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

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 30, 2002
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|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from to
----------------------- ----------------------
Commission file number:
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SILICON LABORATORIES INC.
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(Exact name of registrant as specified in its charter)

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

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

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

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

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

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. | | Yes | | No

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date. As of March 10,
2002, 48,747,166 shares of common stock of Silicon Laboratories Inc. were
outstanding.
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PAGE
PART I. FINANCIAL INFORMATION NUMBER
------

ITEM 1 Financial Statements:

Condensed Consolidated Balance Sheets at March 30, 2002
and December 29, 2001..................................................... 3

Condensed Consolidated Statements of Operations for the
three months ended March 30, 2002 and March 31, 2001...................... 4

Condensed Consolidated Statements of Cash Flows for the
three months ended March 30, 2002 and March 31, 2001...................... 5

Notes to Condensed Consolidated Financial Statements........................ 6

ITEM 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations............................. 8

ITEM 3 Quantitative and Qualitative Disclosures About Market Risk.................. 26

PART II. OTHER INFORMATION

ITEM 1 Legal Proceedings........................................................... 26

ITEM 2 Changes in Securities and Use of Proceeds................................... 26

ITEM 3 Defaults Upon Senior Securities............................................. 27

ITEM 4 Submission of Matters to a Vote of Securities Holders....................... 27

ITEM 5 Other Information........................................................... 27

ITEM 6 Exhibits and Reports on Form 8-K............................................ 27

PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

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

MARCH 30, DECEMBER 29,
2002 2001
----------------- ------------------

ASSETS (UNAUDITED)
Current assets:
Cash and cash equivalents........................... $ 74,390 $ 82,346
Short-term investments.............................. 29,777 18,902
Accounts receivable, net of allowance for
doubtful accounts of $563 at March 30,
2002 and $490 at December 29, 2001................ 13,406 10,543
Inventories......................................... 5,946 5,221
Deferred income taxes............................... 2,268 2,268
Prepaid expenses and other.......................... 3,503 3,073
----------------- ---------------
Total current assets................................... 129,290 122,353
Property, equipment and software, net.................. 26,264 20,038
Goodwill and other intangible assets................... 199 199
Other assets........................................... 2,403 2,431
----------------- ---------------
Total assets........................................... $158,156 $145,021
================= ===============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................... $ 16,233 $ 6,999
Accrued expenses.................................... 5,388 3,897
Deferred revenue.................................... 3,136 2,862
Current portion of long-term obligations............ 1,938 2,039
----------------- ---------------
Total current liabilities.............................. 26,695 15,797
Long-term debt and leases.............................. 936 1,363
Other long-term obligations............................ 2,469 2,454
----------------- ---------------
Total liabilities...................................... 30,100 19,614
Stockholders' equity:
Common stock--$.0001 par value; 250,000
shares authorized; 48,737 and 48,640
shares issued and outstanding at
March 30, 2002 and December 29, 2001,
respectively....................................... 5 5
Additional paid-in capital........................... 171,364 170,567
Stockholder notes receivable......................... (612) (794)
Deferred stock compensation.......................... (17,289) (18,603)
Retained earnings (accumulated deficit).............. (25,412) (25,768)
----------------- ---------------
Total stockholders' equity............................. 128,056 125,407
----------------- ---------------
Total liabilities and stockholders' equity............. $158,156 $145,021
================= ===============

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

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

THREE MONTHS ENDED
----------------------------
MARCH 30, MARCH 31,
2002 2001
------------- -------------

Revenues................................. $28,849 $14,437
Cost of revenues......................... 12,094 6,428
------------- -------------
Gross profit............................. 16,755 8,009
Operating expenses:
Research and development............... 8,047 6,508
Selling, general and administrative.... 6,676 4,090
Goodwill amortization.................. -- 2,103
Amortization of deferred stock
compensation.......................... 1,305 1,331
------------- -------------
Operating expenses....................... 16,028 14,032
------------- -------------
Operating income (loss).................. 727 (6,023)
Other income (expense):
Interest income........................ 458 1,039
Interest expense....................... (151) (198)
------------- -------------
Income (loss) before income taxes........ 1,034 (5,182)
Provision (benefit) for income taxes..... 678 (594)
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Net income (loss) ....................... $ 356 $(4,588)
============= =============
Net income (loss) per share:
Basic.................................. $ 0.01 $ (0.10)
Diluted................................ $ 0.01 $ (0.10)
Weighted-average common shares outstanding:
Basic.................................. 47,129 45,367
Diluted................................ 51,283 45,367

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

SILICON LABORATORIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)

THREE MONTHS ENDED
---------------------------------------
MARCH 30, MARCH 31,
2002 2001
----------------- -----------------

OPERATING ACTIVITIES

Net income (loss)...................................... $ 356 $ (4,588)
Adjustments to reconcile net income (loss) to cash
provided by operating activities:
Depreciation and amortization of property, equipment
and software....................................... 2,283 1,869
Amortization of goodwill, other intangible assets and
other assets....................................... 24 2,241
Amortization of deferred stock compensation.......... 1,305 1,331
Amortization of note/lease end-of-term interest
payments........................................... 14 81
Income tax benefit from exercise of stock options.... 173 --
Changes in operating assets and liabilities:
Investment interest receivable..................... (27) 359
Accounts receivable................................ (2,863) 6,589
Inventories........................................ (725) (668)
Prepaid expenses and other......................... (935) (850)
Income tax receivable.............................. 505 --
Other assets....................................... 4 (8)
Accounts payable................................... 3,949 (2,753)
Accrued expenses................................... 1,491 335
Deferred revenue................................... 274 437
Deferred income taxes.............................. -- (361)
Income taxes payable............................... -- (912)
----------------- -----------------
Net cash provided by operating activities.............. 5,828 3,102

INVESTING ACTIVITIES

Purchases of short-term investments.................... (17,830) (13,770)
Maturities of short-term investments................... 6,983 28,176
Purchases of property, equipment and software.......... (3,223) (1,110)
Purchases of other assets.............................. -- (500)
----------------- -----------------
Net cash provided by (used in) investing activities.... (14,070) 12,796

FINANCING ACTIVITIES

Payments on long-term debt............................. (413) (360)
Payments on capital leases............................. (116) (134)
Proceeds from repayment of stockholder notes........... 182 --
Net proceeds from exercises of stock options........... 633 148
----------------- -----------------
Net cash provided by (used in) financing activities.... 286 (346)
----------------- -----------------
Increase (decrease) in cash and cash equivalents....... (7,956) 15,552
Cash and cash equivalents at beginning of period....... 82,346 51,902
----------------- -----------------
Cash and cash equivalents at end of period............. $ 74,390 $ 67,454
================= =================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

Interest paid.......................................... $ 80 $ 118
================= =================
Income taxes paid...................................... $ -- $ 716
================= =================

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

SILICON LABORATORIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 30, 2002

1. SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

The condensed consolidated financial statements, other than the condensed
consolidated balance sheet of December 29, 2001, included herein are
unaudited; however, they contain all normal recurring accruals and
adjustments which, in the opinion of management, are necessary to present
fairly the consolidated financial position of Silicon Laboratories Inc. and
its subsidiaries (collectively, the "Company") at March 30, 2002, the
consolidated results of its operations for the three months ended March 30,
2002 and March 31, 2001 and the consolidated statements of cash flows for the
three months ended March 30, 2002 and March 31, 2001. All intercompany
accounts and transactions have been eliminated. The results of operations for
the three months ended March 30, 2002 are not necessarily indicative of the
results to be expected for the full year.

The accompanying unaudited condensed consolidated financial statements do
not include footnotes and certain financial presentations normally required
under accounting principles generally accepted in the United States.
Therefore, these financial statements should be read in conjunction with the
audited consolidated financial statements and notes thereto for the year
ended December 29, 2001, included in the Company's Form 10-K filed with the
Securities and Exchange Commission on January 22, 2002.

INVENTORIES

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

MARCH 30, DECEMBER 29,
2002 2001
---------------- ----------------

Work in progress.............. $4,752 $3,582
Finished goods................ 1,194 1,639
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$5,946 $5,221
================ ================

OTHER COMPREHENSIVE INCOME

There were no material differences between net income (loss) and
comprehensive income (loss) during any of the periods presented.

RECENT ACCOUNTING PRONOUNCEMENTS

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

SILICON LABORATORIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)

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

EARNINGS (LOSS) PER SHARE

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

THREE MONTHS ENDED
-----------------------------
MARCH 30, MARCH 31,
2002 2001
------------- -------------

Net income (loss)................................................ $ 356 $ (4,588)

Basic:
Weighted-average shares of common stock outstanding........... 48,708 48,289
Weighted-average shares of common stock subject to repurchase. (1,579) (2,922)
------------- -------------
Shares used in computing basic net income (loss) per share.... 47,129 45,367
------------- -------------

Effect of dilutive securities:
Weighted-average shares of common stock subject to repurchase. 1,386 --
Stock options................................................. 2,768 --
------------- -------------
Shares used in computing diluted net income (loss) per share.. 51,283 45,367
============= =============

Basic net income (loss) per share................................ $ 0.01 $ (0.10)
Diluted net income (loss) per share.............................. $ 0.01 $ (0.10)

2. SEGMENT REPORTING

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

3. COMMITMENTS AND CONTINGENCIES

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

On August 7, 2001, TDK Semiconductor Corporation commenced a lawsuit
against the Company for alleged willful infringement by its direct access
arrangement (DAA) products of a TDK-held patent. TDK's complaint seeks
unspecified treble damages, costs and attorneys' fees, and an injunction. On
September 27, 2001, the Company served and filed an answer to TDK's
complaint, in which the Company denied infringement and asserted that TDK's
patent is invalid. On March 27, 2002, the Company filed an amended answer and
counterclaims in which the Company claimed that the TDK-held patent is
unenforceable due to inequitable conduct and asserted counterclaims against
TDK based on state unfair competition law, as well as counterclaims seeking a
declaration that the TDK-held patent is invalid, not infringed and
unenforceable. This lawsuit may involve significant expense and may also
divert management's time and attention from other aspects of the Company's
business. Due to the inherent uncertainties of litigation, the Company is
unable to predict the outcome of this matter.

SILICON LABORATORIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)

On December 6, 2001, a class action complaint for violations of U.S.
federal securities laws was filed in the United States District Court,
Southern District of New York against the Company, four of its officers
individually and the three investment banking firms who served as
representatives of the underwriters in connection with the Company's initial
public offering of common stock which became effective on March 23, 2000.
These claims are premised on allegations that the registration statement and
prospectus for the Company's initial public offering did not disclose that
(1) the underwriters solicited and received additional, excessive and
undisclosed commissions from certain investors, and (2) the underwriters had
agreed to allocate shares of the offering in exchange for a commitment from
the customers to purchase additional shares in the aftermarket at
pre-determined higher prices. The Company intends to vigorously contest this
case, however, the Company is unable at this time to determine whether the
outcome of the litigation will have a material impact on its results of
operations or financial condition in any future period.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES THERETO INCLUDED
ELSEWHERE IN THIS QUARTERLY REPORT ON FORM 10-Q AND OUR ANNUAL REPORT ON FORM
10-K FILED JANUARY 22, 2002. EXCEPT FOR THE HISTORICAL FINANCIAL INFORMATION
CONTAINED HEREIN, THE MATTERS DISCUSSED IN THIS QUARTERLY REPORT ON FORM 10-Q
MAY BE CONSIDERED "FORWARD-LOOKING" STATEMENTS WITHIN THE MEANING OF SECTION
27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. SUCH STATEMENTS INCLUDE
DECLARATIONS REGARDING THE INTENT, BELIEF OR CURRENT EXPECTATIONS OUR COMPANY
AND MANAGEMENT AND MAY BE SIGNIFIED BY THE WORDS "EXPECTS," "ANTICIPATES,"
"INTENDS," "BELIEVES" OR SIMILAR LANGUAGE. PROSPECTIVE INVESTORS ARE
CAUTIONED THAT ANY SUCH FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF
FUTURE PERFORMANCE AND INVOLVE A NUMBER OF RISKS AND UNCERTAINTIES. ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THOSE INDICATED BY SUCH FORWARD-LOOKING
STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES
INCLUDE THOSE DISCUSSED BELOW, AS WELL AS THOSE DISCUSSED IN OUR ANNUAL
REPORT ON FORM 10-K FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON
JANUARY 22, 2002. OUR FISCAL YEAR-END FINANCIAL REPORTING PERIODS ARE A 52-
OR 53- WEEK YEAR ENDING ON THE SATURDAY CLOSEST TO DECEMBER 31ST. OUR FIRST
QUARTER OF FISCAL YEAR 2002 ENDED MARCH 30, 2002. OUR FIRST QUARTER OF FISCAL
YEAR 2001 ENDED MARCH 31, 2001. ALL OF THE QUARTERLY PERIODS REPORTED IN THIS
QUARTERLY REPORT ON FORM 10-Q HAD THIRTEEN WEEKS.

OVERVIEW

We design and develop proprietary, analog-intensive, mixed-signal
integrated circuits (ICs) for the rapidly growing communications industry.
Our innovative ICs can dramatically reduce the cost, size and system power
requirements of the products that our customers sell to their end-user
customers. We currently offer ICs that can be incorporated into
communications devices, such as modems and wireless phones, as well as cable
and satellite set-top boxes, residential communication gateways for cable or
DSL, and optical network equipment. Customers during the first three months
of fiscal 2002 and fiscal 2001 included 3Com, Agere Systems, Ambit, Ciena,
Echostar, Panasonic, PC-TEL, Samsung, Smart Link, Sony, Texas Instruments and
Thomson.

Our company was founded in 1996. As of March 30, 2002 we had 300
employees, up from 279 at the end of fiscal 2001, 256 at the end of fiscal
2000 and 148 at the end of fiscal 1999. As a "fabless" semiconductor company,
we rely on third-party semiconductor fabricators to manufacture the silicon
wafers that reflect our IC designs. Each wafer contains numerous die, which
are cut from the wafer to create a chip for an IC. We also rely on
third-party assemblers to assemble and package these die prior to final
product testing and shipping.

We offer numerous mixed-signal communication ICs across eight product
lines. We commenced research and development for our first IC product, the
DAA, in October 1996. We introduced our DAA product in the first quarter of
fiscal 1998, and first received acceptance of this product for inclusion in a
customer's device, which we refer to as a "design win", in March 1998. The
first commercial shipment of our DAA product was made in April 1998. Based on
the success of our family of DAA products, we achieved profitability in the
fourth quarter of fiscal 1998. In fiscal 1999, we introduced a voice codec
product, an ISOmodem product and our RF synthesizer product. In fiscal 2000,
we introduced our ProSLIC product and a clock and data recovery product
suitable for SONET physical layer applications. In fiscal 2001, we introduced
several products, including a GSM transceiver chipset, a digital subscriber
line analog front end and added several new optical networking products. We
have made significant progress in our revenue diversity and expect to be less
dependent on our DAA products for future sales to the extent that these
products, or other products that we may introduce, are incorporated into
devices sold by our customers.

During the first three months of 2002, three customers represented, in the
aggregate, 38% of our total revenues. PC-TEL represented 16% of revenues,
Agere Systems represented 12% and Samsung represented 10%. No other customer
accounted for more than 10% of our revenues during the first three months of
2002. To date, a significant portion of our revenues has been generated
through our direct sales force. In fiscal 1998, we began to establish a
network of independent sales representatives and distributors worldwide to
support our sales and marketing activities. We believe that sales through
these representatives and distributors may increase as a percentage of our
revenues in future periods.

The percentage of our revenues to customers located outside of the United
States was 71% in the three months ended March 30, 2002, 66% in fiscal 2001,
21% in fiscal 2000 and 7% in fiscal 1999. All of our revenues to date have
been denominated in U.S. dollars. We believe that a large percentage of our
revenues will continue to be made to customers outside of the United States
as our products receive acceptance in international markets.

The sales cycle for the test and evaluation of our ICs can range from 1
month to 12 months or more. An additional 3 to 6 months or more may be
required before a customer ships a significant volume of devices that
incorporate our ICs. Due to this lengthy sales cycle, we may experience a
significant delay between incurring expenses for research and development and
selling, general and administrative efforts, and the generation of
corresponding sales, if any. Consequently, if sales in any quarter do not
occur when expected, expenses and inventory levels could be
disproportionately high, and our operating results for that quarter and,
potentially, future quarters would be adversely affected.

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

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

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

COST OF REVENUES. Cost of revenues includes the cost of purchasing
finished silicon wafers processed by independent foundries; costs associated
with assembly, test and shipping of those products; costs of personnel and
equipment associated with manufacturing support, logistics and quality
assurance; an allocated portion of our occupancy costs; and allocable
depreciation of testing equipment and leasehold improvements. Generally, we
depreciate equipment over four years on a straight line basis. We also
depreciate our leasehold improvements over the shorter of the estimated
useful life or the applicable lease term. Recently introduced products tend
to have higher cost of revenues per unit due to initially low production
volumes required by our customers and higher costs associated with new
package variations. Generally, as production volumes for a product increase,
unit production costs tend to decrease as our semiconductor fabricators and
assemblers achieve greater economies of scale for that product. Additionally,
the cost of wafer procurement, which is a significant component of cost of
goods sold, varies cyclically with overall demand for semiconductors.

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

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

GOODWILL AMORTIZATION. Goodwill amortization includes the amortization of
goodwill purchased in connection with our acquisitions of Krypton Isolation,
Inc. (Krypton) in August 2000 and SNR Semiconductor Incorporated (SNR) in
October 2000. Goodwill is amortized over four to five years using the
straight line method.

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

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

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

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

RESULTS OF OPERATIONS

The following table sets forth our statement of operations data as a
percentage of revenues for the periods indicated:

THREE MONTHS ENDED
-----------------------------
MARCH 30, MARCH 31,
2002 2001
------------- --------------

Revenues........................................... 100.0% 100.0%
Cost of revenues................................... 41.7 44.5
------------- --------------
Gross profit....................................... 58.3 55.5

Operating expenses:
Research and development......................... 27.8 45.1
Selling, general and administrative.............. 23.3 28.3
Goodwill amortization............................ -- 14.6
Amortization of deferred stock compensation...... 4.5 9.2
------------- --------------
Operating expenses................................. 55.6 97.2

Operating income (loss)............................ 2.7 (41.7)

Other income and (expenses):
Interest income.................................. 1.7 7.2
Interest expense................................. (0.7) (1.4)
------------- --------------
Income (loss) before income taxes.................. 3.7 (35.9)
Provision (benefit) for income taxes............... 2.4 (4.1)
------------- --------------
Net income (loss) ................................. 1.3% (31.8)%
============= ==============

COMPARISON OF THE THREE MONTHS ENDED MARCH 30, 2002 TO THE THREE MONTHS ENDED
MARCH 31, 2001.

REVENUES. Revenues for the three months ended March 30, 2002 were $28.8
million, an increase of $14.4 million or 100% from revenues of $14.4 million
in the three months ended March 31, 2001. The increase was primarily due to a
significant growth in the sales of our non-DAA family of products, such as
the ISOmodem, the ProSLIC, the RF Synthesizer, the RF Transceiver and our
optical networking products, reflecting the growing market acceptance for
those products. Revenues from non-DAA products accounted for approximately
53.0% of revenues for the three months ended March 30, 2002 as compared to
32.5% of revenues for the three months ended March 31, 2001.

GROSS PROFIT. Gross profit for the three months ended March 30, 2002 was
$16.8 million or 58.3% of revenues, an increase of $8.8 million as compared
with gross profit of $8.0 million or 55.5% of revenues in the three months
ended March 31, 2001. The increase in gross profit dollars was primarily due
to the substantial increase in sales volume, increased utilization of our
testing capacity and decreased reserves for excess inventory due to sales of
previously reserved inventory. This increase was partially offset by the
lower gross margins associated with the sales of our wireless products. We
anticipate that gross margins may fluctuate significantly in the future due
to the effect of many factors including our ability to sell existing
inventory on hand, our ability to successfully introduce and sell new
products, market forces that impact the selling prices for existing and new
products, the extent to which our competitors introduce new products to
market, the revenue mix of products, variations in manufacturing production
yields and future product cost considerations with our vendors. During fiscal
2002, we expect the sales of our wireless products into the highly
competitive GSM handset market to comprise a larger percentage of our
revenues, resulting in increased downward pressure on our average selling
prices and gross profits.

RESEARCH AND DEVELOPMENT. Research and development expense for the three
months ended March 30, 2002 was $8.0 million, or 27.8%, of revenues, which
reflected an increase of $1.5 million, or 23.1%, as compared with research
and development expense of $6.5 million or 45.1% of revenues for the three
months ended March 31, 2001. The increase in the dollar amount of research
and development expense was principally due to continued product development
activities, significant increases in new product development initiatives in
wireless and optical networking opportunities, usage of more expensive
advanced silicon complementary metal oxide semiconductor (CMOS) processes,
and increased spending to develop test methodologies for new products. As a
percentage of revenues, research and development expense decreased
significantly due to the substantial increase in revenues for the three
months ended March 30, 2002. We expect that research and development expense
will continue to increase in absolute dollars in future periods as we develop
new ICs, and may fluctuate as a percentage of revenues due to changes in
sales volume and new product development initiatives.

SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expense for the three months ended March 30, 2002 was $6.7 million, or 23.3%,
of revenues, which reflected an increase of $2.6 million or 63.4% as compared
to selling, general and administrative expense of $4.1 million or 28.3% of
revenues in the three months ended March 31, 2001. The increase in the dollar
amount of selling, general and administrative expense was principally
attributable to increased staffing and spending on patent litigation fees. We
expect our legal expenses to increase as a result of the ongoing infringement
lawsuit filed against us by TDK Semiconductor Corporation in August 2001. We
expect that selling, general and administrative expense will increase in
absolute dollars in future periods as we expand our sales channels, marketing
efforts and administrative infrastructure. In addition, we expect selling,
general and administrative expense to fluctuate as a percentage of revenues
because of (1) the likelihood that indirect distribution channels, which
typically entail the payment of commissions, will account for a larger
portion of our revenues in future periods and, therefore, increase our
selling, general and administrative expense relative to a direct sales force
performing at satisfactory levels of productivity; (2) fluctuating usage of
advertising to promote our products and, in particular, our newly introduced
products; and (3) potential significant variability in our future sales
volume.

GOODWILL AMORTIZATION. We did not incur goodwill amortization in the three
months ended March 30, 2002. Goodwill amortization for the three months ended
March 31, 2001 was $2.1 million. During the three months ended September 29,
2001, we wrote off our goodwill balances after determining that they were
permanently impaired.

AMORTIZATION OF DEFERRED STOCK COMPENSATION. We recorded deferred stock
compensation for the difference between the exercise price of option grants
or the issuance price of direct issuances of stock, as the case may be, and
the deemed fair value of our common stock at the time of such grants or
issuances. We are amortizing this amount over the vesting periods of the
applicable options or restricted stock, which resulted in amortization
expense of $1.3 million in each of the three months ended March 30, 2002 and
March 31, 2001.

INTEREST INCOME. Interest income for the three months ended March 30, 2002
was $0.5 million as compared to $1.0 million for the three months ended March
31, 2001. This decrease was primarily due to lower interest rates on cash and
short-term investments balances during the three months ended March 30, 2002.

INTEREST EXPENSE. Interest expense in each of the three months ended March
30, 2002 and March 31, 2001 was $0.2 million.

PROVISION (BENEFIT) FOR INCOME TAXES. Our effective tax rate, excluding
the impact of amortization of goodwill and deferred stock compensation, was
29.0% in the three months ended March 30, 2002, as compared to 34.0% in the
three months ended March 31, 2001. The current period's rate was lower than
the prior comparable period's rate primarily due to an increase in our
estimated research and development tax credit.

LIQUIDITY AND CAPITAL RESOURCES

Our principal sources of liquidity as of March 30, 2002 consisted of
$104.2 million in cash, cash equivalents and short-term investments in
addition to our bank credit facility. Our bank credit facility is a revolving
line of credit available for borrowings and letters of credit of up to the
lesser of $5.0 million or 80% of eligible accounts receivable at the bank's
prime lending rate (4.75% as of March 30, 2002). At March 30, 2002, a letter
of credit for $0.4 million related to a building lease was outstanding under
the revolving line of credit and $4.6 million was available for new
borrowings or letters of credit.

The bank facility is secured by our accounts receivable, inventories,
capital equipment and all other unsecured assets (excluding intellectual
property). The line of credit prohibits the payment of cash dividends and
requires the maintenance of tangible net worth and compliance with financial
ratios which measure our immediate liquidity and our ongoing ability to pay
back our outstanding obligations. We believe we were in compliance with all
covenants at March 30, 2002.

We also have entered into agreements with three institutional lenders for
equipment financing to purchase or lease equipment, leasehold improvements
and software. At March 30, 2002, the amount outstanding under these
agreements was $2.9 million. This indebtedness bears effective interest rates
(including end-of-term interest payments of $1.2 million) ranging from 12.5%
to 14.6% per annum, is secured by certain equipment, and is repayable over
approximately the next two years.

During the three months ended March 30, 2002, cash provided by operating
activities was $5.8 million as compared to cash provided by operating
activities of $3.1 million during the three months ended March 31, 2001. This
increase in cash flow was primarily due to the net income generated during
the period.

Due to the nature of our business, we experience working capital needs in
the areas of accounts receivable and inventory. Typically, we bill our
customers on an open account basis with net 30 day payment terms or other
specific terms and conditions that may vary from account to account as
individually negotiated with customers. As of March 30, 2002, we had a net
accounts receivable balance of $13.4 million. If sales levels were to
increase, it is likely that the level of receivables would also increase. In
the event that customers delay their payments to us, the levels of accounts
receivable would also increase. In the area of inventory, we believe that in
order to maintain an adequate supply of product for our customers, we must
carry a certain level of inventory. This inventory level may vary based
principally upon either orders received from customers or our forecast of
demand for our products. Other considerations in determining inventory levels
may include the product life cycle stage of our products, customer demands
for consignment inventory arrangements, and competitive situations in the
marketplace. To address this difficult, subjective and complex area of
judgment in determining appropriate inventory levels in a consistent manner,
we apply a set of methods, assumptions and estimates to arrive at the net
inventory amount by completing the following procedures which collectively
comprise a critical accounting policy. First, we identify any inventory that
has been previously reserved in prior periods. This inventory remains
reserved until sold, destroyed or otherwise disposed of. Second, we examine
the inventory line items that may have some form of obsolescence due to
non-conformance with electrical and mechanical standards as identified by our
quality assurance personnel. Third, the remaining inventory not otherwise
identified to be reserved is compared to an assessment of product history and
forecasted demand, typically over the next six months, or actual firm backlog
on hand. Finally, an analysis of the result of this methodology is compared
against the product life cycle and competitive situations in the marketplace
driving the outlook for the consumption of the inventory and the
appropriateness of the resulting inventory levels. As of March 30, 2002, we
had a net inventory balance of $5.9 million resulting from the application of
this critical accounting policy which we deemed adequate to address these
inventory considerations.

Capital expenditures increased by $1.6 million to $3.2 million for the
three months ended March 30, 2002 from $1.6 million for the three months
ended March 31, 2001. This increase in capital expenditures was primarily due
to the purchase of additional semiconductor test equipment for wireless
products for GSM mobile handsets. We anticipate additional capital
expenditures of approximately $15.3 million during fiscal 2002, primarily to
fund additional expansion of our internal test floor, high speed capabilities
and new product development activities.

Our future capital requirements will depend on many factors, including the
rate of sales growth, market acceptance of our products, the timing and
extent of research and development projects and the expansion of our sales
and marketing activities. We believe our existing cash balances and credit
facilities are sufficient to meet our capital requirements through at least
the next 12 months, although we could be required, or could elect, to seek
additional funding prior to that time. We may enter into acquisitions or
strategic arrangements in the future which also could require us to seek
additional equity or debt financing. There can be no assurances that
additional equity or debt financing, if required, will be available to us on
acceptable terms or at all.

RECENT ACCOUNTING PRONOUNCEMENTS

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

QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK

Our interest income is sensitive to changes in the general level of U.S.
interest rates, particularly since the majority of our investments are in
short-term instruments. Due to the nature of our short-term investments, we
have concluded that there is no material market risk exposure.

FACTORS AFFECTING OUR FUTURE OPERATING RESULTS

RISKS RELATED TO OUR BUSINESS

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

Our future success will depend on our ability to reduce our dependence on
our direct access arrangement (DAA) products by developing new ICs and
product enhancements that achieve market acceptance in a timely and
cost-effective manner. The development of mixed-signal ICs is highly complex,
and we occasionally have experienced delays in completing the development and
introduction of new products and product enhancements. Successful product
development and market acceptance of our products depend on a number of
factors, including:

- changing requirements of customers within the communications
markets;

- accurate prediction of market requirements;

- timely completion and introduction of new designs;

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

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

- availability of foundry and assembly capacity;

- achievement of high manufacturing yields;

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

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

- our customer service and support capabilities and
responsiveness;

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

- changes in technology, industry standards or end-user
preferences.

We cannot provide any assurance that products which we recently have
developed or may develop in the future will achieve market acceptance. We
have introduced to market or are in development of many ICs including:

- a family of RF synthesizers, which are used to generate high
frequency signals that are used in wireless communications
systems to select a particular radio channel;

- an Aero-TM- Transceiver chipset, providing a highly integrated
radio communication section of a GSM wireless handset with
versatile interfaces to other electronic sections of the
handset;

- an ISOmodem, which is a miniaturized modem that can be
embedded in electronic devices with low transmission
requirements, such as credit card verification devices, to
provide quick network access;

- a higher speed ISOmodem product to serve additional embedded
modem markets where faster transmission is required such as
next generation set-top boxes;

- a family of ProSLIC products, which provides dial tone, busy
tone, caller ID and ring signal functions at the source end of
the telephone addressing long-haul and short-haul
applications;

- a Digital Subscriber Line, or DSL, Analog Front End providing
a highly integrated interface for DSL modems with legacy
support for traditional analog phone line functionality; and

- a family of optical networking products, which features highly
integrated physical layer and clock circuits designed for
SONET/ATM routers, multiplexers, digital cross connects and
optical transceiver modules.

We also are actively developing other ICs. If our recently introduced or
other ICs fail to achieve market acceptance, our operating results and
competitive position could be adversely affected.

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

In recent periods, we have significantly increased the scope of our
operations and expanded our workforce from 42 employees at January 2, 1999 to
300 employees at March 30, 2002. This growth has placed, and any future
growth of our operations will continue to place, a significant strain on our
management personnel, systems and resources. We anticipate that we will need
to implement a variety of new and upgraded operational and financial systems,
procedures and controls, including the improvement of our accounting and
other internal management systems. We also expect that we will need to
continue to expand, train, manage and motivate our workforce. All of these
endeavors will require substantial management effort. If we are unable to
effectively manage our expanding operations, our business could be materially
and adversely affected.

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

Although we experienced revenue and earnings growth in annual periods
prior to 2001, we may not be able to return to or maintain these annual
growth rates. We may also experience significant period-to-period
fluctuations in our revenues and operating results in the future due to a
number of factors, and any such variations may cause our stock price to
fluctuate. It is likely that in some future period our operating results will
be below the expectations of public market analysts or investors. If this
occurs, our stock price may drop, perhaps significantly.

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

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

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

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

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

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

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

- changes in product mix; and

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

The mobile telephone market is characterized by rapid fluctuations in
demand which results in corresponding fluctuations in the demand for our
wireless products that are incorporated in mobile telephones. Additionally,
the rate of technology acceptance by our customers results in fluctuating
demand for our products as customers are reluctant to incorporate a new IC
into their products until the new IC has achieved market acceptance. Once a
new IC achieves market acceptance, demand for the new IC can quickly
accelerate to a point and then level off such that rapid historical growth in
sales of a product should not be viewed as indicative of continued future
growth. In addition, demand can quickly decline for a product when a new IC
product is introduced and receives market acceptance. Accordingly, you should
not rely on the results of any prior quarterly or annual periods as an
indication of our future operating performance.

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

We have opened additional sales offices in international markets to expand
our international sales activities in Europe and the Pacific Rim region and
intend to increase our staffing in international sales. The percentage of our
revenues to customers located outside of the United States was 71% in the
three months ended March 30, 2002, 66% in fiscal 2001, 21% in fiscal 2000 and
7% in fiscal 1999. Our planned international sales growth will be limited if
we are unable to hire additional personnel and develop relationships with
international distributors. We may not be able to maintain or increase

international market demand for our products. Our international operations
are subject to a number of risks, including:

- increased complexity and costs of managing international
operations;

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

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

- longer sales cycles;

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

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

- political and economic instability.

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

WE HAVE DEPENDED ON OUR DAA FAMILY OF PRODUCTS FOR A MAJORITY OF OUR REVENUES
IN FISCAL 2001, AND SUBSTANTIAL REDUCTIONS IN ORDERS FOR DAA PRODUCTS WOULD
SIGNIFICANTLY REDUCE OUR REVENUES

A majority of our sales in fiscal 2001 were derived from sales of our DAA
family of ICs. This product family, in turn, is highly dependent on sales to
the personal computer industry. Continued diversification of our sales
through the introduction and commercial acceptance of products other than DAA
will be required to reduce our reliance on sales of our DAA products. A
decline in overall demand for personal computers or the introduction of
products with superior price/performance characteristics by our competitors
could significantly reduce our sales. In addition, substantially all of our
DAA products that we have sold include technology related to one or more of
our issued U.S. patents. If these patents are found to be invalid or
unenforceable, our competitors could introduce competitive products that
could reduce both the volume and price per unit of our products.

In August 2001, TDK Semiconductor Corporation filed suit against us
alleging that certain of our DAA products infringe a TDK-held patent. We have
filed a response denying the alleged infringement. If our DAA products are
found to infringe TDK's patent, our future operating results and financial
condition could be substantially adversely affected.

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

During the first three months of 2002, three customers represented in the
aggregate, 38% of our total revenues. PC-TEL represented 16% of revenues,
Agere Systems represented 12% and Samsung represented 10%. Most of the
markets for our products are dominated by a small number of potential
customers. Therefore, our operating results in the foreseeable future will
continue to depend on our ability to effect sales to these dominant
customers, as well as the ability of these customers to sell products that
incorporate our IC products. In the future, these customers may decide not to
purchase our ICs at all, purchase fewer ICs than they did in the past or
alter their purchasing patterns, particularly because:

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

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

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

While we have been the sole supplier of the direct access arrangement, or
DAA, IC used in many of our customers' soft modem DAA products, we anticipate
that our customers will regularly evaluate alternative sources of supply in
the future in order to diversify their supplier base, which would increase
their negotiating leverage with us and protect their ability to secure DAA
components. We believe that any second source of DAA ICs for our customers
could have an adverse effect on the prices we are able to charge our
customers and the volume of DAA ICs that we sell to our customers, which
would negatively affect our revenues and operating results.

The loss of any of our key customers, or a significant reduction in sales
to any one of them, would significantly reduce our revenues and adversely
affect our business.

DUE TO OUR LIMITED OPERATING HISTORY, WE MAY HAVE DIFFICULTY BOTH IN
ACCURATELY PREDICTING OUR FUTURE SALES AND APPROPRIATELY BUDGETING FOR OUR
EXPENSES

We were incorporated in 1996, did not begin generating revenues until the
second quarter of 1998 and have rapidly expanded our product lines in recent
years. As a result, we have only a short history from which to predict future
revenues. This limited operating experience, combined with the rapidly
evolving nature of the markets in which we sell our products and other
factors which are beyond our control, reduce our ability to accurately
forecast quarterly or annual revenues. Additionally, because most of our
expenses are fixed in the short term or incurred in advance of anticipated
revenues, we may not be able to decrease our expenses in a timely manner to
offset any shortfall of revenues. During fiscal 2001, despite our reduced
level of revenues relative to fiscal 2000, we expanded our staffing and
increased our expenses in anticipation of future sales growth. If our sales
do not increase as and to the extent that we anticipated, we likely will
incur significant losses due to our higher expense levels.

WE DEPEND ON OUR CUSTOMERS TO SUPPORT OUR PRODUCTS

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

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

We do not have our own manufacturing facilities. Therefore, we must rely
on third-party vendors to manufacture the ICs we design. We also currently
rely principally on two third-party assembly contractors, Advanced
Semiconductor Engineering and Amkor, to assemble and package the silicon
chips provided by the wafers for use in final products. Additionally, we rely
on third-party vendors for a minor portion of the testing requirements of our
products prior to shipping.

There are significant risks associated with relying on these third-party
contractors, including:

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

- capacity shortages during periods of high demand;

- reduced control over delivery schedules and quality;

- limited warranties on wafers or products supplied to us;

- potential increases in prices; and

- their inability to supply or support new or changing packaging
technologies.

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

Since our inception, substantially all of the silicon wafers for the
products that we have shipped were manufactured either by Taiwan
Semiconductor Manufacturing Co. or affiliates of Taiwan Semiconductor
Manufacturing Co. Our customers typically complete their own qualification
process. If we fail to balance customer demand across semiconductor
fabrications properly, we might not be able to fulfill demand for our
products, which would adversely affect our operating results. Additionally, a
resulting write off of unusable or excess inventories would contribute to a
decline in earnings.

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

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

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

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

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

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

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

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

- potential loss of key employees of the acquired company.

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

Our current semiconductor manufacturers are located in the same region
within Taiwan and our assembly contractors are located in the Pacific Rim
region. In addition, many of our customers, particularly mobile telephone
manufacturers, are located in the Pacific Rim region. The risk of earthquakes
in Taiwan and the Pacific Rim region is significant due to the proximity of
major earthquake fault lines in the area. We are not currently covered by
insurance against business disruption caused by earthquakes as such insurance
is not currently available on terms that we believe are commercially
reasonable. Earthquakes, fire, flooding or other natural disasters in Taiwan
or the Pacific Rim region, or political unrest, war, labor strikes or work
stoppages in countries where our semiconductor manufacturers' and assemblers'
facilities are located, likely would result in the disruption of our foundry
or assembly capacity. Any disruption resulting from these events could cause
significant delays in shipments of our products until we are able to shift
our manufacturing or assembling from the affected contractor to another
third-party vendor. There can be no assurance that such alternate capacity
could be obtained on favorable terms, if at all. In addition, a natural
disaster, labor strike, war or political unrest where our customers'
facilities are located would likely reduce our sales to such customers.

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

In order to assure availability of our products for some of our largest
customers, we start the manufacturing of our products in advance of receiving
purchase orders based on forecasts provided by these customers. However,
these forecasts do not represent binding purchase commitments and we do not
recognize sales for these products until they are shipped to the customer. As
a result, we incur inventory and manufacturing costs in advance of
anticipated sales. Because demand for our products may not materialize,
manufacturing based on forecasts subjects us to increased risks of high
inventory carrying costs and increased obsolescence and may increase our
operating costs.

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

Some of our current and potential competitors have longer operating
histories, significantly greater resources and name recognition and a larger
base of customers than we have. As a result, these competitors may have
greater credibility with our existing and potential customers. They also may
be able to adopt more aggressive pricing policies and devote greater
resources to the development, promotion and sale of their products than we
can to ours. In addition, some of our current and potential competitors have
already established supplier or joint development relationships with the
decision makers at our current or potential customers. These competitors may
be able to leverage their existing relationships to discourage their
customers from purchasing products from us or persuade them to replace our
products with their products. Our competitors may also offer bundled chipset
kit arrangements offering a more complete product despite the technical
merits or advantages of our products. These competitors may elect not to
support our products which could complicate our sales efforts.

In addition, our largest competitors may restructure their operations to
create separate companies that are more focused on providing the types of
products we produce. For example, Rockwell's restructuring in 1998 led to the
creation of Conexant which is a significant competitor across multiple
product offerings. Conexant has initiated actions to spin off multiple

businesses to create focus in specific areas. Additionally, Siemens spun off
its semiconductor business in 1999 to create a more focused company named
Infineon Technologies. In July 2000, Lucent Technologies spun off its
microelectronics business, which included its optoelectronics components and
integrated circuits division, into a separate company named Agere Systems in
order to accelerate the growth of the business and alleviate strategic
conflicts with Lucent's competitors. Increased competition could decrease our
prices, reduce our sales, lower our margins or decrease our market share.
These and other competitive pressures may prevent us from competing
successfully against current or future competitors, and may materially harm
our business.

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

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

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

Our ICs are used as components in communications devices in various
markets. As a result, we have devoted and expect to continue to devote a
large amount of resources to develop products based on new and emerging
technologies and standards that will be commercially introduced in the
future. For the three months ended March 30, 2002, our research and
development expense was $8.0 million, which represented 27.8% of our revenues
compared to $6.5 million, or 45.1% of our revenues for the three months ended
March 31, 2001. A number of large companies in the communications industry
are actively involved in the development of these new technologies and
standards. Should any of these companies delay or abandon their efforts to
develop commercially available products based on new technologies and
standards, our research and development efforts with respect to these
technologies and standards likely would have no appreciable value. In
addition, if we do not correctly anticipate new technologies and standards,
or if the products that we develop based on these new technologies and
standards fail to achieve market acceptance, our competitors may be better
able to address market demand than would we. Furthermore, if markets for
these new technologies and standards develop later than we anticipate, or do
not develop at all, demand for our products that are currently in development
would suffer, resulting in lower sales of these products than we currently
anticipate. For example, we have introduced to market a RF synthesizer
product for use in wireless phones operating on the GSM standard. The RF
synthesizer is also compatible with GPRS standard, which we believe is the
emerging data communications protocol for GSM based wireless phones. We
cannot be certain whether these standards will not change, thereby making our
products unsuitable or impractical. Additionally, despite the published
GSM/GPRS specifications, mobile phone network operators may demand increased
performance beyond specifications for this highly competitive market. In the
area of optical networking, our clock and data recovery integrated circuit
operates within stringent specifications for high speed communications
systems known as SONET. Changes to this standard could make our products
uncompetitive or unsuitable to changing system requirements and result in our
inability to sell these products.

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

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

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

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

We have a large installed base of DAA products in the field. As part of
our ongoing support of this product line, we verify the performance of our
products through regulatory agency qualifications, customer acceptance
procedures, evaluation of end customer technical support information, and
analysis of field returns. Certain customer modem implementations of our
direct access arrangement products have been identified to be susceptible to
a particular class of electrical surges originating from lightning strikes
that are not adequately described in regulatory agency qualifications. We
have provided application guidelines to our customers to enhance their
implementation of the modem function to protect our devices from these
lightning strike electrical surges.

Damage from these electrical surges could result in product liability
claims against our customers that produce these modems or against us. Our
customers may seek indemnification or other compensation from us with respect
to any liability that they incur. Even if our DAA product is not the source
of the problem and we are not contractually liable for such indemnification,
we may incur costs in an effort to maintain good relations with our
customers. If we are held liable for these claims or incur other costs in
order to maintain good relations, this problem could adversely affect our
operating results.

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

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

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

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

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

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

- cease selling products that use the challenged intellectual
property;

- obtain from the owner of the infringed intellectual property
right a license to sell or use the relevant technology, which

license may not be available on reasonable terms, or at all;

- redesign those products that use infringing intellectual
property; or

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

In August 2001, TDK Semiconductor Corporation commenced a lawsuit against
us for alleged willful infringement by our DAA products of a TDK-held patent.
TDK's complaint seeks unspecified treble damages, costs and attorneys' fees,
and an injunction. In September 2001, we served and filed an answer to TDK's
complaint, in which we denied the alleged infringement and asserted that
their patent is invalid. On March 27, 2002, we filed an amended answer and
counterclaims in which we claimed that the TDK-held patent is unenforceable
due to inequitable conduct and asserted counterclaims against TDK based on
state unfair competition law, as well as counterclaims seeking a declaration
that the TDK-held patent is invalid, not infringed and unenforceable. This
lawsuit may involve significant expense and may also divert our management's
time and attention from other aspects of our business. Due to the inherent
uncertainties of litigation, we are unable to predict the outcome of this
matter.

For further information regarding this litigation, please see "Part II, Item
1. Legal Proceedings."

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

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

RISKS RELATED TO OUR INDUSTRY

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

The markets for semiconductors in general, and for mixed-signal ICs in
particular, are intensely competitive. We expect that the market for our
products will continually evolve and will be subject to rapid technological
change. In addition, as we target and supply products to numerous markets and
applications, we face competition from a relatively large number of
competitors. Across all of our product areas, we compete with Agere Systems,
AMCC, Analog Devices, Broadcom, Conexant, CP Clare, Cypress, ESS, Fujitsu,
Hitachi, Infineon Technologies, Legerity (formerly the Advanced Micro Devices
telecom division), Maxim Integrated Products, National Semiconductor,
Philips, Semtech, Texas Instruments, Vitesse Semiconductor Corp, and others.
We expect to face competition in the future from our current competitors,
other manufacturers and designers of semiconductors, and innovative start-up
semiconductor design companies. Some of our customers, such as Agere Systems,
Intel, Motorola, Samsung and Texas Instruments, are also large, established
semiconductor suppliers. Our sales to and support of these customers may
enable them to become a source of competition to us, despite our efforts to
protect our intellectual property rights. As the markets for communications
products grow, we also may face competition from traditional communications
device companies. These companies may enter the mixed-signal semiconductor
market by introducing their own ICs or by entering into strategic
relationships with or acquiring other existing providers of semiconductor
products. The sales of our wireless products into the highly competitive GSM
handset market are expected to comprise a larger percentage of our future
revenues resulting an increasingly competitive marketplace for our aggregate
product revenue.

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

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

WE ARE SUBJECT TO THE CYCLICAL NATURE OF THE SEMICONDUCTOR INDUSTRY

The semiconductor industry is highly cyclical and is characterized by
constant and rapid technological change, rapid product obsolescence and price
erosion, evolving standards, short product life cycles and wide fluctuations
in product supply and demand. The industry has experienced significant
downturns, often connected with, or in anticipation of, maturing product
cycles of both semiconductor companies' and their customers' products and
declines in general economic conditions. These downturns have been

characterized by diminished product demand, production overcapacity, high
inventory levels and accelerated erosion of average selling prices. Specific
areas of the communications markets have contributed to the overall decline
and volatility of the semiconductor industry. For example, the semiconductor
industry has suffered a downturn due to reductions in the actual unit sales
of personal computers and wireless phones as compared to previous robust
forecasts, and forecasts of excess capacity in the fiber optic networks.
Additionally, changing and competing technical standards in airwave
interfaces such as GSM and CDMA for mobile handsets, migration to higher
speed communication protocols in the optical space and the return to
prominence of the traditional bell regional operating companies compared to
the competitive local exchange companies all have contributed to the
volatility in the communications area of the semiconductor industry. This
downturn has resulted in a material adverse effect on our business and
operating results. The severity and duration of these industry-wide trends
are currently unclear and the material adverse effect on our business may
continue in the future.

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

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

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

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

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

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Information related to quantitative and qualitative disclosures regarding
market risk is set forth in Management's Discussion and Analysis of Financial
Condition and Results of Operations and the risk factors under Item 2 above.
Such information is incorporated by reference herein.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

PATENT INFRINGEMENT LITIGATION

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

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

On March 27, 2002, we filed an amended answer and counterclaims in which
we claimed that the TDK-held patent is unenforceable due to inequitable
conduct and asserted counterclaims against TDK based on state unfair
competition law, as well as counterclaims seeking a declaration that the
TDK-held patent is invalid, not infringed and unenforceable.

For a description of risks associated with this pending lawsuit, please
see "Risk Factors - Significant litigation over intellectual property in our
industry may cause us to become involved in costly and lengthy litigation
which could seriously harm our business."

SECURITIES LITIGATION

On December 6, 2001, a class action complaint for violations of U.S.
federal securities laws was filed in the United States District Court,
Southern District of New York against us, four officers individually and the
three investment banking firms who served as representatives of the
underwriters in connection with our initial public offering of common stock
which became effective on March 23, 2000. These claims are premised on
allegations that the registration statement and prospectus for our initial
public offering did not disclose that (1) the underwriters solicited and
received additional, excessive and undisclosed commissions from certain
investors, and (2) the underwriters had agreed to allocate shares of the
offering in exchange for a commitment from the customers to purchase
additional shares in the aftermarket at pre-determined higher prices. We
intend to vigorously contest this case, and are unable at this time to
determine whether the outcome of the litigation will have a material impact
on our results of operations or financial condition in any future period.

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

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

Our registration statement (Registration No. 333-94853) under the
Securities Act of 1933, as amended, relating to our initial public offering
of our common stock became effective on March 23, 2000. A total of 3,680,000
shares of common stock were registered. We sold a total of 3,200,000 shares
of our common stock and selling stockholders sold a total of 480,000 shares
to an underwriting syndicate. The managing underwriters were Morgan Stanley &
Co. Incorporated, Lehman Brothers Inc., and Salomon Smith Barney Inc. The
offering commenced and was completed on March 24, 2000, at a price to the
public of $31.00 per share. The initial public offering resulted in net
proceeds to us of $90.6 million, after deducting underwriting commissions of
$6.9 million and offering expenses of $1.6 million. We used $15 million of
the proceeds as part of the consideration paid in the acquisition of Krypton
Isolation, Inc. on August 9, 2000. Another $4.3 million was used to pay off
equipment loans provided by Imperial Bank. We used another $1.0 million of
the proceeds as part of the consideration paid in the acquisition of SNR
Semiconductor Incorporated on October 2, 2000. As of March 30, 2002, the
remaining proceeds were invested in government securities and other
short-term, investment-grade, interest bearing instruments.
26

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable

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

Not applicable

ITEM 5. OTHER INFORMATION

Not applicable

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) The following exhibits are filed as part of this report:

Exhibit
Number
------

3.1* Form of Fourth Amended and Restated Certificate of
Incorporation of Silicon Laboratories Inc. filed as Exhibit
3.1 to the Registrant's Registration Statement on Form S-1
(SEC File No. 333-94853 (the "IPO Registration Statement")).

3.2* Form of Amended and Restated Bylaws of Silicon Laboratories
Inc. (filed as Exhibit 3.2 to the IPO Registration
Statement).

4.1* Specimen certificate for shares of common stock (filed as
Exhibit 4.1 to the IPO Registration Statement).

- ----------------

* Incorporated herein by reference to the indicated filing.

(b) During the three months ended March 30, 2002, we filed the
following Current Reports on Form 8-K:

Not applicable

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

SILICON LABORATORIES INC.
(Registrant)

April 22, 2002 /s/ NAVDEEP S. SOOCH
- -------------------------------- -----------------------------------
Date Navdeep S. Sooch
CHAIRMAN AND
CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)

April 22, 2002 /s/ JOHN W. MCGOVERN
- -------------------------------- -----------------------------------
Date John W. McGovern
VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
(PRINCIPAL ACCOUNTING OFFICER)