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

These leases comprise an aggregate of 97,862 square feet and have terms expiring on or prior to December 2009. We believe that our current facilities, together with planned expansions, will be adequate for at least the next twelve months and that additional leased space can be obtained on commercially reasonable terms if needed.

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

(a) none

(b) none

(c) none

(d) none

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

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

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

The following selected consolidated financial data should be read in conjunction with the consolidated financial statements and related notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere in this Annual Report on Form 10-K. The selected consolidated statement of operations data for each of the three fiscal years ended December 31, 2001, 2000 and 1999 and selected consolidated balance sheet data as of December 31, 2001 and December 31, 2000 are derived from, and qualified by reference to, the audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. The selected consolidated statement of operations data for the fiscal year ended December 31, 1998 and the period from February 21, 1997 (inception) to December 31, 1997 and selected consolidated balance sheet data as of December 31, 1999, 1998 and 1997 are derived from audited financial statements not included in this Annual Report.

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

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

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

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

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

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

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

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

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

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

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

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

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

Our revenues currently are derived from the sale of our DSL and Voice over Packet network products, which include the CopperLite CO, CopperLite CPE, Optimizer, and Entropia families of products. To date, we have generated a substantial portion of our revenues from a limited number of customers. For the year ended December 31, 2001, Sumitomo Electric Industries and NEC represented 48% and 38% of our revenues, respectively. For the year ended December 31, 2000, Lucent Technologies, Sumitomo Electric Industries, Copper Mountain Networks, NEC and Nortel Networks represented 24%, 20%, 12%, 10% and 10%, of our revenues, respectively. Our top two customers in 1999 were Sumitomo Electric Industries and NEC, who accounted for 34% and 21% of our revenues, respectively.

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

We have focused our initial sales and marketing efforts on Asian and North American communications equipment manufacturers. During the years ended December 31, 2001, 2000, and 1999, 89%, 39% and 78% of our revenues, respectively, were to Asia. Revenues from our customers in Asia increased in 2001 compared to 2000 primarily due to the broad market acceptance and use of our DSL products in Japan. Revenues from our customers in North America decreased in 2001 compared to 2000 primarily due to decreases in spending in the communications equipment industry. We currently sell through our direct sales force in China, Japan, North America and the United Kingdom. We also sell through sales representatives in Canada, China, Hong Kong, Israel, Italy, Japan, Korea, North America and Taiwan. International revenues are denominated solely in U.S. dollars, which reduces our exposure to foreign currency exchange risks.

Revenues related to product sales are generally recognized when the products are shipped to the customer, title has transferred and no significant obligations remain. Allowances are provided for estimated returns at the time of shipment. In circumstances where we have not shipped the final version of our product, or when a customer has delayed its acceptance of our product, we defer recognition of the revenue associated with the given product at the time of shipment. In addition, we defer technology development revenues when customers make advance payments and specified milestones under the technology development contract have not been met. This deferred revenue is recognized when the final version of the product is delivered, upon acceptance by the customer, or when the specified milestones have been met. As of December 31, 2001, there was no deferred revenue. Deferred revenue as of December 31, 2000 was $200,000 and was comprised primarily of unearned technology development fees and prepayments from certain customers.

It usually takes more than one year for us to realize volume shipments of our products after we first contact a customer. We first work with customers to achieve a design win, which may take six months or longer. Our customers then complete the design, testing and evaluation of their systems and begin the marketing process, a period which typically lasts an additional three to six months or longer. As a result, a significant period of time may elapse between our sales efforts and our realization of revenues, if any, from volume purchases of our products by our customers. Our customers are not obligated by long-term contracts to purchase our products and can generally cancel or reschedule orders on short notice.

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

Research and development expenses consist primarily of salaries and related personnel costs, fees paid to consultants and outside service providers, prototype costs related to the fabrication of our silicon chips, and depreciation associated with software development tools and amortization of deferred compensation. We expense our research and development costs as they are incurred. Several components of our research and development effort require significant expenditures, the timing of which can cause significant quarterly variability in our expenses. For example, we require a substantial number of prototypes to build and test our complex products and therefore incur significant prototype costs. Because our research and development is key to our future success, we intend to increase our research and development expenditures in future periods.

Sales and marketing expenses consist primarily of salaries, commissions, and related expenses for personnel engaged in marketing, sales, customer service and applications engineering support functions, costs associated with promotional and other marketing expenses, as well as amortization of deferred compensation. We intend to expand our direct and indirect sales operations substantially, both domestically and internationally, in order to increase market awareness, support customer requirements, and increase orders for our products. We expect that sales and marketing expenses will increase over the next year as we hire additional sales and marketing personnel, initiate additional marketing programs to support our products and establish sales offices in additional domestic and international locations. We intend to expand our use of independent manufacturers' representatives. We believe that to be successful, we must reach agreement with additional representatives in several countries. In addition, the complexity of our products and the applications support necessary for successful interoperability and customer specific applications requires highly trained customer service and support personnel. We expect to expand our customer service and support organization to meet these requirements.

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

In connection with the grant of certain stock and other equity-based compensation to our employees, technical advisors and directors, we have recorded amortization of deferred compensation of $15.3 million, $25.6 million and $4.1 million for the years ended December 31, 2001, 2000 and 1999, respectively. Deferred compensation is recorded upon grant and represents the difference between the grant price and the deemed fair value of our common stock options granted during these periods. Deferred compensation expense is being amortized using the graded vesting method, in accordance with Statement of Financial Accounting Standards No. 123 (FAS123) and FASB Interpretation No. 28, over the vesting period of each respective option, generally four years. Under the graded vesting method, each option grant is separated into portions based on its vesting terms, which results in acceleration of amortization expense for the overall award. The accelerated amortization pattern results in expensing approximately 59% of the total award in year one, 25% in year two, 12% in year three and 4% in year four. Unamortized deferred compensation is presented as a reduction of stockholders' equity. See Note 7 of notes to consolidated financial statements for more information about our equity-based compensation programs.

We have not reported an operating profit for any year since our incorporation and have experienced net losses of approximately $19.7 million, $46.0 million and $19.7 million for the years ended December 31, 2001, 2000 and 1999, respectively.

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

                                              Years ended December 31,
                                        ----------------------------------
                                           2001        2000        1999
                                        ----------  ----------  ----------
Net revenues..........................        100 %       100 %       100 %
Cost of revenues......................         50          57          83
                                        ----------  ----------  ----------
Gross profit..........................         50          43          17
                                        ----------  ----------  ----------
Operating expenses:
  Research and development............         37          74         357
  Sales and marketing.................         11          27         102
  General and administrative..........          9          28         113
  Amortization of goodwill and other
   acquisition-related intangibles....          2           2          --
  In-process research and development.          5          --          --
                                        ----------  ----------  ----------
    Total operating expenses..........         64         131         572
                                        ----------  ----------  ----------
Operating loss........................        (14)        (88)       (555)
Interest income.......................          2           7          34
Interest expense......................         --          --          (6)
Loss on long-term investment..........         (1)         --          --
Provision for income taxes............         --          --          --
                                        ----------  ----------  ----------
Net loss..............................        (13)%       (81)%      (527)%
                                        ==========  ==========  ==========

Net Revenues: Net revenues in 2001 were $159.5 million, compared with $56.5 million in 2000, an increase of 182%. The growth in revenue was due to a higher volume of shipments, which increased 191%, offset by a 4% decrease in our average selling price and changes in product mix. In addition, in the fourth quarter of 2001, we recorded $1.1 million in revenues from cancellation fees.

Cost of Revenues: Cost of revenues, which reflects costs of product revenues, was $79.8 million in 2001 and $32.3 million in 2000 resulting in gross profit as a percentage of revenues of 50% and 43%, respectively. The increase in gross profit as a percentage of revenues was attributable to improved yields and cost reductions at our suppliers, an increase in unit volume of shipments, and a decrease in excess and obsolete inventory writedowns as a percentage of sales. Our gross margins in the future may be affected by competitive pricing strategies and the future introduction of certain lower margin items.

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

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

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

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

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

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

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

At the acquisition date, we expected to incur additional costs of $2.0 million to complete the in-process project, which we expected to complete in June 2001. Subsequent to the acquisition date, we discontinued development efforts on this specific project and intend to use certain aspects of this technology in future products.

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

Interest Income: Interest income was $3.6 million in 2001, compared to $4.2 million in 2000, a decrease of 13%. This decrease was primarily due to lower interest rates obtained on our cash, cash equivalents and short-term investment portfolio, offset partially by an increase in average invested balances.

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

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

As of December 31, 2001, we have $25 million and $16 million of net operating loss carryforwards for federal and state purposes, respectively. We also have federal and state research and development tax credit carryforwards of approximately $1.5 million and $400,000, respectively. The net operating losses and federal credit carryforwards will expire at various dates beginning in 2005, if not utilized.

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

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

The valuation allowance at December 31, 2001 includes approximately $3.9 million related to stock option deductions, the benefit of which will be recorded in paid-in capital when realized.

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

Cost of Revenues: Cost of revenues, which reflects costs of product revenues, was $32.3 million in 2000 and $3.1 million in 1999 resulting in gross profit as a percentage of revenues of 43% and 17%, respectively. The increase in gross profit was mainly attributable to the significant increase in the unit volume of shipments. The increase in gross profit as a percentage of revenues was driven by cost reductions from our suppliers. Our gross margins in the future may be affected by competitive pricing strategies and the future introduction of certain lower margin items.

Research and Development Expenses: Research and development expenses in 2000 were $41.9 million, compared to $13.4 million in 1999, an increase of 214%. The increase was due primarily to additions in engineering personnel, increased usage of materials necessary to build prototypes, increases in depreciation resulting from the additional purchases of laboratory equipment and software development tools and an increase in amortization of deferred compensation of $9.0 million.

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

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

Amortization of Deferred Compensation and Non-Cash Stock Compensation: Amortization of deferred compensation, which is allocated among the above expense categories, was $25.6 million in 2000, compared to $4.1 million in 1999, an increase of $21.5 million. The increase was attributable to deferred stock compensation recorded in 2000 of $31.1 million related to option grants made to a significant number of new and existing employees and the use of the graded vesting method, which results in accelerated amortization of deferred compensation expense in the earlier years of the awards' expected life. In addition, expenses for 2000 and 1999 include charges of $2.3 million and $173,000, respectively, related to grants to consultants.

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

Interest Expense: Interest expense was $334,000 in 2000, compared to $242,000 in 1999, an increase of 38%. The increase was due to higher outstanding balances under our working capital line of credit during 2000.

Since our inception, we have financed our operations through a combination of sales of equity securities and cash generated by operations. At December 31, 2001, we had $110.9 million in cash, cash equivalents and short-term investments as compared to $87.7 million at December 31, 2000.

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

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

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

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

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

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

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

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

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

In August 2001, the FASB issued FAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (FAS 144), which addresses financial accounting and reporting for impairment or disposal of long- lived assets and is effective January 1, 2002. FAS 144 supersedes FAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of", and the accounting and reporting provisions relating to the disposal of segments of a business under Accounting Principles Board Opinion No. 30. We do not expect that the adoption of FAS 144 will have a significant impact on our financial statements.

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

We have not reported an operating profit for any year since our incorporation and have experienced net losses of approximately $19.7 million, $46.0 million, and $19.7 million for the years ended December 31, 2001, 2000, and 1999, respectively.

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

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

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

• variations in our quarterly operating results;
• changes in financial estimates of our revenues and operating results by securities analysts;
• changes in market valuations of integrated circuit companies;
• announcements by us, our competitors, or others in related market segments of significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments;
• loss or decrease in sales to a major customer or failure to complete significant transactions;
• loss or reduction in manufacturing capacity from one or more of our key suppliers;
• additions or departures of key personnel;
• future sales of our common stock;
• stock market price and volume fluctuations attributable to inconsistent or low trading volume levels of our stock;
• commencement of or involvement in litigation;
• announcements by us or our competitors of key design wins and product introductions;
• a decrease in the average selling price of our products;
• ability to achieve cost reductions; and
• fluctuations in the timing and amount of customer requests for product shipments.

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

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

Sales to customers located in Japan accounted for 87% of net revenues for the year ended December 31, 2001 and 31% of net revenues for the year ended December 31, 2000. Any slowdown in the demand for our customers' equipment in Japan may cause our revenues to decline. Our sales have been historically denominated in US dollars and major fluctuations in currency exchange rates could materially affect our Japanese customers' demand, thereby forcing them to reduce their orders, which could adversely affect our operating results.

We have worked in partnership with local telecommunications companies to develop the Annex C standard for the Japanese market and have been able to achieve a dominant market share of DSL equipment purchases in Japan. In July 2001, a certain service provider announced plans to deploy lower priced competing DSL technologies in the Japanese market. If these competing technologies are successful, we may lose our dominant position in the Japanese market and our business and operating results may be adversely affected.

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

• staffing and managing foreign operations;
• changes in regulatory requirements;
• licenses, tariffs and other trade barriers;
• political and economic instability;
• obtaining governmental approvals for products; and
• complying with a wide variety of complex foreign laws and treaties.

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

We sell our DSL products primarily to network equipment manufacturers. Our top two customers for the year ended December 31, 2001 were Sumitomo Electric Industries and NEC, accounting for 48% and 38% of our revenues, respectively. Our top five customers for the year ended December 31, 2000 were Lucent Technologies, Sumitomo Electric Industries, Copper Mountain Networks, NEC and Nortel Networks accounting for 24%, 20%, 12%, 10% and 10%, of our revenues, respectively. We do not have formal long-term agreements with these customers, but rather sell our products to them on an order-by-order basis. We expect to be dependent upon a relatively small number of large customers in future periods, although the specific customers may vary from period to period. If we are not successful in maintaining relationships with key customers and winning new customers, our business and results of operations will suffer.

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

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

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

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

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

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

We obtain certain parts, components and packaging used in the delivery of our products from sole sources of supply. For example, we obtain certain semiconductor wafers from Mitsubishi Electric and Taiwan Semiconductor Manufacturing Co., Ltd. If we fail to obtain components in sufficient quantities when required, and are unable to meet customer demand, our business could be harmed, as our customers would consider purchasing products from our competitors. We also rely on United Microelectronics Corporation to manufacture our analog silicon wafers. Developing and maintaining these strategic relationships with our vendors is critical for us to be successful. Any of our sole source suppliers may:

• enter into exclusive arrangements with our competitors;
• stop selling their products or components to us at commercially reasonable prices;
• refuse to sell their products or components to us at any price; or
• be subject to production disruptions such as earthquakes.

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

• inconsistent quality and reliability of service;
• lack of availability of cost-effective, high-speed service;
• lack of interoperability among multiple vendors' network equipment;
• congestion in service providers' networks;
• inadequate security; and
• slow deployment of new broadband services over DSL lines.

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

• intense competition;
• rapid technological change;
• frequent new product introductions by our competitors;
• changes in customer demands; and
• evolving industry standards.

Any of these factors could make our products obsolete or unmarketable. To compete, we must innovate and introduce new products. If we fail to successfully introduce new products on a timely and cost-effective basis that meet customer requirements and are compatible with evolving industry standards, then our business, financial condition and results of operations will be seriously harmed.

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

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

The market for communications semiconductor and software solutions is intensely competitive. Given our stage of development, there is a substantial risk that we will not have the financial resources, technical expertise or marketing and support capabilities to compete successfully. In addition, a number of other semiconductor companies have announced their intent to enter the market segments adjacent to or addressed by our products. These competitors have longer operating histories, greater name recognition, larger installed customer bases and significantly greater financial, technical and marketing resources than we have. They may be able to introduce new technologies, respond more quickly to changing customer requirements or devote greater resources to the development, promotion and sale of their products than we can.

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

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

WE MAY MAKE FUTURE ACQUISITIONS WHERE ADVISABLE AND ACQUISITIONS INVOLVE NUMEROUS RISKS.

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

• difficulties in integration of the operations, technologies, and products of the acquired companies;
• the risk of diverting management's attention from normal daily operations of the business;
• potential difficulties in completing projects associated with purchased in-process research and development;
• risks of entering markets in which we have no or limited direct prior experience and where competitors in such markets have stronger market positions; and
• the potential loss of key employees of the acquired company.

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

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

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

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

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

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

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

Our products are complex and have contained errors, defects and bugs when introduced. If we deliver products with errors, defects or bugs, our credibility and the market acceptance and sales of our products could be harmed. Further, if our products contain errors, defects and bugs, then we may be required to expend significant capital and resources to alleviate such problems. Defects could also lead to product liability as a result of product liability lawsuits against us or against our customers. We have agreed to indemnify our customers in some circumstances against liability from defects in our products. A successful product liability claim could seriously harm our business, financial condition and results of operations.

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

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

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

We rely on a combination of patent, copyright and trademark laws, trade secrets, confidentiality agreements and other contractual provisions to protect our proprietary rights. However, these measures afford only limited protection. Our failure to adequately protect our proprietary rights may adversely affect us. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or to obtain and use trade secrets or other information that we regard as proprietary.

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

We have received correspondence from certain parties, including Texas Instruments, Alcatel, and Ricoh, requesting us to discuss the potential need for non-exclusive licenses permitting us to utilize technology covered by various patents held by these parties. We could be subject to claims similar to the Texas Instruments, Alcatel and Ricoh claims in the future. Depending on the amount and timing of any unfavorable resolutions of these claims, our future results of operations or cash flows could be materially adversely affected in a particular period. There can be no guaranty that the aggregate effect of any such claims will not have a material adverse effect on our business, financial condition or results of operations.

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

The primary objective of our investment activities is to preserve principal while concurrently maximizing the income we receive from our investments without significantly increasing risk. Some of the securities that we may invest in may be subject to market risk. This means that a change in prevailing interest rates may cause the principal amount of the investment to fluctuate. For example, if we hold a security that was issued with a fixed interest rate at the then-prevailing rate and the prevailing interest rate later rises, the current value of the principal amount of our investment will decline. To minimize this risk in the future, we intend to maintain our portfolio of cash equivalents and short-term investments in a variety of securities, including commercial paper, money market funds, government and non-government debt securities and certificates of deposit. In general, money market funds are not subject to market risk because the interest paid on such funds fluctuates with the prevailing interest rate. As of December 31, 2001, all of our investments were in money market funds, high quality commercial paper, government and non- government debt securities and auction rate preferred stock. A hypothetical 100 basis point increase in interest rates would result in an approximate $88,000 decrease in the fair value of our available-for-sale securities as of December 31, 2001. See Note 3 of notes to the consolidated financial statements.

We have audited the accompanying consolidated balance sheets of Centillium Communications, Inc. as of December 31, 2001 and 2000, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2001. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Centillium Communications, Inc. at December 31, 2001 and 2000, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

/s/ Ernst & Young LLP

San Jose, California
March 12, 2002

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

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

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

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

See accompanying notes.

CENTILLIUM COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)

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

Commitments and contingencies

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

See accompanying notes.

CENTILLIUM COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except per share data)

                                                                                                                        Accum-
                                                                                                                        ulated
                                     Convertible                                                   Stock-                Other     Total
                                   Preferred Stock       Common Stock      Additional  Deferred   holders'    Accum-    Compre-   Stock-
                                 -------------------- -------------------   Paid-In     Compen-     Notes     ulated    hensive  holders'
                                    Shares     Amount   Shares     Amount   Capital     sation    Receivable  Deficit   Income    Equity
                                 ------------  ------ -----------  ------  ----------  ---------  ---------  ---------  -------  ---------
BALANCE AT DECEMBER 31, 1998....   7,839,482  $    8   8,505,600  $    9  $   23,681  $    (446) $      --  $ (13,993) $    --  $   9,259
 Noncash issuance of common
  stock for services and
  other.........................          --      --      97,643      --         173         --         --         --       --        173
 Cash proceeds from issuance
  of Series C convertible
  preferred stock, net of
  issuance costs................   7,610,754       7          --      --      35,568         --         --         --       --     35,575
 Exercise of options to
  purchase common stock for
  cash and notes................          --      --   1,715,598       1       1,147         --       (430)        --       --        718
 Deferred compensation related
  to stock option grants........          --      --          --      --      19,701    (19,701)        --         --       --         --
 Amortization of deferred
  compensation..................          --      --          --      --          --      4,104         --         --       --      4,104
 Net loss.......................          --      --          --      --          --         --         --    (19,749)      --    (19,749)
 Unrealized loss on available-
  for-sale investments..........          --      --          --      --          --         --         --         --      (25)       (25)
                                                                                                                                 ---------
 Total comprehensive net loss...          --      --          --      --          --         --         --         --       --    (19,774)
                                 ------------  ------ -----------  ------  ----------  ---------  ---------  ---------  -------  ---------
BALANCE AT DECEMBER 31, 1999....  15,450,236      15  10,318,841      10      80,270    (16,043)      (430)   (33,742)     (25)    30,055
 Noncash issuance of common
  stock for services............          --      --      53,900      --       2,333         --         --         --       --      2,333
 Exercise of options to
  purchase common stock for
  cash..........................          --      --   1,939,010       2       2,551         --         --         --       --      2,553
 Issuance of shares under
  Employee Stock Purchase
  Plan..........................          --      --      52,196      --         801         --         --         --       --        801
 Deferred compensation related
  to stock option grants........          --      --          --      --      31,088    (31,088)        --         --       --         --
 Amortization of deferred
  compensation..................          --      --          --      --          --     25,610         --         --       --     25,610
 Conversion of preferred stock
  to common stock............... (15,450,236)    (15) 15,450,236      15          --         --         --         --       --         --
 Issuance of common stock for
  cash, net of issuance costs
  of $7,182.....................          --      --   5,200,000       6      91,477         --         --         --       --     91,483
 Exercise of warrants to
  purchase common stock.........          --      --      15,931      --          --         --         --         --       --         --
 Net loss.......................          --      --          --      --          --         --         --    (45,998)      --    (45,998)
 Unrealized gain on available-
  for-sale investments..........          --      --          --      --          --         --         --         --       33         33
                                                                                                                                 ---------
 Total comprehensive net loss...          --      --          --      --          --         --         --         --       --    (45,965)
                                 ------------  ------ -----------  ------  ----------  ---------  ---------  ---------  -------  ---------
BALANCE AT DECEMBER 31, 2000....          --      --  33,030,114      33     208,520    (21,521)      (430)   (79,740)       8    106,870
 Noncash issuance of common
  stock for services............          --      --      10,000      --          70         --         --         --       --         70
 Exercise of options to
  purchase common stock for
  cash..........................          --      --     557,412       1       2,394         --         --         --       --      2,395
 Cash proceeds from payments on
  stockholder note receivable...          --      --          --      --          --         --        430         --       --        430
 Issuance of shares under
  Employee Stock Purchase
  Plan..........................          --      --     164,621      --       1,883         --         --         --       --      1,883
 Deferred compensation related
  to stock option grants, net
  of terminations...............          --      --          --      --      (1,958)     1,958         --         --       --         --
 Amortization of deferred
  compensation..................          --      --          --      --          --     15,346         --         --       --     15,346
 Common stock issued in
  connection with acquisition...          --      --     813,915       1      18,315         --         --         --       --     18,316
 Acquisition related deferred ..
  compensation..................          --      --          --      --          --     (4,517)        --         --       --     (4,517)
 Net loss.......................          --      --          --      --          --         --         --    (19,693)      --    (19,693)
 Unrealized gain on available-
  for-sale investments..........          --      --          --      --          --         --         --         --       58         58
                                                                                                                                 ---------
 Total comprehensive net loss...          --      --          --      --          --         --         --         --       --    (19,635)
                                 ------------  ------ -----------  ------  ----------  ---------  ---------  ---------  -------  ---------
BALANCE AT DECEMBER 31, 2001....          --  $   --  34,576,062  $   35  $  229,224  $  (8,734) $      --  $ (99,433) $    66  $ 121,158
                                 ============  ====== ===========  ======  ==========  =========  =========  =========  =======  =========

See accompanying notes.

CENTILLIUM COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

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

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

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

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

See accompanying notes.

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

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

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

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

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

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

Revenue Recognition: Revenues related to product sales are generally recognized when the products are shipped to the customer, title has transferred and no significant obligations remain. In circumstances where the Company has not shipped the final production version of a product, or when the customer has delayed its acceptance of our product, the Company defers recognition of the revenue until acceptance. Under certain circumstances the Company allows its customers to return product. A provision is made for estimated product returns. Our products are warranted to be free from defect for a period of one year. A provision is made for warranty costs as shipments are made. To date, such costs have not been material.

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

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

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

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

* represents less than 10% of total accounts receivable.

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

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

The Company's investments in marketable equity securities and all debt securities are classified as available-for-sale at the time of purchase and the Company periodically reevaluates such designation. At December 31, 2001 and 2000, all of the Company's investments in debt securities were classified as available-for-sale, with changes in market value recorded as unrealized gains and losses in accumulated other comprehensive income until their disposition. Realized gains and losses and declines in value judged to be other than temporary on available-for-sale securities are included in interest income and were insignificant for all periods presented. The cost of securities sold is based on the specific-identification method.

Inventories: Inventories are stated at the lower of cost (first in, first out) or market. The components of inventories are as follows (in thousands):

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

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

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

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

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

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

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

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

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

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

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

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

                                                    Years ended December 31,
                                                -------------------------------
                                                  2001       2000       1999
                                                ---------  ---------  ---------
   Net loss .................................. $ (19,693) $ (45,998) $ (19,749)
                                                =========  =========  =========
   Basic and diluted:
     Weighted average shares of common
      stock outstanding.......................    33,909     24,405      9,363
     Less weighted average shares subject
      to repurchase...........................       414      1,455        521
                                                ---------  ---------  ---------
     Weighted average shares used in computing
      basic and diluted net loss per share ...    33,495     22,950      8,842
                                                =========  =========  =========

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

The Company has excluded all outstanding warrants, stock options, and shares subject to repurchase by the Company from the calculation of basic and diluted net loss per share because these securities are antidilutive for all periods presented. Options and warrants to purchase 5,903,370, 7,809,376 and 3,417,007 shares of common stock have been excluded for the years ended December 31, 2001, 2000 and 1999.

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

The Company accounts for stock issued to non-employees in accordance with the provisions of FAS 123 and Emerging Issues Task Force Issue No. 96-18, "Accounting for Equity Instruments That are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services." Direct grants of shares of common stock are made to certain advisors and consultants to the Company for past services with no vesting or future performance obligations. The fair value of such grants is immediately charged to expense in accordance with EITF 96-18.

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

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

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

In August 2001, the FASB issued FAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (FAS 144), which addresses financial accounting and reporting for impairment or disposal of long- lived assets and is effective January 1, 2002. FAS 144 supersedes FAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of", and the accounting and reporting provisions relating to the disposal of segments of a business under Accounting Principles Board Opinion No. 30. The Company does not expect that the adoption of FAS 144 will have a significant impact on its financial statements.

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

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

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

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

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

The portion of the purchase price allocated to purchased in- process research and development was $7.4 million and was valued based on net cash flows over four years, discounted at a cost of capital of 25% to reflect the uncertainty of the products' future use. The entire amount of $7.4 million was expensed on acquisition because the technological feasibility of products under development had not been established and no future alternative uses existed. The specific products under development using vEngines technology have been discontinued; however, certain aspects of the technologies have been incorporated into the Company's Voice-over-Packet solutions.

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

Goodwill and the assembled workforce are amortized on a straight-line basis over their expected useful lives of four and two years, respectively. Beginning January 1, 2002, upon adoption of FAS 142, the Company will no longer amortize goodwill; rather, goodwill will be evaluated for impairment at least on an annual basis.

Pro-forma results of operations have not been presented because the pro-forma impact of the acquisition was not material to the Company's results of operations and financial position for the year ended December 31, 2001.

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

The estimated fair market values of cash equivalents and short-term investments are based on quoted market prices. Cash equivalents and short-term investments as of December 31, 2001 and 2000 were as follows (in thousands):

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

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

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

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

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

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

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

In conjunction with the equipment facility described above, the Company issued a warrant to the bank and to the financial institution to purchase 1,800 and 9,450 shares, respectively, of the Company's common stock at an exercise price of $4.00 per share. The warrants are immediately exercisable and will expire in May 2005. The fair value is not material for reporting purposes. On June 2, 2000, 1,800 of these warrants were exercised.

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

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

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

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

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

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

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

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

The Company does not own or operate a fabrication facility and foundries located in Asia currently supply substantially all of its wafer requirements. The Company's purchase obligations to these foundries are based on wafer supply agreements or non-cancelable purchase orders. As of December 31, 2001, the Company's non-cancelable purchase obligation is $4.6 million.

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

Preferred Stock: The Board of Directors has the authority, without any further vote or action by the stockholders, to provide for the issuance of 10,000,000 shares of preferred stock from time to time in one or more series with such designation, rights preferences and limitations as the Board of Directors may determine, including the consideration received therefore, the number of shares comprising each series, dividend rates, redemption provisions, liquidation preferences, redemption fund provisions, conversion rights, and voting rights, all without the approval of the holders of common stock.

Common Stock Reserved: Common stock reserved is as follows:

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

Deferred Compensation: During the years ended December 31, 2001, 2000 and 1999, the Company recorded deferred compensation, net of adjustments for employee terminations, of approximately $2.6 million, $31.1 million and $19.7 million, respectively. This deferred compensation represents the difference between the grant price and the deemed fair value for financial statement reporting purposes of the Company's common stock options granted during these periods. Deferred compensation expense is being amortized using the graded vesting method, in accordance with FAS 123 and FAS Interpretation No. 28, over the vesting period of each respective option, generally four years. Under the graded vesting method, each option grant is separated into portions based on their vesting terms, which results in acceleration of amortization expense for the overall award. The accelerated amortization pattern results in expensing approximately 59% of the total award in year one, 25% in year two, 12% in year three and 4% in year four.

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

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

Stockholders' Notes Receivable: In November 1999, the Company issued 215,000 shares of common stock in connection with the exercise of an employee stock option at an exercise price of $2.00 per share in return for a full recourse note receivable for $430,000. The note earned interest at an annual interest rate of 6.00% per annum and was paid in full in June 2001.

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

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

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

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

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

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

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

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

Stock-Based Compensation: The Company has elected to follow APB Opinion No. 25 and related interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under FAS 123 requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB Opinion No. 25, when the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized.

The option valuation models used to fair value options under FAS 123 were developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected life of the option. Because the Company's employee stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.

Pro forma information regarding net loss is required by FAS 123, which requires that the information be determined as if the Company has accounted for its employee stock-based awards under the fair value method of FAS 123. The fair value of the options granted in 1999 was estimated using the minimum-value method and the fair value of the options granted in 2001 and 2000 were estimated using the Black-Scholes method, with the following weighted average assumptions:

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

For purposes of FAS 123 pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. Had compensation expense for the Company's stock-based award plans been determined on the fair value at the grant dates for awards under the plan consistent with the method of FAS 123, the Company's net loss would have been increased to the following approximate FAS 123 pro forma amounts:

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

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

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

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

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

                                                 Years ended December 31,
                                             -------------------------------
                                               2001       2000       1999
                                             ---------  ---------  ---------
Tax (benefit) at federal statutory rate.... $  (6,560) $ (15,641) $  (6,715)
Loss for which no tax benefit is
 currently recognizable....................        --      3,414      5,073
Unbenefited foreign losses...................      --      5,301         --
Amortization of deferred compensation........   5,252      6,926      1,642
Purchased in-process research and development
 and amortization of goodwill and other
 acquired intangibles........................   3,640         --         --
Utilization of net operating losses, net of
 changes in valuation allowance............    (2,237)        --         --
Other........................................     305          8         --
                                             ---------  ---------  ---------
Total tax  provision....................... $     400  $       8  $      --
                                             =========  =========  =========

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

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

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

                                        Years ended December 31,
                                        ---------------------
                                          2001       2000
                                        ---------  ---------
Deferred tax assets:
  Net operating losses................ $   9,606  $  14,655
  Tax credit carryforwards............     1,756      1,793
  Reserves and accruals...............     8,835      4,482
                                        ---------  ---------
Total deferred tax assets.............    20,197     20,930
Valuation allowance................... $ (20,197) $ (20,930)
                                        ---------  ---------
Net deferred tax assets...............        --         --
                                        ---------  ---------
Net deferred taxes.................... $      --  $      --
                                        =========  =========

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

The valuation allowance decreased by approximately $733,000 for the year ended December 31, 2001 and increased by approximately $8.6 million and $7.2 million for the years ended December 31, 2000 and 1999, respectively. The valuation allowance at December 31, 2001 includes approximately $3.9 million related to stock option deductions, the benefit of which will be recorded in paid-in capital when realized.

Through December 31, 2001, the Company's revenues have been primarily derived from one business segment, the sale of broadband communication products for the DSL and VoP markets. The Company sells primarily to original equipment manufacturers and companies in the communications industries.

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

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

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

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

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

* represents less than 10% of net revenues.

The Company has adopted a 401(k) Profit Sharing Plan and Trust that allows eligible employees to make contributions subject to certain limitations. The Company may make discretionary contributions based on profitability as determined by the Board of Directors. There was no amount contributed by the Company to the plan for the years ended December 31, 2001, 2000 and 1999.

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

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


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

None

The information required by this item is incorporated by reference from the information under the captions "Information Concerning Solicitation and Voting," "Election for Directors" and "Section 16(A) Beneficial Ownership Reporting Compliance" contained in our definitive proxy statement to be filed no later than May 1, 2002 in connection with solicitation of proxies for our annual meeting of stockholders to be held June 11, 2002 (the "Proxy Statement").

The information required by this item is incorporated by reference from the information under the captions "Executive Compensation" and "Compensation of Directors" contained in the Proxy Statement. In addition, Exhibits 10.29 through 10.30 of this report contain recently executed Employment Agreements.

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

The information required by this item is incorporated by reference from the information under the caption "Certain Transactions" contained in the Proxy Statement.

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

The following financial statement schedule of Centillium Communications, Inc. for the years ended December 31, 2001, 2000, and 1999 should be read in conjunction with the Consolidated Financial Statements of Centillium Communications, Inc.

Schedule II--Valuation and Qualifying Accounts

Allowance for Doubtful Accounts:

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

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

__________

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

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

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

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

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Fremont, State of California, on March 25, 2002.

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