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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



---



FORM 10-K/A

(Amendment No. 1)



(Mark One)



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



For the fiscal year ended December 31, 2002



OR



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



For the transition period from
 to



Commission File Number: 000-30649



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CENTILLIUM
COMMUNICATIONS, INC.

(Exact name of Registrant as Specified in its Charter)



|Delaware                                                       |  | 94-3263530                             
|-------------------------------------------------------------- |  | ---------------------------------------
|(State or Other Jurisdiction of Incorporation or Organization) |  | (I.R.S. Employer Identification Number)



47211
Lakeview Boulevard

Fremont, California 94538

(Address of Principal Executive Offices including Zip Code)



(510) 771-3700

(Registrants Telephone Number, Including Area Code)



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Securities registered pursuant to Section 12(b) of the Act:
None



Securities registered pursuant to
Section 12(g) of the Act:

Common Stock



---



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 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/A, or any amendment to this Form 10-K/A.  x



Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the
Exchange Act). Yes  x  No ̈



The aggregate market value of the voting stock held by
non-affiliates of the Registrant, as of January 24, 2003, was approximately $79,452,809 based upon the closing price for shares of the Registrants Common Stock as reported by the Nasdaq National Market. 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 January 24, 2003,
approximately 35,255,018 shares of the Registrants Common Stock, $0.001 par value, were outstanding.



DOCUMENTS INCORPORATED BY REFERENCE



Part III incorporates certain information by reference from the registrants definitive proxy statement (the Proxy
Statement) for the Annual Meeting of Stockholders to be held on June 11, 2003.



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##### Table of Contents



CENTILLIUM COMMUNICATIONS, INC.



FORM 10-K/A

ANNUAL REPORT



TABLE OF CONTENTS



|               |  |                                                                                                |  | Page
|-------------- |  | ---------------------------------------------------------------------------------------------- |  | ----
|Part I.        |  |                                                                                               
|              
|Item 1.        |  | Business                                                                                       |  | 1   
|              
|Item 2.        |  | Properties                                                                                     |  | 8   
|              
|Item 3.        |  | Legal Proceedings                                                                              |  | 8   
|              
|Item 4.        |  | Submission of Matters to a Vote of Security Holders                                            |  | 8   
|              
|Part II.       |  |                                                                                               
|              
|Item 5.        |  | Market for the Registrants Common Equity and Related Stockholder Matters                      |  | 9   
|              
|Item 6.        |  | Selected Consolidated Financial Data                                                           |  | 10  
|              
|Item 7.        |  | Managements Discussion and Analysis of Financial Condition and Results of Operations          |  | 10  
|              
|Item 7a.       |  | Quantitative and Qualitative Disclosures About Market Risk                                     |  | 27  
|              
|Item 8.        |  | Financial Statements and Supplementary Data                                                    |  | 28  
|              
|Item 9.        |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure           |  | 52  
|              
|Part III.      |  |                                                                                               
|              
|Item 10.       |  | Directors and Executive Officers of the Registrant                                             |  | 53  
|              
|Item 11.       |  | Executive Compensation                                                                         |  | 53  
|              
|Item 12.       |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |  | 53  
|              
|Item 13.       |  | Certain Relationships and Related Transactions                                                 |  | 53  
|              
|Item 14.       |  | Controls and Procedures                                                                        |  | 53  
|              
|Part IV.       |  |                                                                                               
|              
|Item 15.       |  | Exhibits, Financial Statement Schedules and Reports on Form 8-K                                |  | 54  
|              
|Signatures     |  | 56                                                                                            
|              
|Certifications |  | 57                                                                                            





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CAUTIONARY
STATEMENT



This report contains
forward-looking statements which include, but are not limited to, statements concerning projected revenues, expenses, gross profit and income, the need for additional capital, market acceptance of our products, our ability to consummate acquisitions
and integrate their operations successfully, our ability to achieve further product integration, the status of evolving technologies and their growth potential, and our production capacity. These forward-looking statements are based on our current
expectations, estimates and projections about our industry, managements beliefs, and certain assumptions made by us. Words such as anticipates, expects, intends, plans, believes,
seeks, estimates, may, will and variations of these words or similar expressions are intended to identify forward-looking statements. In addition, any statements that refer to expectations, projections
or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and
assumptions that are difficult to predict. Therefore, our actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors. The section entitled Risk Factors set
forth in Part II, Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations, of this report, and similar discussions in our other Securities and Exchange Commission (SEC) filings,
discuss some of the important risk factors that may affect our business, results of operations and financial condition. You should carefully consider those risks, in addition to the other information in this report and in our other filings with the
SEC, before deciding to invest in our company or to maintain or increase your investment. We undertake no obligation to revise or update publicly any forward-looking statements for any reason.



PART I



ITEM 1.    BUSINESS



COMPANY OVERVIEW



Centillium provides semiconductor products that enable broadband communications. Our products are used in telecommunications equipment targeting the Digital Subscriber Line (DSL) and Voice over Packet (VoP) markets, each of which is
described below under the subheading Markets.



Consumers and businesses desire low cost, high bandwidth and always-on access to the Internet. Telecommunications service providers face continuing cost competitive pressures on voice services, thus creating the need for new
generations of communications semiconductor products. For example, broadband transmission of digital information over existing telecommunications infrastructures requires complex signal processing and the ability to convert digital data to and from
analog signals. Broadband communications equipment requires substantially higher levels of system performance, in terms of both speed and precision, than can typically be addressed by traditional semiconductor products developed for low speed
transmission applications. These requirements are best addressed by new generations of highly integrated semiconductor devices that combine complex functions with high performance circuitry and that can be manufactured in high volumes using
cost-effective semiconductor technologies.



We
make available free of charge on or through our Internet website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material
is electronically filed with or furnished to the Securities and Exchange Commission. Our Internet address is http://www.centillium.com.



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MARKETS



DIGITAL SUBSCRIBER LINE (DSL)



Although the availability and use of high bandwidth
applications for the Internet has grown significantly in recent years, low speed, dial-up access for consumers and expensive T-1 lines for businesses remain the predominant methods for reaching the Internet. Consumers are seeking low-cost,
high-speed access to Internet content and other services that require transmission of large amounts of data, such as highly graphical Web sites, MP3 audio files and streaming multimedia applications. Businesses have even greater requirements for
high-speed access in order to implement electronic commerce strategies and to provide telecommuting employees with the same capabilities they would experience at the office.



As more consumers and businesses rely on the Internet and communications networks, the demand for access to
these networks has accelerated. In addition, the demand for access is increasing as more and more corporate telecommuters, small businesses and self-employed individuals regularly access the Internet and other communications networks. Many users are
demanding the same access speeds from their home offices that they experience at corporate locations.



To meet the demand for high-speed, broadband data transmission, network access providers have upgraded the main transmission channels, or
backbone, of their networks with faster equipment. While this network backbone is now capable of delivering data at very high speeds, an access bottleneck continues to exist between the telephone companies central offices and the
end-users homes and businesses. These copper line connections between the central office and the end-user are commonly known as 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 kilobits per second
using standard dial-up analog modems. At this rate, several minutes may be required to access and display a media-rich Web site, and several hours may be required to transfer or download large files.



DSL technology allows consumers or businesses to access the
Internet at speeds of up to twelve or more megabits per second or more than 100 times as fast as dial up access by using the existing copper telephone wiring between the telephone companys central office and the end user. According to the
DellOro Group, the number of worldwide DSL subscribers grew from 5.6 million at the end 2000 to 33.0 million at the end of 2002 and is projected to reach 51.0 million by the end of 2003.



VOICE OVER PACKET (VoP)



VoP technology provides telecommunications service providers
with a number of economic and competitive advantages over legacy circuit-switched voice technology. Currently, most service providers maintain two separate networksone for legacy voice traffic and another for data traffic. VoP technology
compresses voice signals into discrete packets of data, thereby enabling the voice signals to be transmitted over lower-cost networks originally designed for data-only transmission. VoP technology is used in new types of high capacity voice
switching equipment, such as next generation digital loop carriers and gateways or soft switches. VoP-based equipment allows service providers to reduce their investment in expensive legacy circuit switches and migrate to a single converged voice
and data switching infrastructure. Furthermore, because of the high efficiencies enabled by data-only transmission standards, voice transmissions on a data network are significantly less costly than transmissions using the existing voice-only
networks.



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STRATEGY



Our objective is to be the leading provider of semiconductor
products for equipment manufacturers serving the broadband communications markets. Key elements of our strategy include the following:



Target complementary high-growth broadband communications markets.    Our strategy is to focus on
complementary, high-growth broadband communications markets and to develop products for applications in those markets. Our products are designed for the DSL infrastructure equipment, DSL end-user equipment and VoP markets. By targeting these
complementary markets, which share common technologies and customers, we are able to more effectively utilize our existing engineering, sales and marketing resources.



Strengthen and expand relationships with strategic customers.    We have
established customer relationships with key equipment manufacturers, including Sumitomo Electric Industries, NEC, Lucent Technologies and Advanced Fibre Communications. We have shipped DSL products to each of these manufacturers and have recognized
approximately $93.9 million in net revenues from sales to this group during the year ended December 31, 2002. During this period, sales to NEC and Sumitomo Electric Industries accounted for 45% and 41% of our net revenues, respectively. We do
not have long-term agreements with these customers relating to the sale of our products. Rather, they purchase our products on an order-by-order basis. These companies are market and technology leaders within the broadband communications market, and
selling products to these companies provides references for our products that in turn help to secure future sales. Collaborating with these industry leaders also helps us to enhance our technological capabilities. We believe these strategic
relationships are essential to our continued growth and the further development and acceptance of our technologies.



Extend technology leadership.    We have invested substantial resources to establish our technology leadership.
We believe we were the first company to deliver a DSL infrastructure product that manages multiple ports and the first to deliver a set of the two primary semiconductors for a DSL modem that requires less than one watt of power. An important element
of our technological leadership is our programmable digital signal processor and associated processing instructions, or algorithms, which are optimized for high bandwidth communications applications. This core technology can be extended to develop
multiple communications products for complementary markets.



Leverage system-level expertise.    Many of our system-level engineers have previous experience as employees of communication equipment manufacturers and are therefore very familiar with the requirements
of, and challenges faced by, our customers. We combine this system-level engineering expertise with our expertise in integrated circuit, digital signal processor and software design to develop products that allow our customers to optimize
time-to-market, performance and systems cost.



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 key markets and customer relationships. We believe completing selective acquisitions will be important to remaining competitive as a complete product solutions provider to manufacturers of broadband communications
equipment.



PRODUCTS



DSL PRODUCTS



Our DSL products are based on a type of DSL technology known
as asymmetrical DSL or ADSL. ADSL technology provides substantially faster transmission of data from the network to the end-user than from the end-user to the network. This tradeoff works to the consumers advantage in that most users typically
download more data from the network than they send to the network. Each of our DSL products consists primarily of two semiconductor chipsa mixed-signal chip and a digital chipand related software. The mixed-signal chip



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translates signals between analog and digital formats, and our digital chip incorporates our proprietary software programmable digital signal
processor, which provides flexibility for enhancements and upgrades.



DSL Infrastructure Products



Our CopperFlitefamily of DSL infrastructure products is used in various types of equipment
that aggregate and process data traffic from a substantial number of individual telephone lines for transmission through a data network. Our high performance, tightly integrated infrastructure chipsets offer high port density coupled with low power
consumption. These features lower costs for service providers. High port density means that a service provider can serve more customers with fewer pieces of equipment, while a low power chipset leads to lower energy and operational costs for the
service provider.



DSL Customer Premises Equipment (CPE)
Products



Our Palladiafamily of products is used in various types of equipment based at an end-users home or small business. This
customer premises equipment processes data signals between a regular telephone line and a computer and enables end-users to simultaneously connect to the Internet at very high data rates while talking on the telephone or sending a fax. Our high
performance DSL CPE chipsets enable CPE equipment manufacturers to produce devices with high data throughput. In addition, the integration of various features, small form factor and low power consumption of our Palladia chipsets result in lower
production and ownership costs.



VOICE OVER
PACKET PRODUCTS



We currently sell two
classes of products for the VoP Market: Entropia Central Office (CO) and Entropia CPE. Entropia CO is sold to manufacturers of broadband infrastructure products for use in voice-switching equipment that transmits voice signals over less expensive
data networks. Entropia CPE is being marketed for use in voice-processing equipment that aggregates multiple voice and data channels from businesses for transmission over the data network and computer servers that manage telephone calls in medium to
large businesses.



TECHNOLOGY



Our primary competitive advantage is technology expertise in
key areas including our system-level knowledge, programmable digital signal processor, signal processing algorithms, digital chip design capability, mixed-signal chip design capability and system-level software. Together, these capabilities have
enabled us to provide system-level communications products that have:



| |  |  | flexibility due to programmability;
| | - |  | -----------------------------------



| |  |  | higher data throughput;
| | - |  | -----------------------



| |  |  | low power consumption; and
| | - |  | --------------------------



| |  |  | small size.
| | - |  | -----------



Software programmable digital signal processor.    A cornerstone of our technology is our internally-developed
software programmable digital signal processor. A digital signal processor, as it relates to communications applications, encodes digital data for transmission over bandwidth-limited media, such as copper telephone lines, and recovers the encoded
data at the receiving end. Our software programmable digital signal processor is optimized for communications applications and provides high processing bandwidth with low power requirements. This digital signal processor can be programmed for
several different applications, such as DSL and VoP networking. We currently use this core technology in every product line currently in production. This software programmable digital signal processor technology gives us the advantage of field
programmability



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of devices. Field programmability means that service providers can remotely upgrade their equipment to address new standards or enable
improved features, thereby extending the life cycles of their equipment while incurring lower costs.



Signal processing algorithms.    A key component of our continued success is the expertise that we have
developed in communications algorithms. Communications algorithms are the processes and techniques used to transform a digital data stream into a specially conditioned analog signal suitable for transmission across copper telephone wires. We possess
a thorough understanding of, and practical experience in, the process of transmitting and receiving a digital data stream in analog form. We also have significant experience developing algorithms to enable voice compression, echo cancellation and
telephony signal processing. This expertise allows us to design highly efficient algorithms that in turn enable us to create products with high performance, re-programmability and low power consumption.



Digital chip design.    We are
experts in the area of highly complex, high-speed digital chip development. We perform both the logic design and the physical layout design for our products. This design expertise has enabled us to develop tightly integrated digital chips that have
small form factors and consume low power.



Mixed-signal chip design.    A mixed-signal chip translates signals between analog and digital formats. Our team of analog engineers has substantial experience in signal conversion techniques and analog
circuit design, and we believe our mixed-signal chip contains the highest level of integration in the industry.



System software.    We have expertise in developing software that addresses the needs of network equipment
manufacturers and service providers. Our knowledge of network operation and architectures allows us to write software that ensures that our products are interoperable with communications equipment vendors products. In addition, our
understanding of various operating systems and personal computer environments allows us to create software that provides for simple installation and operation.



CUSTOMERS AND STRATEGIC RELATIONSHIPS



We sell our products to leading manufacturers of broadband communications equipment in our target markets. Because we leverage our
technologies across different markets, certain of our integrated circuits may be incorporated into equipment used in several different markets.



As part of our business strategy, we periodically establish strategic relationships with certain key customers. From time to time, we have
also entered into development agreements with Sumitomo Electric Industries, NEC and Lucent Technologies to co-develop products.



A small number of customers have historically accounted for a substantial portion of our revenue. Sales to NEC represented approximately
45% of our net revenue in 2002 and approximately 38% of our net revenue in 2001. Sales to Sumitomo Electric Industries represented approximately 41% of our net revenue in 2002 and approximately 48% of our net revenue in 2001. The loss of a key
customer could materially and adversely affect our business, financial condition and results of operations.



SALES AND MARKETING



Our sales and marketing strategy is to achieve design wins with technology leaders in each of our targeted broadband communications markets by, among other things, providing superior engineering
support. We believe that providing comprehensive product service and support is critical to shortening our customers design cycles and maintaining a competitive position in our targeted markets. We market and sell our products through our
direct sales force and through independent sales representatives. Our sales managers are dedicated to our principal customers to promote close cooperation and communication. Representatives support the sales managers by providing leads, nurturing
customer relationships, closing design wins and securing customer orders.



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



BACKLOG



Our sales are made primarily pursuant to standard purchase
orders for delivery of products. Due to industry practice, which allows customers to cancel or change orders prior to shipment, we believe that backlog is not a reliable indicator of future revenue levels.



RESEARCH AND DEVELOPMENT



We have assembled a core team of experienced engineers and
technologists, many of whom are leaders in their particular field or discipline. As of December 31, 2002, we employed 195 engineers in Research and Development. In addition, 170 of our employees hold a total of 203 advanced degrees, including 25
PhDs. These employees are involved in advancing our core technologies, as well as applying these core technologies to product development activities in our target markets.



We believe that the achievement of higher levels of integration, functionality and performance and the
introduction of new products in our target markets are essential to our growth. Research and development expense for 2002, 2001 and 2000 was approximately $50.8 million, $59.0 million and $41.9 million, respectively.



OPERATIONS AND MANUFACTURING



We outsource the fabrication, assembly and testing of our
semiconductor devices. This fabless model allows us to focus our resources on the design, development and marketing of our products. We manage the production of our devices through our operations and manufacturing group, which consists of technology
engineering, test engineering, logistics, quality assurance and reliability.



We source our semiconductor fabrication from some of the worlds largest foundries, including but not limited to, our principal suppliers: Taiwan Semiconductor Manufacturing Company and United
Microelectronics Corporation. Our manufacturing strategy is to qualify and utilize multiple facilities within a given foundry partner for the fabrication of a given IC semiconductor device. This second source strategy seeks to ensure production and
performance consistency, both of which are critical for our products, while maintaining multiple channels of supply.



Foundry subcontractors conduct our silicon wafer testing. Following completion of the silicon wafer tests, the dies are assembled into
packages and the finished semiconductor products are tested by one of our four key subcontractors: Advanced Semiconductor Engineering, Amkor Technology, ST Assembly Test Services, and United Test and Assembly Center Ltd. While we have not
experienced any material disruption in supply from assembly subcontractors to date, we could experience assembly problems in the future. The availability of assembly and testing services from these subcontractors could be materially and adversely
affected in the event a subcontractor experiences financial difficulties, if a subcontractor suffers any damage or destruction to its respective facilities, or in the event of any other disruption of assembly and testing capacity.



COMPETITION



Although we produce system-level products, we primarily
compete with vendors of semiconductor devices for the DSL and VoP markets. We believe that the principal factors of competition for semiconductor vendors to



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these markets are product capabilities, level of integration, rate of data throughput, performance and reliability, power consumption, price,
time-to-market, system cost, intellectual property rights, customer support and reputation. We believe we compete favorably with respect to each of these factors.



We compete with a number of major domestic and international suppliers of semiconductors for both DSL central
office and customer premises equipment and with suppliers of semiconductors for equipment enabling VoP networks. Our principal competitors that supply semiconductors to these markets include Analog Devices, Broadcom, Conexant Systems,
GlobespanVirata, Infineon, ST Microelectronics and Texas Instruments.



Many of our competitors operate their own fabrication facilities and have longer operating histories and presence in key markets, greater name recognition, access to larger customer bases and significantly greater financial,
sales and marketing, manufacturing, distribution, technical and other resources. As a result, our competitors may be able to adapt more quickly to new or emerging technologies and changes in customer requirements or devote greater resources to the
promotion and sale of their products. Current and potential competitors have established or may establish financial or strategic relationships among themselves or with existing or potential customers, resellers or other third parties. Accordingly,
it is possible that new competitors or alliances among competitors could emerge and rapidly acquire significant market share. In addition, our competitors may in the future develop technologies that more effectively address our markets at a lower
cost. We cannot assure you that we will be able to compete successfully against current or potential competitors, or that competition will not have a material adverse effect on our business, financial condition and results of operations.



INTELLECTUAL PROPERTY



We rely on a combination of copyright, patent, trademark,
trade secret and other intellectual property law, nondisclosure agreements and other protective measures to protect our proprietary rights. We also utilize unpatented proprietary know-how and trade secrets and employ various methods to protect such
intellectual property. To date, we have been granted 10 U.S. patents and have a significant number of U.S. and international patent applications pending.



Although we employ a variety of intellectual property in the development and manufacturing of our products, we believe that none of that
intellectual property is individually critical to our current operations. However, taken as a whole, we believe our intellectual property rights are significant and that the loss of all or a substantial portion of such rights could have a material
adverse effect on our results of operations. We cannot assure you that our intellectual property protection measures will be sufficient to prevent misappropriation of our technology. In addition, the laws of many foreign countries do not protect our
intellectual properties to the same extent as the laws of the United States. From time to time, third parties have or may assert infringement claims against us or against our customers in connection with their use of our products. In addition, 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 assure you that any necessary licenses will be available on reasonable terms.



EMPLOYEES



As of December 31, 2002, we had a total of 320 employees, of
whom 277 are engineers. None of our employees is represented by a labor union. However, certain of our foreign employees are subject to collective bargaining agreements mandated by local country law. We do not anticipate that the results of future
negotiations under these collective bargaining agreements will have a material adverse financial impact on our business. We have not experienced any work stoppages and we consider our relations with our employees to be good. Our future performance
depends in significant part upon the continued service of our key personnel, none of whom is bound by an employment agreement requiring service for any definite period of time. Our future success also depends on our continued ability to attract,
integrate, retain and motivate highly qualified sales, technical and managerial personnel. Competition for such qualified personnel is intense.



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REVENUES BY GEOGRAPHIC AREA



The following is a summary of net revenues
by major geographic area (in thousands):



|                     |  | Years ended December 31,
|-------------------- |  | ------------------------
|                     |  | 2002                    
|Japan                |  | $                       
|North America        |  |                         
|Asiaexcluding Japan |  |                         
|All other            |  |                         
|                     |  |                         
|Total                |  | $                       
|                     |  |                         



ITEM 2.    PROPERTIES



We lease two buildings in Fremont, California that comprise our corporate headquarters and include our administration, sales and marketing, research and development, and operations departments. In addition, we have a lease
for an engineering design center in Huntsville, Alabama and a sales office in Boston, Massachusetts. Internationally, we lease one engineering design center in France and two in India, and we also lease sales offices in Japan, China, Taiwan and
South Korea.



These leases comprise an aggregate
of 95,556 square feet and have terms expiring on or prior to November 2009. We believe that our current facilities, together with planned expansions, will be adequate for at least the next twelve months and that additional leased space can be
obtained on commercially reasonable terms if needed.



ITEM 3.    LEGAL PROCEEDINGS



We are not currently a party to any material litigation. Discussion regarding potential litigation can be found in Section 7, Risk Factors of this Form 10-K/A.



ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS



(a)  none



(b)  none



(c)  none



(d)  none



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PART II



ITEM 5.    MARKET FOR THE REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS



Price Range of Common Stock



Our Common Stock has traded on the Nasdaq National Market under the symbol CTLM since our initial public offering in May 2000.
The following table sets forth, for the periods indicated, the high and low closing bid prices for the common stock on the Nasdaq National Market:



|Quarter                       |  | High |       | Low
|----------------------------- |  | ---- | ----- | ---
|Year ended December 31, 2001: |  |      |       |    
|First quarter                 |  | $    | 49.19 |    
|Second quarter                |  | $    | 37.15 |    
|Third quarter                 |  | $    | 26.68 |    
|Fourth quarter                |  | $    | 10.21 |    
|                             
|Year ended December 31, 2002: |  |      |       |    
|First quarter                 |  | $    | 13.97 |    
|Second quarter                |  | $    | 14.38 |    
|Third quarter                 |  | $    | 7.87  |    
|Fourth quarter                |  | $    | 3.33  |    



On
January 24, 2003 there were approximately 200 record holders of the Companys Common Stock, and the last reported sale price of the Companys common stock was $3.29. There were approximately 3,543 beneficial stockholders as of January 24,
2003.



Dividend Policy



We have never declared or paid cash dividends on shares of
our capital stock. We currently intend to retain all of our earnings, if any, for use in our business and in acquisitions of other businesses, products or technologies and do not anticipate paying any cash dividends in the foreseeable future.



Stockholder Rights Plan



In December 2002, the Companys Board of Directors
approved the adoption of a stockholder rights plan. The plan is designed to assure that Centillium stockholders receive fair value in the event of a future unsolicited business combination or similar transaction involving Centillium in a manner or
on terms not approved by the Centillium Board of Directors.



Under the plan, Centillium issued a dividend of one right for each outstanding share of common stock of the Company held by stockholders of record as of the close of business on January 9, 2003. Each right will initially entitle
stockholders to purchase a fractional share of the Companys preferred stock for $25.00. However, the rights will become exercisable only after the occurrence of certain specified events, including the acquisition of 15% or more of
Centilliums outstanding common stock by an unsolicited third party acquiror. Upon the occurrence of any such event, under the terms specified in the plan, each right entitles the holder, other than the unsolicited third party acquiror, to
purchase a certain number of shares of common stock of the Company, at a fifty percent discount to the then-current market price. The rights expire on January 9, 2013, under the terms of the plan. Centilliums Board of Directors may redeem
outstanding rights at a price of $0.001 per right, with certain exceptions. The terms of the rights and the plan may be amended by Centilliums Board of Directors at any time without the approval of the rights holders as set forth in the plan.



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ITEM 6.    SELECTED CONSOLIDATED FINANCIAL DATA



The following selected consolidated financial data should be read in conjunction with the consolidated financial statements and related notes thereto and Managements Discussion and Analysis
of Financial Condition and Results of Operations appearing elsewhere in this Annual Report on Form 10-K/A.



|                                                                   |  | Years Ended                           |        
|------------------------------------------------------------------ |  | ------------------------------------- | -------
|                                                                   |  | 2002                                  |        
|                                                                   |  | (In thousands, except per share data) |        
|Consolidated Statement of Operations Data:                         |  |                                       |        
|Total net revenues                                                 |  | $                                     | 104,972
|Gross profit                                                       |  | $                                     | 45,472 
|Operating loss                                                     |  | $                                     | (35,630
|Net loss                                                           |  | $                                     | (33,301
|Net loss per sharebasic and diluted                               |  | $                                     | (0.96  
|Shares used to compute basic and diluted net loss per share        |  |                                       | 34,641 
|                                                                  
|Consolidated Balance Sheet Data:                                   |  |                                       |        
|Cash and cash equivalents and short-term investments               |  | $                                     | 102,002
|Working capital                                                    |  | $                                     | 83,795 
|Total assets                                                       |  | $                                     | 122,439
|Long-term debt and capital lease obligations, less current portion |  | $                                     | 525    
|Total stockholders equity                                         |  | $                                     | 93,823 



ITEM 7.    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



Cautionary Statement



You should read the following discussion and analysis in conjunction with the consolidated financial statements and related notes thereto
contained elsewhere in this report. The information in this report is not a complete description of our business or the risks associated with an investment in our common stock. We urge you to carefully review and consider the various disclosures
made by us in this report and in our other reports filed with the SEC.



The section entitled Risk Factors set forth in this report, and similar discussions in our other SEC filings, discuss some of the important risk factors that may affect our business, results of operations and
financial condition. You should carefully consider those risks, in addition to the other information in this report and in our other filings with the SEC, before deciding to invest in our company or to maintain or increase your investment.



Critical Accounting Policies



General.    Our
discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The
preparation of these financial statements requires that we make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going
basis, we evaluate our estimates based on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.



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We believe
that, of the significant accounting policies used in the preparation of our consolidated financial statements (see Note 1 of Notes to Consolidated Financial Statements), the following are critical accounting policies, which may involve a higher
degree of judgment and complexity.



Allowance
for Doubtful Accounts.    We record allowances for doubtful accounts for estimated losses based upon specifically identified amounts that we believe to be uncollectible. We record additional allowances based on certain
percentages of our aged receivables, which are determined based on historical experience and our assessment of the general financial condition of our customer base. If our actual collections experience changes, revisions to our allowances may be
required. We have a limited number of customers with individually large amounts due at any given balance sheet date. Any unanticipated change in one of those customers creditworthiness or other matters affecting the collectibility of amounts
due from such customers could have a material affect on our results of operations in the period in which such changes or events occur.



Sales Returns and Allowances.    We establish, upon shipment of our products, a provision for estimated
returns. Under certain circumstances we allow our customers to return products and a provision is made for such returns. Our estimate of product returns is based on contractual terms or sales agreements, historical experience and expectation of
future conditions. Additional provisions and allowances may be required, resulting in decreased net revenue and gross profit, should we experience increased product returns.



Inventory Valuation.    We value our inventories at the lower of cost or market
using the first-in, first-out method. We may record charges to write down inventories due to excess, obsolete and slow-moving inventory based on an analysis of the impact of changes in technology, the timing of these changes and our estimate of
forecasted demand for our products. We typically use a six-month rolling forecast based on anticipated product orders, product order history, forecasts and backlog. We assess our current or committed inventory levels to these forecasts on a regular
basis and any adverse changes to our future product demand may result in increased writedowns, resulting in decreased gross profit.



Impairment of Long-Lived Assets.    We evaluate goodwill for impairment annually and when indicators of
impairment, such as reductions in demand or significant economic slowdowns in the communications industry, are present. We also evaluate long-lived assets used in operations when indicators of impairment are present. Reviews are performed to
determine whether the carrying value of assets is impaired and if the comparison indicates that there is impairment, the impaired asset is written down to fair value. Significant management judgment is required in the forecast of future operating
results that is used in the preparation of the analysis. It is reasonably possible that the estimates of anticipated future net revenue, the remaining estimated economic life of the products and technologies, or both, could differ from those used to
assess the recoverability of these assets. In that event, additional impairment charges or shortened useful lives of certain long-lived assets could be required.



Litigation and Contingencies.    From time to time, we receive various inquiries
or claims in connection with patent and other intellectual property rights. In certain cases, we have accrued estimates of the amounts we expect to pay upon resolution of such matters. Should we not be able to secure the terms we expect, these
estimates may change and may result in increased accruals, resulting in decreased profit.



Overview



We provide semiconductor products that enable broadband communications to the home and business enterprise. We serve the DSL and the Voice
over Packet markets. Our current customers are broadband access equipment vendors who manufacture DSL equipment for use in the phone companies communications infrastructure or in the customer premise for high-speed Internet or other network
access in a home or small business. Our customers also include equipment vendors who supply products that allow convergence of data and voice networks.



Our revenues are derived primarily from the sale of our DSL and Voice over Packet semiconductor products, which include the CopperFlite
CO, CopperFlite CPE, Optimizer, Palladia, and Entropia families of



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products. To date, we have generated a substantial portion of our revenues from a limited number of customers. For the year ended December
31, 2002, NEC and Sumitomo Electric Industries represented 45% and 41% of our revenues, respectively. For the year ended December 31, 2001, Sumitomo Electric Industries and NEC represented 48% and 38% of our revenues, respectively. For the year
ended December 31, 2000, Lucent Technologies, Sumitomo Electric Industries, Copper Mountain Networks, NEC and Nortel Networks represented 24%, 20%, 12%, 10% and 10%, of our revenues, respectively.



We have focused our sales and marketing efforts on Asian and
North American communications equipment manufacturers. During the years ended December 31, 2002, 2001, and 2000, 89%, 89% and 39% of our revenues, respectively, were from customers in Asia. Revenues from our customers in Asia increased in 2001
compared to 2000 primarily due to the broad market acceptance and use of our DSL products in Japan. Revenues from our customers in North America decreased in 2002 and 2001 primarily due to decreases in spending in the communications equipment
industry. We currently sell through our direct sales force in China, Japan, North America, the United Kingdom and South Korea. We also utilize sales representatives in China, Hong Kong, Israel, Italy, Japan, South Korea, North America and Taiwan.
International revenues are denominated solely in U.S. dollars, which reduces our exposure to foreign currency exchange risks.



Revenues related to product sales are generally recognized when the products are shipped to the customer, title has transferred and no
significant obligations remain. Allowances are provided for estimated returns at the time of shipment. In circumstances where we have not shipped the final version of our product, or when a customer has delayed its acceptance of our product, we
defer recognition of the revenue associated with the given product at the time of shipment. In addition, we defer technology development revenues when customers make advance payments and specified milestones under the technology development contract
have not been met.



It usually takes more than
one year for us to realize volume shipments of our products after we first contact a customer. We first work with customers to achieve a design win, which may take six months or longer. 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. Our customers are not obligated by long-term contracts to purchase our products and can generally cancel or reschedule orders on short notice.



We outsource the fabrication, assembly and testing of our
products. Accordingly, a significant portion of our cost of revenues consists of payments to our manufacturing partners. Costs of revenues also encompass our internal manufacturing and operations functions and a portion of our information systems
and facilities costs.



Research and development
expenses consist primarily of salaries and related personnel costs, fees paid to consultants and outside service providers, prototype costs related to the fabrication of our silicon chips, depreciation associated with software development tools, and
amortization of deferred compensation. We expense our research and development costs as they are incurred. Several components of our research and development effort require significant expenditures, the timing of which can cause significant
quarterly variability in our expenses. For example, we require a substantial number of prototypes to build and test our complex products and therefore incur significant prototype costs. Research and development is key to our future success. The near
term impact of our restructuring plan is expected to result in lower absolute dollar spending for research and development. Notwithstanding the anticipated impact on spending, based on past experience, we anticipate that research and development
expense may increase in the long-term as we incur additional costs related to the growth of our Company.



Sales and marketing expenses consist primarily of salaries, commissions, and related expenses for personnel engaged in marketing, sales,
customer service and applications engineering support functions, costs associated with promotional and other marketing expenses, as well as amortization of deferred compensation. In addition, the complexity of our products and the applications
support necessary for successful interoperability and customer specific applications requires highly trained customer service and support personnel.



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General and
administrative expenses consist primarily of salaries and related expenses for executives, finance, accounting, facilities, information services, human resources, recruiting expenses, legal and other professional fees, other corporate expenses, and
amortization of deferred compensation. In addition, general and administrative expenses include managements estimate of potential bad debt expense. General and administrative expenses may increase in the long-term as we incur additional costs
related to the growth of our business.



In
connection with the grant of certain stock and other equity-based compensation to our employees, technical advisors and directors, we have recorded stock-based compensation expense of $3.8 million, $15.3 million and $25.6 million for the years
ended December 31, 2002, 2001 and 2000, respectively. Deferred compensation is recorded upon grant and represents the difference between the grant price and the deemed fair value of our common stock options granted during these periods. Deferred
compensation expense is being amortized using the graded vesting method, in accordance with Statement of Financial Accounting Standards No. 123 (SFAS 123) and FASB Interpretation No. 28, over the vesting period of each respective option,
generally four years. Under the graded vesting method, each option grant is separated into portions based on its vesting terms, which results in acceleration of amortization expense for the overall award. The accelerated amortization pattern results
in expensing approximately 59% of the total award in year one, 25% in year two, 12% in year three and 4% in year four. Deferred compensation is presented as a reduction of stockholders equity. As required by APB 25, we record an adjustment to
equity-based compensation when employees forfeit options for which compensation expense had been recognized using the graded vesting method, but which were unvested on the date their employment terminated. See Notes 1 and 8 of notes to consolidated
financial statements for more information about our equity-based compensation programs.



We have not reported an operating profit for any year since our incorporation and have experienced net losses of approximately $33.3 million, $19.7 million and $46.0 million for the years ended
December 31, 2002, 2001 and 2000, respectively.



Results of
Operations



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



|                                                                   |  | Years ended December 31, |   
|------------------------------------------------------------------ |  | ------------------------ | --
|                                                                   |  | 2002                     |   
|Total net revenues                                                 |  | 100                      | % 
|Cost of revenues                                                   |  | 57                       |   
|                                                                   |  |                          |   
|Gross profit                                                       |  | 43                       |   
|                                                                   |  |                          |   
|Operating expenses:                                                |  |                          |   
|Research and development                                           |  | 48                       |   
|Sales and marketing                                                |  | 14                       |   
|General and administrative                                         |  | 9                        |   
|Amortization of goodwill and other acquisition-related intangibles |  |                         |   
|Impairment of goodwill                                             |  | 6                        |   
|In-process research and development                                |  |                         |   
|                                                                   |  |                          |   
|Total operating expenses                                           |  | 77                       |   
|                                                                   |  |                          |   
|Operating loss                                                     |  | (34                      | ) 
|Interest income, net                                               |  | 2                        |   
|Gain (loss) on long-term investment                                |  |                         |   
|Benefit (provision) for income taxes                               |  |                         |   
|                                                                   |  |                          |   
|Net loss                                                           |  | (32                      | )%
|                                                                   |  |                          |   



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Years
ended December 31, 2002 and 2001



Total Net Revenues:    Total net revenues in 2002 were $105.0 million, compared with $159.5 million in 2001, a decrease of $54.5 million or 34%. The decrease in revenues is primarily due to a 40% decrease
in the average selling prices of our DSL products which accounted for approximately $65 million of the decrease. This was partially offset by a 4% increase in unit volume shipments that provided approximately $10 million of revenue in 2002. Revenue
from our DSL products accounted for $100.9 million or 96% of total net revenues in 2002, as compared to $155.7 million or 98% of total net revenues in 2001. Revenues from Voice over Packet products accounted for $3.0 million of revenues in 2002
as compared to $2.5 million in 2001, or 3% and 2% of total net revenues, respectively. We anticipate that revenues from our DSL products will continue to account for greater than 90% of our total net revenues in 2003.



Competition and technological change in the rapidly evolving
DSL market has and may continue to influence our quarterly and annual net revenues and results of operations. Average selling prices of our DSL and Voice over Packet products tend to be higher at the time we introduce new products and decline over
time due to competitive pressures. We expect this pattern to continue with existing and future products. Our average selling prices are also impacted by our customer concentration and product mix.



Our major customers for the years ended December 31, 2002 were
NEC and Sumitomo who represented 45% and 41% of net revenues, respectively. For the year ended December 31, 2001, Sumitomo and NEC represented 48% and 38% of net revenues, respectively. Revenues from international customers, who were primarily
located in Japan, comprised 89% of our net revenues in each of the years ended December 31, 2002 and 2001.



Cost of Revenues:    Cost of revenues, which reflects costs of product revenues, was $59.5 million in 2002 and
$79.8 million in 2001 resulting in gross profit as a percentage of revenues of 43% and 50%, respectively. The decrease in gross profit and gross profit percentage was primarily due to lower average selling prices per unit, partially offset by lower
per unit product costs. Our gross margins in the future may be affected by competitive pricing strategies and the future introduction of certain lower margin items.



Research and Development Expenses:    Research and development expenses in 2002
were $50.8 million, compared to $59.0 million in 2001, a decrease of 14%. This decrease was primarily due to a $5.5 million decrease in the amortization of deferred compensation and a decrease in software expense.



Sales and Marketing
Expenses:    Sales and marketing expenses in 2002 were $14.7 million, compared to $18.0 million in 2001, a decrease of 18%. The decrease was due primarily to a $2.8 million decrease in the amortization of deferred
compensation, a decrease in customer evaluation board costs and a decrease in sales commissions, partially offset by increases in salary and severance costs.



General and Administrative Expenses:    General and administrative expenses in
2002 were $9.7 million, compared to $13.9 million in 2001, a decrease of 30%, which was primarily due to a decrease in the amortization of deferred compensation of $2.7 million, a decrease in bad debt expense of $800,000 and decreases in expensed
software and legal and stock administration fees, offset by increases in business insurance costs.



Amortization of Deferred Compensation and Non-Cash Stock Compensation:    Amortization of deferred
compensation, which is allocated among the above expense categories, was $3.8 million in 2002 compared to $15.3 million in 2001, a decrease of $11.5 million. The decrease is primarily related to the use of the graded vesting method, which results in
accelerated amortization of deferred compensation expense in the earlier years of the awards expected life, as well as adjustments in 2002 related to forfeited options. As required by APB 25, we record an adjustment to equity-based
compensation related to employees who forfeit options for which compensation expense had been recognized using the graded vesting method, but which are unvested on the date their employment terminated.



Amortization of Goodwill and Other Acquisition Related
Intangibles:    Amortization of goodwill and other acquisition-related intangibles decreased to $167,000 for the year ended December 31, 2002 from $3.3 million



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for the year ended December 31, 2001. This was due to the adoption of Statement of Financial Accounting Standards No. 142, Goodwill
and Other Intangible Assets(SFAS 142), which required us to discontinue the amortization of goodwill effective January 1, 2002. In addition, in accordance with SFAS 142 we reclassified assembled workforce to goodwill, which eliminated the
amortization of assembled workforce effective January 1, 2002.



Impairment of Goodwill:    During the fourth quarter of 2002, we completed our annual goodwill impairment test. Based upon this test, we recorded a charge of $5.8 million to write down the value of
goodwill associated with our purchase transactions. No comparable charges were incurred in 2001.



In-Process Research and Development Expense:    In 2002, we did not have any acquired in-process research and development. In the first quarter of fiscal 2001, we wrote off
$7.4 million of acquired in-process research and development (IPR&D) related to our acquisition of vEngines, Inc. The entire IPR&D charge of $7.4 million related to one project. This project related to the development of high-density
voice processing semiconductor products, which bridge circuit switched voice and data networks. The write off was necessary because the acquired technology had not yet reached technological feasibility and there were no alternative future uses for
the technology.



Gain (Loss) on Long-Term
Investment:    We monitor and evaluate the realizable value of our long-term equity investment and if events and circumstances indicate that a decline in value of this asset is other than temporary, we write down the carrying
value to its estimated fair value. In June 2001, in connection with the ongoing evaluation and review of our only long-term equity investment, we recorded a non-cash charge of $990,000 to write down the basis of this investment to zero as a result
of this impairment. In January 2002, we sold this equity investment for $440,000 and reported this as a gain in the first quarter of 2002.



Interest Income, Net:    Interest income, net was $1.8 million in 2002, compared to $3.5 million in 2001, a
decrease of 49%. This decrease was primarily due to lower interest rates obtained on our cash, cash equivalents and short-term investment portfolio, and slightly lower average invested balances.



Benefit (Provision) for Income
Taxes:    We recorded a tax benefit of $95,000 for the year ended December 31, 2002, which represents a refund of U.S. Federal Income Taxes, offset by foreign federal income taxes. We recorded a provision for income
taxes of $400,000 for the year ended December 31, 2001, which represents federal and state minimum taxes as well as foreign income taxes.



As of December 31, 2002, we have $55 million and $30 million of net operating loss carryforwards for federal and state purposes,
respectively. We also have federal and state research and development tax credit carryforwards of approximately $2.9 million and $2.7 respectively. The net operating losses and federal credit carryforwards will expire at various dates beginning in
2006, if not utilized. The California net operating losses are not available to offset income until 2004 due to recent state law change.



Utilization of net operating loss and credit carryforwards may be subject to a substantial annual limitation due to the ownership change
limitations provided by the Internal Revenue Code of 1986, as amended, and similar state provisions. The annual limitation may result in the expiration of net operating losses and tax credit carryforwards before full utilization.



Financial Accounting Standards Board Statement No. 109,
Accounting for Income Taxes, provides for the recognition of deferred tax assets if realization of such assets is more likely than not. Based upon the weight of available evidence, which includes our historical operating performance and
our reported cumulative net losses to date, we have provided a full valuation allowance against our deferred tax assets.



The valuation allowance at December 31, 2002 includes approximately $4.6 million related to stock option deductions, the benefit of which
will be recorded in paid-in capital when realized.



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Net
Losses:    We incurred net losses of $33.3 million in 2002 compared to $19.7 million in 2001. The increase in net loss of $13.6 million or 69% is primarily the result of lower gross profit of $34.3 million, the write off of
goodwill of $5.8 million, and higher depreciation and amortization expense of $3.0 million partially offset by lower expenses for deferred compensation of $11.5 million, in-process research and development of $7.4 million, goodwill amortization
of $3.1 million, bad debt expense of $800,000 and lower interest income of $1.7 million. Net loss per common share was $0.96 in 2002 and $0.59 in 2001.



Years ended December 31, 2001 and 2000



Total Net Revenues:    Total net revenues in 2001 were $159.5 million, compared
with $56.5 million in 2000, an increase of 182%. The growth in revenue was due to a higher volume of shipments, which increased 191%, offset by a 4% decrease in our average selling price and changes in product mix. In 2001, our DSL products
accounted for $155.7 million or 98% of total net revenues and our Voice over Packet products accounted for $2.5 million or 2% of total net revenues. Our DSL products accounted for $56.1 million or greater than 99% of total net revenues in 2000. In
addition, in the fourth quarter of 2001, we recorded $1.1 million in revenues from cancellation fees.



Cost of Revenues:    Cost of revenues, which reflects costs of product revenues, was $79.8 million in 2001 and
$32.3 million in 2000, resulting in gross profit as a percentage of revenues of 50% and 43%, respectively. The increase in gross profit as a percentage of revenues was attributable to improved yields and cost reductions at our suppliers, an increase
in unit volume of shipments and a decrease in excess and obsolete inventory writedowns as a percentage of sales.



Research and Development Expenses:    Research and development expenses in 2001 were $59.0 million, compared to
$41.9 million in 2000, an increase of 41%. The increase was due primarily to additions in engineering personnel, increased usage of materials necessary to build prototypes, increases in depreciation resulting from the additional purchases of
laboratory equipment and software development tools offset by a decrease in the amortization of deferred compensation of $2.7 million.



Sales and Marketing Expenses:    Sales and marketing expenses in 2001 were $18.0 million, compared to $15.5
million in 2000, an increase of 16%. The increase was due primarily to the addition of personnel, an increase in marketing activity such as customer visits and attendance at trade shows offset by a decrease in the amortization of deferred
compensation of $2.7 million.



General and
Administrative Expenses:    General and administrative expenses in 2001 were $13.9 million, compared to $15.9 million in 2000, a decrease of 12%. The decrease was primarily due to a decrease in the amortization of deferred
compensation of $4.2 million, offset by increases in payroll and related costs, professional services, and business insurance expenditures. During 2001 and 2000, we charged $102,000 and $782,000, respectively, to bad debt expense based on our
estimates of the collectibility of our accounts receivable.



Amortization of Deferred Compensation and Non-Cash Stock Compensation:    Amortization of deferred compensation, which is allocated among the above expense categories, was $15.3 million in 2001 compared to
$25.6 million in 2000, a decrease of $10.3 million. The decrease was primarily attributable to the use of the graded vesting method, which results in accelerated amortization of deferred compensation expense in the earlier years of the awards
expected life. In addition, expenses for 2001 and 2000 include charges of $70,000 and $2.3 million, respectively, related to grants to consultants.



In-Process Research and Development Expense:    In the first quarter of fiscal 2001, we wrote off
$7.4 million of acquired in-process research and development (IPR&D) related to our acquisition of vEngines, Inc. The entire IPR&D charge of $7.4 million related to one project. This project related to the development of high-density
voice processing semiconductor products, which bridge circuit switched voice and data networks. The write off was necessary because the acquired technology had not yet reached technological feasibility and there were no alternative future uses for
the technology.



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At the time of
the acquisition, the efforts required to develop the acquired in-process technology principally related to the completion of all planning, design, development and testing activities that were necessary to establish that the product could be produced
to meet its design specifications including features, function and performance. At the acquisition date, we expected certain aspects of the acquired in-process technology to be developed into commercially feasible products.



We estimated the fair value of the acquired in-process
technology based upon projected future revenues and cash flows related to the product that was expected to result from the in-process project. Specific consideration was given to the percentage of completion of the in-process project, which was
estimated at 55%. The forecast cash flows were discounted back to a present value using a discount rate of 25%.



At the acquisition date, we expected to incur additional costs of $2.0 million to complete the in-process project, which we expected to
complete in June 2001. Subsequent to the acquisition date, we discontinued development efforts on this specific project, as the performance of a similar product under development internally was determined to be superior.



Gain (Loss) on Long-Term
Investment:    We monitor and evaluate the realizable value of our long-term equity investment and if events and circumstances indicate that the decline in value of this asset is other than temporary, we write down the
carrying value to estimated fair value. In June 2001, in connection with the ongoing evaluation and review of our only long-term equity investment, we recorded a non-cash charge of $990,000 to write down the basis of this investment to zero as a
result of this impairment. In January 2002, we sold this non-current equity investment for $440,000 and reported this as a gain in the first quarter of 2002.



Interest Income, Net:    Interest income was $3.5 million in 2001, compared to $3.8 million in 2000, a decrease
of 8%. This decrease was primarily due to lower interest rates obtained on our cash, cash equivalents and short-term investment portfolio, offset partially by an increase in average invested balances.



Provision for Income Taxes:    We
recorded a tax provision of $400,000 for the year ended December 31, 2001, which represents federal and state minimum taxes as well as foreign income taxes. We recorded a provision for foreign income taxes of $8,000 for the year ended December 31,
2000.



Net
Losses:    We incurred net losses of $19.7 million in 2001 and $46.0 million in 2000. The decrease in net loss of $26.3 million or 57% is primarily the result of higher gross profit of $55.5 million and a decrease in deferred
compensation of $10.3 million offset by $11.8 million in higher personnel costs, $7.4 million for in-process research and development expense, $8.2 million for software tools and maintenance contracts, $2.5 million in goodwill amortization and
$1.4 million for the cost of prototype development. Net loss per common share was $0.59 in 2001 and $2.00 in 2000.



Liquidity and Capital Resources



Since our inception, we have financed our operations through a combination of sales of equity securities and cash generated by operations.
At December 31, 2002, we had $102.0 million in cash, cash equivalents and short-term investments as compared to $110.9 million at December 31, 2001.



Cash and cash equivalents decreased to $93.5 million at December 31, 2002 from $93.7 million at December 31, 2001. Operating activities
during 2002 used $7.1 million in cash. This was primarily the result of the net loss of $33.3 million being offset by the non-cash impact of a $5.8 million charge for the goodwill impairment, $3.8 million in amortization of deferred compensation and
$7.2 million of depreciation and amortization expense. The net loss was further offset by a decrease in inventories of $5.2 million, a decrease in accounts receivable of $1.2 million, and an increase in accrued liabilities and accrued payroll and
related expenses of $3.2 million.



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Net cash
provided by investing activities was $4.9 million for the year ended December 31, 2002, and was primarily related to net sales of short-term investments of $8.6 million offset by purchases of property and equipment of $4.1 million.



Cash generated from financing activities was $2.0 million for
the year ended December 31, 2002, and was related to the net proceeds from employee stock plans of $2.2 million.



Our principal source of liquidity as of December 31, 2002 consisted of $102.0 million of cash and cash equivalents, and short-term
investments. We believe our current cash, cash equivalents and marketable securities will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least 12 months. The rate at which we will consume
cash will be dependent on the cash needs of future operations, which will, in turn, be directly affected by the levels of demand for our products.



Significant contractual obligations and commercial commitments are shown in the table below (in thousands):



|                               |  | Payments due by period
|------------------------------ |  | ----------------------
|                               |  | Total                 
|Operating leasesfacilities    |  | $                     
|Capital leasessoftware        |  |                       
|Operating leasessoftware      |  |                       
|Inventory purchase commitments |  |                       
|                               |  |                       
|Total cash obligations         |  | $                     
|                               |  |                       



If we
are able to sustain our current business plan and general economic conditions stabilize, we hope to achieve profitability in the second half of 2003. We believe our revenue forecast and the steps we have taken to reduce spending will allow us to
achieve that objective. Our future capital requirements depend on many factors that affect our research, development, collaboration and sales and marketing activities. We believe that existing cash and investment securities and anticipated cash flow
from operations will be sufficient to support our current operating plan for 2003. These cash flow and profitability expectations are subject to numerous assumptions, many of which may not actually occur. If some or all of such assumptions do not
occur, our results may be substantially lower or different than expected. Such assumptions include, without limitation, assumptions that new product introductions will occur on a timely basis and achieve market acceptance, that our existing and
potential customer base will continue to grow and that our industrys competitive landscape will not change adversely. For more information about the risks relating to our business, please read carefully the Risk Factors set forth below.



We expect to devote capital resources to
continue our research and development efforts, to support our sales, marketing, and product development programs, to establish additional facilities worldwide and to fund other general corporate activities. From time to time, we receive various
inquiries or claims in connection with intellectual property and other rights and may become party to associated claims. In certain cases, management has accrued estimates of the amounts it expects to pay upon resolution of such matters. Depending
on the amount and timing of the resolutions of these claims, our future cash flows could be materially adversely affected in a particular period.



If our existing resources and cash generated from operations are insufficient to satisfy our liquidity requirements, we may seek to raise
additional funds through public or private debt or equity financings. The sale of equity or debt securities could result in additional dilution to our stockholders, and we cannot be certain that additional financing will 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 sales and marketing efforts, which could harm our business, financial condition
and operating results.



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Recent Accounting
Pronouncements



As of January 1, 2002, we
adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS 142), which addresses the financial accounting and reporting standards for goodwill and other intangible assets subsequent to their
acquisition. This accounting standard requires that goodwill no longer be amortized, and instead, be tested for impairment at least annually. In addition, within six months of adopting the new accounting standard, a transitional impairment test must
be completed and any impairments identified must be reported as a cumulative effect of a change in accounting principle. We completed our transitional impairment test during the quarter ended June 30, 2002 and no impairment was recognized. In the
fourth quarter of 2002, we completed our annual impairment review and, as a result of our assessment, we recorded an expense of $5.8 million for the impairment of goodwill. For further discussion, see Notes to Consolidated Financial Statements.



In August 2001, the Financial Accounting
Standards Board (FASB) issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144), which addresses financial accounting and reporting for impairment or disposal of long-lived assets and was effective
January 1, 2002. SFAS 144 supersedes SFAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of, and the accounting and reporting provisions relating to the disposal of segments of a business
under Accounting Principles Board Opinion No. 30. The adoption of SFAS 144 did not have a material impact on our financial position or results of operations.



In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities (SFAS 146), which
addresses financial accounting and reporting for costs associated with exit or disposal activities and supersedes Emerging Issues Task Force (EITF) Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity, including Certain Costs Incurred in a Restructuring (EITF 94-3). SFAS 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. In addition, SFAS No. 146 establishes that fair value is the basis for initial measurement of the liability. SFAS 146 is effective for exit or disposal activities initiated after December 31, 2002. The effect
of adoption of SFAS 146 is dependant on our activities subsequent to adoption.



In November 2002, the FASB issued FASB Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others
(FIN 45). FIN 45 requires that upon issuance of a guarantee, a guarantor must recognize a liability for the fair value of an obligation assumed under a guarantee. FIN 45 also requires additional disclosures by a guarantor in its interim and annual
financial statements about the obligations associated with guarantees issued. The recognition provisions of FIN 45 are effective for any guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for financial
statements of interim or annual periods ending after December 15, 2002. We have adopted the disclosure requirements for our financial statements included in this Form 10-K/A. We are currently evaluating the effects of FIN 45, however we do not
expect that the adoption of FIN 45 will have a material effect on our financial position, results of operations, or cash flows.



In January 2003, the FASB issued EITF No. 00-21, Revenue Arrangements with Multiple Deliverables (EITF 00-21). EITF 00-21
provides guidance on how to determine whether an arrangement involves multiple deliverables and contains more than one unit of accounting. EITF 00-21 will be effective for arrangements entered into after June 15, 2003. The Company is evaluating the
impact of its adoption on its consolidated results of operation and financial position.



In December 2002, the FASB issued SFAS 148, Accounting for Stock-Based CompensationTransition and Disclosure. SFAS 148 amends SFAS 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to
require prominent disclosures in both annual and interim financial statements about the method of accounting for



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stock-based employee compensation and the effect of the method used on reported results. The transition guidance and annual disclosure
requirements are effective for fiscal years ending after December 15, 2002. We adopted the disclosure provisions for this Form 10-K/A. We will continue to account for stock-based compensation under the provisions of Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees using the intrinsic value method. Accordingly, the adoption of SFAS 148 is not anticipated to have a material effect on our financial position, results of operations,
or cash flows.



Recently Passed Legislation



On July 30, 2002, President Bush signed into law the
Sarbanes-Oxley Act of 2002 (the Act), portions of which immediately impact Securities and Exchange Commission registrants, public accounting firms, lawyers and securities analysts. This legislation is expected to have far reaching
effects on the standards of integrity for corporate management, boards of directors, and executive management. Additional disclosures, certifications and possibly procedures will be required of the Company. The Company does not expect any material
change in its practices as a result of the passage of this legislation; however, the full scope of the Act has not yet been determined. The Act calls for additional regulations and requirements of publicly-traded companies, many of which have yet to
be issued.



Risk Factors



You should carefully consider the risks described below and
all of the information contained in this Form 10-K/A. If any of the following risks actually occur, our business, financial condition and results of operations could be harmed, the trading price of our common stock could decline, and you may
lose all or part of your investment in our common stock.



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



We have not reported an operating profit for any year since our incorporation and have experienced net losses of approximately $33.3
million, $19.7 million and $46.0 million for the years ended December 31, 2002, 2001, and 2000, respectively.



OUR STOCK PRICE MAY CONTINUE TO BE VOLATILE.



The market price of our common stock has been volatile and will likely continue to fluctuate significantly in
response to the following factors, some of which are beyond our control:



| |  |  | variations in our quarterly operating results;
| | - |  | ----------------------------------------------



| |  |  | changes in financial estimates of our revenues and operating results by securities analysts;
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | changes in market valuations of integrated circuit companies;
| | - |  | -------------------------------------------------------------



| |  |  | announcements by us, our competitors or others in related market segments of significant contracts, acquisitions, strategic partnerships, joint ventures or capital
commitments;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | loss or decrease in sales to a major customer or failure to complete significant transactions;
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | loss or reduction in manufacturing capacity from one or more of our key suppliers;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | additions or departures of key personnel;
| | - |  | -----------------------------------------



| |  |  | future sales of our common stock;
| | - |  | ---------------------------------



| |  |  | inconsistent or low levels of trading volume of our common stock;
| | - |  | -----------------------------------------------------------------



| |  |  | commencement of or involvement in litigation;
| | - |  | ---------------------------------------------



| |  |  | announcements by us or our competitors of key design wins and product introductions;
| | - |  | ------------------------------------------------------------------------------------



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| |  |  | a decrease in the average selling price of our products;
| | - |  | --------------------------------------------------------



| |  |  | ability to achieve cost reductions; and
| | - |  | ---------------------------------------



| |  |  | fluctuations in the timing and amount of customer requests for product shipments.
| | - |  | ---------------------------------------------------------------------------------



A GENERAL ECONOMIC SLOWDOWN, AND A SLOWDOWN IN SPENDING IN THE TELECOMMUNICATIONS INDUSTRY
SPECIFICALLY, MAY NEGATIVELY AFFECT OUR BUSINESS AND OPERATING RESULTS.



There have been announcements throughout the worldwide telecommunications industry of current and planned reductions in component inventory levels and equipment production volumes, and of delays in the
build-out of new infrastructure. Any of these trends, if continued, could result in lower than expected demand for our products, which could have a material adverse effect on our revenues and results of operations generally, and could cause the
market price of our common stock to decline.



A SLOWDOWN IN DEPLOYMENT OF DSL IN JAPAN WOULD ADVERSELY AFFECT OUR BUSINESS AND OPERATING RESULTS.



Sales to customers located in Japan accounted for 86% of net revenues for the year ended December 31, 2002 and 87% of net revenues for the
year ended December 31, 2001. Any slowdown in the demand for our customers equipment in Japan may cause our revenues to decline. Our sales have been historically denominated in U.S. dollars and major fluctuations in currency exchange rates
could materially affect our Japanese customers demand, thereby forcing them to reduce their orders, which could adversely affect our operating results.



COMPETING DSL TECHNOLOGIES HAVE BEEN DEPLOYED IN JAPAN, WHICH MAY ADVERSELY IMPACT THE DEMAND FOR OUR DSL PRODUCTS, MARKET SHARE AND
OPERATING RESULTS.



We have worked in
partnership with local telecommunications companies to develop the Annex C standard for the DSL market in Japan. As a result, we have been able to achieve significant market share for DSL equipment purchases based on our products in Japan. In July
2001, a certain service provider announced plans to deploy lower priced competing DSL technologies in Japan and has subsequently deployed these competing technologies. If these competing technologies continue to be successful, our market share in
the DSL market in Japan may decline and our business and operating results may be adversely affected.



WE DERIVE A SUBSTANTIAL AMOUNT OF OUR REVENUES FROM INTERNATIONAL SOURCES, AND DIFFICULTIES ASSOCIATED WITH INTERNATIONAL OPERATIONS
COULD HARM OUR BUSINESS.



A substantial
portion of our revenues have been derived from customers located outside of the United States. In each of the years ended December 31, 2002 and 2001, 89% of our net revenues were to customers located in Asia. We may be unable to successfully
overcome the difficulties associated with international operations. These difficulties include:



| |  |  | staffing and managing foreign operations;
| | - |  | -----------------------------------------



| |  |  | changes in regulatory requirements;
| | - |  | -----------------------------------



| |  |  | licenses, tariffs and other trade barriers;
| | - |  | -------------------------------------------



| |  |  | political and economic instability;
| | - |  | -----------------------------------



| |  |  | difficulties in protecting intellectual property rights in some foreign countries;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | a limited ability to enforce agreements and other rights in some foreign countries;
| | - |  | -----------------------------------------------------------------------------------



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| |  |  | obtaining governmental approvals for products; and
| | - |  | --------------------------------------------------



| |  |  | complying with a wide variety of complex foreign laws and treaties.
| | - |  | -------------------------------------------------------------------



Because sales of our products are denominated exclusively in United States dollars, increases in the value of
the United States dollar could increase the price of our products so that they become relatively more expensive to customers in the local currency of a particular country, leading to a reduction in sales and profitability in that country.



WE DEPEND ON A FEW CUSTOMERS AND IF WE
LOSE ANY OF THEM OUR SALES AND OPERATIONS WILL SUFFER.



We sell our DSL products primarily to network equipment manufacturers. Our top two customers for the year ended December 31, 2002 were NEC and Sumitomo Electric Industries, which represented for 45% and 41% of our net revenues,
respectively. For the year ended December 31, 2001, Sumitomo Electric Industries and NEC represented for 48% and 38% of our net revenues, respectively. We do not have contractual volume commitments with these customers, but rather sell our products
to them on an order-by-order basis. We expect to be dependent upon a relatively small number of large customers in future periods, although the specific customers may vary from period to period. If we are not successful in maintaining relationships
with key customers and winning new customers, our business and results of operations will suffer.



OUR CUSTOMERS MAY DEMAND PREFERENTIAL TERMS OR DELAY OUR SALES CYCLE, WHICH WOULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS.



Our customers are in most cases larger
than us and are able to exert a high degree of influence over us. These customers may have sufficient bargaining power to demand low prices and other terms and conditions that may materially adversely affect our business, financial condition and
results of operations. In addition, prior to selling our products to such customers, we must typically undergo lengthy product approval processes, often taking up to one year. Accordingly, we are continually submitting successive versions of our
products as well as new products to our customers for approval. The length of the approval process can vary and is affected by a number of factors, including customer priorities, customer budgets and regulatory issues affecting telecommunication
service providers. Delays in the product approval process could materially adversely affect our business, financial condition and results of operations. While we have been successful in the past in obtaining product approvals from our customers,
such approvals and the ensuing sales of such products may not continue to occur. Delays can also be caused by late deliveries by other vendors, changes in implementation priorities and slower than anticipated growth in demand for the services that
our products support. A delay in, or cancellation of, the sale of our products could adversely affect our results from operations or cause them to significantly vary from quarter to quarter.



SALES OF OUR PRODUCTS DEPEND ON THE WIDESPREAD ADOPTION
OF BROADBAND ACCESS SERVICES, ESPECIALLY DSL. IF THE DEMAND FOR BROADBAND ACCESS SERVICE DOES NOT INCREASE, WE MAY NOT BE ABLE TO GENERATE SUBSTANTIAL SALES.



Sales of our products depend on the increased use and widespread adoption of broadband access services, and
DSL services in particular, as well as the ability of telecommunications service providers to market and sell broadband access services. Our business would be harmed, and our results of operations and financial condition would be adversely affected,
if the use of broadband access services does not increase as anticipated. Certain critical factors will likely continue to affect the development of the broadband access service market. These factors include:



| |  |  | inconsistent quality and reliability of service;
| | - |  | ------------------------------------------------



| |  |  | lack of availability of cost-effective, high-speed service;
| | - |  | -----------------------------------------------------------



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| |  |  | lack of interoperability among multiple vendors network equipment;
| | - |  | -------------------------------------------------------------------



| |  |  | congestion in service providers networks;
| | - |  | ------------------------------------------



| |  |  | inadequate security; and
| | - |  | ------------------------



| |  |  | slow deployment of new broadband services over DSL lines.
| | - |  | ---------------------------------------------------------



BECAUSE THE SALES CYCLE FOR OUR PRODUCTS TYPICALLY LASTS UP TO ONE YEAR, AND MAY BE SUBJECT TO DELAYS, IT IS DIFFICULT TO FORECAST
SALES FOR ANY GIVEN PERIOD.



If we fail
to realize forecasted sales for a particular period, our stock price could decline significantly. The sales cycle of our products is lengthy and typically involves a detailed initial technical evaluation of our products by our prospective customers,
followed by the design, construction and testing of prototypes incorporating our products. Only after these steps are complete will we receive a purchase order from a customer for volume shipments. This process generally takes from 9 to 12 months,
and may last longer. Given this lengthy sales cycle, it is difficult to accurately predict when sales to a particular customer will occur. In addition, we may experience unexpected delays in orders from customers, which may prevent us from realizing
forecasted sales for a particular period. Our products are typically sold to equipment manufacturers, who incorporate our products in the products that they in turn sell to consumers or to network service providers. As a result, any delay by our
customers, or by our customers customers, in the manufacture or distribution of their products will result in a delay in obtaining orders for our products, which would cause our business and results to suffer.



RAPID CHANGES IN THE MARKET FOR DSL CHIP SETS MAY RENDER
OUR CHIP SETS OBSOLETE OR UNMARKETABLE.



The market for chip sets for DSL products is characterized by:



| |  |  | intense competition;
| | - |  | --------------------



| |  |  | rapid technological change;
| | - |  | ---------------------------



| |  |  | frequent new product introductions by our competitors;
| | - |  | ------------------------------------------------------



| |  |  | changes in customer demands; and
| | - |  | --------------------------------



| |  |  | evolving industry standards.
| | - |  | ----------------------------



Any of these factors could make our products obsolete or unmarketable. In addition, the life cycles of some of our products may depend
upon the life cycles of the end products into which our products will be designed. Products with short life cycles require us to closely manage production and inventory levels. Unanticipated changes in the estimated total demand for our products
and/or the estimated life cycles of the end products into which our products are designed may result in obsolete or excess inventories, which in turn may adversely affect our operating results. To compete, we must innovate and introduce new
products. If we fail to successfully introduce new products on a timely and cost-effective basis that meet customer requirements and are compatible with evolving industry standards, then our business, financial condition and results of operations
will be seriously harmed.



BECAUSE OTHER
BROADBAND TECHNOLOGIES MAY COMPETE EFFECTIVELY WITH DSL SERVICES, OUR PRODUCTS MAY NOT CAPTURE MARKET SHARE.



DSL services are competing with a variety of different broadband data transmission technologies, including cable, satellite and other
wireless technologies. If any technology that is competing with DSL technology is more reliable, faster and less expensive or has other advantages over DSL technology, then the demand for our DSL products may decrease.



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OUR
MARKETS ARE HIGHLY COMPETITIVE AND MANY OF OUR COMPETITORS ARE ESTABLISHED AND HAVE GREATER RESOURCES THAN WE HAVE.



The market for communications semiconductor products is intensely competitive. Given our stage of development, there is a substantial risk
that we will not have the financial resources, technical expertise or marketing and support capabilities to compete successfully. In addition, a number of other semiconductor companies have announced their intent to enter the market segments
adjacent to or addressed by our products. Many of these competitors operate their own fabrication facilities, have longer operating histories and presence in key markets, greater name recognition, access to larger customer bases and significantly
greater financial, sales and marketing, manufacturing, distribution and technical resources than we have. We may also face competition from customers or prospective customers own internal development efforts. Any of these competitors 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.



BECAUSE OUR PRODUCTS ARE COMPONENTS OF OTHER EQUIPMENT,
IF BROADBAND EQUIPMENT MANUFACTURERS DO NOT INCORPORATE OUR PRODUCTS IN THEIR EQUIPMENT, WE MAY NOT BE ABLE TO GENERATE SALES OF OUR PRODUCTS IN VOLUME QUANTITIES.



Our products are not sold directly to the end-user; 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 the manufacturing and deployment of the equipment to be successful. If equipment that incorporates our products is not accepted in the marketplace, we
may not achieve sales of our products in volume quantities, which would have a negative impact on our results of operations.



BECAUSE MANUFACTURERS OF COMMUNICATIONS EQUIPMENT MAY BE RELUCTANT TO CHANGE THEIR SOURCES OF COMPONENTS, IF WE DO NOT ACHIEVE
DESIGN WINS WITH SUCH MANUFACTURERS, WE MAY BE UNABLE TO SECURE SALES FROM THESE CUSTOMERS IN THE FUTURE.



Once a manufacturer of communications 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 equipment manufacturers, who have chosen a competitors semiconductor
could create barriers to future sales opportunities with these manufacturers.



THIRD-PARTY CLAIMS REGARDING INTELLECTUAL PROPERTY MATTERS COULD CAUSE US TO STOP SELLING OUR PRODUCTS, PAY MONETARY DAMAGES OR OBTAIN LICENSES ON ADVERSE TERMS.



There is a significant risk that third parties, including
current and potential competitors, will claim that our products, or our customers products, infringe on their intellectual property rights. The owners of these intellectual property rights may bring infringement claims against us or our
customers. Any such litigation, whether or not determined in our favor or settled by us, would be costly and divert the attention of our management and technical personnel. Inquiries with respect to the coverage of our intellectual property could
develop into litigation. In the event of an adverse ruling for an intellectual property infringement claim, we could be required to obtain a license or pay substantial damages or have the sale of our products stopped by an injunction. Such a license
may not be available on reasonable terms, or at all. In addition, if a customer of our products cannot acquire a required license on commercially reasonable terms, that customer may choose not to use our products. We have obligations to indemnify
our customers under some circumstances for infringement of third-party intellectual property rights. If any intellectual property claims from third parties against one of our customers whom we have indemnified is held to be valid, the costs to us
could be substantial and our business could be harmed.



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We have
received correspondence from certain parties, including Texas Instruments, Alcatel and Ricoh, requesting us to discuss the potential need for non-exclusive licenses permitting us to utilize technology covered by various patents held by these
parties. We could be subject to claims similar to the Texas Instruments, Alcatel and Ricoh claims in the future. Depending on the amount and timing of any unfavorable resolutions of these claims, our future results of operations or cash flows could
be materially adversely affected.



IF WE
DELIVER PRODUCTS WITH DEFECTS, OUR CREDIBILITY WILL BE HARMED, AND THE SALES AND MARKET ACCEPTANCE OF OUR PRODUCTS WILL DECREASE.



Our products are complex and have contained errors, defects and bugs when introduced and revised. If we deliver products with errors,
defects or bugs or products that have reliability, quality or compatibility problems, our credibility and the market acceptance and sales of our products could be harmed, which could adversely affect our ability to retain existing customers or
attract new customers. Further, if our products contain errors, defects and bugs, then we may be required to expend significant capital and resources to alleviate such problems and may have our sales to customers interrupted or delayed. If any of
these problems are not found until we have commenced commercial production, we may be required to incur additional development costs and product repair or replacement costs. Defects could also lead to potential liability as a result of product
liability lawsuits against us or against our customers. We have agreed to indemnify our customers in some circumstances against liability from defects in our products. A successful product liability claim could seriously harm our business, financial
condition and results of operations, and may divert our technical and other resources from other development efforts.



WE DEPEND ON SOLE SOURCE SUPPLIERS FOR SEVERAL KEY COMPONENTS OF OUR PRODUCTS.



We obtain certain parts, components and packaging used in the
delivery of our products from sole sources of supply. For example, historically, we have obtained digital semiconductor wafers from Taiwan Semiconductor Manufacturing Co., Ltd and we have obtained analog silicon wafers from United Microelectronics
Corporation. If we fail to obtain components in sufficient quantities when required or if we cannot adequately control manufacturing process quality, product yields or production costs, our business could be harmed. Developing and maintaining these
strategic relationships with our vendors is critical for us to be successful.



Any of our sole source suppliers may:



| |  |  | enter into exclusive arrangements with our competitors;
| | - |  | -------------------------------------------------------



| |  |  | stop selling their products or components to us at commercially reasonable prices;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | refuse to sell their products or components to us at any price; or
| | - |  | ------------------------------------------------------------------



| |  |  | be subject to production disruptions from causes such as earthquakes.
| | - |  | ---------------------------------------------------------------------



WE MAY EXPERIENCE DIFFICULTIES IN TRANSITIONING TO SMALLER GEOMETRY PROCESS TECHNOLOGIES OR IN
ACHIEVING HIGHER LEVELS OF DESIGN INTEGRATION AND THAT MAY RESULT IN LOWER THAN EXPECTED MANUFACTURING YIELDS, DELAYS IN PRODUCT DELIVERIES AND INCREASED EXPENSES.



In order to remain competitive, we expect to continue to transition our products to increasingly smaller line
width geometries. This transition will require us to modify the manufacturing processes for our products and redesign some products. We periodically evaluate the benefits, on a product-by-product basis, of migrating to smaller geometry process
technologies to reduce our costs, and we have designed some of our products to be manufactured in .35 micron, .25 micron, .18 micron and .13 micron geometry processes. In the past, we have experienced some difficulties in shifting to smaller
geometry process technologies or new manufacturing processes, which resulted in reduced manufacturing yields, delays in product deliveries and increased expenses.



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We may face similar difficulties, delays and expenses as we continue to transition our products to smaller geometry processes. We are
dependent on our relationships with our foundries to transition to smaller geometry processes successfully. We cannot assure you that our foundries will be able to effectively manage the transition or that we will be able to maintain our foundry
relationships. If we experience significant delays in this transition or fail to efficiently implement this transition, our business, financial condition and results of operations could be materially and adversely affected. As smaller geometry
processes become more prevalent, we expect to continue to integrate greater levels of functionality, as well as customer and third party intellectual property, into our products. However, we may not be able to achieve higher levels of design
integration or deliver new integrated products on a timely basis, or at all.



FUTURE CONSOLIDATION IN THE TELECOMMUNICATIONS EQUIPMENT INDUSTRY MAY INCREASE COMPETITION THAT COULD HARM OUR BUSINESS.



The markets in which we compete are characterized by increasing consolidation both within the
telecommunications equipment sector and by companies combining or acquiring data communications assets and assets for delivering voice-related services. We cannot predict with certainty how industry consolidation will affect our competitors. We may
not be able to compete successfully in an increasingly consolidated industry. Increased competition and consolidation in our industry may require that we reduce the prices of our products or result in a loss of market share, which could materially
adversely affect our business, financial condition and results of operations. Additionally, because we are now, and may in the future be, dependent on certain strategic relationships with third parties in our industry, any additional consolidation
involving these parties could reduce the demand for our products and otherwise harm our business prospects.



WE MAY MAKE FUTURE ACQUISITIONS AND ACQUISITIONS INVOLVE NUMEROUS RISKS.



Our business is highly competitive and, as such, our growth
is dependent upon market growth, our ability to enhance our existing products and our ability to introduce new products on a timely basis. One of the ways we have addressed and may continue to address the need to develop new products is through
acquisitions of other companies. Acquisitions involve numerous risks, including the following:



| |  |  | difficulties in integration of the operations, technologies and products of the acquired companies;
| | - |  | ---------------------------------------------------------------------------------------------------



| |  |  | the risk of diverting managements attention from normal daily operations of the business;
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | potential difficulties in completing projects associated with purchased in-process research and development;
| | - |  | ------------------------------------------------------------------------------------------------------------



| |  |  | risks of entering markets in which we have no or limited direct prior experience and where competitors in such markets have stronger market positions; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the potential loss of key employees of the acquired company.
| | - |  | ------------------------------------------------------------



Mergers and acquisitions of high-technology companies are inherently risky, and no assurance can be given that our previous or future
acquisitions will be successful and will not materially adversely affect our business, operating results or financial condition.



We must also maintain our ability to manage such growth effectively. Failure to manage growth effectively and successfully integrate
acquisitions could harm our business and operating results.



OUR EXECUTIVE OFFICERS AND KEY PERSONNEL ARE CRITICAL TO OUR BUSINESS, AND THESE OFFICERS AND PERSONNEL MAY NOT REMAIN WITH US IN THE FUTURE.



We depend upon the continuing contributions of our key management, sales, customer support and product
development personnel. The loss of such personnel could seriously harm us. In addition, we have not obtained key-man life insurance on any of our executive officers or key employees.



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OUR
FUTURE SUCCESS WILL DEPEND IN PART ON OUR ABILITY TO PROTECT OUR PROPRIETARY RIGHTS AND THE TECHNOLOGIES USED IN OUR PRINCIPAL PRODUCTS, AND IF WE DO NOT ENFORCE AND PROTECT OUR INTELLECTUAL PROPERTY, OUR BUSINESS WILL BE HARMED.



We rely on a combination of patent,
copyright and trademark laws, trade secrets, confidentiality agreements and other contractual provisions to protect our proprietary rights. However, these measures afford only limited protection. Our failure to adequately protect our proprietary
rights may adversely affect us. 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.



The laws of some foreign countries do not
protect our proprietary rights to the same extent as do the laws of the United States, and many U.S. companies have encountered substantial infringement problems in these countries. There is a risk that our efforts to protect proprietary rights may
not be adequate. For example, our competitors may independently develop similar technology, duplicate our products or design around our patents or our other intellectual property rights. If we fail to adequately protect our intellectual property or
if the laws of a foreign jurisdiction do not effectively permit such protection, it would be easier for our competitors to sell competing products.



WE MAY NEED TO RAISE ADDITIONAL CAPITAL WHICH MIGHT NOT BE AVAILABLE OR WHICH, IF AVAILABLE, COULD BE ON TERMS ADVERSE TO OUR COMMON
STOCKHOLDERS.



We expect that our
current cash and cash equivalents and short-term investment balances will be adequate to meet our working capital and capital expenditure needs for at least twelve months. After that, we may need to raise additional funds, and we cannot be certain
that we will be able to obtain additional financing on favorable terms, if at all. We may also require additional capital for the acquisition of businesses, products and technologies that are complementary to ours. Further, if we issue equity
securities, the ownership percentage of our stockholders would be reduced, and the new equity securities may have rights, preferences or privileges senior to those existing holders of our common stock. If we cannot raise needed funds on acceptable
terms, we may not be able to develop or enhance our products, take advantage of future opportunities or respond to competitive pressures or unanticipated requirements, which could seriously harm our business, operating results and financial
condition.



ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



The primary objective of our investment activities is to preserve principal while concurrently maximizing the income we receive from our
investments without significantly increasing risk. Some of the securities that we may invest in may be subject to market risk. This means that a change in prevailing interest rates may cause the principal amount of the investment to fluctuate. For
example, if we hold a security that was issued with a fixed interest rate at the then-prevailing rate and the prevailing interest rate later rises, the current value of the principal amount of our investment will decline. To minimize this risk in
the future, we intend to maintain our portfolio of cash equivalents and short-term investments in a variety of securities, including commercial paper, money market funds, government and non-government debt securities and certificates of deposit. 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 December 31, 2002, all of our investments were in money market funds, high quality commercial
paper, government and non-government debt securities and auction rate preferred securities. A hypothetical 100 basis point increase in interest rates would result in an approximate $51,000 decrease in the fair value of our available-for-sale
securities as of December 31, 2002. See Note 5 of Notes to the Consolidated Financial Statements.



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ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



CENTILLIUM COMMUNICATIONS, INC.



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



|                                                           |  | Page
|---------------------------------------------------------- |  | ----
|Consolidated Financial Statements                          |  |     
|                                                          
|Report of Ernst & Young LLP, Independent Auditors          |  | 29  
|                                                          
|Consolidated Statements of Operations                      |  | 30  
|                                                          
|Consolidated Balance Sheets                                |  | 31  
|                                                          
|Consolidated Statements of Stockholders Equity            |  | 32  
|                                                          
|Consolidated Statements of Cash Flows                      |  | 33  
|                                                          
|Notes to Consolidated Financial Statements                 |  | 34  
|                                                          
|Financial Statement Schedule                               |  |     
|                                                          
|Schedule IIConsolidated Valuation and Qualifying Accounts |  | 54  



28



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##### Table of Contents



REPORT OF
ERNST & YOUNG LLP, INDEPENDENT AUDITORS



The Board of Directors and Stockholders

Centillium Communications, Inc.



We have audited the accompanying consolidated balance sheets
of Centillium Communications, Inc. as of December 31, 2002 and 2001, and the related consolidated statements of operations, stockholders equity, and cash flows for each of the three years in the period ended December 31, 2002. Our audits also
included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements
and schedule based on our audits.



We conducted
our audits in accordance with auditing standards generally accepted in the United States. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.



In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated
financial position of Centillium Communications, Inc. at December 31, 2002 and 2001, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2002, in conformity with
accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.



As discussed
in Note 4 to the consolidated financial statements, effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets.



/s/    ERNST & YOUNG LLP



San Jose, California

January 24, 2003



29



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##### Table of Contents



CENTILLIUM
COMMUNICATIONS, INC.



CONSOLIDATED
STATEMENTS OF OPERATIONS

(In thousands, except per share data)



|                                                                   |  | Years ended December 31, |        
|------------------------------------------------------------------ |  | ------------------------ | -------
|                                                                   |  | 2002                     |        
|Net product revenues                                               |  | $                        | 104,784
|Technology development revenues                                    |  |                          | 188    
|                                                                   |  |                          |        
|Total net revenues                                                 |  |                          | 104,972
|Cost of revenues                                                   |  |                          | 59,500 
|                                                                   |  |                          |        
|Gross profit                                                       |  |                          | 45,472 
|                                                                   |  |                          |        
|Operating expenses:                                                |  |                          |        
|Research and development                                           |  |                          | 50,754 
|Sales and marketing                                                |  |                          | 14,686 
|General and administrative                                         |  |                          | 9,660  
|Amortization of goodwill and other acquisition-related intangibles |  |                          | 167    
|Impairment of goodwill                                             |  |                          | 5,835  
|In-process research and development                                |  |                          |       
|                                                                   |  |                          |        
|Total operating expenses                                           |  |                          | 81,102 
|                                                                   |  |                          |        
|Operating loss                                                     |  |                          | (35,630
|Interest income, net                                               |  |                          | 1,794  
|Gain (loss) on long-term investment                                |  |                          | 440    
|                                                                   |  |                          |        
|Loss before benefit (provision) for income taxes                   |  |                          | (33,396
|Benefit (provision) for income taxes                               |  |                          | 95     
|                                                                   |  |                          |        
|Net loss                                                           |  | $                        | (33,301
|                                                                   |  |                          |        
|Basic and diluted net loss per share                               |  | $                        | (0.96  
|                                                                   |  |                          |        
|Shares used to compute basic and diluted net loss per share        |  |                          | 34,641 
|                                                                   |  |                          |        





See accompanying notes.



30



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##### Table of Contents



CENTILLIUM
COMMUNICATIONS, INC.



CONSOLIDATED BALANCE
SHEETS

(In thousands, except share and per share data)



|                                                                                                                                |  | December 31, |         
|------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | --------
|                                                                                                                                |  | 2002         |         
|ASSETS                                                                                                                          |  |              |         
|                                                                                                                               
|Current assets:                                                                                                                 |  |              |         
|Cash and cash equivalents                                                                                                       |  | $            | 93,513  
|Short-term investments                                                                                                          |  |              | 8,489   
|Accounts receivablenet of allowance for doubtful accounts of $160 at
December 31, 2002 and $1,026 at December 31, 2001         |  |              | 2,864   
|Inventories                                                                                                                     |  |              | 4,130   
|Other current assets                                                                                                            |  |              | 2,622   
|                                                                                                                                |  |              |         
|Total current assets                                                                                                            |  |              | 111,618 
|Property and equipment, net                                                                                                     |  |              | 10,389  
|Goodwill                                                                                                                        |  |              |        
|Other intangible assets, net                                                                                                    |  |              | 83      
|Other assets                                                                                                                    |  |              | 349     
|                                                                                                                                |  |              |         
|Total assets                                                                                                                    |  | $            | 122,439 
|                                                                                                                                |  |              |         
|                                                                                                                               
|LIABILITIES AND STOCKHOLDERS
EQUITY                                                                                            |  |              |         
|                                                                                                                               
|Current liabilities:                                                                                                            |  |              |         
|Accounts payable                                                                                                                |  | $            | 8,485   
|Accrued payroll & related expenses                                                                                              |  |              | 3,991   
|Accrued liabilities                                                                                                             |  |              | 13,627  
|Accrued taxes                                                                                                                   |  |              | 192     
|Long-term debtcurrent portion                                                                                                  |  |              |        
|Capital leasescurrent portion                                                                                                  |  |              | 1,528   
|                                                                                                                                |  |              |         
|Total current liabilities                                                                                                       |  |              | 27,823  
|Capital leaseslong-term portion                                                                                                |  |              | 525     
|Other liabilities                                                                                                               |  |              | 268     
|                                                                                                                               
|Commitments and contingencies                                                                                                   |  |              |         
|                                                                                                                               
|Stockholders equity:                                                                                                           |  |              |         
|Preferred stock; $0.001 par value:                                                                                              |  |              |         
|Authorized shares: 10,000,000; Issued and outstanding shares: none at December 31,
2002 and 2001                                |  |              |        
|Common stock; $0.001 par value:                                                                                                 |  |              |         
|Authorized shares: 100,000,000; Issued and outstanding shares: 35,245,171 at December
31, 2002, 34,576,062 at December 31, 2001 |  |              | 35      
|Additional paid-in capital                                                                                                      |  |              | 228,847 
|Accumulated other comprehensive income                                                                                          |  |              | 8       
|Deferred compensation                                                                                                           |  |              | (2,333  
|Accumulated deficit                                                                                                             |  |              | (132,734
|                                                                                                                                |  |              |         
|Total stockholders equity                                                                                                      |  |              | 93,823  
|                                                                                                                                |  |              |         
|Total liabilities and stockholders equity                                                                                      |  | $            | 122,439 
|                                                                                                                                |  |              |         



See
accompanying notes.



31



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##### Table of Contents



CENTILLIUM
COMMUNICATIONS, INC.



CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY

(In thousands, except share data)



|                                                                          |  | Convertible Preferred Stock |   |  | Common Stock |     | Additional Paid-In Capital |        |            | Deferred Compensation |        |   | Stockholders Notes Receivable |  |   | Accumulated Deficit |   |  | Accumulated Other Comprehensive Income |         |   | Total Stockholders Equity |  
|------------------------------------------------------------------------- |  | --------------------------- | - |  | ------------ | --- | -------------------------- | ------ | ---------- | --------------------- | ------ | - | ------------------------------ |  | - | ------------------- | - |  | -------------------------------------- | ------- | - | -------------------------- | -
|                                                                          |  | Shares                      |   |  | Amount       |     |                            | Shares |            |                       | Amount |   |                                |  |   |                     |  
|BALANCE AT DECEMBER 31, 1999                                              |  | 15,450,236                  |   |  | $            | 15  |                            |        | 10,318,841 |                       |        | $ | 10                             |  | $ | 80,270              |   |  | $                                      | (16,043 | ) |                            | $
|Noncash issuance of common stock for services                             |  |                            |   |  |              |    |                            |        | 53,900     |                       |        |   |                               |  |   | 2,333               |   |  |                                        |        |   |                            |  
|Exercise of options to purchase common stock for cash                     |  |                            |   |  |              |    |                            |        | 1,939,010  |                       |        |   | 2                              |  |   | 2,551               |   |  |                                        |        |   |                            |  
|Issuance of shares under employee stock purchase plan                     |  |                            |   |  |              |    |                            |        | 52,196     |                       |        |   |                               |  |   | 801                 |   |  |                                        |        |   |                            |  
|Deferred compensation related to stock option grants                      |  |                            |   |  |              |    |                            |        |           |                       |        |   |                               |  |   | 31,088              |   |  |                                        | (31,088 | ) |                            |  
|Stock-based compensation expense, net                                     |  |                            |   |  |              |    |                            |        |           |                       |        |   |                               |  |   |                    |   |  |                                        | 25,610  |   |                            |  
|Conversion of preferred stock to common stock                             |  | (15,450,236                 | ) |  |              | (15 | )                          |        | 15,450,236 |                       |        |   | 15                             |  |   |                    |   |  |                                        |        |   |                            |  
|Issuance of common stock for cash, net of issuance costs of $7,182        |  |                            |   |  |              |    |                            |        | 5,200,000  |                       |        |   | 6                              |  |   | 91,477              |   |  |                                        |        |   |                            |  
|Exercise of warrants to purchase common stock                             |  |                            |   |  |              |    |                            |        | 15,931     |                       |        |   |                               |  |   |                    |   |  |                                        |        |   |                            |  
|Net loss                                                                  |  |                            |   |  |              |    |                            |        |           |                       |        |   |                               |  |   |                    |   |  |                                        |        |   |                            |  
|Unrealized gain on available-for-sale investments                         |  |                            |   |  |              |    |                            |        |           |                       |        |   |                               |  |   |                    |   |  |                                        |        |   |                            |  
|                                                                          |  |                             |   |  |              |     |                            |        |            |                       |        |   |                                |  |   |                     |   |  |                                        |         |   |                            |  
|Total comprehensive net loss                                              |  |                             |   |  |              |     |                            |        |            |                       |        |   |                                |  |   |                     |   |  |                                        |         |   |                            |  
|                                                                          |  |                             |   |  |              |     |                            |        |            |                       |        |   |                                |  |   |                     |   |  |                                        |         |   |                            |  
|BALANCE AT DECEMBER 31, 2000                                              |  |                            |   |  |              |    |                            |        | 33,030,114 |                       |        |   | 33                             |  |   | 208,520             |   |  |                                        | (21,521 | ) |                            |  
|Noncash issuance of common stock for services                             |  |                            |   |  |              |    |                            |        | 10,000     |                       |        |   |                               |  |   | 70                  |   |  |                                        |        |   |                            |  
|Exercise of options to purchase common stock for cash                     |  |                            |   |  |              |    |                            |        | 557,412    |                       |        |   | 1                              |  |   | 2,394               |   |  |                                        |        |   |                            |  
|Cash proceeds from payments on stockholder note receivable.               |  |                            |   |  |              |    |                            |        |           |                       |        |   |                               |  |   |                    |   |  |                                        |        |   |                            |  
|Issuance of shares under employee stock purchase plan                     |  |                            |   |  |              |    |                            |        | 164,621    |                       |        |   |                               |  |   | 1,883               |   |  |                                        |        |   |                            |  
|Deferred compensation related to stock option grants, net of
terminations |  |                            |   |  |              |    |                            |        |           |                       |        |   |                               |  |   | (1,958              | ) |  |                                        | 1,958   |   |                            |  
|Stock-based compensation expense, net                                     |  |                            |   |  |              |    |                            |        |           |                       |        |   |                               |  |   |                    |   |  |                                        | 15,346  |   |                            |  
|Common stock issued in connection with acquisition                        |  |                            |   |  |              |    |                            |        | 813,915    |                       |        |   | 1                              |  |   | 18,315              |   |  |                                        |        |   |                            |  
|Acquisition related deferred compensation                                 |  |                            |   |  |              |    |                            |        |           |                       |        |   |                               |  |   |                    |   |  |                                        | (4,517  | ) |                            |  
|Net loss                                                                  |  |                            |   |  |              |    |                            |        |           |                       |        |   |                               |  |   |                    |   |  |                                        |        |   |                            |  
|Unrealized gain on available-for-sale investments                         |  |                            |   |  |              |    |                            |        |           |                       |        |   |                               |  |   |                    |   |  |                                        |        |   |                            |  
|                                                                          |  |                             |   |  |              |     |                            |        |            |                       |        |   |                                |  |   |                     |   |  |                                        |         |   |                            |  
|Total comprehensive net loss                                              |  |                             |   |  |              |     |                            |        |            |                       |        |   |                                |  |   |                     |   |  |                                        |         |   |                            |  
|                                                                          |  |                             |   |  |              |     |                            |        |            |                       |        |   |                                |  |   |                     |   |  |                                        |         |   |                            |  
|BALANCE AT DECEMBER 31, 2001                                              |  |                            |   |  |              |    |                            |        | 34,576,062 |                       |        |   | 35                             |  |   | 229,224             |   |  |                                        | (8,734  | ) |                            |  
|Noncash issuance of common stock for services and other                   |  |                            |   |  |              |    |                            |        | 2,000      |                       |        |   |                               |  |   | 10                  |   |  |                                        |        |   |                            |  
|Exercise of options to purchase common stock for cash, net of
repurchases |  |                            |   |  |              |    |                            |        | 208,610    |                       |        |   |                               |  |   | 498                 |   |  |                                        |        |   |                            |  
|Common stock repurchased                                                  |  |                            |   |  |              |    |                            |        | (1,565     | )                     |        |   |                               |  |   |                    |   |  |                                        |        |   |                            |  
|Issuance of shares under employee stock purchase plan                     |  |                            |   |  |              |    |                            |        | 460,064    |                       |        |   |                               |  |   | 1,719               |   |  |                                        |        |   |                            |  
|Reversal of deferred compensation                                         |  |                            |   |  |              |    |                            |        |           |                       |        |   |                               |  |   | (2,604              | ) |  |                                        | 2,604   |   |                            |  
|Stock-based compensation expense, net                                     |  |                            |   |  |              |    |                            |        |           |                       |        |   |                               |  |   |                    |   |  |                                        | 3,797   |   |                            |  
|Net loss                                                                  |  |                            |   |  |              |    |                            |        |           |                       |        |   |                               |  |   |                    |   |  |                                        |        |   |                            |  
|Unrealized loss on available-for-sale investments                         |  |                            |   |  |              |    |                            |        |           |                       |        |   |                               |  |   |                    |   |  |                                        |        |   |                            |  
|                                                                          |  |                             |   |  |              |     |                            |        |            |                       |        |   |                                |  |   |                     |   |  |                                        |         |   |                            |  
|Total comprehensive net loss                                              |  |                             |   |  |              |     |                            |        |            |                       |        |   |                                |  |   |                     |   |  |                                        |         |   |                            |  
|                                                                          |  |                             |   |  |              |     |                            |        |            |                       |        |   |                                |  |   |                     |   |  |                                        |         |   |                            |  
|BALANCE AT DECEMBER 31, 2002                                              |  |                            |   |  | $            |    |                            |        | 35,245,171 |                       |        | $ | 35                             |  | $ | 228,847             |   |  | $                                      | (2,333  | ) |                            | $
|                                                                          |  |                             |   |  |              |     |                            |        |            |                       |        |   |                                |  |   |                     |   |  |                                        |         |   |                            |  



See
accompanying notes.



32



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##### Table of Contents



CENTILLIUM
COMMUNICATIONS, INC.



CONSOLIDATED
STATEMENTS OF CASH FLOWS

(In thousands)



|                                                                                          |  | Years ended December 31, |        
|----------------------------------------------------------------------------------------- |  | ------------------------ | -------
|                                                                                          |  | 2002                     |        
|OPERATING ACTIVITIES                                                                      |  |                          |        
|Net loss                                                                                  |  | $                        | (33,301
|Adjustments to reconcile net loss to net cash provided by (used in) operating
activities: |  |                          |        
|Depreciation and leasehold amortization expense                                           |  |                          | 7,223  
|Net loss on retirements of property and equipment                                         |  |                          | 36     
|Stock-based compensation expense                                                          |  |                          | 3,797  
|Issuance of common stock for services and other                                           |  |                          | 10     
|Amortization of goodwill and other acquisition related intangibles                        |  |                          | 167    
|Impairment of goodwill                                                                    |  |                          | 5,835  
|Amortization of warrants issued in conjunction with financings                            |  |                          |       
|In-process research and development                                                       |  |                          |       
|Loss (gain) on non-current investment                                                     |  |                          | (440   
|Changes in operating assets and liabilities:                                              |  |                          |        
|Accounts receivable                                                                       |  |                          | 1,178  
|Inventory                                                                                 |  |                          | 5,226  
|Other current assets                                                                      |  |                          | (475   
|Other assets                                                                              |  |                          | (107   
|Working capital line of credit                                                            |  |                          |       
|Accounts payable                                                                          |  |                          | 631    
|Accrued payroll and related expenses                                                      |  |                          | 672    
|Accrued liabilities                                                                       |  |                          | 2,521  
|Other liabilities                                                                         |  |                          | (47    
|                                                                                          |  |                          |        
|Net cash provided by (used in) operating activities                                       |  |                          | (7,074 
|                                                                                          |  |                          |        
|INVESTING ACTIVITIES                                                                      |  |                          |        
|Purchases of short-term investments                                                       |  |                          | (16,967
|Sales and maturities of short-term investments                                            |  |                          | 25,549 
|Purchases of property and equipment                                                       |  |                          | (4,112 
|Acquisitions, net of cash acquired                                                        |  |                          |       
|Purchases of intangibles and other long-term assets                                       |  |                          |       
|Proceeds from sale of non-current investment                                              |  |                          | 440    
|                                                                                          |  |                          |        
|Net cash provided by (used in) investing activities                                       |  |                          | 4,910  
|                                                                                          |  |                          |        
|FINANCING ACTIVITIES                                                                      |  |                          |        
|Principal payments on capital lease                                                       |  |                          |       
|Principal payments on long-term debt obligations                                          |  |                          | (264   
|Proceeds from issuance of common stock, net of repurchases                                |  |                          | 2,217  
|Proceeds from stockholder note receivable                                                 |  |                          |       
|                                                                                          |  |                          |        
|Net cash provided by financing activities                                                 |  |                          | 1,953  
|                                                                                          |  |                          |        
|Net increase (decrease) in cash and cash equivalents                                      |  |                          | (211   
|Cash and cash equivalents at beginning of period                                          |  |                          | 93,724 
|                                                                                          |  |                          |        
|Cash and cash equivalents at end of period                                                |  | $                        | 93,513 
|                                                                                          |  |                          |        
|SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION                                         |  |                          |        
|Cash paid for interest                                                                    |  | $                        | 203    
|Cash paid (received) for income taxes                                                     |  | $                        | (210   
|                                                                                         
|SUPPLEMENTAL DISCLOSURES OF NON-CASH TRANSACTIONS                                         |  |                          |        
|Property and equipment purchases through capital leases                                   |  | $                        | 2,053  
|Deferred compensation related to stock option grants, net of
terminations                 |  | $                        | (2,604 



See
accompanying notes.



33



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##### Table of Contents



CENTILLIUM
COMMUNICATIONS, INC.



NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS



Note
1.    Summary of Significant Accounting Policies



Centillium Communications, Inc.:    Centillium (the Company) was incorporated in California on February 21, 1997 for the purpose of developing and marketing semiconductor devices
for equipment manufacturers serving the broadband communications markets. The Company develops products designed for the Digital Subscriber Line (DSL) and Voice over Packet (VoP) markets.



Our revenues currently are derived from the sale of our DSL and VoP products, which include the CopperFlite
CO, CopperFlite CPE, Optimizer, Palladia, and Entropia families of products.



Principles of Consolidation:The consolidated financial statements include all the accounts of the Company and those of its wholly owned subsidiaries. All intercompany
accounts and transactions have been eliminated.



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



Revenue Recognition:Revenues related to product sales are generally recognized when the products are
shipped to the customer, title has transferred and no significant obligations remain. In circumstances where the Company has not shipped the final production version of a product, or when the customer has delayed its acceptance of our product, the
Company defers recognition of the revenue until acceptance. Under certain circumstances the Company allows its customers to return product. A provision is made for estimated product returns.



The Company has also performed research and product
development work under best efforts technology development agreements. Revenues under technology development agreements are recognized when applicable contractual milestones have been met, including deliverables, and in any case, do not exceed the
amount that would be recognized using the percentage-of-completion method. The costs associated with our technology development revenues are closely related to the costs of our ongoing research and development activities. Generally, the incremental
costs of providing any deliverables under our technology development arrangements are not easily distinguishable from the costs of our ongoing activities, are not significant and have been included in research and development in our statements of
operations.



Warranty:Our products are warranted to be free from defect for a period of one year. The Company estimates the costs that may be incurred under its warranty and records a liability for the costs at the
time product revenue is recognized. The Company periodically assesses the adequacy of the warranty liability and adjusts such amounts as necessary.



Concentrations of Credit Risk:Financial instruments that potentially subject the Company to significant
concentration of credit risk consist principally of cash, cash equivalents, short-term investments and accounts receivable. The Company places its cash, cash-equivalents and short-term investments in several high credit-quality financial
institutions. The Company is exposed to credit risk in the event of default by these institutions to the extent of the amount recorded on the balance sheet. Accounts receivable are billed in U.S. currency and are derived from revenues earned from
customers primarily located in Japan and the United States. The Company performs ongoing credit evaluations of its customers financial condition and generally does not require collateral. The Company maintains reserves for potential credit
losses. Management judgment is used to estimate the required reserves. Actual results could differ from those estimates.



34



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##### Table of Contents



CENTILLIUM COMMUNICATIONS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





Customer Concentrations:The following customers accounted for 10% or more of total accounts receivable:



|                             |  | December 31, |  
|---------------------------- |  | ------------ | -
|                             |  | 2002         |  
|NEC                          |  | 51           | %
|Sumitomo Electric Industries |  | 35           | %



We have
a limited number of customers with individually large amounts due at any given balance sheet date. Any unanticipated change in one of those customers creditworthiness or other matters affecting the collectibility of amounts due from such
customers could have a material effect on our results of operations in the period in which such changes or events occur.



Supplier Concentrations:The Company depends on a single or limited number of outside contractors to
fabricate, assemble and test our semiconductor devices. The Company generally sources its production through standard purchase orders and has wafer supply and assembly and test agreements with outside contractors. While the Company seeks to maintain
a sufficient level of supply and endeavors to maintain ongoing communications with suppliers to guard against interruptions or cessation of supply, business and results of operations could be adversely affected by a stoppage or delay of supply,
substitution of more expensive or less reliable products or services, receipt of defective semiconductor devices, an increase in the price of products, or inability to obtain reduced pricing from suppliers in response to competitive pressures.



Cash Equivalents and Short-term
Investments:The Company invests its excess cash in money market accounts and debt instruments and considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash
equivalents. Cash equivalents are recorded at cost, which approximates fair value.



The Companys investments in marketable equity securities and all debt securities are classified as available-for-sale at the time of purchase and the Company periodically reevaluates such
designation. At December 31, 2002 and 2001, all of the Companys investments in debt securities were classified as available-for-sale, with changes in market value recorded as unrealized gains and losses in accumulated other comprehensive
income until their disposition. Realized gains and losses and declines in value judged to be other than temporary on available-for-sale securities are included in interest income and were insignificant for all periods presented. The cost of
securities sold is based on the specific-identification method.



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



Property and Equipment:    Property and equipment are carried at cost less accumulated depreciation and
amortization. Property and equipment are depreciated for financial reporting purposes using the straight-line method over the assets estimated useful lives of three years. Leasehold improvements are amortized using the straight-line method
over the shorter of the useful lives of the assets or the terms of the leases.



Impairment of Long-lived Assets:The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. The Company measures the recoverability of long-lived assets by comparison of the carrying amount to undiscounted future net cash flows. If the Company considers such assets to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the long-lived assets exceeds their fair value, as determined by discounted cash flows.



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CENTILLIUM COMMUNICATIONS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





Goodwill:    As of January 1, 2002, the Company adopted Statement of Financial Standards No. 142, Goodwill and Other Intangible Assets (SFAS 142), which addresses the financial accounting
and reporting standards for goodwill and other intangible assets subsequent to their acquisition. This accounting standard requires that goodwill no longer be amortized, and instead, be tested for impairment at least annually. In addition, within
six months of adopting the new accounting standard, a transitional impairment test must be completed and any impairments identified must be reported as a cumulative effect of a change in accounting principle. See Note 4.



Software Development
Costs:Costs incurred in the research and development of the software embedded in our products are expensed as incurred until technological feasibility has been established. The Company believes its current process for
developing software is essentially completed concurrently with the establishment of technological feasibility, which is evidenced by a working model that includes the semiconductor device and embedded software; accordingly, development costs
incurred after the establishment of technological feasibility have not been material and, therefore, have been expensed.



Advertising Costs:The Company expenses advertising costs as incurred. These costs were not material and are
included in sales and marketing expense.



Shipping and Handling:    The cost of shipping products to customers is not material, and is included in cost of goods sold.



Foreign Currency Accounting:    The United States dollar is the functional
currency for all foreign operations. The effect on the consolidated statements of operations of transaction and translation gains and losses is insignificant for all years presented.



Fair Value of Financial
Instruments:    The Company has evaluated the estimated fair value of financial instruments. The amounts reported for cash and cash equivalents, accounts receivable, short-term borrowings, accounts payable, and accrued
expenses approximate the fair value due to their short maturities. Investment securities are reported at their estimated fair value based on quoted market prices. Realized gains and losses from the Companys investments are
insignificant.



Net Loss Per
Share:Basic and diluted net loss per share have been computed using the weighted average number of shares of common stock outstanding during the period, less shares subject to repurchase. The following table presents the
computation of basic and diluted net loss per share (in thousands, except per share amounts):



|                                                                               |  | Years ended December 31, |        
|------------------------------------------------------------------------------ |  | ------------------------ | -------
|                                                                               |  | 2002                     |        
|Net loss                                                                       |  | $                        | (33,301
|                                                                               |  |                          |        
|Basic and diluted:                                                             |  |                          |        
|Weighted average shares of common stock outstanding                            |  |                          | 34,686 
|Less weighted average shares subject to repurchase                             |  |                          | (45    
|                                                                               |  |                          |        
|Weighted average shares used in computing basic and diluted net loss per
share |  |                          | 34,641 
|                                                                               |  |                          |        
|Basic and diluted net loss per share                                           |  | $                        | (0.96  
|                                                                               |  |                          |        



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CENTILLIUM COMMUNICATIONS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





The
Company has excluded all outstanding warrants, stock options, and shares subject to repurchase by the Company from the calculation of basic and diluted net loss per share because these securities are antidilutive for all periods presented. Options
and warrants to purchase 13,292,190, 5,903,370 and 7,809,376 shares of common stock have been excluded for the years ended December 31, 2002, 2001 and 2000.



Stock-based Compensation:The Company has employee stock plans, that are
described more fully in Note 8. The Company has elected to account for its employee stock plans in accordance with the intrinsic value method under Accounting Principles Board Opinion No. 25, Accounting For Stock Issued to Employees
(APB Opinion No. 25). The following table illustrates the effect on net loss and loss per share had compensation expense for the Companys stock-based award plans been determined on the fair value at the grant dates for awards under the
plan consistent with the method of Statement of Financial Accounting Standards No. 123, Accounting For Stock Issued to Employees (FAS 123). For purposes of FAS 123 pro forma disclosures, the estimated fair value of the options is
amortized to expense over the options vesting period (in thousands):



|                                                                                                                               |  | Years ended December 31, |        
|------------------------------------------------------------------------------------------------------------------------------ |  | ------------------------ | -------
|                                                                                                                               |  | 2002                     |        
|Net loss as reported                                                                                                           |  | $                        | (33,301
|Add: Stock-based employee compensation expense included in reported net income, net of
related tax effects                     |  |                          | 3,807  
|Less: Total stock-based employee compensation expense under fair value based method for
all awards, net of related tax effects |  |                          | (56,652
|                                                                                                                               |  |                          |        
|Pro forma net loss                                                                                                             |  | $                        | (86,146
|                                                                                                                               |  |                          |        
|Basic and diluted net loss per shareas reported                                                                               |  | $                        | (0.96  
|                                                                                                                               |  |                          |        
|Basic and diluted net loss per sharepro forma                                                                                 |  | $                        | (2.49  
|                                                                                                                               |  |                          |        



See Note
8 for a discussion of the assumptions used in the option pricing model and estimated fair value of employee stock options.



The Company accounts for stock issued to non-employees in accordance with the provisions of FAS 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. Direct grants of shares of common stock are made to certain advisors and
consultants to the Company for past services with no vesting or future performance obligations. The fair value of such grants is immediately charged to expense in accordance with EITF 96-18.



Reclassifications:    Certain
amounts in the 2001 and 2000 financial statements have been reclassified to conform to current year presentation.



Recent Accounting Pronouncements:    In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets (SFAS 144), which addresses financial accounting and reporting for impairment or disposal of long-lived assets and was effective January 1, 2002. SFAS 144 supersedes SFAS 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of, and the accounting and reporting provisions relating to the disposal of segments of a business under Accounting Principles Board Opinion No. 30. The adoption of
SFAS 144 did not have a material impact on the Companys financial position or results of operations.



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CENTILLIUM COMMUNICATIONS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





In June
2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities (SFAS 146), which addresses financial accounting and reporting for costs associated with exit or disposal activities and supersedes
Emerging Issues Task Force (EITF) Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity, including Certain Costs Incurred in a Restructuring (EITF 94-3). SFAS 146
requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. In addition, SFAS No. 146 establishes that fair value is the objective for
initial measurement of the liability. SFAS 146 is effective for exit or disposal activities initiated after December 31, 2002. The effect of adoption of SFAS 146 is dependent on the Companys activities subsequent to adoption.



In November 2002, the FASB issued FASB Interpretation No. 45,
Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN 45). FIN 45 requires that upon issuance of a guarantee, a guarantor must recognize a liability for
the fair value of an obligation assumed under a guarantee. FIN 45 also requires additional disclosures by a guarantor in its interim and annual financial statements about the obligations associated with guarantees issued. The recognition provisions
of FIN 45 are effective for any guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. The Company has adopted the
disclosure requirements for its financial statements included in this Form 10-K/A. Management is currently evaluating the effects of FIN 45, however management does not expect that the adoption of FIN 45 will have a material effect on the
Companys financial position, results of operations, or cash flows.



In December 2002, the FASB issued SFAS 148, Accounting for Stock-Based CompensationTransition and Disclosure. SFAS 148 amends SFAS 123 to provide alternative methods of transition for a voluntary change to
the fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the method used on reported results. The transition guidance and annual disclosure requirements are effective for fiscal years ending after December 15, 2002. The Company
adopted the disclosure provisions for this Form 10-K/A. The Company will continue to account for stock-based compensation under the provisions of APB Opinion No. 25 Accounting for Stock Issued to Employees using the intrinsic
value method. Accordingly, the adoption of SFAS 148 is not anticipated to have a material effect on the Companys financial position, results of operations, or cash flows.



In January 2003, the FASB issued EITF No. 00-21, Revenue Arrangements with Multiple Deliverables
(EITF 00-21). EITF 00-21 provides guidance on how to determine whether an arrangement involves multiple deliverables and contains more than one unit of accounting. EITF 00-21 will be effective for arrangements entered into after June 15, 2003.
The Company is evaluating the impact of its adoption on its consolidated results of operation and financial position.



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CENTILLIUM COMMUNICATIONS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





Note
2.    Balance Sheet Information



Inventories (in thousands):



|                |  | December 31,
|--------------- |  | ------------
|                |  | 2002        
|Work-in-process |  | $           
|Finished goods  |  |             
|                |  |             
|                |  | $           
|                |  |             



Property
and equipment (in thousands):



|                                          |  | December 31, |        
|----------------------------------------- |  | ------------ | -------
|                                          |  | 2002         |        
|Equipment and software                    |  | $            | 22,746 
|Furniture and fixtures                    |  |              | 998    
|Leasehold improvements                    |  |              | 1,220  
|Construction in progress                  |  |              | 33     
|                                          |  |              |        
|                                          |  |              | 24,997 
|Accumulated depreciation and amortization |  |              | (14,608
|                                          |  |              |        
|Property and equipment, net               |  | $            | 10,389 
|                                          |  |              |        



Accrued
liabilities (in thousands):



|                          |  | December 31,
|------------------------- |  | ------------
|                          |  | 2002        
|Accrued royalties         |  | $           
|Other accrued liabilities |  |             
|                          |  |             
|                          |  | $           
|                          |  |             



Warranty
reserve (in thousands):



|                             |  | Balances at Beginning of Period |     | Product Warranty Accruals |   | Adjustments for Payments Made |  |   | Adjustments to Prior Accruals |   |  | Balances at End of Period
|---------------------------- |  | ------------------------------- | --- | ------------------------- | - | ----------------------------- |  | - | ----------------------------- | - |  | -------------------------
|Year ended December 31, 2002 |  | $                               | 766 |                           | $ | 608                           |  | $ | (719                          | ) |  | $                        
|                             |  |                                 |     |                           |   |                               |  |   |                               |   |  |                          
|Year ended December 31, 2001 |  | $                               | 312 |                           | $ | 766                           |  | $ | (509                          | ) |  | $                        
|                             |  |                                 |     |                           |   |                               |  |   |                               |   |  |                          
|Year ended December 31, 2000 |  | $                               | 100 |                           | $ | 312                           |  | $ |                              |   |  | $                        
|                             |  |                                 |     |                           |   |                               |  |   |                               |   |  |                          



Note
3.    Acquisition and Asset Purchase



Acquisition:    On January 5, 2001, the Company completed its acquisition of vEngines, Inc. (vEngines). vEngines developed high-density voice processing semiconductor products, which bridge
circuit switched voice and packet-based data networks. This technology compresses voice traffic, converting it into digital packets, which can then travel on data networks. vEngines targeted customer base included communications equipment
manufacturers that provide carrier and access voice gateways and remote access servers.



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CENTILLIUM COMMUNICATIONS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





Under the
terms of the purchase agreement, 813,915 shares of the Companys common stock, with an aggregate value of approximately $17.1 million, were exchanged for all of the issued and outstanding capital stock of vEngines. In addition, all of the
outstanding options to purchase shares of vEngines capital stock were exchanged for options to purchase 58,628 shares of our common stock with an aggregate fair value of approximately $1.2 million. The Company valued the common stock and
outstanding options exchanged in the transaction as follows:



|Security Exchanged                     |  | Valuation Methodology             
|-------------------------------------- |  | ----------------------------------
|Common stocknot subject to repurchase |  | Fair value of Companys stock     
|Common stocksubject to repurchase     |  | Black-Scholes option pricing model
|Options                                |  | Black-Scholes option pricing model



Including direct acquisition costs of approximately $523,000, the aggregate purchase price of vEngines was approximately $18.8 million. The acquisition has been accounted for using the purchase method of accounting and accordingly,
the accompanying financial statements include the results of operations of vEngines subsequent to the acquisition date.



The Company allocated the purchase price of vEngines as follows (in thousands):



|In-process research and development                   |  | $ | 7,422 
|----------------------------------------------------- |  | - | ------
|Acquisition related deferred compensation             |  |   | 4,517 
|Fair value of assets acquired and liabilities assumed |  |   | 730   
|Assembled workforce                                   |  |   | 354   
|Goodwill                                              |  |   | 5,816 
|                                                      |  |   |       
|Total                                                 |  | $ | 18,839
|                                                      |  |   |       



The
portion of the purchase price allocated to purchased in-process research and development was $7.4 million and was valued based on net cash flows over four years, discounted at a cost of capital of 25% to reflect the uncertainty of the
products future use. The entire amount of $7.4 million was expensed on acquisition because the technological feasibility of the product under development had not been established and no future alternative uses existed. The specific product
under development using vEngines technology has been discontinued, as the performance of a similar product under development internally was determined to be superior.



The Company recorded acquisition-related deferred compensation of $4.5 million as unearned stock-based
compensation. This amount represents the portion of the purchase consideration related to shares issued contingent on continued employment of certain employee stockholders and the intrinsic value of stock options assumed that become exercisable as
future services are provided by employees. The compensation is being recognized over the related employment period, using the graded vesting method, which results in acceleration of amortization expense for the overall award. A total of $1.1 million
and $2.7 million of expense was recognized for the years ended December 31, 2002 and 2001, respectively, and has been included in amortization of deferred compensation.



Goodwill and the assembled workforce were amortized through December 31, 2001, on a straight-line basis over
their expected useful lives of four and two years, respectively. Beginning January 1, 2002, upon adoption of FAS 142, the Company no longer amortizes goodwill; rather, goodwill is evaluated for impairment at least on an annual basis. See Note 3 for
further details. Pro-forma results of operations have not been presented because the



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CENTILLIUM COMMUNICATIONS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



pro-forma impact of the acquisition was not material to the Companys results of operations and financial position for the year ended
December 31, 2001.



Asset
Purchase:    In June 2000, the Company acquired for cash consideration certain assets from Avio Digital Inc. and entered into employment agreements with key employees of Avio Digital Inc. The Company has assigned a portion of
the purchase price to identifiable tangible and intangible assets based on their fair values. The excess of the purchase price over the identifiable assets was recorded as intangible assets and goodwill in the financial statements.



Note 4.    Goodwill and Other Intangible Assets



With the adoption of SFAS 142, the Company
ceased amortizing goodwill effective January 1, 2002. In addition, the Company reclassified assembled workforce, which is no longer defined as an acquired intangible under SFAS 141, to goodwill as required by SFAS 142. The Company completed its
transitional impairment test during the quarter ended June 30, 2002 and no impairment was recognized. The Company completed its annual impairment test in the fourth quarter of 2002. The goodwill impairment test was based on a two-step approach. The
fair value of the Company was compared to its carrying value. Since the carrying value of the Company exceeded its fair value, the implied value of goodwill was calculated by deducting the fair value of all tangible and intangible assets from the
fair value of the Company. As the implied fair value of goodwill was zero, the Company recognized an impairment charge of $5.8 million to fully impair the goodwill. Fair value of the Company was determined using a discounted future cash flows
analysis and a market approach. The cash flow period used in the analysis was nine years, with a discount rate of 18% and estimated terminal values based on a terminal growth rate of 5%. The discount rate was based on the Companys weighted
average cost of capital. The assumptions supporting the estimated future cash flows, including the discount rate and estimated terminal values, reflect managements best estimates.



Changes in the carrying amount of goodwill for the years ended December 31, 2002 and 2001 are as follows (in
thousands):



|Balance as of January 1, 2001        |  | $ | 1,381  |  
|------------------------------------ |  | - | ------ | -
|Goodwill acquired during the period  |  |   | 5,816  |  
|Goodwill amortized during the period |  |   | (2,007 | )
|                                     |  |   |        |  
|Balance as of December 31, 2001      |  |   | 5,190  |  
|Workforce reclassified as goodwill   |  |   | 645    |  
|Goodwill impairment                  |  |   | (5,835 | )
|                                     |  |   |        |  
|Balance as of December 31, 2002      |  | $ |       |  
|                                     |  |   |        |  



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CENTILLIUM COMMUNICATIONS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





The
following table presents a reconciliation of previously reported net loss and net loss per share to the amounts adjusted to exclude goodwill and acquired workforce amortization (in thousands, except for per share data):



|                                      |  | Years ended December 31, |        
|------------------------------------- |  | ------------------------ | -------
|                                      |  | 2002                     |        
|Net loss:                             |  |                          |        
|As reported                           |  | $                        | (33,301
|Goodwill amortization                 |  |                          |       
|Workforce amortization                |  |                          |       
|                                      |  |                          |        
|As adjusted                           |  | $                        | (33,301
|                                      |  |                          |        
|Basic and diluted net loss per share: |  |                          |        
|As reported                           |  | $                        | (0.96  
|Goodwill amortization                 |  |                          |       
|Workforce amortization                |  |                          |       
|                                      |  |                          |        
|As adjusted                           |  | $                        | (0.96  
|                                      |  |                          |        



Amortization expense for other intangible assets was $167,000 in each of the years ended December 31, 2002 and 2001, and $83,000 for the year ended December 31, 2000. The amortization period of the other purchased intangibles is 3
years. The estimated amortization expense for other intangible assets is $83,000 for the year ended December 31, 2003. Other acquisition related intangible assets subject to amortization were as follows (in thousands):



|                                 |  | December 31, |     
|-------------------------------- |  | ------------ | ----
|                                 |  | 2002         |     
|Other purchased intangibles      |  | $            | 500 
|Less accumulated amortization    |  |              | (417
|                                 |  |              |     
|Other purchased intangibles, net |  | $            | 83  
|                                 |  |              |     



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CENTILLIUM COMMUNICATIONS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





Note
5.    Cash Equivalents and Short-term Investments



The estimated fair market values of cash equivalents and short-term investments are based on quoted market prices. Cash equivalents and short-term investments as of December 31, 2002 and 2001 were as
follows (in thousands):



|                                                       |  | Amortized Cost |         | Gross Unrealized Gain |   | Gross Unrealized Loss |  |   | Estimated Fair Market Value
|------------------------------------------------------ |  | -------------- | ------- | --------------------- | - | --------------------- |  | - | ---------------------------
|December 31, 2002                                      |  |                |         |                       |   |                       |  |   |                            
|Cash equivalents:                                      |  |                |         |                       |   |                       |  |   |                            
|Money market funds                                     |  | $              | 87,557  |                       | $ |                      |  | $ |                           
|Obligations of U.S. government and affiliated agencies |  |                | 495     |                       |   |                      |  |   |                           
|                                                       |  |                |         |                       |   |                       |  |   |                            
|                                                       |  |                | 88,052  |                       |   |                      |  |   |                           
|                                                       |  |                |         |                       |   |                       |  |   |                            
|Short-term investments:                                |  |                |         |                       |   |                       |  |   |                            
|Corporate debt securities                              |  |                | 1,001   |                       |   |                      |  |   | (1                         
|Obligations of U.S. government and affiliated agencies |  |                | 7,013   |                       |   | 9                     |  |   |                           
|Certificates of deposit                                |  |                | 467     |                       |   |                      |  |   |                           
|                                                       |  |                |         |                       |   |                       |  |   |                            
|                                                       |  |                | 8,481   |                       |   | 9                     |  |   | (1                         
|                                                       |  |                |         |                       |   |                       |  |   |                            
|Total cash equivalents and short-term investments      |  | $              | 96,533  |                       | $ | 9                     |  | $ | (1                         
|                                                       |  |                |         |                       |   |                       |  |   |                            
|December 31, 2001                                      |  |                |         |                       |   |                       |  |   |                            
|Cash equivalents:                                      |  |                |         |                       |   |                       |  |   |                            
|Money market funds                                     |  | $              | 88,359  |                       | $ |                      |  | $ |                           
|Obligations of U.S. government and affiliated agencies |  |                | 747     |                       |   |                      |  |   |                           
|                                                       |  |                |         |                       |   |                       |  |   |                            
|                                                       |  |                | 89,106  |                       |   |                      |  |   |                           
|                                                       |  |                |         |                       |   |                       |  |   |                            
|Short-term investments:                                |  |                |         |                       |   |                       |  |   |                            
|Corporate debt securities                              |  |                | 475     |                       |   | 5                     |  |   |                           
|Obligations of U.S. government and affiliated agencies |  |                | 16,121  |                       |   | 63                    |  |   | (2                         
|Certificates of deposit                                |  |                | 467     |                       |   |                      |  |   |                           
|                                                       |  |                |         |                       |   |                       |  |   |                            
|                                                       |  |                | 17,063  |                       |   | 68                    |  |   | (2                         
|                                                       |  |                |         |                       |   |                       |  |   |                            
|Total cash equivalents and short-term investments      |  | $              | 106,169 |                       | $ | 68                    |  | $ | (2                         
|                                                       |  |                |         |                       |   |                       |  |   |                            



At
December 31, 2002, all available for sale investments had maturities of one year or less.



Note 6.    Long-Term Debt Obligations



In April 1998, the Company entered into an agreement with a bank and a financial institution which allowed the Company to make multiple draws up to a cumulative total of $1,000,000 for the purchase of
equipment. No amount was available during fiscal 2002, 2001 or 2000, as the aggregate draw under the facility reached $1,000,000 in fiscal 1999. Draws under the facility were payable via principal and interest payments made ratably over a forty-two
month period from the initial draw date. The Company had nothing outstanding under the equipment facility as of December 31, 2002. Approximately $264,000 of principal and accrued interest was outstanding at December 31, 2001. At the end of the
equipment facilitys term, the Company was obligated to make an additional payment of $150,000 based on the total facility draws multiplied by 15%. The Company recorded the additional payment as interest expense over the life of the related
long-term obligation.



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CENTILLIUM COMMUNICATIONS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





In
connection with the equipment facility described above, the Company issued a warrant to the bank and to the financial institution to purchase 1,800 and 9,450 shares, respectively, of the Companys common stock at an exercise price of $4.00 per
share. The warrant for 1,800 shares was exercised in June 2000. The remaining warrant is immediately exercisable and expires in May 2005. The fair value of the warrant is not material for reporting purposes.



Note 7.    Commitments and Contingencies



The Company leases its facilities under
operating leases expiring through 2009. Rental expense was approximately $2.5 million, $2.2 million and $1.3 million for the years ended December 31, 2002, 2001 and 2000, respectively. Additionally, the Company leases certain software under
operating leases expiring through December 2005.



During 2002, the Company exchanged certain software licenses which were set to expire in 2003 for new software licenses. In connection with this arrangement, the Company entered into a noncancelable capital lease agreement totaling
approximately $2.1 million. The transaction was accounted for under Accounting Principles Board No. 29, Nonmonetary Transactions, and no gain or loss was recorded on the transaction. The software and related accumulated amortization that
was included in property and equipment was approximately $3.4 million and $95,000 at December 31, 2002. Amortization expense related to assets under capital lease is included with depreciation expense. In addition, the related software licenses
secure the capital lease.



Future minimum lease
payments under the Companys capital and operating leases at December 31, 2002 are as follows (in thousands):



|                       |  | Operating Leases |        | Capital Leases |  
|---------------------- |  | ---------------- | ------ | -------------- | -
|2003                   |  | $                | 6,404  |                | $
|2004                   |  |                  | 3,331  |                |  
|2005                   |  |                  | 2,398  |                |  
|2006                   |  |                  | 79     |                |  
|2007                   |  |                  | 21     |                |  
|Thereafter             |  |                  | 40     |                |  
|                       |  |                  |        |                |  
|Total payments         |  |                  | 12,273 |                |  
|Less: Interest portion |  |                  |       |                |  
|                       |  |                  |        |                |  
|Total minimum payments |  | $                | 12,273 |                | $
|                       |  |                  |        |                |  



The
Company does not own or operate a fabrication facility and foundries located in Asia currently supply substantially all of its wafer requirements. The Companys purchase obligations to these foundries are based on wafer supply agreements or
noncancelable purchase orders. As of December 31, 2002, the Companys non-cancelable purchase obligations for wafers, all expected to be delivered within the next six months, is $6.1 million.



The semiconductor and telecommunications industries are
characterized by substantial litigation regarding patent and other intellectual property rights. From time to time, the Company receives various inquiries or claims in connection with these rights and may become party to associated claims. In
certain cases, management has accrued estimates of the amounts it expects to pay upon resolution of such matters and such amounts are included in accrued liabilities. Should the company not be able to secure the terms it expects, these estimates may
change and will be recognized in the period in which they are identified. Although the ultimate outcome of such



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CENTILLIUM COMMUNICATIONS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



inquiries is not presently determinable, management believes that the resolution of these matters will not have a material adverse effect on
the Companys financial position or results of operations.



Note 8.    Stockholders Equity



Preferred Stock:    The Board of Directors has the authority, without any further vote or action by the stockholders, to provide for the issuance of 9,500,000 shares of
preferred stock from time to time in one or more series with such designation, rights, preferences and limitations as the Board of Directors may determine, including the consideration received therefore, the number of shares comprising each series,
dividend rates, redemption provisions, liquidation preferences, redemption fund provisions, conversion rights, and voting rights, all without the approval of the holders of common stock.



Stockholder Rights Plan:    In December 2002, the Companys Board of
Directors approved the adoption of a stockholder rights plan and reserved 500,000 shares of preferred stock for issuance under the plan. The plan is designed to assure that Centillium stockholders receive fair value in the event of a future
unsolicited business combination or similar transaction involving Centillium in a manner or on terms not approved by the Centillium Board of Directors.



Under the plan, Centillium issued a dividend of one right for each outstanding share of common stock of the Company held by stockholders
of record as of the close of business on January 9, 2003. Each right will initially entitle stockholders to purchase a fractional share of the Companys preferred stock for $25.00. However, the rights will become exercisable only after the
occurrence of certain specified events, including the acquisition of 15% or more of Centilliums outstanding common stock by an unsolicited third party acquiror. Upon the occurrence of any such event, under the terms specified in the plan, each
right entitles the holder, other than the unsolicited third party acquiror, to purchase a certain number of shares of common stock of the Company, at a fifty percent discount to the then-current market price. The rights expire on January 9,
2013, under the terms of the plan. Centilliums Board of Directors may redeem outstanding rights at a price of $0.001 per right, with certain exceptions. The terms of the rights and the rights plan may be amended by Centilliums Board of
Directors at any time without the approval of the rights holders as set forth in the rights plan.



Common Stock Reserved:    Common stock reserved is as follows:



|                             |  | December 31,
|---------------------------- |  | ------------
|                             |  | 2002        
|Common stock options         |  | 16,723,618  
|Employee stock purchase plan |  | 499,181     
|Common stock warrants        |  | 9,450       
|                             |  |             
|                             |  | 17,232,249  
|                             |  |             



Deferred Compensation:    During 2002, the Company recorded an adjustment to deferred compensation of $2.6 million related to the termination of certain option grants. During the years ended December
31, 2001 and 2000, the Company recorded deferred compensation, net of adjustments for employee terminations, of approximately $2.6 million, and $31.1 million, respectively. This deferred compensation represents the difference between the grant price
and the deemed fair value for financial statement reporting purposes of the Companys common stock options granted during these periods. Deferred compensation expense is being amortized using the graded vesting method, in accordance with FAS
123 and FAS Interpretation No. 28, over the vesting period of each respective option, generally four years. Under the graded vesting method, each option grant is separated into portions based on their vesting terms, which results in acceleration of
amortization expense for the overall award. The accelerated amortization pattern results in expensing approximately 59% of the total award in year one, 25% in year two, 12% in year three and 4% in year four. As required by APB 25, we



45



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##### Table of Contents



CENTILLIUM COMMUNICATIONS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



record an adjustment to amortization of deferred compensation when employees who forfeit options for which compensation expense is recognized
using the graded vesting method, but which are unvested on the date their employment terminates.



Deferred compensation expense, net of adjustments, was allocated among the associated expense categories as follows (in thousands):



|                           |  | Years ended December 31,
|-------------------------- |  | ------------------------
|                           |  | 2002                    
|Cost of revenues           |  | $                       
|Research and development   |  |                         
|Sales and marketing        |  |                         
|General and administrative |  |                         
|                           |  |                         
|                           |  | $                       
|                           |  |                         



Stockholders Notes Receivable:    In November 1999, the Company issued 215,000 shares of common stock in connection with the exercise of an employee stock option at an exercise price of $2.00 per
share in return for a full recourse note receivable for $430,000. The note earned interest at an annual interest rate of 6.0% per annum and was paid in full in June 2001.



Stock Options:    In March 1997, the Board of Directors approved a stock option
plan that authorized the grant of options to purchase shares of the Companys common stock. The plan is administered by the Board of Directors and provides for incentive stock options or nonqualified stock options to be issued to employees,
directors, and consultants of the Company. Prices for incentive stock options may not be less than the fair value of the common stock at the date of grant. Prices for nonqualified stock options may not be less than 85% of the fair value of the
common stock at the date of grant. Options granted prior to May 23, 2000 are immediately exercisable and generally vest over a period of four years from the date of grant. Options granted on or after May 23, 2000 are exercisable when vested and
generally vest over a four-year period. Any unvested stock issued is subject to repurchase by the Company at the original issuance price upon termination of the option holders employment. Unexercised options expire ten years after the date of
grant. The plan also provides for automatic annual increases on the first day of each of the Companys fiscal years equal to 6% of the Companys outstanding common stock on the date of the annual increase.



In February 2001, the Company adopted a nonstatutory stock
option plan that authorized the grant of nonstatutory stock options (options) to purchase shares of the Companys common stock. Such shares may be authorized, but unissued, or reacquired common stock. The plan is administered by the
Board of Directors or any of its Committees and provides for options to be issued to employees and consultants of the Company only and not to officers and directors, except in connection with an officers initial service to the Company. Options
generally vest over a period of four years from the date of grant and prices for such options shall be determined by the plan administrator, with the prices generally being not less than the fair value of the common stock at the date of grant. Upon
termination of the option holders employment, any unvested stock issued shall revert back to the plan.



In December 2001, the Company offered a voluntary stock option exchange program to its employees and officers. Under the program,
participants were able to tender for cancellation stock options that had an exercise price equal to or greater than $10 per share for replacement options to be granted on a date which was at least six months plus one day from the date of
cancellation of the tendered options. On December 3, 2001, 5.2 million stock options were tendered for cancellation. On June 4, 2002, the Company issued options for 5.1 million shares of common stock at an exercise price of $6.62
per share, which was equal to 100 percent of the market price of Centilliums common stock on the grant date. The terms and conditions of the replacement options, including the vesting schedules, were substantially the same as the terms and
conditions of the options cancelled.



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##### Table of Contents



CENTILLIUM COMMUNICATIONS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





The
following is a summary of additional information with respect to the stock option plan:



|                                                       |  | Options Outstanding        
|------------------------------------------------------ |  | ---------------------------
|                                                       |  | Options Available for Grant
|Balance at December 31, 1999                           |  | 1,353,652                  
|Options authorized                                     |  | 5,569,743                  
|Options granted                                        |  | (6,988,263                 
|Options exercised                                      |  |                           
|Options available due to repurchase of unvested shares |  | 105,224                    
|Options canceled                                       |  | 534,360                    
|                                                       |  |                            
|Balance at December 31, 2000                           |  | 574,716                    
|Options authorized                                     |  | 7,040,434                  
|Options granted                                        |  | (5,059,462                 
|Options exercised                                      |  |                           
|Options available due to repurchase of unvested shares |  | 55,283                     
|Options canceled                                       |  | 6,352,773                  
|                                                       |  |                            
|Balance at December 31, 2001                           |  | 8,963,744                  
|Options authorized                                     |  | 2,074,564                  
|Options granted                                        |  | (9,617,872                 
|Options exercised                                      |  |                           
|Options available due to repurchase of unvested shares |  | 84,534                     
|Options canceled                                       |  | 1,935,908                  
|                                                       |  |                            
|Balance at December 31, 2002                           |  | 3,440,878                  
|                                                       |  |                            



In
addition, the following table summarizes information about stock options that were outstanding and exercisable at December 31, 2002:



|                         |  |  |  | Options Outstanding |  | Options Exercisable            
|------------------------ |  |  |  | ------------------- |  | -------------------------------
|Range of Exercise Prices |  |  |  | Number of Shares    |  | Weighted Average Exercise Price
|$  0.40$  0.40          |  |  |  | 50,802              |  | $                              
|$  0.60$  1.35          |  |  |  | 1,385,874           |  | $                              
|$  1.51$  5.00          |  |  |  | 2,168,411           |  | $                              
|$  5.15$  6.37          |  |  |  | 588,008             |  | $                              
|$  6.40$  6.62          |  |  |  | 5,426,526           |  | $                              
|$  6.68$  9.80          |  |  |  | 1,516,130           |  | $                              
|$10.00$19.00            |  |  |  | 1,551,669           |  | $                              
|$20.00$50.91            |  |  |  | 552,757             |  | $                              
|$68.88$68.88            |  |  |  | 4,000               |  | $                              
|$75.13$75.13            |  |  |  | 38,563              |  | $                              
|                         |  |  |  |                     |  |                                
|$  0.40$75.13           |  |  |  | 13,282,740          |  | $                              
|                         |  |  |  |                     |  |                                



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##### Table of Contents



CENTILLIUM COMMUNICATIONS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





At
December 31, 2001 and 2000, options for 2,567,049 and 259,368 shares, respectively, were exerciseable at a weighted average price of $8.21 and $1.71 per share, respectively.



Employee Stock Purchase Plan:    To provide employees with an opportunity to
purchase common stock of the Company through payroll deductions, the Company established the 2000 Employee Stock Purchase Plan and initially reserved 500,000 shares of common stock for issuance to participants. In addition, the plan provides for
automatic annual increases on the first day of each of the Companys fiscal years equal to the lesser of 400,000 shares or 1% of the Companys outstanding common stock on the date of the annual increase, or a lesser number of shares
determined by the Board of Directors. Under the plan, the Companys employees, subject to certain restrictions, may purchase shares of common stock at the lesser of 85 percent of the fair market value at either the beginning or end of each
six-month offering period. Under the plan, the Company sold 460,064, 164,621 and 52,196 shares of common stock during fiscal years 2002, 2001 and 2000, respectively.



SFAS 123 Assumptions and Fair Value:    The Company has elected to follow APB
Opinion No. 25 and related interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under FAS 123 requires use of option valuation models that were not developed for
use in valuing employee stock options. Under APB Opinion No. 25, when the exercise price of the Companys employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. The
fair value of options granted in 2002, 2001 and 2000 reported in Note 1 was estimated at the date of grant.



The option valuation models used to estimate the fair value of options under FAS 123 were developed for use in estimating the fair value
of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected life of the option. Because the Companys employee
stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in managements opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee stock options. Pro forma information regarding net loss is required by FAS 123, which requires that the information be determined as if the Company has accounted for its
employee stock-based awards under the fair value method of FAS 123. The fair value of the options granted in all periods were estimated using the Black-Scholes method, with the following weighted average assumptions:



|                             |  | Stock Option Plan |  | Employee Stock Purchase Plan
|---------------------------- |  | ----------------- |  | ----------------------------
|                             |  | 2002              |  | 2001                        
|Expected life from vest date |  | 2.7 years         |  | 2.9 years                   
|Volatility                   |  | 121%              |  | 147%                        
|Risk-free interest rate      |  | 2.90%             |  | 3.90%                       
|Dividend rate                |  |                  |  |                            



The
options weighted average grant date fair value, which is the value assigned to the options under FAS 123, was approximately $4.33, $7.86, and $16.72 for the years ended December 31, 2002, 2001 and 2000, respectively. The weighted-average
fair value of purchase rights granted under the Employee Stock Purchase Plan in 2002, 2001 and 2000 were $3.74, $7.93, and $12.54 per share, respectively.



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##### Table of Contents

CENTILLIUM COMMUNICATIONS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





Note
9.    Income Taxes



The
provision for income taxes for the years ended December 31, 2002, 2001 and 2000 consists of the following (in thousands):



|         |  | Years ended December 31,
|-------- |  | ------------------------
|         |  | 2002                    
|Current: |  |                         
|Federal  |  | $                       
|State    |  |                         
|Foreign  |  |                         
|         |  |                         
|         |  | $                       
|         |  |                         



The
difference between the provision for income taxes and the amount computed by applying the federal statutory income tax rate of 34% to income before taxes is explained as follows (in thousands):



|                                                                                                          |  | Years ended December 31, |        
|--------------------------------------------------------------------------------------------------------- |  | ------------------------ | -------
|                                                                                                          |  | 2002                     |        
|Tax (benefit) at federal statutory rate                                                                   |  | $                        | (11,355
|Loss for which no tax benefit is currently recognizable                                                   |  |                          | 8,690  
|Unbenefited foreign losses                                                                                |  |                          |       
|Deferred compensation                                                                                     |  |                          | 576    
|Purchased in-process research and development and amortization of goodwill and other
acquired intangibles |  |                          | 2,040  
|Utilization of net operating losses                                                                       |  |                          |       
|Other                                                                                                     |  |                          | (46    
|                                                                                                          |  |                          |        
|Total tax (benefit) provision                                                                             |  | $                        | (95    
|                                                                                                          |  |                          |        



As of
December 31, 2002, the Company has $55 million and $30 million of net operating loss carryforwards for federal and state purposes, respectively. The Company also has federal and state research and development tax credit carryforwards of
approximately $2.9 million and $2.7 million, respectively. The net operating losses and federal tax credit carryforwards will expire at various dates beginning in 2006, if not utilized. The California net operating losses are not available to offset
income until 2004 due to the recent state law change.



Utilization of the net operating loss and credits carryforwards may be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended, and similar state
provisions. The annual limitation may result in the expiration of net operating losses and tax credit carryforwards before full utilization.



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##### Table of Contents

CENTILLIUM COMMUNICATIONS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





Deferred
taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Companys deferred
taxes consist of the following (in thousands):



|                          |  | Years ended December 31, |        
|------------------------- |  | ------------------------ | -------
|                          |  | 2002                     |        
|Deferred tax assets:      |  |                          |        
|Net operating losses      |  | $                        | 20,440 
|Tax credit carryforwards  |  |                          | 4,733  
|Reserves and accruals     |  |                          | 9,648  
|                          |  |                          |        
|Total deferred tax assets |  |                          | 34,821 
|Valuation allowance       |  |                          | (34,821
|                          |  |                          |        
|Net deferred tax assets   |  |                          |       
|                          |  |                          |        
|Net deferred taxes        |  | $                        |       
|                          |  |                          |        



Financial Accounting Standards Board Statement No. 109, Accounting for Income Taxes provides for the recognition of deferred tax assets if realization of such assets is more likely than not. Based upon the weight of
available evidence, which includes the Companys historical operating performance and the reported cumulative net losses to date, the Company has provided a full valuation allowance against its deferred tax assets.



The valuation allowance increased by approximately $14.6
million for the year ended December 31, 2002. The valuation allowance decreased by approximately $733,000 for the year ended December 31, 2001 and increased by approximately $8.6 million for the year ended December 31, 2000. The valuation allowance
at December 31, 2002 and 2001 includes approximately $4.6 million and $3.9 million, respectively, related to stock option deductions, the benefit of which will be recorded in paid-in capital when realized.



Note 10.    Business Segment Information



Through December 31, 2002, the
Companys revenues have been primarily derived from one business segment, the sale of broadband communication products for the DSL and VoP markets. The Company sells primarily to original equipment manufacturers and companies in the
communications industries.



The Chief Executive
Officer has been identified as the Chief Operating Decision Maker (CODM) because he has final authority over resource allocation decisions and performance assessment. The CODM does not receive discrete financial information about any individual
components.



The following is a summary of net
revenues by major geographic area (in thousands):



|                     |  | Years ended December 31,
|-------------------- |  | ------------------------
|                     |  | 2002                    
|Japan                |  | $                       
|North America        |  |                         
|Asiaexcluding Japan |  |                         
|All other            |  |                         
|                     |  |                         
|Total                |  | $                       
|                     |  |                         



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##### Table of Contents

CENTILLIUM COMMUNICATIONS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





The
following customers account for 10% or more of net revenues:



|                             |  | Years ended December 31, |  
|---------------------------- |  | ------------------------ | -
|                             |  | 2002                     |  
|NEC                          |  | 45                       | %
|Sumitomo Electric Industries |  | 41                       | %
|Lucent Technologies          |  | *                        | %
|Copper Mountain Networks     |  | *                        | %

---

|* |  | represents less than 10% of net revenues.
|- |  | -----------------------------------------



Note 11.    401(k) Profit Sharing Plan And Trust



The Company has adopted a 401(k) Profit Sharing Plan and Trust that allows eligible employees to make
contributions subject to certain limitations. The Company may make discretionary contributions based on profitability as determined by the Board of Directors. There was no amount contributed by the Company to the plan for the years ended December
31, 2002, 2001 and 2000.



Note
12.    Related Party Transactions



In the second quarter of 2000, the Company invested $990,000 in equity securities of Broadxent, Inc., a wholly owned subsidiary of Creative Technology Ltd. In the second quarter of 2001, in connection with an ongoing evaluation of
this long-term equity investment, the Company wrote down the basis of this investment to zero as a result of impairment in the value of this asset. In the first quarter of 2002, the Company sold this long-term investment for $440,000 and reported
this amount as a gain.



The Company sold $2.5
million and $2.1 million of products to Broadxent, Inc. for years ended December 31, 2002 and 2001, respectively. As of December 31, 2002 and December 31, 2001, the Company had $4,600 and $486,000, respectively, in accounts receivable from
Broadxent, Inc. One of the Companys directors is also a director of Creative Technology Ltd.



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##### Table of Contents

CENTILLIUM COMMUNICATIONS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





Note
13.    Supplementary Data:  Quarterly Results of Operations (unaudited)



Summarized quarterly financial information is as follows (in thousands, except per share data):



|                                                            |  | Year 2002 Three Months Ended |        
|----------------------------------------------------------- |  | ---------------------------- | -------
|                                                            |  | Mar 31                       |        
|Net revenues                                                |  | $                            | 22,606 
|Cost of revenues                                            |  | $                            | 12,066 
|Gross profit                                                |  | $                            | 10,540 
|Operating loss                                              |  | $                            | (11,052
|Net loss                                                    |  | $                            | (10,126
|Basic and diluted net loss per share                        |  | $                            | (0.30  
|Shares used to compute basic and diluted net loss per share |  |                              | 34,294 
|                                                           
|                                                            |  | Year 2001 Three Months Ended |        
|                                                            |  | Mar 31                       |        
|Net revenues                                                |  | $                            | 31,855 
|Cost of revenues                                            |  | $                            | 16,171 
|Gross profit                                                |  | $                            | 15,684 
|Operating loss                                              |  | $                            | (14,590
|Net loss                                                    |  | $                            | (13,457
|Basic and diluted net loss per share                        |  | $                            | (0.41  
|Shares used to compute basic and diluted net loss per share |  |                              | 32,775 



ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE



None.



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##### Table of Contents

PART III



ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT



The information required by this item is incorporated by reference from the information under the captions Information Concerning
Solicitation and Voting, Election for Directors and Section 16(a) Beneficial Ownership Reporting Compliance contained in our definitive proxy statement to be filed no later than April 30, 2003 in connection with
solicitation of proxies for our annual meeting of stockholders to be held June 11, 2003 (the Proxy Statement).



ITEM 11.    EXECUTIVE COMPENSATION



The information required by this item is incorporated by reference from the information under the captions Executive Compensation and Compensation of Directors contained in the
Proxy Statement. In addition, Exhibits 10.31 through 10.34 of this report contain recently executed change of control severance agreements.



ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS



The information required by this item is incorporated by reference from the information under the caption Security Ownership of
Certain Beneficial Owners and Management and Securities Authorized for Issuance Under Equity Compensation Plans contained in the Proxy Statement.



ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS



The information required by this item is incorporated by reference from the information under the captions Certain
Transactions contained in the Proxy Statement.



ITEM 14.    CONTROLS AND PROCEDURES



(a)  Evaluation of disclosure controls and procedures.



Within 90 days prior to the date of this report (the Evaluation Date), the Companys Chief Executive Officer and Chief
Financial Officer carried out an evaluation of the effectiveness of the Companys disclosure controls and procedures, as defined in the Securities Exchange Act of 1934 Rules 13a-14(c) and 15(d)-14(c). Based on that evaluation, these
officers have concluded that as of the Evaluation Date, the Companys disclosure controls and procedures were effective and designed to ensure that material information relating to the Company and the Companys consolidated subsidiaries
would be made known to them by others within those entities.



(b)  Changes in internal controls.



There were no significant changes in the Companys internal controls, or to the Companys knowledge, in other factors that could significantly affect the Companys disclosure controls and procedures subsequent
to the Evaluation Date.



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##### Table of Contents

PART IV



ITEM 15.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K



(a) (1)  Financial Statements



The Financial Statements required by this item are listed on the Index to Consolidated Financial Statements in Part II, Item 8 of this
report.



(a) (2)  Financial
Statements Schedules



The following
financial statement schedule of Centillium Communications, Inc. for the years ended December 31, 2002, 2001, and 2000 should be read in conjunction with the Consolidated Financial Statements of Centillium Communications, Inc.



Schedule IIConsolidated Valuation and Qualifying
Accounts



Allowance for Doubtful Accounts:



|                             |  | Balances at Beginning of Period |       | Charged to Costs and Expense |   |      | Deductions Write-Offs |  |   | Balances at End of Period
|---------------------------- |  | ------------------------------- | ----- | ---------------------------- | - | ---- | --------------------- |  | - | -------------------------
|                             |  | (In thousands)                 
|Year ended December 31, 2000 |  | $                               | 150   |                              | $ | 782  |                       |  | $ |                         
|                             |  |                                 |       |                              |   |      |                       |  |   |                          
|Year ended December 31, 2001 |  | $                               | 932   |                              | $ | 102  |                       |  | $ | (8                       
|                             |  |                                 |       |                              |   |      |                       |  |   |                          
|Year ended December 31, 2002 |  | $                               | 1,026 |                              | $ | (709 | )                     |  | $ | (157                     
|                             |  |                                 |       |                              |   |      |                       |  |   |                          



All
other schedules have been omitted because they are not applicable or are not required or the information required to be set forth therein is included in the Consolidated Financial Statements or Notes thereto.



(a) (3)  Exhibits



|Exhibit Number |  | Description                                                                                                                  
|-------------- |  | -----------------------------------------------------------------------------------------------------------------------------
|              
|3.1*           |  | Certificate of Incorporation of the Registrant                                                                               
|              
|3.2 *****      |  | Certificate of Designations of Rights, Preferences and Privileges of Series A Participating Preferred Stock of the
Registrant
|              
|4.1*           |  | Specimen certificate of common stock                                                                                         
|              
|4.2*           |  | Bylaws of the Registrant                                                                                                     
|              
|4.3 *****      |  | Preferred Stock Rights Agreement, dated as of December 30, 2002, between the Registrant and Mellon Investor Services
LLC     
|              
|10.1*          |  | Form of Indemnification Agreement between the Registrant and each of its directors and officers                              
|              
|10.2**         |  | 1997 Stock Plan                                                                                                              
|              
|10.3**         |  | 2000 Employee Stock Purchase Plan                                                                                            
|              
|10.5*          |  | Lease, dated August 16, 1999, between the Registrant and Renco Investment Company                                            
|              
|10.21*         |  | Foundry Agreement, dated March 7, 2000, between Registrant and United Microelectronics
Corporation                           
|              
|10.22*         |  | Assembly and Test Services Agreement, dated February 28, 2000, between Registrant and ST Assembly and Test
Services, Ltd.    
|              
|10.23**        |  | 2001 Nonstatutory Stock Option Plan                                                                                          
|              
|10.24 ***      |  | Lease, dated August 28, 2000, between the Registrant and Bedford Property Industries, Inc.                                   



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##### Table of Contents

|Exhibit Number |  | Description                                                                                                                                                                                                           
|-------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|              
|10.25 ***      |  | Change of Control Severance Agreement between the Registrant and Surendra Mandava dated December 14,
2000                                                                                                             
|              
|10.26 ***      |  | Change of Control Severance Agreement between the Registrant and Faraj Aalaei dated December 14,
2000                                                                                                                 
|              
|10.27 ***      |  | Change of Control Severance Agreement between the Registrant and Shahin Hedayat dated December 14,
2000                                                                                                               
|              
|10.28 ***      |  | Change of Control Severance Agreement between the Registrant and Kamran Elahian dated December 14,
2000                                                                                                               
|              
|10.29 ****     |  | Employment Terms Sheet between the Registrant and Darrel Slack dated December 12, 2001                                                                                                                                
|              
|10.30 ****     |  | Offer letter between the Registrant and Todd DeBonis dated December 13, 2001                                                                                                                                          
|              
|10.31******    |  | Amendment No. 1 to Change of Control Severance Agreement between the Registrant and Faraj Aalaei dated November 19,
2002                                                                                              
|              
|10.32******    |  | Change of Control Severance Agreement between the Registrant and Darrel Slack dated January 14,
2003                                                                                                                  
|              
|10.33******    |  | Change of Control Severance Agreement between the Registrant and William Mackenzie dated January 14,
2003                                                                                                             
|              
|10.34******    |  | Change of Control Severance Agreement between the Registrant and Todd DeBonis dated January 15,
2003                                                                                                                  
|              
|21.1 ***       |  | Subsidiaries of the Registrant                                                                                                                                                                                        
|              
|23.1           |  | Consent of Ernst & Young LLP, Independent Auditors                                                                                                                                                                    
|              
|99.1           |  | Certification of Faraj Aalaei, Chief Executive Officer of Centillium Communications, Inc., Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                   
|              
|99.2           |  | Certification of Darrel Slack, Vice President and Chief Financial Officer of Centillium Communications, Inc., Pursuant
to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

---

|* |  | Incorporated by reference to the Exhibits filed with the Registration Statement of Form S-1 (No. 333-30772), declared effective by the Commission on May 23, 2000.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

|** |  | Incorporated by reference to the Exhibits filed with the Registration Statement of Form S-8 (No. 333-56610), filed with the Commission on March 6, 2001.
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------

|*** |  | Incorporated by reference to the Exhibits filed with the Registrants Annual Report on Form 10-K for the year ended December 31, 2000 filed with the Commission
on March 19, 2001.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|**** |  | Incorporated by reference to the Exhibits filed with the Registrants Annual Report on Form 10-K for the year ended December 31, 2001 filed with the Commission
on March 27, 2002.
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|***** |  | Incorporated by reference to the Exhibits filed with the Registration Statement on Form 8-K filed with the Commission on December 31, 2002.
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------

|****** |  | Incorporated by reference to the Exhibits filed with the Registrants Annual Report on Form 10-K for the year ended December 31, 2002 filed with the Commission
on February 18, 2003.
|------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



(b)  Reports on Form 8-K



We filed the following current reports on Form 8-K during the quarter ended December 31, 2002:



Form 8-K filed on December 31, 2002 reporting the adoption of a Preferred Stock Rights Agreement, as presented in a press release of
December 31, 2002.



(c)  Exhibits



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



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SIGNATURES



Pursuant to the
requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report on Form 10-K/A to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Fremont, State of
California, on April 18, 2003.



CENTILLIUM COMMUNICATIONS, INC.By:

/s/    FARAJ
AALAEIFaraj Aalaei Chief Executive Officer




Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K/A has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.



|Signature                           |  | Title                                                                                   |  | Date          
|----------------------------------- |  | --------------------------------------------------------------------------------------- |  | --------------
|                                   
|/s/    KAMRAN
ELAHIANKamran Elahian |  | Chairman of the Board                                                                   |  | April 18, 2003
|                                   
|/s/    FARAJ
AALAEIFaraj Aalaei     |  | Chief Executive Officer and Director (Principal Executive Officer)                      |  | April 18, 2003
|                                   
|/s/    DARREL
SLACKDarrel Slack     |  | Vice President and Chief Financial Officer (Principal Financial and Accounting
Officer) |  | April 18, 2003
|                                   
|/s/    SHAHIN
HEDAYATShahin Hedayat |  | President and Director                                                                  |  | April 18, 2003
|                                   
|/s/    JERE
DRUMMONDJere Drummond   |  | Director                                                                                |  | April 18, 2003
|                                   
|/s/    IRWIN
FEDERMANIrwin Federman |  | Director                                                                                |  | April 18, 2003
|                                   
|/s/    ROBERT C.
HAWKRobert C. Hawk |  | Director                                                                                |  | April 18, 2003
|                                   
|/s/    LIP-BU
TANLip-Bu Tan         |  | Director                                                                                |  | April 18, 2003



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CERTIFICATIONS



I, Faraj
Aalaei, certify that:



1.  I have reviewed this annual report on Form 10-K/A of Centillium Communications, Inc.;



2.  Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;



3.  Based on my knowledge, the
financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in
this annual report;



4.  The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:



a)  designed
such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual
report is being prepared;



b)  evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the Evaluation Date); and



c)  presented in this annual report
our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date.



5.  The registrants other certifying officer and I have disclosed, based on our most recent evaluation, to
the registrants auditors and the audit committee of registrants Board of Directors (or persons performing the equivalent functions):



a)  all significant deficiencies in the design or operation of internal controls which could adversely affect
the registrants ability to record, process, summarize and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and



b)  any fraud, whether or not
material, that involves management or other employees who have a significant role in the registrants internal controls.



6.  The registrants other certifying officer and I have indicated in this annual report whether or not
there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies
and material weaknesses.



By:

/s/    FARAJ AALAEIFaraj Aalaei Chief Executive Officer




Date:  April 18, 2003



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CERTIFICATIONS



I, Darrel
Slack, certify that:



1.  I have reviewed this annual report on Form 10-K/A of Centillium Communications, Inc.;



2.  Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;



3.  Based on my knowledge, the
financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in
this annual report;



4.  The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:



a)  designed
such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual
report is being prepared;



b)  evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the Evaluation Date); and



c)  presented in this annual report
our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date.



5.    The registrants other certifying officer and I have disclosed, based on our most recent
evaluation, to the registrants auditors and the audit committee of registrants Board of Directors (or persons performing the equivalent functions):



a)  all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrants ability to record, process, summarize and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and



b)  any fraud, whether or not
material, that involves management or other employees who have a significant role in the registrants internal controls.



6.  The registrants other certifying officer and I have indicated in this annual report whether or not
there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies
and material weaknesses.



By:

/s/    DARREL SLACKDarrel Slack Vice President and Chief Financial Officer




Date:  April 18, 2003



58