom, NorthPoint Communications,
Rhythms NetConnections and Sprint, are now deploying high-speed services using
DSL technologies over the copper infrastructure owned by the ILECs. The growing
deployment of high speed cable modems by cable system operators provides
additional pressure on the ILECs to modify their high speed data line pricing.
In particular, AT&T has announced plans to offer broadband and interactive
services, including telephony, on a broad scale over TCI's cable systems over
the next few years. In response to these competitive pressures, and in an effort
to increase revenues and maintain their existing customer base, ILECs in the US
are now aggressively committing their resources to deploy DSL services. Service
providers in Asia and Europe are also rapidly deploying DSL.

     DSL enables data transmission speeds of 128 kilobits per second, or Kbps,
to 52 megabits per second, or Mbps, using the existing local loop copper wire
infrastructure. DSL delivers "always on" availability, eliminating the tedious
dial-up process associated with traditional analog modem technologies. It is a
point-to-point technology that connects the end user to a telecommunications
service provider's central office or to an intermediate hub. DSL equipment is
deployed at each end of the copper wire and the transmission speed depends on
the length and condition of the existing wire as well as the capabilities of the
DSL equipment.

     Data, voice and video can all be delivered over DSL, enabling service
providers to offer a wide range of new value-add services. To date, the focus
has been on the application of DSL technologies to deliver high-speed access to
the Internet. Even more exciting opportunities lie ahead with the introduction
of voice and video over DSL services. Home and office gateways that include
voice telephony capabilities--typically known as Integrated Access Devices or
IADs--can deliver multiple lines of toll-quality voice over a single twisted
copper pair to the home or business. Voice over DSL requires sophisticated voice
processing algorithms, highly capable call-control software to support the
interface to the public telephone system and advanced user features, as well as
specially tuned and extended network protocol software to ensure toll-quality
audio. While the technical challenges of voice IADs are substantial, voice
support is fast becoming the next major requirement for DSL equipment
manufacturers. Over the next two years, IADs are projected to absorb new
application capabilities, including but not limited to secure data transmission
and distributed video reception capability.

     DSL implementations offer several attractive benefits over other broadband
technologies, including:

     .  Dedicated bandwidth. Some alternative high-speed data transmission
        solutions, such as cable, are shared-media systems where many users are
        attached to the same cable loop. As a result, existing users may suffer
        performance degradation or security breaches as new users are added to
        the network. Because each DSL connection is dedicated to a single user,
        DSL does not suffer from this kind of service degradation and enables a
        higher level of security.

     .  Broad coverage. As large numbers of businesses and homes in developed
        countries have installed copper telephone wire connections, DSL
        technologies can be made available to a large percentage of potential
        end users.

     .  Low cost. Because DSL uses the existing local loop connection, it is
        generally less expensive to deploy than other high-speed data
        transmission technologies. In addition, recent advances in technology
        development, industry standardization and competition are further
        enabling widespread, low-cost deployment of DSL.

     .  Scalable to customer requirements. DSL technology enables service
        providers to regulate the transmission speed for individual customers,
        allowing tiered pricing at various service levels. Service providers can
        then more efficiently segment their customer base.

     .  Natural upgrade from analog modems. DSL modems use the same phone port
        as analog modems, providing the user with a simple upgrade path.

                                       4
<PAGE>

     Fixed wireless serves similar needs to those served by DSL. Firstly, and
most importantly, it provides high speed data access to the Internet. Secondly,
it is capable in some circumstances of supporting advanced applications such as
voice. Fixed wireless is most often deployed in the following circumstances:

     .  If copper loop infrastructure is unsuitable, and in particular if the
        copper local loop is more than 18k feet long, then DSL cannot be used.
        Fixed wireless provides a cost effective way to serve those customers
        who are beyond the range of DSL technologies.

     .  In a sparsely populated area, it may be more effective to provide
        wireless than DSL broadband service.

     .  If there is a scarcity of copper local loop, then it can be quicker to
        deploy wireless because it does not involve placing physical
        infrastructure in the ground. This is often seen in emerging-economy
        markets.

     .  For service providers who neither own nor have access to fixed-line
        local loop infrastructure, fixed wireless enables them to create a
        broadband local loop product offering.

     Fixed wireless communications processing requirements are similar in many
respects to those of DSL communications processing, allowing Virata to leverage
its core investments in DSL communications processing technology into the
supplementary opportunity of fixed wireless.

     Equipment manufacturers encounter a number of challenges meeting the
demands of the growing broadband local-loop market. These challenges include
constantly evolving technology and networking standards, an expanding range of
feature expectations and shorter product life-cycles. To meet these challenges
and reduce the time it takes for their products to reach the market, equipment
manufacturers are increasingly relying on multiple third-party vendors to
deliver critical component building blocks that can be incorporated into a
complete DSL product.

     The analog front end receives and transmits the electronic signal and
converts that signal to either analog or digital streams. The physical layer
semiconductor, or PHY, together with its software, establishes, maintains and
controls the digital encoding and decoding of the signal and ensures reliable
transmission of information over the copper wire infrastructure. The layer 2 and
3 processor, combined with complex, multifunctional software modules, is
responsible for managing the addressing, routing, switching and protocol
conversions needed to encapsulate and route information packets.

     The integration of these individual components from multiple third-party
vendors can be a complex, time consuming and costly process. While today there
are a number of vendors which deliver a portion of either the hardware or
software building blocks, an opportunity exists for a supplier capable of
delivering higher levels of integration of both semiconductor and software
components.


The Virata Solution

     We provide a solution that combines communications processors with
integrated software modules to manufacturers of equipment utilizing digital
subscriber line, or DSL, technologies. Our systems expertise, "integrated
software on silicon" product solutions and support services enable our customers
to simplify product development, reduce the time it takes for products to reach
the market and focus resources on product differentiation and enhancement. Our
communications processors perform system functions which require real-time
processing speed and are technically mature, thus unlikely to change as
standards evolve. Our proprietary software is used for protocol processing,
management and control of network and semiconductor interfaces, allowing our
communications processors to be fine tuned or fully customized for specific
applications. This approach delivers off-the-shelf functionality for rapid
development, scalability from single PCs to complex edge routers and flexibility
to add new features and quickly respond to evolving standards. Key features of
our solution include:

     .  Flexible design. Our products are based on a flexible design that
        simplifies the addition of features. This design enables new services
        such as voice, video and security to be added incrementally as broadband
        solutions evolve.

     .  High levels of feature integration. We offer semiconductor solutions
        which are either PHY-independent or include an integrated ADSL/V.90 PHY.
        Our PHY-independent devices use generic, industry standard interfaces
        that attach to any third party DSL physical layer semiconductor and some
        fixed wireless physical layer semiconductors, which are the other
        primary semiconductor components required for broadband access
        communications equipment. By being PHY-independent, these products offer
        OEMs the maximum flexibility to choose the PHY to match a wide array of

                                       5
<PAGE>

        applications within the broadband local loop. We believe that our PHY-
        integrated devices, which incorporate an ADSL/V.90 PHY, are the most
        integrated communications processors currently available and offer OEMs
        the most cost-effective solution for ADSL equipment designs.

     .  Compelling price/performance. By designing software to run only on our
        semiconductors we are able to achieve efficiency in silicon area and
        code size. The combination of these features results in high
        performance, low power consumption and compelling price/performance.

     .  Standards compliant. Our products are compliant with relevant ADSL
        Forum, ATM Forum, IETF, ITU and other industry standards. Such standards
        evolve over time and our products are designed to accommodate such
        changes.


     Our customers recognize the following key benefits from using our
solutions:

     .  Faster time-to-market. Fewer building blocks to integrate results in
        shorter development and test cycles, lower engineering risks, faster
        product introduction and reduced development costs.

     .  Reduced product cost. Eliminating costly external components and
        reducing board space leads to lower product cost.

     .  Differentiation. Our customers' engineering resources can be focused on
        product differentiation through value-added features and innovations,
        rather than on elements contained in our solution.

     .  Platform for multiple products. Our modular software and hardware
        architecture enables the design of multiple products using different
        subsets of our modular software.

     .  Re-usability. As we add features and capabilities to our communications
        processors and software modules, software extensions developed by our
        customers can continue to be used on future generations of their
        products.


The Virata Strategy

     Our objective is to be the leading provider of communications processors
integrated with a comprehensive suite of related software to manufacturers of
voice and high-speed data network access equipment. Key elements of our strategy
include:

     .  Initial focus on DSL. We have extensive expertise in providing solutions
        that integrate communications processors with software for the content
        and connection enabling layers of the broadband communications network.
        While our core technologies are capable of supporting a number of
        broadband access alternatives, we have chosen to initially focus on the
        DSL market.

     .  License our software to all customers. We typically license our software
        to a customer at the time we achieve an initial design win. The customer
        then designs products incorporating our communications processors, which
        they purchase separately from us. By standardizing on our software,
        customers build a foundation for integrating additional functionality
        and designing next generation products. We believe that once a customer
        employs our architecture and experiences the benefits of our systems
        expertise, we become that customer's preferred partner for future
        products.

     .  Leverage our flexible design. Our integrated solution provides us
        substantial flexibility to extend our existing products, whether at the
        software or semiconductor level, to meet evolving standards and features
        required by the market. This approach allows our customers to achieve
        faster time-to-market, lower development costs and focus engineering
        resources on proprietary product feature development.

     .  Deliver market-leading features and functionality, such as voice over
        DSL and network quality of service solutions. We are building on our
        core technologies to add market leading features and functionality,
        enhancing the value of our products. The first set of added features we
        are developing includes voice over DSL and network quality of service
        solutions.

     .  Pursue strategic acquisitions. Our strategy is to enhance our growth
        capability by pursuing selective acquisitions. This strategy allows us
        to more rapidly obtain complementary technologies and engineering talent
        and to access certain markets and key customer relationships. Consistent
        with this strategy, we acquired RSA Communications in July 1998,

                                       6
<PAGE>

        D2 Technologies, Inc. in February 2000 and Inverness Systems Ltd. in
        April 2000. We believe completing further selective acquisitions will be
        important to remain competitive as a complete solutions provider to
        manufacturers of broadband access equipment.

     .  Leverage products and technologies into adjacent market spaces. Where
        our products and technology portfolio can be effectively leveraged into
        opportunities that are additional to DSL, Virata will seek to expand its
        revenues and net margin dollars by pursuing said opportunities. Virata's
        involvement in the fixed wireless broadband local loop is a current
        example.


Products

     We specialize in communications processors that are integrated with a
comprehensive suite of software for broadband local loop, including DSL,
equipment manufacturers. We offer solutions which are either PHY-independent or
include an ADSL/V.90 PHY. Our PHY-independent communications processors perform
the critical content encapsulation and content routing functionality required in
broadband local loop equipment, which is commonly referred to as layer 2 and
layer 3 processing. Our system combines multiple elements required for managing
the addressing, routing, switching and protocol conversions needed to
encapsulate and route information packets. Our PHY-inclusive solutions
incorporate all the functionality of the PHY-independent products together with
an ADSL/V.90 PHY all on the same semiconductor. This choice of a PHY-independent
or PHY-inclusive product, each featuring integration of a communications
processor and software, provides our customers a comprehensive, tested, self
sufficient solution that replaces semiconductors, software and support
previously sourced from multiple vendors.

  Semiconductor Products

     We offer two families of semiconductor products: the Proton family of
application specific integrated circuits, or ASICS, and the ATOM family of
application specific standard products, or ASSPs. The Proton ASICs were first
introduced in 1995 and are used in various combinations to enable different
applications including switching fabrics for small to mid-sized DSLAMs. Proton
products enabled customers to quickly develop their products prior to the
establishment of widely accepted broadband access standards. While we are still
realizing revenue from our Proton family of products, we have integrated the
functionality of the Proton family of products into our new, more advanced ASSP
products and thus expect the Proton family to constitute a declining percentage
of our revenues in the future.

     The establishment of broadband access standards and our experience with the
Proton ASIC family has enabled us to design the ATOM family of ASSPs for OEMs
focusing on the DSL market. These communications processors combine the relevant
elements of the Proton ASICs with at least one embedded ARM RISC microprocessor,
and different family members offer either a PHY-independent or PHY-inclusive
solution. ATOM devices also provide Ethernet, PCI or USB network interfaces as
well as Utopia for connection to physical layer devices and other semiconductors
and MII and serial interfaces for connection of next-generation home-area-
networking semiconductors. While Hydrogen features a single embedded ARM RISC
microprocessor, Helium and Lithium contain two ARM RISC microprocessors to
separate protocol and network processing. The Hydrogen, Helium and Lithium ASSPs
support physical layer devices from a broad range of vendors. The following is a
list of our PHY-independent ATOM family products:

<TABLE>
<CAPTION>
Product                  Interfaces                        Target Applications                      Introduction Date
-------                  ----------                        -------------------                      -----------------
<S>                      <C>                               <C>                                      <C>
Hydrogen...............  PCI, Utopia 1 and ATM25 PHY       DSL internal and external modems and     August 1997
                                                           set-top boxes

Helium.................  USB, Utopia 1/2, ADSL T1.432,     DSL external modems, gateways,           June 1999
                         HDLC and 10BaseT Ethernet         routers, DSLAMs and DLC line
                                                           cards

Lithium................  PCI, Utopia 1/2 and ADSL T1.432   DSL internal and external modems,        October 1999
                                                           gateways and set-top boxes
</TABLE>

We have also developed a new generation of ATOM products which combine ADSL PHY
layer processing along with the layer 2 and layer 3 functionality of Helium and
Lithium into a single highly integrated device. The first PHY-inclusive products
we have developed for this market are Beryllium and Boron. Each of these devices
is offered with a separate analog front end semiconductor called Neon.

                                       7
<PAGE>

<TABLE>
<CAPTION>
Product                  Interfaces                          Target Applications                        Introduction Date
-------                  ----------                          -------------------                        -----------------
<S>                      <C>                                 <C>                                        <C>
Beryllium..............  ADSL, V.90, PCI, USB and MII        ADSL/V.90 external bridges, routers        March 2000
                         interfaces (for 10/100 Ethernet     and gateways
                         and homephone-line networking)

Boron..................  ADSL, V.90, PCI and USB             ADSL/V.90 internal and external            expected
                         interfaces                          modems                                     June 2000

Neon...................                                      Analog front end for use with Beryllium    expected
                                                             and Boron                                  June 2000
</TABLE>

     Beryllium and Boron take the communications processing capabilities of
Helium and Lithium and add an on-chip ADSL transceiver or PHY eliminating a
large and expensive component from ADSL equipment. Representing the industry's
first "ADSL home router on a chip," Beryllium can lower equipment costs by a
substantial amount. Using a Virata-patented invention, Beryllium has also
delivered superior performance at longer distances from the central office
versus the current generation of ADSL routers in performance tests undertaken by
Virata. The Boron chip was designed around the same flexible and integrated
architecture as Beryllium, shares the same long loop performance capabilities,
but is targeted specifically at single-PC ADSL modems and achieves an even lower
cost point.

     Beryllium provides a highly integrated solution for ADSL bridges and
routers, with the ability to provide local area interfaces such as 10/100
Ethernet, HomePNA (using home telephone wiring for the home network), home
powerline, and home wireless. It is also well suited for voice IADs. Boron
provides a highly integrated solution for both USB and PCI ADSL modems. By
utilizing the Beryllium and Boron solutions teamed with the Neon analog front
end chip and a separate V.90 analog front end, equipment manufacturers will be
able to offer products that are functional with either dial-up 56K V.90 or ADSL
networks. Because of their dual V.90 and ADSL character, Beryllium and Boron
will allow the consumer to buy an "ADSL-ready" solution and subsequently upgrade
from V.90 to ADSL network access without any changes to their equipment once
ADSL services are available from the consumer's service provider.

 Products Under Development

     We are developing new PHY-independent and PHY-inclusive semiconductors with
higher feature content such as voice, video and security capabilities and higher
performance levels to meet the ever increasing demands of broadband equipment
manufacturers.

 Software

     Our extensive suite of software is key to providing flexible, off-the-shelf
communications processing solutions. Multiple software modules deliver
management and support for functions at the link, protocol and physical layers.
These modules either operate on top of ATMOS, our operating system Kernel, which
is optimized for communications applications that run on ARM RISC
microprocessors, or on top of Vx Works, a general purpose and widely used
operating system from Wind River Systems. The software provides our customers a
ready-to-deploy menu of over 50 modules to meet their specific product
requirements. Together, these modules complete a customized, sophisticated
system which supports multiple functions including quality of service, system
management, bridging, tunneling, address translation, signaling and routing.
Addition of the communications algorithms for the ITU ADSL and V.90 standards
complements the layer 2 and layer 3 code for our PHY-inclusive solutions. We
also offer customers a full set of software development tools including
compilers, linkers and other special-purpose tools.

     The recent acquisitions of D2 Technologies and Inverness Systems
substantially broaden and deepen the range of software capabilities we are able
to offer our customers as well as provide new points of contact with many of the
world's leading telecommunications equipment manufacturers. D2 Technologies'
software assets in the voice over IP arena include voice coders; advanced
telephony functions including PBX functionality, speaker phone, voice
conferencing; and echo cancellation. Inverness Systems' complementary
capabilities include Frame Relay; advanced routing including ATM AAL-2 SSCS,
Open Shortest Path First, or OSPF; BGP4, and Multi Protocol Label Switching, or
MPLS.

                                       8
<PAGE>

Design and Support Services

     We offer a number of design and support services which we believe add
substantial value to our product offerings. Our key services are detailed below:

 Reference Design Services

     Our Customer Services and Solutions group specializes in speeding
customers' time to market by developing reference designs featuring board-level
DSL hardware and integrated software products. Examples include modem solutions
featuring ADSL PHYs supplied by ST Microelectronics or Analog Devices. We
recently introduced an SDSL router design kit which teams our Helium processor
with a SDSL PHY marketed by Conexant.

 Technical Support Services

     Once customers have purchased a license for our software, they desire to
quickly and efficiently commence product development. We assist our customers by
providing comprehensive training in the use of our semiconductors and software
development systems. Our Technical Advice Center delivers technical assistance
to customers and manages our extranet site, which is accessible to all of our
customers, through which we deliver new software and documentation and take
action on bug reports. Our technical consultants, field application engineers
(FAEs) and, as appropriate, development engineers assist our customers
throughout the product development cycle, and may include formal and informal
design reviews.

 Evaluation Systems

     We help our customers accelerate their product development programs by
designing a board-level evaluation system for each ATOM product. Typically, each
time a new ATOM ASSP is introduced, an evaluation system featuring the new
product is made available to our customers simultaneously with the first release
to customers of the new semiconductor. This approach provides an effective way
for our customers to evaluate the new semiconductor and its software while
enabling designers to add their own functionality.


Technology

     A key element of our success is our technology expertise which spans
physical, networking layer, protocol layer and voice processing and systems-
level knowledge. Our semiconductor and software architectures are designed to
enable the rapid, flexible development of new products to meet the evolving
feature, performance and standards compliance demands of the broadband access
market. A single-chip, multi-processor architecture was chosen as the most
flexible and cost-efficient approach to the complex challenge of satisfying the
requirements of:

     .  layer 2 and 3 processing for broad application across the different DSL
        technologies when used in conjunction with physical layer transceivers
        from third party vendors;

     .  integration of layer 2 and 3 processing with DSL processing on a single
        communications processor;

     .  processing support for an evolving range of services and applications
        such as high speed Internet access, corporate routing, voice services,
        security and encryption for Virtual Private Networks, or VPNs, and video
        distribution; and

     .  broad application of our solutions whether used in modems close-coupled
        to PCs, Internet appliances, remote gateways and routers, DSLAMs or
        DLCs.

     We believe the core of our technology expertise is delivered to our
customers through our ASSP architecture, software architecture, communications
algorithms, digital signal processing, ATM, Frame and Internet protocol
processing voice algorithms and systems-level expertise.

 ASSP Architecture

     Our current ASSP architecture is specifically designed to meet the
performance and feature demands for broadband access equipment. This
architecture provides the flexibility for application in a wide range of
customer premises equipment without the need for additional processing support.
For example, when used inside or close coupled to a PC, our ASSPs and software
place

                                       9
<PAGE>

minimal demands on the host PC processor freeing it to focus on its own
operating system and application software support. We believe this approach
results in improved user satisfaction through enhanced PC reliability and better
performance, and minimized support costs for PC suppliers and service providers.

     The architecture is based on a dual bus structure. One bus connects the
embedded ARM RISC processors used for protocol processing, network processing
and other control functions with a wide range of physical interfaces. These
physical interfaces support connection of our communications processors to other
semiconductors and memory systems as well as to external devices such as PCs and
Ethernet hubs. The second bus supports DSPs and other specialized processors
required for on-chip ADSL or V.90 PHY-layer processing, voice or video
processing. Both buses access common resources such as an SDRAM controller, an
interprocessor gateway, processor registers and debugging facilities.

     This architecture makes it possible for us to quickly develop new ASSPs to
meet evolving standards and the application demands of the market.

 Software Architecture

     By simultaneously developing the software and semiconductor architectures,
we have achieved tight software/semiconductor integration. This results in
better system performance, smaller chip size, fewer lines of code and lower
memory requirements than is possible through the complex alternative of
assembling, integrating and testing functionally equivalent software elements
from multiple off-the-shelf sources. Our software architecture partitions the
processing requirements into time critical and non-time critical tasks. All time
critical code is optimized to run on the network processor ensuring the high
performance required for low latency and control of external interfaces. A
compact real-time operating system Kernel, either ATMOS or VxWorks controls
processing on the protocol processor.

     The modular construction of the software architecture makes it easier to
add further functionality. This facilitates rapid development and release of new
software features.

 Communications Algorithms and Digital Signal Processing

     Communications algorithms are the processes and techniques used to
transform a digital data stream into a specially conditioned signal suitable for
transmission across copper telephone wires. We have extensive experience
developing software code for the analog modem market and have leveraged that
expertise to develop the solutions required for the ITU ADSL standards. PHY
layer code is executed in our Beryllium and Boron communications processors
using a compact, low power DSP supported by fixed function hardware blocks.

 Voice Algorithms and Digital Signal Processing

     Advanced telephony and voice solutions also require DSP algorithms which we
access through our recent acquisition of D2 Technologies. Algorithms include
basic encoding such as G.711 and G.726; advanced encoding such as G.723, G.728
and G.729; echo cancellation including single and multi reflector G.168; fax
relay; and voicemail capability. The G.xxx algorithm implementations are based
on ITU standards, and achieve an industry leading level of algorithmic
performance measured in DSP millions-of-instructions-per-second, or MIPS, for a
given number of voice channels, saving customers money by enabling them to use
less powerful DSPs than they would otherwise have to for their applications.
Voice algorithms typically run on a DSP external to the Virata communications
processor. Virata's communications processors include interfaces that allow them
to gluelessly connect to popular voice DSPs including the C54xx series from
Texas Instruments.

 ATM, Frame and Internet Protocol Processing

     The ATM processing software manages, channels, buffers and shapes ATM cells
and utilizes the custom hardware filters in the semiconductors to achieve the
optimum trade-off between software flexibility and hardware performance. To
support transmission of frame encapsulated data, our software supplies drivers
for Ethernet and HDLC as well as a variety of methods for encapsulating frames
over ATM. The software management capabilities for layer 3 processing include
TCP/IP, IP routing, network address translation, IP configuration and tunneling.
The acquisition of Inverness Systems broadens and deepens our existing software
through the addition of Frame Relay, advanced IP routing and MPLS capabilities.

                                       10
<PAGE>

Systems-Level Expertise

  We have accumulated experience designing systems-level products that meet the
technical challenges of the local loop environment and of interoperability with
products from other suppliers. This know-how is embedded in our products. Our
customers additionally benefit from this experience during their product
architecture and design milestone reviews.


Customers

  We sell our products to established telecommunications equipment vendors,
modem manufacturers and broadband access equipment companies, including 67
customers who have licensed our software. Several of our largest customers in
terms of revenue include (in alphabetical order): Adaptive Broadband, Allied
Data, Arescom, Com21, Coppercom, Diamond Multimedia, Ericsson, Netopia, Orckit
Communications, Westell Technologies, Xavi Technologies, and Zhone.

  Our customers have developed or are developing 118 equipment designs based on
our semiconductors and software. Of these 118 designs, 33 are currently
shipping.

  Our ASICs and ASSPs are employed by our customers in the following
representative product types:

  . DSL modems which are installed inside PCs;
  . DSL modems which are connected to a PC via a USB or Ethernet link;
  . DSL gateways and routers;
  . DSLAMs and DLCs; and
  . Cable modem head-ends.

  We depend on a relatively small number of customers for a large percentage of
our revenues. For the fiscal year ended April 2, 2000, Orckit Communications and
Westell Technologies accounted for 23.1% and 15.1%, respectively, of our total
revenues. We do not have purchase orders with any of our customers that obligate
them to continue to purchase our products and these customers could cease
purchasing our products at any time.


Sales and Marketing

  Our sales and marketing strategy is to license our software and secure design
wins with industry leaders in emerging high growth segments of the broadband
access equipment market. We typically license our software to a customer at the
time we achieve an initial design win. Following training, the customer then
designs products incorporating our communications processors, which they
purchase separately from us. As a result, prior to completing the license
agreement, our FAEs and development engineers often act as consultants to
customers to assist them with their architectural decisions. We generally employ
a direct sales model to build a close relationship with customers both prior to
and following the execution of a license. In Korea, we work with representative
firms.

  Generally, our sales team consists of qualified engineers who are located in
California, Massachusetts, North Carolina, the United Kingdom, Israel, Taiwan,
Hong Kong and Japan providing coverage of the U.S., Europe and Asia. The sales
team is supported by FAEs and development engineers that work directly with
customers on their new product developments.

  We manage a number of marketing programs designed to communicate our
capabilities and benefits to broadband access equipment manufacturers. Our
Internet site is an important marketing tool where a wide range of information
is available including product information, white papers, application notes,
press releases, contributed articles and presentations. In addition we
participate in industry trade shows, technical conferences and technology
seminars, conduct press tours and publish technical articles in industry
journals.


Research and Development

  As of April 27, 2000, we had 125 engineers based in California, Massachusetts,
North Carolina, England and Israel. Of these engineers, 55 have advanced
degrees, including 12 with Ph.D.s. Several individuals were early developers in
analog modem software, voice algorithms, IP telephony and ATM technologies.

                                       11
<PAGE>

  Since mid-1998, we have invested a significant portion of our research and
development expenditures in the development of Beryllium and Boron and
associated software to address the ADSL market. Consistent with our strategy to
enhance our capabilities by pursuing selective acquisitions, we recently
acquired D2 Technologies and Inverness Systems, each of which creates new market
opportunities for us. We believe that we must continue to innovate, extend the
range and enhance our products and services to maintain our leadership position.
We cannot be sure that our research and development efforts will result in the
introduction of a new product or product enhancements or that any new product
will achieve market acceptance. We will invest further to expand our research
and development staff and capabilities. Our research and development
expenditures were $4.0 million and $8.3 million in the fiscal years ended March
31, 1998, 1999 and $12.3 million, excluding the National Insurance Contribution
on options accrual of $2.0 million, in the fiscal year ended April 2, 2000,
respectively (see "Management's Discussion and Analysis of Results of Operations
and Financial Condition").


Manufacturing

  We outsource the wafer manufacturing, assembly and testing of all our
semiconductors. This fabless semiconductor model allows us to focus our
resources on the design, development and marketing of our products. Our Proton
semiconductors and Hydrogen and Helium communications processors have all been
sourced from suppliers that deliver fully assembled and tested products. For our
most recent semiconductor product introductions, which include the Lithium,
Beryllium and Boron communications processors, we separately outsource the wafer
fabrication, assembly and test functions from different contractors. This
improves manufacturing efficiency and lowers overall product costs. The
Hydrogen, Helium and Lithium ATOM products incorporate embedded ARM RISC
microprocessors and are supplied by companies that have an ARM license. In June
1999, we entered into a per semiconductor design license agreement with ARM
which allows us to select foundry suppliers that best meet our quality, delivery
and cost objectives. Among other provisions, our ARM license requires ARM to
indemnify us, up to a specified dollar amount, in the event of third party
claims of intellectual property infringement. Our Beryllium and Boron
communications processors are supplied by UMC under the provisions of this
license. We have expanded our operations team so that we are able to assume more
of the manufacturing and quality control responsibilities as well as develop and
maintain contractor relationships with multiple suppliers.

  Our inventory storage and warehousing function is contracted to a global
freight forwarding service provider to fulfill our worldwide customer demand. We
have also initiated drop shipments from several of our third party manufacturing
locations, to enable more timely product delivery to our rapidly-expanding
worldwide customer base. Our ordering systems are undergoing continual business-
process-level improvements, resulting in shortened order commit lead times and
product sourcing cycle times. We have experienced significant improvements in
lead times, to both our customers and from our vendors due to our improved
communication delivery systems.

  We only employ standard processes at high-quality, high-volume manufacturers.
We have undergone rigorous third party quality and reliability evaluations of
our products, which resulted in the successful certification of our
semiconductors for high-volume, commodity-type applications. We rely on third
party suppliers including semiconductor foundries for substantially all of our
semiconductor requirements and have taken action to ensure we can obtain
products within the time frames and in the volumes required by us at an
affordable cost. We have a guaranteed capacity and pricing commitment from UMC
which covers all Virata-required wafers through calendar 2001. Virata has also
received capacity allowances from LSI Logic to secure the supply of Helium
integrated circuits. Third party foundries supplying the Proton products,
however, are not obligated to supply products to us for any specific period, in
any specific quantity or at any specific price. Virata has several long-term
relationships with these foundries, and on some occasions we have experienced
delays and may in the future experience delays in receiving semiconductors from
these foundries. Any problems associated with the delivery, quality or cost of
the assembly and testing of our products could impact our business, financial
condition and results of operations.

Competition

  The communications semiconductor market is intensely competitive and
characterized by rapid technological change, evolving standards, short product
life cycles and price erosion. Major competitive factors in the market we
address include technical innovation, product features and performance, level of
integration, reliability, price, total system cost, time-to-market, customer
support and reputation. We believe that while, today, no other single company
offers a competing integrated solution, there is competition with respect to
individual elements of our solution. We also believe that competition may
increase substantially as the introduction of new technologies and potential
regulatory changes create new opportunities for established and emerging
companies.

                                       12
<PAGE>

  We face competition from semiconductor device suppliers, software development
companies and vertically integrated telecommunications equipment vendors. We
believe our principal competitors for each of our products include:

  .  Proton, our family of ASICs: devices from Motorola, PMC-Sierra and
Transwitch;

  .  Hydrogen, Helium and Lithium, our PHY-independent ASSPs: devices from Intel
through their pending acquisition of BASIS Communications and Motorola;

  .  Beryllium and Boron, our PHY-inclusive, ADSL/V.90 products: devices from
Alcatel Microelectronics, Analog Devices, Centillium Technology, Conexant
Systems, GlobeSpan, Lucent Technologies and Texas Instruments; and

  .  Software: operating systems and software stacks from Wind River Systems and
its recently acquired subsidiary, Integrated Systems; and networking and
protocol layer software from Harris & Jeffries, Microsoft and Trillium; and
voice software from Broadcom through their 1999 acquisition of Hothaus and Texas
Instruments through their 1999 acquisition of Telogy.

  In addition, there have been a number of announcements by other semiconductor
companies that they intend to enter the market segments adjacent to or addressed
by our products.

  Many of the companies that compete, or may compete against us in the future,
have longer operating histories, greater name recognition, larger installed
customer bases and significantly greater financial, technical and/or marketing
resources. As a result, they may be able to respond more quickly to changing
customer circumstances or to devote greater resources to the development,
promotion and sale of their products than we can. We cannot be sure that our
current or future competitors will not develop and introduce new products that
will be priced lower, provide superior performance or achieve greater market
acceptance than our products. Furthermore, current or potential competitors have
established, or may establish, cooperative relationships among themselves or
with third parties to increase the ability of their products to address the
needs of our prospective customers. Accordingly, it is possible that new
alliances among our competitors will emerge and rapidly acquire market share,
which would harm our business.

  In addition, many of our customers and potential customers have substantial
technological capabilities and financial resources. Some customers have already
developed, or in the future may develop, technologies that will compete directly
with our products and services. Because these companies do not purchase all of
their semiconductors from suppliers such as us, if they displace our customers
in the equipment market, our customers would no longer need our products, and
our business, financial condition and results of operations would be seriously
harmed.

  Given the highly competitive environment in which we operate, we cannot be
sure that any current competitive advantages enjoyed by our products will be
sufficient to establish or sustain our position in the market. Any increase in
price from our suppliers or other competition could result in erosion of our
market share and could harm our business, financial condition and results of
operations. We cannot be sure that we will have the financial resources,
technical expertise or marketing and support capabilities to continue to compete
successfully.


Intellectual Property

  We rely primarily on a combination of patents, copyrights, trademarks, trade
secret laws, contractual provisions, licenses and maskwork protection to protect
our intellectual property. We also enter into confidentiality agreements with
our employees, consultants and customers and seek to control access to, and
distribution of, our other proprietary information. However, these measures
afford only limited protection. There is no guarantee that such safeguards will
protect our intellectual property and other valuable competitive information.

  Our success depends significantly upon our ability to protect our intellectual
property. Despite our efforts to protect our proprietary rights, unauthorized
parties may attempt to copy aspects of our products or obtain and use
information that we regard as proprietary. Our competitors may also
independently develop similar technologies. In addition, in the past,
competitors have recruited our employees who have had access to our proprietary
technologies, processes and operations. Our competitors' recruiting efforts,
which we expect will continue, expose us to the risk that such employees will
misappropriate our intellectual property. Furthermore, the laws of some foreign
countries do not protect our proprietary rights as fully as do the laws of the
United States. Many U.S. companies have encountered substantial infringement
problems in such countries, some of which are

                                       13
<PAGE>

countries in which we have sold and continue to sell products. There is a risk
that our means of protecting our proprietary rights may not be adequate. Our
failure to adequately protect our proprietary rights may seriously harm our
business.

  As of April 2, 2000, we have been granted two patents in the United States,
with three counterpart patents in other countries. Our patents have expiration
dates ranging from 2016 to 2017. In addition, we have nine patent applications
pending in the United Kingdom and twelve pending in the United States. We also
have counterpart patent applications pending in various countries other than the
United Kingdom and the United States. These patents may never be issued. Even if
these patents are issued, taken together with our existing patents, they may not
provide sufficiently broad protection to protect our proprietary rights, or they
may prove to be unenforceable. We also utilize unpatented proprietary know-how
and trade secrets and employ various methods to protect our trade secrets and
know-how.

  From time to time, we may desire or be required to renew or to obtain licenses
from others in order to further develop and market commercially viable products
effectively. We cannot be sure that any necessary licenses will be available or
will be available on reasonable terms.

  We have registered the trademarks "Virata," "ATMOS" and "ATOM". The Virata
Logo, "ISOS," "Proton," "Hydrogen," "Helium," "Lithium," "Beryllium," "Boron"
and "Neon" are also trademarks of Virata Corporation.


Employees

  As of April 27, 2000, we had 205 full-time employees in our worldwide
operations. Of that total, 125 were primarily engaged in engineering, 44 were
engaged in sales and marketing and the remainder were engaged in operational,
financial and administrative functions. As of April 27, 2000, our employees were
employed at the following facilities:

  .  36 of our employees were employed at our facilities in Santa Clara,
     California;
  .  71 of our employees were employed at our facilities in Cambridge, England;
  .  42 of our employees were employed at our facilities in Raleigh, North
     Carolina;
  .  25 of our employees were employed at our facilities in Santa Barbara,
     California;
  .  15 of our employees were employed at our facilities in Kfar Saba, Israel;
  .  12 of our employees were employed at our facilities in Marlborough,
     Massachusetts; and
  .  4 of our employees were employed at our facilities in Taipei, Taiwan.

  None of our employees are covered by, nor are we a party to, any collective
bargaining agreement. We believe our employee relations are good.

Executive Officers and Directors

As of April 2, 2000, the executive officers and directors of the Company are as
follows:

<TABLE>
<CAPTION>
               Name                      Age                                      Position
               ----                      ---                                     ---------
<S>                                      <C>      <C>
Charles Cotton.....................       53      Chief Executive Officer and Director
Michael Gulett.....................       46      President, Chief Operating Officer
Andrew Vought......................       45      Senior Vice President, Finance, Chief Financial Officer and Secretary
Martin Jackson.....................       41      Chief Technology Officer and Director
Thomas Cooper......................       50      Senior Vice President, Corporate Development
Duncan Greatwood...................       32      Vice President, Marketing
Dr. Hermann Hauser.................       51      Chairman of the Board
Marco De Benedetti.................       37      Director
Gary Bloom.........................       39      Director
Bandel Carano......................       38      Director
Professor Andrew Hopper............       46      Director
Peter Morris.......................       43      Director
Patrick Sayer......................       42      Director
Giuseppe Zocco.....................       34      Director
</TABLE>

  Charles Cotton has been our Chief Executive Officer and a member of our board
of directors since September 1997. Mr. Cotton joined us in January 1995, first
as a consultant, and then in August 1995 as our General Manager, Europe, and was

                                       14
<PAGE>

subsequently promoted to Chief Operating Officer in July 1996. From January 1991
to December 1995, Mr. Cotton was an independent consultant. In 1990, he served
as Chief Executive Officer of Shandwick Europe, a public relations consulting
firm. From 1988 to 1989, Mr. Cotton served as President of Thermal Scientific
and as a Director of its parent company, Thermal Scientific plc. From 1983 to
1986, he served in a variety of international marketing and operations functions
for Sinclair Research. Mr. Cotton holds an honors degree in Physics from Oxford
University.

  Michael Gulett joined us in November 1998 as Chief Operating Officer and was
promoted to President and Chief Operating Officer in June 1999. Prior to joining
us, Mr. Gulett was President and Chief Executive Officer at Paradigm Technology,
a developer of fast, static memory solutions, in Milpitas, California, from
February 1993 to June 1998. Mr. Gulett has also held management positions at
VLSI Technology, California Devices, Intel Corporation and NCR. Mr. Gulett holds
a B.S.E.E. from the University of Dayton.

  Andrew Vought joined us in May 1996 as Chief Financial Officer and Secretary
and was named Senior Vice President of Finance in September 1997. From January
1995 to May 1996, Mr. Vought founded and served as a General Partner of Cheyenne
Capital Corporation, a private venture capital firm. From May 1990 to July 1994,
Mr. Vought served as Chief Financial Officer of Micro Power Systems, an analog
semiconductor company. Mr. Vought has also held senior finance and manufacturing
management positions with Diasonics and the European semiconductor operations of
Texas Instruments. Mr. Vought serves on the board of directors of SCM
Microsystems Inc. a supplier of digital access control and connectivity
solutions. Mr. Vought holds a M.B.A. from the Harvard Business School and a B.S.
in Finance and a B.A. in Environmental Studies from the University of
Pennsylvania.

  Martin Jackson is our Chief Technology Officer and has directed new product
development since joining us in April 1994. Prior to joining us, Mr. Jackson was
a co-founder and Vice President of Technology of EO--formerly Active Book
Company. Mr. Jackson also co-founded Tadpole Technology, a developer of high
performance computer boards. Mr. Jackson is acknowledged as a leader in the
application of asynchronous transfer mode technology for provisioning broadband
in the local loop and serves on the board of directors of the DSL Forum. Mr.
Jackson holds an M.A. in Electrical Sciences from the University of Cambridge.

  Thomas Cooper is our Senior Vice President, Corporate Development and has been
employed by us in various capacities since December 1994. Prior to joining us,
Mr. Cooper served as Vice President of Distribution for Network Equipment
Technologies Inc., an early entrant into in the asynchronous transfer mode
market, from 1992 to December 1994. He holds a M.B.A. from the University of
Toledo (Ohio) and a B.A. in English from Hamilton College.

  Duncan Greatwood became our Vice President, Marketing, and previously served
as our Vice President, European Sales since joining us in November 1997. Prior
to joining us, Mr. Greatwood held a variety of management positions in the
software engineering and marketing functions of Madge Networks, a network
equipment company, from 1989 to November 1997. At Madge Networks, Mr. Greatwood
was responsible for activities in the areas of voice-over-IP (Internet Protocol)
and multiservice networking. Mr. Greatwood holds a degree in Mathematics from
Oxford University and an M.B.A. from London Business School.

  Dr. Hermann Hauser is one of our co-founders and has served as our Chairman
since March 1993. Dr. Hauser also serves as a member of the Compensation
Committee of the Board of Directors. Dr. Hauser's principal occupation is
Director of Amadeus Capital Partners Ltd., a venture capital fund management
company a position he has held since December 1997. Dr. Hauser has also co-
founded more than 20 other high technology companies, including Acorn Computer
Group plc, EO Ltd., Harlequin, IXI Ltd., Vocalis, Electronic Share Information,
Advanced Displays Limited and SynGenix. Dr. Hauser holds a Ph.D. in Physics from
Cambridge University.

  Marco De Benedetti has served as a member of our board of directors since July
1994. Mr. De Benedetti has been the Chairman and Managing Director of Telecom
Italia Mobile S.p.A., Europe's largest cellular phone operator since July 1999.
Prior to joining Telecom Italia Mobile, Mr. De Benedetti was chairman of
Infostrada S.p.A., a company controlled by Olivetti operating as an alternative
fixed line carrier in Italy from 1990 to July 1999. Prior to joining Olivetti in
1990, Mr. De Benedetti worked for the investment bank Wasserstein, Perella & Co.
in mergers and acquisitions from 1987 to 1989. Mr. De Benedetti holds an M.B.A.
from the Wharton School of the University of Pennsylvania and a B.S. in
Economics and History from Wesleyan University.

  Gary Bloom has served as a member of our board of directors since February
1999. Mr. Bloom is Executive Vice President of Oracle Corporation and has been
employed by Oracle since September 1986. Mr. Bloom received a B.S. in Computer
Science from California Polytechnic State University at San Luis Obispo.

                                       15
<PAGE>

  Bandel Carano has served as a member of our board of directors since May 1995.
Mr. Carano also serves as a member of the Compensation Committee of the Board of
Directors. Mr. Carano is a General Partner of Oak Investment Partners in Palo
Alto, California, a private venture capital firm, which he joined in 1985. Mr.
Carano currently serves as a member of the Investment Advisory Board of the
Stanford University Engineering Venture Fund. Mr. Carano also serves as a member
of the board of Advanced Radio Telecom Corp., Metawave Communications Corp.,
Wireless Facilities, Inc. and several private companies. Mr. Carano holds both a
M.S. and a B.S. in Electrical Engineering from Stanford University.

  Professor Andrew Hopper is one of our co-founders and has served as a member
of our board of directors since March 1993.  Since November 1997, Professor
Hopper has been the Professor of Communications Engineering within the
Department of Engineering at Cambridge University and prior to that he was a
Reader. Since 1986, Professor Hopper has also been the Managing Director of the
Olivetti Research Laboratory, now AT&T Laboratories-Cambridge. Professor Hopper
is considered one of the early developers of asynchronous transfer mode
technology and has over 20 years experience in networking, computer systems and
multimedia. Professor Hopper is also involved with the commercialization of
technology with a number of Cambridge-area firms. Professor Hopper is a Fellow
of the Royal Academy of Engineering and holds a Ph.D. from Cambridge University.

  Peter T. Morris has served as a member of our board of directors since May
1995. Mr. Morris also serves as a member of the Audit Committee of the Board of
Directors. Mr. Morris is a General Partner of New Enterprise Associates, a
private venture capital firm, in Menlo Park, California, where he has been
employed since 1992. Mr. Morris specializes in information technologies, with a
focus on communications and the Internet. His current board memberships include
Gadzoox Networks Inc., Packeteer Inc. and several private companies. Before
joining New Enterprise Associates, Mr. Morris served in various capacities with
Telebit Corporation from 1987 to 1991. Prior to that he was with Montgomery
Securities, an investment bank, from 1985 to 1987, and Bain & Company, a
management consultancy, from 1980 to 1982. Mr. Morris holds an M.B.A. and a B.S.
in Electrical Engineering from Stanford University.

  Patrick Sayer has served as a member of our board of directors since June
1998. Mr. Sayer also serves as a member of the Audit Committee of the Board of
Directors. Mr. Sayer is a General Partner of Lazard Freres et Cie, a French
investment bank, where he oversees the technology, telecommunications and media
sectors. Mr. Sayer has worked within the Lazard Freres Group throughout his
career with assignment in its international advisory group, the corporate
finance department and the mergers and acquisitions department. In addition, Mr.
Sayer is the Chairman of the Investment Committee of Eurafrance and Gaz et Eaux,
two French publicly traded holding companies ultimately controlled by the Lazard
Freres Group. Mr. Sayer is a graduate of Ecole Polytechnique and Ecole des Mines
de Paris.

  Giuseppe Zocco has served as a member of our board of directors since June
1998. Mr. Zocco also serves as a member of both the Audit Committee and the
Compensation Committee of the Board of Directors. Mr. Zocco is a General Partner
of Index Ventures, a private venture capital firm based in Geneva, Switzerland,
which he joined in 1996. Prior to joining Index Ventures, Mr. Zocco was a
management consultant with McKinsey & Company from 1988 to 1996, working in
several of its European offices and its EuroCenter, a special consulting unit
focused on Pan-European clients. Mr. Zocco holds a M.B.A. from Stanford Business
School, a B.A. in Finance from Bocconi University in Milan, and an I.E.P. from
the London Business School. He is a director of Belle Systems A/S and Evolve
Software, Inc.

Risk Factors

The risks described below and other information included in this Annual Report
should be carefully considered. The risks and uncertainties described below are
not the only ones facing us. Additional risks and uncertainties not presently
known to us or that we currently deem immaterial may also impair our business
operations. If any of the following risks actually occur, our business,
financial condition or results of operations could be harmed. These risk factors
are not intended to represent a complete list of the general or specific risk
factors that may affect us.

 Because we have a limited operating history selling products to the digital
 subscriber line, or DSL, market, we cannot be sure that we can successfully
 implement our business strategy

  We have not had a long history of selling our products to the DSL market or
generating significant revenues and many of our products have only recently been
introduced. Furthermore, we have limited historical financial data that can be
used in evaluating our business and our prospects and in projecting future
operating results. For example, we cannot forecast operating expenses based on
our historical results because they are limited, and we are instead required to
forecast expenses based in part on future revenue projections. Most of our
expenses are fixed in the short term and we may not be able to quickly reduce
spending if our revenue is lower than we had projected. Therefore net losses in
a given quarter could be greater than expected. In addition, our ability to
forecast accurately our quarterly revenue is limited, making it difficult to
predict the quarter in which sales will occur.

                                       16
<PAGE>

  You must consider our prospects in light of the risks, expenses and
difficulties we might encounter because we are at an early stage of development
in a new and rapidly evolving market. Many of these risks are described under
the sub-headings below. We may not successfully address any or all of these
risks and our business strategy may not be successful.

 Because we expect to continue to incur net losses, the price of our stock may
 decline and we may not be able to implement our business strategy

  We have not reported an operating profit for any fiscal year since our
incorporation and experienced net losses of approximately $26.1 million, $17.2
million and $10.3 million for the fiscal year ended April 2, 2000 and the fiscal
years ended March 31, 1999 and 1998, respectively. We expect to continue to
incur net losses, and these losses may be substantial. Further, we expect to
incur substantial negative cash flow in the future. Accordingly, our ability to
continue to operate our business and implement our business strategy may be
hampered and the value of our stock may decline.

 Because we may not be able to achieve or sustain profitability or positive cash
 flow, the price of our stock may decline and we may not be able to implement
 our business strategy

  Due to our continuing substantial capital expenditures and product
development, sales, marketing and administrative expenses, we will need to
generate significant revenues to achieve profitability and positive cash flow.
We cannot be sure that we will be able to generate such revenues or achieve
profitability or positive cash flow. Even if we do achieve profitability and
positive cash flow, we may not be able to sustain or increase profitability or
cash flow on a quarterly or annual basis. Our ability to generate future
revenues will depend on a number of factors, many of which are beyond our
control. These factors include:

  .  the rate of market acceptance of high speed network access;
  .  the rate of market acceptance of our products and the demand for equipment
     that incorporates our products;
  .  changes in industry standards governing DSL technologies;
  .  the extent and timing of new customer transactions;
  .  personnel changes, particularly those involving engineering and technical
     personnel;
  .  regulatory developments; and
  .  general economic trends.

  Due to these factors, we cannot forecast with any degree of accuracy what our
revenues will be in future periods and we may not be able to achieve or sustain
profitability or positive cash flow. Our ability to continue to operate our
business and implement our business strategy may thus be hampered and the value
of our stock may decline.

 Because our operating results from quarter to quarter may fluctuate, the price
 of our stock may decline

  Our revenues, expenses and operating results have fluctuated in the past and
are likely to fluctuate significantly in the future on a quarterly and an annual
basis due to a number of factors, many of which are outside our control. For
example, our results of operations have been negatively affected by the
following:

  .  the loss of or decrease in sales to a major customer or failure to complete
     significant transactions;
  .  the timing and size of semiconductor orders from, and shipments to, our
     existing and new customers;
  .  unexpected delays in introducing new or enhanced products, including
     manufacturing delays;
  .  the volume and average cost of products manufactured; and
  .  the timing and size of expenses, including expenses of developing new
     products and product improvements.

  Accordingly, our revenues, expenses and results of operations could vary
significantly in the future, and you should not rely upon period-to-period
comparisons as indications of future performance. Such fluctuations may make our
stock unattractive to investors and result in a decline in the price of our
stock.

 Because our business is dependent upon the broad deployment of DSL services by
 telecommunications service providers, we may not be able to generate
 substantial sales of our products if such deployment does not occur

  Our products are incorporated in equipment that is targeted at end-users of
DSL technologies. Consequently, the success of our products may depend upon the
decision by telecommunications service providers to broadly deploy DSL
technologies and the timing of such deployment. If telecommunications service
providers do not offer DSL services on a timely basis or if there are technical
difficulties with the deployment of DSL services, sales of our products may
decline, which would have a negative effect on our results of operations.
Factors that may impact this deployment include:

                                       17
<PAGE>

  .  a prolonged approval process, including laboratory tests, technical trials,
     marketing trials, initial commercial deployment and full commercial
     deployment;
  .  the development of a viable business model for DSL services, including the
     capability to market, sell, install and maintain DSL services;
  .  cost constraints, such as installation costs and space and power
     requirements at the telecommunications service provider's central office;
  .  evolving industry standards for DSL technologies; and
  .  government regulation.

 Because our products are components of other equipment, if equipment
 manufacturers do not incorporate our products in their equipment, we may not be
 able to generate adequate sales of our products

  Our products are not sold directly to the end-user; rather, they are
components of other products. As a result, we rely upon equipment manufacturers
to design our products into their equipment. We further rely on this equipment
to be successful. If equipment that incorporates our products is not accepted in
the marketplace, we may not achieve adequate sales volume of our products, which
would have a negative effect on our results of operations.

 Because the requirements of our customers frequently change, we may not be able
 to anticipate trends in the markets for our products, which could result in a
 decline in sales of our products

  We must anticipate the price, performance and functionality requirements of
equipment manufacturers who design DSL equipment. We must also successfully
develop products that meet these requirements and make these products available
on a timely basis and in sufficient quantities. If we do not anticipate trends
in the DSL market and meet the requirements of manufacturers of DSL equipment,
we may be unable to generate substantial sales of our products, which would have
a negative effect on our results of operations.

  While we have a strategy of licensing and partnering with as many key
participants in our markets as possible, some equipment manufacturers will be
more successful than others in developing and marketing their products that
incorporate our semiconductor products and it is difficult for us to predict
which of these customers will generate revenues for us. Our product sales are
almost completely dependent upon the relative success of our customers in the
marketplace for high-speed network access equipment.

 Because we depend on third party foundries to manufacture, assemble and test
 our products, we may experience delays in receiving semiconductor devices

  We do not own or operate a semiconductor fabrication facility. Rather, our
semiconductor devices are generally manufactured at independent foundries. We
intend to continue to rely on third-party foundries and other specialist
suppliers for all of our manufacturing, assembly and testing requirements.
However, these foundries are not obligated to supply products to us for any
specific period, in any specific quantity or at any specific price, except as
may be provided in a particular purchase order that has been accepted by one of
them. As a result, we cannot directly control semiconductor delivery schedules,
which could lead to product shortages, quality assurance problems and increases
in the costs of our products. In addition, we have occasionally experienced
delays in receiving semiconductor devices from foundries due to foundry
scheduling and process problems. To date, such delays have not had a material
effect on our results of operations. However, we may experience delays in the
future and we cannot be sure that we will be able to obtain semiconductors
within the time frames and in the volumes required by us at an affordable cost
or at all. Any disruption in the availability of semiconductors or any problems
associated with the delivery, quality or cost of the fabrication assembly and
testing of our products could significantly hinder our ability to deliver our
products to our customers and may result in a decrease in sales of our products.

  If the foundries we currently use are unable to provide us with
semiconductors, we may be required to seek a new manufacturer of our
semiconductors, and we cannot be certain that a new manufacturer of our
semiconductors will be available. Furthermore, switching to a new manufacturer
could require six months or more and would involve significant expense and
disruption to our business.

 Because we depend on third party foundries, if there is a shortage in worldwide
 foundry capacity, we may not be able to obtain sufficient manufacturing
 capacity to meet our requirements

                                       18
<PAGE>

  From time to time there may be shortages in worldwide foundry capacity due to
increases in semiconductor demand or other factors. In the event of such a
shortage, we may not be able to obtain a sufficient allocation of foundry
capacity to meet our product needs. In addition, such a shortage could lengthen
our products' manufacturing cycle and cause a delay in the shipments of our
products to our customers. This could ultimately lead to a loss of sales of our
products and have a negative effect on our results of operations.

 Because we may be required to enter into financial and other arrangements with
 foundries in order to secure foundry capacity, our earnings or the ownership of
 our stockholders may be diluted

  Allocation of a foundry's manufacturing capacity may be influenced by a
customer's size or the existence of a long-term agreement with the foundry. To
address foundry capacity constraints, other semiconductor suppliers that rely on
third-party foundries have utilized various arrangements, including equity
investments in or loans to independent component manufacturers, in exchange for
guaranteed production capacity, joint ventures to own and operate foundries, or
"take or pay" contracts that commit a company to purchase specified quantities
of components over extended periods. While we are not currently a party to any
of these arrangements, we may enter into such arrangements in the future and may
use a portion of the proceeds from this offering to do so. We cannot be sure,
however, that these arrangements will be available to us on acceptable terms or
at all. Any of these arrangements could require us to commit substantial
capital. The need to commit substantial capital could require us to obtain
additional debt or equity financing, which could result in dilution to our
earnings or the ownership of our stockholders. We cannot be sure that this
additional financing, if required, would be available when needed or, if
available, could be obtained on terms acceptable to us.

 Because the manufacture of our products is complex, the foundries on which we
 depend may not achieve the necessary yields or product reliability that our
 business requires

  The manufacture of our products is a highly complex and precise process,
requiring production in a highly controlled environment. Changes in
manufacturing processes or the inadvertent use of defective or contaminated
materials by a foundry could adversely affect the foundry's ability to achieve
acceptable manufacturing yields and product reliability. If the foundries we
currently use do not achieve the necessary yields or product reliability, our
customer relationships could suffer. This could ultimately lead to a loss of
sales of our products and have a negative effect on our results of operations.

 Because we depend on a license from Advanced RISC Machines to manufacture
 certain of our planned communicator processor products, our loss of or
 inability to maintain the license could result in increased costs or delays in
 the manufacturing of our products

  Our communicator processor products feature embedded ARM RISC microprocessors
and, accordingly, are required to be manufactured under a license from Advanced
RISC Machines, or ARM, the owner of the intellectual property to the ARM RISC
microprocessor. In the past, we were required to use foundries with an ARM
license for the manufacture of our communicator processor products. In June
1999, we obtained a per semiconductor design ARM license, which means that we
are now able to select foundry suppliers that best meet our quality, delivery
and cost objectives regardless of whether they have their own ARM license or
not. With this greater flexibility, we are able to assume more of the
manufacturing and quality control responsibilities, including contracting for
wafer processing, assembly and testing from separate suppliers. If we lose or
are unable to maintain the per semiconductor design license, we would be
required to seek alternative fabrication facilities in our manufacturing of our
communicator processor products. Without the ARM license, the number of
fabrication facilities we could use in our manufacturing would be substantially
reduced to those fabrication facilities that themselves have been directly
licensed by Advanced RISC Machines. Accordingly, the loss of, or our inability
to maintain the ARM license may result in increased costs or delays in our
ability to manufacture our products and could harm our results of operations. In
addition, ARM is only required to indemnify us against intellectual property
infringement claims up to a specified dollar amount.

 Because we rely on the technology of third parties, the loss of or inability to
 obtain the third party technology could result in increased costs or delays in
 the production or improvement of our products

  We currently license needed access to technology of third parties to develop
and manufacture our products, including licenses from Advanced RISC Machines,
AltoCom Limited, and Wind River Systems, Inc. If any of these third party
providers were to change their product offerings or terminate our licenses, we
would incur additional developmental costs and, perhaps, delays in production,
or be forced to modify our existing or planned software product offerings. In
addition, if the cost of any of these third party licenses or products
significantly increases, we could suffer a resulting increase in costs or delays
in our ability to manufacture our products or provide complete customer
solutions and this could harm our results of operations. We cannot be

                                       19
<PAGE>

sure that such third party licenses or substitutes will be available on
commercially favorable terms. Because our customer base is concentrated, the
loss of one or more of our customers may result in a loss of a significant
amount of our revenues.

  A relatively small number of customers account for a large percentage of our
total revenues. We expect this trend to continue. Our business will be seriously
harmed if we do not generate as much revenue as we expect from these customers,
experience a loss of any of our significant customers or suffer a substantial
reduction in orders from these customers. For the fiscal year ended April 2,
2000, Orckit Communications and Westell Technologies accounted for 23.1% and
15.1%, respectively, of our total revenues. For the fiscal year ended March 31,
1999, Com21 and Orckit Communications accounted for 22.6% and 15.7%,
respectively, of our total revenues. Our future success depends in significant
part upon the decision of our customers to continue to purchase products from
us. Furthermore, it is possible that equipment manufacturers may design and
develop internally, or acquire, their own semiconductor technology, rather than
continue to purchase semiconductors from third parties like us. If we are not
successful in maintaining relationships with key customers and winning new
customers, sales of our products may decline. In addition, because a significant
portion of our business has been and is expected to continue to be derived from
orders placed by a limited number of large customers, variations in the timing
of these orders can cause significant fluctuations in our operating results.

 Because manufacturers of DSL equipment may be reluctant to change their sources
 of components, if we do not achieve design wins with manufacturers of DSL
 equipment, we may be unable to secure sales from these customers in the future

  Once a manufacturer of DSL equipment has designed a supplier's semiconductor
into its products, the manufacturer may be reluctant to change its source of
semiconductors due to the significant costs associated with qualifying a new
supplier. Accordingly, our failure to achieve design wins with manufacturers of
DSL equipment which have chosen a competitor's semiconductor could create
barriers to future sales opportunities with these manufacturers.

 Because our customers are not subject to binding agreements, we cannot be
 certain that we will sell any of our products

  Achieving a design win with a customer does not create a binding commitment
from that customer to purchase our products. Rather, a design win is solely an
expression of interest by potential customers in purchasing our products and is
not supported by binding commitments of any nature. Accordingly, a customer can
choose at any time to discontinue using our products in their designs or product
development efforts. Even if our products are chosen to be incorporated into a
customer's products, we still may not realize significant revenues from that
customer if their products are not commercially successful. Therefore, we cannot
be sure that any design win will result in purchase orders for our products, or
that these purchase orders will not be later canceled. Our inability to convert
design wins into actual sales and any cancellation of a purchase order could
have a negative impact on our financial condition and results of operations.

 Because our customers may cancel orders, we may not be able to recoup expenses
 incurred in anticipation of sales of our products

  We work closely with our customers to determine their future product needs and
receive a rolling forecast for products. We have incurred and expect to continue
to incur expenses based upon these sales forecasts. However, 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 if notice is given within an agreed-upon
period. Therefore, we cannot be sure that the actual product revenues which we
will receive will be commensurate with the level of expenses that we will incur
based on forecasts we receive from our customers in any future period. As a
result, cancellations, deferrals or reductions in pending purchase orders could
have a negative impact on our financial condition and results of operations.

 Because most of our revenues have been and will be derived from a limited
 number of products, we may not be able to generate sufficient revenues to
 sustain our business if any of these products fail to gain market acceptance

  For the fiscal year ended April 2, 2000, approximately 44.6%, 30.9% and 24.5%,
respectively, of our semiconductor revenues were generated from sales of our
Helium and Hydrogen products and our Proton family. We expect that our Proton
family and Hydrogen products will represent a diminishing proportion of our
total revenues while a substantial portion of our total revenues will be derived
from our Helium and Beryllium products in the foreseeable future. Therefore,
broad market acceptance of the Helium and Beryllium products is critical to our
success. We cannot be sure that our products will attain broad market
acceptance. The failure of our products to achieve broad market acceptance could
result in a decrease in our revenues, which would have a negative impact on our
results of operations and financial condition.

                                       20
<PAGE>

Because our products typically have lengthy sales cycles, we may experience
substantial delays between incurring expenses related to research and
development and the generation of sales revenue and may not ultimately sell a
large volume of our products

  It often takes more than one year, occasionally more than two years, for us to
realize volume shipments of our semiconductor products after we first contact a
customer. We first work with customers to achieve a design win, which may take
six months or longer, at which time we sell a source code license. Our customers
then complete the design, testing and evaluation of their systems and begin the
marketing process, a period which typically lasts an additional three to six
months or longer. As a result, a significant period of time may elapse between
our sales efforts and our realization of revenues, if any, from volume
purchasing of our products by our customers.

 Because our products are complex, the detection of errors in our products may
 be delayed, and if we deliver products with defects, our credibility will be
 harmed, and the sales and market acceptance of our products may decrease

  Our products are complex and may contain errors, defects and bugs when
introduced. If we deliver products with errors, defects or bugs, our credibility
and the market acceptance and sales of our products could be significantly
harmed. Furthermore, the nature of our products may also delay the detection of
any such error or defect. If our products contain errors, defects and bugs, then
we may be required to expend significant capital and resources to alleviate
these problems. This could result in the diversion of technical and other
resources from our other development efforts. Any actual or perceived problems
or delays may also adversely affect our ability to attract or retain customers.

 Because defects in our products may give rise to product liability claims
 against us, we may be required to incur increased expenses and divert
 management resources away from our operations

  The existence of any defects, errors or failures in our products could lead to
product liability claims or lawsuits against us or against our customers. In
addition, we have agreed to indemnify certain of our customers in certain
limited circumstances against liability from defects in our products. A
successful product liability claim could result in substantial cost and divert
management's attention and resources, which would have a negative impact on our
financial condition and results of operations. Although we have not experienced
any product liability claims to date, the sale and support of our products
entail the risk of these claims.

 Because we have significant operations in countries outside of the US, we may
 be subject to political, economic and other conditions affecting such countries
 that could result in increased operating expenses and regulation of our
 products

  A significant portion of our operations occur outside the United States. One
of our principal subsidiaries is incorporated under the laws of, and its
principal offices are located in, the United Kingdom. We also have a facility in
Taipei, Taiwan. In addition, on April 27, 2000, we completed the acquisition of
Inverness Systems, Ltd, a privately-held corporation based in Israel. Our
international operations are subject to a number of risks, including foreign
currency exchange rate fluctuations; longer sales cycles; multiple, conflicting
and changing governmental laws and regulations; protectionist laws and business
practices that favor local competition; difficulties in collecting accounts
receivable; and political and economic instability. In addition, in September
1999, Taiwan was affected by a significant earthquake, and the risk of future
earthquakes is significant due to the proximity of major earthquake fault lines
in the area. Taiwan has also suffered from political unrest. Any future
earthquakes, fire, flooding or other natural disasters, political unrest, labor
strikes or work stoppages in Taiwan likely would result in the disruption of our
operations at that facility. Finally, as a result of our acquisition of
Inverness Systems, we are directly affected by the political, economic and
military conditions affecting Israel. Any major hostilities involving Israel
could significantly harm our business. Israel's economy has been subject to
numerous destabilizing factors, including low foreign exchange reserves,
fluctuations in world commodity prices, military conflicts and civil unrest.
Although Israel has entered into various agreements with certain Arab countries
and the Palestinian Authority, and various declarations have been signed in
connection with efforts to resolve some of the economic and political problems
in the Middle East, we cannot predict whether or in what manner these problems
will be resolved. In addition, some of the officers and employees of Inverness
are currently obligated to perform annual reserve duty and are subject to being
called to active duty at any time under emergency circumstances. We cannot
assess the full impact of these requirements on our workforce or business should
this occur and we cannot predict the effect on us of any expansion or reduction
of their obligations.

 Because we incur a charge for National Insurance Contribution on any gain in
 the per share price of our stock for stock options granted to our United
 Kingdom employees, a significant rise in our stock price may harm our result of
 operations and cash flow.

  Under the laws of the United Kingdom, we must record a charge for National
Insurance Contribution on options incurred on any gain in the Company's per
share price for stock options granted to our United Kingdom employees. The
charge is calculated in the United Kingdom as the difference between the market
value of Virata common stock at the close of the period and the exercise price
of the option multiplied by a 12.2% tax rate. The calculation is applied to all
options issued to our UK employees, vested and unvested. Due to the significant
movement in Virata's per share price in the fiscal year ended April 2, 2000, the
charge recorded was $4.5 million, creating a cash payment obligation payable
upon exercise of vested options by a UK employee. The charge will be revised to
take account of the movement in Virata's stock price at each future balance
sheet date. Accordingly, a significant rise in our stock price may result in
recorded charges which may harm our results of operations and cash payment
obligations.

 Because we sell a significant portion of our products in countries other than
 the US, we may be subject to political, economic and other conditions affecting
 such countries that could result in increased reduced revenue for our products

                                       21
<PAGE>

  International revenues accounted for 43.6% of our total revenues for the
fiscal year ended April 2, 2000. We expect that sales to our international
customers will continue to account for a significant portion of our total
revenues for at least the next 12 months. Accordingly, we are subject to the
political, economic and other conditions affecting countries or jurisdictions
other than the United States, including Israel, Europe and Asia. Any
interruption or curtailment of trade between the countries in which we operate
and their present trading partners, change in exchange rates or a significant
downturn in the political, economic or financial condition of these countries
could cause demand for and revenue from our products to decrease, cause our
costs of doing business to increase or subject us to increased regulation
including future import and export restrictions.

 Because we have expanded rapidly and future expansion may be required, we may
 lack the ability to manage this growth in our operations

  We have rapidly and significantly expanded our operations, including the
number of our employees, the geographic scope of our activities and our product
offerings. Recently, we completed the acquisitions of D2 Technologies, Inc., a
privately-held corporation based in Santa Barbara, California, and Inverness
Systems, Ltd, a privately-held corporation based in Kfar Saba, Israel. Our
continued success will depend significantly on our ability to integrate these
new operations and new personnel. We expect that further significant 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 successfully manage the
anticipated growth of our operations, we believe we must effectively be able to:

  .  improve our existing and implement new operational, financial and
     management information controls, reporting systems and procedures;
  .  hire, train and manage additional qualified personnel;
  .  expand and upgrade our core technologies; and
  .  effectively manage multiple relationships with our customers, suppliers and
     other third parties.

 We may engage in future acquisitions that could dilute our stockholders' equity
 and harm our business, results of operations and financial condition

  In February 2000, we completed the acquisition of D2 Technologies, Inc., a
privately-held corporation based in Santa Barbara, California. D2 Technologies
is a leading supplier of telephony and voice over IP software. In April 2000, we
completed the acquisition of Inverness Systems, Ltd, a privately-held
corporation based in Kfar Saba, Israel. Inverness is a leading supplier of
network software solutions. As part of our business strategy, from time to time,
we expect to review opportunities to acquire and may acquire other businesses or
products that will complement our existing product offerings, augment our market
coverage or enhance our technological capabilities. Although we have no current
agreements or negotiations underway with respect to any material acquisitions,
we may make acquisitions of businesses, products or technologies in the future.
However, we cannot be sure that we will be able to locate suitable acquisition
opportunities. Future acquisitions by us could result in the following, any of
which could seriously harm our results of operations or the price of our stock:

  .  issuances of equity securities that would dilute our current stockholder's
     percentages ownership;
  .  large one-time write-offs;
  .  the incurrence of debt and contingent liabilities;
  .  difficulties in the assimilation and integration of the operations,
     personnel, technologies, products and the information systems of the
     acquired companies;
  .  diversion of management's attention from other business concerns;
  .  contractual disputes;
  .  risks of entering geographic and business markets in which we have no or
     only limited prior experience; and
  .  potential loss of key employees of acquired organizations.

 Use of our products requires significant training and support and, because of
 our limited resources, we may not be able to support the demand for our
 products

  The development of equipment using our products requires significant training
and support. If we are unable to provide this training and support for our
products, more time may be necessary to complete the implementation process and
customer satisfaction may be adversely affected. In addition, our suppliers may
not be able to meet increased demand for our products. We cannot be sure that
our systems, procedures or controls or those of our suppliers will be adequate
to support the anticipated

                                       22
<PAGE>

growth in our operations or the demand for our products. This may result in a
decline in the sales of our products and have a negative impact on our results
of operations.

 Our executive officers and key personnel are critical to our business, and
 because there is significant competition for personnel in our industry, we may
 not be able to attract and retain such qualified personnel

  Our success depends to a significant degree upon the continued contributions
of our executive management team, and our technical, marketing, sales customer
support and product development personnel. The loss of significant numbers of
such personnel could significantly harm our business, financial condition and
results of operations. We do not have any life insurance or other insurance
covering the loss of any of our key employees.

  Because our products are specialized and complex, our success depends upon our
ability to attract, train and retain qualified personnel, including qualified
technical, marketing and sales personnel. However, the competition for personnel
is intense and we may have difficulty attracting and retaining such personnel.
In addition, companies in the communications, software and semiconductor
industries have frequently made unfair hiring practices claims against
competitors who have hired away such companies' personnel. We cannot be sure
that these claims will not be made against us in the future as we seek to hire
qualified personnel, or that any of these claims would be decided in our favor.
We may incur substantial costs in defending ourselves against any such claims,
regardless of their merits.

  We have entered into employment agreements with our executive officers and
certain other key employees that provide for set terms of employment. In
addition, all of our employees in the United Kingdom and Israel have employment
agreements governed by the laws of the United Kingdom and Israel. Our employment
agreements do not contain anti-competition clauses.

 Because the markets in which we compete are highly competitive and many of our
 competitors have greater resources than we have, we cannot be certain that our
 products will be accepted in the marketplace or capture market share

  The market for software and communications semiconductor solutions is
intensely competitive and characterized by rapid technological change, evolving
standards, short product life cycles and price erosion. We expect competition to
intensify as current competitors expand their product offerings and new
competitors enter the market. Given the highly competitive environment in which
we operate, we cannot be sure that any competitive advantages enjoyed by our
products would be sufficient to establish and sustain our products in the
market. Any increase in price or other competition could result in erosion of
our market share, to the extent we have obtained market share, and would have a
negative impact on our financial condition and results of operations. We cannot
be sure that we will have the financial resources, technical expertise or
marketing and support capabilities to continue to compete successfully.

  We face competition from a variety of vendors, including software and
semiconductor companies, which generally vary in size and in the scope and
breadth of products and services offered. We also face competition from
customers' or prospective customers' own internal development efforts. Many of
the companies that compete, or may compete in the future, against us have longer
operating histories, greater name recognition, larger installed customer bases
and significantly greater financial, technical and marketing resources. These
competitors may also have pre-existing relationships with our customers or
potential customers. As a result, they may be able to introduce new
technologies, respond more quickly to changing customer requirements or devote
greater resources to the development, promotion and sale of their products than
we can. Our competitors may successfully integrate the functionality of our
software and communication processors into their products and thereby render our
products obsolete. Further, in the event of a manufacturing capacity shortage,
these competitors may be able to manufacture products when we are unable to do
so.

  We believe our principal competitors include or will include Alcatel
Microelectronics, Analog Devices, Centillium Technology, Conexant Systems,
GlobeSpan, Lucent Technologies, Motorola, Texas Instruments and Broadcom. In
addition, there have been a number of announcements by other semiconductor
companies including Intel and smaller emerging companies that they intend to
enter the market segments adjacent to or addressed by our products.

 Because the markets in which our customers compete are highly competitive, our
 customers may not be successful and they may not continue to purchase our
 products

  Many of our customers face significant competition in their markets. If our
customers are unable to successfully market and sell their products which
incorporate our products, these customers may cease to purchase our products,
which may have a negative impact on our results of operations.

                                       23
<PAGE>

 Because the markets in which we compete are subject to rapid changes, our
 products may become obsolete or unmarketable

  The markets for our products and services are characterized by rapidly
changing technology, short product life cycles, evolving industry standards,
changes in customer needs, growing competition and new product introductions. If
our product development and improvements take longer than planned, the
availability of our products would be delayed. Any such delay may render our
products obsolete or unmarketable, which would have a negative impact on our
ability to sell our products and our results of operations.

 Because of changing customer requirements and emerging industry standards, we
 may not be able to achieve broad market acceptance of our products

  Our success is dependent, in part, on our ability, in a timely and cost-
effective manner, to:

  .  successfully develop, introduce and market new and enhanced products at
     competitive prices in order to meet changing customer needs;
  .  respond effectively to new technological changes or new product
     announcements by others;
  .  effectively use and offer leading technologies; and
  .  maintain close working relationships with our key customers.

  We cannot be sure that we will be successful in these pursuits, that the
growth in demand will continue or that our products will achieve market
acceptance. Our failure to develop and introduce new products that are
compatible with industry standards and that satisfy customer requirements or the
failure of our products to achieve broad market acceptance could have a negative
impact on our ability to sell our products and our results of operations.

 Because the development of new products requires substantial time and expense,
 we may not be able to recover our development costs

  The pursuit of necessary technological advances and the development of new
products require substantial time and expense. Improvements to existing products
or the introduction of new products by us or our competitors have the potential
to replace or provide lower cost alternatives to our existing products or render
these products obsolete, unmarketable or inoperable. The mere announcement of
any improvement or new product could cause potential customers to defer or
cancel purchases of existing products and services. Therefore, we cannot be sure
that we will be able to recover the costs of the development of our products or
succeed in adapting our business to advancements.

 Because other high speed data transmission technologies may compete effectively
 with digital subscriber line services, our products may not achieve anticipated
 unit growth

  DSL services are competing with a variety of different broadband data
transmission technologies, including cable modems, satellite and other wireless
technologies. If any technology that is competing with DSL technology is more
reliable, faster, less expensive or has other advantages over DSL technology,
then the demand for our semiconductors may decrease, which would have a negative
impact on our operating results.

 Because price competition among our competitors and volume purchases by large
 customers may result in a decrease in the average per unit selling price of our
 products, our gross margins for our products may decline

  We expect that price competition among our competitors and volume purchases of
our products at discounted prices will have a negative effect on our gross
margin for these products. We anticipate that average per unit selling prices of
DSL semiconductors will continue to decline as product technologies mature.
Since we do not manufacture our own products, we may be unable to reduce our
manufacturing costs in response to declining average per unit selling prices.
Many of our competitors are larger and have greater resources, and therefore may
be able to achieve greater economies of scale and would be less vulnerable to
price competition. Further, we expect that average per unit selling prices of
our products will decrease in the future due to volume discounts to our large
customers. These declines in average per unit selling prices will generally lead
to declines in our gross margins for these products.

 Because the measures on which we rely to protect our intellectual property
 rights afford only limited protections, we may lose any competitive advantage
 we may have

                                       24
<PAGE>

  The measures on which we rely to protect our intellectual property afford only
limited protection and we cannot be certain that these safeguards will
adequately protect our intellectual property and other valuable competitive
information. In addition, the laws of some countries in which we sell or plan to
sell our products, including the Peoples' Republic of China, Korea and certain
other Asian countries, may not protect our proprietary rights as fully as do the
laws of the United States, the United Kingdom, or Israel. If we are unable to
adequately protect our proprietary rights, we may lose any competitive advantage
we may have over our competitors. This may have a negative impact on sales of
our products and our results of operations.

  Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or to obtain and use trade secrets
or other information that we regard as proprietary. Our competitors may also
independently develop similar technologies. Moreover, through our participation
in various industry groups, we have entered into cross-licenses for intellectual
property necessary to the implementation of certain types of standards-compliant
products. Such cross-licenses may limit our ability to enforce our intellectual
property rights against competitors.

 Because our industry is characterized by frequent litigation over intellectual
 property rights, we may be required to incur substantial expenses and divert
 management resources

  The industries in which we compete are characterized by numerous allegations
of patent infringement among competitors. Such an infringement claim could be
asserted against us or by us in the future. The defense or prosecution of any
such claim could result in us 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:

  .  pay substantial damages, including treble damages if we are held to have
     willfully infringed on the intellectual property of another;
  .  halt the manufacture, use and sale of infringing products or technology;
  .  forfeit a competitive advantage;
  .  expend significant resources to develop non-infringing technology; or
  .  obtain licenses to the infringing technology, which may not be available on
     commercially reasonable terms, or at all.

 Because our products may be required to meet certain industry standards, we may
 be required to pay substantial royalties to the owners of the intellectual
 property underlying the standards

  In order for us to comply with the International Telecommunications Union
V.34, V.90 and ADSL standards, the software embedded in our current and planned
future products may use the proprietary technology of various parties advancing
or promoting these standards. Where such owners are members of such working
group or union, they must provide a license upon reasonable terms, which may
include the payment of a reasonable royalty. However, if such owners are not
members of such working group or union, there may be no limit on the terms or
the amount of the royalty with respect to such proprietary technology. As a
result, the cumulative effect of the terms and royalties with respect to the use
of the proprietary technology necessary to meet such industry standards could
increase the cost of our products to the point that they are no longer
competitive and could limit our ability to meet certain industry standards.

 Because our products and those of our customers are subject to government
 regulations, changes in current or future laws or regulations could cause sales
 of our products to decline

  The jurisdiction of the Federal Communications Commission, or FCC, extends to
the entire U.S. communications industry, including our customers and their
products and services that incorporate our products. Future FCC regulations
affecting the U.S. communications services industry, our customers or our
products may have a negative effect on our business. For example, FCC regulatory
policies that affect the availability of data and Internet services may impede
our customers' penetration into certain markets or affect the prices that they
are able to charge. This may cause sales of our products to decline. In
addition, international regulatory bodies have introduced new regulations for
the communications industry. Delays caused by our compliance with regulatory
requirements may result in order cancellations or postponements of product
purchases by our customers, which would have a negative impact on our results of
operations and financial condition.

 Because the Nasdaq stock market is likely to experience extreme price and
 volume fluctuations, the price of our stock may decline even if our business is
 doing well

  The stock markets, and in particular the Nasdaq stock market, have experienced
extreme price and volume fluctuations that have affected and continue to affect
the market prices of equity securities of many technology companies. These
fluctuations often have been unrelated or disproportionate to the operating
performance of those companies. We also expect that the market

                                       25
<PAGE>

price of our common stock will fluctuate as a result of variations in our
quarterly operating results. These fluctuations may be exaggerated if the
trading volume of our common stock is low. In addition, due to the technology-
intensive and emerging nature of our business, the market price of our common
stock may rise and fall in response to:

  .  announcements of technological or competitive developments;

  .  acquisitions or strategic alliances by us or our competitors;

  .  the gain or loss of a significant customer or order; and

  .  changes in estimates of our financial performance or changes in
     recommendations by securities analysts.

  Accordingly, market fluctuations, as well as general economic, political and
market conditions such as recessions, interest rate changes or international
currency fluctuations, may negatively impact the market price of our common
stock.

 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 financial condition and results of operations.


ITEM 2 - Properties.

  Our headquarters are located in Santa Clara, California, where we lease
approximately 13,000 square feet of office space under a lease that expires in
September 2001. Additionally, we lease the following space for our other
facilities:

  .  approximately 9,600 square feet of office and laboratory space in
     Cambridge, England, under two leases that expire in 2004 and 2005;
  .  approximately 13,200 square feet of office space in Raleigh, North
     Carolina, under a lease that expires in September 2003;
  .  approximately 15,000 square feet of office and laboratory space in Santa
     Barbara, California under leases that expire in January 2002 and April
     2002;
  .  approximately 2,100 square feet of office and laboratory space in Kfar
     Saba, Israel under a lease that expires in December, 2001;
  .  approximately 2,800 square feet of office space in Marlborough,
     Massachusetts under a lease that expires in August 2004; and
  .  approximately 1,950 square feet of office space in Taipei, Taiwan under a
     lease that expires in August 2001.

  We are expanding rapidly and we anticipate that we may need to expand our
office space within the next 12 months.


ITEM 3 -- Legal Proceedings.

  We are not currently a party to any material legal proceedings, nor to our
knowledge, is any such proceeding threatened.

                                       26
<PAGE>

ITEM 4 -- Submission Of Matters To A Vote Of Security Holders.

The Company held a special meeting of shareholders on May 1, 2000. At such
meeting, the following actions were voted upon:

Proposal to approve an amendment to the Company's Amended and Restated
Certificate of Incorporation to increase the number of authorized shares of the
Company's Common Stock from 40,000,000 to 450,000,000 to accommodate a 2 for 1
stock split of the Company's Common Stock and to provide the Company with
adequate flexibility in the future with respect to the issuance of its Common
Stock.


      Votes For     Votes Against     Withheld    Abstentions     Non-Votes
      13,001,748       683,456            0             0          9,619,639

                                       27
<PAGE>

PART II

ITEM 5 -- Market For Registrant's Common Stock And Related Stockholder Matters.


  Our common stock began trading on The Nasdaq Stock Market's National Market
under the symbol "VRTA" effective November 17, 1999. Prior to that date, there
was no public market for our Common Stock. The following table sets forth for
the periods indicated the high and low closing prices for our common stock, as
reported by Nasdaq:


                                                                 High     Low
                                                                 ----     ---
Fiscal Year Ending April 2, 2000
     Third Quarter (beginning November 17, 1999)...........      $ 20.50  $12.00
     Fourth Quarter.........................................     $111.00  $13.50


  The last reported sale price for our common stock on the Nasdaq National
Market was $53.38 per share on June 5, 2000. As of April 2, 2000, there were
approximately 199 holders of record of our common stock.

  We have never declared nor paid any dividends on our capital stock. We
currently intend to retain any future earnings for use in the operation and
expansion of our business, and we do not anticipate paying any dividends on our
capital stock in the foreseeable future. Additionally, our line of credit
currently prohibits the payment of dividends.


ITEM 6 -- Selected Financial Data.


                     SELECTED CONSOLIDATED FINANCIAL DATA

  The following selected consolidated financial data should be read in
conjunction with the consolidated financial statements and related notes
beginning on page 43 of this Annual Report and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" beginning on page 30
of this Annual Report. The selected consolidated statement of operations data
for each of the three fiscal years ended April 2, 2000, March 31, 1999 and 1998
and selected consolidated balance sheet data as of April 2, 2000 and March 31,
1999 are derived from, and qualified by reference to, the audited consolidated
financial statements included elsewhere in this Annual Report. The selected
consolidated statement of operations data for the fiscal years ended March 31,
1998, 1997 and 1996 and selected consolidated balance sheet data as of March 31,
1998, 1997 and 1996 are derived from audited financial statements not included
in this Annual Report. Information for the fiscal year ended March 31, 1999
includes the results of operations for RSA Communications, Inc. only since July
17, 1998, the closing date of the acquisition. Information for the fiscal year
ended April 2, 2000 includes the results of operations of D2 Technologies, Inc.
since February 10, 2000, the closing date of the acquisition.

  Effective October 3, 1999, we changed our fiscal year such that each quarter
ends on the Sunday closest to the calendar quarter end.

                                       28
<PAGE>

<TABLE>
<CAPTION>
                                                                                      Year Ended
                                                                                      ----------
                                                               April 2,   March 31,   March 31,   March 31,   March 31,
                                                               --------   ---------   ---------   ---------   ---------
                                                                 2000       1999        1998        1997        1996
                                                               --------   ---------   ---------   ---------   ---------
                                                                        (in thousands, except per share data)
<S>                                                            <C>        <C>         <C>         <C>         <C>
Consolidated Statement of Operations Data:
Revenues:
  Semiconductors.............................................  $ 14,041    $  2,784    $    505     $    --     $    --
  License....................................................     3,717       1,628       1,570         971          85
  Services and royalty.......................................     1,724       2,367       1,206       1,134         333
  Systems....................................................     2,295       2,477       5,650       4,848       2,424
                                                               --------    --------    --------     -------     -------
     Total revenues..........................................    21,777       9,256       8,931       6,953       2,842
                                                               --------    --------    --------     -------     -------
Cost of revenues:
  Semiconductors.............................................     9,651       2,421         325          --          --
  License....................................................       107          --          --          --          --
  Services and royalty.......................................       701         528         192         185          55
  Systems....................................................       780       1,048       3,270       3,754       1,854
                                                               --------    --------    --------     -------     -------
     Total cost of revenues..................................    11,239       3,997       3,787       3,939       1,909
                                                               --------    --------    --------     -------     -------
Gross profit.................................................    10,538       5,259       5,144       3,014         933
                                                               --------    --------    --------     -------     -------
Operating expenses:
  Research and development...................................    12,331       8,323       3,987       3,518       4,402
  Sales and marketing........................................     5,350       2,917       4,076       4,753       4,037
  General and administrative.................................     5,976       5,567       4,917       3,410       2,096
  Restructuring costs........................................        --          --       1,871          --          --
  National Insurance Contribution on options.................     4,471          --          --          --          --
  Amortization of intangible assets..........................     4,497         549          --          --          --
  Amortization of stock compensation.........................       907       1,394         399          --          --
  Acquired in-process research and development...............     5,324       5,260          --          --          --
                                                               --------    --------    --------     -------     -------
     Total operating expenses................................    38,856      24,010      15,250      11,681      10,535
                                                               --------    --------    --------     -------     -------
Loss from operations.........................................   (28,318)    (18,751)    (10,106)     (8,667)     (9,602)
Interest and other income (expense), net.....................     2,210       1,594        (172)        127         264
                                                               --------    --------    --------     -------     -------
Net loss.....................................................  $(26,108)   $(17,157)   $(10,278)    $(8,540)    $(9,338)
                                                               ========    ========    ========     =======     =======
Net loss per share:
  Basic and diluted..........................................  $  (1.40)   $  (4.46)   $  (3.00)    $ (2.68)    $ (2.99)
                                                               ========    ========    ========     =======     =======
  Weighted average shares....................................    18,672       3,845       3,428       3,186       3,128
                                                               ========    ========    ========     =======     =======
</TABLE>

<TABLE>
<CAPTION>
                                                                        April 2,  March 31,  March 31,   March 31,  March 31,
                                                                        --------  ---------  ---------   ---------  ---------
                                                                          2000       1999      1998         1997      1996
                                                                        --------  ---------  ---------   ---------  ---------
                                                                                           (in thousands)
<S>                                                                     <C>       <C>        <C>         <C>        <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents..................................             $ 60,193    $ 8,616    $   767     $ 3,752     $1,315
Working capital............................................               70,631      8,042     (3,653)      6,346        451
Total assets...............................................              181,362     19,187      5,950      12,066      4,422
Total long term liabilities................................                1,178      1,130        738         875         48
Total stockholders' equity (deficit).......................              161,788     12,719     (3,085)      6,857      1,850
</TABLE>

                                       29
<PAGE>

ITEM 7 -- Management's Discussion And Analysis Of Results Of Operations And
Financial Condition.

  This section of this Annual Report includes a number of forward-looking
statements that reflect our current views with respect to future events and
financial performance. We use words such as "anticipates," "believes,"
"expects," "future," and "intends," and similar expressions to identify forward-
looking statements. You should not place undue reliance on these forward-looking
statements, which apply only as of the date of this Annual Report. These
forward-looking statements are subject to risks and uncertainties that could
cause actual results to differ materially from historical results or our
predictions. These risks are described in "Risk Factors" and elsewhere in this
Annual Report.

Overview

  Our predecessor company, Virata Limited, was formed in 1993 as Advanced
Telecommunications Modules Limited, a corporation organized in the United
Kingdom, as a spin-out from the Olivetti Research Laboratories (now AT&T
Laboratories). Until 1995, we were a development-stage company focused primarily
on product development. From our first production revenue shipment in April 1995
through March 1996, we focused on developing and delivering ATM-based, board-
level systems primarily for local area network applications. In mid-1996, we
began licensing our software suite and selling our semiconductors to developers
of broadband access products. In September 1997, we ceased development of our
systems products and focused exclusively on expanding our software offering and
developing additional semiconductors for the broadband marketplace with a focus
on the digital subscriber line, or DSL, market. In February 1998, the
predecessor company changed its name to Virata Limited. In July 1998, the
predecessor company completed its acquisition of RSA Communications, Inc.
("RSA"), a corporation organized in North Carolina. RSA was subsequently renamed
to Virata Raleigh Corporation. On February 10, 2000, we completed the
acquisition of D2 Technologies Inc., a provider of digital voice and telephony
software solutions. On April 27, 2000 we completed the acquisition of Inverness
Systems Ltd., a provider of networking software solutions. Effective October 3,
1999, we changed our fiscal year such that each quarter ends on the Sunday
closest to the calendar quarter end.

  On November 16, 1999, we completed a reorganization of Virata Limited,
pursuant to which:

  .  each of Virata Limited's previously outstanding ordinary and preference
     shares were cancelled;
  .  Virata Limited issued 64,811,364 new ordinary shares to the company,
     thereby becoming our wholly-owned subsidiary;
  .  we assumed all of the outstanding options and warrants of Virata Limited;
  .  we effected a 1 for 6.7 reverse stock split of our common stock; and
  .  we issued 29,344,096 shares of our common stock to the former shareholders
     of Virata Limited.

  The reorganization was effected pursuant to a share reconstruction under
Section 425 of the United Kingdom Companies Act of 1985.

  We generate revenues from sales of semiconductors, systems-level products,
software licenses, maintenance, royalties and related design services.
Semiconductor revenues have come from two sources, our Proton family of
application specific integrated circuit ("ASIC") products and our ATOM family of
application specific standard parts ("ASSP"). Original equipment manufacturers,
or OEMs, license our software, which permits them to purchase our semiconductors
for use in their products. We support our licensee customers through the sale of
maintenance contracts and design services. Since September 1997, we have sold
our systems-level products primarily to one customer, and we expect sales of
these products to decline. We sell our products through a direct sales force,
which we believe most effectively allows us to serve our customers. We also
utilize sales representatives in Korea.

  Revenues from the sale of both semiconductors and systems are recognized upon
shipment to customers. Allowances are provided for estimated returns at the time
of shipment. We recognize software license revenues under the American Institute
of Certified Public Accountants ("AICPA") Statement of Position, or SOP, 97-2,
Software Revenue Recognition, and SOP 98-9, Modification of SOP 97-2, Software
Revenue Recognition, with Respect to Certain Transactions. When contracts
contain multiple elements and vendor-specific objective evidence exists for all
undelivered elements, we account for the delivered elements in accordance with
the "Residual Method" prescribed by SOP 98-9. Software licenses are generally
recognized as revenue upon shipment of the software product. In the event that
we grant our customers the right to specified upgrades, license revenue is
deferred until delivery of the specific upgrade. If vendor-specific objective
evidence of fair value does not exist, the entire license fee is deferred until
the delivery of the specified upgrade. We recognize revenues from maintenance
and support services provided to licensees ratably over the term of the
agreement, generally one year, and recognize revenues from design services
provided to OEMs as the services are performed.

                                       30
<PAGE>

  It usually takes more than one year, occasionally more than two years, for us
to realize volume shipments of our semiconductor products after we first contact
a customer. We first work with customers to achieve a design win, which may take
six months or longer, at which time we sell a source code license. Our customers
then complete the design, testing and evaluation of their systems and begin the
marketing process, a period which typically lasts an additional three to six
months or longer. As a result, a significant period of time may elapse between
our sales efforts and our realization of revenues, if any, from volume purchases
of our products by our customers. We generally sell our products based on
individual purchase orders. Our customers are not obligated by long-term
contracts to purchase our semiconductors and can generally cancel or reschedule
orders upon short notice. As of April 2, 2000, our backlog was approximately
$24.9 million, including the backlog for semiconductors, which was approximately
$20.5 million.

  Achieving a design win with a customer does not create a binding commitment
from that customer to purchase our products. Rather, it is a decision by a
customer to use our products in the design process of their products. A customer
can choose at any time to discontinue using our products in their designs or
product development efforts. Even if our products are chosen to be incorporated
into a customer's products, we may still not realize significant revenues from
that customer if their products are not commercially successful. We have a
strategy of licensing and partnering with as many key participants in our
markets as possible, and we have achieved a significant number of design wins.
Nevertheless, some customers will be more successful than others in developing
and marketing their products that incorporate our semiconductor products, and it
is difficult for us to predict which of these customers will generate revenues
for us. Our semiconductor product sales are almost completely dependent upon the
relative success of our customers in the marketplace for broadband access
products.

  We have spent considerable resources developing our Beryllium product for the
ADSL market, and we are just beginning to work with potential customers for this
product. Our future success will depend, in part, on the success of Beryllium.
However, we do not expect to know whether we will realize significant commercial
shipments of Beryllium until the second half of fiscal 2001.

  Our revenues to date have been concentrated with a small number of customers.
We expect this concentration to continue. For the fiscal year ended April 2,
2000, Orckit Communications and Westell Technologies accounted for 23.1% and
15.1%, respectively, of our total revenues. For the fiscal year ended March 31,
1999, Com21 and Orckit Communications accounted for 22.6% and 15.7%,
respectively, of our total revenues. For the fiscal year ended March 31, 1998,
Com21, Orckit Communications, and Escalate Networks accounted for 16.6%, 10.4%,
and 10.4%, respectively, of our total revenues.

  International revenues accounted for 43.6% for the fiscal year ended April 2,
2000, 40.3% for the fiscal year ended March 31, 1999 and 44.2% of total revenues
for the fiscal year ended March 31, 1998. Sales to customers in Israel
represented 23.3%, 16.5%, and 10.8%, of total revenues for the fiscal year ended
April 2, 2000, March 31, 1999 and March 31, 1998, respectively. International
revenues are denominated solely in U.S. dollars, which reduces our exposure to
fluctuations in revenues attributable to changes in foreign currency exchange
rates. However, we experience risks inherent in international business. These
risks include extended collection time for receivables, reduced ability to
enforce contractual obligations and reduced protection of our intellectual
property. Our material costs are denominated in U.S. dollars and our operating
expenses are primarily in U.S. dollars and British pounds sterling.

  Our gross margin has fluctuated significantly due primarily to product mix.
For the fiscal year ended April 2, 2000, our semiconductor gross margin was
31.3%, our license gross margin was 97.1%, our services and royalty gross margin
was 59.3% and our systems gross margin was 66.0%. We believe our gross margin
may continue to fluctuate because we expect semiconductors to be a greater
percentage of total revenues and increased competition and more consumer
oriented markets may impact pricing.

  We recorded a charge for National Insurance Contribution on options which will
be incurred on a gain in the Company's per share price for stock options granted
to our United Kingdom employees. Due to the significant movement in Virata's per
share price in the fiscal year ended April 2, 2000, the charge recorded was $4.5
million. The charge is calculated in the United Kingdom as the difference
between the market value of Virata common stock at the close of the period and
the exercise price of the option multiplied by a 12.2% tax rate. The calculation
is applied to all options issued to our UK employees, vested and unvested. The
charge will be revised to reflect the movement in Virata's stock price at each
future balance sheet date. The allocation of the $4.5 million charge, by
department, is $2.0 million to research and development, $1.0 million to sales
and marketing, and $1.5 million to general and administrative.

  Since inception, we have invested heavily in research and development and have
built a worldwide sales force and administration infrastructure, which has
contributed to net losses. Additionally, we have chosen to operate principally
in the following locations: Cambridge, England; Raleigh, North Carolina; Santa
Barbara, California; and Santa Clara, California. We

                                       31
<PAGE>

believe that our strategy of locating research and development in Cambridge,
Raleigh, and Santa Barbara, has provided access to high quality engineers and
contributed to low turnover. However, we incur higher general and administrative
expenses associated with multi-site operations. We plan to continue to invest to
exploit market opportunities and revenues may not increase at a rate sufficient
to achieve and maintain profitability. In September 1997, we implemented a new
business strategy and reduced the resources allocated to the systems line of
business. A restructuring plan was implemented in the second half of fiscal 1998
which resulted in one-time charges of $1.9 million for the year ended March 31,
1998. Approximately $900,000 of the restructuring charge represents employee
costs, $900,000 represents asset write-downs and $71,000 relates to other
restructuring costs. We continue to sell our systems products to one principal
customer and systems revenues for the fiscal year April 2, 2000 were $2.3
million.

  To extend our analog and DSL technical capabilities, in July 1998 we acquired
RSA Communications, a privately-held company based in Raleigh, North Carolina
specializing in analog modem software development. Financial information for the
fiscal year ended March 31, 1999 includes the results of operations for RSA
Communications beginning July 17, 1998, the closing date of the acquisition. The
transaction was accounted for as a purchase business combination. The aggregate
purchase price was allocated to the net tangible and identifiable intangible
assets acquired and liabilities assumed on the basis of their fair values on the
acquisition date. Based on a valuation by an independent appraiser, $5.3 million
of the $9.3 million purchase price was allocated to in-process research and
development and charged to operations at the date of the acquisition. The core
technologies acquired in the RSA Communications acquisition were the ADSL PHY
software and voiceband modem protocol software. The significant in-process
research and development projects include V.90 modem software and two software
algorithms, the modem modulation software algorithm and the ADSL software
algorithm.

  The V.90 modem software is voiceband modem software for the Hitachi SH-3
processor on a Windows CE platform. This software project was completed
subsequent to the acquisition in 1998 and has been licensed to Hitachi. At the
time of the acquisition this project was approximately 90% complete, and the
fair value assigned to this project was $2.4 million.

  The modem modulation software algorithm includes layer 1 software (PHY
software) that provides modulation/demodulation functions of a voiceband modem,
and layer 2 software for a voiceband modem that provides functions such as
control, error correction and data compression. It has a complete set of
flexible and portable voiceband modem and facsimile protocols required for our
customers' voiceband modem products. At the time of the acquisition, this
project was approximately 90% complete, and the fair value assigned to this
project was $2.4 million. This project was subsequently terminated.

  The ADSL software algorithm is a complete software stack that is compliant
with the ITU ADSL standards. The fair value assigned to this project was
$425,000 at the time of the acquisition when this project was approximately 35%
complete. The remaining risks affecting the timely completion and
commercialization of this project are minimal. The remaining uncertainties that
might affect the outcome of this project are related to the size of the
developing ADSL market.

  The in-process research and development valuation was determined using the
income-based approach for the V.90 modem software and replacement cost method
for the software algorithms. The acquired in-process technology was not
considered to have reached technological feasibility and had no alternative
future use. Accordingly, the amount was charged to operations upon acquisition.
For more information on the valuation of the acquired in-process research and
development, see Note 4 of the "Notes to Consolidated Financial Statements". For
information showing our unaudited pro forma results of operations including RSA
Communications for the fiscal year ended March 31, 1999, see Note 4 of the
"Notes to Consolidated Financial Statements".

  Our limited operating history in the DSL market makes it difficult to forecast
our future operating results accurately. To date, we have not achieved
profitability in any quarterly or annual period, and as of April 2, 2000, we had
an accumulated deficit of $76.7 million. Although our total revenues have grown
in recent quarters, we cannot be certain that our total revenues will increase
at a rate sufficient to achieve and maintain profitability.


Recent Developments

 Financial Trends

  Our revenues have increased during each of the past four quarters ended April
2, 2000. However, we continue to operate at a loss, with operating expenses
exceeding revenues.

                                       32
<PAGE>

 Acquisition of D2 Technologies

  We acquired D2 Technologies, Inc. on February 10, 2000. Based in Santa
Barbara, California, D2 Technologies develops, markets and supports innovative
digital signal processing (DSP) solutions for the next generation telephony
products. D2 Technologies serves the computer and Internet telephony markets
with robust and cost-effective DSP solutions. Its customers include some of the
largest telecommunications and internet companies in the industry whose markets
range from high-capacity telecommunications systems to personal communications
products.

  Under the terms of the merger agreement, 4,396,826 shares of Virata common
stock, with an aggregate value of $79.1 million were exchanged for all of the
outstanding common stock of D2 Technologies. In addition, employee options to
purchase shares of D2 Technologies common stock were exchanged for options to
purchase 932,330 shares of Virata common stock with an aggregate fair value of
$13.6 million. The Company valued the options using the Black-Scholes option
pricing model, applying an expected life of four years, a weighted average risk-
free rate 0f 6.64%, an expected dividend yield of zero percent, a volatility of
55% and a deemed fair value of common stock of $18.00 per share.Including direct
acquisition costs of $4.2 million, the aggregate purchase price of D2 was $96.9
million. The acquisition has been accounted for as a purchase business
combination.

  Based on a valuation by an independent appraiser, the purchase price of D2
Technologies was allocated as follows:

<TABLE>
<S>                                                                      <C>
     Fair value of assets acquired and liabilities assumed............   $ 1,252
     Workforce-in-place...............................................       760
     Customer base....................................................     1,001
     Contracts........................................................     1,006
     Technology.......................................................    15,872
     In-process research and development..............................     5,324
     Goodwill.........................................................    71,695
                                                                         -------
     Total............................................................   $96,909
                                                                         =======
</TABLE>

  D2 Technologies has 19 completed products that comprise the complete
technology at the date of acquisition. They are classified into five product
groups as follows:

     Telephony Algorithms
     Echo Cancellation Products
     Standard Voice Coders
     Proprietary Voice Coders
     Fax and Data Products

  The individual products and algorithms are entirely independent from each
other. The value of the completed technology is based on the net cash flow
forecast, discounted at a cost of capital of 18.0%. The acquired in-process
technology are mainly related to the fax and data products and include the Fax
Modem Data Pump, Fax Relay Protocols and Single Sample Echo Cancellers and
Standard Voice Coders. The acquired in-process technology is also valued using
the net cash flow forecast, discounted at a higher cost of capital of 23.0% to
reflect the uncertainty of its future use. The company does not consider it to
have reached technological feasibility and charged it to operations upon
acquisition.

  Financial information for the fiscal year ended April 2, 2000 includes the
results of operations for D2 Technologies from February 10, 2000. For
information showing our unaudited pro forma results of operations including D2
Technologies for the period ended April 2, 2000, see Note 4 of the "Notes to
Consolidated Financial Statements".


 Acquisition of Inverness Systems Ltd.

  On March 21, 2000, Virata entered into a definitive agreement to acquire
Inverness Systems, Ltd., a privately-held Israeli Company, in a stock for stock
transaction. Inverness Systems maintains offices in Kfar Saba and Jerusalem, in
Israel as well as in Marlborough, Massachusetts.

  Inverness Systems is a software company with expertise spanning many
technologies, including ATM, voice over ATM, xDSL, IP Routing, Multi-Protocol
label Switching (MPLS), Frame Relay and Network Simulation. Inverness' source
code solutions and network simulation products facilitate fast-to-market product
development programs for advanced communication products.

                                       33
<PAGE>

  Under the terms of the agreement, Virata will issue approximately 2,011,624
shares and 517,896 options to purchase shares of Virata common stock to
shareholders of Inverness Systems common and preferred stock.

  The acquisitions will be accounted for as a purchase business combination.
Accordingly, the purchase price will be allocated to the net tangible and
identifiable intangible assets acquired and liabilities assumed on the closing
date. The valuation of the intangible assets acquired will be determined by an
independent appraiser and are expected to include complete technology, workforce
in place and customer base.

  The total purchase price of $ 98.2 million consists of 2,011,624 shares of the
Virata's common stock valued at $77.8 million, options to purchase 517,896
shares of Virata, valued at $20.0 million and estimated acquisition expenses of
$0.4 million, consisting mainly of legal, accounting and financial advisory
fees. The Company valued the options using the Black-Scholes option pricing
model, applying an expected life of four years, a weighted average risk-free
rate of 6.5%, an expected dividend yield of zero percent, a volatility of 55%
and a deemed fair value of common stock of $38.67 per share.


 Stock Split

     On March 21, 2000, the Company's Board of Directors approved a two-for-one
split of the Company's common stock that was applicable to stockholders of
record on May 4, 2000. The stock split, approved by the Company's stockholders
on May 1, 2000, was effective May 18, 2000. Unless specifically noted otherwise,
all references to share and per share data for all periods presented have been
adjusted to give effect to this split.


Results of Operations

  The following table sets forth, for the periods presented, certain data from
our consolidated statement of operations expressed as a percentage of total
revenues.

<TABLE>
<CAPTION>
                                                                                                   Year Ended
                                                                                                   ----------
<S>                                                                                     <C>        <C>         <C>
                                                                                        April 2,   March 31,   March 31,
                                                                                         2000        1999        1998
                                                                                         ----      -------     -------
Consolidated Statement of Operations Data as a
Percentage of Total Revenues
Revenues:
  Semiconductors......................................................................      64.5%       30.1%        5.7%
  License.............................................................................      17.0        17.6        17.6
  Services and royalty................................................................       8.0        25.5        13.4
  Systems.............................................................................      10.5        26.8        63.3
                                                                                         -------     -------     -------
     Total revenues...................................................................     100.0       100.0       100.0
                                                                                         -------     -------     -------
Cost of revenues:
  Semiconductors......................................................................      44.3        26.2         3.6
  License.............................................................................       0.5          --          --
  Services and royalty................................................................       3.2         5.7         2.2
  Systems.............................................................................       3.6        11.3        36.6
                                                                                         -------     -------     -------
     Total cost of revenues...........................................................      51.6        43.2        42.4
                                                                                         -------     -------     -------
Gross profit..........................................................................      48.4        56.8        57.6
                                                                                         -------     -------     -------
Operating expenses:
  Research and development............................................................      56.6        89.9        44.6
  Sales and marketing.................................................................      24.6        31.5        45.6
  General and administrative..........................................................      27.4        60.2        55.1
  Restructuring costs  ...............................................................        --          --        20.9
  National Insurance Contribution on options  ........................................      20.5          --          --
  Amortization of intangible assets  .................................................      20.6         5.9          --
  Amortization of stock compensation  ................................................       4.2        15.1         4.5
  Acquired in-process research and development  ......................................      24.5        56.8          --
                                                                                         -------     -------     -------
     Total operating expenses........................................................      178.4       259.4       170.7
                                                                                         -------     -------     -------
Loss from operations.................................................................     (130.0)     (202.6)     (113.1)
Interest and other income (expense), net.............................................       10.1        17.2        (2.0)
                                                                                         -------     -------     -------
Net loss.............................................................................     (119.9)%    (185.4)%    (115.1)%
                                                                                         =======     =======     =======
</TABLE>

                                       34
<PAGE>

Fiscal Years Ended April 2, 2000, March 31, 1999 and 1998

Total Revenues

  Total revenues increased 135.3% from $9.3 million for the fiscal year ended
March 31, 1999 to $21.8 million for the fiscal year ended April 2, 2000. Total
revenues increased 3.6% from $8.9 million for the fiscal year ended March 31,
1998 to $9.3 million for the fiscal year ended March 31, 1999.

  Semiconductor revenues increased 404.3% to $14.0 million for the fiscal year
ended April 2, 2000 compared to $2.8 million for the fiscal year ended March 31,
1999 . Semiconductor revenues for the fiscal year ended March 31, 1999 increased
451.1% to 2.8 million compared to $500,000 during the fiscal year ended March
31, 1998. As a growing number of software licensees began initial trials and
deployments of broadband access devices, semiconductor revenues increased from
30.1% of total revenues for the fiscal year ended March 31, 1999 to 64.5% of
total revenues for the fiscal year ended April 2, 2000.

  License revenues for the fiscal year ended April 2, 2000 increased 128.3% to
$3.7 million compared to $1.6 million for the fiscal year ended March 31, 1999.
The absolute increase in license revenues was primarily the result of success
expanding our software licensee customer base and license revenues earned by D2
Technologies, our recent acquisition. Year over year, license revenues decreased
to 17.0% of total revenues as semiconductor revenues continue to grow. License
revenues of $1.6 million for the fiscal year ended March 31, 1999 were
substantially the same as the fiscal year ended March 31, 1998. License revenues
were 17.6% of total revenues for both the fiscal year ended March 31, 1999 and
1998.

  Services and royalty revenues decreased 27.2% to $1.7 million, or 8.0% of
total revenues for the fiscal year ended April 2, 2000, compared to $2.4
million, or 25.5% of total revenues, for the fiscal year ended March 31, 1999.
Services and royalty revenues increased 96.3% to $2.4 million for the fiscal
year ended March 31, 1999, compared to $1.2 million or 13.5% of total revenues
for the fiscal year ended March 31, 1998. The change is due primarily to the
reduction in royalty revenues from two customers.

  Systems revenues decreased 7.3% to $2.3 million for the fiscal year ended
April 2, 2000 compared to $2.5 million for the fiscal year ended March 31, 1999.
Systems revenues decreased 56.2% to $2.5 million for the fiscal year ended March
31, 1999 compared to $5.7 million for the fiscal year ended March 31, 1998. The
decrease in systems revenue, to 10.5% of total revenues for the fiscal year
ended April 2, 2000, from 26.8% of total revenues for the fiscal year ended
March 31, 1999, and 63.3% of total revenues for the fiscal year ended March 31,
1998 was primarily due to our decision in September 1997 to focus our sales and
development efforts on semiconductor devices for the DSL market.


 Cost of Revenues and Gross Margin

  Total cost of revenues consists primarily of costs paid to foundry vendors to
manufacture our semiconductors, costs attributable to design services and
software maintenance and operations expense. Cost of revenues increased to $11.2
million, or 51.6% of total revenues, for the fiscal year ended April 2, 2000,
from $4.0 million, or 43.2% of total revenues, for the fiscal year ended March
31, 1999. Total cost of revenues was $3.8 million, or 42.4% of total revenues,
for the fiscal year ended March 31, 1998.

  Semiconductor gross margin increased to 31.3% for the fiscal year ended April
2, 2000. The increase was primarily due to product mix and an increase in sales
volume. Semiconductor gross margin decreased to 13.0% for the fiscal year ended
March 31, 1999 from 35.6% for the fiscal year ended March 31, 1998.

  Software license gross margin was 97.1% for the fiscal year ended April 2,
2000 primarily due to costs incurred with license contracts assumed following
the D2 Technologies acquisition. There were no costs of revenues associated with
our software license revenues for the fiscal years ended March 31, 1999 and
1998.

  Services and royalty revenues gross margin decreased to 59.0% for the fiscal
year ended April 2, 2000, from 77.7% for the fiscal year ended March 31, 1999 as
a result of costs incurred for design services and higher mix of design services
revenues as higher margin royalty revenues decreased. Services and royalty
revenues gross margin was 84.1% for the fiscal year ended March 31, 1998.

                                       35
<PAGE>

  Systems product gross margin improved to 65.9% for the fiscal year ended April
2, 2000 from 57.7% for the fiscal year ended March 31, 1999. The increase was
primarily due to decreased operations support related to systems products and a
narrower systems product range. Gross margin for systems products was 42.1% for
the fiscal year ended March 31, 1998.


 Research and Development Expenses

  Research and development expenses consist primarily of engineering staffing
costs and technology license fees. Research and development expenses increased
48.2% from $8.3 million to $12.3 million for the fiscal year ended April 2,
2000. The increase was primarily due to the addition of research and development
personnel as a result of accelerated new product development and the addition of
personnel as a result of the acquisition of D2 Technologies. In the fiscal year
ended April 2, 2000 a charge of $2.0 million was recorded for National Insurance
Contribution on options for the research and development group. This expense is
listed separately in our financial results and is calculated for stock options
granted to United Kingdom employees as the difference between the option
exercise price and the fair value of the underlying common stock at the balance
sheet date. (See National Insurance Contribution on options below.) Research and
development expenses increased 108.9% to $8.3 million for the fiscal year ended
March 31, 1999 from $4.0 million for the fiscal year ended March 31, 1998. The
increase was attributable primarily to the addition of personnel in our research
and development organization associated with semiconductor product development
as well as the addition of personnel as a result of the acquisition of RSA
Communications.


 Sales and Marketing Expenses

  Sales and marketing expenses consist primarily of employee salaries, sales
commissions, travel and related costs, promotional materials and trade show
expenses. Sales and marketing expenses increased 83.4% from $2.9 million to $5.4
million for the fiscal year ended April 2, 2000. The increase was primarily due
to the addition of sales and marketing personnel and increased sales commissions
associated with higher revenues. In the fiscal year ended April 2, 2000 a charge
of $961,000 was recorded for National Insurance Contribution on options for the
sales and marketing group. (See National Insurance Contribution on options
below.) Sales and marketing expenses decreased 28.4% to $2.9 million for the
fiscal year ended March 31, 1999 from $4.1 million for the fiscal year ended
March 31, 1998. The decrease in sales and marketing expenses resulted from our
reduced emphasis on systems-level products from September 1997 and increased
focus on semiconductor products.


 General and Administrative Expenses

  General and administrative expenses consist primarily of employee salaries and
costs associated with legal, accounting and other professional service fees, bad
debt expense as well as general corporate expenses. General and administrative
expenses increased 7.3% from $5.6 million to $6.0 million for the fiscal year
ended April 2, 2000. The increase was primarily due to increased staff and the
addition of costs as a result of being a publicly traded company. In the fiscal
year ended April 2, 2000 a charge of $1.5 million was recorded for National
Insurance Contribution on options for the general and administrative group. (See
National Insurance Contribution on options below.) General and administrative
expenses increased 13.2% to $5.6 million for the fiscal year ended March 31,
1999 from $4.9 million for the fiscal year ended March 31, 1998. The increase
was primarily due to increased staff performing general and administrative tasks
added with the acquisition of RSA Communications and increased bad debt
provision.


 Restructuring Cost

  We recognized $1.9 million of restructuring cost for the fiscal year ended
March 31, 1998 associated with our reduced emphasis on systems-level products.


 National Insurance Contribution on options

  We recorded a charge for National Insurance Contribution taxes which will be
incurred on a gain in the Company's per share price for stock options granted to
our United Kingdom employees. Due to the significant movement in Virata's per
share price in the fiscal year ended April 2, 2000, the charge recorded was $4.5
million. The charge is calculated in the United Kingdom as the difference
between the market value of Virata stock at the close of the period and the
exercise price of the option multiplied by a 12.2% tax rate. The calculation is
applied to all options issued to our UK employees, vested and unvested. The
charge will be revised to reflect

                                       36
<PAGE>

the movement in Virata's stock price at each future balance sheet date. The
allocation of the $4.5 million charge, by department, is $2.0 million to
research and development, $1.0 million to sales and marketing, and $1.5 million
to general and administrative.

 Amortization of Intangible Assets

  Amortization of intangible assets expense is related to the intangible assets
acquired in the acquisition of RSA Communications, which occurred in July 1998
and the acquisition of D2 Technologies, which occurred in February 2000.

  Amortization of intangible assets for the fiscal year ended April 2, 2000
relating to the acquisition of D2 Technologies was $3.8 million. We are
amortizing the intangible assets from the D2 Technologies acquisition over 24 to
48 months beginning in the quarter ended April 2, 2000.

  Amortization of intangible assets for the fiscal year ended April 2, 2000
relating to the RSA Communications acquisition was $743,000. During the fiscal
year ended March 31, 1999, amortization of intangible assets expense was
$549,000. We are amortizing the intangible assets from the RSA Communications
acquisition on a straight-line basis over 60 months beginning in the quarter
ended September 30, 1998.


 Amortization of Stock Compensation

  During the fiscal years ended April 2, 2000, March 31, 1999 and 1998, we
recorded a total of $3.4 million of unearned stock compensation. We recognized
amortization of stock compensation of $907,000 for the fiscal year ended April
2, 2000, $1.4 million for the fiscal year ended March 31, 1999 and $399,000 for
the fiscal year ended March 31, 1998. We are amortizing the unearned stock
compensation over 48 months.


 Acquired In-Process Research and Development Expense

  Acquired in-process research and development expense is related to our
acquisitions.

  For the fiscal year ended April 2, 2000, the expense relates to the
acquisition of D2 Technologies, which occurred in February 2000. Based on a
valuation by an independent appraiser, $5.4 million of the $96.9 million
purchase price was allocated to in-process research and development.

  For the fiscal year ended March 31, 1999, the expense relates to the
acquisition of RSA Communications, which occurred in July 1998. Based on a
valuation by an independent appraiser, $5.3 million of the $9.3 million purchase
price was allocated to in-process research and development.


 Interest Expense

  Interest expense increased to $200,000 for the fiscal year ended April 2, 2000
from $155,000 for the fiscal year ended March 31, 1999. The increase in interest
expense was primarily due to interest expense associated with capital equipment
under our lease facility and borrowings under our revolving credit facility.
Interest expense was $214,000 for the fiscal year ended March 31, 1998. The
decrease in interest expense was primarily due to interest expense associated
with capital equipment under our lease facility.


 Interest and Other Income, Net

  Interest and other income, net consists primarily of income earned on cash and
cash equivalents and short-term investments, foreign exchange gains and losses
and income tax refunds. Interest income for the fiscal years ended April 2,
2000, March 31, 1999 and 1998 were $1.6 million, $786,000, and $121,000,
respectively. Interest income for each fiscal year corresponded to the average
cash balance during the years. During the fiscal year ended April 2, 2000,
foreign exchange gain was $800,000 and in income tax refund was $ 39,000. During
the fiscal year ended March 31, 1999 the foreign exchange gain was $427,000, and
an income tax refund was $531,000. Losses at RSA Communications, subsequent to
its acquisition, allowed for the income tax refund. During the fiscal year ended
March 31, 1998 foreign exchange losses were $80,000.

                                       37
<PAGE>

 Income Taxes

  Since inception, we have incurred net losses for federal and state tax
purposes and have not recognized any tax provision or benefit. At April 2, 2000,
the Company had approximately $33.1 million, $25.9 million and $30.0 million in
federal, state and foreign net operating loss carryforwards, respectively, to
reduce future taxable income. The net operating loss carryforwards expire
between 2002 and 2019 for both federal and state purposes, if not utilized.

  As of April 2, 2000, we had deferred tax assets of $24.3  million, which were
fully offset by a valuation allowance. Deferred tax assets consist principally
of the federal and state net operating loss carryforwards, capitalized start-up
expenditures, accruals and reserves not currently deductible for tax purposes,
research and development credits and foreign tax credit carryforwards. We have
provided a valuation allowance due to the uncertainty of generating future
profits that would allow for the realization of these deferred tax assets.
Accordingly, no tax benefit was recorded in the accompanying consolidated
statements of operations.

                                       38
<PAGE>

Quarterly Results of Operations

  The following table sets forth our consolidated operating results for each of
the five quarters ended April 2, 2000. This data has been derived from unaudited
consolidated financial statements that, in the opinion of our management,
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of this information when read in conjunction
with our annual audited consolidated financial statements and notes thereto
appearing elsewhere in this Annual Report. These operating results are not
necessarily indicative of results of any future period.

<TABLE>
<CAPTION>
                                                                                       Three Months Ended
                                                                                       ------------------
                                                                      April 2,   Jan. 2,   Oct. 3,    June 30,   Mar. 31,
                                                                       2000       2000      1999        1999      1999
                                                                      --------   -------   --------   --------    -------
                                                                                        (in thousands)
<S>                                                                  <C>        <C>       <C>        <C>        <C>
Revenues:
  Semiconductors....................................................  $  8,118   $ 2,430   $  2,074   $  1,419    $   662
  License...........................................................     2,195       994        254        274        444
  Services and royalty..............................................       609       307        435        373        592
  Systems...........................................................     1,109       338        249        599        720
                                                                      --------   -------   --------   --------    -------
     Total revenues.................................................    12,031     4,069      3,012      2,665      2,418
                                                                      --------   -------   --------   --------    -------
Cost of revenues:
  Semiconductors....................................................     6,051     1,659      1,130        811        842
  License...........................................................       107        --         --         --         --
  Services and royalty..............................................       217       146        200        138        161
  Systems...........................................................       174       115        167        324        (27)
                                                                      --------   -------   --------   --------    -------
     Total cost of revenues.........................................     6,549     1,920      1,497      1,273        976
                                                                      --------   -------   --------   --------    -------
Gross profit........................................................     5,482     2,149      1,515      1,392      1,442
Operating expenses:
  Research and development..........................................     4,156     3,045      2,581      2,549      2,184
  Sales and marketing...............................................     2,262     1,192        973        923        826
  General and administrative........................................     2,196     1,477      1,400        903      1,503
  National Insurance Contribution on options........................     4,471        --         --         --         --
  Amortization of intangible assets.................................     3,944       183        176        194        206
  Amortization of stock compensation................................       196       206        239        266        348
  Acquired in-process research and development......................     5,324        --         --         --         --
                                                                      --------   -------   --------   --------    -------
     Total operating expenses.......................................    22,549     6,103      5,369      4,835      5,067
                                                                      --------   -------   --------   --------    -------
Loss from operations................................................   (17,067)   (3,954)    (3,854)    (3,443)    (3,625)
Interest and other income (expense), net............................     1,866       619       (703)       428      1,353
                                                                      --------   -------   --------   --------    -------
Net loss............................................................  $(15,201)  $(3,335)  $ (4,557)  $ (3,015)   $(2,272)
                                                                      ========   =======   ========   ========    =======
As a Percentage of Total Revenues
Revenues:
  Semiconductors....................................................      67.5%     59.8%      68.9%      53.2%      27.4%
  License...........................................................      18.2      24.4        8.3       10.3       18.3
  Services and royalty..............................................       5.1       7.5       14.4       14.0       24.5
  Systems...........................................................       9.2       8.3        8.4        2.5       29.8
                                                                      --------   -------   --------   --------    -------
     Total revenues.................................................     100.0     100.0      100.0      100.0      100.0
                                                                      --------   -------   --------   --------    -------
Cost of revenues:
  Semiconductors....................................................      50.3      40.8       37.5       30.4       34.8
  License...........................................................       0.9        --         --         --         --
  Services and royalty..............................................       1.8       3.6        6.7        5.2        6.6
  Systems...........................................................       1.4       2.8        5.5       12.2       (1.1)
                                                                      --------   -------   --------   --------    -------
     Total cost of revenues.........................................      54.4      47.2       49.7       47.8       40.3
                                                                      --------   -------   --------   --------    -------
Gross profit  ......................................................      45.6      52.8       50.3       52.2       59.7
Operating expenses:
  Research and development..........................................      34.5      74.8       85.7       95.7       90.3
  Sales and marketing...............................................      18.8      29.3       32.3       34.6       34.2
  General and administrative........................................      18.2      36.3       46.5       33.9       62.2
  National Insurance Contribution on options........................      37.2        --         --         --         --
  Amortization of intangible assets.................................      32.8       4.5        5.9        7.2        8.5
  Amortization of stock compensation................................       1.6       5.1        7.9       10.0       14.4
  Acquired in-process research and development......................      44.3        --         --         --         --
                                                                      --------   -------   --------   --------    -------
     Total operating expenses.......................................     187.4     150.0       78.3      181.4      209.6
                                                                      --------   -------   --------   --------    -------
Loss from operations................................................    (141.8)    (97.2)    (128.0)    (129.2)    (149.9)
Interest and other income (expense), net............................      15.5      15.2       23.3)      16.1       56.0
                                                                      --------   -------   --------   --------    -------
Net loss............................................................    (126.3)%   (82.0)%   (151.3)%   (113.1)%    (93.9)%
                                                                      ========   =======   ========   ========    =======
</TABLE>

                                       39
<PAGE>

Liquidity and Capital Resources

     We have financed our operations primarily through venture capital and
corporate investments in our convertible preferred stock and our initial public
offering of common stock in November 1999, which totaled approximately $142.0
million in aggregate net proceeds through April 2, 2000.

     Our cash and cash equivalents together with our short-term investments
increased $68.6 million to $78.2 million for the fiscal year ended April 2,
2000. The increase in these accounts was primarily due to net proceeds of our
initial public offering in November 1999 of $73.0 million and net proceeds from
the sale of convertible preferred stock in October 1999 of $8.0 million. Our
cash and cash equivalents increased $51.6 million to $60.2 million for the
fiscal year ended April 2, 2000.

     Net cash used in operating activities for the fiscal year ended April 2,
2000 of $7.0 million was primarily due to net operating losses of $26.1 million,
an increase in accounts receivables and other current assets of $4.2 million and
$1.6 million respectively, partially offset by depreciation and amortization of
$6.3 million, acquired in-process research and development expenses of $5.3
million in connection with the acquisition of D2 Technologies, and increases in
accounts payable, accrued liabilities, accrued employee benefits, accrued
National Insurance Contribution on options expense, and deferred revenue of $2.8

                                       40
<PAGE>

million $2.2 million, $1.7 million, $4.5 million, and $1.3 million,
respectively. Net cash used in operating activities for the fiscal year ended
March 31, 1999 of $9.5 million was primarily due to net operating losses of
$17.2 million and a decrease in accrued liabilities of $2.1 million, partially
offset by depreciation and amortization of $1.7 million, acquired in-process
research and development expenses of $5.3 million in connection with the
acquisition of RSA Communications, amortization of stock compensation of $1.4
million and a provision for doubtful accounts of $1.5 million. Net cash used in
operating activities for the fiscal year ended March 31, 1998 of $9.2 million
was primarily due to net operating losses of $10.3 million and an increase in
accounts receivable of $1.7 million, partially offset by depreciation and
amortization of $1.1 million and a provision for doubtful accounts of $1.1
million.

     Net cash used in investing activities was $22.1 million for the fiscal year
ended April 2, 2000, which reflected the net purchase of short-term investments
of $17.0 million, $3.6 million of cash paid in connection with our acquisition
of D2 Technologies net of cash acquired, and net purchases of property and
equipment of $1.4 million. Net cash used in investing activities was $8.3
million for the fiscal year ended March 31, 1999, which reflected purchases of
property and equipment of $2.1 million, the net cash paid in connection with the
acquisition of RSA Communications of $5.1 million and the purchase of short-term
investments of $1.0 million. Net cash used in investing activities was $174,000
for the fiscal year ended March 31, 1998, which primarily reflected purchases of
property and equipment.

     Net cash provided by financing activities was $81.1 million for the fiscal
year ended April 2, 2000. Net cash provided by financing activities was
attributable primarily to proceeds from the issuance of common stock through our
initial public offering of $73.0 million, issuance of convertible preferred
stock of $8.0 million, partially offset by repayments on capital lease
obligations of $1.0 million. Net cash provided by financing activities was $25.6
million and $2.8 million for the fiscal years ended March 31, 1999 and 1998,
respectively. Net cash provided by financing activities in each of these periods
was attributable primarily to proceeds from the issuance of convertible
preferred stock, proceeds from equipment lease financing less repayments on
capital lease obligations and, for the fiscal year ended March 31, 1998, a
revolving credit facility.

     Our working capital at April 2, 2000 was approximately $70.6 million as
compared to $8.0 million at March 31, 1999. The Company's current ratio
increased to 4.8 to 1.0, as of April 2, 2000, from 2.5 to 1.0, as of March 31,
1999.

     We have a loan and security agreement that provides for borrowings up to
$3.0 million. The agreement bears interest at prime rate plus one-half percent,
and all outstanding advances are due in August 2000. Borrowings are secured by
our property, equipment, intellectual property, inventory and receivables and
require that we comply with certain financial covenants including the
maintenance of specific minimum ratios. As of April 2, 2000, we had obtained
waivers for such financial covenants, and we had no outstanding debt under this
agreement.

     We plan to continue to invest in our infrastructure, including information
systems, to gain efficiencies and meet the demands of our markets and customers.
We believe our current cash, cash equivalents, and short-term investments will
be sufficient to meet our anticipated cash needs for working capital and capital
expenditures for the next 12 months. Thereafter, if cash generated from
operations is insufficient to satisfy our long-term liquidity requirements, we
may seek to sell additional equity or debt securities or to obtain an additional
credit facility. If additional funds are raised through the issuance of debt
securities, these securities could have rights, preferences and privileges
senior to holders of common stock, and the terms of any debt could impose
restrictions on our operations. The sale of additional equity or debt securities
could result in additional dilution to our stockholders, and additional
financing may not be available in amounts or on terms acceptable to us, if at
all. If we are unable to obtain this additional financing, we may be required to
reduce the scope of our planned product development and marketing efforts, which
could harm our business, financial condition and operating results.


Year 2000 Impact

     We have not experienced any material internal or supplier problems relating
to distinguishing twenty-first century dates from twentieth century dates,
generally referred to as year 2000 problems. We are also not aware of any
material year 2000 problems with our customers or suppliers. We do not
anticipate incurring material expenses or experiencing any material operational
disruptions as a result of any year 2000 problems, however, we cannot guarantee
that we and our suppliers, customers or other business partners will not
experience any year 2000 problems in the future.

                                       41
<PAGE>

Recent Accounting Pronouncements

     In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivatives and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. In July 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities--Deferral of the Effective Date of
FASB Statement No. 133." SFAS No. 137 deferred the effective date of SFAS No.
133 until fiscal years beginning after June 15, 2000. We will adopt SFAS No. 133
during the year ending March 31, 2002. To date, we have not engaged in
derivative or hedging activities. We cannot predict the impact of adopting SFAS
No. 133 if we were to engage in derivative and hedging activities in the future.

     In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") 101, "Revenue Recognition in Financial Statements."
SAB 101 summarizes certain of the Staff's views in applying generally accepted
accounting principles to revenue recognition in financial statements. We do not
expect the adoption of SAB 101 to have a material effect on our results of
operations.

     In March 2000, the FASB issued Interpretation No. 44 ("FIN 44"), Accounting
for Certain Transactions Involving Stock Compensation - an Interpretation of APB
25. This Interpretation clarifies (a) the definition of employee for purposes of
applying Opinion 25, (b) the criteria for determining whether a plan qualifies
as a noncompensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination. This Interpretation is effective July 1, 2000, but certain
conclusions in this Interpretation cover specific events that occur after either
December 15, 1998 or January 12, 2000. To the extent that this Interpretation
covers events occurring during the period after December 15, 1998, or January
12, 2000, but before the effective date of July 1, 2000, the effects of applying
this Interpretation are recognized on a prospective basis from July 1, 2000. The
Company has not yet determined the impact, if any, of adopting this
Interpretation.


ITEM 7A -- Quantitative And Qualitative Disclosures About Market Risk.

     The primary objective of our investment activities is to preserve principal
while at the same time 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
principal amount of our investment will probably decline. To minimize this risk
in the future, we 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. 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 April 2, 2000, all of our investments were in money market funds,
certificates of deposits or high quality commercial paper. See Note 1 of the
"Notes to Consolidated Financial Statements".

     We develop products in both the United Kingdom and the United States and
sell in North America, Asia, Israel and Europe. As a result, our financial
results could be affected by factors such as changes in foreign currency
exchange rates or weak economic conditions. A strengthening of the dollar could
make our products less competitive in foreign markets, since all of our sales
are currently made in U.S. dollars.

                                       42
<PAGE>

ITEM 8 -- Financial Statements And Supplementary Data.

                              VIRATA CORPORATION

                  INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                            Page
                                                                            ----
Financial Statements:

Report of Independent Accountants........................................    44

Consolidated Balance Sheet at April 2, 2000 and March 31, 1999...........    45

Consolidated Statement of Operations for the Years Ended April 2, 2000,
  March 31, 1999 and 1998................................................    46

Consolidated Statement of Stockholders' Equity (Deficit) for the Years
  Ended April 2, 2000, March 31, 1999 and 1998...........................    47

Consolidated Statement of Cash Flows for the Years Ended April 2, 2000,
  March 31, 1999 and 1998................................................    48

Notes to Consolidated Financial Statements...............................    49

Financial Statement Schedule:

Schedule II--Valuation and Qualifying Accounts for the Years Ended
  April 2, 2000, March 31, 1999, 1998, and 1997..........................    70

Schedules other than those listed above have been omitted since either they are
not required or the information is included in the financial statements included
herewith

                                      43
<PAGE>

                       REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of Virata Corporation

     In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Virata Corporation and its subsidiaries at April 2, 2000 and March
31, 1999, and their results of operations and their cash flows for each of the
three years in the period ended April 2, 2000, in conformity with accounting
principles generally accepted in the United States. In addition, in our opinion,
the financial statement schedule listed in the accompanying index presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.


/s/ PricewaterhouseCoopers LLP

San Jose, California
April 26, 2000, except as to Note 14
which is as of April 27, 2000

                                       44
<PAGE>

                              VIRATA CORPORATION

                          CONSOLIDATED BALANCE SHEET
                (in thousands, except share and per share data)

<TABLE>
<CAPTION>
                                                                                                            April 2,      March 31,
                                                                                                              2000          1999
                                                                                                            --------      ---------
<S>                                                                                                         <C>           <C>
ASSETS
Current Assets:
  Cash and cash equivalents.........................................................................        $ 60,193      $  8,616
  Short-term investments............................................................................          18,006         1,001
  Accounts receivables, net of allowance for doubtful accounts and returns of $295 and
    $2,742, respectively............................................................................           7,524         2,267
  Inventories.......................................................................................             409           264
  Other current assets..............................................................................           2,895         1,232
                                                                                                            --------      --------
     Total current assets...........................................................................          89,027        13,380
Property and equipment, net.........................................................................           3,222         2,479
Intangible assets, net..............................................................................          89,113         3,328
                                                                                                            --------      --------
     Total assets...................................................................................        $181,362      $ 19,187
                                                                                                            ========      ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
  Accounts payable..................................................................................        $  4,887      $  2,112
  Accrued liabilities...............................................................................           3,484         1,018
  Accrued employee benefits.........................................................................           2,555           869
  Accrued National Insurance Contribution on options................................................           4,471            --
  Deferred revenue..................................................................................           2,215           489
  Capital lease obligations, current................................................................             784           850
                                                                                                            --------      --------
     Total current liabilities......................................................................          18,396         5,338
Capital lease obligations, long-term................................................................           1,178         1,130
                                                                                                            --------      --------
     Total liabilities..............................................................................           9,574         6,468
                                                                                                            --------      --------
Commitments (Note 9)
Stockholders' Equity
 Convertible preferred stock, $0.02 par value; zero shares authorized at April 2, 2000,
  86,100,000 at March 31, 1999; no shares and 51,431,179 issued or outstanding
  at April 2, 2000 and March 31, 1999, respectively.................................................              --           801
 Preferred stock, $0.001 par value; 5,000,000 shares authorized at April 2, 2000, no
  shares issued or outstanding .....................................................................              --            --
 Common stock, $0.001 par value; 450,000,000 and 95,000,000 shares authorized at
  April 2, 2000 and March 31, 1999, respectively; 46,568,006 and 4,004,020 shares
  issued and outstanding at April 2, 2000 and March 31, 1999, respectively..........................              47             4
 Additional paid-in capital.........................................................................         238,833        63,171
 Accumulated other comprehensive income.............................................................             335           871
 Unearned stock compensation........................................................................            (691)       (1,500)
 Accumulated deficit................................................................................         (76,736)      (50,628)
                                                                                                            --------      --------
     Total stockholders' equity.....................................................................         161,788        12,719
                                                                                                            --------      --------
     Total liabilities and stockholders' equity.....................................................        $181,362      $ 19,187
                                                                                                            ========      ========
</TABLE>


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

                                       45
<PAGE>

                              VIRATA CORPORATION

                     CONSOLIDATED STATEMENT OF OPERATIONS
                     (in thousands, except per share data)

<TABLE>
<CAPTION>
                                                                                                        Year Ended
                                                                                       ---------------------------------------------
                                                                                         April 2,       March 31,       March 31,
                                                                                       ------------   -------------   -------------
                                                                                           2000            1999            1998
                                                                                       ------------   -------------   -------------
<S>                                                                                    <C>            <C>             <C>
Revenues:
  Semiconductors....................................................................    $ 14,041        $  2,784        $    505
  License...........................................................................       3,717           1,628           1,570
  Services and royalty..............................................................       1,724           2,367           1,206
  Systems...........................................................................       2,295           2,477           5,650
                                                                                        --------        --------        --------
     Total revenues.................................................................      21,777           9,256           8,931
                                                                                        --------        --------        --------
Cost of revenues:
  Semiconductors....................................................................       9,651           2,421             325
  License...........................................................................         107              --              --
  Services and royalty..............................................................         701             528             192
  Systems...........................................................................         780           1,048           3,270
                                                                                        --------        --------        --------
     Total cost of revenues.........................................................      11,239           3,997           3,787
                                                                                        --------        --------        --------
Gross profit........................................................................      10,538           5,259           5,144
                                                                                        --------        --------        --------
Operating expenses:
  Research and development..........................................................      12,331           8,323           3,987
  Sales and marketing...............................................................       5,350           2,917           4,076
  General and administrative........................................................       5,976           5,567           4,917
  Restructuring costs...............................................................          --              --           1,871
  National Insurance Contribution on options  *.....................................       4,471              --              --
  Amortization of intangible assets.................................................       4,497             549              --
  Amortization of stock compensation................................................         907           1,394             399
  Acquired in-process research and development......................................       5,324           5,260              --
                                                                                        --------        --------        --------
     Total operating expenses.......................................................      38,856          24,010          15,250
                                                                                        --------        --------        --------
Loss from operations................................................................     (28,318)        (18,751)        (10,106)
Interest expense....................................................................        (200)           (155)           (214)
Interest and other income, net......................................................       2,410           1,749              42
                                                                                        --------        --------        --------
Net loss............................................................................    $(26,108)       $(17,157)       $(10,278)
                                                                                        ========        ========        ========
Basic and diluted net loss per share................................................    $  (1.40)       $  (4.46)       $  (3.00)
                                                                                        ========        ========        ========
Weighted average common shares--basic and diluted...................................      18,672           3,845           3,428
                                                                                        ========        ========        ========



*   National Insurance Contribution on options (Note 6):

      Research and development......................................................    $  2,036        $     --        $     --
      Sales and marketing...........................................................         961              --              --
      General and administrative....................................................       1,474              --              --
                                                                                        --------        --------        --------
                                                                                        $  4,471        $     --        $     --
                                                                                        ========        ========        ========
</TABLE>

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




                                       46
<PAGE>

                              VIRATA CORPORATION

           CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
                                (in thousands)


<TABLE>
<CAPTION>
                                                                                                              Accumulated
                                                               Convertible                      Additional       Other
                                                             Preferred Stock     Common Stock     Paid-in    Comprehensive
                                                            ------------------
                                                             Shares    Amount   Shares  Amount    Capital    Income (Loss)
                                                            --------  --------  ------  ------  -----------  --------------
<S>                                                         <C>       <C>       <C>     <C>     <C>          <C>
Balance, March 31, 1997...................................   22,320   $ 1,709    3,290     $ 3    $ 27,604           $ 729
                                                            -------   -------   ------     ---    --------           -----
  Issuance of common stock for cash.......................       --        --      242       1          51              --
  Unearned stock compensation.............................       --        --       --      --       1,958              --
  Amortization of unearned stock compensation.............       --        --       --      --          --              --
  Currency translation adjustment.........................       --        --       --      --          --            (110)
  Net loss................................................       --        --       --      --          --              --
                                                            -------   -------   ------     ---    --------           -----
Balance, March 31, 1998...................................   22,320     1,709    3,532       4      29,613             619
                                                            -------   -------   ------     ---    --------           -----
  Change in the par value of Series A convertible
   preferred stock........................................       --    (1,366)      --      --       1,366              --
  Issuance of Series D convertible preferred stock
   and warrants...........................................   24,781       410       --      --      24,672              --
  Issuance of Series D convertible preferred stock,
   common stock and options for acquisition...............      606        10      458      --       3,578              --
  Issuance of Series D convertible preferred stock
   upon conversion of debt................................    3,039        38       --      --       2,576              --
  Issuance of Series D convertible preferred stock
   for cash...............................................       22        --       --      --          24              --
  Issuance of common stock for cash.......................       --        --       14      --           7              --
  Exchange Series B and Series C convertible
   preferred stock to Series D convertible
   preferred stock........................................      663        --       --      --          --              --
  Unearned stock compensation.............................       --        --       --      --       1,335              --
  Amortization of unearned stock compensation.............       --        --       --      --          --              --
  Unrealized gain on investments..........................       --        --       --      --          --               1
  Currency translation adjustment.........................       --        --       --      --          --             251
  Net loss................................................       --        --       --      --          --              --
                                                            -------   -------   ------     ---    --------           -----
Balance, March 31, 1999...................................   51,431       801    4,004       4      63,171             871
                                                            -------   -------   ------     ---    --------           -----
  Issuance of Series E convertible preferred stock
   for cash...............................................    6,154       615       --      --       7,339              --
  Reorganization to US Delaware corporation...............  (57,585)   (1,416)  24,902      25       1,391              --
  Issuance of common upon initial public
   offering...............................................       --        --   11,500      12      73,001              --
  Issuance of common stock for cash.......................       --        --    1,032       1       1,129              --
  Issuance of common stock and options for acquisition....       --        --    4,396       4      92,705              --
  Issuance of common stock upon exercise of
   warrants...............................................       --        --      734       1          (1)             --
  Unearned stock compensation.............................       --        --       --      --          98              --
  Amortization of unearned stock compensation.............       --        --       --      --          --              --
  Currency translation adjustment.........................       --        --       --      --          --            (536)
  Net loss................................................       --        --       --      --          --              --
                                                            -------   -------   ------     ---    --------           -----
Balance, April 2, 2000....................................       --   $    --   46,568     $47    $238,833           $ 335
                                                            =======   =======   ======     ===    ========           =====

<CAPTION>
                                                                                            Total
                                                               Unearned                  Stockholders'    Total
                                                                 Stock      Accumulated    Equity     Comprehensive
                                                             Compensation     Deficit     (Deficit)       Income
                                                             -------------    -------     ----------      ------
<S>                                                          <C>            <C>           <C>         <C>
Balance, March 31, 1997...................................        $    --      $(23,193)   $  6,852     $ (8,149)
                                                                  -------      --------    --------     ========
  Issuance of common stock for cash.......................             --            --          52           --
  Unearned stock compensation.............................         (1,958)           --          --           --
  Amortization of unearned stock compensation.............            399            --         399           --
  Currency translation adjustment.........................             --            --        (110)        (110)
  Net loss................................................             --       (10,278)    (10,278)     (10,278)
                                                                  -------      --------    --------     --------
Balance, March 31, 1998...................................         (1,559)      (33,471)     (3,085)     (10,388)
                                                                  -------      --------    --------     ========
  Change in the par value of Series A convertible
   preferred stock........................................             --            --          --           --
  Issuance of Series D convertible preferred stock
   and warrants...........................................             --            --      25,082           --
  Issuance of Series D convertible preferred stock,
   common stock and options for acquisition...............             --            --       3,588           --
  Issuance of Series D convertible preferred stock
   upon conversion of debt................................             --            --       2,614           --
  Issuance of Series D convertible preferred stock
   for cash...............................................             --            --          24           --
  Issuance of common stock for cash.......................             --            --           7           --
  Exchange Series B and Series C convertible
   preferred stock to Series D convertible
   preferred stock........................................             --            --          --           --
  Unearned stock compensation.............................         (1,335)           --          --           --
  Amortization of unearned stock compensation.............          1,394            --       1,394           --
  Unrealized gain on investments..........................             --            --           1            1
  Currency translation adjustment.........................             --            --         251          251
  Net loss................................................             --       (17,157)    (17,157)     (17,157)
                                                                  -------      --------    --------     --------
Balance, March 31, 1999...................................         (1,500)      (50,628)     12,719      (16,905)
                                                                  -------      --------    --------     ========
  Issuance of Series E convertible preferred stock
   for cash...............................................             --            --       7,954           --
  Reorganization to US Delaware corporation...............             --            --          --           --
  Issuance of common upon initial public
   offering...............................................             --            --      73,013           --
  Issuance of common stock for cash.......................             --            --       1,130           --
  Issuance of common stock and options for acquisition....             --            --      92,709           --
  Issuance of common stock upon exercise of
   warrants...............................................             --            --          --           --
  Unearned stock compensation.............................            (98)           --          --           --
  Amortization of unearned stock compensation.............            907            --         907           --
  Currency translation adjustment.........................             --            --        (536)        (536)
  Net loss................................................             --       (26,108)    (26,108)     (26,108)
                                                                  -------      --------    --------     --------
Balance, April 2, 2000....................................        $  (691)     $(76,736)   $161,788     $(26,644)
                                                                  =======      ========    ========     ========
 </TABLE>

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

                                       47
<PAGE>

                              VIRATA CORPORATION

                     CONSOLIDATED STATEMENT OF CASH FLOWS
                                (in thousands)


<TABLE>
<CAPTION>
                                                                                                      Year Ended
                                                                                         April 2,      March 31,     March 31,
                                                                                           2000          1999          1998
                                                                                           ----          ----          ----
<S>                                                                                      <C>           <C>           <C>
Cash flows from operating activities:
  Net loss.........................................................................      $(26,108)     $(17,157)     $(10,278)
  Adjustments to reconcile net loss to net cash used in operating
    activities:
     Provision for doubtful accounts and returns...................................           157         1,458         1,075
     Acquired in-process research and development..................................         5,324         5,260            --
     Depreciation and amortization.................................................         6,269         1,695         1,079
     Amortization of stock compensation............................................           907         1,394           399
     Changes in current assets and liabilities (excluding the effect of
       acquisitions):
        Accounts receivable........................................................        (4,207)         (739)       (1,651)
        Inventories................................................................          (167)          158           393
        Other current assets.......................................................        (1,648)           82          (445)
        Accounts payable...........................................................         2,797           248          (339)
        Accrued liabilities........................................................         2,213        (2,131)          280
        Deferred revenue...........................................................         1,286           184           306
        Accrued employee benefits..................................................         1,686            48            --
        Accrued National Insurance Contribution on options.........................         4,471            --            --
                                                                                         --------      --------      --------
           Net cash used in operating activities...................................        (7,020)       (9,500)       (9,181)
                                                                                         --------      --------      --------
Cash flows from investing activities:
  Sale of short-term investments...................................................        21,024            --            --
  Purchase of short-term investments...............................................       (38,029)       (1,000)           --
  Purchase of property and equipment, net..........................................        (1,447)       (2,127)         (174)
  Cash paid in connection with acquisition, net of cash acquired...................        (3,598)       (5,149)           --
                                                                                         --------      --------      --------
           Net cash used in investing activities...................................       (22,050)       (8,276)         (174)
                                                                                         --------      --------      --------
Cash flows from financing activities:
  Proceeds from issuance of convertible preferred stock, net of issuance costs.....         7,954        25,106            --
  Proceeds from issuance of common stock...........................................        74,143             7            52
  Proceeds from capital leases.....................................................            --         1,201            11
  Repayments of capital lease obligations..........................................        (1,004)         (318)         (277)
  Proceeds from convertible loan...................................................            --            --         2,606
  Proceeds from (repayment of) bank borrowings.....................................            --          (417)          417
                                                                                         --------      --------      --------
           Net cash provided by financing activities...............................        81,093        25,579         2,809
                                                                                         --------      --------      --------
Effect of exchange rate changes on cash............................................          (446)           46            24
                                                                                         --------      --------      --------
Net increase (decrease) in cash and cash equivalents...............................        51,577         7,849        (6,522)
                                                                                         --------      --------      --------
Cash and cash equivalents at beginning of period...................................         8,616           767         7,289
                                                                                         --------      --------      --------
Cash and cash equivalents at end of period.........................................      $ 60,193      $  8,616      $    767
                                                                                         ========      ========      ========
</TABLE>


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

                                       48
<PAGE>

                              VIRATA CORPORATION

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 1--The Company and Summary of Significant Accounting Policies:

The Company

     Virata Corporation (the "Company") was formed in 1993 as Advanced
Telecommunications Modules Limited, a corporation organized in the United
Kingdom, as a spin-off from Olivetti Research Laboratories. In February 1998,
the Company changed its name to Virata Limited. The Company is a provider of
solutions that integrate communication processors with a suite of software for
the digital subscriber line equipment ("DSL") market.

     In July 1998, the Company completed its acquisition of RSA Communications,
Inc., a corporation organized in North Carolina. RSA Communications was
subsequently renamed to Virata Raleigh Corporation. In February 2000, the
Company completed its acquisition of D2 Technologies, Inc., a company organized
in California (see Note 4). On April 27, 2000 we completed the acquisition of
Inverness Systems Ltd., a provider of networking software solutions (see Note
4).

     The historical financial statements presented are those of Virata Limited.
In August 1999, Virata Corporation was created and, immediately prior to its
initial public offering ("IPO") Virata Corporation became the holding company of
Virata Limited. The reorganization was accounted for on a historical basis.

     Effective October 3, 1999, the Company changed the fiscal year such that
each quarter ends on the Sunday closest to the calendar quarter end.

Principles of consolidation and basis of presentation

     The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.

Stock Split

     On March 21, 2000, the Company's Board of Directors approved a two-for-one
split of the Company's common stock that was applicable to stockholders of
record on May 4, 2000. The stock split, approved by the Company's stockholders
on May 1, 2000, was effective May 18, 2000. Unless specifically noted otherwise,
all references to share and per share data for all periods presented have been
adjusted to give effect to this split.

Use of estimates

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

                                       49
<PAGE>

                              VIRATA CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


Revenue recognition

     Revenues from the sale of both semiconductors and systems are recognized
upon shipment to customers. Allowances are provided for estimated returns at the
time of shipment. The Company recognizes software license revenue under the
American Institute of Certified Public Accountants ("AICPA") Statement of
Position ("SOP") 97-2, Software Revenue Recognition, and SOP 98-9, Modification
of SOP 97-2, Software Revenue Recognition, with Respect to Certain Transactions.
When contracts contain multiple elements and vendor-specific objective evidence
exists for all undelivered elements, the Company accounts for the delivered
elements in accordance with the "Residual Method" prescribed by SOP 98-9.
Software licenses are generally recognized as revenue upon shipment of the
software product. In the event the Company grants customers the right to
specified upgrades, license revenue is deferred until delivery of the specific
upgrade. If vendor-specific objective evidence of fair value does not exist for
the specific upgrade, the entire license fee is deferred until the delivery of
the specified upgrade. The Company recognizes revenues from maintenance and
support services provided to licensees ratably over the term of the agreement,
generally one year, and recognizes revenues from design services provided to
customers as the services are performed.

Cash equivalents

     The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. At April 2,
2000 and March 31, 1999, $53.3 million and $7.1 million, respectively, of money
market funds and certificate of deposits, the fair value of which approximates
cost, are included in cash and cash equivalents. The Company deposits cash and
cash equivalents with high credit quality financial institutions.

Short-term Investments

     Short term investments consist of high quality debt securities with
original maturity dates greater than ninety days. In accordance with Statement
of Financial Accounting Standard ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," the Company's investments are
classified as available-for-sale and, at the balance sheet date, are reported at
fair value, with the unrealized gains and losses, net of related taxes, reported
as a component of Accumulated Other Comprehensive Income. The cost of these
investments at April 2, 2000 and March 31, 1999 was $18.0 million and $1.0
million, respectively. Gains and losses on the sale of available-for-sale
securities would be determined using the specific-identification method.

Fair value of financial instruments

     Carrying amounts of certain of the Company's financial instruments,
including cash and cash equivalents, short term investments, accounts
receivable, accounts payable, and accrued liabilities approximate
fair value due to their short maturities.

Segment information

     The Company identifies its operating segments based on business activities,
management responsibility and geographical location. During each of the three
years in the period ended April 2, 2000, the Company operated in one operating
segment, primarily in the United States and Europe.

                                       50
<PAGE>

                              VIRATA CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


Concentration of credit risk

     Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash, cash equivalents, and accounts
receivable. The Company's accounts receivable are derived from revenues earned
primarily from customers located in the United States, Europe and Asia. The
Company performs ongoing credit evaluations of its customers' financial
condition and, generally, requires no collateral from its customers. The Company
maintains an allowance for doubtful accounts receivable based upon the expected
collectibility of accounts receivable.

     The following customers accounted for 10% or more of total revenues:

<TABLE>
<CAPTION>
                                                                      Year Ended
                                                                      ----------
                                                            April 2,   March 31,   March 31,
          Revenues                                            2000        1999        1998
          --------                                            ----        ----        ----
          <S>                                               <C>        <C>         <C>
          Customer A.....................................      23%         16%         10%
          Customer B.....................................      15%         23%         17%
          Customer C.....................................      --          --          10%
</TABLE>

     Revenues from customers located outside the United States were 44% in 2000,
40% in 1999 and 44% in 1998. The Company has $1,700,000 and $1,800,000 invested
in identifiable tangible assets in Europe as of April 2, 2000 and March 31,
1999, respectively. The remaining identifiable tangible assets are located in
the United States.

     The following customers account for 10% or more of total accounts
receivable:

<TABLE>
<CAPTION>
                                                            April 2,        March 31,
     Accounts Receivable                                      2000            1999
     -------------------                                      ----            ----
     <S>                                                    <C>             <C>
     Customer A......................................          11%             54%
     Customer B......................................          --              11%
     Customer D......................................          25%             --
</TABLE>


Inventories

     Inventories consist solely of finished goods and are stated at the lower of
cost or market, cost being determined using the first-in, first-out method.

Property and equipment

     Property and equipment are recorded at cost. Depreciation and amortization
are computed on a straight-line basis over the estimated useful lives of the
assets, as follows:

          Computer and network equipment and software............    2-3 years
          Furniture and office equipment.........................      5 years
          Research and development equipment.....................    2-3 years

     Leasehold improvements are amortized on a straight-line basis over the life
of the lease, or the useful life of the assets, whichever is shorter.

                                       51
<PAGE>

                               VIRATA CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)


Impairment of long-lived assets

     The Company investigates potential impairments of its long lived assets on
an exception basis when evidence exists that events or changes in circumstances
may have made recovery of the carrying value unlikely. An impairment loss is
recognized when the expected undiscounted future net cash flows is less than the
carrying amount of the asset. No such losses have been identified to date.

Intangible assets

     Intangible assets consist of technology, contracts, customer base,
assembled workforce and goodwill, which are being amortized on a straight line
basis over their estimated lives ranging from two to five years.

Net loss per share

     The Company computes net loss per share in accordance with SFAS No. 128,
"Earnings per Share" and SEC Staff Accounting Bulletin No. 98. Under the
provisions of SFAS No. 128 and SAB No. 98, basic and diluted net loss per share
is computed by dividing the net loss available to holders of common stock for
the period by the weighted average number of shares of common stock outstanding
during the period. The calculation of diluted net loss per share excludes
potential shares of common stock if their effect is anti-dilutive. Potential
common stock consists of shares of common stock issuable upon the exercise of
stock options and warrants and shares issuable upon conversion of the Series A,
B, C, and D convertible preferred stock.

                                       52
<PAGE>

                              VIRATA CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


     The following tables sets forth potential shares of common stock as
converted that are not included in the diluted net loss per share calculation
above because to do so would be anti-dilutive for the period indicated (in
thousands):

<TABLE>
<CAPTION>
                                                                          April 2,        March 31,
                                                                          --------        ---------
                                                                            2000       1999       1998
                                                                            ----       ----       ----
          <S>                                                             <C>         <C>         <C>
          Series A convertible preferred stock......................          --         269        269
          Series B convertible preferred stock......................          --         208      2,068
          Series C convertible preferred stock......................          --         836      1,194
          Series D convertible preferred stock......................          --      10,219         --
          Convertible preferred stock warrants......................          --         420         21
          Common stock warrants.....................................         102          22         22
          Common stock options......................................       8,166       4,334      1,432
                                                                           -----      ------      -----
                                                                           8,268      16,308      5,006
                                                                           =====      ======      =====
</TABLE>


Stock compensation

     The Company accounts for stock compensation arrangements in accordance with
provision of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for
Stock Issued to Employees" and complies with the disclosure provisions of SFAS
No. 123, "Accounting for Stock-Based Compensation." Under APB Opinion No. 25,
unearned stock compensation is based on the difference, if any, on the date of
the grant, between the fair value of the Company's common stock and the exercise
price. Unearned stock compensation is amortized and expensed in accordance with
FASB Interpretation No. 28. The Company accounts for stock issued to non-
employees in accordance with the provisions of SFAS No. 123 and Emerging Issues
Task Force Issue No. 96-18, "Accounting for Equity Instruments that are Issued
to Other than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services."

Recent accounting pronouncements

     In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivatives and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. In July 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities--Deferral of the Effective Date of
FASB Statement No. 133." SFAS No. 137 deferred the effective date of SFAS No.
133 until fiscal years beginning after June 15, 2000. The Company will adopt
SFAS No. 133 during its year ending March 31, 2002. To date, the Company has not
engaged in derivative or hedging activities. The Company is unable to predict
the impact of adopting SFAS No. 133 if it were to engage in derivative and
hedging activities in the future.

     In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") 101, "Revenue Recognition in Financial Statements."
SAB 101 summarizes certain of the Staff's views in applying generally accepted
accounting principles to revenue recognition in financial statements. The
Company does not expect the adoption of SAB 101 to have a material effect on its
results of operations.

     In March 2000, the FASB issued Interpretation No. 44 ("FIN 44"), Accounting
for Certain Transactions Involving Stock Compensation - an Interpretation of APB
25.  This Interpretation clarifies (a) the definition of employee for purposes
of applying Opinion 25, (b) the criteria for determining whether a plan
qualifies as a noncompensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination. This Interpretation is effective July 1, 2000, but certain
conclusions in this Interpretation cover specific events that occur after either
December 15, 1998 or January 12, 2000. To the extent that this Interpretation
covers events occurring during the period after December 15, 1998, or January
12, 2000, but before the effective date of July 1, 2000, the effects of applying
this Interpretation are recognized on a prospective basis from July 1, 2000. The
Company has not yet determined the impact, if any, of adopting this
Interpretation.

Comprehensive income

     Comprehensive income consists of foreign currency translation gains and
losses arising from the valuation of short-term investments and is presented in
the Consolidated Statement of Stockholders' Equity (Deficit). Balance sheet
accounts of foreign operations are translated using the period-end exchange
rate, and income statement accounts are translated on a monthly basis using the
average exchange rate for the period. Unrealized gains and losses on translation
adjustments are recorded in stockholders' equity as other comprehensive income.
The currency translation adjustments are not adjusted for income taxes as they
relate to indefinite investments in non-U.S. subsidiaries. Foreign currency
transaction gains and losses are included as a component of other income and
expense and during the fiscal years ended April 2, 2000, March 31, 1999 and 1998
the Company recognized (losses) gains of $543,000, $432,000, and $(80,000),
respectively.

Note 2--Supplemental Cash Flow Information (in thousands):

<TABLE>
<CAPTION>
                                                                                             Year ended
                                                                                             ----------
                                                                                April 2,      March 31,     March 31,
                                                                                  2000          1999          1998
                                                                                  ----          ----          ----
          <S>                                                                   <C>           <C>           <C>
          Supplemental cash flow information:
             Cash paid for interest.....................................         $  188         $  180        $ 197
                                                                                 ======         ======        =====
          Supplemental noncash investing and financing activity:
             Issuance of preferred stock for convertible loan...........         $   --         $2,712        $  --
                                                                                 ======         ======        =====
             Issuance of warrants in connection with financing..........         $   --         $  949        $  --
                                                                                 ======         ======        =====
             Property and equipment purchased with capital leases.......         $1,295         $  929        $ 361
                                                                                 ======         ======        =====
</TABLE>


                                       53
<PAGE>

                              VIRATA CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


Note 3--Balance Sheet Components (in thousands):

<TABLE>
<CAPTION>
                                                                      April 2, 2000       March 31, 1999
                                                                      -------------       --------------
          <S>                                                         <C>                 <C>
          Other current assets:
             Prepaid expenses....................................           $ 1,541              $   564
             Deposits............................................                99                  113
             Other current assets................................             1,255                  555
                                                                            -------              -------
                                                                            $ 2,895              $ 1,232
                                                                            =======              =======
          Property and equipment, net:
             Office equipment....................................           $ 4,727              $ 2,856
             Furniture and fixtures..............................               254                  247
             Leasehold improvements..............................               440                  429
             Research and development equipment..................             3,426                3,039
                                                                            -------              -------
                                                                              8,847                6,571
          Less: Accumulated depreciation and amortization........            (5,625)              (4,092)
                                                                            -------              -------
                                                                            $ 3,222              $ 2,479
                                                                            =======              =======
</TABLE>

     Property and equipment includes $3,843,000 and $3,485,000 of computer
equipment and internal-use software under capital leases at April 2, 2000 and
March 31, 1999, respectively. Accumulated amortization of assets under capital
leases totaled $3,044,000, and $2,015,000, at April 2, 2000, and March 31, 1999,
respectively.


<TABLE>
<CAPTION>
                                                                      April 2, 2000       March 31, 1999
                                                                      -------------       --------------
          <S>                                                         <C>                 <C>
          Intangible assets:
             Goodwill.............................................          $75,572               $3,877
             Technology...........................................           15,872                   --
             Contracts............................................            1,006                   --
             Customer base........................................            1,001                   --
             Assembled workforce..................................              760                   --
                                                                            -------               ------
                                                                             94,211                3,877
          Less: Accumulated amortization..........................           (5,098)                (549)
                                                                            -------               ------
                                                                            $89,113               $3,328
                                                                            =======               ======
</TABLE>


Note 4--Acquisitions

RSA Communications

     The Company completed its acquisition of RSA Communications Inc. on July
17, 1998. RSA Communications was privately-held and based in Raleigh, North
Carolina, specializing in analog modem software development. The Company's
acquisition of RSA Communications was accounted for as a purchase business
combination.

     The Company's allocation of RSA Communications' aggregate purchase price to
the tangible and identifiable intangible assets acquired in connection with this
acquisition were based on fair values as determined by an independent appraiser.
The allocation is summarized below (in thousands):

          In-process research and development...................      $5,260
          Goodwill..............................................       3,877
          Net tangible assets...................................         138
                                                                      ------
               Total purchase price.............................      $9,275
                                                                      ======

                                       54
<PAGE>

                              VIRATA CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  The total purchase price of $9,275,000 million consisted of 459,700 shares of
the Company's common stock valued at $1,417,000 million, 606,500 shares of
series D convertible preferred stock valued at $667,000, options to purchase
594,925 shares of common stock valued at $1,505,000 million, cash of $5,332,000
million and acquisition related expenses, consisting primarily of legal and
other professional fees, of approximately $354,000. The Company valued the
options using the Black-Scholes option pricing model, applying an expected life
of four years, a weighted average risk-free rate of 5.47%, an expected dividend
yield of zero percent, a volatility of 70% and a deemed fair value of common
stock of $0.46 per share.

  The core technologies acquired in the RSA Communications acquisition were the
ADSL PHY software and voiceband modem protocol software. The significant in-
process research and development projects include V.90 Modem Software and two
software algorithms, the Modem Modulation Software Algorithm and the ADSL
Software Algorithm.

  The valuation of the acquired in-process research and development of
$5,260,000 was based on the result of an independent appraisal which was
determined using the income-based approach for V.90 Modem Software and the
replacement cost method for software algorithms. The acquired in-process
technology was not considered to have reached technological feasibility at the
time it was acquired and had no alternative future use. Accordingly, the amount
was charged to operations at the date of acquisition.

  The V.90 Modem Software project was completed subsequent to its acquisition in
1998 and has been licensed to one customer. At the time of the acquisition this
project was approximately 90% complete, and the fair value assigned to this
project was $2.435 million.

  The Modem Modulation Software Algorithm includes certain software that
provides modulation/demodulation functions of a voiceband modem, and certain
software for a voiceband modem that provides functions such as control, error
correction and data compression. At the time of the acquisition, this project
was approximately 90% complete, and the fair value assigned to this project was
$2.4 million. This project was subsequently terminated.

  The ADSL software algorithm is a complete software stack that is compliant
with the ITU ADSL standards. The fair value assigned to this project was
$425,000 at the time of the acquisition when this project was approximately 35%
complete. The project is currently 85% complete and has a remaining expected
development cost of $375,000. The remaining risks affecting the timely
completion and commercialization of this project are minimal. The remaining
uncertainties that might affect the outcome of this project are related to the
size of the developing ADSL market.

  The income method of valuation for the V.90 Modem Software was determined
using a modified version of the relief from royalty avoided by the Company upon
the purchase of RSA Communications. Royalty rates were estimated based on past
contracts and unit sales were estimated based on the size of the total market
from industry analysis. The avoided royalty payments by the Company were then
calculated for the life of the product. The net cash flow was discounted back to
the present value at a risk-adjusted discount rate of 40%.

  The algorithms which require a special skill set for their development were
valued using the replacement cost method which considered costs incurred through
the valuation date.

  The goodwill is being amortized on a straight line basis over the estimated
period of benefit of five years.

                                       55
<PAGE>

                              VIRATA CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  The following unaudited pro forma financial information present the
consolidated results of the Company as if the acquisition had occurred at the
beginning of each period, and includes adjustments for amortization of goodwill.
This pro forma financial information is not intended to be indicative of future
results. Unaudited pro forma consolidated results of operations are as follows
(in thousands, except per share data):

<TABLE>
<CAPTION>
                                                                                           Year Ended
                                                                                           March 31,
                                                                                   --------------------------
                                                                                       1999          1998
                                                                                   ------------  ------------
           <S>                                                                     <C>           <C>
                                                                                          (unaudited)

           Revenues..........................................................         $ 10,075     $ 13,251
           Net loss..........................................................          (19,224)     (11,931)
           Basic and diluted net loss per share..............................            (4.82)       (3.08)
</TABLE>

D2 Technologies

  The acquisition of D2 Technologies, Inc. was completed on February 10, 2000.
Based in Santa Barbara, California, D2 Technologies develops, markets and
supports innovative digital signal processing (DSP) solutions for the next
generation telephony products. D2 Technologies serves the computer and Internet
telephony markets with robust and cost-effective DSP solutions. Its customers
include some of the largest telecommunications and internet companies in the
industry whose markets range from high-capacity telecommunications systems to
personal communications products.

  Under the terms of the merger agreement, 4,396,826 shares of Virata common
stock were exchanged for all of the outstanding common stock of D2 Technologies.
In addition, employee options to purchase shares of D2 Technologies common stock
were exchanged for options to purchase 932,330 shares of Virata common stock.
The Company valued the options using the Black-Scholes option pricing model,
applying an expected life of four years, a weighted average risk-free rate of
6.64%, an expected dividend yield of zero percent, a volatility of 55% and a
deemed fair value of common stock of $18.00 per share. The acquisition has been
accounted for as a purchase business combination. The aggregate purchase price
is as follows (in thousands):

<TABLE>
           <S>                                                                        <C>
           Shares of Virata common stock.....................................         $79,143
           Options to purchase Virata common stock...........................          13,566
           Direct acquisition costs..........................................           4,200
                                                                                      -------
                                                                                      $96,908
                                                                                      =======
</TABLE>

  Based on a valuation by an independent appraiser, the purchase price of D2
Technologies was allocated as follows:

<TABLE>
           <S>                                                                        <C>
           Fair value of assets acquired and liabilities assumed ............          $1,252
           Assembled workforce...............................................             760
           Customer base.....................................................           1,001
           Contracts.........................................................           1,006
           Technology........................................................          15,872
           In-process research and development...............................           5,324
           Goodwill..........................................................          71,695
                                                                                      -------
           Total.............................................................         $96,909
                                                                                      =======
</TABLE>

  D2 Technologies has 19 completed products that comprise the completed
technology at the date of acquisition. They are classified into five product
groups as follows:

           Telephony Algorithms
           Echo Cancellation Products
           Standard Voice Coders
           Proprietary Voice Coders
           Fax and Data Products

  The individual products and algorithms are entirely independent from each
other. The value of the completed technology is based on the net cash flow
forecast, discounted at a cost of capital of 18.0%. The acquired in-process
technology are mainly related to the fax and data products and include the Fax
Modem Data Pump, Fax Relay Protocols and Single Sample Echo Cancellers and
Standard Voice Coders. The acquired in-process technology is also valued using
the net cash flow forecast, discounted at a higher cost of capital of 23.0% to
reflect the uncertainty of its future use. The company does not consider it to
have reached technological feasibility and accordingly charged it to operations
upon acquisition.

  Financial information for the fiscal year ended April 2, 2000 includes the
results of operations for D2 Technologies from February 10, 2000.

                                       56
<PAGE>

                              VIRATA CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  The following unaudited pro forma financial information presents the
consolidated results of the Company as if the acquisitions had occurred at the
beginning of each period, and includes adjustments for amortization of
intangible assets. This pro forma financial information is not intended to be
indicative of future results. Unaudited pro forma consolidated results of
operations are as follows (in thousands, except per share data):

<TABLE>
<CAPTION>
                                                                                               Year Ended
                                                                                               ----------
                                                                                        April 2,         March 31,
                                                                                          2000             1999
                                                                                        --------         --------
                                                                                               (unaudited)
           <S>                                                                          <C>              <C>
           Revenues............................................................         $ 23,281         $ 11,480
           Net loss............................................................          (45,689)         (47,365)
           Basic and diluted net loss per share................................            (1.98)           (5.66)
</TABLE>


Acquisition of Inverness Systems Ltd.

  On March 21, 2000, Virata entered into a definitive agreement to acquire
Inverness Systems, Ltd., a privately-held Israeli Company, in a stock for stock
transaction. Inverness Systems maintains offices in Kfar Saba and Jerusalem, in
Israel as well as in Marlborough, Massachusetts.

  Inverness Systems is a software company with expertise spanning many
technologies, including ATM, voice over ATM, xDSL, IP Routing, Multi-Protocol
label Switching (MPLS), Frame Relay and Network Simulation. Inverness' source
code solutions and network simulation products facilitate fast-to-market product
development programs for advanced communication products.

  Under the terms of the agreement, Virata will issue 2,011,624 shares and
517,896 options to purchase shares of Virata common stock to shareholders of
Inverness Systems common and preferred stock. The acquisition will be accounted
for as a purchase business combination. Accordingly, the purchase price will be
allocated to the net tangible and identifiable intangible assets acquired and
liabilities assumed on the closing date. The valuation of the intangible assets
acquired will be determined by an independent appraiser and are expected to
include complete technology, workforce in place and customer base.

  The total purchase price of $98.2 million consists of 2,011,624 shares of the
Virata's common stock valued at $77.8 million, options to purchase 517,896
shares of Virata, valued at $20.0 million and estimated acquisition expenses of
$0.4 million, consisting mainly of legal, accounting and financial advisory
fees. The Company valued the options using the Black-Scholes option pricing
model, applying expected an life of four years, a weighted average risk-free
rate of 6.5%, an expected dividend yield of zero percent, a volatility of 55%
and a deemed fair value of common stock of $38.67 per share.

  The results of operations of Inverness Systems have not been included in the
consolidated statement of operations of the Company.

  The following unaudited pro forma financial information presents the
consolidated results of the Company as if the acquisitions had occurred at the
beginning of each period, and includes adjustments for amortization of
intangible assets. This pro forma financial information is not intended to be
indicative of future results. Unaudited pro forma consolidated results of
operations are as follows (in thousands, except per share data):

<TABLE>
<CAPTION>
                                                                               Year Ended
                                                                               ----------
                                                                        April 2,       March 31,
                                                                          2000           1999
                                                                          ----           ----
                                                                               (unaudited)
   <S>                                                                  <C>            <C>
   Revenues...........................................................  $ 26,026        $ 13,573
   Net loss...........................................................   (69,253)        (70,704)
   Basic and diluted net loss per share...............................     (2.88)          (6.81)
</TABLE>

Note 5--Restructuring:

  In September 1997, the Company implemented a new business strategy focusing on
semiconductors and reduced the resources allocated to its systems line of
business. A restructuring plan was implemented in the second half of the fiscal
year ended March 31, 1998, which resulted in one time charges of $1,871,000 in
the fiscal year ended March 31, 1998. Approximately, $900,000 of the
restructuring charge represents employee costs, $900,000 represent asset write
downs and $71,000 related to other restructuring costs. As of March 31, 1998 the
Company had reduced the operations of the systems business including reducing
headcount from the prior years level by approximately 33%. The Company continues
to sell its systems products to one principal customer and systems revenues for
the year ended April 2, 2000, were $2,296,000. The Company fully utilized its
restructuring accrual as of March 31, 1999.


Note 6--National Insurance Contribution on options:

  The Company recorded a charge for National Insurance Contribution on options
which will be incurred on a gain in the Company's per share price for stock
options granted to our United Kingdom employees. The requirement to book this
charge came into effect on April 5, 1999. Due to the significant movement in
Virata's per share price in the fiscal year ended April 2, 2000, the charge
recorded was $4.5 million. The charge is calculated in the United Kingdom as
the difference between the market value of Virata common stock at the close of
the period and the exercise price of the option multiplied by a 12.2% tax
rate. The calculation is applied to all options issued to our UK employees,
vested and unvested. The charge will be revised to reflect the movement in
Virata's stock price at each future balance sheet date. The allocation of the
$4.5 million charge, by department, is $2.0 million to research and
development, $1.0 million to sales and marketing, and $1.5 million to general
and administrative.


Note 7--Income Taxes:

  No income tax provision was recorded for the three years ended April 2, 2000
because the Company incurred net losses in such periods.

                                       57
<PAGE>

                              VIRATA CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  Deferred tax assets and liabilities consist of the following:

<TABLE>
                                                                                      April 2,        March 31,
                                                                                        2000            1999
                                                                                      --------        --------
           <S>                                                                        <C>             <C>
           Deferred tax assets:
                 Net operating loss carryforwards.............................        $ 21,939        $ 12,647
                 Temporary differences........................................           2,105           1,764
                 Other........................................................             303              67
                                                                                      --------        --------
                                                                                        24,347          14,478
           Valuation allowance................................................         (24,347)        (14,478)
                                                                                      --------        --------
                                                                                      $     --        $     --
                                                                                      ========        ========
</TABLE>

  The deferred tax asset has been fully reserved due to the uncertainty of the
Company's ability to realize this asset in the future.

  At April 2, 2000, the Company has approximately $33.1 million, $25.9 million
and $30.0 million in federal, state and foreign net operating loss
carryforwards, respectively, to reduce future taxable income. The net operating
loss carryforwards expire between 2002 and 2019 for both federal and state
purposes, if not utilized.


Note 8--Borrowings:

  A convertible loan in the amount of $2,712,000 was converted to 2,402,710
shares of series D convertible preferred stock valued at $1.10 per share on June
4, 1998. The value of the stock was determined by the series D convertible
preferred stock offering price of $1.10, also on June 4, 1998. The loan was
drawn in December 1997 bearing interest at the rate of 10% per annum and was due
to related parties.

  In connection with a loan and security agreement, the Company issued a warrant
to purchase 35,294 shares of series D convertible preferred stock at an exercise
price of $1.70 per share. The Company valued the warrant using the Black-Scholes
option pricing model, applying an expected life of 5 years, a weighted average
risk free rate of 5.77%, an expected dividend yield of zero percent, a
volatility of 70% and a deemed fair value of common stock of $0.95. The Company
determined that the fair value of the warrant was not significant at the date of
grant. The warrant was exercised and converted into 14,490 shares of the
Company's common stock in February 2000.

  The Company has a loan and security agreement that provides for borrowings up
to $3.0 million. The agreement bears interest at prime rate plus one-half
percent, and all outstanding advances are due in August 2000. Borrowings are
secured by our property, equipment, intellectual property, inventory and
receivables and require that we comply with certain financial covenants
including the maintenance of specific minimum ratios. As of April 2, 2000, we
had obtained waivers for such financial covenants, and we had no outstanding
debt under this agreement.


Note 9--Commitments:

Leases

  The Company leases office space and equipment under noncancelable operating
and capital leases with various expiration dates through August 2005. Net rent
expense for the years ended April 2, 2000, March 31, 1999 and 1998 was $606,000,
$536,000, and $372,000, respectively. The terms of the facility lease provide
for rental payments on a graduated scale. The Company recognizes rent expense on
a straight-line basis over the lease period, and has accrued for rent expense
incurred but not paid.

                                       58
<PAGE>

                              VIRATA CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  Future minimum lease payments under noncancelable operating and capital leases
are as follows (in thousands):

<TABLE>
<CAPTION>
           Year Ending                                                                                 Capital        Operating
           March 31,                                                                                    Leases         Leases
           ---------                                                                                    ------         ------
           <S>                                                                                         <C>            <C>
           2001............................................................................                   919             892
           2002............................................................................                   735             666
           2003............................................................................                   544             449
           2004............................................................................                     7             434
           2005............................................................................                    --              73
           2006............................................................................                    --              30
                                                                                                           ------          ------
           Total minimum lease payments....................................................                 2,205          $2,544
                                                                                                                           ======
           Less: Amount representing interest..............................................                  (243)
                                                                                                           ------
           Present value of capital lease obligations......................................                 1,962
           Less: Current portion...........................................................                  (784)
                                                                                                           ------
              Long-term portion of capital lease obligations...............................                $1,178
                                                                                                           ======
</TABLE>


Note 10--Preferred Stock:

  Under the Company's Certificate of Incorporation, as amended, the Company is
authorized to issue 5,000,000 shares of preferred stock. As of April 2, 2000,
there are no shares outstanding of our preferred stock outstanding. However, the
Company's certificate of incorporation provides that the preferred stock be
divisible into and issuable in one or more series. The rights and preferences of
the different series may be established by the Company's board of directors
without future action by Virata stockholders. The Company's board of directors
is authorized with respect to each series to fix and determine, among other
things:

  .  its dividend rate;
  .  its liquidation preference;
  .  whether or not the shares will be convertible into, or exchangeable for,
     any other securities; and
  .  whether or not the shares will have voting rights, and, if so, determine
     the extent of the voting powers and the conditions under which the shares
     will vote as a separate class.

                                       59
<PAGE>

                              VIRATA CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


Note 11--Stock Option Plans:

  In November 1999, the Company adopted the 1999 Stock Option Plan (the "Plan").
The Plan provides for the granting of stock options to employees and consultants
of the Company. Options granted under the Plan may be either incentive stock
options or nonqualified stock options. Incentive stock options ("ISO") may be
granted only to Company employees (including officers and directors who are also
employees). Nonqualified stock options ("NSO") may be granted to Company
employees and consultants.

  Options under the Plan may be granted for periods of up to ten years and at
prices no less than 85% of the estimated fair value of the shares on the date of
grant as determined by the Board of Directors, provided, however, that (i) the
exercise price of an ISO and NSO shall not be less than 100% and 85% of the
estimated fair value of the shares on the date of grant, respectively, and (ii)
the exercise price of an ISO and NSO granted to a 10% shareholder shall not be
less than 110% of the estimated fair value of the shares on the date of grant,
respectively. To date, options granted generally vest over four years. Options
expire at the earlier of 90 days after the employee ceases employment or seven
years after the effective date of the grant of the options.

  Upon the acquisition of D2 Technologies, the Company assumed the stock option
plan for D2 Technologies and reserved a total of 932,330 shares of the Company's
common stock for issuance under the plan.

  During the period from April 1, 1996 through November 16, 1999, the date of
the Company's initial public offering, the Company recorded $3,392,000 of
unearned stock compensation for the excess of the deemed fair market value over
the exercise price at the date of grant related to options granted in 1998 and
1999. The compensation expense is being recognized over the option vesting
period of four years. The Company amortized $907,000, $1,394,000 and $399,000
for the years ended April 2, 2000, March 31, 1999 and 1998, respectively.

  In November 1999, the Company adopted the 1999 Employee Stock Purchase Plan
("ESPP") and reserved a total of 1,200,000 shares of the Company's common stock
for issuance thereunder, plus an automatic annual increase on the first day of
each of our fiscal years beginning in 2001, 2002, 2003, 2004 and 2005 equal to
the lesser of (i) 1,000,000 shares, (ii) 1% of the total number of shares of
common stock outstanding on the last day of the immediately preceding fiscal
year or (iii) an amount unanimously determined by the board of directors. Under
the ESPP, eligible employees are permitted to contribute up to 15% of their
compensation, as defined, to the purchase of the Company's common stock at a
price which is equal to the lower of 85% of the fair market value of the common
stock at the beginning of each offering period or at the end of each purchase
period.

  In November 1999, the Company adopted the 1999 Non-employee Director
Compensation Plan (the "Director's Plan") and reserved a total of 2,000,000
shares of the Company's common stock for issuance thereunder. Each non-employee
director who becomes a member of the Board of Directors will initially be
granted an option for 80,000 shares of the Company's common stock at an exercise
price per share equal to the fair market value of a share of common stock on the
date of grant or, if the non-employee director was serving as a board member on
November 16, 1999, at an exercise price per share equal to the initial offering
price per share to the public in the Company's initial public offering. These
options will vest proportionately each month over a period of four years. On the
fourth anniversary and on each anniversary thereafter, each member of the Board
of Directors will be granted an option to purchase an additional 20,000 shares
of the Company's common stock at an exercise price per share equal to the fair
market value of a share of common stock on the date of grant. These options will
vest proportionately each month over a period of one year.

                                       60
<PAGE>

                              VIRATA CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


The following table summarizes activity under the Company's Plan from March 31,
1997 through April 2, 2000:

<TABLE>
<CAPTION>
                                                                                            Outstanding Options
                                                                                            -------------------
                                                                                                            Weighted-
                                                                      Shares                                 Average
                                                                     Available           Number of          Exercise
                                                                     for Grant             Shares             Price
                                                                     ---------             ------             -----
     <S>                                                             <C>                  <C>                 <C>
     Balance, March 31, 1997......................................      562,966             828,898              0.37
        Shares reserved for grant.................................      600,640                  --                --
        Options granted...........................................   (1,815,672)          1,815,672              0.80
        Options exercised.........................................           --            (243,332)             0.20
        Options canceled..........................................      969,614            (969,614)             0.80
                                                                     ----------          ----------

     Balance, March 31, 1998......................................      317,550           1,431,624              0.67
        Shares reserved for grant.................................    2,996,484                  --                --
        Options granted...........................................   (3,098,566)          3,098,566              2.04
        Options exercised.........................................           --             (14,398)             0.34
        Options canceled..........................................      182,748            (182,748)             2.35
                                                                     ----------          ----------

     Balance, March 31, 1999......................................      398,216           4,333,044              2.55
        Shares reserved for grant.................................    6,253,696                  --                --
        Options granted...........................................   (5,187,816)          5,187,816             11.39
        Options exercised.........................................           --          (1,031,304)             1.10
        Options canceled..........................................      323,208            (323,208)             2.46
                                                                     ----------          ----------

     Balance, April 2, 2000.......................................    1,787,304           8,166,348              7.83
                                                                     ==========          ==========
</TABLE>

<TABLE>
<CAPTION>
                                                                       Options Exercisable at
                                 Options Outstanding at April 2, 2000      April 2, 2000
                                 ------------------------------------  ----------------------
                                                 Weighted
                                                 Average     Weighted                Weighted
                                                Remaining    Average                 Average
             Range of               Number     Contractual   Exercise     Number     Exercise
          Exercise Price         Outstanding       Life       Price    Outstanding    Price
          --------------         -----------       ----       -----    -----------    -----
        <S>                      <C>           <C>           <C>       <C>           <C>
         $ 0.07 - $ 6.42           6,189,826        5.5      $ 2.58     1,788,180    $ 1.34
         $ 6.84 - $10.26             706,262        6.6        7.11            --        --
         $14.47 - $18.00             696,000        6.7       16.70        10,492     18.00
         $21.72 - $37.56             162,450        6.8       24.20            --        --
         $42.19 - $49.94             126,210        7.0       49.27            --        --
         $62.25 - $72.38             106,400        6.9       71.08            --        --
         $75.38 - $86.06             179,200        7.0       75.97            --        --
                                   ---------                            ---------
                                   8,166,348                            1,798,672
                                   =========                            =========
</TABLE>

  The total number of options exercisable at April 2, 2000, March 31, 1999 and
1998 was 1,798,672, 1,342,112 and 406,434, respectively.

                                       61
<PAGE>

                              VIRATA CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


Fair value disclosures

  If compensation cost for the Company's stock-based compensation plan had been
determined based on the fair value at the grant dates for the awards under a
method prescribed by SFAS No. 123, the Company's net loss would have been
increased to the pro forma amounts indicated below (in thousands, except per
share data):

<TABLE>
<CAPTION>
                                                                                      Year Ended
                                                                                      ----------
                                                                          April 2,    March 31,    March 31,
                                                                            2000        1999         1998
                                                                            ----        ----         ----
     <S>                                                                   <C>        <C>          <C>
     Net loss:
        As reported......................................................  $(26,108)   $(17,157)   $(10,278)
        Pro forma........................................................   (31,969)    (19,707)    (10,974)
     Basic and diluted net loss per share:
        As reported......................................................  $  (1.40)   $  (4.46)   $  (3.00)
        Pro forma........................................................     (1.71)      (5.12)      (3.20)
</TABLE>

  The Company calculated the fair value of each option grant on the date of
grant using the Black-Scholes pricing method with the following assumptions:
expected dividend yield of zero percent; weighted average expected option term
of four years; risk free interest rates of 5.1% to 6.7% and 4.5% to 5.8% and
5.6% to 6.6% and a volatility of 55%, 70%, and 70% for the years ended April 2,
2000, March 31, 1999, and 1998 and, respectively. The weighted average fair
value of options granted during fiscal year 2000, 1999 and 1998 was $7.83, $0.44
and $.047, respectively.

Warrants for Common Stock

  In connection with a consulting agreement, the Company issued a warrant to
purchase 150,000 shares of common stock for $0.04 per share in July 1997. The
Company valued the warrant using the Black-Scholes option pricing model,
applying expected life of five years, a weighted average risk-free rate of
6.62%, an expected dividend yield of zero percent, a volatility of 70% and a
deemed fair value of common stock of $0.45. Using the Black-Scholes pricing
model, the Company determined that the fair value of the warrant was not
significant at the date of grant. The warrant was exercised and converted into
150,000 shares of the Company's common stock in September 1999.

  In connection with a lease agreement, the Company issued warrants to purchase
69,705 shares of series C convertible preferred stock and 163,636 shares of
series D convertible preferred stock for $1.50 and $1.10 per share,
respectively, in the period September 1996 to May 1999. Such warrants are
convertible into 101,724 shares of the Company's common stock and are
outstanding at April 2, 2000 and expire in the period September 2001 to May
2009. The Company valued the warrants using the Black-Scholes option pricing
model, applying an expected life of five years, a weighted average risk-free
rate of 4.81% and 6.6%, an expected dividend yield of zero percent, a volatility
of 70% and a deemed fair value of common stock between $0.74 and $1.03,
respectively. The Company determined that the fair value of the warrants was not
significant at the date of grant.

  In connection with the series D convertible preferred stock financing, the
Company issued warrants to purchase 1,595,054 shares of series D convertible
preferred stock for $1.10 per share in June 1998. Such warrants are convertible
into 748,212 shares of the Company's common stock and are outstanding at April
2, 2000 and expire in June 2003. The Company valued the warrants using the
Black-Scholes option pricing model, applying an expected life of five years, a
weighted average risk-free rate of 5.52%, an expected dividend yield of zero
percent, a volatility of 70% and a deemed fair value of common stock of $0.99.
The Company determined that the fair value of the warrants was not significant
at the date of grant.

Note 12--Employee Benefit Plans

  The Company has three benefit plans, one in the United Kingdom, and two plans
in the United States. The United Kingdom plan includes private health care,
permanent health insurance, death in service coverage and a pension arrangement.
In addition, under the United Kingdom Plan, the Company matches pension
contributions of up to 5% of an employee's salary. Contributions for the years
ended April 2, 2000, March 31, 1999 and 1998 were $141,800, $112,600, and
$109,400, respectively.

  The United States plan includes a medical plan, life insurance, accidental
death and dismemberment insurance, long-term disability, IRC Section 125 premium
payment plan, COBRA and a 401(k) retirement plan. The Company provides 50%
matching contribution to the retirement plan of up to $2,000 per calendar year
per employee. Contributions for the year ended April 2, 2000 and March 31, 1999
were $178,500 and $58,000, respectively.

  The D2 Technologies plan includes a medical plan, long-term disability, IRC
Section 125 premium payment plan, and COBRA.

                                       62
<PAGE>

                              VIRATA CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


Note 13--Related Party Transactions:

  The Company had revenues of $82,000, $549,000, and $1,321,000 during the
years ended April 2, 2000, March 31, 1999 and 1998 respectively, to related
parties. At April 2, 2000, March 31, 1999 and 1998, there were accounts
receivable from related parties in the amounts of $17,600, $154,000, and $5,000,
respectively.

  The Company made purchases of $5,786,000, zero and $35,000, for the three
years ended April 2, 2000, respectively, from related parties. At April 2, 2000,
there were accounts payable from related parties totaling $1,884,000.

Note 14--Subsequent Events:

  On April 27, 2000, the Company completed the acquisition of Inverness Systems,
Ltd., a privately-held Israeli Company, in a stock for stock transaction (see
Note 4).

                                       63
<PAGE>

ITEM 9 -- Changes In And Disagreements With Accountants On Accounting And
Financial Disclosure.

   None.

                                       64
<PAGE>

PART III

Item 10 -- Directors And Executive Officers Of The Registrant.

  Information required by this Item other than information regarding the
executive officers and directors is set forth under the section of the Company's
Proxy Statement for the 2000 Annual Meeting of Stockholders (the "Proxy
Statement") entitled "Election Of Directors" and "Executive Compensation And
Other Matters." Information regarding the Company's executive officers and
directors may be found in the section entitled "Executive Officers" in Part I of
this 10-K.


Item 11 -- Executive Compensation.

  The information under the captions "Executive Compensation and Other Matters"
and "Stock Options and Bonuses" in the Proxy Statement is incorporated herein by
reference.


Item 12 -- Security Ownership Of Certain Beneficial Owners And Management.

  The information under the caption "Stock Ownership of Certain Beneficial
Owners" of the Proxy Statement is incorporated herein by reference.


Item 13 -- Certain Relationships And Related Transactions.

  The information under the caption "Certain Transactions" of the Proxy
Statement is incorporated herein by reference.

  With the exception of the information specifically stated as being
incorporated by reference from the Company's Proxy Statement in Part III of this
Annual Report on Form 10-K, the Company's Proxy Statement is not to be deemed as
filed as of this Annual Report. The Proxy Statement will be filed with the
Securities and Exchange Commission within 120 days of the Company's fiscal year
end.

                                       65
<PAGE>

PART IV

Item 14 -- Exhibits, Financial Statement, Schedules And Reports On Form 8-K.

(a)  1.  Financial Statements

         See Item 8 of this Annual Report.

(a)  2.  Financial Statement Schedules

         See Item 8 of this Annual Report.

(a)  3.  Exhibits

<TABLE>
<CAPTION>
  Exhibit
  Number                                                         Description
  ------                                                         -----------
  <S>        <C>
    2.1      Agreement and Plan of Merger among Virata Limited, Virata Acquisition Sub, Inc., a Delaware corporation, RSA
             Communications, Inc., a Delaware corporation, and Munther Qubain, an individual, dated as of June 1, 1998+*
    2.2      Amendment No. 1 to Agreement and Plan of Merger among Virata Limited, Virata Acquisition Sub, Inc., a Delaware
             corporation, RSA Communications, Inc., a Delaware corporation, and Munther Qubain, an individual, dated as of June
             25, 1998*.
    2.3      Agreement and Plan of Merger among Virata Corporation, D2 Technologies, Inc., VC Acquisition, Inc. and David Y.
             Wong, as Securityholder Agent, dated as of January 23, 2000+**.
    2.4      Share Purchase Agreement among Virata Corporation and Jonathan Masel, Joanne Masel, Menachem Student, David St.
             Charles, Peter Simon, Holland Venture B.V., Docor International B.V., dated as of March 21, 2000+***.
    3.1      Amended and Restated Certificate of Incorporation of Virata Corporation, as filed with the Secretary of State of
             the State of Delaware on November 17, 1999.
    3.2      Certificate of Amendment of Amended and Restated Certificate of Incorporation of Virata Corporation, as filed with
             the Secretary of State of the State of Delaware on May 2, 2000.
    3.3      Amended and Restated Bylaws of Virata Corporation, as currently in effect.
    4.1      Specimen form of Virata Corporation's Common Stock Certificate*.
   10.1      Agreement with Gaz et Eaux and Board with respect to Board of Directors and other shareholder rights*.
   10.2      Warrant Agreement between Virata Limited and Index Securities, S.A., dated as of June 4, 1998*.
   10.3      Form of Warrant between Virata Limited and Comdisco, Inc.*
   10.4      Lease between WHC-SIX Real Estate Limited Partnership and Advanced Telecommunications Modules, Inc., a California
             corporation, dated June 26, 1996*.
   10.5      Lease Agreement between Lake Partners, L.L.C. and RSA Communications, Inc., dated as of July 1, 1998*.
   10.6      Lease between Universities Superannuation Scheme Limited and Advanced Telecommunications Modules Limited, dated
             1994*.
   10.7      License to Subunderlet among Universities Superannuation Scheme Limited, Royal Insurance (U.K.) Limited, Hill
             Samuel Investment Services Group Limited, and Advanced Telecommunications Modules Limited, dated 1995*.
   10.8      Lease between Virata Limited and Comdisco, Inc., dated September 30, 1996*.
   10.9      Loan and Security Agreement among Venture Banking Group, Virata Santa Clara Corporation and Virata Raleigh
             Corporation, dated as of August 27, 1999*.
  10.10      Collateral Assignment, Patent Mortgage and Security Agreement between Virata Ltd. And Venture Banking Group, dated
             as of August 27, 1999*.
  10.11      Agreement between ARM Limited and Virata Ltd., dated June 2, 1999++*.
  10.12      Amendment No. 1 to License and Technical Co-Operation Agreement for ATM Technology between Ing. C. Olivetti & C.,
             S.p.A. and Advanced Telecommunications Modules Limited, dated September 19, 1994*.
  10.13      License and Technical Co-Operation Agreement for ATM Technology between Ing. C. Olivetti & C., S.p.A. and Advanced
             Telecommunications Modules Limited, dated December 3, 1993*.
  10.14      Settlement Agreement between Virata Limited and Cirrus Logic, Inc., a California corporation, dated as of June 19,
             1998*.
  10.15      Development, Production, Supply and License Agreement between Advanced Telecommunications Modules Limited and
             Symbios Incorporated, a Delaware corporation, dated as of August 16, 1997*
  10.16      1999 Stock Incentive Plan****+++.
  10.17      1999 Employee Stock Purchase Plan****.
  10.18      Non-Employee Director Plan****+++.
  10.19      Form of Indemnity Agreement*.
  10.20      Employment Agreement--Charles Cotton*+++.
</TABLE>

                                       66
<PAGE>

<TABLE>
<CAPTION>
  Exhibit
  Number                        Description
  ------                        -----------
  <S>        <C>
   10.21     Employment Agreement--Michael Gulett*+++.
   10.22     Employment Agreement--Andrew Vought*+++.
   10.23     Employment Agreement--Martin Jackson*+++.
   10.24     Employment Agreement--Thomas Cooper*+++.
   10.25     Employment Agreement--Duncan Greatwood+++.
   10.26     Registration Rights Agreement by and among Virata Corporation and the Investors, dated November 17, 1999*.
   10.27     Registration Rights Agreement by and among Virata Corporation and David Y. Wong, dated February 10, 2000.
   10.28     Registration Rights Agreement by and among Virata Corporation and Jonathan Masel, dated April 27, 2000.
   21.1      List of Subsidiaries of Virata Corporation.
   23.1      Consent of Independent Accountants
   24.1      Power of Attorney (see the signature page to this Annual Report on Form 10-K).
   27.1      Financial Data Schedule.
</TABLE>

_______________
+    Filed without schedules.

++   Confidential treatment has been requested for selected sections of this
     exhibit.

 *   Incorporated by reference to the Registrant's Registration Statement on
     Form S-1 (No. 333-86591).

**   Incorporated by reference to the Registrant's Current Report on From 8-K
     filed on February 1, 2000.

***  Incorporated by reference to the Registrant's Current Report on From 8-K
     filed on April 4, 2000.
**** Incorporated by reference to the Registrant's Registration Statement on
     Form S-8 (No. 333-34742).

+++  A management contract or compensatory plan or arrangement.

(b)  Reports on Form 8-K.

     The Company has filed the following reports on Form 8-K since November 17,
1999:

February 1, 2000         The Company announced the acquisition of D2
                         Technologies, Inc.
February 16, 2000        The Company announced the completion of the acquisition
                         of D2 Technologies, Inc.
April 3, 2000            The Company announced the acquisition of Inverness
                         Systems Limited.
April 21, 2000           The Company reported consolidated financial information
                         reflecting the acquisition of D2 Technologies, Inc.
May 5, 2000              The Company announced the completion of the acquisition
                         of Inverness Systems Limited.

(c)  Exhibits.

     The Company hereby files as part of this Form 10-K the Exhibits listed in
Item 14(a) 3 above.

                                       67
<PAGE>

                                  SIGNATURES

  Pursuant to the requirements of Section 13 or 15(d) 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.

                                  VIRATA CORPORATION



                                  By: /s/ Charles Cotton
                                     ___________________________________________
                                                     Charles Cotton
                                        Chief Executive Officer and Director

                                Dated: June 6, 2000


                               POWER OF ATTORNEY

  KNOWN ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Charles Cotton and Andrew Vought, each of whom
may act without joinder of the other, as their true and lawful attorneys-in-fact
and agents, each with full power of substitution and resubstitution, for him and
in his name, place and stead, in any and all capacities, to sign any and all
amendments to this Annual Report on Form 10-K, and to file the same, with all
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or their substitutes, may
lawfully do or cause to be done by virtue hereof.

  Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated:

<TABLE>
<CAPTION>
                  Signature                                     Title                                    Date
                  ---------                                     -----                                    ----
<S>                                            <C>                                                   <C>
         /s/ Charles Cotton                    Chief Executive Officer and                           June 6, 2000
-------------------------------------------      Director (Principal Executive
             Charles Cotton                      Officer)

         /s/ Andrew Vought                     Senior Vice President, Chief                          June 6, 2000
-------------------------------------------      Financial Officer and Secretary
             Andrew Vought                       (Principal Financial Officer and
                                                 Principal Accounting Officer)

         /s/ Dr. Hermann Hauser                Chairman of the Board                                 June 6, 2000
-------------------------------------------
             Dr. Hermann Hauser

         /s/ Marco De Bennedetti               Director                                              June 6, 2000
-------------------------------------------
             Marco De Benedetti

         /s/ Gary Bloom                        Director                                              June 6, 2000
-------------------------------------------
             Gary Bloom
</TABLE>

                                       68
<PAGE>

<TABLE>
<CAPTION>
                  Signature                             Title                Date
                  ---------                             -----                ----
<S>                                            <C>                        <C>
         /s/ Bandel Carano                     Director                   June 6, 2000
-------------------------------------------
             Bandel Carano


         /s/ Andrew Hopper                     Director                   June 6, 2000
-------------------------------------------
             Andrew Hopper


         /s/ Martin Jackson                    Director                   June 6, 2000
-------------------------------------------
             Martin Jackson


         /s/ Peter Morris                      Director                   June 6, 2000
-------------------------------------------
             Peter Morris


         /s/ Patrick Sayer                     Director                   June 6, 2000
-------------------------------------------
             Patrick Sayer


         /s/ Giuseppe Zocco                    Director                   June 6, 2000
-------------------------------------------
             Giuseppe Zocco
</TABLE>

                                       69
<PAGE>

                                                                     SCHEDULE II

                              VIRATA CORPORATION

                       VALUATION AND QUALIFYING ACCOUNT

<TABLE>
<CAPTION>
                                                             Balance at  Charged to
                                                             Beginning   Costs and                Balance at
                        Description                          of Period    Expenses   Deductions  End of Period
                        -----------                          ---------    --------   ----------  -------------
                                                                              (in thousands)
<S>                                                          <C>         <C>         <C>         <C>
Allowance for doubtful accounts:
  Year ended March 31, 1997...............................      $  602      $  111      $   --       $  713
  Year ended March 31, 1998...............................         713       1,075         221        1,567
  Year ended March 31, 1999...............................       1,567       1,458         283        2,742
  Year ended April 2, 2000................................       2,742          --       2,447          295
</TABLE>

                                      70
<PAGE>

                                 EXHIBIT INDEX

  Exhibit
  -------                         Description
  Number                          -----------
  ------
    2.1   Agreement and Plan of Merger among Virata Limited, Virata Acquisition
          Sub, Inc., a Delaware corporation, RSA Communications, Inc., a
          Delaware corporation, and Munther Qubain, an individual, dated as of
          June 1, 1998+*........................................................
    2.2   Amendment No. 1 to Agreement and Plan of Merger among Virata Limited,
          Virata Acquisition Sub, Inc., a Delaware corporation, RSA
          Communications, Inc., a Delaware corporation, and Munther Qubain, an
          individual, dated as of June 25, 1998*................................
    2.3   Agreement and Plan of Merger among Virata Corporation, D2
          Technologies, Inc., VC Acquisition, Inc. and David Y. Wong, as
          Securityholder Agent, dated as of January 23, 2000+**.................
    2.4   Share Purchase Agreement among Virata Corporation and Jonathan Masel,
          Joanne Masel, Menachem Student, David St. Charles, Peter Simon,
          Holland Venture B.V., Docor International B.V., dated as of March 21,
          2000+***..............................................................
    3.1   Amended and Restated Certificate of Incorporation of Virata
          Corporation, as filed with the Secretary of State of the State of
          Delaware on November 17, 1999.........................................
    3.2   Certificate of Amendment of Amended and Restated Certificiate of
          Incorporation of Virata Corporation, as filed with the Secretary of
          State of the State of Delaware on May 2, 2000.........................
    3.3   Amended and Restated Bylaws of Virata Corporation, as currently in
          effect................................................................
    4.1   Specimen form of Virata Corporation's Common Stock Certificate*.......
   10.1   Agreement with Gaz et Eaux and Board with respect to Board of
          Directors and other shareholder rights*...............................
   10.2   Warrant Agreement between Virata Limited and Index Securities, S.A.,
          dated as of June 4, 1998*.............................................
   10.3   Form of Warrant between Virata Limited and Comdisco, Inc.*............
   10.4   Lease between WHC-SIX Real Estate Limited Partnership and Advanced
          Telecommunications Modules, Inc., a California corporation, dated June
          26, 1996*.............................................................
   10.5   Lease Agreement between Lake Partners, L.L.C. and RSA Communications,
          Inc., dated as of July 1, 1998*.......................................
   10.6   Lease between Universities Superannuation Scheme Limited and Advanced
          Telecommunications Modules Limited, dated 1994*.......................
   10.7   License to Subunderlet among Universities Superannuation Scheme
          Limited, Royal Insurance (U.K.) Limited, Hill Samuel Investment
          Services Group Limited, and Advanced Telecommunications Modules
          Limited, dated 1995*..................................................
   10.8   Lease between Virata Limited and Comdisco, Inc., dated September 30,
          1996*.................................................................
   10.9   Loan and Security Agreement among Venture Banking Group, Virata Santa
          Clara Corporation and Virata Raleigh Corporation, dated as of August
          27, 1999*.............................................................
   10.10  Collateral Assignment, Patent Mortgage and Security Agreement between
          Virata Ltd. And Venture Banking Group, dated as of August 27, 1999*...
   10.11  Agreement between ARM Limited and Virata Ltd., dated June 2, 1999++*..
   10.12  Amendment No. 1 to License and Technical Co-Operation Agreement for
          ATM Technology between Ing. C. Olivetti & C., S.p.A. and Advanced
          Telecommunications Modules Limited, dated September 19, 1994*.........
   10.13  License and Technical Co-Operation Agreement for ATM Technology
          between Ing. C. Olivetti & C., S.p.A. and Advanced Telecommunications
          Modules Limited, dated December 3, 1993*..............................
   10.14  Settlement Agreement between Virata Limited and Cirrus Logic, Inc., a
          California corporation, dated as of June 19, 1998*....................
   10.15  Development, Production, Supply and License Agreement between Advanced
          Telecommunications Modules Limited and Symbios Incorporated, a
          Delaware corporation, dated as of August 16, 1997*....................
   10.16  1999 Stock Incentive Plan****+++......................................
   10.17  1999 Employee Stock Purchase Plan****.................................
   10.18  Non-Employee Director Plan****+++.....................................
   10.19  Form of Indemnity Agreement*..........................................
   10.20  Employment Agreement--Charles Cotton*+++..............................
<PAGE>

  Exhibit
  -------                              Description
  Number                               -----------
  ------
   10.21  Employment Agreement--Michael Gulett*+++..............................
   10.22  Employment Agreement--Andrew Vought*+++...............................
   10.23  Employment Agreement--Martin Jackson*+++..............................
   10.24  Employment Agreement--Thomas Cooper*+++...............................
   10.25  Employment Agreement--Duncan Greatwood+++.............................
   10.26  Registration Rights Agreement by and among Virata Corporation and the
          Investors, dated November 17, 1999*...................................
   10.27  Registration Rights Agreement by and among Virata Corporation and
          David Y. Wong, dated February 10, 2000................................
   10.28  Registration Rights Agreement by and among Virata Corporation and
          Jonathan Masel, dated April 27, 2000..................................
   21.1   List of Subsidiaries of Virata Corporation............................
   23.1   Consent of Independent Accountants....................................
   24.1   Power of Attorney (see the signature page to this Annual Report on
          Form 10-K)............................................................
   27.1   Financial Data Schedule...............................................

_______________
+    Filed without schedules.

++   Confidential treatment has been requested for selected sections of this
     exhibit.

 *   Incorporated by reference to the Registrant's Registration Statement on
     Form S-1 (No. 333-86591).

**   Incorporated by reference to the Registrant's Current Report on From 8-K
     filed on February 1, 2000.

***  Incorporated by reference to the Registrant's Current Report on From 8-K
     filed on April 4, 2000.
**** Incorporated by reference to the Registrant's Registration Statement on
     Form S-8 (No. 333-34742).

+++  A management contract or compensatory plan or arrangement.