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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 June 29, 2002
---------------------------------------------

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

For the transition period from to
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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 July 10, 2002,
48,802,998 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 June 29, 2002
and December 29, 2001..................................................... 3

Condensed Consolidated Statements of Operations for the
three and six months ended June 29, 2002 and June 30, 2001................ 4

Condensed Consolidated Statements of Cash Flows for the
six months ended June 29, 2002 and June 30, 2001.......................... 5

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

ITEM 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations............................. 9

ITEM 3 Quantitative and Qualitative Disclosures About Market Risk.................. 27

PART II. OTHER INFORMATION

ITEM 1 Legal Proceedings........................................................... 27

ITEM 2 Changes in Securities and Use of Proceeds................................... 28

ITEM 3 Defaults Upon Senior Securities............................................. 28

ITEM 4 Submission of Matters to a Vote of Securities Holders....................... 28

ITEM 5 Other Information........................................................... 28

ITEM 6 Exhibits and Reports on Form 8-K............................................ 29

PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

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

JUNE 29, DECEMBER 29,
2002 2001
-------------- --------------
ASSETS (UNAUDITED)

Current assets:
Cash and cash equivalents.................... $ 65,229 $ 82,346
Short-term investments....................... 34,307 18,902
Accounts receivable, net of allowance for
doubtful accounts of $665 at June 29,
2002 and $490 at December 29, 2001......... 21,253 10,543
Inventories.................................. 7,976 5,221
Deferred income taxes........................ 2,268 2,268
Prepaid expenses and other................... 2,530 3,073
-------------- --------------
Total current assets............................ 133,563 122,353
Property, equipment and software, net........... 31,049 20,038
Goodwill and other intangible assets............ 199 199
Other assets.................................... 3,694 2,431
-------------- --------------
Total assets.................................... $168,505 $145,021
============== ==============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................. $ 19,823 $ 6,999
Accrued expenses............................. 6,271 3,897
Deferred revenue............................. 4,413 2,862
Current portion of long-term obligations..... 1,716 2,039
-------------- --------------
Total current liabilities....................... 32,223 15,797
Long-term debt and leases....................... 650 1,363
Other long-term obligations..................... 2,523 2,454
-------------- --------------
Total liabilities............................... 35,396 19,614

Stockholders' equity:
Common stock--$.0001 par value; 250,000
shares authorized; 48,801 and 48,640 shares
issued and outstanding at June 29, 2002 and
December 29, 2001, respectively............. 5 5
Additional paid-in capital.................... 172,354 170,567
Stockholder notes receivable.................. (528) (794)
Deferred stock compensation................... (15,964) (18,603)
Retained earnings (accumulated deficit)....... (22,758) (25,768)
-------------- --------------
Total stockholders' equity...................... 133,109 125,407
-------------- --------------
Total liabilities and stockholders' equity...... $168,505 $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 SIX MONTHS ENDED
----------------------- ------------------------
JUNE 29, JUNE 30, JUNE 29, JUNE 30,
2002 2001 2002 2001
----------- ----------- ----------- ------------

Revenues............................... $41,185 $16,120 $70,034 $30,558
Cost of revenues....................... 19,304 7,375 31,398 13,804
----------- ----------- ----------- ------------
Gross profit........................... 21,881 8,745 38,636 16,754
Operating expenses:
Research and development............ 8,211 7,070 16,258 13,578
Selling, general and administrative. 8,299 4,746 14,975 8,836
Goodwill amortization............... -- 2,084 -- 4,187
Amortization of deferred stock
compensation...................... 1,308 1,331 2,613 2,662
----------- ----------- ----------- ------------
Operating expenses..................... 17,818 15,231 33,846 29,263
----------- ----------- ----------- ------------
Operating income (loss)................ 4,063 (6,486) 4,790 (12,509)
Other income (expense):
Interest income..................... 358 1,044 816 2,083
Interest expense.................... (148) (201) (299) (400)
----------- ----------- ----------- ------------
Income (loss) before income taxes...... 4,273 (5,643) 5,307 (10,826)
Provision (benefit) for income taxes... 1,618 (757) 2,297 (1,352)
----------- ----------- ----------- ------------
Net income (loss) ..................... $ 2,655 $(4,886) $ 3,010 $(9,474)
=========== =========== =========== ============
Net income (loss) per share:
Basic............................... $ 0.06 $ (0.11) $ 0.06 $ (0.21)
Diluted............................. $ 0.05 $ (0.11) $ 0.06 $ (0.21)
Weighted-average common shares
outstanding:
Basic............................... 47,482 45,840 47,158 45,494
Diluted............................. 50,901 45,840 50,982 45,494

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)

SIX MONTHS ENDED
------------------------------
JUNE 29, JUNE 30,
2002 2001
------------ ------------

OPERATING ACTIVITIES

Net income (loss)...................................... $ 3,010 $ (9,474)
Adjustments to reconcile net income (loss) to cash
provided by operating activities:
Depreciation and amortization of property, equipment
and software....................................... 5,124 3,688
Amortization of goodwill, other intangible assets and
other assets....................................... 80 4,557
Amortization of deferred stock compensation.......... 2,613 2,662
Amortization of note/lease end-of-term interest
payments........................................... 69 161
Income tax benefit from exercise of stock options.... 288 129
Changes in operating assets and liabilities:
Investment interest receivable..................... (66) 251
Accounts receivable................................ (10,710) 6,669
Inventories........................................ (2,754) 1,181
Prepaid expenses and other......................... (970) (1,706)
Income tax receivable.............................. 1,512 --
Other assets....................................... (25) 13
Accounts payable................................... 8,326 (2,393)
Accrued expenses................................... 2,374 (244)
Deferred revenue................................... 1,551 (683)
Deferred income taxes.............................. -- (34)
Income taxes payable............................... -- (912)
------------ ------------
Net cash provided by operating activities.............. 10,422 3,865

INVESTING ACTIVITIES

Purchases of short-term investments.................... (39,965) (21,906)
Maturities of short-term investments................... 24,628 37,529
Purchases of property, equipment and software.......... (11,656) (2,113)
Equity investment...................................... (1,300) --
Purchases of other assets.............................. -- (571)
------------ ------------
Net cash provided by (used in) investing activities.... (28,293) 12,939

FINANCING ACTIVITIES

Payments on long-term debt............................. (833) (734)
Payments on capital leases............................. (204) (261)
Proceeds from repayment of stockholder notes........... 266 118
Proceeds from Employee Stock Purchase Plan............. 632 566
Net proceeds from exercises of stock options........... 893 170
------------ ------------
Net cash provided by (used in) financing activities.... 754 (141)
------------ ------------
Increase (decrease) in cash and cash equivalents....... (17,117) 16,663
Cash and cash equivalents at beginning of period....... 82,346 51,902
------------ ------------
Cash and cash equivalents at end of period............. $ 65,229 $ 68,565
============ ============

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

Interest paid.......................................... $ 146 $ 227
============ ============
Income taxes paid...................................... $ 497 $ 719
============ ============

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

SILICON LABORATORIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 29, 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 June 29, 2002, the consolidated results of its
operations for the three and six months ended June 29, 2002 and June 30, 2001
and the consolidated statements of cash flows for the six months ended June 29,
2002 and June 30, 2001. All intercompany accounts and transactions have been
eliminated. The results of operations for the three and six months ended June
29, 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):

JUNE 29, DECEMBER 29,
2002 2001
------------------- -------------------

Work in progress........ $6,219 $3,582
Finished goods.......... 1,757 1,639
------------------- -------------------
$7,976 $5,221
=================== ===================

EQUITY METHOD INVESTMENTS

Where the Company has investments in which it has the ability to exercise
significant influence over operating and financial policies, these investments
are accounted for using the equity method.

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

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

are required to adopt SFAS No. 142 for fiscal years beginning after December 15,
2001. The Company adopted SFAS No. 142 on December 30, 2001, the beginning of
fiscal 2002. In connection with the adoption of SFAS No. 142, the Company has
performed a transitional goodwill impairment assessment. The adoption of SFAS
No. 141 and SFAS No. 142 did not have a material impact on the Company's results
of operations and financial position since the Company's existing balances of
goodwill and other intangible assets were not significant.

In 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 SIX MONTHS ENDED
--------------------------- -------------------------
JUNE 29, JUNE 30, JUNE 29, JUNE 30,
2002 2001 2002 2001
------------ ----------- ------------- -----------

Net income (loss).................... $ 2,655 $ (4,886) $ 3,010 $ (9,474)
Basic:
Weighted-average shares of common
stock outstanding............... 48,782 48,382 48,744 48,336
Weighted-average shares of common
stock subject to repurchase..... (1,300) (2,542) (1,586) (2,842)
------------ ----------- ------------- -----------
Shares used in computing basic
net income (loss) per share..... 47,482 45,840 47,158 45,494
------------ ----------- ------------- -----------
Effect of dilutive securities:
Weighted-average shares of common
stock subject to repurchase..... 1,047 -- 1,348 --
Stock options..................... 2,372 -- 2,476 --
------------ ----------- ------------- -----------
Shares used in computing diluted
net income (loss) per share..... 50,901 45,840 50,982 45,494
============ =========== ============= ===========

Basic net income (loss) per share.... $ 0.06 $ (0.11) $ 0.06 $ (0.21)
Diluted net income (loss) per share.. $ 0.05 $ (0.11) $ 0.06 $ (0.21)

Approximately 4,141,000 and 4,293,000 common shares have been excluded
from the diluted loss per share calculation for the three and six months ended
June 30, 2001, respectively.

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.

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

3. INVESTMENT IN A NON-PUBLICLY TRADED COMPANY

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

The Company has a contingent obligation to make two additional equity
investments in ADS totaling $2.7 million based on ADS' achievement of certain
milestones and the satisfaction of other conditions. Additionally, the Company
has an exclusive option to purchase ADS for $15 million in cash or common stock
in connection with the occurrence of certain events.

At June 29, 2002, the Company's voting interest in ADS was less than 20%
of the total ownership of ADS. However, the Company determined, based on APB
Opinion No. 18 "THE EQUITY METHOD OF ACCOUNTING FOR INVESTMENTS IN COMMON STOCK"
and other relevant guidance that it has the ability to exercise significant
influence over the management of ADS as a result of its contractual rights,
rights as an equity stockholder and ability to designate a member of ADS' Board
of Directors. Therefore, the Company has accounted for its investment in ADS
under the equity method of accounting.

The operations of ADS were insignificant for the quarter ended June 29,
2002. The investment continues to be carried at its initial cost of $1.3
million.

4. 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 seeking a
declaration that the TDK-held patent is invalid, not infringed and
unenforceable. We are currently in the discovery phase of this litigation. This
lawsuit has involved, and may continue to involve, significant expense and may
also divert management's time and attention from other aspects of the Company's
business. The Company intends to vigorously contest this case, however, the
Company is unable at this time to determine whether the outcome of the
litigation will have a material impact on its results of operations or financial
condition in any future period.

On December 6, 2001, a class action complaint for violations of U.S.
federal securities laws was filed in the United States District Court, Southern
District of New York against the Company, four of its officers individually and
the three investment banking firms who served as representatives of the
underwriters in connection with the Company's initial public offering of common
stock which became effective on March 23, 2000. On April 19, 2002, a
consolidated amended complaint was filed in the same court. The action is being
coordinated with over 300 other nearly identical actions filed against other
companies. These claims are premised on allegations that the registration
statement and prospectus for the Company's initial public offering did not
disclose that (1) the underwriters solicited and received additional, excessive
and undisclosed commissions from certain investors, and (2) the underwriters had
agreed to allocate shares of the offering in exchange for a commitment from the
customers to purchase additional shares in the aftermarket at pre-determined
higher prices. The 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 OF 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 SECOND QUARTER OF FISCAL YEAR 2002 ENDED JUNE 29, 2002. OUR SECOND
QUARTER OF FISCAL YEAR 2001 ENDED JUNE 30, 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 wireless phones and modems, as well as cable and satellite
set-top boxes, residential communication gateways for cable or DSL, and optical
network equipment. Customers during the first six months of fiscal 2002 and
fiscal 2001 included 3Com, Agere Systems, Ambit, Ciena, Echostar, Panasonic,
PC-TEL, Samsung, Smart Link, Sony, Texas Instruments, Thomson and Wavecom.

Our company was founded in 1996. As of June 29, 2002 we had 335 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
ISO modem 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 six months of 2002, two customers represented,
in the aggregate, 24% of our total revenues. Samsung represented 13% of
revenues and Agere Systems represented 11%. No other customer accounted
for more than 10% of our revenues during the first six 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 76% in the six months ended June 29, 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 through December 2001
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. Upon adoption of SFAS No.
142, GOODWILL AND OTHER INTANGIBLE ASSETS, the Company ceased amortization of
its goodwill.

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 SIX MONTHS ENDED
-------------------------- ---------------------------
JUNE 29, JUNE 30, JUNE 29, JUNE 30,
2002 2001 2002 2001
------------ ------------ ------------ -------------

Revenues.............................. 100.0% 100.0% 100.0% 100.0%
Cost of revenues...................... 46.8 46.0 44.9 45.1
------------ ------------ ------------ -------------
Gross profit.......................... 53.2 54.0 55.1 54.9
Operating expenses:
Research and development............ 19.9 44.1 23.3 44.4
Selling, general and administrative. 20.1 29.2 21.4 28.8
Goodwill amortization............... -- 13.0 -- 13.7
Amortization of deferred stock
compensation...................... 3.2 8.1 3.7 8.8
------------ ------------ ------------ -------------
Operating expenses.................... 43.2 94.4 48.4 95.7
------------ ------------ ------------ -------------
Operating income (loss)............... 10.0 (40.4) 6.7 (40.8)
Other income (expense):
Interest income..................... 0.9 6.2 1.1 6.9
Interest expense.................... (0.4) (1.2) (0.4) (1.3)
------------ ------------ ------------ -------------
Income (loss) before income taxes..... 10.5 (35.4) 7.4 (35.2)
Provision (benefit) for income taxes.. 3.9 (5.0) 3.3 (4.2)
------------ ------------ ------------ -------------
Net income (loss) .................... 6.6% (30.4)% 4.1% (31.0)%
============ ============ ============ =============

COMPARISON OF THE THREE AND SIX MONTHS ENDED JUNE 29, 2002 TO THE THREE AND SIX
MONTHS ENDED JUNE 30, 2001.

REVENUES. Revenues for the three months ended June 29, 2002 were $41.2
million, an increase of $25.1 million or 156% from revenues of $16.1 million in
the three months ended June 30, 2001. Revenues for the six months ended June 29,
2002 were $70.0 million, an increase of $39.4 million or 129% from revenues of
$30.6 million in the six months ended June 30, 2001. The increases were
primarily due to a significant growth in the sales of our non-DAA family of
products, such as the Aero Transceiver, the RF Synthesizer, the ISOmodem, and
the ProSLIC, reflecting the growing market acceptance for those products.
Revenues from non-DAA products accounted for approximately 69.0% of revenues for
the three months ended June 29, 2002 as compared to 32.0% of revenues for the
three months ended June 30, 2001.

GROSS PROFIT. Gross profit for the three months ended June 29, 2002 was
$21.9 million or 53.2% of revenues, an increase of $13.2 million as compared
with gross profit of $8.7 million or 54.0% of revenues in the three months ended
June 30, 2001. Gross profit for the six months ended June 29, 2002 was $38.6
million or 55.1% of revenues, an increase of $21.8 million as compared with
gross profit of $16.8 million or 54.9% of revenues in the six months ended June
30, 2001. The increases in gross profit dollars were primarily due to the
substantial increase in sales volume and increased utilization of our testing
capacity. These increases were 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 June 29, 2002 was $8.2 million, or 19.9%, of revenues, which
reflected an increase of $1.1 million, or 15.5%, as compared with research and
development expense of $7.1 million or 44.1% of revenues for the three months
ended June 30, 2001. Research and development expense for the six months ended
June 29, 2002 was $16.3 million, or 23.3%, of revenues, which reflected an
increase of $2.7 million, or 19.9%, as compared with research and development
expense of $13.6 million or 44.4% of revenues for the six months ended June 30,
2001. The increases in the dollar amount of research and development expense
were 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 and six months ended June 29, 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 June 29, 2002 was $8.3
million, or 20.1%, of revenues, which reflected an increase of $3.6 million
or 76.6% as compared to selling, general and administrative expense of $4.7
million or 29.2% of revenues in the three months ended June 30, 2001.
Selling, general and administrative expense for the six months ended June
29, 2002 was $15.0 million, or 21.4%, of revenues, which reflected an
increase of $6.2 million or 70.5% as compared to selling, general and
administrative expense of $8.8 million or 28.8% of revenues in the six
months ended June 30, 2001. The increases in the dollar amount of selling,
general and administrative expense were principally attributable to
increased staffing and legal fees incurred during patent litigation. We
expect to continue to incur significant legal expenses, fluctuating with
case activity, for at least the remainder of this fiscal year 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
or six months ended June 29, 2002 due to the adoption of SFAS No. 142. Goodwill
amortization for the three and six months ended June 30, 2001 was $2.1 million
and $4.2 million, respectively. 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 and
$2.6 million for the three and six months ended June 29, 2002, respectively, as
compared to $1.3 million and $2.7 million for the three and six months ended
June 30, 2001, respectively.

INTEREST INCOME. Interest income for the three and six months ended June
29, 2002 was $0.4 million and $0.8 million, respectively, as compared to $1.0
million and $2.1 million for the three and six months ended June 30, 2001,
respectively. The decreases were primarily due to lower interest rates on cash
and short-term investments balances during the recent three and six month
periods.

INTEREST EXPENSE. Interest expense for the three and six months ended June
29, 2002 was $0.1 million and $0.3 million, respectively, as compared to $0.2
million and $0.4 million for the three and six months ended June 30, 2001,
respectively.

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 six months ended June 30, 2002, as compared to 34.0% in the six
months ended June 30, 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 June 29, 2002 consisted of $99.5
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 June 29, 2002). At June 29, 2002, a letter of credit for $0.4
million related to a building lease was outstanding under the revolving line of
credit and $3.7 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 June 29, 2002.

We also have agreements with three institutional lenders for equipment
financing to purchase or lease equipment, leasehold improvements and software.
At June 29, 2002, the amount outstanding under these agreements was $2.4
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 six months ended June 29, 2002, cash provided by operating
activities was $10.4 million as compared to cash provided by operating
activities of $3.9 million during the six months ended June 30, 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 June 29, 2002, we had a net accounts receivable balance of
$21.3 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 June 29, 2002, we had a net inventory balance
of $8.0 million resulting from the application of this critical accounting
policy which we deemed adequate to address these inventory considerations.

Capital expenditures increased by $9.0 million to $11.7 million for the
six months ended June 29, 2002 from $2.7 million for the six months ended June
30, 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 $8.3 million during fiscal 2002, primarily to fund additional
expansion of our internal test floor, high speed capabilities and new product
development activities.

In June 2002, we entered into agreements with a newly-formed,
privately-held company, ASIC Design Services, Inc. (ADS). These agreements cover
i) an initial equity investment by us in ADS of $1.3 million; ii) a contingent
commitment by us to make additional equity investments in increments
cumulatively totaling $2.7 million based on ADS' achievement of certain
milestones and the satisfaction of other conditions; iii) ADS' grant to us of
certain manufacturing, sales and marketing rights during ADS' early revenue
phase, and; iv) the right, but not the obligation, to acquire ADS in its
entirety at a total acquisition value of $15 million in cash or our common stock
in connection with the occurrence of certain events.

The use of this structure provides us visibility and significant influence
over the direction of research and development activities of ADS. If we find the
results of their development efforts to be desirable or advisable for full
ownership, then we could exercise our right to acquire ADS. If we elect not to
exercise our option to acquire ADS, we would still hold our preferred stock
investment.

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

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

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

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.

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
335 employees at June 29, 2002. This growth has placed, and any future growth of
our operations will continue to place, a significant strain on our management
personnel, systems and resources. We anticipate that we will need to implement a
variety of new and upgraded operational and financial systems, procedures and
controls, including the improvement of our accounting and other internal
management systems. We also expect that we will need to continue to expand,
train, manage and motivate our workforce. All of these endeavors will require
substantial management effort. If we are unable to effectively manage our
expanding operations, our business could be materially and adversely affected.

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

Our future success will depend on our ability to reduce our dependence on
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 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 family of 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.

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 76% in the six
months ended June 29, 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 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.

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.

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 six 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 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 six months of 2002, two customers represented, in the
aggregate, 24% of our total revenues. Samsung represented 13% of revenues and
Agere Systems represented 11%. 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.

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.

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, Conexant is a significant competitor of ours
across multiple product lines. In June, 2002, Conexant completed the spin-out
of a new company named Skyworks Solutions, Inc., resulting from the
combination of Conexant's wireless business merged with Alpha Industries, Inc.
Conexant has also re-affirmed their intention to spin-out their Mindspeed
entity which is principally focused on optical networking semiconductor
components. In July 2000, Lucent Technologies spun off its microelectronics
business, which included its optoelectronics components and integrated
circuits division, into a separate company named Agere Systems in order to
accelerate the growth of the business and alleviate strategic conflicts with
Lucent's competitors. Additionally, Siemens spun off its semiconductor
business in 1999 to create a more focused company named Infineon Technologies.
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 six
months ended June 29, 2002, our research and development expense was $16.3
million, which represented 23.3% of our revenues compared to $13.6 million, or
44.4% of our revenues for the six months ended June 30, 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.

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 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, Skyworks
Solutions Inc. (the combination of Conexant's wireless business and Alpha
Industries) , 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 seeking a declaration that the TDK-held patent is
invalid, not infringed and unenforceable. We are currently in the discovery
phase of this litigation.

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

SECURITIES LITIGATION

On December 6, 2001, a class action complaint for violations of U.S.
federal securities laws was filed in the United States District Court, Southern
District of New York against us, four officers individually and the three
investment banking firms who served as representatives of the underwriters in
connection with our initial public offering of common stock which became
effective on March 23, 2000. On April 19, 2002, a consolidated amended complaint
was filed in the same court. The action is being coordinated with over 300 other
nearly identical actions filed against other companies. These claims are
premised on allegations that the registration statement and prospectus for our
initial public offering did not disclose that (1) the underwriters solicited and
received additional, excessive and undisclosed commissions from certain
investors, and (2) the underwriters had agreed to allocate shares of the
offering in exchange for a commitment from the customers to purchase additional
shares in the aftermarket at pre-determined higher prices. 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 June 29, 2002, the remaining proceeds were invested in
government securities and other short-term, investment-grade, interest bearing
instruments.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable

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

On April 24, 2002, we held our Annual Meeting of Shareholders. The matters
voted upon at the meeting and the results of those votes were as follows:

1. Election of Directors

Total Vote For Total Vote Withheld
Each Director From Each Director
-------------- -------------------

Navdeep S. Sooch 44,003,164 1,963,517
William P. Wood 45,648,053 318,628

2. Ratification of the appointment of Ernst & Young LLP as independent
auditors for fiscal 2002

Votes Votes Votes
For Against Abstaining
----------------- ----------- --------------

45,717,570 245,455 3,656

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).

10.13 Letter Agreement dated June 4, 2002 by and between Silicon
Laboratories Inc. and Comerica Bank-Texas.

- ----------------
* Incorporated herein by reference to the indicated filing.

(b) During the three months ended June 29, 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)

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

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



                              COMERICA BANK-TEXAS
                  8911 Capital of Texas Highway, Suite 2310
                              Austin, Texas 78759

                                 June 4, 2002


Silicon Laboratories Inc.
4635 Boston Lane
Austin, Texas 78735

         RE:    Credit Agreement dated September 5, 2001 (as heretofore amended
                or modified, the "Agreement") between Silicon Laboratories Inc.
                ("Borrower") and Comerica Bank-Texas ("Bank")

Ladies and Gentlemen:

         Capitalized terms used and not otherwise defined herein have the
meanings given them in the Agreement. Borrower and Bank desire to amend the
Agreement for the purposes expressed herein.

         The first sentence of Section 5.8 of the Agreement is hereby amended
in its entirety to read as follows:

         Make Capital Expenditures or commit to make Capital Expenditures, in
         an aggregate amount that exceeds $25,000,000 in any fiscal year.

         This letter agreement shall become effective as of the date first
above written when and only when Bank shall have received, at Bank's office, a
counterpart of this agreement executed and delivered by Borrower. The
Agreement as hereby amended is hereby ratified and confirmed in all respects.
Any reference to the Agreement in any Loan Document shall be deemed to be a
reference to the Agreement, as hereby amended. The execution, delivery and
effectiveness of this letter agreement shall not, except as expressly provided
herein, operate as a waiver of any right, power or remedy of Bank under the
Agreement or any other Loan Document nor constitute a waiver of any other
provisions of the Agreement or any other Loan Document.

         This letter agreement may be separately executed by Borrower and Bank
in any number of counterparts, each of which when so executed and delivered,
shall be deemed to be an original and all of which, when so executed and
delivered, shall be deemed to be an original and all of which, taken together,
shall constitute but one and the same agreement. This agreement shall be




governed by and construed under to laws of the State of Texas, without giving
effect to the conflict-of-laws principles thereof.

         Please indicate your agreement to the foregoing by executing where
indicated below and returning a copy to the undersigned at the address given
above.

                                       Yours truly,

                                       COMERICA BANK-TEXAS

                                       By: /s/ JULIE A. SMITH
                                          -------------------------------------
                                           Julie A. Smith
                                           Vice President


Agreed to as of the date first written above

SILICON LABORATORIES INC.

By:  /s/ NAVDEEP SOOCH
   ------------------------------
   Name: Navdeep Sooch
        -------------------------
   Title: CHAIRMAN AND CEO
         ------------------------


By:  /s/ JOHN W. MCGOVERN
   ------------------------------
   Name: John W. McGovern
        -------------------------
   Title: CHIEF FINANCIAL OFFICER
         ------------------------




[COMERICA LOGO]     NO ORAL AGREEMENTS

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

         This Agreement is executed on June 4th, 2002, by Silicon Laboratories
Inc. ("Borrower") and Comerica Bank - Texas, a Texas banking association
("Lender"), in connection with credit accommodations made by the Lender to the
Borrower (the "Loan").

         The parties covenant and agree as follows:

(1)      The rights and obligations of the parties shall be determined solely
         from the written "Loan Agreement" (as such term is defined in Section
         26.02(a)(2) of the Texas Business and Commerce Code) executed and
         delivered in connection with the Loan, and any oral agreements
         between or among the parties are superseded by and merged into the
         Loan Agreement.

(2)      The Loan Agreement has not been and may not be varied by any oral
         agreements or discussions that have or may occur before,
         contemporaneously with, or subsequent thereto.

(3)      THE WRITTEN LOAN AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE
         PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
         CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE
         ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES.

         Executed and delivered as of the date first written above.




BORROWER:                                           LENDER:

SILICON LABORATORIES INC.                   COMERICA BANK - TEXAS




By:  /s/ NAVDEEP SOOCH                              By: /s/ JULIE A. SMITH
   ------------------------------                      -------------------------
Printed Name: Navdeep Sooch                         Printed Name: Julie A. Smith
Its: Chief Executive Officer                        Its: Vice President



By:  /s/ JOHN W. MCGOVERN
   ------------------------------
Printed Name: John W. McGovern
Its: Chief Financial Officer