UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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FORM 10-K

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(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, 2001

OR

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

FOR THE TRANSITION PERIOD FROM ___________ TO  _____________

Commission File Number 000-30649

CENTILLIUM COMMUNICATIONS, INC.



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

47211 Lakeview BoulevardFremont, California     94538

(510) 771-3700

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

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

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

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, or any amendment to
this Form 10-K.     [     ]

The aggregate market value of the voting stock held by non-affiliates of the
Registrant, as of Feruary 20, 2002, was approximately $229,900,780 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 February 20, 2002, approximately 34,635,875 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
Shareholders to be held on June 11, 2002.









Centillium Communications, Inc.
                            FORM 10-K ANNUAL REPORT

                               TABLE OF CONTENTS



|Part I.    |                                                                                       | Page
|---------- | ------------------------------------------------------------------------------------- | ----
|Item 1.    | Business                                                                              | 4   
|Item 2.    | Properties                                                                            | 11  
|Item 3.    | Legal Proceedings                                                                     | 11  
|Item 4.    | Submission of Matters to a Vote of Security Holders                                   | 11  
|Part II.   |                                                                                       |     
|Item 5.    | Market for the Registrant's Common Equity and Related Stockholder Matters             | 12  
|Item 6.    | Selected Consolidated Financial Data                                                  | 13  
|Item 7.    | Management's Discussion and Analysis of Financial Condition and Results of Operations | 14  
|Item 7a.   | Quantitative and Qualitative Disclosures About Market Risks                           | 29  
|Item 8.    | Consolidated Financial Statements and Supplementary Data                              | 30  
|Item 9.    | Changes in and Disagreements with Accountants on Accounting and Financial Disclosures | 51  
|Part III.  |                                                                                       |     
|Item 10.   | Directors and Executive Officers of the Registrant                                    | 51  
|Item 11.   | Executive Compensation                                                                | 51  
|Item 12.   | Security Ownership of Certain Beneficial Owners and Management                        | 51  
|Item 13.   | Certain Relationships and Related Transactions                                        | 52  
|Part IV.   |                                                                                       |     
|Item 14.   | Exhibits, Financial Statement Schedules and Reports on Form 8-K                       | 52  
|Signatures |                                                                                       | 55  

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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

Centillium is a leading provider of highly integrated
silicon solutions that enable broadband communications.  Using proprietary
technologies and advanced design methodologies, Centillium designs, develops and
supplies communications semiconductor solutions for applications in the Digital
Subscriber Line (DSL) and Voice over Packet (VoP) markets.

The increasing desire of consumers and businesses to obtain
low cost, high bandwidth and always-on access to the Internet and the continuing
cost competitive pressures on voice services have created the need for new
generations of communications semiconductor solutions.  Broadband transmission
of digital information over existing infrastructures requires highly integrated
semiconductor solutions to perform critical systems functions such as complex
signal processing and converting 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 solutions developed for low speed
transmission applications.  Moreover, solutions that are based on multiple
discrete analog and digital chips generally cannot achieve the cost-
effectiveness, performance and reliability required by the broadband
communications markets.  These requirements are best addressed by new
generations of highly integrated semiconductor devices that combine complex
functions with high performance circuitry that can be manufactured in high
volumes using cost-effective semiconductor technologies.

MARKETS

DIGITAL SUBSCRIBER LINE

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 have begun to rely on the
Internet and communications networks, the demand for access to these networks
has accelerated.  As a result, the number of devices and access lines leading
into these networks has undergone dramatic growth.  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 eight 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 16.8 million at the end of 2001 and is projected to reach 32.0 million
by the end of 2002.

VOICE OVER PACKET

Consumers and businesses have become increasingly
sensitive regarding their telephone service costs.  Additionally, portions of
many traditional voice networks are constrained by capacity limitations and also
require routine maintenance of the existing communications equipment.  As a
result, telecommunications service providers must continuously evaluate the need
for additional cost-efficient voice transmission and processing capacity in
portions of their legacy voice networks.  They have a choice of adding
traditional equipment for supporting voice transmissions on their legacy
networks or equipment based on high-density cost effective packet-based
technologies.

VoP technology provides a number of economic and competitive
advantages for service providers.  A high capacity packet-based gateway or
switch based on VoP technology allows service providers to reduce their
investment in traditional Class 5 and Class 4 circuit switches and migrate to a
converged voice and data switching infrastructure.  A key benefit of this
convergence is that service providers can reduce the long term cost of providing
voice transmission services by migrating these transmissions from their legacy
voice networks to their more efficient data networks.

These data networks use several different transmission
standards, such as asynchronous transfer mode or ATM, Internet Protocol or Frame
Relay.  Voice over Packet technology enables voice signals to be transmitted
over networks originally designed for data transmission by compressing voice
signals into discrete packets of data, using one of the existing data
transmission standards. Because of the high efficiencies enabled by these
transmission standards, voice transmissions on a data network are significantly
less costly than transmissions using the existing voice trunks connecting
carriers' central office locations.

STRATEGY

Our objective is to be the leading provider of system-
level 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 system-level solutions
for applications in those markets.  Our initial 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 $144.4 million in gross
revenues from sales to this group during the year ended December 31, 2001.
During this period, sales to Sumitomo Electric Industries and NEC accounted for
48% and 38%, 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, which manages
multiple ports, and the first to deliver a set of the two primary semiconductors
for a DSL modem which 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 through the manipulation of algorithms and software 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 remain
competitive as a complete solutions provider to manufacturers of broadband
communications equipment.

PRODUCTS

DSL PRODUCTS

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 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.

The following features are common to each of our DSL
products:

- ADSL.  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 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.
- Full rate ADSL/G.lite. Each of our DSL products is
designed for use with either the full rate ADSL standard (up to eight megabits
per second) or the G.lite standard (up to 1.5 megabits per
second).

DSL Infrastructure Products

Our DSL infrastructure products are designed for use in
the following types of DSL equipment:

- DSLAM.  A DSL access multiplexer, or DSLAM,
aggregates the data traffic from a substantial number of home telephone lines
for transmission through a data network.
- Central office switch.  A central office switch is
a device that enables telephone subscribers to dial and make a connection with
any other subscriber in the telephone network.
- Remote terminal.  A remote terminal is a generic
name for telecommunications equipment that is located outside the telephone
company's central office facility.

DSL Customer Premises Equipment (CPE) Products

Our CPE products are deployed for use as a subsystem for
devices that distribute network access for multiple appliances.  Examples of
these devices include the following:

- Integrated access device / residential gateway.
An integrated access device and a residential gateway combine multiple voice and
data channels for transmission from a home or small business to the telephone
company's central office.
- Set-top box.  A set-top box processes
transmissions from the traditional cable television infrastructure and delivers
digital signals, which can include voice, video or Internet access.
- Bridge / router.  A bridge or router is a device
that resides between network segments and forwards data to its appropriate
destination.

VOICE OVER PACKET PRODUCTS

We currently sell two classes of products for the VoP
Market: Entropia CO and Entropia CPE.  Entropia CO is sold to manufacturers of
broadband infrastructure products for use in carrier class equipment such as
voice gateways and soft switches and is positioned to support current and
evolving VoP applications.  Entropia CPE is being marketed for use in voice-
enabling equipment installed at enterprises.  Examples of such equipment are a
high-end integrated access device, or IAD, which aggregates multiple voice and
data channels from businesses for transmission over the data network, and a
private branch exchange, or PBX, which is a computer server that manages
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,
which have:

- flexibility due to programmability;
- 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 that is
being developed within our company.  This software programmable digital signal
processor technology gives us the advantage of field programmability and
scalable upgradability of devices for future standards.

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.  All of our
chips are designed and manufactured using the latest development tools and
silicon process technologies.

Mixed-signal chip design.  This mixed-signal
chip translates signals between analog and digital formats.  We believe our
mixed-signal chip contains the highest level of integration in the industry,
replacing the multiple components used in competing DSL solutions and also
supporting multiple telephone lines for DSL infrastructure products.

System software. We have expertise in
developing code 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 38%
of our net revenue in 2001 and approximately 10% of our net revenue in 2000.
Sales to Sumitomo Electric Industries represented approximately 48% of our net
revenue in 2001 and approximately 20% of our net revenue in 2000.  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 application and 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 our independent manufacturers'
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.

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 with limited advance notice 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, 2001, we employed 194 engineers in Research and
Development. Our employees, including our research and development staff, have
collectively co-authored over 100 patents. As of December 31, 2001, we held 8
issued US patents, 36 U.S. utility patent applications pending and several
provisional and foreign patent applications pending in various stages of
prosecution. In addition, 189 of our employees hold a total of 236 advanced
degrees, including 32 PhDs. These employees are involved in advancing our core
technologies, as well as applying these core technologies to product development
activities in our targeted markets.

We believe that the achievement of higher levels of
integration, functionality and performance and the introduction of new products
in our target markets is essential to our growth.  As a result, we plan to
increase research and development staffing levels in 2002. Research and
development expense for 2001, 2000 and 1999 was approximately $59.0 million,
$41.9 million and $13.4 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, quality assurance and reliability.

We source our semiconductor fabrication from some of the
world's largest foundries: Mitsubishi Electric, Taiwan Semiconductor
Manufacturing Co. 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.

Our independent wafer probe test subcontractors conduct our
wafer probe testing.  Following completion of the wafer probe tests, the dies
are assembled into packages and the finished products are tested by one of our
five key subcontractors:  ST Assembly Test Services, Amkor Technology,
Siliconware Precision, United Test and Assembly Center Ltd or Advanced
Semiconductor Engineering.  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
these markets are product capabilities, level of integration, performance and
reliability, power consumption, price, time-to-market, system cost, intellectual
property, 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 include Alcatel
Microelectronics, Analog Devices, Broadcom, Conexant Systems, GlobespanVirata,
Intel, 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 the transmission of digital
information through existing analog infrastructures 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 eight 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 such
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, 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, 2001, we had a total of 336 employees,
of whom 289 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.

REVENUES BY GEOGRAPHIC AREA

The following is a summary of net revenues by major geographic area:

`Years Ended December 31,
                                   -------------------------------
                                     2001       2000       1999
                                   ---------  ---------  ---------
     Japan....................... $ 138,948     17,301  $   2,363
     North America...............    16,710     34,451        676
     Asia -- excluding Japan.....     3,108      4,587        555
     All other...................       741        135        150
                                   ---------  ---------  ---------
     Total....................... $ 159,507  $  56,474  $   3,744
                                   =========  =========  =========`

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 leases for engineering design centers in Huntsville, Alabama and Plano,
Texas and a sales office in Boston, Massachusetts. Internationally, we lease one
design center in France and two in India and we also lease sales offices in
Japan, and China.

These leases comprise an aggregate of 97,862 square feet and
have terms expiring on or prior to December 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.

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

> (a) none

> (b) none

> (c) none

> (d) none

PART II

ITEM 5.  MARKET FOR 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, 2000: |          |        
|Second quarter                | $ 71.00  | $ 22.88
|Third quarter                 | $ 107.00 | $ 63.00
|Fourth quarter                | $ 95.75  | $ 14.75
|Year ended December 31, 2001: |          |        
|First quarter                 | $ 49.19  | $ 16.63
|Second quarter                | $ 37.15  | $ 17.47
|Third quarter                 | $ 26.68  | $ 5.30 
|Fourth quarter                | $ 10.21  | $ 4.62 

On February 20, 2002 there were approximately 212 record
holders of the Company's Common Stock, and the last reported sale price of the
Company's common stock was $10.00.  We estimate that there were approximately
4,650 beneficial stockholders as of February 20, 2002.

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.

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. The selected consolidated statement of operations data for
each of the three fiscal years ended December 31, 2001, 2000 and 1999 and
selected consolidated balance sheet data as of December 31, 2001 and December
31, 2000 are derived from, and qualified by reference to, the audited
consolidated financial statements included elsewhere in this Annual Report on
Form 10-K. The selected consolidated statement of operations data for the fiscal
year ended December 31, 1998 and the period from February 21, 1997 (inception)
to December 31, 1997 and selected consolidated balance sheet data as of December
31, 1999, 1998 and 1997 are derived from audited financial statements not
included in this Annual Report.

`Period from
                                                                                February 21,
                                                                                   1997
                                                                                (inception)
                                                     Years Ended                    to
                                    ------------------------------------------  December 31,
                                      2001       2000       1999       1998        1997
                                    ---------  ---------  ---------  ---------  ----------
CONSOLIDATED STATEMENT OF                   (In thousands, except per share data)
 OPERATIONS DATA:
  Net revenues.................... $ 159,507  $  56,474  $   3,744  $     752  $      300
  Operating loss.................. $ (21,847) $ (49,826) $ (20,781) $  (9,722) $   (2,102)
  Net loss........................ $ (19,693) $ (45,998) $ (19,749) $  (9,256) $   (1,937)
  Deemed dividend on Series B
   convertible preferred stock....        --         --         --         --      (2,800)
  Net loss applicable to common
   stockholders................... $ (19,693) $ (45,998) $ (19,749) $  (9,256) $   (4,737)
  Net loss per share--basic and
   diluted........................ $   (0.59) $   (2.00) $   (2.23) $   (1.15) $    (0.59)
  Shares used to compute basic
   and diluted net loss per
   share..........................    33,495     22,950      8,842      8,056       8,000

CONSOLIDATED BALANCE SHEET DATA:
  Cash and cash equivalents and
   short-term investments......... $ 110,853  $  87,684  $  28,313  $   7,926  $   13,645
  Working capital................. $ 103,663  $  94,739  $  26,043  $   6,686  $   12,537
  Total assets.................... $ 144,208  $ 127,943  $  35,587  $  12,010  $   16,339
  Long-term debt and capital
   lease obligations, less
   current portion................ $      --  $     221  $     549  $   1,235  $      630
  Total stockholders' equity...... $ 121,158  $ 106,870  $  30,055  $   9,259  $   14,156`

See Note 1 of notes to the consolidated financial statements
for an explanation of the determination of the number of shares used in
computing per share data.

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS AND RISK FACTORS

##### 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, including those related to product returns, the
allowance for doubtful accounts, inventories, investments, intangible assets,
income taxes, warranty obligations, and contingencies and litigation. We base
our estimates 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.

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

Allowance for Doubtful Accounts.

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
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.

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 system-level 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 Internet or other network
access in a home or small business. Our customers also include equipment vendors who
supply Voice over Packet products that allow convergence of data and voice networks.

We were incorporated on February 21, 1997 and commenced
operations on April 1, 1997. During the period from February 1997 through June
1999, we were a development stage company focused on developing our initial
products, recruiting personnel, building our corporate infrastructure and
raising capital, and therefore had no product revenue. In 1999, we began
shipping products and recorded our first significant product revenues in the
third quarter, emerging from the development stage at that time. Since 1999, we
have also increased our investment in research and development, sales and
marketing, operations and our general and administrative infrastructure.

On May 24, 2000, we issued 4.0 million shares of our common
stock in a registered underwritten initial public offering and 600,000 shares of
our common stock in a concurrent private placement at a price of $19.00 per
share. On June 5, 2000, we sold an additional 600,000 shares pursuant to the
underwriters' overallotment option granted in connection with our initial public
offering. Net proceeds from these offerings were $91.5 million and are being
used for general working capital purposes and selected asset purchases.

Our revenues currently are derived from the sale of our DSL
and Voice over Packet network products, which include the CopperLite CO,
CopperLite CPE, Optimizer, and Entropia families of products. To date, we have
generated a substantial portion of our revenues from a limited number of
customers. 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. Our top two customers in 1999 were
Sumitomo Electric Industries and NEC, who accounted for 34% and 21% of our
revenues, respectively.

During 1999 and 1998, we recorded $1.2 million and $0.8
million of revenues, respectively, under best efforts technology development
agreements. Revenues under these agreements represent payments we received for
the performance of contract engineering services. Under these agreements, we
generally received payments upon the completion of contractual milestones. We
are not required to refund any payments under the contracts.   Our policy is to
recognize revenue under technology development agreements when applicable
contractual milestones have been met, including deliverables; in any case,
revenue recognized does not exceed the amount that would be recognized using the
percentage of completion method. In this regard, the timing of technology
development revenue depends on the timing of completion of milestones under
individual agreements. Technology development revenue was not significant after
1999, but we still generate revenue from certain customers under development
agreements from time to time. 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.

We have focused our initial sales and marketing efforts on
Asian and North American communications equipment manufacturers. During the
years ended December 31, 2001, 2000, and 1999, 89%, 39% and 78% of our
revenues, respectively, were to 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 2001 compared to 2000 primarily due to decreases in
spending in the communications equipment industry.  We currently sell through
our direct sales force in China, Japan, North America and the United Kingdom. We
also sell through sales representatives in Canada, China, Hong Kong, Israel,
Italy, Japan, 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.  This deferred revenue is
recognized when the final version of the product is delivered, upon acceptance
by the customer, or when the specified milestones have been met.  As of December
31, 2001, there was no deferred revenue.  Deferred revenue as of December 31,
2000 was $200,000 and was comprised primarily of unearned technology development
fees and prepayments from certain customers.

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, and 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.  Because our research and
development is key to our future success, we intend to increase our research and
development expenditures in future periods.

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.  We intend to expand our direct and
indirect sales operations substantially, both domestically and internationally,
in order to increase market awareness, support customer requirements, and
increase orders for our products.  We expect that sales and marketing expenses
will increase over the next year as we hire additional sales and marketing
personnel, initiate additional marketing programs to support our products and
establish sales offices in additional domestic and international locations. We
intend to expand our use of independent manufacturers' representatives. We
believe that to be successful, we must reach agreement with additional
representatives in several countries.  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.  We expect to expand our customer service and support
organization to meet these requirements.

General and administrative expenses consist primarily of
salaries and related expenses for executives, finance, accounting, facilities,
information services, human resources, recruiting expenses, 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.  We expect general and administrative expenses to
increase as we add personnel and 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 amortization of deferred compensation of $15.3 million, $25.6
million and $4.1 million for the years ended December 31, 2001, 2000 and 1999,
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 (FAS123) 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.  Unamortized deferred compensation is presented as a
reduction of stockholders' equity.  See Note 7 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 $19.7
million, $46.0 million and $19.7 million for the years ended December 31, 2001,
2000 and 1999, 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,
                                        ----------------------------------
                                           2001        2000        1999
                                        ----------  ----------  ----------
Net revenues..........................        100 %       100 %       100 %
Cost of revenues......................         50          57          83
                                        ----------  ----------  ----------
Gross profit..........................         50          43          17
                                        ----------  ----------  ----------
Operating expenses:
  Research and development............         37          74         357
  Sales and marketing.................         11          27         102
  General and administrative..........          9          28         113
  Amortization of goodwill and other
   acquisition-related intangibles....          2           2          --
  In-process research and development.          5          --          --
                                        ----------  ----------  ----------
    Total operating expenses..........         64         131         572
                                        ----------  ----------  ----------
Operating loss........................        (14)        (88)       (555)
Interest income.......................          2           7          34
Interest expense......................         --          --          (6)
Loss on long-term investment..........         (1)         --          --
Provision for income taxes............         --          --          --
                                        ----------  ----------  ----------
Net loss..............................        (13)%       (81)%      (527)%
                                        ==========  ==========  ==========`

Years ended December 31, 2001 and 2000

Net Revenues:  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
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.  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 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%, which 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.

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 and intend to use certain aspects
of this technology in future products.

Loss on Non-Current Investment:  We monitor and
evaluate the realizable value of our non-current 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 non-
current 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 will
report this as a gain in the first quarter of 2002.

Interest Income:  Interest income was $3.6 million in
2001, compared to $4.2 million in 2000, a decrease of 13%. 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.

Interest Expense:  Interest expense was $76,000 in
2001, compared to $334,000 in 2000, a decrease of 77%. The decrease was
primarily due to the termination of our revolving credit agreement with
Mitsubishi International Corporation in June 2000.

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.

As of December 31, 2001, we have $25 million and $16 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 $1.5 million and $400,000, respectively.  The net
operating losses and federal credit carryforwards will expire at various dates
beginning in 2005, if not utilized.

Utilization of net operating loss 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, 2001 includes
approximately $3.9 million related to stock option deductions, the benefit of
which will be recorded in paid-in capital when realized.

Years ended December 31, 2000 and 1999

Net Revenues:  Net revenues in 2000 were $56.5
million, compared with $3.7 million in 1999, an increase of 1,408%. The growth
in revenue resulted mainly from increases in volume shipments of our
semiconductor products.

Cost of Revenues:  Cost of revenues, which reflects
costs of product revenues, was $32.3 million in 2000 and $3.1 million in 1999
resulting in gross profit as a percentage of revenues of 43% and 17%,
respectively. The increase in gross profit was mainly attributable to the
significant increase in the unit volume of shipments. The increase in gross
profit as a percentage of revenues was driven by cost reductions from our
suppliers. 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 2000 were $41.9 million, compared to $13.4 million in
1999, an increase of 214%. 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 and an increase in
amortization of deferred compensation of $9.0 million.

Sales and Marketing Expenses:  Sales and marketing
expenses in 2000 were $15.5 million, compared to $3.8 million in 1999, an
increase of 305%. These increases were due primarily to the addition of
personnel, an increase in marketing activity such as customer visits and
attendance at trade shows and an increase in amortization of deferred
compensation of $4.2 million.

General and Administrative Expenses:  General and
administrative expenses in 2000 were $15.9 million, compared to $4.2 million in
1999, an increase of 275%. These increases were due primarily to the addition of
personnel in the accounting, human resources, information services and
facilities functions and an increase in amortization of deferred compensation of
$7.0 million. During 2000 and 1999, we charged $782,000 and $150,000,
respectively, to bad debt expense to reserve for specific aged customer
receivable balances and to establish a reserve for unidentified potential bad
debt exposures.

Amortization of Deferred Compensation and Non-Cash Stock
Compensation:  Amortization of deferred compensation, which is allocated
among the above expense categories, was $25.6 million in 2000, compared to $4.1
million in 1999, an increase of $21.5 million. The increase was attributable to
deferred stock compensation recorded in 2000 of $31.1 million related to option
grants made to a significant number of new and existing employees and 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 2000 and 1999 include charges of $2.3 million and
$173,000, respectively, related to grants to consultants.

Interest Income:  Interest income was $4.2 million in
2000, compared to $1.3 million in 1999, an increase of 227%.  This increase was
due to higher cash and cash equivalent balances resulting from our initial
public offering in May 2000.

Interest Expense:  Interest expense was $334,000 in
2000, compared to $242,000 in 1999, an increase of 38%.  The increase was due to
higher outstanding balances under our working capital line of credit during
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, 2001, we had $110.9 million in cash, cash
equivalents and short-term investments as compared to $87.7 million at December
31, 2000.

Cash and cash equivalents increased to $93.7 million at
December 31, 2001 from $71.2 million at December 31, 2000.  Operating activities
provided $25.8 million in cash.  This was primarily the result of the net loss
of $19.7 million being more than offset by the non-cash impact of $15.3 million
in amortization of deferred compensation, $7.5 million of depreciation and
amortization expense, $7.4 million of acquired in process research and
development expense and a write-down of $990,000 in non-current investments.
Net cash provided by operating activities also increased due to a decrease in
accounts receivable of $12.8 million and an increase in accrued liabilities of
$6.9 million, offset by decreases in accounts payable of $5.3 million and other
current assets of $1.0 million.

Net cash used in investing activities was $7.6 million for
the year ended December 31, 2001, and was primarily related to net purchases of
short-term investments, and purchases of property and equipment of $7.3
million.

Cash generated from financing activities was $4.3 million for
the year ended December 31, 2001, and was primarily related to the net proceeds
from employee stock plans.

Our principal source of liquidity as of December 31, 2001
consisted of $110.9 million of cash and cash equivalents, and short-term
investments.  In 2001, we began generating cash in an amount sufficient to fund
our operations. We anticipate that our existing capital resources and cash flow
generated from future operations will enable us to maintain our current level of
operations and planned operations and capital expenditures for at least the next 12 months.
Significant contractual obligations and commercial commitments
are shown in the table below (in thousands):

`Payments due by period
                                        -------------------------------------------------------
                                          Total     1 year    2-3 years  4-5 years  Over 5 years
                                        ---------  ---------  ---------  ---------  -----------
Operating Leases-Facilities........... $   5,708  $   1,891  $   2,996  $     764  $        57
Operating Leases-Software.............     7,351      5,140      2,211         --           --
Inventory Purchase Commitments........     4,574      4,574         --         --           --
                                        ---------  ---------  ---------  ---------  -----------
Total cash obligations................ $  17,633  $  11,605  $   5,207  $     764  $        57
                                        =========  =========  =========  =========  ===========`

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.

##### Recent Accounting Pronouncements

In June 1998, the Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting Standards (FAS) No. 133,
"Accounting for Derivative Instruments and Hedging Activities" (FAS
133).  FAS 133 establishes accounting methods for derivative financial
instruments and hedging activities related to those instruments as well as other
hedging activities. We adopted FAS 133 as of January 1, 2001.  Because we do not
currently hold any derivative instruments and do not engage in hedging
activities, the adoption of FAS 133 did not have a material impact on our
financial position or results of operations.

In June 2001, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 141, "Business
Combinations" (FAS 141), and No. 142, "Goodwill and Other Intangible
Assets" (FAS 142). FAS 141 requires that the purchase method of accounting
be used for all business combinations initiated after June 30, 2001.  FAS 141
also includes guidance on the initial recognition and measurement of goodwill
and other intangible assets arising from business combinations completed after
June 30, 2001.  FAS 142 prohibits the amortization of goodwill and intangible
assets with indefinite useful lives.  FAS 142 requires that these assets be
reviewed for impairment at least annually.  Intangible assets with finite lives
will continue to be amortized over their estimated useful lives.

We will apply FAS 142 beginning in the first quarter of
fiscal 2002. Application of the nonamortization provisions of FAS 142 is
expected to result in an increase in net income of $2.8 million ($0.08 per
share) in fiscal 2002.  We will reclassify an assembled workforce intangible
asset with an unamortized balance of $644,000 to goodwill at the date of
adoption.  We will test goodwill for impairment using the two-step process
prescribed in FAS 142.  The first step is a screen for potential impairment,
while the second step measures the amount of the impairment, if any.  We expect
to perform the first of the required impairment tests of goodwill and indefinite
lived intangible assets as of January 1, 2002 in the second quarter of fiscal
2002.  Any impairment charge resulting from these transitional impairment tests
will be reflected as the cumulative effect of a change in accounting principle
in the second quarter of 2002.  We have not yet determined what the effect of
these tests will have on our financial statements.

In August 2001, the FASB issued FAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets" (FAS 144), which
addresses financial accounting and reporting for impairment or disposal of long-
lived assets and is effective January 1, 2002.  FAS 144 supersedes FAS 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.  We do not expect that the adoption of FAS 144 will have a
significant impact on our financial statements.

Risk Factors

You should carefully consider the risks described below
and all of the information contained in this Form 10-K. 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 $19.7
million, $46.0 million, and $19.7 million for the years ended December 31, 2001,
2000, and 1999, respectively.

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.

SEVERAL COMPANIES IN THE DSL MARKET HAVE EXPERIENCED
SIGNIFICANT BUSINESS DIFFICULTIES DURING THE PAST YEAR, AND IF THERE IS
CONTINUED SOFTNESS IN DEMAND FOR DSL EQUIPMENT, OUR BUSINESS AND OPERATING
RESULTS MAY BE ADVERSELY AFFECTED.

Since mid-2000, a number of competitive local
exchange carriers (CLECs) in the business of installing and providing DSL
service have had difficulty in obtaining sufficient capital to build their
infrastructure and to introduce their services.  In 2001, Northpoint
Communications and Rhythm NetConnections voluntarily filed for bankruptcy under
Chapter 11.  These companies have reduced their spending on DSL equipment, which
has resulted in lower than expected sales volume for DSL equipment manufacturers
including some of our major customers.  In May 2001, Nortel Networks,
historically one of our major customers, announced plans to exit the DSL
equipment business.  A continued or further slowdown in sales of DSL equipment
will likely result in a decline, cancellation or delay in sales orders for our
products, which are components of DSL equipment.  Any such decline, cancellation
or delay may negatively affect our business and operating results.

OUR STOCK PRICE MAY CONTINUE TO BE VOLATILE.

The market price of our common stock has been
extremely 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;
- stock market price and volume fluctuations attributable
to inconsistent or low trading volume levels of our stock;
- commencement of or involvement in litigation;
- announcements by us or our competitors of key design wins
and product introductions;
- 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.

DUE TO OUR RECENT IMPLEMENTATION OF AN OPTION EXCHANGE
PROGRAM, OUR MANAGEMENT AND EMPLOYEES MAY HAVE A NEAR TERM INCENTIVE TO KEEP OUR
STOCK PRICE LOW.

We recently filed a statement on Schedule TO with the
Securities and Exchange Commission relating to an offer to our employees,
including our Chief Executive Officer, our President and our other executive
officers, to exchange outstanding "underwater" stock options priced at
$10 or higher for new options to be issued on a future date, currently expected
to be on or after June 4, 2002.  The exercise price for the new options is
expected to be equal to the market price of our common stock on the date of the
grant.  Since the relative value of the stock option increases as the exercise
price decreases, management and employees participating in the option exchange
would benefit from a lower market price for our common stock on June 4, 2002 (or
such later date the new options are granted).

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

Our officers and directors and their affiliates owned
or controlled approximately 14.7% of our common stock as of February 20, 2002.
Accordingly, our officers and directors and their affiliates, as a group, may
have the ability to control the election of a majority of the members of our
board of directors and the outcome of corporate actions requiring stockholder
approval.  This concentration of ownership may have the effect of delaying,
deferring or preventing a change in control of us, or may impede a merger,
consolidation, takeover or other business combination involving us.  This
concentration of ownership could also adversely affect our stock's market price
or lessen any premium over market price that an acquirer might otherwise pay.

AN ECONOMIC SLOWDOWN IN JAPAN MAY ADVERSELY AFFECT OUR
BUSINESS AND OPERATING RESULTS.

Sales to customers located in Japan accounted for 87%
of net revenues for the year ended December 31, 2001 and 31% of net revenues for
the year ended December 31, 2000.  Any slowdown in the demand for our customers'
equipment in Japan may cause our revenues to decline. Our sales have been
historically denominated in US 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 MAY BE DEPLOYED IN THE
JAPANESE MARKET, 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 Japanese
market and have been able to achieve a dominant market share of DSL equipment
purchases in Japan.  In July 2001, a certain service provider announced plans to
deploy lower priced competing DSL technologies in the Japanese market.  If these
competing technologies are successful, we may lose our dominant position in the
Japanese market 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 has been
derived from customers located outside of the United States. For the year ended
December 31, 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;
- obtaining governmental approvals for products; and
- complying with a wide variety of complex foreign laws and
treaties.

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, 2001 were
Sumitomo Electric Industries and NEC, accounting for 48% and 38% of our
revenues, respectively.  Our top five customers for the year ended December 31,
2000 were Lucent Technologies, Sumitomo Electric Industries, Copper Mountain
Networks, NEC and Nortel Networks accounting for 24%, 20%, 12%, 10% and 10%, of
our revenues, respectively.  We do not have formal long-term agreements 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 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.

COMPETITION FOR QUALIFIED PERSONNEL IN THE
SEMICONDUCTOR AND TELECOMMUNICATIONS INDUSTRIES IS INTENSE, AND IF WE ARE NOT
SUCCESSFUL IN ATTRACTING AND RETAINING THESE PERSONNEL, WE WILL NOT BE ABLE TO
EXECUTE OUR BUSINESS PLAN.

Competition for qualified personnel in the semiconductor and
telecommunications industries is intense, and we may not be successful in
attracting and retaining personnel.  There may be only a limited number of
people with the requisite skills to serve in these positions, and it may become
increasingly difficult to hire these people. Also, competitors and others have
in the past, and may in the future, attempt to recruit our employees.

Furthermore, we rely, in part, on equity incentives to
attract and retain qualified personnel.  The market price of our common stock
has fluctuated substantially since our initial public offering in May 2000.  We
have granted, and may grant, additional equity and/or cash compensation to our
employees as incentive to remain with our Company. In addition, any perception
by potential employees that our equity incentives are less attractive could harm
our ability to attract qualified employees.

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, we obtain
certain semiconductor wafers from Mitsubishi Electric and Taiwan Semiconductor
Manufacturing Co., Ltd.  If we fail to obtain components in sufficient
quantities when required, and are unable to meet customer demand, our business
could be harmed, as our customers would consider purchasing products from our
competitors.  We also rely on United Microelectronics Corporation to manufacture
our analog silicon wafers. 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 such as earthquakes.

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 AS EXPECTED, 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, and 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;
- 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.

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.  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 modems,
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.

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

The market for communications semiconductor and software
solutions 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.  These
competitors have longer operating histories, greater name recognition, larger
installed customer bases and significantly greater financial, technical and
marketing resources than we have.  They may be able to introduce new
technologies, respond more quickly to changing customer requirements or devote
greater resources to the development, promotion and sale of their products than
we can.

OUR 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.

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 WHERE ADVISABLE 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.

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, which have chosen a competitor's semiconductor,
could create barriers to future sales opportunities with these
manufacturers.

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.  If we deliver products with errors, defects or bugs,
our credibility and the market acceptance and sales of our products could be
harmed.  Further, if our products contain errors, defects and bugs, then we may
be required to expend significant capital and resources to alleviate such
problems.  Defects could also lead to product 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.

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 of our products.

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.

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.  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 chip sets cannot acquire a required
license on commercially reasonable terms, that customer may choose not to use
our chip sets.  We have obligations to indemnify our customers under some
circumstances for infringement of third-party intellectual property rights.
From time to time we receive letters from customers inquiring as to scope of
these indemnity rights.  If any claims from third parties required us to
indemnify customers under our agreements, the costs could be substantial and our
business could be harmed.

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 in a particular period.  There can be no guaranty that the
aggregate effect of any such claims will not have a material adverse effect on
our business, financial condition or results of operations.

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,
short-term investment balances and cash generated from operations 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, 2001, all of our investments
were in money market funds, high quality commercial paper, government and non-
government debt securities and auction rate preferred stock.  A hypothetical 100
basis point increase in interest rates would result in an approximate $88,000
decrease in the fair value of our available-for-sale securities as of December
31, 2001.  See Note 3 of notes to the consolidated financial statements.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

CENTILLIUM COMMUNICATIONS, INC
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS:



|Consolidated Financial Statements:                | Page
|------------------------------------------------- | ----
|Report of Ernst & Young LLP,
Independent Auditors | 31  
|Consolidated Financial Statements                 |     
|Consolidated Statements of
Operations             | 32  
|Consolidated Balance Sheets                       | 33  
|Consolidated Statements of
Stockholders' Equity   | 34  
|Consolidated Statements of Cash
Flows             | 35  
|Notes to Consolidated Financial
Statements        | 36  
|Financial Statement Schedule:                     |     
|Schedule II--Valuation and
Qualifying Accounts    | 52  





REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS



---

We have audited the accompanying consolidated balance sheets
of Centillium Communications, Inc. as of December 31, 2001 and 2000, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 2001. Our
audits also included the financial statement schedule listed in the Index at
Item 14(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, 2001 and
2000, and the consolidated results of its operations and its cash flows for each
of the three years in the period ended December 31, 2001, 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.

/s/ Ernst & Young LLP

San Jose, California
March 12, 2002

---

CENTILLIUM COMMUNICATIONS, INC.
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                (In thousands, except share and per share data)

`Years ended December 31,
                                        ----------------------------------
                                           2001        2000        1999
                                        ----------  ----------  ----------

Net product revenues.................. $  159,207  $   56,324  $    2,509
Technology development revenues.......        300         150       1,235
                                        ----------  ----------  ----------
    Total net revenues................    159,507      56,474       3,744
Cost of revenues......................     79,781      32,251       3,118
                                        ----------  ----------  ----------
Gross profit..........................     79,726      24,223         626
                                        ----------  ----------  ----------
Operating expenses:
  Research and development............     59,034      41,879      13,357
  Sales and marketing.................     17,953      15,497       3,823
  General and administrative..........     13,879      15,846       4,227
  Amortization of goodwill and other
   acquisition-related intangibles....      3,285         827          --
  In-process research and development.      7,422          --          --
                                        ----------  ----------  ----------
    Total operating expenses..........    101,573      74,049      21,407
                                        ----------  ----------  ----------
Operating loss........................    (21,847)    (49,826)    (20,781)
Interest income.......................      3,620       4,170       1,274
Interest expense......................        (76)       (334)       (242)
Loss on long-term investment..........       (990)         --          --
                                        ----------  ----------  ----------
Loss before provision for income
 taxes................................    (19,293)    (45,990)    (19,749)
Provision for income taxes............        400           8          --
                                        ----------  ----------  ----------
Net loss.............................. $  (19,693) $  (45,998) $  (19,749)
                                        ==========  ==========  ==========

Basic and diluted net loss per share.. $    (0.59) $    (2.00) $    (2.23)
                                        ==========  ==========  ==========
Shares used to compute basic and
 diluted net loss per share...........     33,495      22,950       8,842`

See accompanying notes.

---

CENTILLIUM COMMUNICATIONS, INC.
                          CONSOLIDATED BALANCE SHEETS

                (In thousands, except share and per share data)

`December 31,
                                                            --------------------
                                                              2001       2000
                                                            ---------  ---------
                          ASSETS
Current assets:
  Cash and cash equivalents............................... $  93,724  $  71,240
  Short-term investments..................................    17,129     16,444
  Accounts receivable--net of allowance for doubtful
   accounts of $1,026 at December 31, 2001 and $932 at
   December 31, 2000......................................     4,042     16,883
  Inventories.............................................     9,356      9,183
  Other current assets....................................     2,147      1,552
                                                            ---------  ---------
   Total current assets...................................   126,398    115,302
Property and equipment, net...............................    11,483      8,355
Goodwill and other intangible assets, net.................     6,085      3,200
Other assets..............................................       242      1,086
                                                            ---------  ---------
     Total assets......................................... $ 144,208  $ 127,943
                                                            =========  =========
           LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable........................................ $   7,854  $  13,133
  Accrued payroll & related expenses......................     3,272      2,578
  Accrued liabilities.....................................    11,268      4,277
  Accrued taxes...........................................        77          8
  Deferred revenue........................................        --        200
  Long-term debt--current portion.........................       264        367
                                                            ---------  ---------
   Total current liabilities..............................    22,735     20,563
Long-term debt............................................        --        221
Other liabilities.........................................       315        289

Commitments and contingencies

Stockholders' equity:
  Preferred stock; $0.001 par value:
    Authorized shares: 10,000,000; Issued and outstanding
     shares: none at December 31, 2001 and 2000...........        --         --
  Common stock; $0.001 par value:
    Authorized shares: 100,000,000; Issued and
     outstanding shares: 34,576,062 at December 31, 2001,
     33,030,114 at December 31, 2000......................        35         33
  Additional paid in capital..............................   229,224    208,520
  Stockholder note receivable.............................        --       (430)
  Accumulated other comprehensive income..................        66          8
  Deferred compensation...................................    (8,734)   (21,521)
  Accumulated deficit.....................................   (99,433)   (79,740)
                                                            ---------  ---------
     Total stockholders' equity...........................   121,158    106,870
                                                            ---------  ---------
     Total liabilities and stockholders' equity........... $ 144,208  $ 127,943
                                                            =========  =========`

See accompanying notes.

---

CENTILLIUM COMMUNICATIONS, INC.

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                     (in thousands, except per share data)

`Accum-
                                                                                                                        ulated
                                     Convertible                                                   Stock-                Other     Total
                                   Preferred Stock       Common Stock      Additional  Deferred   holders'    Accum-    Compre-   Stock-
                                 -------------------- -------------------   Paid-In     Compen-     Notes     ulated    hensive  holders'
                                    Shares     Amount   Shares     Amount   Capital     sation    Receivable  Deficit   Income    Equity
                                 ------------  ------ -----------  ------  ----------  ---------  ---------  ---------  -------  ---------
BALANCE AT DECEMBER 31, 1998....   7,839,482  $    8   8,505,600  $    9  $   23,681  $    (446) $      --  $ (13,993) $    --  $   9,259
 Noncash issuance of common
  stock for services and
  other.........................          --      --      97,643      --         173         --         --         --       --        173
 Cash proceeds from issuance
  of Series C convertible
  preferred stock, net of
  issuance costs................   7,610,754       7          --      --      35,568         --         --         --       --     35,575
 Exercise of options to
  purchase common stock for
  cash and notes................          --      --   1,715,598       1       1,147         --       (430)        --       --        718
 Deferred compensation related
  to stock option grants........          --      --          --      --      19,701    (19,701)        --         --       --         --
 Amortization of deferred
  compensation..................          --      --          --      --          --      4,104         --         --       --      4,104
 Net loss.......................          --      --          --      --          --         --         --    (19,749)      --    (19,749)
 Unrealized loss on available-
  for-sale investments..........          --      --          --      --          --         --         --         --      (25)       (25)
                                                                                                                                 ---------
 Total comprehensive net loss...          --      --          --      --          --         --         --         --       --    (19,774)
                                 ------------  ------ -----------  ------  ----------  ---------  ---------  ---------  -------  ---------
BALANCE AT DECEMBER 31, 1999....  15,450,236      15  10,318,841      10      80,270    (16,043)      (430)   (33,742)     (25)    30,055
 Noncash issuance of common
  stock for services............          --      --      53,900      --       2,333         --         --         --       --      2,333
 Exercise of options to
  purchase common stock for
  cash..........................          --      --   1,939,010       2       2,551         --         --         --       --      2,553
 Issuance of shares under
  Employee Stock Purchase
  Plan..........................          --      --      52,196      --         801         --         --         --       --        801
 Deferred compensation related
  to stock option grants........          --      --          --      --      31,088    (31,088)        --         --       --         --
 Amortization of deferred
  compensation..................          --      --          --      --          --     25,610         --         --       --     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         --         --         --       --     91,483
 Exercise of warrants to
  purchase common stock.........          --      --      15,931      --          --         --         --         --       --         --
 Net loss.......................          --      --          --      --          --         --         --    (45,998)      --    (45,998)
 Unrealized gain on available-
  for-sale investments..........          --      --          --      --          --         --         --         --       33         33
                                                                                                                                 ---------
 Total comprehensive net loss...          --      --          --      --          --         --         --         --       --    (45,965)
                                 ------------  ------ -----------  ------  ----------  ---------  ---------  ---------  -------  ---------
BALANCE AT DECEMBER 31, 2000....          --      --  33,030,114      33     208,520    (21,521)      (430)   (79,740)       8    106,870
 Noncash issuance of common
  stock for services............          --      --      10,000      --          70         --         --         --       --         70
 Exercise of options to
  purchase common stock for
  cash..........................          --      --     557,412       1       2,394         --         --         --       --      2,395
 Cash proceeds from payments on
  stockholder note receivable...          --      --          --      --          --         --        430         --       --        430
 Issuance of shares under
  Employee Stock Purchase
  Plan..........................          --      --     164,621      --       1,883         --         --         --       --      1,883
 Deferred compensation related
  to stock option grants, net
  of terminations...............          --      --          --      --      (1,958)     1,958         --         --       --         --
 Amortization of deferred
  compensation..................          --      --          --      --          --     15,346         --         --       --     15,346
 Common stock issued in
  connection with acquisition...          --      --     813,915       1      18,315         --         --         --       --     18,316
 Acquisition related deferred ..
  compensation..................          --      --          --      --          --     (4,517)        --         --       --     (4,517)
 Net loss.......................          --      --          --      --          --         --         --    (19,693)      --    (19,693)
 Unrealized gain on available-
  for-sale investments..........          --      --          --      --          --         --         --         --       58         58
                                                                                                                                 ---------
 Total comprehensive net loss...          --      --          --      --          --         --         --         --       --    (19,635)
                                 ------------  ------ -----------  ------  ----------  ---------  ---------  ---------  -------  ---------
BALANCE AT DECEMBER 31, 2001....          --  $   --  34,576,062  $   35  $  229,224  $  (8,734) $      --  $ (99,433) $    66  $ 121,158
                                 ============  ====== ===========  ======  ==========  =========  =========  =========  =======  =========`

See accompanying notes.

---

CENTILLIUM COMMUNICATIONS, INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                               (in thousands)

`Years ended December 31,
                                                                               -------------------------------
                                                                                 2001       2000       1999
                                                                               ---------  ---------  ---------
OPERATING ACTIVITIES
Net loss..................................................................... $ (19,693) $ (45,998) $ (19,749)
Adjustments to reconcile net loss to net cash used by operating activities:
 Depreciation and leasehold amortization expense.............................     4,245      3,770      2,258
 Net loss on retirements of property and equipment...........................       472         --         --
 Amortization of deferred compensation.......................................    15,346     25,610      4,104
 Issuance of common stock for services and other.............................        70      2,333        173
 Amortization of goodwill and other acquisition related intangibles..........      3285        827         --
 Amortization of warrants issued in conjunction with financings..............         4          6         10
 In-process research and development.........................................     7,422         --         --
 Loss on non-current investment..............................................       990         --         --
   Changes in operating assets and liabilities:
    Accounts receivable......................................................    12,841    (15,968)      (915)
    Inventory................................................................      (173)    (7,972)    (1,211)
    Other current assets.....................................................    (1,045)    (1,037)      (258)
    Other assets.............................................................      (146)         6        (59)
    Working capital line of credit...........................................        --     (2,044)     2,044
    Accounts payable.........................................................    (5,280)    12,323        682
    Accrued payroll and related expenses.....................................       694      1,678        512
    Accrued liabilities......................................................     6,861      3,960        154
    Deferred revenue.........................................................      (200)        78         47
    Other liabilities........................................................        95        217         53
                                                                               ---------  ---------  ---------
     Net cash provided by (used in) operating activities.....................    25,788    (22,211)   (12,155)
                                                                               ---------  ---------  ---------
INVESTING ACTIVITIES
 Purchases of short-term investments.........................................   (28,642)   (29,045)   (27,626)
 Sales and maturities of short-term investments..............................    28,015     37,745      7,600
 Purchases of property and equipment.........................................    (7,252)    (7,594)    (3,005)
 Acquisitions, net of cash acquired..........................................       258         --         --
 Purchases of intangibles and other long-term assets.........................        --     (5,017)        --
                                                                               ---------  ---------  ---------
     Net cash (used in) investing activities.................................    (7,621)    (3,911)   (23,031)
                                                                               ---------  ---------  ---------
FINANCING ACTIVITIES
 Principal payments on capital lease.........................................        --       (164)      (223)
 Principal payments on long-term debt obligations............................      (391)      (513)      (498)
 Proceeds from issuance of common stock, net of repurchases..................     4,278     94,837        718
 Proceeds from stockholder note receivable                                          430         --         --
 Proceeds from issuance of preferred stock...................................        --         --     35,575
                                                                               ---------  ---------  ---------
     Net cash provided by financing activities...............................     4,317     94,160     35,572
                                                                               ---------  ---------  ---------

 Net increase in cash and cash equivalents...................................    22,484     68,038        386
Cash and cash equivalents at beginning of period.............................    71,240      3,202      2,816
                                                                               ---------  ---------  ---------
Cash and cash equivalents at end of period................................... $  93,724  $  71,240  $   3,202
                                                                               =========  =========  =========

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
  Cash paid for interest..................................................... $      76  $     327  $     244
  Cash paid for income taxes................................................. $     331  $      --  $      --

SUPPLEMENTAL DISCLOSURES OF NON-CASH TRANSACTIONS
  Issuance of common stock for note receivable............................... $      --  $      --  $     430
  Deferred compensation related to stock option grants, net of terminations.. $   2,559  $  31,088  $  19,701`

See accompanying notes.

---

CENTILLIUM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1.  Summary of Significant Accounting Policies Nature of Operations:

Centillium Communications, Inc. (Centillium or 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 has focused initially
on developing products designed for the Digital Subscriber Line (DSL) and Voice
over Packet markets.

Our revenues currently are derived from the sale of our DSL
and Voice over Packet products, which include the CopperLite CO, CopperLite CPE,
Optimizer, and Entropia families of products.

On May 24, 2000, the Company issued 4.0 million shares of
common stock in a registered underwritten initial public offering and 600,000
shares of common stock in a concurrent private placement at a price of $19.00
per share.  On June 5, 2000, the Company sold an additional 600,000 shares
pursuant to the underwriters' overallotment option granted in connection with
its initial public offering.  Net proceeds from these offerings were $91.5
million and are being used for general working capital purposes and selected
asset purchases.

Centillium has incurred significant losses since inception
and, as of December 31, 2001, had an accumulated deficit of $99.4 million
including a net loss for the year ended December 31, 2001 of $19.7 million.

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.  Our products are warranted to be free from defect
for a period of one year.  A provision is made for warranty costs as shipments
are made.  To date, such costs have not been material.

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.

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 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, but obtains letters of credit or prepayments as deemed
necessary.   The Company maintains reserves for potential credit losses.
Management judgment is used to estimate the required reserves. Actual results
could differ from those estimates.

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

`December 31,
                                                ---------------------
                                                  2001       2000
                                                ---------  ---------
   Sumitomo Electric Industries...............        61 %       30 %
   Lucent Technologies........................        *  %       19 %
   NEC........................................        20 %       10 %`

* represents less than 10% of total accounts receivable.

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, 2001
and 2000, all of the Company's investments in debt securities were classified as
available-for-sale, with changes in market value recorded as unrealized gains
and losses in accumulated other comprehensive income until their disposition.
Realized gains and losses and declines in value judged to be other than
temporary on available-for-sale securities are included in interest income 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.  The components of inventories are as
follows (in thousands):

`December 31,
                                                --------------------
                                                  2001       2000
                                                ---------  ---------
   Work-in-process............................ $   6,600  $   5,393
   Finished goods.............................     2,756      3,790
                                                ---------  ---------
                                               $   9,356  $   9,183
                                                =========  =========`

Property and Equipment: Property and equipment are
carried at cost less accumulated depreciation.  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. Property and equipment are as follows (in
thousands):

`December 31,
                                                --------------------
                                                  2001       2000
                                                ---------  ---------
   Equipment and software..................... $  19,399  $  13,900
   Furniture and fixtures.....................       914        657
   Leasehold improvements.....................     1,107        349
   Construction in progress...................       387        791
                                                ---------  ---------
                                                  21,807     15,697
   Accumulated depreciation and amortization..   (10,324)    (7,342)
                                                ---------  ---------
   Property and equipment, net................ $  11,483  $   8,355
                                                =========  =========`

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 market value, as determined by discounted
cash flows.

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.

Goodwill and Other Intangible Assets: Goodwill
represents the excess of the purchase price paid over the fair value of tangible
and identifiable intangible net assets acquired in business acquisitions.
Identifiable intangible assets consist primarily of assembled workforce.  In the
event that facts and circumstances indicate that the carrying value of goodwill
and intangible assets may be impaired, an evaluation of recoverability would be
performed. If an evaluation is required, the fair value associated with the
asset would be compared to the asset's carrying amount to determine if a write-
down may be required.  Goodwill and other intangible assets are stated net of
accumulated amortization and are amortized on a straight-line basis over their
expected useful lives of between 24 and 48 months.  Goodwill and other
intangible assets are as follows (in thousands):

`December 31,
                                                --------------------
                                                  2001       2000
                                                ---------  ---------
   Goodwill................................... $   7,473  $   1,657
   Other purchased intangibles................     2,724      2,370
                                                ---------  ---------
                                                  10,197      4,027
   Less accumulated amortization..............    (4,112)      (827)
                                                ---------  ---------
   Goodwill and other intangible assets, net.. $   6,085  $   3,200
                                                =========  =========`

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,
                                                -------------------------------
                                                  2001       2000       1999
                                                ---------  ---------  ---------
   Net loss .................................. $ (19,693) $ (45,998) $ (19,749)
                                                =========  =========  =========
   Basic and diluted:
     Weighted average shares of common
      stock outstanding.......................    33,909     24,405      9,363
     Less weighted average shares subject
      to repurchase...........................       414      1,455        521
                                                ---------  ---------  ---------
     Weighted average shares used in computing
      basic and diluted net loss per share ...    33,495     22,950      8,842
                                                =========  =========  =========

   Basic and diluted net loss per share ...... $   (0.59) $   (2.00) $   (2.23)
                                                =========  =========  =========`

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 5,903,370,
7,809,376 and 3,417,007 shares of common stock have been excluded for the years
ended December 31, 2001, 2000 and 1999.

Stock-based Compensation: As described in Note 7, the
Company has elected to account for its employee stock plans in accordance with
Accounting Principles Board Opinion No. 25, "Accounting For Stock Issued to
Employees" (APB Opinion No. 25), and to adopt the disclosure-only
provisions as required under statement of Financial Accounting Standards No.
123, "Accounting For Stock- Based Compensation" (FAS 123).

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.

New Accounting Pronouncements: In June 1998, the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (FAS 133).  FAS 133 establishes accounting methods for
derivative financial instruments and hedging activities related to those
instruments as well as other hedging activities.  The Company adopted FAS 133 as
of January 1, 2001.  Because the Company does not currently hold any derivative
instruments and does not engage in hedging activities, the adoption of FAS 133
did not have a material impact on the Company's financial position or results of
operations.

In June 2001, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 141, "Business
Combinations" (FAS 141), and No. 142, "Goodwill and Other Intangible
Assets" (FAS 142). FAS 141 requires that the purchase method of accounting
be used for all business combinations initiated after June 30, 2001.  FAS 141
also includes guidance on the initial recognition and measurement of goodwill
and other intangible assets arising from business combinations completed after
June 30, 2001.  FAS 142 prohibits the amortization of goodwill and intangible
assets with indefinite useful lives.  FAS 142 requires that these assets be
reviewed for impairment at least annually.  Intangible assets with finite lives
will continue to be amortized over their estimated useful lives.

The Company will apply FAS 142 beginning in the first quarter
of fiscal 2002. Application of the nonamortization provisions of FAS 142 is
expected to result in an increase in net income of $2.8 million ($0.08 per
share) in fiscal 2002. The Company will reclassify an assembled workforce
intangible asset with an unamortized balance of $644,000 to goodwill at the date
of adoption.  The Company will test goodwill for impairment using the two-step
process prescribed in FAS 142.  The first step is a screen for potential
impairment, while the second step measures the amount of the impairment, if any.
The Company expects to perform the first of the required impairment tests of
goodwill and indefinite lived intangible assets as of January 1, 2002 in the
second quarter of fiscal 2002.  Any impairment charge resulting from these
transitional impairment tests will be reflected as the cumulative effect of a
change in accounting principle in the second quarter of 2002.  The Company has
not yet determined what the effect of these tests will be on the earnings and
financial position of the Company.

In August 2001, the FASB issued FAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets" (FAS 144), which
addresses financial accounting and reporting for impairment or disposal of long-
lived assets and is effective January 1, 2002.  FAS 144 supersedes FAS 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 Company does not expect that the adoption of FAS 144
will have a significant impact on its financial statements.

NOTE 2.  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.

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 products
under development had not been established and no future alternative uses
existed. The specific products under development using vEngines technology have
been discontinued; however, certain aspects of the technologies have been
incorporated into the Company's Voice-over-Packet solutions.

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 $2.7
million of expense was recognized for the year ended December 31, 2001 and has
been included in amortization of deferred compensation.

Goodwill and the assembled workforce are amortized 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
will no longer amortize goodwill; rather, goodwill will be evaluated for
impairment at least on an annual basis.

Pro-forma results of operations have not been presented
because the 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 has been recorded as intangible assets and goodwill in the
financial statements.

NOTE 3.  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, 2001 and 2000 were as follows (in
thousands):

`Estimated
                                                 Gross      Gross      Fair
                                    Amortized  Unrealized Unrealized  Market
                                      Cost       Gain       Loss       Value
                                    ---------  ---------  ---------  ---------
December 31, 2001
----------------------------------
Cash equivalents:
  Money market funds.............. $  88,359  $      --  $      --  $  88,359
  Obligations of U.S. government
   and affiliated agencies..........     747         --         --        747
                                    ---------  ---------  ---------  ---------
                                      89,106         --         --     89,106
                                    ---------  ---------  ---------  ---------
Short-term investments:
  Corporate debt securities.......       475          5         --        480
  Obligations of U.S. government
   and affiliated agencies........    16,121         63         (2)    16,182
  Certificates of deposit.........       467         --         --        467
                                    ---------  ---------  ---------  ---------
                                      17,063         68         (2)    17,129
                                    ---------  ---------  ---------  ---------
    Total cash equivalents and
     short-term investments....... $ 106,169  $      68  $      (2) $ 106,235
                                    =========  =========  =========  =========

December 31, 2000
----------------------------------
Cash equivalents:
  Money market funds.............. $  65,125  $      --  $      --  $  65,125
  Corporate debt securities.......       997         --         (1)       996
                                    ---------  ---------  ---------  ---------
                                      66,122         --         (1)    66,121
                                    ---------  ---------  ---------  ---------
Short-term investments:
  Commercial paper................       990         --         --        990
  Corporate debt securities.......     1,974          6         --      1,980
  Obligations of U.S. government
   and affiliated agencies........    11,000          3         --     11,003
  Auction rate preferred stock
   and other......................     2,000         --         --      2,000
  Certificates of deposit.........       471         --         --        471
                                    ---------  ---------  ---------  ---------
                                      16,435          9         --     16,444
                                    ---------  ---------  ---------  ---------
    Total cash equivalents and
     short-term investments....... $  82,557  $       9  $      (1) $  82,565
                                    =========  =========  =========  =========`

The following is a summary of amortized costs and estimated
fair values of debt securities by contractual maturity as of December 31, 2001
(in thousands):

`Available-for-Sale
                                                          --------------------
                                                          Amortized  Estimated
                                                            Cost     Fair Value
                                                          ---------  ---------
   Amounts maturing within one year..................... $  16,810  $  16,878
   Amounts maturing after one year, within three years..     1,000        998
                                                          ---------  ---------
   Total available-for-sale.............................    17,810     17,876
   Less amounts classified as cash and cash equivalents.      (747)      (747)
                                                          ---------  ---------
                                                         $  17,063  $  17,129
                                                          =========  =========`

Note 4.  Loss on Non-Current Investment

Management monitors and evaluates the realizable value of
its non-current equity investment and if events and circumstances indicate that
the decline in value of this asset is other-than-temporary, the Company writes
the carrying value down to estimated fair value.  In June 2001, in connection
with the ongoing evaluation of its non-current equity investment, management
recorded a non-cash charge of $990,000 to write down the basis of the investment
to zero as a result of impairment in the value of this asset.  In January 2002,
we sold this non-current equity investment for $440,000 and will report this as
a gain in the first quarter of 2002.

NOTE 5.  Long-Term Debt Obligations

In April 1998, the Company entered into an agreement with
a bank and a financial institution which allows the Company to make multiple
draws up to $1,000,000 for the purchase of equipment. The facility bears
interest at 7.30% at December 31, 2001 and 2000.

Draws under the facility are payable via principal and
interest payments made ratably over a forty-two month period from the initial
draw date. The Company had approximately $132,000 and $433,000 outstanding
against the equipment facility as of December 31, 2001 and 2000, respectively,
and no remaining amount was available as the aggregate draw under the facility
had reached $1,000,000 in fiscal 1999. At the end of the equipment facility's
term, the Company is obligated to make an additional payment of total facility
draws multiplied by 15% ($150,000 as of December 31, 2001 and 2000). The Company
is recording the additional payment as interest expense over the life of the
related long-term obligation. The Company has accrued approximately $132,000 and
$89,000 relating to this additional payment as of December 31, 2001 and 2000,
respectively.

In conjunction 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 warrants are immediately exercisable
and will expire in May 2005.  The fair value is not material for reporting
purposes. On June 2, 2000, 1,800 of these warrants were exercised.

In September 1997, the Company negotiated a $1,000,000 term
loan with a bank to finance equipment purchases. The term loan had an interest
rate equal to the bank's prime rate plus 0.25% per annum (9.75% at December 31,
2000).  The note was payable via monthly interest payments until April 1998 at
which time the Company began making thirty-six equal monthly payments of
principal and interest.  As of December 31, 2000, the Company had approximately
$70,000 outstanding against the term loan. In the first quarter of 2001, the
outstanding balance was paid in full in accordance with the terms of the
loan.

In conjunction with the term loan described above, the
Company issued a warrant for the purchase of 5,000 shares of the Company's
Series B3 convertible preferred stock at an exercise price of $4.00 per share.
The warrant was immediately exercisable and was exercised in full on June 2,
2000. The fair value is not material for reporting purposes.

Outstanding borrowings under the long-term debt obligations
are secured by all of the Company's assets.  The long-term debt obligations
contain affirmative and negative covenants and will, among other things, limit
the Company's ability to incur additional debt, pay cash dividends, or purchase
or sell certain assets.  The obligations also require the Company to restrict
certain acquisitions, mergers, consolidations, or similar transactions.

The Company's long-term debt obligation at December 31, 2001
of $264,000 matures in 2002.

NOTE 6.  Commitments and Contingencies

The Company leases its facilities under operating leases
expiring through 2009.  Rental expense was approximately $2.2 million, $1.3
million and $642,000 for the years ended December 31, 2001, 2000 and 1999,
respectively.  Additionally, the Company leases certain software under operating
leases expiring through December 2002.

In July 1997, the Company issued a warrant in conjunction
with a capital lease agreement.  The warrant is immediately exercisable and
allows the holder to purchase 10,500 shares of the Company's Series B3
convertible preferred stock at an exercise price of $4.00 per share.  The
warrant was exercised on July 11, 2000.  The fair value assigned to the warrant
was not material for financial reporting purposes.

Future minimum lease payments under the Company's operating
leases at December 31, 2001 are as follows (in thousands):

`2002........................... $   7,031
   2003...........................     4,086
   2004...........................     1,121
   2005...........................       713
   2006...........................        51
   Thereafter.....................        57
                                    ---------
     Total minimum payments....... $  13,059
                                    =========`

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 non-cancelable purchase orders.  As of December
31, 2001, the Company's non-cancelable purchase obligation is $4.6 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 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 7.  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 10,000,000 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.

Common Stock Reserved: Common stock reserved is as
follows:

`December 31,
                                                    ------------------------
                                                       2001         2000
                                                    -----------  -----------
   Common stock options...........................   5,893,920    7,799,926
   Common stock warrants..........................       9,450        9,450
                                                    -----------  -----------
                                                     5,903,370    7,809,376
                                                    ===========  ===========`

Deferred Compensation: During the years ended December
31, 2001, 2000 and 1999, the Company recorded deferred compensation, net of
adjustments for employee terminations, of approximately $2.6 million, $31.1
million and $19.7 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.

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

`Years ended December 31,
                                        -------------------------------
                                          2001       2000       1999
                                        ---------  ---------  ---------
   Cost of revenues................... $     797  $   1,459  $     139
   Research and development...........     7,992     10,722      1,744
   Sales and marketing................     2,361      5,075        821
   General and administrative.........     4,196      8,354      1,400
                                        ---------  ---------  ---------
                                       $  15,346  $  25,610  $   4,104
                                        =========  =========  =========`

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 6.00% 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.

In February 2001, the Company adopted a nonstatutury 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 be 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 have an
exercise price equal to or greater than $10 per share for replacement options to
be granted on a date which is at least six months plus one day from the date of
cancellation of the tendered options.  The exercise price of the replacement
options is expected to be equal to 100 percent of the market price of
Centillium's common stock on the grant date of the replacement options.  The
terms and conditions of the replacement options, including the vesting
schedules, will be substantially the same as the terms and conditions of the
options cancelled.  On December 3, 2001, 5.2 million stock options were tendered
for cancellation and are expected to be exchanged for new options on or after
June 4, 2002.

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

`Options Outstanding
                                         -----------------------------------
                                                                   Weighted
                                           Options                  Average
                                          Available    Number of   Exercise
                                          for Grant     Shares       Price
                                         -----------  -----------  ---------
Balance at December 31, 1998...........   1,601,250    3,358,257  $    0.35
  Options authorized...................   1,500,000           --         --
  Options granted......................  (2,106,600)   2,106,600  $    1.80
  Options exercised....................          --   (1,719,348) $    0.67
  Options available due to                                        $
   repurchase of unvested shares.......       3,750           --  $    0.40
  Options canceled.....................     355,252     (355,252) $    0.30
                                         -----------  -----------
Balance at December 31, 1999...........   1,353,652    3,390,257  $    1.09
  Options authorized...................   5,569,743           --         --
  Options granted......................  (6,988,263)   6,988,263  $   22.45
  Options exercised....................          --   (2,044,234) $    1.40
  Options available due to
   repurchase of unvested shares.......     105,224           --         --
  Options canceled.....................     534,360     (534,360) $   14.71
                                         -----------  -----------
Balance at December 31, 2000...........     574,716    7,799,926  $   19.22
  Options authorized...................   7,040,434           --         --
  Options granted......................  (5,059,462)   5,059,462  $   18.81
  Options exercised....................          --     (612,695) $    4.04
  Options available due to
   repurchase of unvested shares.......      55,283
  Options canceled.....................   6,352,773   (6,352,773) $   27.03
                                         -----------  -----------
Balance at December 31, 2001...........   8,963,744    5,893,920  $   12.02
                                         ===========  ===========`

In addition, the following table summarizes information about
stock options that were outstanding and exercisable at December 31, 2001:

`Options Outstanding             Options Exercisable (1)
                   --------------------------------  ---------------------------------
                                          Weighted                           Weighted
                                           Average                           Average
                               Weighted   Remaining              Weighted   Remaining
                                Average   Contractual             Average   Contractual
Range of           Number of   Exercise     Life     Number of   Exercise      Life
Exercise Prices      Shares      Price     (years)     Shares      Price     (years)
-----------------  ----------  ---------  ---------  ----------  ---------  ----------
$ 0.40--$  5.00..  1,453,323  $    3.36        7.8   1,426,295  $    3.41        3.36
$ 5.15--$  7.67..  1,767,516       6.90        9.7     164,317       7.50        6.90
$10.00--$ 18.00..  1,032,936      12.38        8.6     681,737      10.25         8.6
$18.06--$ 22.00..    987,763      19.30        8.6     186,908      19.14         8.6
$22.55--$ 68.88..    596,340      29.73        9.2      87,586      33.28         9.2
$75.13--$ 75.13..     56,042      75.13        8.6      20,206      75.13         8.6
                   ----------                        ----------
$ 0.40--$ 75.13..  5,893,920  $   12.02        8.8   2,567,049  $    8.21         8.8
                   ==========                        ==========`

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 beginning January 1, 2001, 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 164,621 and 52,196 shares of common
stock during fiscal years 2001 and 2000 respectively.

Stock-Based Compensation: 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 option valuation models used to fair value 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 1999 was estimated using the
minimum-value method and the fair value of the options granted in 2001 and 2000
were estimated using the Black-Scholes method, with the following weighted
average assumptions:

`Employee    Employee
                                                               Stock       Stock
                                                             Purchase    Purchase
                                   Stock Option Plan           Plan        Plan
                           -------------------------------  ----------- -----------
                             2001       2000       1999           2001     2000
                           ---------  ---------  ---------  ----------- -----------
 Expected life from vest
    date.................  2.9 years  3.0 years  4.0 years  6.0 months  6.0 months
 Volatility..............       147 %      128 %       -- %        147 %       128 %
 Risk-free interest
  rate...................      3.90 %     6.28 %     5.50 %       1.93 %      6.28 %
 Dividend rate...........        --         --         --           --          --`

For purposes of FAS 123 pro forma disclosures, the estimated
fair value of the options is amortized to expense over the options' vesting
period.  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 FAS 123, the Company's net loss would have been
increased to the following approximate FAS 123 pro forma amounts:

`Years ended December 31,
                                                 -------------------------------
                                                   2001       2000       1999
                                                 ---------  ---------  ---------
FAS 123 Pro forma net loss applicable
  to common stockholders....................... $ (70,336) $ (42,524) $ (20,075)
FAS 123 Pro forma basic and diluted net loss
  per share applicable to common shareholders.. $   (2.10) $   (1.85) $   (2.27)`

The options' weighted average grant date fair value, which is
the value assigned to the options under FAS 123, was approximately $7.86, $16.72
and $0.36 for the years ended December 31, 2001, 2000 and 1999, respectively.
The weighted-average fair value of purchase rights granted under the Employee
Stock Purchase Plan in 2001 and 2000 were $7.93 and $12.54 per share,
respectively.

NOTE 8.  Income Taxes

The provision for income taxes for the years ended December 31, 2001,
2000 and 1999 consists of the following:

`Years ended December 31,
                                                -------------------------------
                                                  2001       2000       1999
                                                ---------  ---------  ---------
   Current:
      Federal................................. $     278  $      --  $      --
      State...................................        65         --         --
      Foreign.................................        57          8         --
                                                ---------  ---------  ---------
                                               $     400  $       8  $      --
                                                =========  =========  =========`

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,
                                             -------------------------------
                                               2001       2000       1999
                                             ---------  ---------  ---------
Tax (benefit) at federal statutory rate.... $  (6,560) $ (15,641) $  (6,715)
Loss for which no tax benefit is
 currently recognizable....................        --      3,414      5,073
Unbenefited foreign losses...................      --      5,301         --
Amortization of deferred compensation........   5,252      6,926      1,642
Purchased in-process research and development
 and amortization of goodwill and other
 acquired intangibles........................   3,640         --         --
Utilization of net operating losses, net of
 changes in valuation allowance............    (2,237)        --         --
Other........................................     305          8         --
                                             ---------  ---------  ---------
Total tax  provision....................... $     400  $       8  $      --
                                             =========  =========  =========`

As of December 31, 2001, the Company has $25 million and $16
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 $1.5 million and $400,000,
respectively. The net operating losses and federal tax credit carryforwards will
expire at various dates beginning in 2005, if not utilized.

Utilization of the net operating loss 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.

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,
                                        ---------------------
                                          2001       2000
                                        ---------  ---------
Deferred tax assets:
  Net operating losses................ $   9,606  $  14,655
  Tax credit carryforwards............     1,756      1,793
  Reserves and accruals...............     8,835      4,482
                                        ---------  ---------
Total deferred tax assets.............    20,197     20,930
Valuation allowance................... $ (20,197) $ (20,930)
                                        ---------  ---------
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 decreased by approximately $733,000
for the year ended December 31, 2001 and increased by approximately $8.6 million
and $7.2 million for the years ended December 31, 2000 and 1999, respectively.
The valuation allowance at December 31, 2001 includes approximately $3.9 million
related to stock option deductions, the benefit of which will be recorded in
paid-in capital when realized.

NOTE 9.  Business Segment Information

Through December 31, 2001, 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:

`Years Ended December 31,
                                   -------------------------------
                                     2001       2000       1999
                                   ---------  ---------  ---------
     Japan....................... $ 138,948     17,301  $   2,363
     North America...............    16,710     34,451        676
     Asia -- excluding Japan.....     3,108      4,587        555
     All other...................       741        135        150
                                   ---------  ---------  ---------
     Total....................... $ 159,507  $  56,474  $   3,744
                                   =========  =========  =========`

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

`Years ended December 31,
                                        -------------------------------
                                          2001       2000       1999
                                        ---------  ---------  ---------
   Sumitomo Electric Industries.......        48 %       20  %      34 %
   NEC................................        38 %       10  %      21 %
   Lucent Technologies................        *  %       24  %      *  %
   Copper Mountain Networks...........        *  %       12  %      *  %`

* represents less than 10% of net revenues.

NOTE 10.  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, 2001,
2000 and 1999.

NOTE 11.  Quarterly Results of Operations (unaudited)

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

`Year 2001 Three Month Ended
                                        ------------------------------------------
                                         Mar 31     Jun 30     Sep 30     Dec 31
                                        ---------  ---------  ---------  ---------
Net revenues.......................... $  31,855  $  46,371  $  46,804  $  34,477
Cost of revenues......................    16,171     23,315     23,579     16,716
Gross profit..........................    15,684     23,056     23,225     17,761
Operating loss........................   (14,590)      (497)    (1,830)    (4,930)
Net loss.............................. $ (13,457) $    (755) $  (1,286) $  (4,195)
Basic and diluted net loss per share.. $   (0.41) $   (0.02) $   (0.04) $   (0.12)
Shares used to compute basic and
 diluted net loss per share...........    32,775     33,426     33,782     33,995


                                               Year 2000 Three Month Ended
                                        ------------------------------------------
                                         Mar 31     Jun 30     Sep 30     Dec 31
                                        ---------  ---------  ---------  ---------
Net revenues.......................... $   4,723  $   9,752  $  17,658  $  24,341
Cost of revenues......................     3,483      5,963     10,057     12,748
Gross profit..........................     1,240      3,789      7,601     11,593
Operating loss........................   (10,312)   (17,364)   (12,424)    (9,726)
Net loss.............................. $ (10,058) $ (16,783) $ (10,932) $  (8,225)
Basic and diluted net loss per share.. $   (1.03) $   (0.89) $   (0.35) $   (0.26)
Shares used to compute basic and
 diluted net loss per share...........     9,808     18,919     31,334     31,738`

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

None

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 May 1, 2002 in connection with solicitation of proxies
for our annual meeting of stockholders to be held June 11, 2002 (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 10.29 through 10.30 of this report contain recently executed Employment
Agreements.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT

The information required by this item is incorporated by
reference from the information under the caption "Security Ownership of Certain
Beneficial Owners and Management" 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 caption "Certain
Transactions" contained in the Proxy Statement.

PART IV

ITEM 14.  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, 2001, 2000, and
1999 should be read in conjunction with the Consolidated Financial Statements of
Centillium Communications, Inc.

Schedule II--Valuation and Qualifying Accounts

Allowance for Doubtful Accounts:

`Balances at  Charged to              Balances at
                             Beginning   Costs and   Deductions      End
                             of Period    Expense    Write-Offs   of Period
                            -----------  ----------  ----------  -----------
                                               (in thousands)
Year ended December 31,
 1999..................... $        --  $      150  $       --  $       150
                            ===========  ==========  ==========  ===========
Year ended December 31,
 2000..................... $       150  $      782  $       --  $       932
                            ===========  ==========  ==========  ===========
Year ended December 31,
 2001..................... $       932  $      102  $       (8) $     1,026
                            ===========  ==========  ==========  ===========`

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                                                                           
|4.1*           | Specimen certificate of common stock                                                                                     
|4.2*           | Bylaws of the Registrant                                                                                                 
|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.                               
|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                                             
|21.1           | Subsidiaries of the Registrant                                                                                           
|23.1           | Consent of Ernst & Young LLP, Independent Auditors                                                                       

__________

> * 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.



(b) Reports on Form 8-K

There were no reports on Form 8-K filed by the
Registrant during the fourth quarter of the fiscal year ended December 31,
2001.

(c) Exhibits.



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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 to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Fremont, State of California, on March 25,
2002.

| | Centillium Communications, Inc.
| | -------------------------------
| |                                
| | By:                            
| | Faraj Aalaei                   
| | Chief Executive Officer        



Pursuant to the requirements of the Securities Exchange
Act of 1934, this Annual Report on Form 10-K 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/ Faraj Aalaei
Faraj Aalaei     | Chief Executive Officer and Director (Principal Executive
Officer)                      | March 25, 2002
|/s/ Darrel Slack
Darrel Slack     | Vice President and Chief Financial Officer (Principal Financial
and Accounting Officer) | March 25, 2002
|/s/ Shahin Hedayat
Shahin Hedayat | President and Director                                                                  | March 25, 2002
|/s/ Robert C. Hawk
Robert C. Hawk | Director                                                                                | March 25, 2002
|/s/ Lip-Bu Tan
Lip-Bu Tan         | Director                                                                                | March 25, 2002



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