SILICON LABORATORIES INC - 10-K Annual Report

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

FORM 10-K

(Mark One)

/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the yearly period ended December 28, 2002

Or

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

For the transition period from _____________________ to _______________________

Commission file number: ______________________________________________________

SILICON LABORATORIES INC.
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(Exact name of registrant as specified in its charter)

Delaware 74-2793174
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)

4635 Boston Lane, Austin, Texas 78735
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(Address of principal executive offices) (Zip Code)

(512) 416-8500
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(Registrant's telephone number, including area code)

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

Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.0001 Par Value

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 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. /X/ Yes / / 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 the 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. / /

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

The aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
last sold as of the last business day of the registrant's most recently
completed second fiscal quarter (June 28, 2002) was $768,053,073 (assuming, for
this purpose, that only directors and officers are deemed affiliates).

There were 48,977,242 shares of the registrant's common stock issued and
outstanding as of January 14, 2003.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the registrant's 2003 Annual Meeting of
Stockholders are incorporated by reference into Part III of this Form 10-K.

SILICON LABORATORIES INC.

FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS

CAUTIONARY STATEMENT

EXCEPT FOR THE HISTORICAL FINANCIAL INFORMATION CONTAINED HEREIN, THE MATTERS
DISCUSSED IN THIS REPORT ON FORM 10-K (AS WELL AS DOCUMENTS INCORPORATED HEREIN
BY REFERENCE) MAY BE CONSIDERED "FORWARD-LOOKING" STATEMENTS WITHIN THE MEANING
OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. SUCH FORWARD-LOOKING STATEMENTS
INCLUDE DECLARATIONS REGARDING THE INTENT, BELIEF OR CURRENT EXPECTATIONS OF
SILICON LABORATORIES AND ITS MANAGEMENT AND MAY BE SIGNIFIED BY THE WORDS
"EXPECTS," "ANTICIPATES," "INTENDS," "BELIEVES" OR SIMILAR LANGUAGE. YOU ARE
CAUTIONED THAT ANY SUCH FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE
PERFORMANCE AND INVOLVE A NUMBER OF RISKS AND UNCERTAINTIES. ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THOSE INDICATED BY SUCH FORWARD-LOOKING STATEMENTS.
FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE THOSE
DISCUSSED UNDER "FACTORS AFFECTING FUTURE OPERATING RESULTS" AND ELSEWHERE IN
THIS REPORT. SILICON LABORATORIES DISCLAIMS ANY INTENTION OR OBLIGATION TO
UPDATE OR REVISE ANY FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW
INFORMATION, FUTURE EVENTS OR OTHERWISE.

PART I

Item 1. Business and Factors Affecting Future Operating Results

GENERAL

Silicon Laboratories Inc. designs and develops proprietary, analog-intensive,
mixed-signal integrated circuits (ICs) for the communications industry.
Mixed-signal ICs are electronic components that convert real-world analog
signals, such as sound and radio waves, into digital signals that electronic

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products can process. Therefore, mixed-signal ICs are critical components of
numerous communications products, including wireless phones, cable and
satellite set-top boxes, personal computer modems, voice over digital
subscriber line (DSL) modems, personal video recorders, telephone equipment and
optical networking equipment. To develop our business rapidly, we initially
focused our efforts on developing ICs for the personal computer modem market.
We applied our mixed-signal and communications expertise to the development of
ICs for other high growth communications devices such as wireless telephones,
cable and satellite set-top boxes, voice over DSL modems, personal video
recorders and optical network applications. Our world-class, mixed-signal
design engineers use standard complementary metal oxide semiconductor, or CMOS,
technology to create innovative ICs that can improve the performance and
dramatically reduce the cost, size and system power requirements of devices
that our customers sell to their end-user customers. Our expertise in
analog-intensive, mixed-signal IC design in CMOS allows us to develop new and
innovative products rapidly, which enables our customers to improve their
time-to-market with end products that respond to end customer demand in the
communications industry.

INDUSTRY BACKGROUND

In a November 2002 report, the Semiconductor Industry Association projected
that the analog IC market will grow by 19 percent in 2003 to $28 billion in
total sales. Recent growth in the market for communications ICs has been due to
a number of factors, including the growth of Internet usage, development of new
communications technologies, availability of improved communications services
at lower costs, broad deployment of optical networks and remote access
requirements for corporate networks. This demand has fueled tremendous growth
in the number of wireless and wireline communications devices. For example, in
wireless markets, the demand for wireless phones and other wireless devices,
such as personal digital assistants, has grown steadily as digital wireless
services have become increasingly popular and affordable. In wireline markets,
demand has increased for communications capabilities in a wide range of
products, including personal computers (PCs), cable and satellite set-top
boxes, fax machines, credit card verification machines, automated teller
machines and personal video recorders. Consumers increasingly demand higher
capacity connections at their residences using cable modems or high speed DSL.
The demand for greater and faster Internet access by households and businesses
has increased the need to significantly upgrade the communications backbone to
handle this traffic, increasing the need for smaller, faster and better
performing optical networking systems that route this traffic.

Digital communications devices typically require analog-intensive,
mixed-signal circuits that provide analog-to-digital functionality to access the
communications networks to which they are connected. Traditional designs for
communications devices have used mixed-signal circuits built with numerous
discrete analog and digital components. While these traditional designs provide
the required functionality, they can be inefficient and inadequate for use in
markets where size, cost, power consumption and performance are increasingly
important product differentiators. In order to improve their competitive
position, communications device manufacturers need advanced mixed-signal ICs
that reduce the number of discrete components and required board space to create
smaller products with improved price/performance characteristics. Additionally,
these manufacturers require programmable ICs that can be reconfigured to comply
with numerous and constantly evolving international communications standards
without altering the fundamental design of a product.

Manufacturers of communications devices face accelerating time-to-market
demands and must adapt to evolving industry standards and new technologies.
Because analog-intensive, mixed-signal IC design expertise is difficult to find,
these manufacturers increasingly are turning to third parties to provide
advanced mixed-signal ICs. Designing the analog component of a mixed-signal IC
involves great complexity and difficulty, because the performance of an analog
IC depends on the creative analog expertise of engineers to optimize speed,
power, amplitude and resolution within the constraints of standard manufacturing
processes. The development of analog design expertise typically requires years
of practical analog design experience under the guidance of a senior engineer,
and engineers with the required level of skill and expertise are in short
supply.

Many third-party IC providers lack sufficient analog expertise to develop
compelling mixed-signal ICs. As a result, manufacturers of communications
devices are often faced with inadequate mixed-signal ICs and are challenged to
find third-party providers that can supply them with mixed-signal ICs with
greater functionality, smaller size and lower power requirements at a reduced
cost and shorter time-to-market.

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PRODUCTS

We provide analog-intensive, mixed-signal ICs for use in various
communication applications across eight product areas. Our products integrate
the functions of numerous discrete components required by most existing
mixed-signal solutions for communications devices into single chips or chipsets.
By doing so, we are able to create products that, compared to many competitive
products:

- Require less board space;

- Reduce the use of external components;

- Can offer superior performance;

- Provide increased reliability;

- Reduce system power requirements; and

- Reduce costs.

The following table summarizes the product areas and applications for the
various ICs that we currently sell or have introduced to customers:

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WIRELINE PRODUCTS

Silicon Direct Access Arrangement (DAA)
Our DAA provides the functionality of both a direct access - PCI desktop modems
arrangement and a codec. A direct access arrangement - Audio Modem Riser Cards
provides electrical isolation between a wireline device, - Mobile Daughter Cards
such as a modem, and the telephone line to guard against - Notebook modems
power surges in the telephone line, while the codec - Communication and Network
provides analog-to-digital and digital-to-analog Riser (CNR) Cards
conversion. Traditional direct access arrangement - Modem on Motherboard
implementations contain numerous discrete components to - Mini PCI cards
provide functionality comparable to that which we provide - Fax machines
in a single chipset. This family of products includes - Handheld organizers
offerings to support different computer interface - Set-top boxes
standards. Some versions of this chipset are programmable - Video conferencing systems
for differing international telephone standards, which - Speaker phones
enables manufacturers to distribute their products globally - PBXs
without costly country-specific design modifications. A - Voice recognition systems
complementary voice codec product can be combined with our - Web telephony products
DAA to support speakerphone applications.

ISOmodem(TM) Embedded Modems
The ISOmodem combines an analog modem with a silicon DAA, - Set-top boxes
resulting in a complete modem implemented in a very small - Digital cable boxes
form factor. The ISOmodem products are designed for - Credit card verification
embedded modem applications, which are typically found - Industrial power meters
outside of the personal computer area. The ISOmodem - Postage meters
contains a programmable line interface that meets global - Security systems
telephone line requirements, allowing manufacturers to - Remote medical monitoring
implement a single modem design world-wide. The ISOmodem - Japan L-mode phone
family includes embedded modem solutions for speeds - Personal video recorders
ranging from 2400 bps to 56Kbps, suitable for a wide - Point of sale (POS)
range of applications. terminals

ProSLIC(R) Subscriber Line Interface Circuits
The ProSLIC provides the analog telephone interface on - Telephone switchboard systems
the source end of the telephone which generates dial - Cable telephony
tone, busy tone, caller ID and ring signal. Telephone - Wireless local loop providing
source end electronics have historically been at the remote access for a wireline
telephone company central office, but recently have been system
migrating to the customer premises for voice over - Voice over Internet protocol
internet protocol (VOIP) systems. Our ProSLIC product - Voice over cable or digital
family has offerings for short-haul applications suitable subscriber lines
for the customer premises as well as long-haul - Digital broadband to analog
applications suitable for the traditional telephone telephone adapters
company central office. This family includes a dual
ProSLIC that provides for higher port density and lower
cost per phone line. The dual ProSLIC is in the early
stages of customer adoption and is not yet being produced
in volume.

DSL Analog Front End
The DSL Analog Front End, or AFE, is designed to provide - Personal computer modems
the connectivity functions for business or residential - External modems
asymmetric digital subscriber line, or ADSL, connection - Residential gateways
at the user end in customer premises equipment. Such a - Network interface devices
connection addresses the business and residential demand
for DSL broadband higher capacity connectivity as
compared to traditional standard dial-up analog phone
line transmission speeds. The DSL AFE supports several
ADSL communication standards enabling various upload and
download data rates. When combined with our DAA products
for analog phone line connectivity, our combined product
offering provides a single modem design to address both
the prevalent analog modem and the emerging ADSL
services. The ability to dial up the analog phone line in
order to provision the ADSL connection or run remote
diagnostics can assist in the implementation and
maintenance of this ADSL broadband connection. This
product is in the late stages of customer evaluation and
is not yet being produced in volume.

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OPTICAL NETWORKING PRODUCTS

SiPHY(TM) Optical Physical Layer Transceivers
We offer a family of high-speed physical layer ICs that - Optical port cards for SONET
meet the high-speed fiber Synchronous Optical Network, or - SONET/SDH/ATM routers
SONET, specifications. The transceiver operates at a rate - SONET/SDH test equipment
of 2.5 GHz transmission speed commonly referred to as - Optical transponder modules
OC-48 and 10 GHz speed commonly referred to as OC-192. A - Add/drop multiplexers
transceiver provides both the transmit and receive - SONET/SDH regenerators
function in the physical layer. In addition to the - Digital cross connects
transceiver products, we offer a stand-alone transmitter - Board-level serial links
and stand-alone receiver product. We also offer a family
of clock and data recovery chips to provide specific
functions at multiple speeds up to the OC-48 rate. This
IC family utilizes our proprietary digital signal
processing technology to reduce the device's sensitivity
to board-level noise and improve performance. This
product is still in the early stages of customer adoption
and has produced small amounts of revenue in certain
product configurations.

Precision Clocks Integrated Circuits
This precision clock product family includes various - Optical port cards for SONET
products ranging from general purpose clock multiplier - SONET/SDH test equipment
products up to high performance multi-port, redundant, - SONET/SDH/ATM switches
multiple frequency range clock multipliers and - SONET/SDH/ATM routers
regenerators. SONET optical network systems operate in a - Optical transponder modules
synchronous manner requiring very high precision clock
sources. Our knowledge gained in developing the physical
layer transceiver subsections provided us the technology
to offer these highly precise clock products.
Traditionally, these clock sources have been performed
by expensive, bulky modules, complicated discrete
implementations requiring numerous components or current
incomplete IC offerings needing supplemental corrective
circuitry in order to meet specifications. As the
optical network market makes a transition from OC-48
transmission speeds to OC-192 speeds, the need for
precision clock sources throughout the synchronous
optical network becomes a key design feature for our
customers. This product is still in the early stages of
customer adoption and has produced small amounts of
revenue in certain product configurations.

During fiscal 2002, sales of our wireline products and wireless products
accounted for 54% and 46% of our revenues, respectively. During fiscal 2001,
sales of our wireline products and wireless products accounted for 74% and 25%
of our revenues, respectively. During fiscal 2000, sales of our wireline
products accounted for 95% of our revenues.

CUSTOMERS, SALES AND MARKETING

We market our products to original equipment manufacturers (OEM) and other
providers of applications in the wireless, wireline and optical networking
communications markets through our direct sales staff, a network of independent
sales representatives, and electronics distributors. Direct and distributor
customers buy on an individual purchase order basis, rather than pursuant to
long-term agreements. Two of our distributors, Uniquest and Edom Technology,
each selling to multiple end customers in Asia, represented 20% and 16% of our
fiscal 2002 revenues, respectively. Distributors are not considered end
customers, but rather serve as a sales channel to our end customers. No other
distributor accounted for 10% or more of revenues for fiscal 2002.

During fiscal 2002, our ten largest end customers accounted for 67% of our
revenues. We had one end customer, Samsung, which represented 16% of our
revenues. No other single end customer accounted for more than 10% of our

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revenues. The following is a list of our largest end customers that purchased
our products in fiscal 2002 for inclusion in products or devices offered to
their customers:

- - Agere Systems - PC-TEL - Sony - Wavecom
- - Ambit - Samsung - Texas Instruments
- - Echostar - Smart Link - Thomson

We maintain five sales offices in North America and provide European sales
support through our United Kingdom subsidiary. The Asia Pacific area is
supported through our Japanese and Hong Kong subsidiaries as well as a branch
sales office in Taiwan. Our direct sales force includes regional sales managers
in the field and area business managers at our headquarters to further support
customer communications. Many of these managers have engineering degrees. We
maintain a dedicated website for our field sales organization, which includes
technical documentation, backlog information, order status, product availability
and new product introduction information to support our communications with that
organization. Additionally, we provide direct communication to all field sales
personnel as part of a structured sales communications program.

We also utilize independent sales representatives and distributors to
generate sales of our products. We have relationships with many independent
sales representatives and distributors worldwide whom we have selected based on
their understanding of the mixed-signal IC marketplace and their ability to
provide effective field sales applications support for our products. For the
year ended December 28, 2002, sales through these representatives and
distributors accounted for 52% of our sales.

Our marketing efforts are targeted at both identified industry leaders and
emerging market participants. Direct marketing activities are supplemented by a
focused communications effort that seeks to raise awareness of the company and
our products. Our public relations efforts are focused on leading trade and
business publications. Our external website is used to deliver corporate
information and product information. We also pursue targeted advertising in key
trade publications and we have a cooperative marketing program that allows our
distributors and representatives to promote our products to their local markets
in conjunction with their own advertising activities. Finally we maintain a
presence at strategic trade shows and industry events. These activities, in
combination with direct sales activities, help drive demand for our products.

Due to the complex and innovative nature of our ICs, we employ experienced
applications engineers who work closely with customers to support the design-win
process, and can significantly accelerate the customer's time required to bring
a product to market. A design-win occurs when a customer has designed our ICs
into its product architecture. A considerable amount of effort to assist the
customer in incorporating our ICs into its products is typically required prior
to any sale. In many cases, our innovative ICs require significantly different
implementations than existing approaches and, therefore, successful
implementations may require extensive communication with potential customers.
The amount of time required to achieve a design-win can vary substantially
depending on a customer's development cycle, which can be relatively short (such
as three months) or very long (such as two years) based on a wide variety of
customer factors. Due to this extensive design-win process, once a completed
design architecture has been implemented and produced in high volumes, our
customers are reluctant to significantly alter their designs. We believe this
process, coupled with our intellectual property protection, promotes relatively
longer product life cycles for our ICs and high barriers to entry for
competitive products, even if such competing products are offered at lower
prices. Finally, our close collaboration with our customers provides us with
knowledge of derivative product ideas or completely new product line offerings
that may not otherwise arise in other new product discussions.

RESEARCH AND DEVELOPMENT

Through our research and development efforts, we apply our experienced analog
and mixed-signal engineering talent and expertise to create new ICs that
integrate functions typically performed inefficiently by multiple discrete
components. This integration generally results in lower costs, smaller die
sizes, lower power demands and enhanced price/performance characteristics. We
attempt to reuse successful techniques for integration in new applications where

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similar benefits can be realized. We believe that reliable and precise analog
and mixed-signal ICs can only be developed by teams of engineers that
coordinate their efforts under the direction of senior engineers who have
significant analog experience and are familiar with the intricacies of
designing these ICs for commercial volume production. The development of test
methodologies is a critical activity in releasing a new product for commercial
success. We believe that we have attracted some of the best engineers in our
industry. As of December 28, 2002, we had 128 employees involved in research
and development.

Research and development expenses were $32.0 million, $29.0 million and $19.4
million in fiscal 2002, 2001, and 2000, respectively.

TECHNOLOGY

Our product development process facilitates the design of highly-innovative,
analog-intensive, mixed-signal ICs. Our senior engineers start the product
development process by forming an understanding of our customers' products and
then design alternatives with increased functionality and with decreasing power,
size and cost requirements. Our engineers' deep knowledge of existing and
emerging communications standards and performance requirements help us to assess
the technical feasibility of a particular IC. We target areas where we can
provide compelling product improvements. Once we have solved the primary
challenges, our field engineers continue to work closely with our customers'
design teams to maintain and develop an understanding of our customers' needs,
allowing us to formulate derivative products and refined features.

In providing mixed-signal ICs for our customers, we believe our key
competitive advantages are: (1) analog CMOS design expertise; (2) digital signal
processing design expertise; and (3) our broad understanding of communication
systems technology and trends. To fully capitalize on these advantages, we have
assembled a world-class development team with exceptional analog and
mixed-signal design expertise led by accomplished senior engineers.

ANALOG CMOS DESIGN EXPERTISE

We believe that our most significant core competency is our world-class
analog design capability. Additionally, we strive to design all of our ICs in
CMOS processes. There are several modern process technologies for manufacturing
semiconductors including CMOS, Bipolar, BiCMOS, silicon germanium and gallium
arsenide. While it is significantly more difficult to design analog ICs in CMOS,
CMOS provides multiple benefits versus existing alternatives, including
significantly reduced cost, reduced technology risk and greater worldwide
foundry capacity. CMOS is the most commonly used process technology for
manufacturing digital ICs and as a result is most likely to be used for the
manufacturing of ICs with finer line geometries, which enable smaller and faster
ICs. By designing our ICs in CMOS, we enable our products to benefit from this
trend towards finer line geometries, which lowers the cost of the digital
circuitry in our products and allows us to integrate more digital functionality
into our mixed-signal ICs.

Designing analog ICs is significantly more complicated than designing digital
ICs. While advanced software tools exist to help automate digital IC design,
there are far fewer tools for advanced analog IC design. In many cases, our
analog circuit design efforts begin at the fundamental transistor level. We
believe that we have a demonstrated ability to design the most difficult analog
and RF circuits using standard CMOS technologies. For example, our DAA product
family replaces bulky, discrete modem components, such as transformers, relays
and opto-isolators, with highly integrated CMOS mixed-signal ICs. Similarly,
bulky wireless phone components such as voltage controlled oscillators are
replaced by our integrated CMOS frequency synthesizer products. Our design
expertise in the technically challenging optical networking market has allowed
us to reduce the number of supplemental components used in our customers'
products while providing lower levels of noise in the circuit operation. This is
a key technical consideration in high speed optical networks.

DIGITAL SIGNAL PROCESSING DESIGN EXPERTISE

We consider the partitioning of a circuit's functionality to be a proprietary
and creative design technique. Our digital signal processing design expertise
maximizes the price/performance characteristics of both the analog and digital
functions and allows our ICs to work in an optimized manner to accomplish
particular tasks. Generally, we surround core analog circuitry with inexpensive
digital CMOS transistors, which allows our ICs to perform the required analog

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functions with increased digital capabilities. For example, our ProSLIC product
is designed to function more efficiently than traditional products for the
source end of the telephone line, which involve a two chip combination
requiring more board space and numerous external components. The ProSLIC
product is partitioned by combining a core analog design that provides
analog-to-digital conversion and digital-to-analog conversion with optimized
digital signal processing functions such as data compression, data expansion,
filtering and tone generation. In this manner, we can isolate the higher
voltage required to ring a telephone in low-cost, off-chip high voltage
transistors or a small, complementary high voltage chip, thereby enabling us to
fulfill the remaining core functions with a single CMOS chip. As a further
example, our SiPHY Optical Physical Layer Transceivers utilize an
architecturally advanced phase locked loop circuit based principally on digital
signal processing. By performing a significant portion of this function in the
digital domain in a monolithic chip, the circuit has been able to satisfy the
demanding specifications of the optical network SONET standard using
inexpensive CMOS transistors.

UNDERSTANDING OF COMMUNICATION SYSTEMS TECHNOLOGY AND TRENDS

Our focused expertise in communications ICs is the result of the breadth of
engineering talent we have assembled with experience working in
analog-intensive, mixed-signal CMOS design for communications applications. This
expertise, which we consider a competitive advantage, is the foundation of our
in-depth understanding of the technology and trends that impact communications
systems and markets. We believe we have a rare ability to predict product
evolution and design compelling ICs for communications manufacturers. Our
expertise spans from single line plain old telephone service (POTS) to high
speed SONET-based optical networks. We have also expanded our knowledge base
into wireless communications. Our understanding of the role of analog/digital
interfaces within communications systems and the key domestic and international
telecommunications standards that must be supported are particular areas of our
expertise.

MANUFACTURING

As a fabless IC manufacturer, we conduct IC design and development in our
facilities in the United States and electronically transfer our proprietary IC
designs to third-party semiconductor fabricators who process silicon wafers to
produce the ICs that we design. Our IC designs use industry-standard CMOS
manufacturing process technology to achieve a level of performance normally
associated with more expensive special-purpose IC fabrication technology. We
believe the use of CMOS technology facilitates the rapid production of our ICs
within a lower cost framework. Our IC production employs submicron process
geometries which are readily available from leading foundry suppliers worldwide,
thus ensuring the availability of manufacturing capacity over our products' life
cycles. We currently rely principally on Taiwan Semiconductor Manufacturing Co.
(TSMC) to manufacture substantially all of our semiconductor wafers. We believe
that our fabless manufacturing model significantly reduces our capital
requirements and allows us to focus our resources on design, development and
marketing of our ICs.

Once the silicon wafers have been produced, they are shipped directly to our
third-party assembly subcontractors. The assembled ICs are then forwarded for
final testing, either to our facilities in Austin, Texas or to our third-party
test subcontractors, prior to shipping to our customers. We have increasingly
utilized offshore third-party test subcontractors, typically in Asia where the
parts are assembled and where the products are frequently delivered to our
customers. We expect this trend toward utilization of offshore third-party test
subcontractors to continue.

BACKLOG

Our sales are made primarily pursuant to standard purchase orders for
delivery of products, with such purchase orders officially acknowledged by us
according to our own terms and conditions. Because industry practice allows
customers to cancel orders with limited advance notice to us prior to
shipment, we believe that backlog as of any particular date is not always a
reliable indicator of our future revenue levels.

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COMPETITION

The markets for semiconductors generally, and for analog and mixed-signal ICs
in particular, are intensely competitive. We believe the principal competitive
factors in our industry are:

- - Level of integration; - Intellectual property;
- - Product capabilities; - Customer support;
- - Reliability; - Reputation; and
- - Price; - Ability to rapidly introduce new
- - Performance; products to market.

We believe that we are competitive with respect to these factors,
particularly because our ICs typically are smaller in size, are highly
integrated, achieve high performance specifications at lower price points than
competitive products and are manufactured in standard CMOS which generally
enables us to supply them on a relatively rapid basis to customers to meet their
product introduction schedules. However, disadvantages we face include our
relatively short operating history in certain of our markets and the need for
customers to redesign their products and modify their software to implement our
ICs in their products.

We anticipate that the market for our products will continually evolve and
will be subject to rapid technological change. In addition, as we target and
supply products to numerous communications markets and applications, we face
competition from a relatively large number of competitors. Across our product
offerings, we compete with Agere Systems, AMCC, Analog Devices, Broadcom,
Conexant, Cypress, ESS, Fujitsu, Hitachi, Infineon Technologies, Legerity, Maxim
Integrated Products, National Semiconductor, Philips, RF Micro Devices, Semtech,
Skyworks Solutions (the company resulting from the combination of Conexant's
wireless business and Alpha Industries), Texas Instruments, Vitesse
Semiconductor, and others. We expect to face competition in the future from our
current competitors, other manufacturers and designers of semiconductors, and
innovative start-up semiconductor design companies. Our competitors may also
offer bundled chipset kit arrangements offering a more complete product, which
may negatively impact our competitive position despite the technical merits or
advantages of our products. In addition, our customers could develop products or
technologies internally that would replace their need for our products and would
become a source of competition. As the markets for communications products grow,
we also may face competition from traditional communications device companies.
These companies may enter the mixed-signal semiconductor market by introducing
their own products, including components within their products that would
eliminate the need for our ICs, or by entering into strategic relationships with
or acquiring other existing IC providers.

Many of our competitors and potential competitors have longer operating
histories, greater name recognition, access to larger customer bases,
complementary product offerings, and significantly greater financial, sales and
marketing, manufacturing, distribution, technical and other resources than us.
Current and potential competitors have established or may establish financial
and strategic relationships between themselves or with our 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.

INTELLECTUAL PROPERTY

Our future success depends in part upon our proprietary technology. We seek
to protect our technology through a combination of patents, copyrights, trade
secrets, trademarks and confidentiality procedures. As of December 28, 2002, we
had been granted 63 United States patents in the IC field. We also have filed 98
applications for additional United States patents covering our proprietary
technology. We also frequently file for patent protection in a variety of
international jurisdictions with respect to the proprietary technology covered
by our U.S. patents and patent applications. There can be no assurance that
patents will ever be issued with respect to these applications. Furthermore, it
is possible that any patents held by us may be invalidated, circumvented,
challenged or licensed to others. In addition, there can be no assurance that
such patents will provide us with competitive advantages or adequately safeguard
our proprietary rights. The patents and patent applications described above will
expire at various times in the distant future.

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In addition, we claim copyright protection for proprietary documentation used
in our products. We have filed for registration, or are in the process of filing
for registration, of the visual image of each IC that we have manufactured in
commercial quantities with the United States Copyright Office. We have
registered the "Silicon Laboratories" logo and a variety of other product and
product family names as trademarks in the United States. All other trademarks,
service marks or trade names appearing in this report are the property of their
respective owners. We also attempt to protect our trade secrets and other
proprietary information through agreements with our customers, suppliers,
employees and consultants, and through other customary security measures. We
intend to protect our rights vigorously, but there can be no assurance that our
efforts will be successful. In addition, the laws of other countries in which
our products are sold may not protect our products and intellectual property
rights to the same extent as the laws of the United States.

While our ability to effectively compete depends in large part on our ability
to protect our intellectual property, we believe that our technical expertise
and ability to introduce new products in a timely manner will be an important
factor in maintaining our competitive position.

Many participants in the semiconductor and communications industries have a
significant number of patents and have frequently demonstrated a readiness to
commence litigation based on allegations of patent and other intellectual
property infringement. From time to time, third parties may assert infringement
claims against us. We may not prevail in any such litigation or may not be able
to license any valid and infringed patents from third parties on commercially
reasonable terms, if at all. Litigation, regardless of the outcome, is likely to
result in substantial cost and diversion of our resources, including our
management's time. Any such litigation could materially adversely affect us. For
further information regarding patent litigation, please see "Part I, Item 3.
Legal Proceedings." Our licenses include industry standard licenses with our
vendors, such as wafer fabrication tool libraries, third party core libraries,
computer-aided design applications and business software applications.

EMPLOYEES

As of December 28, 2002, we employed 364 people, including 106 in
manufacturing, 128 in research and development, 75 in marketing, 31 in sales and
24 in administration. Our success depends on the continued service of our key
technical and senior management personnel and on our ability to continue to
attract, retain and motivate highly skilled analog and mixed-signal engineers.
The competition for such personnel is intense. We have never had a work stoppage
and none of our employees are represented by a labor organization. We consider
our employee relations to be good.

ENVIRONMENTAL REGULATION

Federal, state and local regulations impose various environmental controls on
the storage, use, discharge and disposal of certain chemicals and gases used in
the semiconductor industry. Our compliance with these laws and regulations has
not had a material impact on our financial position or results of operations.

FACTORS AFFECTING FUTURE OPERATING RESULTS

RISKS RELATED TO OUR BUSINESS

WE MAY NOT BE ABLE TO MAINTAIN OUR HISTORICAL GROWTH RATE AND MAY EXPERIENCE
SIGNIFICANT PERIOD-TO-PERIOD FLUCTUATIONS IN OUR REVENUES AND OPERATING RESULTS,
WHICH MAY RESULT IN VOLATILITY IN OUR STOCK PRICE

Although we have experienced revenue and earnings growth in our three most
recent quarterly periods, we may not be able to sustain these growth rates. We
may also experience significant period-to-period fluctuations in our revenues
and operating results in the future due to a number of factors, and any such
variations may cause our stock price to fluctuate. It is likely that in some
future period our operating results will be below the expectations of public
market analysts or investors. If this occurs, our stock price may drop, perhaps
significantly.

11

A number of factors, in addition to those cited in other risk factors
applicable to our business, may contribute to fluctuations in our revenues and
operating results, including:

- the timing and volume of orders received from our customers;

- the rate of acceptance of our products by our customers, including the
acceptance of new products we may develop for integration in the products
manufactured by such customers, which we refer to as "design wins";

- the time lag between "design wins" and production orders;

- the demand for, and life cycles of, the products incorporating our ICs;

- the rate of adoption of mixed-signal ICs in the markets we target;

- deferrals of customer orders in anticipation of new products or product
enhancements from us or our competitors or other providers of ICs;

- changes in product mix;

- the average selling prices for our products could drop suddenly due to
competitive offerings or competitive predatory pricing; and

- the rate at which new markets emerge for products we are currently
developing or for which our design expertise can be utilized to develop
products for these new markets.

The markets for mobile telephones, personal computers, satellite television
set-top boxes and voice over DSL applications are characterized by rapid
fluctuations in demand and seasonality which result in corresponding
fluctuations in the demand for our wireless and wireline products that are
incorporated in such devices. Additionally, the rate of technology acceptance by
our customers results in fluctuating demand for our products as customers are
reluctant to incorporate a new IC into their products until the new IC has
achieved market acceptance. Once a new IC achieves market acceptance, demand for
the new IC can quickly accelerate to a point and then level off such that rapid
historical growth in sales of a product should not be viewed as indicative of
continued future growth. In addition, demand can quickly decline for a product
when a new IC product is introduced and receives market acceptance. For example,
transceivers that provide some of the functionality provided by our RF
Synthesizers have recently been introduced to market by us and our competitors.
These competing transceivers are likely to result in a rapid decline in our
sales of RF Synthesizers. If our Aero Transceiver does not gain sufficient
market acceptance to offset the anticipated decline in our sales of RF
Synthesizers, our future operating results and growth could be materially
adversely affected. Due to the various factors mentioned above, the results of
any prior quarterly or annual periods should not be relied upon as an indication
of our future operating performance.

WE DEPEND ON A LIMITED NUMBER OF CUSTOMERS FOR A SUBSTANTIAL PORTION OF OUR
REVENUES, AND THE LOSS OF, OR A SIGNIFICANT REDUCTION IN ORDERS FROM, ANY KEY
CUSTOMER COULD SIGNIFICANTLY REDUCE OUR REVENUES

The loss of any of our key customers, or a significant reduction in sales to
any one of them, would significantly reduce our revenues and adversely affect
our business. During fiscal 2002, our ten largest customers accounted for 67% of
our revenues. We had one customer, Samsung, purchasing primarily through the
distributor Uniquest, which represented 16% of our revenues. No other single
customer accounted for more than 10% of our revenues during fiscal 2002. Two
distributors, Uniquest and Edom Technology, each selling to multiple customers
in Asia, represented 20% and 16% of our fiscal 2002 revenues, respectively. Most
of the markets for our products are dominated by a small number of potential
customers. Therefore, our operating results in the foreseeable future will
continue to depend on our ability to affect sales to these dominant customers,
as well as the ability of these customers to sell products that incorporate our
IC products. In the future, these customers may decide not to purchase our ICs
at all, purchase fewer ICs than they did in the past or alter their purchasing
patterns, particularly because:

- we do not have any material long-term purchase arrangements with these or
any of our other customers;

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- substantially all of our sales to date have been made on a purchase order
basis, which permits our customers to cancel, change or delay product
purchase commitments with little or no notice to us and without penalty;
and

- some of our customers have sought or are seeking relationships with our
current or potential competitors which may affect our customers'
purchasing decisions.

While we have been the sole supplier of the direct access arrangement, or
DAA, ICs used in many of our customers' soft modem DAA products and have also
been a substantial supplier of synthesizers and transceivers to Samsung and
other major GSM handset manufacturers, we anticipate that our customers will
regularly evaluate alternative sources of supply in the future in order to
diversify their supplier base, which would increase their negotiating leverage
with us and protect their ability to secure these components. We believe that
any expansion of our customers' supplier bases could have an adverse effect on
the prices we are able to charge and volume of product that we are able to
supply to our customers, which would negatively affect our revenues and
operating results.

WE ARE SUBJECT TO RISKS RELATING TO PRODUCT CONCENTRATION AND LACK OF REVENUE
DIVERSIFICATION

We derive a substantial portion of our revenues from a limited number of
products, and we expect these products to continue to account for a large
percentage of our revenues in the near term. Continued market acceptance of
these products, is therefore, critical to our future success. In addition,
substantially all of our products that we have sold include technology related
to one or more of our issued U.S. patents. If these patents are found to be
invalid or unenforceable, our competitors could introduce competitive products
that could reduce both the volume and price per unit of our products. Our
business, operating results, financial condition and cash flows could therefore
be adversely affected by:

- a decline in demand for any of our more significant products including our
Aero Transceiver, RF Synthesizer, DAA or ISOmodem;

- failure of our products to achieve continued market acceptance;

- an improved version of our products being offered by a competitor;

- technological change that we are unable to address with our products; and

- a failure to release enhanced versions of our products on a timely basis
and/or the failure of these new products to achieve market acceptance.

We are particularly dependent on sales of our wireless products, which
constituted almost half of our total revenues in 2002. If the market for GSM
mobile handsets in which these products are incorporated deteriorates, our
operating results would be materially and adversely affected.

OUR INABILITY TO MANAGE GROWTH COULD MATERIALLY AND ADVERSELY AFFECT OUR
BUSINESS

In recent periods, we have significantly increased the scope of our
operations and expanded our workforce from 42 employees at January 2, 1999 to
364 employees at December 28, 2002. This growth has placed, and any future
growth of our operations will continue to place, a significant strain on our
management personnel, systems and resources. We anticipate that we will need to
implement a variety of new and upgraded operational and financial systems,
procedures and controls, including the improvement of our accounting and other
internal management systems. We also expect that we will need to continue to
expand, train, manage and motivate our workforce. All of these endeavors will
require substantial management effort. If we are unable to effectively manage
our expanding operations, our business could be materially and adversely
affected.

IF WE ARE UNABLE TO DEVELOP NEW AND ENHANCED PRODUCTS THAT ACHIEVE MARKET
ACCEPTANCE IN A TIMELY MANNER, OUR OPERATING RESULTS AND COMPETITIVE POSITION
COULD BE HARMED

Our future success will depend on our ability to reduce our dependence on a
few products by developing new ICs and product enhancements that achieve market

13

acceptance in a timely and cost-effective manner. The development of
mixed-signal ICs is highly complex, and we occasionally have experienced delays
in completing the development and introduction of new products and product
enhancements. Successful product development and market acceptance of our
products depend on a number of factors, including:

- changing requirements of customers within the communications markets;

- accurate prediction of market requirements;

- timely completion and introduction of new designs;

- timely qualification and certification of our ICs for use in our
customers' products;

- commercial acceptance and volume production of the products into which our
ICs will be incorporated;

- availability of foundry, assembly, and test capacity;

- achievement of high manufacturing yields;

- quality, price, performance, power use and size of our products;

- availability, quality, price and performance of competing products and
technologies;

- our customer service and support capabilities and responsiveness;

- successful development of our relationships with existing and potential
customers;

- changes in technology, industry standards or end-user preferences; and

- cooperation of software partners and semiconductor partners to support our
chips within a system.

We cannot provide any assurance that products which we recently have
developed or may develop in the future will achieve market acceptance. We have
introduced to market or are in development of many ICs. If our recently
introduced or other ICs fail to achieve market acceptance, or if we fail to
develop new products or if these new products fail to achieve market acceptance,
our growth prospects, operating results and competitive position could be
adversely affected.

OUR RESEARCH AND DEVELOPMENT EFFORTS ARE FOCUSED ON A LIMITED NUMBER OF NEW
TECHNOLOGIES AND PRODUCTS, AND ANY DELAY IN THE DEVELOPMENT, OR ABANDONMENT, OF
THESE TECHNOLOGIES OR PRODUCTS BY INDUSTRY PARTICIPANTS, OR THEIR FAILURE TO
ACHIEVE MARKET ACCEPTANCE, COULD COMPROMISE OUR COMPETITIVE POSITION

Our ICs are used as components in communications devices in various markets.
As a result, we have devoted and expect to continue to devote a large amount of
resources to develop products based on new and emerging technologies and
standards that will be commercially introduced in the future. Research and
development expense in fiscal 2002 was $32.0 million, or 17.6% of revenues,
compared with research and development expense of $29.0 million, or 39.1% of
revenues, in fiscal 2001. A number of large companies in the communications
industry are actively involved in the development of these new technologies and
standards. Should any of these companies delay or abandon their efforts to
develop commercially available products based on new technologies and standards,
our research and development efforts with respect to these technologies and
standards likely would have no appreciable value. In addition, if we do not
correctly anticipate new technologies and standards, or if the products that we
develop based on these new technologies and standards fail to achieve market
acceptance, our competitors may be better able to address market demand than we
would. Furthermore, if markets for these new technologies and standards develop
later than we anticipate, or do not develop at all, demand for our products that
are currently in development would suffer, resulting in lower sales of these
products than we currently anticipate. For example, we have introduced to market
the Aero Transceiver product for use in wireless phones operating on the GSM
standard. The Aero Transceiver is also compatible with the GPRS standard, which
we believe is the emerging data communications protocol for GSM based wireless
phones. We cannot be certain that these standards will not change, thereby

14

making our products unsuitable or impractical. Additionally, despite the
published GSM/GPRS specifications, mobile phone network operators may demand
increased performance beyond specifications for this highly competitive market.
In the area of optical networking, our clock and data recovery integrated
circuit operates within stringent specifications for high speed communications
systems known as SONET. Changes to this standard could make our products
uncompetitive or unsuitable to changing system requirements and result in our
inability to sell these products.

WE RELY ON THIRD PARTIES TO MANUFACTURE, ASSEMBLE AND TEST OUR PRODUCTS AND THE
FAILURE TO SUCCESSFULLY MANAGE OUR RELATIONSHIPS WITH OUR MANUFACTURERS AND
ASSEMBLERS WOULD NEGATIVELY IMPACT OUR ABILITY TO SELL OUR PRODUCTS

We do not have our own wafer fab manufacturing facilities. Therefore, we rely
principally on one third-party vendor, TSMC, to manufacture the ICs we design.
We also currently rely principally on two third-party assembly subcontractors,
Advanced Semiconductor Engineering and Amkor, to assemble and package the
silicon chips provided by the wafers for use in final products. Additionally, we
rely on third-party vendors for a portion of the testing requirements of our
products prior to shipping. We also maintain testing facilities in Austin,
Texas. However, we have increasingly utilized offshore third-party test
subcontractors, typically in Asia where the parts are assembled and where the
products are more frequently delivered to our customers. We expect this trend
toward utilization of offshore third-party test subcontractors to continue.

There are significant risks associated with relying on these third-party
foundries and subcontractors, including:

- failure by us, our customers or their end customers to qualify a selected
supplier;

- capacity shortages during periods of high demand;

- potential insolvency of the third-party subcontractors;

- reduced control over delivery schedules and quality;

- limited warranties on wafers or products supplied to us;

- potential increases in prices;

- increased need for international-based supply and logistics management;

- their inability to supply or support new or changing packaging
technologies; and

- low test yields.

We currently do not have long-term supply contracts with any of our
third-party vendors, and, therefore, they are not obligated to perform services
or supply products to us for any specific period, or in any specific quantities,
except as may be provided in a particular purchase order. Although we believe
that other semiconductor foundries or assembly subcontractors can adequately
address our needs, we expect that it would take approximately six to twelve
months to transition performance of these services from our current providers to
new providers. Such a transition may also require a qualification process by our
customers or their end customers. We generally place orders for products with
some of our suppliers approximately four months prior to the anticipated
delivery date, with order volumes based on our forecasts of demand from our
customers. Accordingly, if we do not accurately forecast demand for our
products, we may be unable to obtain adequate foundry or assembly capacity from
our third-party foundry and assembly subcontractors to meet our customers'
delivery requirements, or we may accumulate excess inventories. On occasion, we
have been unable to adequately respond to unexpected increases in customer
purchase orders, and, therefore, were unable to benefit from this incremental
demand. None of our third-party foundry or assembly subcontractors have provided
assurances to us that adequate capacity will be available to us within the time
required to meet additional demand for our products.

Since our inception, substantially all of the silicon wafers for the products
that we have shipped were manufactured either by TSMC or its affiliates. Our
customers typically complete their own qualification process. If we fail to

15

properly balance customer demand across the existing semiconductor fabrication
facilities that we utilize or are required by our foundry partners to increase,
or otherwise change the number of fab lines that we utilize for our production,
we might not be able to fulfill demand for our products and may need to divert
our engineering resources away from new product development initiatives to
support the fab line transition, which would adversely affect our operating
results. Additionally, a resulting write off of unusable or excess inventories
would contribute to a decline in earnings.

WE HAVE INCREASED OUR INTERNATIONAL SALES ACTIVITIES SIGNIFICANTLY AND PLAN TO
CONTINUE SUCH EFFORTS, WHICH SUBJECTS US TO ADDITIONAL BUSINESS RISKS INCLUDING
INCREASED LOGISTICAL COMPLEXITY, POLITICAL INSTABILITY AND CURRENCY FLUCTUATIONS

We recently established an additional international subsidiary and have
opened additional sales offices in international markets to expand our
international sales activities in Europe and the Pacific Rim region and intend
to increase our staffing in international sales. The percentage of our revenues
to customers located outside of the United States was 79% in fiscal 2002, 66% in
fiscal 2001 and 21% in fiscal 2000. This percentage increase in the two most
recent years reflects our progress in the areas of product and customer
diversification, as many of our wireless, and increasingly, wireline customers
manufacture and design their products in the Pacific Rim region. Our planned
international sales growth will be limited if we are unable to hire additional
personnel and develop relationships with international distributors. We may not
be able to maintain or increase international market demand for our products.
Our international operations are subject to a number of risks, including:

- increased complexity and costs of managing international operations;

- protectionist laws and business practices that favor local competition in
some countries;

- multiple, conflicting and changing laws, regulations and tax schemes;

- longer sales cycles;

- greater difficulty in accounts receivable collection and longer collection
periods;

- high levels of distributor inventory subject to rights of return to us;

- political and economic instability; and

- greater difficulty in hiring qualified technical sales and applications
engineers.

To date, all of our sales to international customers and purchases of
components from international suppliers have been denominated in U.S. dollars.
As a result, an increase in the value of the U.S. dollar relative to foreign
currencies could make our products more expensive for our international
customers to purchase, thus rendering our products less competitive.

OUR CURRENT MANUFACTURERS, ASSEMBLERS, TEST SERVICE PROVIDERS, AND CUSTOMERS ARE
CONCENTRATED IN THE SAME GEOGRAPHIC REGION, WHICH INCREASES THE RISK THAT A
NATURAL DISASTER, LABOR STRIKE, WAR OR POLITICAL UNREST COULD DISRUPT OUR
OPERATIONS OR SALES

Our current semiconductor wafer manufacturer's foundries are located in the
same region within Taiwan and our assembly and test subcontractors are located
in the Pacific Rim region. In addition, many of our customers, particularly
mobile telephone manufacturers, are located in the Pacific Rim region. The risk
of earthquakes in Taiwan and the Pacific Rim region is significant due to the
proximity of major earthquake fault lines in the area. We are not currently
covered by insurance against business disruption caused by earthquakes as such
insurance is not currently available on terms that we believe are commercially
reasonable. Earthquakes, fire, flooding or other natural disasters in Taiwan or
the Pacific Rim region, or political unrest, war, labor strikes or work
stoppages in countries where our semiconductor manufacturer, assemblers and test
subcontractors are located, likely would result in the disruption of our

16

foundry, assembly or test capacity. There can be no assurance that such
alternate capacity could be obtained on favorable terms, if at all.

A natural disaster, labor strike, war or political unrest where our
customers' facilities are located would likely reduce our sales to such
customers. For example, Samsung, our largest customer, is based in South Korea
and represented 16% of our fiscal 2002 revenues. North Korea's recent decision
to withdraw from the nuclear Non-Proliferation Treaty and related geopolitical
maneuverings has created unrest. Such unrest could create economic uncertainty
or instability, could escalate to war or otherwise adversely affect South Korea
and our South Korean customers and reduce our sales to such customers, which
would materially and adversely affect our operating results. In addition, a
significant portion of the assembly and test for our wireless products occurs in
South Korea. Any disruption resulting from these events could also cause
significant delays in shipments of our products until we are able to shift our
manufacturing, assembling or testing from the affected subcontractor to another
third-party vendor.

THE SEMICONDUCTOR MANUFACTURING PROCESS IS HIGHLY COMPLEX AND, FROM TIME TO
TIME, MANUFACTURING YIELDS MAY FALL BELOW OUR EXPECTATIONS, WHICH COULD RESULT
IN OUR INABILITY TO SATISFY DEMAND FOR OUR PRODUCTS IN A TIMELY MANNER.

The manufacture of silicon wafers for our products is a highly complex and
technologically demanding process. Although we work closely with our foundries
to minimize the likelihood of reduced manufacturing yields, our foundries from
time to time have experienced lower than anticipated manufacturing yields.
Changes in manufacturing processes or the inadvertent use of defective or
contaminated materials by our foundries could result in lower than anticipated
manufacturing yields or unacceptable performance deficiencies. If our foundries
fail to deliver fabricated silicon wafers of satisfactory quality in a timely
manner, we will be unable to meet our customers' demand for our products in a
timely manner, which would adversely affect our operating results and damage our
customer relationships.

OUR PRODUCTS ARE COMPLEX AND MAY REQUIRE MODIFICATIONS TO RESOLVE UNDETECTED
ERRORS WHICH COULD LEAD TO AN INCREASE IN OUR COSTS OR A REDUCTION IN OUR
REVENUES

Our products are complex and may contain errors when first introduced or as
new versions are released. We rely primarily on our in-house testing personnel
to design test operations and procedures to detect any errors prior to delivery
of our products to our customers. Because our products are manufactured by third
parties, should problems occur in the operation or performance of our ICs, we
may experience delays in meeting key introduction dates or scheduled delivery
dates to our customers. These errors also could cause us to incur significant
re-engineering costs, divert the attention of our engineering personnel from our
product development efforts and cause significant customer relations and
business reputation problems.

WE DEPEND ON OUR KEY PERSONNEL TO MANAGE OUR BUSINESS EFFECTIVELY IN A RAPIDLY
CHANGING MARKET, AND IF WE ARE UNABLE TO RETAIN OUR CURRENT PERSONNEL AND HIRE
ADDITIONAL PERSONNEL, OUR ABILITY TO DEVELOP AND SUCCESSFULLY MARKET OUR
PRODUCTS COULD BE HARMED

We believe our future success will depend in large part upon our ability to
attract and retain highly skilled managerial, engineering, sales and marketing
personnel. Specifically, we believe that our future success is highly dependent
on Navdeep Sooch, our co-founder, Chief Executive Officer and Chairman of the
Board, Daniel Artusi, our President and Chief Operating Officer, Jeffrey Scott,
our co-founder and Vice President, and David Welland, our co-founder and Vice
President. There is currently a shortage of qualified personnel with significant
experience in the design, development, manufacturing, marketing and sales of
analog and mixed-signal communications ICs. In particular, there is a shortage
of engineers who are familiar with the intricacies of the design and
manufacturability of analog elements, and competition for such personnel is
intense. Our key technical personnel represent a significant asset and serve as
the primary source for our technological and product innovations. We may not be
successful in attracting and retaining sufficient numbers of technical personnel
to support our anticipated growth. The loss of any of our key employees or the
inability to attract or retain qualified personnel both in the United States and
internationally, including engineers and sales and marketing personnel, could
delay the development and introduction of, and negatively impact our ability to
sell, our products.

17

WE ARE ENGAGED IN A PATENT LAWSUIT WITH TDK SEMICONDUCTOR CORPORATION

In August 2001, TDK Semiconductor Corporation commenced a lawsuit against us
for alleged willful infringement by our DAA products of a TDK-held patent. TDK's
complaint seeks unspecified treble damages, costs and attorneys' fees, and an
injunction. In September 2001, we served and filed an answer to TDK's complaint,
in which we denied the alleged infringement and asserted that their patent is
invalid. On March 27, 2002, we filed an amended answer and counterclaims in
which we claimed that the TDK-held patent is unenforceable due to inequitable
conduct and asserted counterclaims seeking a declaration that the TDK-held
patent is invalid, not infringed and unenforceable. On November 6, 2002, the
court denied our motion for summary judgment, that we did not infringe TDK's
semiconductor patent rights. On January 6, 2003, the court extended discovery
through July 3, 2003, set a final date for all summary judgment motions of
August 4, 2003, and extended the trial date to November 2003. This lawsuit may
involve significant expense and may also divert our management's time and
attention from other aspects of our business. Due to the inherent uncertainties
of litigation, we are unable to predict the outcome of this matter. For further
information regarding this litigation, please see "Part I, Item 3. Legal
Proceedings."

WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY, WHICH WOULD NEGATIVELY
AFFECT OUR ABILITY TO COMPETE

Our products rely on our proprietary technology, and we expect that future
technological advances made by us will be critical to sustain market acceptance
of our products. Therefore, we believe that the protection of our intellectual
property rights is and will continue to be important to the success of our
business. We rely on a combination of patent, copyright, trademark and trade
secret laws and restrictions on disclosure to protect our intellectual property
rights. We also enter into confidentiality or license agreements with our
employees, consultants, intellectual property providers, and business partners,
and control access to and distribution of our documentation and other
proprietary information. Despite these efforts, unauthorized parties may attempt
to copy or otherwise obtain and use our proprietary technology. Monitoring
unauthorized use of our technology is difficult, and we cannot be certain that
the steps we have taken will prevent unauthorized use of our technology,
particularly in foreign countries where the laws may not protect our proprietary
rights as fully as in the United States. We cannot be certain that patents will
be issued as a result of our pending applications nor can we be certain that any
issued patents would protect or benefit us or give us adequate protection from
competing products. For example, issued patents may be circumvented or
challenged and declared invalid or unenforceable. We also cannot be certain that
others will not develop effective competing technologies on their own.

SIGNIFICANT LITIGATION OVER INTELLECTUAL PROPERTY IN OUR INDUSTRY MAY CAUSE US
TO BECOME INVOLVED IN COSTLY AND LENGTHY LITIGATION WHICH COULD SERIOUSLY HARM
OUR BUSINESS

In recent years, there has been significant litigation in the United States
involving patents and other intellectual property rights. From time to time, we
receive letters from various industry participants alleging infringement of
patents, trademarks or misappropriation of trade secrets. The exploratory nature
of these inquiries has become relatively common in the semiconductor industry.
We typically respond when appropriate and as advised by legal counsel. We have
been involved in litigation to protect our intellectual property rights in the
past and may become involved in such litigation again in the future. In the
future, we may become involved in litigation to defend allegations of
infringement asserted by others, both directly and indirectly as a result of
certain industry-standard indemnities we may offer to our customers. Legal
proceedings could subject us to significant liability for damages or invalidate
our proprietary rights. Legal proceedings initiated by us to protect our
intellectual property rights could also result in counterclaims or countersuits
against us. Any litigation, regardless of its outcome, would likely be time
consuming and expensive to resolve and would divert our management's time and
attention. Any intellectual property litigation also could force us to take
specific actions, including:

- cease selling products that use the challenged intellectual property;

- obtain from the owner of the infringed intellectual property a right to a
license to sell or use the relevant technology, which license may not be
available on reasonable terms, or at all;

18

- redesign those products that use infringing intellectual property; or

- pursue legal remedies with third parties to enforce our indemnification
rights, which may not adequately protect our interests.

FAILURE TO MANAGE OUR DISTRIBUTION CHANNEL RELATIONSHIPS COULD IMPEDE OUR FUTURE
GROWTH

The future growth of our business will depend in part on our ability to
manage our relationships with current and future distributors and sales
representatives, develop additional channels for the distribution and sale of
our products and manage these relationships. As we execute our indirect sales
strategy, we will need to manage the potential conflicts that may arise with our
direct sales efforts. For example, conflicts with a distributor may arise when a
customer begins purchasing directly from us rather than through the distributor.
The inability to successfully execute or manage a multi-channel sales strategy
could impede our future growth.

A SUBSTANTIAL PORTION OF THE FINAL TESTING OF OUR PRODUCTS IS PERFORMED
INTERNALLY BY US, WHICH INCREASES OUR FIXED COSTS

In fiscal 2001, substantially all of our test operations were performed
in-house. During fiscal 2002, we significantly expanded our internal test
capabilities to support our wireless products. However, during this same period
we also outsourced a portion of test operations to our contract manufacturers or
other third parties. While we expect that performing a substantial portion of
testing in-house provides us with advantages in terms of quality control and
shorter time required to bring a product to market, we may encounter
difficulties and delays in maintaining or expanding our internal test
capabilities. In addition, final testing of complex semiconductors requires
substantial resources to acquire state-of-the-art testing equipment and hiring
additional qualified personnel, which has increased our fixed costs. If demand
for our products does not support the effective utilization of these employees
and additional equipment, we may not realize any benefit from performing the
final testing internally. Any decrease in the demand for our products could
result in the underutilization of our testing equipment and personnel. If our
internal test operations are underused or mismanaged, we may incur significant
costs that could adversely affect our operating results.

OUR CUSTOMERS REQUIRE OUR PRODUCTS TO UNDERGO A LENGTHY AND EXPENSIVE
QUALIFICATION PROCESS WHICH DOES NOT ENSURE PRODUCT SALES

Prior to purchasing our products, our customers require that our products
undergo an extensive qualification process, which involves testing of the
products in the customer's system as well as rigorous reliability testing. This
qualification process may continue for six months or longer. However,
qualification of a product by a customer does not ensure any sales of the
product to that customer. Even after successful qualification and sales of a
product to a customer, a subsequent revision to the IC, changes in its
manufacturing process or the selection of a new supplier by us may require a new
qualification process, which may result in delays and in us holding excess or
obsolete inventory. After our products are qualified, it can take an additional
six months or more before the customer commences volume production of components
or devices that incorporate our products. Despite these uncertainties, we devote
substantial resources, including design, engineering, sales, marketing and
management efforts, toward qualifying our products with customers in
anticipation of sales. If we are unsuccessful or delayed in qualifying any of
our products with a customer, such failure or delay would preclude or delay
sales of such product to the customer, which may impede our growth and cause our
business to suffer.

WE DEPEND ON OUR CUSTOMERS TO SUPPORT OUR PRODUCTS

Our products are currently used by our customers to produce modems,
telephony equipment, mobile telephones, various wireless devices and optical
networking equipment. We rely on our customers to provide hardware, software,
intellectual property indemnification and other technical support for the
products supplied by our customers. If our customers do not provide the
required functionality or if our customers do not provide satisfactory
support for their products, the demand for these devices that incorporate our
products may diminish or we may otherwise be materially adversely affected.
Any reduction in the demand for these devices would significantly reduce our
revenues.

19

WE ARE SUBJECT TO INCREASED INVENTORY RISKS AND COSTS BECAUSE WE BUILD OUR
PRODUCTS BASED ON FORECASTS PROVIDED BY CUSTOMERS BEFORE RECEIVING PURCHASE
ORDERS FOR THE PRODUCTS

In order to ensure availability of our products for some of our largest
customers, we start the manufacturing of our products in advance of receiving
purchase orders based on forecasts provided by these customers. However, these
forecasts do not represent binding purchase commitments and we do not recognize
sales for these products until they are shipped to the customer. As a result,
we incur inventory and manufacturing costs in advance of anticipated sales.
Because demand for our products may not materialize, manufacturing based on
forecasts subjects us to increased risks of high inventory carrying costs and
increased obsolescence and may increase our operating costs. These inventory
risks are exacerbated when our customers purchase indirectly through contract
manufacturers because this causes us to have less visibility regarding the
accumulated levels of inventory for such customers.

WE ARE SUBJECT TO CREDIT RISKS RELATED TO OUR ACCOUNTS RECEIVABLE, ESPECIALLY
WHEN CUSTOMERS PURCHASE PRODUCTS THROUGH DISTRIBUTORS AND CONTRACT
MANUFACTURERS.

We do not generally obtain letters of credit or other security for payment
from customers, distributors or contract manufacturers. Accordingly, we are not
protected against accounts receivable default or bankruptcy by these entities.
If we are unable to collect our accounts receivable, our operating results could
be materially harmed. A significant and increasing portion of our revenues are
realized through indirect channels such as distributors and contract
manufacturers, with a growing portion being located outside the United States.
At December 28, 2002, gross receivable balances from distributors and contract
manufacturers totaled $20.6 million versus $5.9 million at December 29, 2001.
Typically, distributors and contract manufacturers are dependent on receiving
payment from the ultimate customers for the resources necessary to pay us. None
of our shipments to distributors and contract manufacturers are guaranteed by
the ultimate customer. If for any reason a customer does not pay the distributor
or contract manufacturer, there are no assurances that our direct contractual
customers will have adequate working capital to enable the collection of our
accounts receivable. We continue to monitor the credit worthiness and payment
practice of each of the distributors or contract manufacturers, and to date have
not had any significant write offs of receivable balances from them.

WE COULD SEEK TO RAISE ADDITIONAL CAPITAL IN THE FUTURE THROUGH THE ISSUANCE OF
EQUITY OR DEBT SECURITIES, BUT ADDITIONAL CAPITAL MAY NOT BE AVAILABLE ON TERMS
ACCEPTABLE TO US, OR AT ALL.

We believe that our existing cash, cash equivalents, investments and bank
credit facility will be sufficient to meet our working capital needs, capital
expenditures, investment requirements and commitments for at least the next 12
months. However, it is possible that we may need to raise additional funds to
finance our activities or to consummate acquisitions of other businesses,
products or technologies. We believe we could raise these funds, if needed, by
selling equity or debt securities to the public or to selected investors. In
addition, even though we may not need additional funds, we may still elect to
sell additional equity or debt securities or obtain credit facilities for other
reasons. However, we may not be able to obtain additional funds on favorable
terms, or at all. If we decide to raise additional funds by issuing equity or
convertible debt securities, the ownership percentages of existing shareholders
would be reduced.

WE ARE A RELATIVELY SMALL COMPANY WITH LIMITED RESOURCES COMPARED TO SOME OF OUR
CURRENT AND POTENTIAL COMPETITORS AND WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY
AND INCREASE MARKET SHARE

Some of our current and potential competitors have longer operating
histories, significantly greater resources and name recognition and a larger
base of customers than we have. As a result, these competitors may have
greater credibility with our existing and potential customers. They also may
be able to adopt more aggressive pricing policies and devote greater
resources to the development, promotion and sale of their products than we
can to ours. In addition, some of our current and potential competitors have
already established supplier or joint development relationships with the

20

decision makers at our current or potential customers. These competitors may be
able to leverage their existing relationships to discourage their customers
from purchasing products from us or persuade them to replace our products with
their products. Our competitors may also offer bundled chipset kit arrangements
offering a more complete product despite the technical merits or advantages of
our products. These competitors may elect not to support our products which
could complicate our sales efforts. These and other competitive pressures may
prevent us from competing successfully against current or future competitors,
and may materially harm our business. Competition could decrease our prices,
reduce our sales, lower our margins or decrease our market share.

ANY ACQUISITIONS WE MAKE COULD DISRUPT OUR BUSINESS AND HARM OUR FINANCIAL
CONDITION

As part of our growth strategy, we will continue to evaluate opportunities to
acquire other businesses or technologies that would complement our current
offerings, expand the breadth of our markets or enhance our technical
capabilities. Acquisitions that we may potentially make in the future entail a
number of risks that could materially and adversely affect our business and
operating results, including:

- problems integrating the acquired operations, technologies or products
with our existing business and products;

- diversion of management's time and attention from our core business;

- need for financial resources above our planned investment levels;

- difficulties in retaining business relationships with suppliers and
customers of the acquired company;

- risks associated with entering markets in which we lack prior experience;

- potential loss of key employees of the acquired company; and

- potential requirement to amortize intangible assets or write off
in-process research and development and other acquisition-related
expenses.

Future acquisitions also could cause us to incur debt or contingent
liabilities or cause us to issue equity securities that could impact the
ownership percentages of existing shareholders.

OUR STOCK PRICE MAY BE VOLATILE.

The market price of our common stock has been volatile in the past and may be
volatile in the future. The market price of our common stock may be
significantly affected by the following factors:

- actual or anticipated fluctuations in our operating results;

- changes in financial estimates by securities analysts or our failure to
perform in line with such estimates;

- changes in market valuations of other technology companies, particularly
semiconductor companies;

- announcements by us or our competitors of significant technical
innovations, acquisitions, strategic partnerships, joint ventures or
capital commitments;

- introduction of technologies or product enhancements that reduce the need
for our products;

- the loss of one or more key OEM customers; and

- departures of key personnel.

The stock market has experienced extreme volatility that often has been
unrelated to the performance of particular companies. These market fluctuations
may cause our stock price to fall regardless of our performance.

21

PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW COULD PREVENT, DELAY OR
IMPEDE A CHANGE IN CONTROL OF US AND MAY REDUCE THE MARKET PRICE OF OUR COMMON
STOCK

Provisions of our certificate of incorporation and bylaws could have the
effect of discouraging, delaying or preventing a merger or acquisition that a
stockholder may consider favorable. For example, our certificate or
incorporation and bylaws provide for:

- the division of our board of directors into three classes to be elected on
a staggered basis, one class each year;

- the ability of our board of directors to issue shares of our preferred
stock in one or more series without further authorization of our
stockholders;

- a prohibition on stockholder action by written consent;

- elimination of the right of stockholders to call a special meeting of
stockholders;

- a requirement that stockholders provide advance notice of any stockholder
nominations of directors or any proposal of new business to be considered
at any meeting of stockholders; and

- a requirement that a supermajority vote be obtained to amend or repeal
certain provisions of our certificate of incorporation.

We also are subject to the anti-takeover laws of Delaware which may
discourage, delay or prevent someone from acquiring or merging with us, which
may adversely affect the market price of our common stock.

THE PERFORMANCE OF OUR NEXT GENERATION DIRECT ACCESS ARRANGEMENT PRODUCTS MAY BE
ADVERSELY AFFECTED BY SEVERE ENVIRONMENTAL CONDITIONS THAT MAY REQUIRE
MODIFICATIONS, WHICH COULD LEAD TO AN INCREASE IN OUR COSTS OR A REDUCTION IN
OUR REVENUES

Although our DAA products are compliant with published specifications, these
established specifications might not adequately address all conditions that must
be satisfied in order to operate in harsh environments. This includes
environments where there are wide variations in electrical quality, telephone
line quality, static electricity and operating temperatures or that may be
affected by lightning or improper handling by customers and end users. Our next
generation products have had a limited period of time in the field under
operation, and these environmental factors may result in unanticipated returns
of our products. Any necessary modifications could cause us to incur significant
re-engineering costs, divert the attention of our engineering personnel from our
product development efforts and cause significant customer relations and
business reputation problems.

RISKS RELATED TO OUR INDUSTRY

COMPETITION WITHIN THE NUMEROUS MARKETS WE TARGET MAY REDUCE SALES OF OUR
PRODUCTS AND REDUCE MARKET SHARE

The markets for semiconductors in general, and for mixed-signal ICs in
particular, are intensely competitive. We expect that the market for our
products will continually evolve and will be subject to rapid technological
change. In addition, as we target and supply products to numerous markets and
applications, we face competition from a relatively large number of competitors.
Across all of our product areas, we compete with Agere Systems, AMCC, Analog
Devices, Broadcom, Conexant, Cypress, ESS, Fujitsu, Hitachi, Infineon
Technologies, Legerity, Maxim Integrated Products, National Semiconductor,
Philips, RF Micro Devices, Semtech, Skyworks Solutions Inc. (the company
resulting from the combination of Conexant's wireless business and Alpha
Industries), Texas Instruments, Vitesse Semiconductor, and others. We expect to
face competition in the future from our current competitors, other manufacturers
and designers of semiconductors, and innovative start-up semiconductor design
companies. Some of our customers, such as Agere Systems, Intel, Motorola,
Samsung and Texas Instruments, are also large, established semiconductor
suppliers. Our sales to and support of these customers may enable them to become
a source of competition to us, despite our efforts to protect our intellectual
property rights. As the markets for communications products grow, we also may
face competition from traditional communications device companies.

22

These companies may enter the mixed-signal semiconductor market by introducing
their own ICs or by entering into strategic relationships with or acquiring
other existing providers of semiconductor products. We anticipate increasing
competitive pressure because sales of our wireless products into the highly
competitive GSM handset market are expected to comprise a larger percentage of
our future revenues.

In addition, our largest competitors may restructure their operations to
create separate companies that are more focused on providing the types of
products we produce. For example, Conexant is a significant competitor of ours
across multiple product areas. In June 2002, Conexant completed the spin-out of
Skyworks Solutions, resulting from the combination of Conexant's wireless
business with Alpha Industries. In July 2000, Lucent Technologies spun off its
microelectronics business, which included its optoelectronics components and
integrated circuits division, into a separate company named Agere Systems in
order to accelerate the growth of the business and alleviate strategic conflicts
with Lucent's competitors. Additionally, Siemens spun off its semiconductor
business in 1999 to create a more focused company named Infineon Technologies.

THE AVERAGE SELLING PRICES OF OUR PRODUCTS COULD DECREASE RAPIDLY WHICH MAY
NEGATIVELY IMPACT OUR GROSS MARGINS AND REVENUES

We may experience substantial period-to-period fluctuations in future
operating results due to the erosion of our average selling prices. We have
reduced the average unit price of our products in anticipation of future
competitive pricing pressures, new product introductions by us or our
competitors and other factors. The highly competitive GSM handset market is
extremely cost sensitive due to the potentially very high volumes and stringent
expectations placed on consumer electronics component suppliers for aggressive
and sustained price reductions which do result in declining average selling
prices. We expect that these factors will create downward pressure on our
average selling prices and gross margins. If we are unable to offset any such
reductions in our average selling prices by increasing our sales volumes, our
gross profits and revenues will suffer. To maintain gross margins, we will need
to develop and introduce new products and product enhancements on a timely basis
and continually reduce our costs. Our failure to do so would cause our revenues
and gross margins to decline.

WE ARE SUBJECT TO THE CYCLICAL NATURE OF THE SEMICONDUCTOR INDUSTRY, WHICH HAS
BEEN SUBJECT TO SIGNIFICANT DOWNTURNS

The semiconductor industry is highly cyclical and is characterized by
constant and rapid technological change, rapid product obsolescence and price
erosion, evolving standards, short product life cycles and wide fluctuations in
product supply and demand. The industry has experienced significant downturns,
often connected with, or in anticipation of, maturing product cycles of both
semiconductor companies' and their customers' products and declines in general
economic conditions. These downturns have been characterized by diminished
product demand, production overcapacity, high inventory levels and accelerated
erosion of average selling prices. Specific areas of the communications markets
have contributed to the overall decline and volatility of the semiconductor
industry in the recent past. For example, in fiscal 2001, the semiconductor
industry suffered a downturn due to reductions in the actual unit sales of
personal computers and wireless phones as compared to previous robust forecasts.
Additionally, changing and competing technical standards in airwave interfaces
such as GSM and CDMA for mobile handsets, migration to higher speed
communication protocols in the optical space and the return to prominence of the
traditional bell regional operating companies compared to the competitive local
exchange companies all have contributed to the volatility in the communications
area of the semiconductor industry. This downturn resulted in a material adverse
effect on our business and operating results in fiscal 2001.

Due to the cyclical nature of the semiconductor industry, an upturn in
business could result in increased competition for access to third-party
foundry, assembly and test capacity. We are dependent on the availability of
such capacity to manufacture, assemble and test our ICs. None of our third-party
foundry, assembly or test subcontractors have provided assurances that adequate
capacity will be available to us.

23

OUR PRODUCTS MUST CONFORM TO INDUSTRY STANDARDS IN ORDER TO BE ACCEPTED BY END
USERS IN OUR MARKETS

Generally, our products comprise only a part of a communications device. All
components of such devices must uniformly comply with industry standards in
order to operate efficiently together. We depend on companies that provide other
components of the devices to support prevailing industry standards. Many of
these companies are significantly larger and more influential in affecting
industry standards than we are. Some industry standards may not be widely
adopted or implemented uniformly, and competing standards may emerge that may be
preferred by our customers or end users. If larger companies do not support the
same industry standards that we do, or if competing standards emerge, market
acceptance of our products could be adversely affected which would harm our
business.

Products for communications applications are based on industry standards that
are continually evolving. Our ability to compete in the future will depend on
our ability to identify and ensure compliance with these evolving industry
standards. The emergence of new industry standards could render our products
incompatible with products developed by other suppliers. As a result, we could
be required to invest significant time and effort and to incur significant
expense to redesign our products to ensure compliance with relevant standards.
If our products are not in compliance with prevailing industry standards for a
significant period of time, we could miss opportunities to achieve crucial
design wins. We may not be successful in developing or using new technologies or
in developing new products or product enhancements that achieve market
acceptance. Our pursuit of necessary technological advances may require
substantial time and expense.

AVAILABLE INFORMATION

Our Internet website address is http://www.silabs.com. Our annual report on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and
amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934 are available through our Internet
website as soon as reasonably practicable after we electronically file such
material with, or furnish it to, the SEC. Our Internet website and the
information contained therein or connected thereto are not intended to be
incorporated into this Annual Report on Form 10-K.

Item 2. Properties

The Company's primary facilities, housing test operations, sales and
marketing, research and development, and administration are located in Austin,
Texas. These facilities consist of approximately 124,000 square feet of leased
floor space with lease terms expiring at various dates through December 2007. In
addition to these properties, we lease approximately 5,600 square feet in
Nashua, New Hampshire for engineering activities and various other smaller
locations throughout the United States, England, Japan and Malaysia for sales,
marketing, design and manufacturing support activities.

We believe that these facilities are suitable and adequate to meet our
current operating needs.

Item 3. Legal Proceedings

PATENT INFRINGEMENT LITIGATION

On August 7, 2001, TDK Semiconductor Corporation (TDK) commenced a lawsuit in
the United States District Court for the Central District of California against
us for alleged infringement of TDK's United States Patent No. 5,654,984. TDK's
complaint asserts that we have infringed TDK's '984 patent by making, using and
selling in the United States certain DAA semiconductor chipsets, including our
Si3035 and Si3044 products, and that the infringement was and continues to be
willful. TDK's complaint seeks unspecified treble damages, costs and attorneys'
fees, and an injunction.

On September 27, 2001, we served and filed an answer to TDK's complaint, in
which we denied infringement and asserted that TDK's '984 patent is invalid.

On March 27, 2002, we filed an amended answer and counterclaims in which we
claimed that the TDK-held patent is unenforceable due to inequitable conduct and

24

asserted counterclaims seeking a declaration that the TDK-held patent is
invalid, not infringed and unenforceable.

On November 6, 2002, the court denied our motion for summary judgment that we
did not infringe TDK's `984 patent as a matter of law.

On January 6, 2003, the court extended discovery through July 3, 2003, set a
final date for all summary judgment motions of August 4, 2003, and extended the
trial date to November 2003.

We are currently in the discovery phase of this litigation. We intend to
vigorously contest this case, and are unable at this time to determine whether
the outcome of the litigation will have a material impact on our results of
operations or financial condition in any future period. For a description of
risks associated with this pending lawsuit, please see "Risk Factors -
Significant litigation over intellectual property in our industry may cause us
to become involved in costly and lengthy litigation which could seriously harm
our business."

SECURITIES LITIGATION

On December 6, 2001, a class action complaint for violations of U.S. federal
securities laws was filed in the United States District Court, Southern District
of New York against us, four officers individually and the three investment
banking firms who served as representatives of the underwriters in connection
with our initial public offering of common stock which became effective on March
23, 2000. On April 19, 2002, a consolidated amended complaint, which is now the
operative complaint, was filed in the same court. The action is being
coordinated with over 300 other nearly identical actions filed against other
companies. These claims are premised on allegations that the registration
statement and prospectus for our initial public offering did not disclose that
(1) the underwriters solicited and received additional, excessive and
undisclosed commissions from certain investors, and (2) the underwriters had
agreed to allocate shares of the offering in exchange for a commitment from the
customers to purchase additional shares in the aftermarket at pre-determined
higher prices. The action seeks damages in an unspecified amount. A court order
dated October 9, 2002 dismissed without prejudice numerous individual
defendants, including the four officers of our company who had been named
individually. On July 15, 2002, we moved to dismiss all claims against us and
the individual defendants. The court has not ruled on this motion. Many of the
parties in these actions, including us, are participating in mediation
discussions. Although these discussions are underway, there are no assurances
that such discussions will result in any meaningful progress towards an
acceptable settlement. We intend to vigorously contest this case, and are unable
at this time to determine whether the outcome of the litigation will have a
material impact on our results of operations or financial condition in any
future period.

We are not currently involved in any other material legal proceedings.

Item 4. Submission of Matter to a Vote of Security Holders

None.

PART II

Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters

Our common stock has been quoted on the Nasdaq National Market under the
symbol "SLAB" since our initial public offering on March 23, 2000.

25

The table below shows the high and low per-share sales prices of our common
stock for the periods indicated, as reported by the Nasdaq National Market.
As of December 28, 2002, the end of our 2002 fiscal year, there were 296
holders of record of our common stock.

We have never declared or paid any cash dividends on our common stock and we
do not intend to pay cash dividends in the foreseeable future. We currently
expect to retain any future earnings to fund the operation and expansion of our
business. In addition, our credit agreements with our bank lender prohibits us
from paying cash dividends on our capital stock without the prior consent of the
lender.

Our registration statement (Registration No. 333-94853) under the Securities
Act of 1933, as amended, relating to our initial public offering of our common
stock became effective on March 23, 2000. A total of 3,680,000 shares of common
stock were registered. We sold a total of 3,200,000 shares of our common stock
and selling stockholders sold a total of 480,000 shares to an underwriting
syndicate. The managing underwriters were Morgan Stanley & Co. Incorporated,
Lehman Brothers Inc., and Salomon Smith Barney Inc. The offering commenced and
was completed on March 24, 2000, at a price to the public of $31.00 per share.
The initial public offering resulted in net proceeds to us of $90.6 million,
after deducting underwriting commissions of $6.9 million and offering expenses
of $1.6 million. We used $15 million of the proceeds as part of the
consideration paid in the acquisition of Krypton Isolation, Inc. on August 9,
2000. Another $4.3 million was used to pay off equipment loans provided by
Imperial Bank. We used another $1.0 million of the proceeds as part of the
consideration paid in the acquisition of SNR Semiconductor Incorporated (SNR) on
October 2, 2000. In December 2002, we prepaid $2.4 million in satisfaction of
our remaining debt and lease obligations to three equipment financing
institutions. As of December 28, 2002, the remaining proceeds were invested in
short-term, investment-grade, interest bearing instruments.

Item 6. Selected Consolidated Financial Data

The selected consolidated balance sheet data as of fiscal year ended 2002 and
2001 and the selected consolidated statements of operations data for fiscal
2002, 2001 and 2000 have been derived from audited consolidated financial
statements included in this Form 10-K. The selected consolidated balance sheet
data as of fiscal year ended 2000, 1999 and 1998 and the selected consolidated
statements of operations data for fiscal 1999 and 1998 have been derived from
audited consolidated financial statements not included in this Form 10-K.

26

You should read this selected consolidated financial data in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," our consolidated financial statements and the notes to those
statements included in this Form 10-K.

CONSOLIDATED STATEMENTS OF OPERATIONS DATA

CONSOLIDATED BALANCE SHEET DATA:

27

Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations

THE FOLLOWING DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL
STATEMENTS AND RELATED NOTES THERETO INCLUDED ELSEWHERE IN THIS REPORT ON FORM
10-K. THIS DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS. PLEASE SEE THE
"CAUTIONARY STATEMENT" AND "FACTORS AFFECTING FUTURE OPERATING RESULTS" UNDER
ITEM 1 FOR A DISCUSSION OF THE UNCERTAINTIES, RISKS AND ASSUMPTIONS ASSOCIATED
WITH THESE STATEMENTS. OUR FISCAL YEAR-END FINANCIAL REPORTING PERIODS ARE A 52-
OR 53- WEEK YEAR ENDING ON THE SATURDAY CLOSEST TO DECEMBER 31ST. FISCAL 2002
HAD 52 WEEKS AND ENDED ON DECEMBER 28, 2002. FISCAL 2001 HAD 52 WEEKS AND ENDED
ON DECEMBER 29, 2001. FISCAL 2000 HAD 52 WEEKS AND ENDED ON DECEMBER 30, 2000.
FISCAL YEAR 2003 WILL HAVE 53 WEEKS WITH THE EXTRA WEEK OCCURRING IN THE
FOURTH QUARTER OF THE YEAR.

OVERVIEW

We design and develop proprietary, analog-intensive, mixed-signal integrated
circuits (ICs) for the communications industry. Our innovative ICs can
dramatically reduce the cost, size and system power requirements of the products
that our customers sell to consumers. We currently offer ICs that can be
incorporated into communications devices, such as wireless phones and modems, as
well as cable and satellite set-top boxes, residential communication gateways
for cable or DSL, and optical network equipment. Customers during fiscal 2002
included Agere Systems, Ambit, Echostar, PC-TEL, Samsung, Smart Link, Sony,
Texas Instruments, Thomson and Wavecom.

Our company was founded in 1996. Our business has grown rapidly since our
inception, as reflected by our employee headcount, which increased to 364
employees at the end of fiscal 2002, from 279 employees at the end of fiscal
2001, 256 at the end of fiscal 2000, and 148 at the end of fiscal 1999. As a
"fabless" semiconductor company, we rely on third-party semiconductor
fabricators to manufacture the silicon wafers that reflect our IC designs. Each
wafer contains numerous die, which are cut from the wafer to create a chip for
an IC. We also rely on third-party assemblers to assemble and package these die
prior to final product testing and shipping.

We offer numerous mixed-signal communication ICs across eight product areas.
We commenced research and development for our first IC product, the DAA, in
October 1996. We introduced our DAA product in the first quarter of fiscal 1998,
and first received acceptance of this product for inclusion in a customer's
device, which we refer to as a design win, in March 1998. The first commercial
shipment of our DAA product was made in April 1998. Based on the success of our
family of DAA products, we achieved profitability in the fourth quarter of
fiscal 1998. In 1999, we introduced a voice codec product, an ISOmodem product
and our RF synthesizer product. In 2000, we introduced our ProSLIC product and a
clock and data recovery product suitable for SONET physical layer applications.
In 2001, we introduced several products, including a GSM transceiver chipset, a
digital subscriber line analog front end and added several new optical
networking products. In 2002, we expanded our existing product areas by
introducing the third-generation silicon DAA product family, Aero+ Transceiver
and Wideband Dual ProSLIC. During fiscal 2002, our wireless products were
responsible for almost half of our revenues. Although we have made progress in
diversifying our revenue across a variety of product areas, we expect to
generally become more dependent on our wireless products for our future sales
as, and to the extent, those products become more widely adopted by GSM handset
manufacturers. For a further description of our eight product areas, please see
"Part I, Item 1. Business and Factors Affecting Future Operating Results -
Products."

Many of our end customers purchase products indirectly from us through
distributors and contract manufacturers. An end customer purchasing through a
contract manufacturer typically instructs such contract manufacturer to
obtain our products and incorporate such products with other components for
sale by such contract manufacturer to the end customer. Although we actually
sell the products to, and are paid by, the distributors and contract
manufacturers, we refer to such end customer as our customer. During fiscal
2002, one end customer, Samsung, represented 16% of our revenues. During
fiscal 2001, three customers, in the aggregate, represented 40% of our
revenues, including 15% for PC-TEL, 13% for Agere Systems and 12% for
Samsung. In fiscal 2000, PC-TEL accounted for 46% of our revenues. No other
single end customer accounted for more than 10% of our revenues in any of
these years. Two of our distributors, Uniquest and Edom Technology,
each selling products to several customers in Asia, represented 20%
and 16% of our fiscal 2002 revenues, and 14% and 12% of our fiscal 2001

28

revenues, respectively. No other distributor accounted for more than 10% of our
revenues in fiscal years 2002, 2001 or 2000.

The percentage of our revenues derived from customers located outside of the
United States was 79% in fiscal 2002, 66% in fiscal 2001, and 21% in fiscal
2000. All of our revenues to date have been denominated in U.S. dollars. We
believe that a large percentage of our revenues will continue to be derived from
customers outside of the United States as our products receive acceptance in
international markets.

The sales cycle for the test and evaluation of our ICs can range from 1 month
to 12 months or more. An additional 3 to 6 months or more may be required before
a customer ships a significant volume of devices that incorporate our ICs. Due
to this lengthy sales cycle, we may experience a significant delay between
incurring expenses for research and development and selling, general and
administrative efforts, and the generation of corresponding sales, if any.
Consequently, if sales in any quarter do not occur when expected, expenses and
inventory levels could be disproportionately high, and our operating results for
that quarter and, potentially, future quarters would be adversely affected.
Moreover, the amount of time between initial research and development and
commercialization of a product, if ever, generally is substantially longer than
the sales cycle for the product. Accordingly, if we incur substantial research
and development costs without developing a commercially successful product, our
operating results, as well as our growth prospects, could be adversely affected.

Our limited operating history and rapid growth across our product areas makes
it difficult for us to assess the impact of seasonal factors on our business.
Because many of our ICs are designed for use in consumer products such as PCs
and wireless telephones, we expect that the demand for our products will be
subject to seasonal demand resulting in increased sales in the third and fourth
quarters of each year when customers place orders to meet holiday demand.

The following describes the line items set forth in our consolidated
statements of operations:

REVENUES. Revenues are generated principally by sales of our ICs. We
recognize revenue upon the transfer of title, which generally occurs upon
shipment to our customers. Revenues are deferred on shipments to distributors
until they are resold by such distributors to end customers. Our products
typically carry a one-year replacement guarantee. Replacements have been
insignificant to date. Our revenues are subject to variation from period to
period due to the volume of shipments made within a period and the prices we
charge for our products. The vast majority of our revenues was negotiated at
prices that reflect a discount from the list prices for our products. These
discounts are made for a variety of reasons, including to establish a
relationship with a new customer, as an incentive for customers to purchase
products in larger volumes, to provide profit margin to our distributors who
resell our products or in response to competition. In addition, as a product
matures, we expect that the average selling price for our products will
decline due to the greater availability of competing products. The sales of
our wireless products into the highly competitive GSM handset market are
expected to comprise a larger percentage of our revenue, resulting in
increased downward pressure on our average selling prices for individual
products. Our ability to increase revenues in the future is dependent on
increased demand for our established products and our ability to ship larger
volumes of those products in response to such demand, as well as our ability
to develop new products and subsequently achieve customer acceptance of newly
introduced products.

COST OF REVENUES. Cost of revenues includes the cost of purchasing
finished silicon wafers processed by independent foundries; costs associated
with assembly, test and shipping of those products; costs of personnel and
equipment associated with manufacturing support, logistics and quality
assurance; costs of software royalties and amortization of purchased software
and other intellectual property license costs; an allocated portion of our
occupancy costs; and allocable depreciation of testing equipment and
leasehold improvements. Generally, we depreciate equipment over four years on
a straight line basis and leasehold improvements over the shorter of the
estimated useful life or the applicable lease term. Recently introduced
products tend to have higher cost of revenues per unit due to initially low
production volumes required by our customers and higher costs associated with
new package variations. Generally, as production volumes for a product
increase, unit production costs tend to decrease as our yields improve and
our semiconductor fabricators, assemblers and our internal test operations
achieve greater economies of scale for that product.

29

Additionally, the cost of wafer procurement, which is a significant component
of cost of goods sold, varies cyclically with overall demand for
semiconductors and availability of supply from our foundries.

RESEARCH AND DEVELOPMENT. Research and development expense consists primarily
of compensation and related costs of employees engaged in research and
development activities and the related new product mask and wafer costs,
external consulting and services costs, as well as an allocated portion of our
occupancy costs for such operations. We depreciate our research and development
equipment over four years and amortize our purchased software from
computer-aided design tool vendors over four years. Development activities
include the design of new products and creation of new product masks and wafers
and test methodologies to ensure compliance with required specifications.

SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expense consists primarily of personnel-related expenses, related allocable
portion of our occupancy costs, sales commissions to independent sales
representatives, professional fees, directors' and officers' liability
insurance, patent litigation legal fees, other promotional and marketing
expenses, and reserves for bad debt. Write offs of uncollectible accounts have
been insignificant to date.

WRITE OFF OF IN-PROCESS RESEARCH & DEVELOPMENT. Write off of in-process
research & development reflects the write off of in-process research and
development costs which we acquired in connection with our acquisition of
Krypton Isolation, Inc. (Krypton).

GOODWILL AMORTIZATION. Goodwill amortization through December 2001 includes
the amortization of goodwill purchased in connection with our acquisitions of
Krypton in August 2000 and SNR in October 2000. Goodwill was amortized over four
to five years using the straight line method. We adopted Statement of Financial
Accounting Standards (SFAS) No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS, at
the beginning of fiscal 2002 and accordingly have ceased amortization of
goodwill.

IMPAIRMENT OF GOODWILL AND OTHER INTANGIBLE ASSETS. Impairment of goodwill
and other intangible assets reflects the charge to write-down that portion of
the carrying value of goodwill and other intangible assets that are in excess of
their fair market value.

AMORTIZATION OF DEFERRED STOCK COMPENSATION. In connection with the grant of
stock options and direct issuances of stock to our employees, we recorded
deferred stock compensation, representing, for accounting purposes, the
difference between the exercise price of option grants, or the issuance price of
direct issuances of stock, as the case may be, and the deemed fair value of our
common stock at the time of such grants or issuances. The deferred stock
compensation is amortized over the vesting period of the applicable options or
shares, generally five to eight years. The amortization of deferred stock
compensation is recorded as an operating expense.

INTEREST INCOME. Interest income reflects interest earned on average cash,
cash equivalents and investment balances. We may from time to time elect to
invest in tax-advantaged short-term investments yielding lower nominal interest
proceeds.

INTEREST EXPENSE. Interest expense consists of interest on our long-term debt
and capital lease obligations.

OTHER INCOME (EXPENSE). Other income (expense) reflects our share of losses
in our equity investment, ASIC Design Services, Inc. (ADS) and the gain on the
disposal of fixed assets.

PROVISION (BENEFIT) FOR INCOME TAXES. We accrue a provision (benefit) for
federal and state income tax at the applicable statutory rates adjusted for
non-deductible expenses, research and development tax credits and interest
income from tax-advantaged short-term investments.

RESULTS OF OPERATIONS

COMPARISON OF FISCAL 2002 TO FISCAL 2001

REVENUES. Revenues in fiscal 2002 were $182.0 million, an increase of $107.9
million, or 146%, from revenues of $74.1 million in fiscal 2001. The increase

30

was primarily attributable to significant growth in the volume of sales for our
wireless products, including the Aero Transceiver and RF Synthesizer,
reflecting a growing number of customers adopting these products into their
offerings. We also continued to see significant growth in the sales of our
wireline products, particularly the ISOmodem and DAA, reflecting increasing
demand by existing customers for these products. During fiscal 2002, we
experienced normal decreases in the average selling prices for certain
products. However, these price decreases were offset by the significant
increases in sales volumes for our products and the introduction of higher
priced next generation products and product extensions.

GROSS PROFIT. Gross profit in fiscal 2002 was $102.1 million, or 56.1% of
revenues, an increase of $59.9 million, or 142%, as compared with gross profit
of $42.1 million, or 56.8% of revenues, in fiscal 2001. The increase in gross
profit dollars was primarily due to the substantial increase in sales volume.
The decrease in gross margin percentage was primarily due to a greater portion
of our sales being comprised of our lower margin wireless products which have
lower average selling prices and higher material costs than our other products.
The gross margin percentage in fiscal year 2002 was also negatively impacted by
start up costs associated with the rapid production ramp of our Aero Transceiver
product.

RESEARCH AND DEVELOPMENT. Research and development expense in fiscal 2002 was
$32.0 million, or 17.6% of revenues, which reflected an increase of $3.0
million, or 10.4%, as compared with research and development expense of $29.0
million, or 39.1% of revenues, in fiscal 2001. The increase in the dollar amount
of research and development expense was principally due to increased staffing
and associated costs to pursue new product development opportunities, and
continue to develop new testing methodologies for newly introduced and existing
products. As a percentage of revenues, research and development expense
decreased significantly due to the substantial increase in revenues in fiscal
2002. We expect that research and development expense will increase in absolute
dollars in future periods as we continue to increase our staffing and associated
costs to pursue additional new product development opportunities, and may
fluctuate as a percentage of revenues due to changes in sales volume and the
timing of certain expensive items related to new product development
initiatives, such as engineering mask and wafer costs.

SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expense in fiscal 2002 was $33.9 million, or 18.6% of revenues, which reflected
an increase of $13.8 million, or 68.9%, as compared to selling, general and
administrative expense of $20.0 million or 27.0% of revenues, in fiscal 2001.
The increase in the dollar amount of selling, general and administrative expense
was principally attributable to increased staffing and associated costs, legal
fees incurred during patent litigation, sales commissions associated with our
higher revenues and employee bonuses resulting from increased earnings. We
expect to continue to incur significant legal expenses, fluctuating with case
activity, during fiscal year 2003 as a result of the ongoing infringement
lawsuit filed against us by TDK Semiconductor Corporation in August 2001. We
expect that selling, general and administrative expense will increase in
absolute dollars in future periods as we expand our sales channels, marketing
efforts and administrative infrastructure. In addition, we expect selling,
general and administrative expense to fluctuate as a percentage of revenues
because of (1) the likelihood that indirect sales distribution channels, which
typically entail the payment of commissions, will account for a larger portion
of our revenues in future periods and, therefore, increase our selling, general
and administrative expense relative to a direct sales force performing at
satisfactory levels of productivity; (2) fluctuating usage of advertising to
promote our products and, in particular, our newly introduced products; and (3)
potential significant variability in our future sales volume.

GOODWILL AMORTIZATION. We did not incur goodwill amortization in fiscal 2002
due to the adoption of SFAS No. 142. Goodwill amortization in fiscal 2001 was
$4.2 million. In fiscal 2001, we wrote off the majority of our goodwill balances
after determining that they were permanently impaired.

IMPAIRMENT OF GOODWILL AND OTHER INTANGIBLE ASSETS. During fiscal 2001, we
performed an assessment of the carrying value of our long-lived assets recorded
in connection with our acquisitions of Krypton and SNR. As a result of this
assessment, we concluded that the value of these assets had become permanently
impaired and recorded charges of $33.3 million to write off related goodwill
and $1.6 million to reduce the carrying value of related intangible

31

assets to their fair value. During fiscal 2002, we determined that the
remaining goodwill of $37,000 related to Krypton was impaired and wrote off the
balance. There were no other impairments of goodwill and other intangible
assets in fiscal 2002.

AMORTIZATION OF DEFERRED STOCK COMPENSATION. We recorded deferred stock
compensation for the difference between the exercise price of option grants or
the issuance price of direct issuances of stock, as the case may be, and the
deemed fair value of our common stock at the time of such grants or issuances.
We are amortizing this amount over the vesting periods of the applicable options
or restricted stock, which resulted in amortization expense of $5.2 million in
fiscal 2002, as compared to $5.3 million in fiscal 2001. In fiscal 2003, we
expect our amortization expense to stay at roughly this same level.

INTEREST INCOME. Interest income in fiscal 2002 was $1.6 million, as compared
to $3.6 million in fiscal 2001. The decrease was generally due to lower interest
rates on cash and short-term investments balances during the current year and
our transition to tax-exempt investments which bear even lower interest rates.

INTEREST EXPENSE. Interest expense in fiscal 2002 was $0.6 million as
compared to $0.8 million in fiscal 2001. The decrease in interest expense was
primarily due to lower debt and lease payable balances during the recent period.
In December 2002. we prepaid $2.4 million in satisfaction of our remaining debt
and lease obligations to three equipment financing institutions. As a result, we
expect to pay little to no interest expense in fiscal 2003.

OTHER INCOME (EXPENSE). Other expense in fiscal 2002 was $0.6 million, which
primarily reflects our share of the losses in our investment in ADS. We did not
have any equity investments, and therefore no corresponding losses, in fiscal
2001.

PROVISION (BENEFIT) FOR INCOME TAXES. Our effective tax provision rate,
excluding the impact of goodwill amortization, impairment of goodwill and other
intangible assets, and deferred stock compensation amortization, was 29.0% in
fiscal 2002, as compared to our effective tax benefit rate of 69.6% in fiscal
2001. Such fiscal 2002 effective tax provision rate reflects our tax benefits
from our estimated research and development tax credit, tax-exempt interest
income, and other deductions. The effective tax benefit in fiscal 2001 was
attributable to our pre-tax loss as well as tax benefits from our estimated
research and development tax credit, tax-exempt interest income and other
deductions. For additional information regarding our provision (benefit) for
income taxes, see Note 8 of the Notes to Consolidated Financial Statements.

COMPARISON OF FISCAL 2001 TO FISCAL 2000

REVENUES. Revenues in fiscal 2001 were $74.1 million, representing a decrease
of $29.0 million or 28.1% from revenues of $103.1 million in fiscal 2000. The
decrease in the dollar amount of revenues was primarily due to a decline in the
sales volume of our DAA family of products, reflecting the rapid deterioration
in demand for personal computers. Revenues from non-DAA products, such as the
ISOmodem, the ProSLIC, the RF Synthesizer and our optical networking products,
accounted for approximately 45.1% of revenues in fiscal 2001 as compared to
13.2% of revenues in fiscal 2000.

GROSS PROFIT. Cost of revenues decreased $3.6 million, or 10.1%, to $32.0
million in fiscal 2001 from $35.6 million in fiscal 2000, and represented 43.2%
of revenues in fiscal 2001 and 34.5% of revenues in fiscal 2000, respectively.
Gross profit in fiscal 2001 was $42.1 million or 56.8% of revenues, a decrease
of $25.4 million or 37.6% as compared with gross profit of $67.5 million or
65.5% of revenues in fiscal 2000. The decrease in both the dollar amount of
gross profit and gross margin percentage was primarily due to the substantial
decrease in sales volume, decreased utilization of our testing capacity and
higher reserves for excess inventory due to greater fluctuations in demand for
our products.

RESEARCH AND DEVELOPMENT. Research and development expense in fiscal 2001 was
$29.0 million or 39.1% of revenues, which reflected an increase of $9.6 million
or 49.5% as compared with research and development expense of $19.4 million or
18.8% of revenues in fiscal 2000. The increase in the dollar amount of research
and development expense was principally due to significant increases in new
product development initiatives, usage of more expensive advanced silicon CMOS
processes, and increased spending to develop test methodologies for new

32

products. As a percentage of revenues, research and development expense
increased significantly due to the substantial decrease in sales volume in
fiscal 2001.

SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expense in fiscal 2001 was $20.0 million or 27.0% of revenues, which reflected
an increase of $2.3 million or 13.0% as compared to selling, general and
administrative expense of $17.7 million or 17.1% of revenues in fiscal 2000. The
increase in the dollar amount of selling, general and administrative expense was
principally attributable to increased staffing, but was partially offset by a
decrease in spending on patent litigation fees.

WRITE OFF OF IN-PROCESS RESEARCH & DEVELOPMENT. There was no write off of
in-process research & development in fiscal 2001. Write off of in-process
research & development in fiscal 2000 was $0.4 million as a result of the
acquisition of Krypton.

GOODWILL AMORTIZATION. Goodwill amortization in fiscal 2001 was $4.2 million
compared to $3.3 million in fiscal 2000. This increase was primarily due to the
timing of the acquisitions of Krypton and SNR in late fiscal 2000. In fiscal
2001 we recorded a charge to reduce the carrying value of goodwill as discussed
below in "IMPAIRMENT OF GOODWILL AND OTHER INTANGIBLE ASSETS."

IMPAIRMENT OF GOODWILL AND OTHER INTANGIBLE ASSETS. During fiscal 2001, we
performed an assessment of the carrying value of our long-lived assets recorded
in connection with our acquisitions of Krypton and SNR. This assessment was
performed because we became aware of the following factors and circumstances:

- The revenue streams associated with those assets had decreased
significantly since their acquisition and we did not expect to have any
significant or identifiable future cash flows related to those assets;

- We determined that further development or alternative uses of the acquired
technologies were remote; and

- The Krypton office was closed in August of 2001 and the related employees
had since either ceased to work for us or been reassigned to new projects
which were unrelated to the projects on which they previously worked.

As a result of this assessment, we concluded that the value of these assets
had become permanently impaired and recorded charges of $33.3 million to write
off related goodwill and $1.6 million to reduce the carrying value of related
intangible assets to their fair value.

AMORTIZATION OF DEFERRED STOCK COMPENSATION. We have recorded deferred stock
compensation for the difference between the exercise price of option grants or
the issuance price of direct issuances of stock, and the deemed fair value of
our common stock at the time of such grants or issuances. We are amortizing this
amount over the vesting periods of the applicable options or restricted stock,
which resulted in amortization expense of $5.3 million in fiscal 2001 as
compared to $3.8 million in fiscal 2000. The increase in the dollar amount of
amortization of deferred stock compensation was due to additional deferred stock
compensation for options and restricted stock issued.

INTEREST INCOME. Interest income in fiscal 2001 was $3.6 million as compared
to $4.0 million in fiscal 2000. This decrease was primarily due to lower
prevailing interest rates.

INTEREST EXPENSE. Interest expense in fiscal 2001 was $0.8 million as
compared to $1.2 million in fiscal 2000. The decrease in interest expense was
primarily due to lower levels of debt in fiscal 2001.

OTHER INCOME (EXPENSE). Other expense in fiscal 2001 was $2,000 as compared
to other income of $0.1 million in fiscal 2000.

PROVISION (BENEFIT) FOR INCOME TAXES. Our effective tax rate, excluding the
impacts of non-deductible write off of in-process research & development,
amortization of goodwill, impairment of goodwill and other intangible assets and
deferred stock compensation, was a benefit of 69.6% in fiscal 2001, as compared
to our effective tax provision rate of 35.5% in fiscal 2000. The fiscal 2001

33

tax benefit rate was higher than the fiscal 2000 tax provision rate primarily
due to the fiscal 2001 increased tax benefit from the estimated research and
development tax credit in proportion to the amount of the fiscal 2001 pre-tax
loss.

LIQUIDITY AND CAPITAL RESOURCES

Our principal sources of liquidity as of December 28, 2002 consisted of
$115.2 million in cash, cash equivalents and short-term investments. Our short
term investments consist primarily of obligations of municipalities and agencies
of the U.S. government that have initial maturities of less than one year.

In addition, we have credit available under a bank credit facility with a
revolving line of credit for borrowings and letters of credit of up to the
lesser of $5.0 million or 80% of eligible accounts receivable at the bank's
prime lending rate, which was 4.25% as of December 28, 2002. At December 28,
2002, a letter of credit for $0.4 million related to a building lease was
outstanding under the revolving line of credit and $4.6 million was available
for new borrowings or letters of credit. The bank facility is secured by our
accounts receivable, inventories, capital equipment and all other unsecured
assets (excluding intellectual property). The line of credit prohibits the
payment of cash dividends and requires the maintenance of tangible net worth and
compliance with financial ratios that measure our immediate liquidity and our
ongoing ability to pay back our outstanding obligations. We believe we were in
compliance with all covenants at December 28, 2002.

Net cash provided by operating activities was $39.0 million in fiscal 2002,
compared to $11.7 million in fiscal 2001. Fiscal 2002 operating cash flows
reflect our net income of $20.7 million, as adjusted for non-cash charges
(depreciation and amortization and equity investment loss) of $19.4 million, and
a net decrease in the non-cash components of our working capital of $1.1
million. The increase in operating cash flow during fiscal 2002 was principally
due to net income generated by a higher volume of sales over a relatively fixed
cost structure.

Net cash used in investing activities was $46.3 million in fiscal 2002,
compared to net cash generated of $18.7 million in fiscal 2001. The decrease in
cash flows from investing activities during fiscal 2002 was principally due to
the net purchase of short-term investments of $22.1 million, capital
expenditures of $21.5 million, and investment in other assets of $2.7 million.
Capital expenditures increased by $16.1 million from 2001 principally due to the
purchase of additional semiconductor test equipment to allow us to test our
wireless products for GSM mobile handsets. We also made investments in other
assets of $2.7 million to acquire certain technology rights during fiscal 2002,
including a $1.3 million equity investment in ADS, a privately-held company
engaged in the development of ICs for networking devices.

We anticipate capital expenditures of $12 million for fiscal 2003. Assuming
the achievement by ADS of certain development milestones and satisfaction of
other conditions, we may be required to make an additional equity investment in
ADS of $1.5 million in fiscal 2003. Additionally, as part of our growth
strategy, we will also continue to evaluate opportunities to invest in or
acquire other business or technologies that would complement our current
offerings, expand the breadth of our markets or enhance our technical
capabilities.

Net cash used in financing activities was $1.1 million in fiscal 2002,
compared to net cash generated of $25,000 in fiscal 2001. The decrease in cash
flows from financing activities during fiscal 2002 was principally due to the
prepayment of $2.4 million to extinguish our debt and lease obligations with
three institutional lenders. The decrease was partially offset by the proceeds
from stock option exercises and employee stock purchases.

The following is a summary of our consolidated contractual payment obligations
at December 28, 2002 (see Note 7 of the consolidated financial statements), in
thousands:

34

Our future capital requirements will depend on many factors, including the
rate of sales growth, market acceptance of our products, the timing and extent
of research and development projects and the expansion of our sales and
marketing activities. We believe our existing cash balances and credit facility
are sufficient to meet our capital requirements through at least the next 12
months, although we could be required, or could elect, to seek additional
funding prior to that time. We may enter into acquisitions or strategic
arrangements in the future which also could require us to seek additional equity
or debt financing.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements and accompanying notes in conformity
with generally accepted accounting principles requires that we make estimates
and assumptions that affect the amounts reported. Changes in the facts and
circumstances could have a significant impact on the resulting financial
statements. We believe the following critical accounting policies affect our
more complex judgments and estimates. We also have other policies that we
consider to be key accounting policies, such as our policies for revenue
recognition, including the deferral of revenues and gross profit on sales to
distributors; however, these policies do not meet the definition of critical
accounting estimates because they do not generally require us to make estimates
or judgments that are difficult or subjective.

Inventory Valuation - We assess the recoverability of inventories through an
on-going review of inventory levels in relation to sales history, backlog and
forecasts, product marketing plans and product life cycles. To address the
difficult, subjective and complex area of judgment in determining appropriate
inventory valuation in a consistent manner, we apply a set of methods,
assumptions and estimates to arrive at the net inventory amount by completing
the following: First, we identify any inventory that has been previously
reserved in prior periods. This inventory remains reserved until sold, destroyed
or otherwise disposed of. Second, we examine the inventory line items that may
have some form of obsolescence due to non-conformance with electrical and
mechanical standards as identified by our quality assurance personnel and
provide reserves. Third, the remaining inventory not otherwise identified to be
reserved is compared to an assessment of product history and forecasted demand,
typically over the last six months and next six months, or actual firm backlog
on hand. Finally, an analysis of the result of this methodology is compared
against the product life cycle and competitive situations in the marketplace
driving the outlook for the consumption of the inventory and the appropriateness
of the resulting inventory levels. Demand for our products may fluctuate
significantly over time, and actual demand and market conditions may be more or
less favorable than those that we project. In the event that actual demand is
lower than originally projected, additional inventory write-downs may be
required.

Impairment of long-lived assets - We review long-lived assets, including
goodwill, fixed assets and purchased intangible assets, for impairment whenever
changes in circumstances indicate that the carrying amount of the assets may not
be recoverable and record an impairment charge if necessary. Such evaluations
compare the carrying amount of an asset to future undiscounted net cash flows
expected to be generated by the asset and are significantly impacted by
estimates of future prices and volumes for our products, capital needs, economic
trends and other factors which are inherently difficult to forecast.

Allowance for doubtful accounts - We evaluate the collectibility of our
accounts receivable based on a combination of factors. In circumstances where we
are aware of a specific customer's inability to meet its financial obligations
to us, we record a specific allowance to reduce the net receivable to the amount
we reasonably believe will be collected. For all other customers, we recognize
allowances for doubtful accounts based on a variety of factors including the
length of time the receivables are past their contractual due date, the current
business environment, and our historical experience. If the financial condition
of our customers were to deteriorate or if economic conditions worsened,
additional allowances may be required in the future. Accounts receivable
write-offs to date have been immaterial.

Income Taxes - We are required to estimate income taxes in each of the
jurisdictions in which we operate. This process involves estimating the
actual current tax liability together with assessing temporary differences in
recognition of income for tax and accounting purposes. These differences
result in deferred tax assets and liabilities, which are included in our

35

consolidated balance sheet. We must then assess the likelihood that the
deferred tax assets will be recovered from future taxable income and, to the
extent we believe that recovery is not likely, we must establish a valuation
allowance against the deferred tax asset. We operate within multiple taxing
jurisdictions and are subject to audit in these jurisdictions. These audits can
involve complex issues, which may require an extended period of time to resolve
and could result in additional assessments of income tax. In our opinion,
adequate provisions for income taxes have been made for all years.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
Nos. 141 and 142, BUSINESS COMBINATIONS and GOODWILL AND OTHER INTANGIBLE
ASSETS. SFAS No. 141 replaced Accounting Principles Board (APB) No. 16 and
eliminates pooling-of-interests accounting. It also provides guidance on
purchase accounting related to the recognition of intangible assets and
accounting for negative goodwill. SFAS No. 142 changes the accounting for
goodwill from an amortization method to an impairment-only approach. Under SFAS
No. 142, goodwill will be tested annually and whenever events or circumstances
occur indicating that goodwill might be impaired. SFAS No. 141 and SFAS No. 142
are effective for all business combinations completed after June 30, 2001. Upon
a company's adoption of SFAS No. 142, a company ceases to amortize goodwill
recorded for business combinations consummated prior to July 1, 2001, and
intangible assets acquired prior to July 1, 2001 that do not meet the criteria
for recognition under SFAS No. 141 are reclassified to goodwill. Companies are
required to adopt SFAS No. 142 for fiscal years beginning after December 15,
2001. We adopted SFAS No. 142 on December 30, 2001, the beginning of fiscal
2002. In connection with the adoption of SFAS No. 142, we performed a
transitional goodwill impairment assessment. The adoption of SFAS No. 141 and
SFAS No. 142 did not have a material impact on our results of operations or
financial position.

In August 2001, the FASB issued SFAS No. 144, ACCOUNTING FOR THE IMPAIRMENT
OR DISPOSAL OF LONG-LIVED ASSETS, which supersedes SFAS No. 121, ACCOUNTING FOR
THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF;
however, it retains the fundamental provisions of that statement related to the
recognition and measurement of the impairment of long-lived assets to be "held
and used." In addition, the Statement provides more guidance on estimating cash
flows when performing a recoverability test, requires that a long-lived asset to
be disposed of other than by sale be classified as "held and used" until it is
disposed of, and establishes more restrictive criteria to classify an asset as
"held for sale." We adopted SFAS No. 144 on December 30, 2001, but the adoption
did not have a material impact on our results of operations or financial
position.

In June 2002 the FASB issued SFAS No. 146, ACCOUNTING FOR COSTS ASSOCIATED
WITH EXIT OR DISPOSAL ACTIVITIES. SFAS No. 146 requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of commitment to an exit or disposal plan. This statement is
effective for exit or disposal activities initiated after December 31, 2002. We
do not believe that the adoption of SFAS No. 146 will have a material impact on
our financial statements.

In December 2002, FASB issued SFAS No. 148, ACCOUNTING FOR STOCK-BASED
COMPENSATION - TRANSITION AND DISCLOSURE, AN AMENDMENT OF FASB STATEMENT NO.
123. This Statement amends FASB Statement No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, to provide alternative methods of transition for an entity that
voluntarily changes to the fair value based method of accounting for stock-based
employee compensation. It also amends the disclosure provisions of that
Statement to require prominent disclosure about the effects on reported net
income of an entity's accounting policy decisions with respect to stock-based
employee compensation. Finally, this Statement amends APB Opinion No. 28,
INTERIM FINANCIAL REPORTING, to require disclosure about those effects in
interim financial information. Since we are continuing to account for stock-
based compensation according to APB 25, our adoption of SFAS No. 148 requires us
to provide prominent disclosures about the effects of FAS 123 on reported income
and will require us to disclose these affects in the interim financial
statements as well.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

All of our investments are entered into for other than trading purposes.
Our interest income is sensitive to changes in the general level of U.S.
interest rates, particularly since the majority of our investments are in

36

short-term instruments. Based on our investment holdings as of December 28,
2002, an immediate 1% decline in the interest rates for such instruments would
decrease our annual interest income by $1.1 million. We believe that our
investment policy is conservative, both in terms of the average maturity of our
investments and the credit quality of the investments we hold.

Item 8. Financial Statements and Supplementary Data

The Financial Statements and supplementary data required by this item are
included in Part IV, Item 15 of this Form 10-K and are presented beginning on
page F-1.

Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

None.

PART III

Certain information required by Part III is omitted from this report because
we intend to file a definitive Proxy Statement pursuant to Regulation 14A (the
"Proxy Statement") no later than 120 days after the end of the fiscal year
covered by this report, and certain information to be included therein is
incorporated herein by reference.

Item 10. Directors and Executive Officers of the Registrant

The information required by this Item is incorporated by reference to the
Proxy Statement under the sections captioned "Proposal 1 -- Election of
Directors", "Executive Compensation" and "Compliance with Section 16(a) of the
Securities Exchange Act of 1934."

Item 11. Executive Compensation

The information under the caption "Executive Compensation," appearing in the
Proxy Statement, is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters

The information under the caption "Ownership of Securities," appearing in the
Proxy Statement, is incorporated herein by reference.

Equity Compensation Plan Information

The following table provides information as of December 28, 2002 with
respect to shares of our common stock that may be issued under our existing
equity compensation plans. The table does not include information with
respect to shares subject to outstanding options assumed by us in connection
with the acquisition of a company which originally granted those options.
Footnote (4) to the table sets forth the total number of shares of our common
stock issuable upon the exercise of those assumed options as of December 28,
2002, and the weighted average exercise price of those options. No additional
options may be granted under such assumed plan.

37

(1) Consists of our 2000 Stock Incentive Plan and our Employee Stock Purchase
Plan.

(2) Excludes purchase rights accruing under our Employee Stock Purchase Plan.
Under the Employee Stock Purchase Plan, each eligible employee may
contribute up to 15% of his or her base salary to purchase shares of our
common stock at semi-annual intervals on the last U.S. business day of April
and October each year at a purchase price per share equal to 85% of the
lower of (i) the closing selling price per share of our common stock on the
employee's entry date into the two-year offering period in which that
semi-annual purchase date occurs or (ii) the closing selling price per share
on the semi-annual purchase date.

(3) Consists of shares available for future issuance under our Employee Stock
Purchase Plan and our 2000 Stock Incentive Plan. As of December 28, 2002, an
aggregate of 709,005 shares of our common stock were available for issuance
under our Employee Stock Purchase Plan and 930,957 shares of our common
stock were available for issuance in connection with future awards under our
2000 Stock Incentive Plan. In addition, the share reserves under our
Employee Stock Purchase Plan and 2000 Stock Incentive Plan increase on the
first trading day of January of each calendar year by 0.5% and 5%,
respectively, of the total number of shares of our common stock outstanding
on the last trading day of the immediately preceding calendar year (subject
to a maximum annual increase of 250,000 and 3,000,000 shares, respectively).
The share reserve under our 2000 Stock Incentive Plan also increases to the
extent we repurchase shares pursuant to our repurchase rights under our
prior plan.

(4) The table does not include information for the equity compensation plan
assumed by the Company in connection with the acquisition of a company which
originally established such plan. As of December 28, 2002, a total of 655
shares of our common stock were issuable upon exercise of outstanding
options under such assumed plan. The weighted average exercise price of
those outstanding options is $35.40 per share. No additional options may be
granted under such assumed plan.

Item 13. Certain Relationships and Related Transactions

The information under the heading "Certain Transactions," appearing in the
Proxy Statement, is incorporated herein by reference.

Item 14. Controls and Procedures

We performed an evaluation under the supervision and with the
participation of our management, including our Chief Executive Officer
("CEO") and Chief Financial Officer ("CFO"), of the effectiveness of the
design and operation of our disclosure controls and procedures, as defined in
Rule 13a-14(c) under the Securities Exchange Act of 1934 (the "Exchange
Act"). Based on that evaluation, our management, including our CEO and CFO,
concluded that our disclosure controls and procedures were effective as of
December 28, 2002 to ensure that information required to be disclosed by us
in the reports filed or submitted by us under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the

38

SEC's rules and forms. There have been no significant changes in our internal
controls or other factors that could significantly affect our internal
controls subsequent to December 28, 2002.

PART IV

Item 15. Exhibits, Financial Statements, Schedules, and Reports on Form 8-K

(a) 1. Financial Statements

SILICON LABORATORIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

2. Schedules

All schedules have been omitted since the information required by
the schedule is not applicable, or is not present in amounts
sufficient to require submission of the schedule, or because the
information required is included in the Consolidated Financial
Statements and notes thereto.

3. Exhibits

The exhibits listed on the accompanying index to exhibits
immediately following the financial statements are filed as part of,
or hereby incorporated by reference into, this Form 10-K

(b) Reports on Form 8-K.

During fiscal year 2002, we filed the following Current Reports on Form
8-K:

We filed a Form 8-K on September 12, 2002 (Item 5) announcing the
appointment of Russell J. Brennan as chief financial officer.

We filed a Form 8-K on October 22, 2002 (Item 9) providing
certification to the Securities and Exchange Commission, as
required by Section 906 of the Sarbanes-Oxley Act of 2002.

(c) Exhibits

* Incorporated herein by reference to the indicated filing.

40

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in Austin, Texas, on
January 22, 2003.

SILICON LABORATORIES INC.

By: /s/ Navdeep S. Sooch
----------------------
Navdeep S. Sooch
CHIEF EXECUTIVE
OFFICER AND CHAIRMAN
OF THE BOARD

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

41

CERTIFICATIONS

I, Navdeep S. Sooch, certify that:

1. I have reviewed this annual report on Form 10-K of Silicon Laboratories
Inc.;

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

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

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

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

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

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

5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons fulfilling the
equivalent functions):

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

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

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

Date: January 22, 2003

/s/ Navdeep S. Sooch
- --------------------------

Navdeep S. Sooch
CHAIRMAN AND
CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)

42

CERTIFICATIONS

I, Russell J. Brennan, certify that:

1. I have reviewed this annual report on Form 10-K of Silicon Laboratories
Inc.;

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

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

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

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

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

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

5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons fulfilling the
equivalent functions):

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

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

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

Date: January 22, 2003

/s/ Russell J. Brennan
- --------------------------

Russell J. Brennan
VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
(PRINCIPAL ACCOUNTING OFFICER)

43

REPORT OF INDEPENDENT AUDITORS

The Board of Directors
Silicon Laboratories Inc.

We have audited the accompanying consolidated balance sheets of Silicon
Laboratories Inc. as of December 28, 2002 and December 29, 2001, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three fiscal years in the period ended December 28, 2002. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Silicon
Laboratories Inc. at December 28, 2002 and December 29, 2001, and the
consolidated results of its operations and its cash flows for each of the three
fiscal years in the period ended December 28, 2002, in conformity with
accounting principles generally accepted in the United States.

/s/ ERNST & YOUNG LLP

Austin, Texas
January 15, 2003

F-1

SILICON LABORATORIES INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.

F-2

SILICON LABORATORIES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.

F-3

F-4

F-5

SILICON LABORATORIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 28, 2002

1. ORGANIZATION

Silicon Laboratories Inc. (the Company), a Delaware corporation, develops and
markets mixed-signal analog intensive integrated circuits (ICs) for the global
communications markets. Within the semiconductor industry, the Company is known
as a "fabless" company meaning that the ICs are manufactured by third-party
semiconductor companies.

2. SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

The Company prepares financial statements on a 52-53 week year that ends on
the Saturday closest to December 31. Fiscal year 2002 ended on December 28,
fiscal year 2001 ended on December 29 and fiscal year 2000 ended on December 30.
All of the periods presented have 52 weeks. Fiscal year 2003 will have 53 weeks
with the extra week occurring in the fourth quarter of the year.

PRINCIPLES OF CONSOLIDATION AND FOREIGN CURRENCY TRANSLATION

The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All significant intercompany
balances and transactions have been eliminated. The functional currency of the
Company's foreign subsidiaries is the U.S. dollar; accordingly, all translation
gains and losses resulting from transactions denominated in currencies other
than U.S. dollars are included in net income (loss).

CASH AND CASH EQUIVALENTS

Cash and cash equivalents consist of cash deposits and investments with a
maturity of ninety days or less when purchased.

SHORT-TERM INVESTMENTS

The Company's short-term investments have original maturities greater than
ninety days and less than one year and have been classified as
available-for-sale securities in accordance with Financial Accounting Standards
Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 115,
Accounting for Certain Investments in Debt and Equity Securities. The carrying
value of all available-for-sale securities approximates their fair value due to
their short-term nature. Short-term investments at December 28, 2002 and
December 29, 2001 consist of the following (in thousands):

FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company's financial instruments consist principally of cash and cash
equivalents, short-term investments, receivables, accounts payable, and
borrowings. The Company believes all of these financial instruments are recorded
at amounts that approximate their current market values.

F-6

2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

INVENTORIES

Inventories are stated at the lower of cost, determined using the first-in,
first-out method, or market. Inventories consist of the following
(in thousands):

PROPERTY, EQUIPMENT, AND SOFTWARE

Property, equipment, and software are stated at cost, net of accumulated
depreciation and amortization. Depreciation and amortization are computed using
the straight-line method over the useful lives of the assets (generally four to
five years). Amortization of assets recorded under capital leases is computed
using the straight-line method over the shorter of the asset's useful life or
the term of the lease and such amortization is included with depreciation
expense. Leasehold improvements are depreciated over the contractual lease
period or their useful life, whichever is shorter. Property, equipment and
software consist of the following (in thousands):

LONG-LIVED ASSETS

The Company evaluates its long-lived assets in accordance with FASB SFAS No.
144, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS. Long-lived assets held
and used by the Company are reviewed for impairment whenever events or changes
in circumstances indicate that their net book value may not be recoverable.
When such factors and circumstances exist, the Company compares the projected
undiscounted future cash flows associated with the related asset or group of
assets over their estimated useful lives against their respective carrying
amounts. Impairment, if any, is based on the excess of the carrying amount over
the fair value of those assets and is recorded in the period in which the
determination was made.

EQUITY METHOD INVESTMENTS

Where the Company has investments in affiliated companies in which it has
the ability to exercise significant influence over operating and financial
policies, but not control, these investments are accounted for using the
equity method. When special conditions warrant, for example when the Company
is the sole funding source for an affiliated company and the affiliated
company has not generated sufficient cash flows to sustain its operations, the
Company determines equity income measurement by using the Hypothetical
Liquidation at Book Value (HLBV) method. The HLBV method is a balance-sheet
oriented approach to equity method accounting and is calculated as the amount
that the Company would receive if the affiliated company were to liquidate all
of its assets at recorded amounts and distribute the cash to creditors and
investors in accordance with their respective liquidation preferences.

F-7

2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

The Company records investment loss under the caption other income (expense)
in its consolidated statement of operations.

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. Among the significant estimates affecting the
financial statements are those related to inventories, accounts receivables,
long-lived assets and income taxes. Actual results could differ from those
estimates, and such differences could be material to the financial statements.

RISKS AND UNCERTAINTIES

Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of cash, cash equivalents,
short-term investments and accounts receivable. The Company places its cash,
cash equivalents and short-term investments primarily in market rate accounts.
The Company performs ongoing credit evaluations of its customers' financial
condition and generally requires no collateral from its customers. The Company
provides an allowance for doubtful accounts receivable based upon the expected
collectibility of such receivables. The following table summarizes the changes
in the allowance for doubtful accounts receivable (in thousands):

Balance at January 1, 2000........................................... $ 569
Balance acquired from Krypton Isolation, Inc. (Krypton) purchase..... 56
Additions charged to costs and expenses.............................. 133
Write-off of uncollectible accounts.................................. --
------

Balance at December 30, 2000......................................... 758
Additions (reductions) charged to costs and expenses................. (229)
Write-off of uncollectible accounts.................................. (39)
------

Balance at December 29, 2001......................................... 490
Additions charged to costs and expenses.............................. 455
Write-off of uncollectible accounts.................................. --
------

Balance at December 28, 2002......................................... $ 945
======

Substantially all of the Company's products are fabricated by Taiwan
Semiconductor Manufacturing Co. (TSMC). The inability of TSMC to deliver wafers
to the company on a timely basis could impact the production of the Company's
products for a substantial period of time, which could have a material adverse
effect on the Company's business, financial condition and results of operations.

The following is a detail of the Company's end customers that accounted for
greater than 10% of revenue in the respective fiscal years:

Two of our distributors, Uniquest and Edom Technology, each selling products
to several end customers in Asia, represented 20% and 16% of our fiscal 2002
revenues, respectively. No other distributor accounted for more than 10% of our
revenues in fiscal years 2002, 2001 or 2000.

F-8

2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

As of December 28, 2002, two distributors and one end customer accounted
for 29%, 26% and 12% of gross accounts receivable, respectively. As of
December 29, 2001, two distributors and one end customer accounted for 21%,
21% and 10% of gross accounts receivable, respectively. As of December 30,
2000, two end customers accounted for 58% and 11% of gross accounts
receivable, respectively.

REVENUE RECOGNITION

Revenue from product sales direct to customers is recognized upon title
transfer, which generally occurs upon shipment. Certain of the Company's sales
are made to distributors under agreements allowing certain rights of return and
price protection on products unsold by distributors. Accordingly, the Company
defers revenue and gross profit on such sales until the product is sold by the
distributors to the end customer.

ADVERTISING

Advertising costs are expensed as incurred. Advertising expenses were
$527,000, $472,000 and $717,000 in the fiscal years ended December 28, 2002,
December 29, 2001 and December 30, 2000, respectively.

STOCK-BASED COMPENSATION

FASB SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, prescribes
accounting and reporting standards for all stock-based compensation plans,
including employee stock options. As allowed by SFAS No. 123, the Company has
elected to continue to account for its employee stock-based compensation using
the intrinsic value method in accordance with APB Opinion No. 25, ACCOUNTING
FOR STOCK ISSUED TO EMPLOYEES. The Company's basis for electing accounting
treatment under APB Opinion No. 25 is principally due to the satisfactory
incorporation of the dilutive effect of these shares in the reported earnings
per share calculation and the presence of pro forma supplemental disclosure of
the estimated fair value methodology prescribed by SFAS No. 123 and SFAS No.
148, ACCOUNTING FOR STOCK-BASED COMPENSATION - TRANSITION AND DISCLOSURE.

The following table illustrates the effect on net income and earnings per
share if the company had applied the fair value recognition provisions of SFAS
No. 123 (in thousands, except per share data):

OTHER COMPREHENSIVE INCOME (LOSS)

In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income,
which establishes standards for reporting and display of comprehensive income
and its components in the financial statements. There were no material
differences between net income (loss) and comprehensive income (loss) during any
of the periods presented.

F-9

2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

INCOME TAXES

The Company accounts for income taxes in accordance with SFAS No. 109,
ACCOUNTING FOR INCOME TAXES. This statement requires the use of the liability
method whereby deferred tax asset and liability account balances are
determined based on differences between financial reporting and the tax bases
of assets and liabilities and are measured using the enacted tax rates and
laws that will be in effect when the differences are expected to reverse.

SEGMENT INFORMATION

The Company has one operating segment, mixed-signal communication integrated
circuits (ICs), consisting of eight product areas. The Company's chief operating
decision maker is considered to be the Chief Executive Officer and Chairman of
the Board. The chief operating decision maker allocates resources and assesses
performance of the business and other activities at the consolidated level.

Approximately $144.7 million, $48.7 million and $22.1 million of the
Company's revenues were from export sales for the fiscal years ended December
28, 2002, December 29, 2001 and December 30, 2000, respectively. The operations
and assets of the Company's wholly owned subsidiaries were immaterial in all
periods presented.

RECLASSIFICATIONS

Certain reclassifications have been made to prior year financial statements
to conform with current year presentation.

EARNINGS (LOSS) PER SHARE

The following table sets forth the computation of basic and diluted net
income (loss) per share (in thousands, except per share data):

Approximately 2,156,000, 4,199,000 and 462,000 weighted-average dilutive
potential shares of common stock have been excluded from the diluted net
income (loss) per share calculation for the years ended December 28, 2002,
December 29, 2001 and December 30, 2000, respectively, as their impact would
have been anti-dilutive.

F-10

2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) Nos. 141 and 142, BUSINESS
COMBINATIONS and GOODWILL AND OTHER INTANGIBLE ASSETS. SFAS No. 141 replaces
Accounting Principles Board Opinion (APB) No. 16 and eliminates
pooling-of-interests accounting prospectively. It also provides guidance on
purchase accounting related to the recognition of intangible assets and
accounting for negative goodwill. SFAS No. 142 changes the accounting for
goodwill from an amortization method to an impairment-only approach. Under
SFAS No. 142, goodwill will be tested annually and whenever events or
circumstances occur indicating that goodwill might be impaired. SFAS No. 141
and SFAS No. 142 are effective for all business combinations completed after
June 30, 2001. Upon a company's adoption of SFAS No. 142, a company ceases to
amortize goodwill recorded for business combinations consummated prior to
July 1, 2001, and intangible assets acquired prior to July 1, 2001 that do
not meet the criteria for recognition under SFAS No. 141 are reclassified to
goodwill. Companies are required to adopt SFAS No. 142 for fiscal years
beginning after December 15, 2001. The Company adopted SFAS No. 142 on
December 30, 2001, the beginning of fiscal 2002. In connection with the
adoption of SFAS No. 142, the Company has performed a transitional goodwill
impairment assessment. The adoption of SFAS No. 141 and SFAS No. 142 did not
have a material impact on the Company's results of operations and financial
position since the Company's existing balances of goodwill and other
intangible assets were not significant.

In June 2002 the FASB issued SFAS No. 146, ACCOUNTING FOR COSTS ASSOCIATED
WITH EXIT OR DISPOSAL ACTIVITIES. SFAS No. 146 requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of commitment to an exit or disposal plan. This statement is
effective for exit or disposal activities initiated after December 31, 2002. The
Company does not believe that the adoption of SFAS No. 146 will have a material
impact on its financial statements.

In December 2002, the FASB issued SFAS No. 148, ACCOUNTING FOR
STOCK-BASED COMPENSATION - TRANSITION AND DISCLOSURE, AN AMENDMENT OF FASB
STATEMENT NO. 123. This Statement amends FASB Statement No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION, to provide alternative methods of transition for an
entity that voluntarily changes to the fair value based method of accounting for
stock-based employee compensation. It also amends the disclosure provisions of
that Statement to require prominent disclosure about the effects on reported net
income of an entity's accounting policy decisions with respect to stock-based
employee compensation. Finally, this Statement amends APB Opinion No. 28,
INTERIM FINANCIAL REPORTING, to require disclosure about those effects in
interim financial information. Since the Company is continuing to account for
stock-based compensation according to APB 25, adoption of SFAS No. 148 requires
the Company to provide prominent disclosures about the affects of FAS 123 on
reported income (loss) and will require the Company to disclose these affects in
the interim financial statements as well.

F-11

3. GOODWILL AND OTHER INTANGIBLE ASSETS

The components of intangible assets are as follows (in thousands):

During fiscal 2001, the Company performed an assessment of the carrying value
of the Company's long-lived assets recorded in connection with the Company's
acquisitions of Krypton and SNR. This assessment was performed pursuant to
Statement of FASB SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED
ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF. The Company performed this
assessment because it became aware of the following factors and circumstances:

- - The revenue streams associated with those assets had decreased significantly
since their acquisition and the Company did not expect to have any
significant or identifiable future cash flows related to those assets;
- - The Company determined that further development or alternative uses of the
acquired technologies were remote; and
- - The Krypton office was closed in August of 2001 and the related workforce had
since either ceased to work for the Company or been reassigned to new
projects which were unrelated to the projects on which they previously
worked.

The Company compared the carrying value for those assets that had separately
identifiable cash flows to the projected undiscounted future cash flows to be
derived from those assets over their remaining estimated useful lives. The
Company placed no value on those assets that did not have separately
identifiable cash flows as the factors normally judged to constitute future
value, such as the expectation of future business, revenues and/or cash flows,
the expectation of ongoing development of new products, the good name and
reputation of the acquired company, etc. appeared to be absent.

As a result of this assessment, the Company concluded that the value of
those assets had become permanently impaired and recorded charges for $33.3
million and $37,000 to write-down related goodwill in fiscal 2001 and 2002,
respectively, and $1.6 million to reduce the carrying value of related
intangible assets to their fair value in fiscal 2001.

4. EQUITY INVESTMENT IN A NON-PUBLICLY TRADED COMPANY

On June 14, 2002, the Company made an equity investment in a start-up
venture, ASIC Design Services, Inc. (ADS), with an initial investment of $1.3
million in the form of convertible-preferred stock. ADS is engaged in the design
and development of proprietary integrated circuits (ICs) used in networking
devices.

The Company has a contingent obligation to make two additional
convertible-preferred stock investments in ADS totaling $2.7 million based on
ADS' achievement of certain milestones and the satisfaction of other conditions.
Additionally, the Company has an exclusive right, but not the obligation, to
purchase ADS for $15 million in cash or common stock in connection with the
occurrence of certain events.

At December 28, 2002, the Company's voting interest in ADS was less than 20%
of the total ownership of ADS. However, the Company determined, based

F-12

4. EQUITY INVESTMENT IN A NON-PUBLICLY TRADED COMPANY (CONTINUED)

on APB Opinion No. 18 THE EQUITY METHOD OF ACCOUNTING FOR INVESTMENTS IN COMMON
STOCK and other relevant guidance that it has the ability to exercise
significant influence, but not control, over the management of ADS as a result
of its contractual rights, rights as an equity stockholder, ability to
designate a member of ADS' Board of Directors, which the Company has done, and
its position as their primary funding source for future operations. Therefore,
the Company has accounted for its investment in ADS using the Hypothetical
Liquidation at Book Value (HLBV) method under the equity method of accounting.
The Company is using the HLBV method to determine its equity investment loss
because the Company believes that it is unlikely that the other stockholders
could bear their proportionate share of ADS' loss. Under this method, the
Company's loss is equivalent to ADS' cash expenditures for the period.

For the fiscal year ended December 28, 2002, the Company recorded an equity
investment loss of $0.7 million from its investment in ADS, included in other
expense.

5. LONG-TERM LIABILITIES

The Company has a revolving line of credit agreement (the Agreement) with a
commercial bank. Under the provisions of the Agreement, the line of credit
allows for borrowings of up to the lesser of $5 million or 80% of eligible
accounts receivable at the bank's prime lending rate (4.25% as of December 28,
2002). The bank facility is secured by the Company's accounts receivable,
inventory, capital equipment and other unsecured assets (excluding intellectual
property). At December 28, 2002 and December 29, 2001, a letter of credit for
$0.4 million relating to a building lease was outstanding under the facility. As
a result, available borrowings under this facility were $4.6 million at December
28, 2002 and December 29, 2001. There are covenants related to net worth and
liquidity associated with this line of credit, with which the Company is in
compliance as of December 28, 2002.

Long-term debt and leases consist of the following:

The notes payable and capital lease obligations represent borrowings from
three institutional financing providers for equipment financing. In fiscal 2002,
the Company made prepayments of $2.4 million to extinguish all of its
outstanding obligations to these financing providers.

F-13

6. STOCKHOLDERS' EQUITY

PREFERRED STOCK

As of December 28, 2002 and December 29, 2001, no shares of preferred
stock were outstanding. On March 23, 2000, simultaneously with the closing of
the Company's initial public offering, all outstanding shares of the
Company's Redeemable Convertible Preferred Stock were converted on a
one-for-two ratio into an aggregate of 13,884,190 shares of the Company's
common stock. Also upon completion of the public offering, the number of
authorized shares of preferred stock increased from 8,000,000 to 10,000,000
shares. The Company's board of directors will have the authority to issue up
to 10,000,000 shares of preferred stock in one or more series and to
designate the rights, preferences, privileges and restrictions of each of the
series.

COMMON STOCK

The Company had 48,903,731 shares of common stock outstanding as of December
28, 2002. Of these shares, 814,932 shares were unvested and are subject to
rights of repurchase that lapse according to a time based vesting schedule.

As of December 28, 2002, the Company had reserved shares of common stock for
future issuance as follows:

Employee Stock Option Plans......... 9,281,491
Employee Stock Purchase Plan........ 709,005
---------
Total shares reserved............... 9,990,496

On January 2, 2003 the amount of shares reserved for the 2000 Stock Incentive
Plan and the Employee Stock Purchase Plan automatically increased by 2,445,187
and 244,519, respectively.

EMPLOYEE STOCK PURCHASE PLAN

The Employee Stock Purchase Plan (the Purchase Plan) was adopted by the
Company's board of directors on January 5, 2000. Eligible employees may purchase
a limited number of shares of the Company's common stock at 85% of the market
value at semi-annual intervals. As of December 28, 2002, a total of 883,787
shares of the Company's common stock were authorized for issuance under the
Purchase Plan. There were 77,460 and 67,981 shares issued under the Purchase
Plan in fiscal 2002 and fiscal 2001, respectively.

STOCK OPTION/STOCK ISSUANCE PLANS

In fiscal 2000, the Company's board of directors and stockholders approved
the 2000 Stock Incentive Plan (the 2000 Plan). The 2000 Plan contains programs
for (i) the discretionary granting of stock options to employees, non-employee
board members and consultants for the purchase of shares of the Company's common
stock, (ii) the discretionary issuance of common stock directly to employees
(direct issuance shares), (iii) the granting of special below-market stock
options to executive officers and other highly compensated employees of the
Company for which the exercise price can be paid using earnings deductions and
(iv) the automatic issuance of stock options to non-employee board members. Upon
the Company's initial public offering, the 2000 Plan incorporated all stock
options and direct issuance shares outstanding under the 1997 Stock Option/Stock
Issuance Plan (the 1997 Plan). Under the 1997 Plan, employees, members of the
Company's board of directors and independent advisors were granted stock options
or were issued direct issuance shares as a direct purchase or as a bonus for
services rendered to the Company. In connection with the acquisition of Krypton
in fiscal 2000, the Company assumed outstanding options for 90,449 shares of the
Company's common stock.

The 2000 Plan and the 1997 Plan contain similar terms. The direct issuance
shares and the stock options contain vesting provisions ranging from four to
eight years. If permitted by the Company, stock options can be exercised
immediately and, similar to the direct issuance shares, are subject to
repurchase rights which generally lapse in accordance with the vesting schedule.
The repurchase rights provide that upon certain defined events, the Company can
repurchase unvested shares at the price paid per share. The term of each stock

F-14

6. STOCKHOLDERS' EQUITY (CONTINUED)

option is no more than ten years from the date of grant. At December 28, 2002,
15,456,160 shares were authorized for issuance under the 2000 Plan. No further
options or direct issuances may be granted under the 1997 Plan.

The Company recorded no deferred stock compensation in fiscal 2002. The
Company recorded deferred stock compensation of $3,294,000 and $9,492,000 in
connection with stock options granted or assumed for 160,000 shares and
297,697 shares of common stock during fiscal 2001 and 2000, respectively.
These amounts represent the difference between the exercise price of the
stock option and the market price or the subsequently deemed fair value of
the Company's common stock. The deferred stock compensation is amortized over
the vesting periods of the applicable options, resulting in amortization
expense of $5,173,000, $5,276,000 and $3,761,000 for fiscal years 2002, 2001
and 2000, respectively.

During fiscal 1999 and 1998, the Company made full recourse loans to
employees of $1,267,500 and $147,500, respectively, in connection with the
employees' purchase of shares through exercises of options. These full recourse
notes are secured by the shares of stock, are interest bearing at rates ranging
from 1.8% to 5.9%, have terms of five years, and must be repaid upon the sale of
the underlying shares of stock. The Company has collected principal payments on
these notes for $566,000, $384,000 and $270,000 in fiscal years 2002, 2001 and
2000, respectively. The remaining balance of shareholder notes as of December
28, 2002 is $228,000. No loans were issued during fiscal 2002, 2001 or 2000.

A summary of the Company's stock option and direct issuance activity and
related information follows:

F-15

6. STOCKHOLDERS' EQUITY (CONTINUED)

In addition, the following table summarizes information about stock options
that were outstanding and exercisable at December 28, 2002.

Pro forma information regarding net income (loss) is required by SFAS No.
123, and has been determined as if the Company had accounted for its
stock-based awards to employees under the fair value method of that
Statement. The fair value of these stock-based awards was estimated at the
date of grant using the Black-Scholes option pricing model with the following
assumptions:

The weighted-average fair values of options granted during fiscal 2002, 2001
and 2000 were $16.40, $12.09 and $26.80, respectively. The weighted-average fair
values for purchase rights granted under the Purchase Plan for fiscal 2002, 2001
and 2000 were $10.74, $10.05 and $11.94 respectively.

F-16

For purposes of pro forma disclosure, the estimated fair value of the
Company's stock-based awards to employees is amortized to expense over the
vesting period of the underlying instruments. The Company's pro forma
information is as follows (in thousands, except per share data):

Option valuation models require the input of highly subjective assumptions,
including the expected stock price volatility. Because changes in the subjective
assumptions can materially affect the fair value estimate, in the opinion of
management, the existing models do not necessarily provide a reliable single
measure of the fair value of the Company's stock-based awards to employees.

7. COMMITMENTS AND CONTINGENCIES

The Company leases its facilities under operating lease agreements that
expire at various dates through 2007. Some of these arrangements contain renewal
options, and require the Company to pay taxes, insurance and maintenance costs.

Rent expense under operating leases was $2,002,000, $1,724,000 and $1,065,000
for fiscal 2002, 2001 and 2000, respectively.

The minimum annual future rentals under the terms of these leases at
December 28, 2002 are as follows (in thousands):

The Company is involved in various legal proceedings that have arisen in the
normal course of business. While the ultimate results of these matters cannot be
predicted with certainty, management does not expect them to have a material
adverse effect on the consolidated financial position or results of operations.

On August 7, 2001, TDK Semiconductor Corporation commenced a lawsuit
against the Company for alleged willful infringement by its direct access
arrangement (DAA) products of a TDK-held patent. TDK's complaint seeks
unspecified treble damages, costs and attorneys' fees, and an injunction. On
September 27, 2001, the Company served and filed an answer to TDK's
complaint, in which the Company denied infringement and asserted that TDK's
patent is invalid. On March 27, 2002, the Company filed an amended answer and
counterclaims in which the Company claimed that the TDK-held patent is
unenforceable due to inequitable conduct and asserted counterclaims seeking a
declaration that the TDK-held patent is invalid, not infringed and
unenforceable. On November 6, 2002, a motion for summary judgment for
non-infringement was brought by the Company before the U.S. District Court,
Central District of California. The court refused to grant the Company's
request for a summary judgment that it did not infringe TDK's patent as a

F-17

7. COMMITMENTS AND CONTINGENCIES (CONTINUED)

matter of law. On January 6, 2003, the court extended discovery through July 3,
2003, set a final date for all summary judgment motions of August 4, 2003, and
extended the trial date to November 2003. The Company is currently in the
discovery phase of this litigation. This lawsuit has involved, and may continue
to involve, significant expense and may also divert management's time and
attention from other aspects of the Company's business. The Company intends to
vigorously contest this case, however, the Company is unable at this time to
determine whether the outcome of the litigation will have a material impact on
its results of operations, cash flows or financial condition in any future
period.

On December 6, 2001, a class action complaint for violations of U.S. federal
securities laws was filed in the United States District Court, Southern District
of New York against the Company, four of its officers individually and the three
investment banking firms who served as representatives of the underwriters in
connection with the Company's initial public offering of common stock which
became effective on March 23, 2000. On April 19, 2002, a consolidated amended
complaint, which is now the operative complaint, was filed in the same court.
The action is being coordinated with over 300 other nearly identical actions
filed against other companies. These claims are premised on allegations that the
registration statement and prospectus for the Company's initial public offering
did not disclose that (1) the underwriters solicited and received additional,
excessive and undisclosed commissions from certain investors, and (2) the
underwriters had agreed to allocate shares of the offering in exchange for a
commitment from the customers to purchase additional shares in the aftermarket
at pre-determined higher prices. The action seeks damages in an unspecified
amount. A court order dated October 9, 2002 dismissed without prejudice numerous
individual defendants, including the four officers of our Company who had been
named individually. On July 15, 2002, the Company moved to dismiss all claims
against it and the individual defendants. The court has not ruled on this
motion. Many of the parties in these actions, including the Company, are
participating in mediation discussions. Although these discussions are underway,
there is no assurance that such discussions will result in any meaningful
progress for an acceptable settlement. The Company intends to vigorously
contest this case, and is unable at this time to determine whether the outcome
of the litigation will have a material impact on its results of operations, cash
flows or financial condition in any future period.

8. INCOME TAXES

As of December 28, 2002, the Company had state research and development
credit carryforwards of approximately $671,000. The credit carryforwards do not
expire.

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying values of assets and liabilities for financial reporting
purposes and the values used for income tax purposes. Significant components of
the Company's deferred taxes as of December 28, 2002 and December 29, 2001 are
as follows (in thousands):

F-18

8. INCOME TAXES (CONTINUED)

Significant components of the provision (benefit) for income taxes
attributable to continuing operations are as follows (in thousands):

The Company's provision (benefit) for income taxes differs from the expected
tax expense (benefit) amount computed by applying the statutory federal income
tax rate to income (loss) before income taxes as a result of the following:

The exercise of certain stock options which have been granted under the 2000
Plan results in compensation which is includable in the taxable income of the
exercising option holder and deductible by the Company for federal and state
income tax purposes. Such compensation results from increases in the fair market

F-19

8. INCOME TAXES (CONTINUED)

value of the Company's common stock subsequent to the date of grant of the
exercised stock options and, in accordance with APB No. 25, such compensation
is not recognized as an expense for financial accounting purposes; however, the
related tax benefits are recorded as an increase to additional paid-in capital.

Substantially all of the Company's operating income was generated from
domestic operations during fiscal 2002. Undistributed earnings of the Company's
foreign subsidiaries are considered to be permanently reinvested and,
accordingly, no provision for U.S. federal and/or state income taxes has been
provided thereon.

The U.S. Internal Revenue Service has selected the Company's 1999 and 2000
federal income tax returns for examination. Management believes that the results
of the examination will not materially affect the financial position or results
of operations of the Company.

8. EMPLOYEE BENEFIT PLAN

The Company maintains a defined contribution or 401(k) Plan for the benefit
of substantially all employees. To be eligible for the 401(k) Plan, employees
must have reached the age of 21. Participants may elect to contribute up to 15%
of their compensation to the 401(k) Plan. The Company may make discretionary
matching contributions of up to 10% of a participant's compensation as well as
discretionary profit-sharing contributions to the 401(k) Plan. The Company's
contributions to the 401(k) Plan vest over four years at a rate of 25% per year.
The Company contributed $320,000, $269,000 and $219,000 to the 401(k) Plan
during fiscal 2002, 2001 and 2000, respectively.

F-20

SUPPLEMENTARY FINANCIAL INFORMATION (UNAUDITED)

All of the quarterly periods reported here had thirteen weeks. Quarterly
financial information for fiscal 2002 and 2001 (in thousands of dollars except
per share amounts):

AS OF A PERCENTAGE OF REVENUES