The provision for income taxes for the three and six month periods ended June 30, 2002 relates to current taxes payable for the Company's subsidiaries located in foreign jurisdictions. The provision for income taxes for the three and six month periods ended June 30, 2001 relates to current taxes payable for the Company's subsidiaries located in foreign jurisdictions and federal alternative minimum taxes based on projected U.S. taxable income for the fiscal year 2001. Income tax expense differs from the expected benefit that was derived by applying the applicable U.S. federal statutory rate to the loss from operations primarily due to losses which are not currently benefited. Due to the Company's loss position, a full valuation allowance has been established to offset the deferred tax assets, primarily related to net operating loss carryforwards.

6. Related Party Transactions

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

The Company sold $2.0 million of products to Broadxent, Inc. in both the six month period ended June 30, 2002 and the year ended December 31, 2001. As of June 30, 2002 and December 31, 2001, the Company had $222,000 and $486,000, respectively, in accounts receivable from Broadxent, Inc. Broadxent, Inc., is a wholly owned subsidiary of Creative Technology Ltd. One of the Company's directors is also a director of Creative Technology Ltd.

You should read the following discussion and analysis in conjunction with our consolidated financial statements and the related notes thereto included in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 27, 2002. 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.

Our discussion contains "forward-looking statements" that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are generally preceded by words that imply a future state such as "expected" or "anticipated" or imply that a particular future event or events will occur such as "will." Investors are cautioned that all forward-looking statements involve risks and uncertainties and those actual results could be materially different from those discussed in this report.

The section entitled "Risk Factors" and similar discussions in our other SEC reports filed with the SEC discuss some of the important risk factors that may affect our business, results of operations and financial condition. Copies of our reports filed with the SEC are available from us without charge and on the SEC's website at www.sec.gov. 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.

Results of Operations for the Three Months Ended June 30, 2002 and 2001

Net Revenues. Our net revenues were $34.4 million for the three months ended June 30, 2002 compared to $46.4 million for the three months ended June 30, 2001. The decrease in revenues primarily reflects a decrease in average selling prices of our DSL products partially offset by an increase in unit volume shipments. Our major customers for the three months ended June 30, 2002, were Sumitomo Electric Industries ("Sumitomo") and NEC who represented 44% and 42% of net revenues, respectively. For the three months ended June 30, 2001, Sumitomo and NEC represented 52% and 45% of net revenues, respectively. Revenues to international customers, who were primarily located in Japan, comprised 91% and 97% of our net revenues for the three months ended June 30, 2002 and 2001, respectively.

Cost of Revenues and Gross Profit. Cost of revenues was $21.3 million for the three months ended June 30, 2002 resulting in a gross profit of $13.1 million or 38% of net revenues. This compares to a gross profit of $23.1 million or 50% of net revenues for the three months ended June 30, 2001. The decrease in gross profit and gross profit percentage was primarily due to a loss on non-cancelable purchase commitments of $1.5 million, an inventory write-down of $1.2 million and a decrease in average selling prices of our DSL products.

Research and Development Expenses. Research and development expenditures increased 4% to $14.4 million for the three months ended June 30, 2002 as compared to $13.7 million for the three months ended June 30, 2001. This increase was primarily due to additions in engineering personnel and related salary costs, increased usage of materials necessary to build prototypes, an increase in depreciation resulting from additional purchases of laboratory equipment and an increase in maintenance and support costs for software development tools, offset by a $1.3 million decrease in the amortization of deferred compensation.

Sales and Marketing Expenses. Sales and marketing expenditures decreased 15% to $4.1 million for the three months ended June 30, 2002 as compared to $4.8 million for the three months ended June 30, 2001. The decrease was due primarily to a $424,000 decrease in the amortization of deferred compensation, a decrease in customer evaluation board costs and a decrease in sales commissions, offset by the addition of sales personnel and related salary costs.

General and Administrative Expenses. General and administrative expenditures decreased 40% to $2.5 million for the three months ended June 30, 2002 from $4.2 million for the three months ended June 30, 2001. This decrease was primarily due to a $702,000 decrease in the amortization of deferred compensation, a decrease in bad debt expense and decreases in payroll and recruiting costs, legal fees, and travel related expenses.

Amortization of Deferred Compensation. Amortization of deferred compensation, which is allocated among the above expense categories, decreased 64% to $1.4 million for the three months ended June 30, 2002 from $3.9 million for the three months ended June 30, 2001. This 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.

Amortization of Goodwill and Other Acquisition Intangibles. Amortization of goodwill and other acquisition-related intangibles decreased to $41,000 for the three months ended June 30, 2002 from $821,000 for the three months ended June 30, 2001. This was due to the implementation of SFAS 142, which required us to discontinue the amortization of goodwill effective January 1, 2002. In addition, in accordance with SFAS 142 we reclassified assembled workforce to goodwill which eliminated the amortization of assembled workforce effective January 1, 2002.

Gain (Loss) on Non-Current Investment. 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 our investment to zero as a result of an impairment of value.

Interest Income. Interest income decreased 47% to $510,000 in the three months ended June 30, 2002 as compared to $956,000 for the three months ended June 30, 2001. This decrease was primarily due to lower interest rates obtained on our cash, cash equivalents and short-term investment portfolio.

Provision for Income Taxes. Income tax expense was $27,000 for the three months ended June 30, 2002 compared to $205,000 for the three months ended June 30, 2001. The provision for income taxes for the three months ended June 30, 2002 relates to current taxes payable for the Company's subsidiaries located in foreign jurisdictions. The provision for income taxes for the three months ended June 30, 2001 relates to current taxes payable for the Company's subsidiaries located in foreign jurisdictions and federal alternative minimum taxes based on projected U.S. taxable income for the fiscal year 2001. Due to the Company's loss position, a full valuation allowance has been established to offset the deferred tax assets, primarily related to net operating loss carryforwards.

Results of Operations for the Six Months Ended June 30, 2002 and 2001

Net Revenues. Our net revenues were $57.0 million for the six months ended June 30, 2002 compared to $78.2 million for the six months ended June 30, 2001. The decrease in revenues is primarily due to a decrease in average selling prices of our DSL products. Our major customers for the six months ended June 30, 2002 were Sumitomo and NEC who represented 50% and 36% of net revenues, respectively. For the six months ended June 30, 2001, Sumitomo and NEC represented 45% and 42% of net revenues, respectively. Revenues to international customers, who were primarily located in Japan, comprised 90% and 89% of our net revenues for the six months ended June 30, 2002 and 2001, respectively.

Cost of Revenues and Gross Profit. Cost of revenues was $33.3 million for the six months ended June 30, 2002 resulting in a gross profit of $23.7 million or 42% of net revenues. This compares to a gross profit of $38.7 million or 50% of net revenues for the six months ended June 30, 2001. The decrease in gross profit and gross profit percentage was primarily due to a decrease in average selling prices of our DSL products and a $1.5 million loss on non-cancelable purchase commitments relating to excess and obsolete products.

Research and Development Expenses. Research and development expenditures were $28.0 million for the six months ended June 30, 2002 and 2001. Research and development expenses remained unchanged primarily due to the $3.1 million decrease in the amortization of deferred compensation being offset by additions in engineering personnel and related salary costs, increased usage of materials necessary to build prototypes, an increase in depreciation resulting from additional purchases of laboratory equipment and an increase in maintenance and support costs for software development tools.

Sales and Marketing Expenses. Sales and marketing expenditures were $9.0 million for the six months ended June 30, 2002 as compared to $9.1 million for the six months ended June 30, 2001. The decrease was due primarily to a $1.0 million decrease in the amortization of deferred compensation and decreases in customer evaluation board costs and sales commissions, offset by the addition of sales personnel and related salary costs.

General and Administrative Expenses. General and administrative expenditures decreased 28% to $5.5 million for the six months ended June 30, 2002 from $7.7 million for the six months ended June 30, 2001. This decrease was primarily due to a $1.8 million decrease in the amortization of deferred compensation and a decrease in bad debt expense.

Amortization of Deferred Compensation. Amortization of deferred compensation, which is allocated among the above expense categories, decreased 66% to $3.2 million for the six months ended June 30, 2002 from $9.4 million for the six months ended June 30, 2001. This 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.

Amortization of Goodwill and Other Acquisition Intangibles. Amortization of goodwill and other acquisition-related intangibles decreased to $83,000 for the six months ended June 30, 2002 from $1.6 million for the six months ended June 30, 2001. This was due to the implementation of SFAS 142, which required us to discontinue the amortization of goodwill effective January 1, 2002. In addition, in accordance with SFAS 142 we reclassified assembled workforce to goodwill which eliminated the amortization of assembled workforce effective January 1, 2002.

In-Process Research and Development Expense. For the six months ended June 30, 2001, we recorded $7.4 million in charges for in-process research and development related to the acquisition vEngines Inc. There were no comparable amounts for the six months ended June 30, 2002.

Gain on Non-Current Investment. For the six months ended June 30, 2001, as a result of an 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 our investment to zero for an impairment. In January 2002, we sold this non-current equity investment for $440,000 and have included this as a gain in the six months ended June 30, 2002.

Interest Income. Interest income decreased 52% to $1.0 million in the six months ended June 30, 2002 as compared to $2.1 million for the six months ended June 30, 2001. This decrease was primarily due to lower interest rates obtained on our cash, cash equivalents and short-term investment portfolio.

Provision for Income Taxes. Income tax expense was $51,000 for the six months ended June 30, 2002 compared to $234,000 for the six months ended June 30, 2001. The provision for income taxes for the six months ended June 30, 2002 relates to current taxes payable for the Company's subsidiaries located in foreign jurisdictions. The provision for income taxes for the six months ended June 30, 2001 relates to current taxes payable for the Company's subsidiaries located in foreign jurisdictions and federal alternative minimum taxes based on projected U.S. taxable income for the fiscal year 2001. Due to the Company's loss position, a full valuation allowance has been established to offset the deferred tax assets, primarily related to net operating loss carryforwards.

Liquidity and Capital Resources

Since our inception, we have financed our operations through a combination of sales of equity securities and cash generated by operations. At June 30, 2002, we had $103.5 million in cash, cash equivalents and short-term investments as compared to $110.9 million at December 31, 2001.

Net cash used in operating activities was $5.9 million for the six months ended June 30, 2002. The net cash used in operating activities was primarily due to our net loss of $17.5 million and an increase in our accounts receivable of $2.5 million. Net cash used in operating activities was offset by non-cash charges of $3.2 million for the amortization of deferred compensation, depreciation and amortization expense of $3.3 million, a decrease in inventory of $3.9 million and increases in accrued liabilities and accrued purchase commitments of $2.3 million and $1.5 million, respectively.

For the six months ended June 30, 2002, net cash provided by investing activities was $7.2 million. Net cash provided by investing activities primarily related to net sales and maturities of short-term investments of $9.7 million and proceeds from the sale of a non-current investment of $440,000 offset by purchases of property and equipment of $2.9 million.

Net cash provided by financing activities was $1.1 million for the six month periods ended June 30, 2002. Net cash provided by financing activities primarily consisted of net proceeds from employee stock plans offset by principal payments on long term debt obligations.

Our principal source of liquidity as of June 30, 2002 consisted of $103.5 million of cash and cash equivalents, and short-term investments. We anticipate that our existing capital resources will be sufficient to maintain our current level of operations and planned operations and capital expenditures for at least the next 12 months.

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.

Risk Factors

You should carefully consider the risks described below and all of the information contained in this Form 10-Q and on our Form 10-K, filed with the Securities and Exchange Commission on March 27, 2002. If any of the following risks actually occurs, our business, financial condition and results of operations could be harmed and the trading price of our common stock could decline and you may lose all or part of your investment in our common stock.

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

We have not reported an operating profit for any year since our incorporation and have experienced net losses of approximately $17.5 million for the six months ended June 30, 2002 and $19.7 million and $46.0 million for the years ended December 31, 2001 and 2000, respectively.

OUR STOCK PRICE MAY CONTINUE TO BE VOLATILE.

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

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

Many telecommunications service providers 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 historical customers. This trend, if continued, could result in lower than expected demand for our products, which could have a material adverse effect on our revenues and results of operations generally, and could cause the market price of our common stock to decline.

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

Sales to customers located in Japan accounted for 86% of net revenues for the six months ended June 30, 2002 and 87% of net revenues for the year ended December 31, 2001. Any slowdown in the demand for our customers' equipment in Japan may cause our revenues to decline. Our sales have been historically denominated in U.S. dollars and major fluctuations in currency exchange rates could materially affect our Japanese customers' demand, thereby forcing them to reduce their orders, which could adversely affect our operating results.

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

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

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

A substantial portion of our revenues has been derived from customers located outside of the United States. For the six months ended June 30, 2002 and for the year ended December 31, 2001, 90% and 89%, respectively, of our net revenues were to customers located in Asia. We may be unable to successfully overcome the difficulties associated with international operations. These difficulties include:

• staffing and managing foreign operations;
• changes in regulatory requirements;
• licenses, tariffs and other trade barriers;
• political and economic instability;
• difficulties in protecting intellectual property rights in some foreign countries;
• a limited ability to enforce agreements and other rights in some foreign countries;
• obtaining governmental approvals for products; and
• complying with a wide variety of complex foreign laws and treaties.

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

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

We sell our DSL products primarily to network equipment manufacturers. Our top two customers for the six months ended June 30, 2002 were Sumitomo and NEC, accounting for 50% and 36% of our net revenues. For the year ended December 31, 2001, Sumitomo and NEC accounted for 48% and 38% of our net revenues, respectively. We do not have contractual volume commitments with these customers, but rather sell our products to them on an order-by-order basis. We expect to be dependent upon a relatively small number of large customers in future periods, although the specific customers may vary from period to period. If we are not successful in maintaining relationships with key customers and winning new customers, our business and results of operations will suffer.

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

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

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

Sales of our products depend on the increased use and widespread adoption of broadband access services, and DSL services in particular, 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.

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

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

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

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

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

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

DSL services are competing with a variety of different broadband data transmission technologies, including cable 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. We may also face competition from customers' or prospective customers' own internal development efforts. Any of these competitors may be able to introduce new technologies, respond more quickly to changing customer requirements or devote greater resources to the development, promotion and sale of their products than we can.

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

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

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

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

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

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

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

We obtain certain parts, components and packaging used in the delivery of our products from sole sources of supply. For example, 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.

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

WE MAY MAKE FUTURE ACQUISITIONS AND ACQUISITIONS INVOLVE NUMEROUS RISKS.

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

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

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

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

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

Our officers and directors and their affiliates owned or controlled approximately 17.3% of our common stock as of July 16, 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.

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.

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

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

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

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

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

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.

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

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

The Company is not currently a party to any material litigation.

None

None

The Annual Meeting of Stockholders was held on June 11, 2002. At that time, there were present in person or by proxy 30,304,556 shares representing 87.5% of the 34,636,776 shares then outstanding and entitled to vote. Stockholders elected two Directors nominated in the April 29, 2002 Proxy Statement, incorporated herein by reference, to hold office for a term of three years. Additionally, the stockholders ratified the proposal to confirm Ernst & Young LLP as independent auditors of the Company for the year ending December 31, 2002.

1. Results of stockholder voting are as follows:

Election of Directors	Votes For	Votes Withheld
Kamran Elahian Lip-Bu Tan	30,188,383 30,216,133	116,173 88,423