10-K 1 d10k.txt FORM 10-K FOR PERIOD ENDING APRIL 1, 2001 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- FORM 10-K (MARK ONE) [X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended April 1, 2001. OR [_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to . Commission File Number: 0-28157 ---------------- Virata Corporation (Exact name of Registrant as specified in its charter) ---------------- ~~Delaware 77-0521696 (State of Incorporation) (IRS Employer Identification No.)~~

2700 San Tomas Expressway, Santa Clara, California 95051 (Address of principal executive offices, including zip code) Registrant's telephone number, including area code: (408) 566-1000 Securities Registered Pursuant To Section 12(b) Of The Act: Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- None None

Securities Registered Pursuant To Section 12(g) Of The Act: Common Stock, $0.001 par value. ---------------- Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 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. Yes [X] No [_] Indicate by a check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] The aggregate market value of the voting stock held by non-affiliates of the Registrant, as of June 6, 2001, was approximately $595 million (based upon the closing price for shares of the Registrant's Common Stock as reported by the Nasdaq National Market for the last trading date prior to that date). Shares of Common Stock held by each executive officer, director and holder of 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. As of June 6, 2001, approximately 63,774,685 shares of the Registrant's Common Stock, $0.001 par value, were outstanding. Documents Incorporated by Reference: Portions of the definitive proxy statement for the Registrant's 2001 Annual Meeting of Stockholders are incorporated by reference into Part III hereof. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- TABLE OF CONTENTS

(i) PART I ITEM 1--Business. In addition to historical information, this Annual Report on Form 10-K contains forward-looking statements that involve risks and uncertainties. Our actual results could differ significantly from the results discussed in these forward-looking statements. Factors that could contribute to such differences include those discussed below and in "Risk Factors," and "Management's Discussion and Analysis of Financial Condition and Results of Operations," as well as those discussed elsewhere in this Annual Report. Introduction Virata Corporation ("Virata" or "we") provides communications processors and DSL physical-layer chips combined with integrated software modules to manufacturers of equipment utilizing digital subscriber line, or DSL, and broadband wireless technologies. These "integrated software on silicon"(TM) product solutions enable our customers to develop a diverse range of equipment, including modems, gateways, routers, fixed wireless receivers and base stations targeted at the voice and high-speed data network access, or broadband, market. We believe our systems expertise, products and support services enable equipment manufacturers to simplify product development, reduce the time it takes for products to reach the market and focus resources on product differentiation and enhancement. We outsource the manufacturing of our semiconductors, which allows us to focus our resources on the design, development and marketing of our products. We were formed in 1993 as a spin-out from the Olivetti Research Laboratories (now AT&T Laboratories) and until 1995, we were a development-stage company focused primarily on product development. We initially focused on developing and delivering ATM-based, board-level systems primarily for local area network applications. However, in September 1997, we ceased development of our systems products and focused exclusively on expanding our software offering and developing additional semiconductors for the broadband marketplace with a focus on the DSL market. In July 1998, we acquired RSA Communications, Inc. On November 16, 1999, we reorganized our corporate structure and completed our initial public offering. On February 10, 2000, we completed our acquisition of D2 Technologies Inc., a provider of digital voice and telephony software solutions. On April 27, 2000 we completed our acquisition of Inverness Systems Ltd., a provider of networking software solutions. On August 16, 2000, we completed our acquisition of Agranat Systems, Inc., a provider of Web managed software products. On August 22, 2000, we completed our acquisition of Excess Bandwidth Corporation, a developer of symmetrical DSL physical-layer chips. On March 21, 2000, our Board of Directors approved a two-for-one split of Virata's common stock that was applicable to stockholders of record on May 4, 2000. The stock split, approved by the Virata's stockholders on May 1, 2000, was effective May 18, 2000. Unless specifically noted otherwise, all references to share and per share data for all periods presented have been adjusted to give effect to this split. On July 13, 2000, we completed our follow-on offering of 6,855,000 shares of common stock, including the exercise of the underwriters' overallotment option, at $71.00 per share. Total proceeds to Virata were approximately $461 million, net of commissions and offering costs. Industry Background The amount of data being carried over the Internet and private communications networks has grown dramatically in recent years and is expected to continue as the number of users accessing networks increases and as businesses and consumers demand richer content and more complex applications for activities, such as telecommuting, electronic commerce and interactive media. These activities require the transmission of large amounts of data which, in turn, requires high-speed, broadband data access services for end users to obtain data reliably and within practical time constraints. 1 To meet the demand for high-speed, broadband data transmission, network service providers continue to install high-bandwidth fiber optic transmission equipment, high-speed switches and core routers in the Internet backbone and in interoffice networks. While this network backbone is capable of delivering data at very high speeds, an access bottleneck exists between the telephone companies' central offices and the end users' premises. The copper line connections between the telecommunications service provider's central office and the end user are commonly known as the local loop, or the last mile. The last mile infrastructure was originally designed for low-speed analog voice traffic, rather than high-speed digital data transmission. As a result, access to the Internet and private communications networks over the copper wire infrastructure of the last mile has typically been limited to data transmission rates of up to 56 Kbps using standard dial-up analog modems, or 128 Kbps using integrated services digital network, or ISDN, modems. At these rates, several minutes may be required to access a media rich website, and several hours may be required to transfer or download large files. In an effort to provide greater bandwidth in the local loop, network service providers are deploying higher speed access services, such as frame relay or T1/E1. However, the historical pricing structure has limited such services to larger businesses. The passage of the Federal Telecommunications Act of 1996 started to change this historical pricing structure, as it intensified the competitive environment by requiring incumbent local exchange carriers, or ILECs, to lease portions of their networks, including the local loop, to other telecommunications service providers. These changes in competitive structures coincided with the maturation of DSL technology, enabling high-bandwidth data networking over the existing local loop copper infrastructure. As a result, a number of US companies are now deploying high-speed services using DSL technologies. The growing deployment of high speed cable modems by cable system operators provides additional pressure on the ILECs to accelerate their roll- outs of competitively priced broadband services. Finally, and most visible recently, with the intensifying competitive pressures in conventional telephone services including long-distance telephony, telephone companies have been turning to DSL services as a way to create a new source of revenue that leverages their existing copper plant investment and customer relationships. The requirement for new revenue flows is worldwide, resulting in the spread in calendar 2000 of mass market deployments of DSL from North America to Europe and Asia. DSL enables data transmission speeds of 128 kilobits per second, or Kbps, to 52 megabits per second, or Mbps, using the existing local loop copper wire infrastructure. DSL delivers "always on" availability, eliminating the tedious dial-up process associated with traditional analog modem technologies. It is a point-to-point technology that connects the end user to a telecommunications service provider's central office or to an intermediate hub. DSL equipment is deployed at each end of the copper wire and the transmission speed depends on the length and condition of the existing wire as well as the capabilities of the DSL equipment. Data, voice and video can all be delivered over DSL, enabling service providers to offer a wide range of new value-add services. To date, the focus has been on the application of DSL technologies to deliver high-speed access to the Internet. Within that domain, there is now significant pressure for additional functionality in the form of access provided, notably: 1) IP-routing at the access point, which enables the customer to use multiple-PCs or other terminals for Internet access, and 2) Data Security (which itself is most easily implemented as part of IP-router). These pressures for additional functionality drive demand for the sophisticated, easy-to-use cost-effective communications processing which Virata provides. Even more exciting opportunities lie ahead with the introduction of voice and video over DSL services. Home and office gateways that include voice telephony capabilities-- typically known as Integrated Access Devices or IADs--can deliver multiple lines of toll-quality voice over a single twisted copper pair to the home or business. Voice over DSL requires sophisticated voice processing algorithms, highly capable call-control software to support the interface to the public telephone system and advanced user features, as well as specially tuned and extended network protocol software to ensure toll-quality audio. While the technical challenges of voice IADs are substantial, voice support is fast becoming the next major requirement for DSL equipment manufacturers. 2 We believe that DSL implementations offer several attractive benefits over other broadband technologies, including: . Dedicated bandwidth. Some alternative high-speed data transmission solutions, such as cable, are shared-media systems where many users are attached to the same cable loop. As a result, existing users may suffer performance degradation or security breaches as new users are added to the network. Because each DSL connection is dedicated to a single user, DSL does not suffer from this kind of service degradation and enables a higher level of security. . Broad coverage. As large numbers of businesses and homes in developed countries have installed copper telephone wire connections, DSL technologies can be made available to a large percentage of potential end users. . Low cost. Because DSL uses the existing local loop connection, it is generally less expensive to deploy than other high-speed data transmission technologies. In addition, recent advances in technology development, industry standardization and competition are further enabling widespread, low-cost deployment of DSL. . Scalable to customer requirements. DSL technology enables service providers to regulate the transmission speed for individual customers, allowing tiered pricing at various service levels. Service providers can then more efficiently segment their customer base. . Natural upgrade from analog modems. DSL modems use the same phone port as analog modems, providing the user with a simple upgrade path. Fixed wireless serves similar needs to those served by DSL. First, and most importantly, it provides high speed data access to the Internet. Second, it is capable in some circumstances of supporting advanced applications such as voice. We believe fixed wireless is most often deployed in the following circumstances: . If copper loop infrastructure is unsuitable, and in particular if the copper local loop is more than 18,000 feet long, then DSL cannot be used. Fixed wireless provides a cost effective way to serve those customers who are beyond the range of DSL technologies. . In a sparsely populated area, it may be more effective to provide wireless than DSL broadband service. . If there is a scarcity of copper local loop, then it can be quicker to deploy wireless because it does not involve placing physical infrastructure in the ground. This is often seen in emerging-economy markets. . For service providers who neither own nor have access to fixed-line local loop infrastructure, fixed wireless enables them to create a broadband local loop product offering. Fixed wireless communications processing requirements are similar in many respects to those of DSL communications processing, allowing Virata to leverage its core investments in DSL communications processing technology into the supplementary opportunity of fixed wireless. Equipment manufacturers encounter a number of challenges in their effort to meet the demands of the growing broadband local-loop market. These challenges include constantly evolving technology and networking standards, an expanding range of feature expectations and shorter product life-cycles. To meet these challenges and reduce the time it takes for their products to reach the market, equipment manufacturers are increasingly relying on multiple third-party vendors to deliver critical component building blocks that can be incorporated into a complete DSL product. The analog front end receives and transmits the electronic signal and converts that signal to either analog or digital streams. The physical layer semiconductor, or PHY, together with its software, establishes, maintains and controls the digital encoding and decoding of the signal and ensures reliable transmission of information over the copper wire infrastructure. The layer 2 and 3 processor, combined with complex, multifunctional software modules, is responsible for managing the addressing, routing, switching and protocol conversions needed to encapsulate and route information packets. 3 The integration of these individual components from multiple third-party vendors can be a complex, time consuming and costly process. While today there are a number of vendors which deliver a portion of either the hardware or software building blocks, an opportunity exists for a supplier capable of delivering higher levels of integration of both semiconductor and software components. The Virata Solution We provide a solution that combines communications processors and DSL PHYs with integrated software modules to manufacturers of equipment utilizing DSL and broadband wireless technologies. We believe that our systems expertise, "integrated software on silicon"(TM) product solutions and support services will enable our customers to simplify product development, reduce the time it takes for products to reach the market and focus resources on product differentiation and enhancement. Our communications processors perform system functions that require real-time processing speed and are technically mature and are thus less likely to change as standards evolve. Our proprietary software is used for protocol processing, management and control of network and semiconductor interfaces, allowing our communications processors to be fine tuned or fully customized for specific applications. This approach delivers off-the-shelf functionality for rapid development, scalability from single PCs to complex edge routers and flexibility to add new features and quickly respond to evolving standards. Key features of our solution include: . Flexible design. Our products are based on a flexible design that simplifies the addition of features. This design enables new services such as voice, video and security to be added incrementally as broadband solutions evolve. . High levels of feature integration. We offer semiconductor solutions which are PHY-independent or include a DSL PHY either integrated or as part of a chipset. Our PHY-independent devices use generic, industry standard interfaces that attach to any third party DSL physical layer semiconductor and some fixed wireless physical layer semiconductors, which are the other primary semiconductor components required for broadband access communications equipment. By being PHY-independent, these products offer OEMs the maximum flexibility to choose the PHY to match a wide array of applications within the broadband local loop. We believe that our PHY-included products, which incorporate a DSL PHY, are the most integrated DSL equipment solutions currently available and offer OEMs the most cost-effective solution for DSL equipment designs. . Compelling price/performance. By designing software to run only on our semiconductors, we are able to achieve efficiency in silicon area and code size. The combination of these features results in high performance, low power consumption and compelling price/performance. . Standards compliant. Our products are compliant with relevant ADSL Forum, ATM Forum, IETF, ITU and other industry standards. Such standards evolve over time and our products are designed to accommodate such changes. We believe our customers receive the following key benefits from using our solutions: . Faster time-to-market. Fewer building blocks to integrate results in shorter development and test cycles, lower engineering risks, faster product introduction and reduced development costs. . Reduced product cost. Eliminating costly external components and reducing board space leads to lower product cost. . Differentiation. Our customers' engineering resources can be focused on product differentiation through value-added features and innovations, rather than on elements contained in our solution. . Platform for multiple products. Our modular software and hardware architecture enables the design of multiple products using different subsets of our modular software. . Re-usability. As we add features and capabilities to our communications processors and software modules, software extensions developed by our customers can continue to be used on future generations of their products. 4 The Virata Strategy Our objective is to be the leading provider of communications processors integrated with a comprehensive suite of related software to manufacturers of voice and high-speed data network access equipment. Key elements of our strategy include: . Initial focus on DSL. We have extensive expertise in providing solutions that integrate communications processors with software for the content and connection enabling layers of the broadband communications network. While our core technologies are capable of supporting a number of broadband access alternatives, we have chosen to initially focus on the DSL market. . License our software to all customers. By standardizing on our software, our customers build a foundation for integrating additional functionality and designing next generation products. We believe that once a customer employs our architecture and experiences the benefits of our systems expertise, we become that customer's preferred partner for future products. . Leverage our flexible design. Our integrated solution provides us substantial flexibility to extend our existing products, whether at the software or semiconductor level, to meet evolving standards and features required by the market. This approach allows our customers to achieve faster time-to-market, lower development costs and focus engineering resources on proprietary product feature development. . Deliver market-leading features and functionality, such as voice over DSL and network quality of service solutions. We are building on our core technologies to add market leading features and functionality, enhancing the value of our products. The first set of added features we are developing includes voice over DSL and network quality of service solutions. . Pursue strategic acquisitions. Our strategy is to enhance our growth capability by pursuing selective acquisitions. This strategy allows us to more rapidly obtain complementary technologies and engineering talent and to access certain markets and key customer relationships. Consistent with this strategy, we have made a number of acquisitions to date, including RSA Communications, D2 Technologies, Inverness Systems, Agranat Systems and Excess Bandwidth. We believe completing further selective acquisitions will be important to remain competitive as a complete solutions provider to manufacturers of broadband access equipment. . Leverage products and technologies into adjacent market spaces. Where our products and technology portfolio can be effectively leveraged into opportunities that are additional to DSL, we will seek to expand its revenues and net margin dollars by pursuing said opportunities. Our involvement in the fixed wireless broadband local loop is a current example. Products We specialize in communications processors that are integrated with a comprehensive suite of software for broadband local loop, including DSL, equipment manufacturers. We offer solutions which are either PHY-independent or include a DSL PHY. Our PHY-independent communications processors perform the critical content encapsulation and content routing functionality required in broadband local loop equipment, which is commonly referred to as layer 2 and layer 3 processing. Our system combines multiple elements required for managing the addressing, routing, switching and protocol conversions needed to encapsulate and route information packets. Our PHY-inclusive solutions incorporate all the functionality of the PHY-independent products together with a DSL PHY all on the same semiconductor. This choice of a PHY-independent or PHY-inclusive product, each featuring integration of a communications processor and software, provides our customers a comprehensive, tested, self sufficient solution that replaces semiconductors, software and support previously sourced from multiple vendors. Semiconductor Products We offer four families of semiconductors products: the PHY-independent communications processors; the PHY-integrated communications processors; non- integrated PHY chips; and voice DSPs. 5 In the PHY-independent communications processor part of the product range, we feature products which combine dual CPUs for processing, hardware- accelerators for additional performance, peripheral integration including PCI, USB, and Ethernet, and flexible expansion interfaces to enable customers to add capabilities such as home wireless networking.

We have also developed a new generation of products that combine ADSL PHY layer processing along with the layer 2 and layer 3 functionality of Helium and Lithium into a single highly integrated device. The first PHY-inclusive product we have developed for this market is Beryllium. Beryllium is offered with a separate analog front end semiconductor called Neon.

Beryllium takes the communications processing capabilities of Helium and Lithium and adds an on-chip ADSL transceiver or PHY, eliminating a large and expensive component from ADSL equipment. Representing the industry's first "ADSL home router on a chip," we believe Beryllium can lower equipment costs by a substantial amount. Using a Virata-patented invention, Beryllium has also delivered superior performance at longer distances from the central office versus the current generation of ADSL routers in performance tests undertaken by Virata. Beryllium provides a highly integrated solution for ADSL bridges and routers, with the ability to provide local area interfaces such as 10/100 Ethernet, HomePNA (using home telephone wiring for the home network), home powerline, and home wireless. It is also well suited for voice IADs. Additionally, we market non-integrated PHY semiconductors, notably the Aluminum 200 SHDSL. SHDSL is a new form of DSL that differs from ADSL principally in providing symmetric (same data rate from the Internet and to the Internet) service where ADSL provides asymmetric (higher data rate from the Internet than to the Internet). SHDSL is also easier to "repeater" over very long distances. SHDSL is finding its principal market in providing DSL service to business, while ADSL is used primarily to provide consumer DSL. Aluminum 200 offers unique benefits of long reach, high performance, and high noise tolerance in comparison to other SHDSL PHYs in the market. The product can be sold on its own, but more typically is purchased as part of a chipset including a Virata PHY-independent communications processor and networking software, enabling a remarkably complete SHDSL equipment solution to be built using our technology.

6 We market TI-compatible "Magnesium" voice DSP bundled with our industry- leading voice-processing software. Magnesium, with its voice software, can be purchased as a standalone product, but is most commonly purchased as part of a chipset including a Virata communications processor and networking software. The Magnesium plus Helium chipset plus comprehensive is marketed as "Azurite", a solution for DSL voice IADs.

Products Under Development We are developing new PHY-independent, PHY-inclusive and non-integrated PHY semiconductors with higher feature content such as voice, video and security capabilities and higher performance levels to meet the ever increasing demands of broadband equipment manufacturers. Software Our extensive suite of software is key to providing flexible, off-the-shelf communications processing solutions. Multiple software modules deliver management and support for functions at the link, protocol and physical layers. These modules either operate on top of ATMOS, our operating system kernel, which is optimized for communications applications that run on ARM RISC microprocessors, or on top of VxWorks, a general purpose and widely used operating system kernel from Wind River Systems. The software provides our customers a ready-to-deploy menu of over 50 modules to meet their specific product requirements. Together, these modules complete a customized, sophisticated system that supports multiple functions including quality of service, system management, bridging, tunneling, address translation, signaling and routing. Addition of the communications algorithms for the ITU DSL standards complements the layer 2 and layer 3 code for our PHY-inclusive solutions. We also offer customers a full set of software development tools including compilers, linkers and other special-purpose tools. We are also expanding our software to address the increasing need for security by adding firewall and IPSec capability, and to increase the manageability of equipment built using our technology with software that includes an embedded web server, auto-configuration of DSL services (T-37 and OpenDSL), and the Universal Plug-and-Play ("UPnP"). Certain Virata software modules, notably Virata's implementation of an embedded web server ("EmWeb"), the universal plug-and-play protocol for automatic configuration of networked devices (UPnP), an advanced IP-switching stack (MPLS), and some voice algorithm software, have applicability beyond the markets directly addressed by Virata's semiconductors. Accordingly, where Virata sees long term business value, Virata sells these software items as "Standalone Software Products", with the goals of both increasing revenues and also spreading Virata's technology as widely as possible, which in turn assists the company in addressing end-to-end networking issues as well as deepening some important customer relationships. Design and Support Services We offer a number of designs and support services which we believe add substantial value to our product offerings. Our key services are detailed below: Reference Design Services Our Customer Services and Solutions group specializes in speeding customers' time to market by developing reference designs featuring board-level hardware and software products from third parties. 7 Examples include modem solutions featuring ADSL PHYs supplied by ST Microelectronics. We recently introduced a home-wireless router design kit which teams our Helium processor with 802.11b wireless LAN technology from Intersil. Technical Support Services Once customers have purchased a license for our software, they desire to quickly and efficiently commence product development. We assist our customers by providing training in the use of our semiconductors and software development systems. Our Technical Advice Center delivers technical assistance to customers and manages our extranet site, which is accessible to all of our customers, through which we deliver new software and documentation and take action on bug reports. Our technical consultants, field application engineers (FAEs) and, as appropriate, development engineers assist our customers throughout the product development cycle, and may include formal and informal design reviews. Evaluation Systems We help our customers accelerate their product development programs by designing a board-level evaluation system for each application specific standard parts ("ASSP") product. Typically, each time a new ASSP is introduced, an evaluation system featuring the new product is made available to our customers simultaneously with the first release to customers of the new semiconductor. This approach provides an effective way for our customers to evaluate the new semiconductor and its software while enabling designers to add their own functionality. Technology A key element of our success is our technology expertise which spans physical, networking layer, protocol layer and voice processing and systems- level knowledge. Our semiconductor and software architectures are designed to enable the rapid, flexible development of new products to meet the evolving feature, performance and standards compliance demands of the broadband access market. A single-chip, multi-processor architecture was chosen as the most flexible and cost-efficient approach to the complex challenge of satisfying the requirements of: . layer 2 and 3 processing for broad application across the different DSL technologies when used in conjunction with physical layer transceivers from third party vendors; . integration of layer 2 and 3 processing with DSL processing on a single communications processor; . processing support for an evolving range of services and applications such as high speed Internet access, corporate routing, voice services, security and encryption for Virtual Private Networks, or VPNs, and video distribution; and . broad application of our solutions whether used in modems close-coupled to PCs, Internet appliances, remote gateways and routers, DSLAMs or DLCs. We believe the core of our technology expertise is delivered to our customers through our ASSP architecture, software architecture, communications algorithms, digital signal processing, ATM, Frame and Internet protocol processing voice algorithms and systems-level expertise. ASSP Architecture Our current ASSP architecture is specifically designed to meet the performance and feature demands for broadband access equipment. This architecture provides the flexibility for application in a wide range of customer premises equipment without the need for additional processing support. For example, when used inside or close coupled to a PC, our ASSPs and software place minimal demands on the host PC processor freeing it to focus on its own operating system and application software support. We believe this approach results in improved user satisfaction through enhanced PC reliability and better performance, and minimized support costs for PC suppliers and service providers. 8 The architecture is based on a dual bus structure. One bus connects the embedded ARM RISC processors used for protocol processing, network processing and other control functions with a wide range of physical interfaces. These physical interfaces support connection of our communications processors to other semiconductors and memory systems as well as to external devices such as PCs and Ethernet hubs. The second bus supports DSPs and other specialized processors required for on-chip DSL PHY-layer processing, voice or video processing. Both buses access common resources such as an SDRAM controller, an interprocessor gateway, processor registers and debugging facilities. This architecture makes it possible for us to quickly develop new ASSPs to meet evolving standards and the application demands of the market. Software Architecture By simultaneously developing the software and semiconductor architectures, we have achieved tight software/semiconductor integration. This results in better system performance, smaller chip size, fewer lines of code and lower memory requirements than is possible through the complex alternative of assembling, integrating and testing functionally equivalent software elements from multiple off-the-shelf sources. Our software architecture partitions the processing requirements into time critical and non-time critical tasks. All time critical code is optimized to run on the network processor ensuring the high performance required for low latency and control of external interfaces. A compact real-time operating system kernel, either ATMOS or VxWorks controls processing on the protocol processor. The modular construction of the software architecture makes it easier to add further functionality. This facilitates rapid development and release of new software features. Communications Algorithms and Digital Signal Processing Communications algorithms are the processes and techniques used to transform a digital data stream to and from a specially conditioned signal suitable for transmission across copper telephone wires. We have extensive experience in the physical-layer issues involved in developing and implementing the algorithms required for this conditioning, and have leveraged that expertise to develop the solutions required for the ITU DSL standards. PHY layer code is executed in our Beryllium communications processor using a compact, low power DSP supported by fixed function hardware blocks, and in our SHDSL Aluminum 200 product by a RISC processor supported by parameterized hardware blocks. Voice Algorithms and Digital Signal Processing Advanced telephony and voice solutions also require DSP algorithms which we access through our recent acquisition of D2 Technologies. Algorithms include basic encoding such as G.711 and G.726; advanced encoding such as G.723, G.728 and G.729; echo cancellation including single and multi reflector G.168; fax relay; and voicemail capability. The G.xxx algorithm implementations are based on ITU standards, and achieve an industry leading level of algorithmic performance measured in DSP millions-of-instructions-per-second, or MIPS, for a given number of voice channels, saving customers money by enabling them to use less powerful DSPs than they would otherwise have to for their applications. Voice algorithms typically run on a DSP external to our communications processor. Our communications processors include interfaces that allow them to seamlessly connect to popular voice DSPs including the C54xx series from Texas Instruments. ATM, Frame and Internet Protocol Processing The ATM processing software manages, channels, buffers and shapes ATM cells and utilizes the custom hardware filters in the semiconductors to achieve the optimum trade-off between software flexibility and hardware performance. To support transmission of frame encapsulated data, our software supplies drivers for Ethernet and HDLC as well as a variety of methods for encapsulating frames over ATM. The software 9 management capabilities for layer 3 processing include TCP/IP, IP routing, network address translation, IP configuration and tunneling. The acquisition of Inverness Systems broadens and deepens our existing software through the addition of Frame Relay, advanced IP routing and MPLS capabilities. Management and Ease-of-Use Software Enabling products to be easy to install and use is a key benefit for consumers, and is also key for service providers responsible for product rollout and support. Accordingly, we provide software to address these issues including--autoconfiguration implementations of the DSL Forum's TR-0037 and OpenDSL standards; embedded web-server for user monitoring and configuration; and UPnP for remote automated configuration by and of PCs and other network terminals. Systems-Level Expertise We have accumulated experience designing systems-level products that meet the technical challenges of the local loop environment and of interoperability with products from other suppliers. This know-how is embedded in our products. Our customers additionally benefit from this experience during their product architecture and design milestone reviews. Customers We sell our products to established telecommunications equipment vendors, modem manufacturers and broadband access equipment companies, including 67 customers who have licensed our software. However, we depend on a relatively small number of customers for a large percentage of our revenues. For the fiscal year ended April 1, 2001, our largest customers in terms of revenue included (in alphabetical order): Ambit, Arescom, Aztech, Efficient Networks, Ericsson, Orckit Communications, Siemens, TECOM, Westell Technologies, and Xavi Technologies. In addition, we do not have purchase orders with any of our customers that obligate them to continue to purchase our products and any of these customers could cease purchasing our products at any time. Our ASSPs are employed by our customers in the following representative product types: . DSL modems which are connected to a PC via a USB or Ethernet link; . Gateways and routers; and . DSLAMs and DLCs. We depend on a relatively small number of customers for a large percentage of our revenues. Westell Technologies and Siemens accounted for 19.6% and 14.6%, respectively, of our total revenues for the fiscal year ended April 1, 2001. We do not have purchase orders with any of our customers that obligate them to continue to purchase our products and these customers could cease purchasing our products at any time. As of April 1, 2001 and April 2, 2000, our backlog were approximately $24.5 million and $24.9 million, respectively, including the backlog for semiconductors, which were approximately $20.0 million and $20.5 million, respectively. International revenues, from customers located outside of the United States, accounted for 49.6% of our total revenues for the fiscal year ended April 1, 2001, 43.6% for the fiscal year ended April 2, 2000, and 40.3% for the fiscal year ended March 31, 1999. For the fiscal year ended April 1, 2001, sales from customers in Germany and Taiwan represented 15.9% and 13.1% of total revenues, respectively. For the fiscal year ended April 2, 2000, sales from customers in Israel represented 23.3% of total revenues. For the fiscal year ended March 31, 1999, sales from customers in Israel represented 16.5% of total revenues. However, almost all of our international revenues are transacted in U.S. dollars, which reduces our exposure to fluctuations in revenues attributable to changes in foreign currency exchange rates. 10 Sales and Marketing Our sales and marketing strategy is to license our software and secure design wins with industry leaders in emerging high growth segments of the broadband access equipment market. We typically license our software to a customer at the time we achieve an initial design win. Following training, the customer then designs products incorporating our communications processors, which they purchase separately from us. As a result, prior to completing the license agreement, our FAEs and development engineers often act as consultants to customers to assist them with their architectural decisions. We generally employ a direct sales model to build a close relationship with customers both prior to and following the execution of a license. In foreign countries such as Korea, Japan, China and certain South American countries, we work with representative firms. Generally, our sales team consists of qualified engineers who are located in California, Massachusetts, Illinois, Texas, North Carolina, Canada, the United Kingdom, Germany, Israel, Taiwan, Hong Kong, Singapore, Korea and Japan providing coverage of the U.S., Europe and Asia. The sales team is supported by FAEs and development engineers that work directly with customers on their new product developments. We manage a number of marketing programs designed to communicate our capabilities and benefits to broadband access equipment manufacturers. Our Internet site is an important marketing tool where a wide range of information is available including product information, white papers, application notes, press releases, contributed articles and presentations. In addition we participate in industry trade shows, technical conferences and technology seminars, conduct press tours and publish technical articles in industry journals. Research and Development As of June 6, 2001, we had 258 employees engaged in research and development based in California, Massachusetts, North Carolina, England and Israel. Of these employees, 134 have advanced degrees, including 27 with Ph.D.s. Several individuals were early developers in analog modem software, voice algorithms, IP telephony and ATM technologies. Since mid-1998, we have invested a significant portion of our research and development expenditures in the development of Beryllium and Boron and associated software to address the ADSL market. Consistent with our strategy to enhance our capabilities by pursuing selective acquisitions, we acquired D2 Technologies, Inverness Systems, Agranat Systems and Excess Bandwidth, each of which creates new market opportunities for us. We believe that we must continue to innovate, extend the range and enhance our products and services to maintain our leadership position. We cannot be sure that our research and development efforts will result in the introduction of a new product or product enhancements or that any new product will achieve market acceptance. We will invest further to expand our research and development staff and capabilities. Our research and development expenditures were $37.7 million, $15.0 million and $9.3 million for the fiscal years ended April 1, 2001, April 2, 2000, and March 31, 1999, respectively. Manufacturing We outsource the wafer manufacturing, assembly, testing, warehousing and shipment of all of our semiconductors. This fabless semiconductor model allows us to focus our resources on the design, development, marketing and sales of our products. Our Helium and Lithium communications processors, our Magnesium line of voice processors and our Neon AFE (analog front end) product, have all been sourced from high-quality suppliers that deliver fully assembled and tested products. For our Beryllium, Helium 200 and Helium 210 communications processors, and our Aluminum 200 g.shdsl PHY and accompanying Aluminum 200 AFE, we separately outsource the wafer fabrication, assembly and test functions from different contractors. Employing the services of the world's two top wafer foundries, as well as the skills of two of the world's foremost assembly and test suppliers, has served to dramatically improve manufacturing efficiencies and lower overall product costs. 11 The Helium and Lithium ASSP products incorporate embedded ARM RISC microprocessors and are supplied by companies that have an ARM license. In June 1999, we entered into a per semiconductor design license agreement with ARM, the worldwide leader in silicon intellectual property, which allows us to select foundry suppliers that best meet our quality, delivery and cost objectives. Our Beryllium, Helium 200 and Helium 210 communications processors are supplied by United Microelectronics Corporation ("UMC") under the provisions of the ARM license. We additionally and similarly have licensed microprocessor cores from MIPS to enable Virata to choose it's preferred worldwide supplier with respect to wafer fabricating our symmetric family of products; in this case, Taiwan Semiconductor Manufacturing Company, Ltd ("TSMC"). We have expanded our operations team so that we are able to assume more of the manufacturing and quality control responsibilities as well as develop and maintain contractor relationships with multiple suppliers. Given our reliance on third party suppliers, including semiconductor foundries, for substantially all of our semiconductor requirements, we have taken action to better ensure that we can obtain products within the time frames and in the volumes required by us at an affordable cost. For example, we have a guaranteed capacity and pricing commitment from both UMC and TSMC, which covers all Virata-required wafers through calendar 2001. However, on some occasions we have experienced delays and may in the future experience delays in receiving semiconductors from these foundries. Any problems associated with the delivery, quality or cost of the assembly and testing of our products could impact our business, financial condition and results of operations. Our inventory storage and warehousing function is contracted to a global freight forwarding service provider. We also drop ship from several of our third party manufacturing locations, enabling more timely product delivery to our worldwide customer base. Our ordering systems undergo continual business- process-level improvements, resulting in shortened order commit lead times and product sourcing cycle times. We only employ standard processes at high-quality, high-volume manufacturers. We have undergone third party quality and reliability evaluations of our products, which resulted in the successful certification of our semiconductors for high-volume, commodity-type applications. Virata was ISO-9002 certified in 2000 for a three-year period, and recently successfully passed its one-year surveillance audit. Competition The communications semiconductor market is intensely competitive and characterized by rapid technological change, evolving standards, short product life cycles and price erosion. Major competitive factors in the market we address include technical innovation, product features and performance, level of integration, reliability, price, total system cost, time-to-market, customer support and reputation. We believe that while today no other single company offers a competing integrated solution, there is competition with respect to individual elements of our solution. We also believe that competition may increase substantially as the introduction of new technologies and potential regulatory changes create new opportunities for established and emerging companies. We face competition from semiconductor device suppliers, software development companies and vertically integrated telecommunications equipment vendors. We believe our principal competitors for each of our products include: . Helium and Lithium, our PHY-independent ASSPs: devices from Intel, Texas Instruments and Motorola; . Beryllium, our PHY-inclusive, ADSL products: devices from Alcatel Microelectronics, Analog Devices, Centillium Technology, Mindspeed, GlobeSpan, Lucent Technologies and Texas Instruments; . Software: operating systems and software stacks from Wind River Systems and its recently acquired subsidiary, Integrated Systems; and networking and protocol layer software from, Microsoft; Intel and Mindspeed; and voice software from Broadcom through their 1999 acquisition of Hothaus and Texas Instruments through their 1999 acquisition of Telogy. 12 In addition, there have been a number of announcements by other semiconductor companies that they intend to enter the market segments adjacent to or addressed by our products, including Broadcom and Ishoni as Helium and Lithium competitors, GlobeSpan as a Beryllium competitor, and Linux shareware as a software competitor. Many of the companies that compete, or may compete against us in the future, have longer operating histories, greater name recognition, larger installed customer bases and significantly greater financial, technical and/or marketing resources. As a result, they may be able to respond more quickly to changing customer circumstances or to devote greater resources to the development, promotion and sale of their products than we can. We cannot be sure that our current or future competitors will not develop and introduce new products that will be priced lower, provide superior performance or achieve greater market acceptance than our products. Furthermore, current or potential competitors have established, or may establish, cooperative relationships among themselves or with third parties to increase the ability of their products to address the needs of our prospective customers. Accordingly, it is possible that new alliances among our competitors will emerge and rapidly acquire market share, which would harm our business. In addition, many of our customers and potential customers have substantial technological capabilities and financial resources. Some customers have already developed, or in the future may develop, technologies that will compete directly with our products and services. Because these companies do not purchase all of their semiconductors from suppliers such as us, if they displace our customers in the equipment market, our customers would no longer need our products, and our business, financial condition and results of operations would be seriously harmed. Given the highly competitive environment in which we operate, we cannot be sure that any current competitive advantages enjoyed by our products will be sufficient to establish or sustain our position in the market. Any increase in price from our suppliers or other competition could result in erosion of our market share and could harm our business, financial condition and results of operations. We cannot be sure that we will have the financial resources, technical expertise or marketing and support capabilities to continue to compete successfully. Intellectual Property We rely primarily on a combination of patents, copyrights, trademarks, trade secret laws, contractual provisions, licenses and maskwork protection to protect our intellectual property. We also enter into confidentiality agreements with our employees, consultants and customers and seek to control access to, and distribution of, our other proprietary information. However, these measures afford only limited protection. There is no guarantee that such safeguards will protect our intellectual property and other valuable competitive information. Our success depends significantly upon our ability to protect our intellectual property. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or obtain and use information that we regard as proprietary. Our competitors may also independently develop similar technologies. In addition, in the past, competitors have recruited our employees who have had access to our proprietary technologies, processes and operations. Our competitors' recruiting efforts, which we expect will continue, expose us to the risk that such employees will misappropriate our intellectual property. Furthermore, the laws of some foreign countries do not protect our proprietary rights as fully as do the laws of the United States. Many U.S. companies have encountered substantial infringement problems in such countries, some of which are countries in which we have sold and continue to sell products. There is a risk that our means of protecting our proprietary rights may not be adequate. Our failure to adequately protect our proprietary rights may seriously harm our business. As of June 20, 2001, we have been granted ten patents in the United States, with a number of counterpart patents in other countries. In addition, we have 28 patent applications pending in the United States. We also 13 have counterpart patent applications pending in various countries including the United Kingdom and a number of countries in Europe and Asia. These patents may never be issued. Even if these patents are issued, taken together with our existing patents, they may not provide sufficiently broad protection to protect our proprietary rights, or they may prove to be unenforceable. We also utilize unpatented proprietary know-how and trade secrets and employ various methods to protect our trade secrets and know-how. From time to time, we may desire or be required to renew or to obtain licenses from others in order to further develop and market commercially viable products effectively. We cannot be sure that any necessary licenses will be available or will be available on reasonable terms. We have registered and/or filed for registration a number of the following trademarks in the United States and a number of countries in Europe and Asia: "Virata," "ATMOS" and "ATOM", Virata Logo, "ISOS," "Integrated Software On Silicon". "Proton," "Hydrogen," "Helium," "Lithium," "Beryllium," "Boron" and "Neon" are also trademarks of Virata Corporation. Employees As of June 6, 2001, we had 408 full-time employees and contractors in our worldwide operations. Of that total, 258 were primarily engaged in engineering, 72 were engaged in sales and marketing, 14 were engaged in our manufacturing operations and the remainder were engaged in information technology, financial and administrative functions. As of June 6, 2001, our employees were employed at the following locations: . 258 of our employees were employed in North America; . 92 of our employees were employed in the United Kingdom and Europe; . 43 of our employees were employed in Israel; . 15 of our employees were employed in Asia; None of our employees are covered by, nor are we a party to, any collective bargaining agreement. We believe our employee relations are good. 14 Executive Officers and Directors As of June 6, 2001, the executive officers and directors of Virata were as follows:

Charles Cotton has been our Chief Executive Officer and a member of our board of directors since September 1997. Mr. Cotton joined us in January 1995, first as a consultant, and then in August 1995 as our General Manager, Europe, and was subsequently promoted to Chief Operating Officer in July 1996. From January 1991 to December 1995, Mr. Cotton was an independent consultant. In 1990, he served as Chief Executive Officer of Shandwick Europe, a public relations consulting firm. From 1988 to 1989, Mr. Cotton served as President of Thermal Scientific and as a Director of its parent company, Thermal Scientific plc. From 1983 to 1986, he served in a variety of international marketing and operations functions for Sinclair Research. Mr. Cotton holds an honors degree in Physics from Oxford University. Andrew Vought joined us in May 1996 as Chief Financial Officer and Secretary and was named Senior Vice President of Finance in September 1997. From January 1995 to May 1996, Mr. Vought founded and served as a General Partner of Cheyenne Capital Corporation, a private venture capital firm. From May 1990 to July 1994, Mr. Vought served as Chief Financial Officer of Micro Power Systems, an analog semiconductor company. Mr. Vought has also held senior finance and manufacturing management positions with Diasonics and the European semiconductor operations of Texas Instruments. Mr. Vought serves on the board of directors of SCM Microsystems Inc. a supplier of digital access control and connectivity solutions. Mr. Vought holds a M.B.A. from the Harvard Business School and a B.S. in Finance and a B.A. in Environmental Studies from the University of Pennsylvania. Martin Jackson is our Chief Technology Officer and has directed new product development since joining us in April 1994. Prior to joining us, Mr. Jackson was a co-founder and Vice President of Technology of EO-formerly Active Book Company. Mr. Jackson also co-founded Tadpole Technology, a developer of high performance computer boards. Mr. Jackson is acknowledged as a leader in the application of asynchronous transfer mode technology for provisioning broadband in the local loop and serves on the board of directors of the DSL Forum. Mr. Jackson holds an M.A. in Electrical Sciences from the University of Cambridge. Thomas Cooper is our Senior Vice President, Corporate Development and has been employed by us in various capacities since December 1994. Prior to joining us, Mr. Cooper served as Vice President of Distribution for Network Equipment Technologies Inc., an early entrant into in the asynchronous transfer mode market, from 1992 to December 1994. He holds a M.B.A. from the University of Toledo (Ohio) and a B.A. in English from Hamilton College. 15 John Graham joined us in July 2000 as Vice President--Human Resources. Prior to joining us Mr. Graham was the Resourcing & Development Director at Marconi Plc, before which he held the same position with BAE Systems where he worked from 1991 to 1998. Mr. Graham was the HR & Customer Services Director at Orange the mobile network company, prior to which he held senior HR positions in the automotive and computer industries, he also ran a Recruitment & Search Consultancy. Mr. Graham holds an honors degree in Management Sciences from the University of Manchester Institute of Science & Technology. Duncan Greatwood became our Vice President, Marketing, and previously served as our Vice President, European Sales since joining us in November 1997. Prior to joining us, Mr. Greatwood held a variety of management positions in the software engineering and marketing functions of Madge Networks, a network equipment company, from 1989 to November 1997. At Madge Networks, Mr. Greatwood was responsible for activities in the areas of voice-over-IP (Internet Protocol) and multiservice networking. Mr. Greatwood holds a degree in Mathematics from Oxford University and a M.B.A. from London Business School. Daniel Karr became our Vice President, Worldwide Sales in August 1999. Prior to joining us, Mr. Karr was Vice President of Worldwide Sales at S3, a supplier of multimedia hardware and software for the PC market, from April 1996 to August 1999. From January 1988 to April 1996, Mr. Karr held various positions at Cirrus Logic, a manufacturer of integrated circuits, where his last position was Sales Director. Mr. Karr earned a B.A. in Physics and Mathematics from Linfield College. Arthur Miller joined Virata in October 2000 as Vice President of Product Development Integration and was promoted to Vice President of Worldwide Engineering in January 2001. Prior to joining us, Mr. Miller was Vice President of Marketing for ZiLOG's communications business from January 2000 through September 2000. From 1984 through 1999, Mr. Miller held senior management positions with Motorola, most recently as Director of Business Development for their Data Communications and Networking Businesses in the U.S. and Europe, Middle East and Africa. Prior to joining Motorola, Mr. Miller held management positions with Texas Instruments. Mr. Miller holds a B.S. in Math from the USAF Academy; an MS EE from Massachusetts Institute of Technology (MIT); and an MBA from St. Edwards University. Dr. Hermann Hauser is one of our co-founders and has served as our Chairman since March 1993. Mr. Hauser also serves as a member of the Executive Committee of the Board of Directors. Dr. Hauser's principal occupation is Director of Amadeus Capital Partners Ltd., a venture capital fund management company a position he has held since December 1997. Dr. Hauser has also co-founded more than 20 other high technology companies, including Acorn Computer Group plc, EO Ltd., Harlequin, IXI Ltd., Vocalis, Electronic Share Information, Advanced Displays Limited and SynGenix. Dr. Hauser holds a Ph.D. in Physics from Cambridge University. Marco De Benedetti has served as a member of our board of directors since July 1994. Mr. De Benedetti has been the Chairman and Managing Director of Telecom Italia Mobile S.p.A., Europe's largest cellular phone operator since July 1999. Prior to joining Telecom Italia Mobile, Mr. De Benedetti was chairman of Infostrada S.p.A., a company controlled by Olivetti operating as an alternative fixed line carrier in Italy from 1996 to July 1999. From 1990 to 1996, Mr. De Benedetti held various positions in the Olivetti Group where he became Marketing Director in 1995. Prior to joining Olivetti in 1990, Mr. De Benedetti worked for the investment bank Wasserstein, Perella & Co. in mergers and acquisitions from 1987 to 1989. Mr. De Benedetti holds a M.B.A. from the Wharton School of the University of Pennsylvania and a B.S. in Economics and History from Wesleyan University. Gary Bloom has served as a member of our board of directors since February 1999. Mr. Bloom also serves as a member of the Compensation Committee of the Broad of Directors. Mr. Bloom has been the Chief Executive Officer, President and a director of Veritas Software since November 2000. Prior to that time, Mr. Bloom served as Executive Vice President of Oracle Corporation and was employed by Oracle from September 1986 to November 2000. Mr. Bloom received a B.S. in Computer Science from California Polytechnic State University at San Luis Obispo. 16 Professor Andrew Hopper is one of our co-founders and has served as a member of our board of directors since March 1993. Since November 1997, Professor Hopper has been the Professor of Communications Engineering within the Department of Engineering at Cambridge University and prior to that he was a Reader. Since 1986, Professor Hopper has also been the Managing Director of the Olivetti Research Laboratory, now AT&T Laboratories-Cambridge. Professor Hopper is considered one of the early developers of asynchronous transfer mode technology and has over 20 years experience in networking, computer systems and multimedia. Professor Hopper is also involved with the commercialization of technology with a number of Cambridge-area firms. Professor Hopper is a Fellow of the Royal Academy of Engineering and holds a Ph.D. from Cambridge University. Peter T. Morris has served as a member of our board of directors since May 1995. Mr. Morris also serves as a member of the Executive Committee and the Audit Committee of the Board of Directors. Mr. Morris is a General Partner of New Enterprise Associates, a private venture capital firm, in Menlo Park, California, where he has been employed since 1992. Mr. Morris specializes in information technologies, with a focus on communications and the Internet. His current board memberships include Gadzoox Networks Inc., Packeteer Inc. and several private companies. Before joining New Enterprise Associates, Mr. Morris served in various capacities with Telebit Corporation from 1987 to 1991. Prior to that he was with Montgomery Securities, an investment bank, from 1985 to 1987, and Bain & Company, a management consultancy firm, from 1980 to 1982. Mr. Morris holds a M.B.A. and a B.S. in Electrical Engineering from Stanford University. Patrick Sayer has served as a member of our board of directors since June 1998. Mr. Sayer also serves as a member of the Audit Committee of the Board of Directors. Mr. Sayer is a Managing Director at Lazard, a leading global investment bank, where he has overseen the Internet and Technology sector since 1999. Since 1995, Mr. Sayer has also held the position of General Partner in Lazard (Paris). Mr. Sayer has worked within Lazard since 1992, holding positions in the international advisory group, the corporate finance department and the mergers and acquisitions department. In addition, Mr. Sayer is a director and an investment advisor of AZEO, a public holding company, and is a director of the following public companies: Sidel, Ipsos, Infogrames Entertainment, and Oberthur Card Systems. Mr. Sayer is a graduate of Ecole Polytechnique and Ecole des Mines de Paris. Giuseppe Zocco has served as a member of our board of directors since June 1998. Mr. Zocco also serves as a member of both the Audit Committee and the Compensation Committee of the Board of Directors. Mr. Zocco is a General Partner of Index Ventures, a private venture capital firm based in Geneva, Switzerland, which he joined in 1996. Prior to joining Index Ventures, Mr. Zocco was a management consultant with McKinsey & Company from 1988 to 1996, working in several of its European offices and its EuroCenter, a special consulting unit focused on Pan-European clients. Mr. Zocco holds a M.B.A. from Stanford Business School, a B.A. in Finance from Bocconi University in Milan, and an I.E.P. from the London Business School. He is a director of Belle Systems A/S and Evolve Software, Inc. Director Resignation Bandel Carano resigned as a director effective May 12, 2001. The Board of Directors accepted his resignation on May 22, 2001. The seat is currently vacant. 17 Risk Factors The risks described below and the other information included in this Annual Report should be carefully considered. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations. If any of the following risks actually occur, our business, financial condition or results of operations could be harmed. These risk factors are not intended to represent a complete list of the general or specific risk factors that may affect us. Because we have a limited operating history selling products to the digital subscriber line, or DSL, market, we cannot be sure that we can successfully implement our business strategy We have not had a long history of selling our products to the DSL market or generating significant revenues and many of our products have only recently been introduced. Furthermore, we have limited historical financial data that can be used in evaluating our business prospects and in projecting future operating results. For example, we cannot forecast operating expenses based on our historical results because they are limited, and we are instead required to forecast expenses based in part on future revenue projections. Most of our expenses are fixed in the short term and we may not be able to quickly reduce spending if our revenue is lower than we had projected. Therefore net losses in a given quarter could be greater than expected. In addition, our ability to accurately forecast our revenue going forward is limited which makes it difficult to predict in which quarter sales will occur. You must consider our prospects in light of the risks, expenses and difficulties we might encounter because we are at an early stage of development in a new and rapidly evolving market. Many of these risks are described under the sub-headings below. We may not successfully address any or all of these risks and our business strategy may not be successful. Because we may not be able to achieve or sustain profitability or positive cash flow, the price of our stock may decline and we may not be able to implement our business strategy We have not reported an operating profit for any fiscal year since our incorporation and have an accumulated deficit of $248.5 million at April 1, 2001. We expect to continue to incur net losses, and these losses may be substantial. Due to our continuing substantial capital expenditures and product development, sales, marketing and administrative expenses, we will need to generate significant revenues to achieve profitability and positive cash flow. We cannot be sure that we will be able to generate such revenues or achieve profitability or positive cash flow. Even if we do achieve profitability and positive cash flow, we may not be able to sustain or increase profitability or cash flow on a quarterly or annual basis. Our ability to generate future revenues will depend on a number of factors, many of which are beyond our control. These factors include: . the rate of market acceptance of high speed network access; . the rate of market acceptance of our products and the demand for equipment that incorporates our products; . changes in industry standards governing DSL technologies; . the extent and timing of new customer transactions; . personnel changes, particularly those involving engineering and technical personnel; . regulatory developments; and . general economic trends. Due to these factors, we cannot forecast with any degree of accuracy what our revenues will be in future periods and we may not be able to achieve or sustain profitability or positive cash flow. Our ability to continue to operate our business and implement our business strategy may thus be hampered and the value of our stock may decline. 18 Because our operating results from quarter to quarter may fluctuate, the price of our stock may decline Our revenues, expenses and operating results have fluctuated in the past and are likely to fluctuate significantly in the future on a quarterly and an annual basis due to a number of factors, many of which are outside our control. For example, our results of operations have been negatively affected by the following: . the loss of or decrease in sales to a major customer or failure to complete significant transactions; . the timing and size of semiconductor orders from, and shipments to, our existing and new customers; . unexpected delays in introducing new or enhanced products, including manufacturing delays; . the volume and average cost of products manufactured; and . the timing and size of expenses, including expenses to develop new products and product improvements. Accordingly, our revenues, expenses and results of operations could vary significantly in the future, and you should not rely upon period-to-period comparisons as indications of future performance. Such fluctuations may make our stock unattractive to investors and result in a decline in the price of our stock. Because our business is dependent upon the broad deployment of DSL services by telecommunications service providers, we may not be able to generate substantial sales of our products if such deployment does not occur Our products are incorporated in equipment that is targeted at end-users of DSL technologies. Consequently, the success of our products may depend upon the decision by telecommunications service providers to broadly deploy DSL technologies and the timing of such deployment. If telecommunications service providers do not offer DSL services on a timely basis, or if there are technical difficulties with the deployment of DSL services, sales of our products may decline, which would have a negative effect on our results of operations. Factors that may impact this deployment include: . a prolonged approval process, including laboratory tests, technical trials, marketing trials, initial commercial deployment and full commercial deployment; . the development of a viable business model for DSL services, including the capability to market, sell, install and maintain DSL services; . cost constraints, such as installation costs and space and power requirements at the telecommunications service provider's central office; . evolving industry standards for DSL technologies; and . government regulation. Because DSL deployments may utilize an alternative CPE solution, we may not be able to generate substantial sales of our products and our results of operations may be negatively impacted Even if telecommunications service providers broadly deploy DSL technologies, such deployments may move away from bridges and routers as the dominate CPE solution and utilize low-end USB modems or another solution where our products are not required or our market share is substantially smaller. In such an event, if we are unable to attain or increase our market share with respect to the alternative deployment solution, then the demand for our products may decrease, which would have a negative impact on our operating results. In addition, even if we are able to participate in the market, the margins we realize in connection with any such alternative solution may be substantially less than the margins we currently realize. A significant decrease in our margins would have a negative impact on our results of operations. 19 Because our products are components of other equipment, if equipment manufacturers do not incorporate our products in their equipment, we may not be able to generate adequate sales of our products Our products are not sold directly to the end-user; rather, they are components of other products. As a result, we rely upon equipment manufacturers to design our products into their equipment. We further rely on this equipment to be successful. If equipment that incorporates our products is not accepted in the marketplace, we may not achieve adequate sales volume of our products, which would have a negative effect on our results of operations. Because the requirements of our customers frequently change, we may not be able to anticipate trends in the markets for our products, which could result in a decline in sales of our products We must anticipate the price, performance and functionality requirements of equipment manufacturers who design DSL equipment. We must also successfully develop products that meet these requirements and make these products available on a timely basis and in sufficient quantities. If we do not anticipate trends in the DSL market and fail to meet the requirements of manufacturers of DSL equipment, we may be unable to generate substantial sales of our products, which would have a negative effect on our results of operations. While we have a strategy of licensing and partnering with as many key participants in our markets as possible, some equipment manufacturers will be more successful than others in developing and marketing their products that incorporate our semiconductor products and it is difficult for us to predict which of these customers will generate revenues for us. Our product sales are almost completely dependent upon the relative success of our customers in the marketplace for high-speed network access equipment. Because we depend on third party foundries to manufacture, assemble and test our products, we may experience delays in receiving semiconductor devices We do not own or operate a semiconductor fabrication facility. Rather, our semiconductor devices are generally manufactured at independent foundries. We intend to continue to rely on third-party foundries and other specialist suppliers for all of our manufacturing, assembly and testing requirements. However, these foundries are not obligated to supply products to us for any specific period, in any specific quantity or at any specific price, except as may be provided in a particular purchase order that has been accepted by one of them. As a result, we cannot directly control semiconductor delivery schedules, which could lead to product shortages, quality assurance problems and increases in the costs of our products. In addition, we have occasionally experienced delays in receiving semiconductor devices from foundries due to foundry scheduling and process problems. To date, such delays have not had a material effect on our results of operations. However, we may experience delays in the future and we cannot be sure that we will be able to obtain semiconductors within the time frames and in the volumes required by us at an affordable cost or at all. Any disruption in the availability of semiconductors or any problems associated with the delivery, quality or cost of the fabrication assembly and testing of our products could significantly hinder our ability to deliver our products to our customers and may result in a decrease in sales of our products. If the foundries we currently use are unable to provide us with semiconductors, we may be required to seek a new manufacturer of our semiconductors, and we cannot be certain that a new manufacturer of our semiconductors will be available. Furthermore, switching to a new manufacturer could require six months or more and would involve significant expense and disruption to our business. Because we depend on third party foundries, if there is a shortage in worldwide foundry capacity, we may not be able to obtain sufficient manufacturing capacity to meet our requirements From time to time there may be shortages in worldwide foundry capacity due to increases in semiconductor demand or other factors. In the event of such a shortage, we may not be able to obtain a sufficient allocation of foundry capacity to meet our product needs. In addition, such a shortage could lengthen our products' manufacturing cycle and cause a delay in the shipments of our products to our customers. This could ultimately lead to a loss of sales of our products and have a negative effect on our results of operations. 20 Because we may be required to enter into financial and other arrangements with foundries in order to secure foundry capacity, our earnings or the ownership of our stockholders may be diluted Allocation of a foundry's manufacturing capacity may be influenced by a customer's size or the existence of a long-term agreement with the foundry. To address foundry capacity constraints, other semiconductor suppliers that rely on third-party foundries have utilized various arrangements, including equity investments in or loans to independent component manufacturers, in exchange for guaranteed production capacity, joint ventures to own and operate foundries, or "take or pay" contracts that commit a company to purchase specified quantities of components over extended periods. While we are not currently a party to any of these arrangements, we may enter into such arrangements in the future. We cannot be sure, however, that these arrangements will be available to us on acceptable terms or at all. Any of these arrangements could require us to commit substantial capital. The need to commit substantial capital could require us to obtain additional debt or equity financing, which could result in dilution to our earnings or the ownership of our stockholders. We cannot be sure that this additional financing, if required, would be available when needed or, if available, could be obtained on terms acceptable to us. Because the manufacture of our products is complex, the foundries on which we depend may not achieve the necessary yields or product reliability that our business requires The manufacture of our products is a highly complex and precise process, requiring production in a highly controlled environment. Changes in manufacturing processes or the inadvertent use of defective or contaminated materials by a foundry could adversely affect the foundry's ability to achieve acceptable manufacturing yields and product reliability. If the foundries we currently use do not achieve the necessary yields or product reliability, our customer relationships could suffer. This could ultimately lead to a loss of sales of our products and have a negative effect on our results of operations. Because we depend on a license from Advanced RISC Machines to manufacture certain of our planned communicator processor products, our loss of or inability to maintain the license could result in increased costs or delays in the manufacturing of our products Our communicator processor products feature embedded ARM RISC microprocessors and, accordingly, are required to be manufactured under a license from Advanced RISC Machines, or ARM, the owner of the intellectual property to the ARM RISC microprocessor. In the past, we were required to use foundries with an ARM license for the manufacture of our communicator processor products. In June 1999, we obtained a per semiconductor design ARM license, which means that we are now able to select foundry suppliers that best meet our quality, delivery and cost objectives regardless of whether they have their own ARM license or not. With this greater flexibility, we are able to assume more of the manufacturing and quality control responsibilities, including contracting for wafer processing, assembly and testing from separate suppliers. If we lose or are unable to maintain the per semiconductor design license, we would be required to seek alternative fabrication facilities in our manufacturing of our communicator processor products. Without the ARM license, the number of fabrication facilities we could use in our manufacturing would be substantially reduced to those fabrication facilities that themselves have been directly licensed by Advanced RISC Machines. Accordingly, the loss of, or our inability to maintain the ARM license may result in increased costs or delays in our ability to manufacture our products and could harm our results of operations. In addition, ARM is only required to indemnify us against intellectual property infringement claims up to a specified dollar amount. Because we rely on the technology of third parties, the loss of or inability to obtain the third party technology could result in increased costs or delays in the production or improvement of our products We currently license needed access to technology of third parties to develop and manufacture our products, including licenses from Advanced RISC Machines, Broadcom, and Wind River Systems, Inc. If any of these third party providers were to change their product offerings or terminate our licenses, we would incur additional developmental costs and, perhaps, delays in production, or be forced to modify our existing or 21 planned software product offerings. In addition, if the cost of any of these third party licenses or products significantly increases, we could suffer a resulting increase in costs or delays in our ability to manufacture our products or provide complete customer solutions and this could harm our results of operations. We cannot be sure that such third party licenses or substitutes will be available on commercially favorable terms. Because our customer base is concentrated, the loss of one or more of our customers may result in a loss of a significant amount of our revenues A relatively small number of customers account for a large percentage of our total revenues. We expect this trend to continue. Our business will be seriously harmed if we do not generate as much revenue as we expect from these customers, experience a loss of any of our significant customers or suffer a substantial reduction in orders from these customers. For the fiscal year ended April 1, 2001, Westell Technologies and Siemens accounted for 19.6% and 14.6%, respectively, of our total revenues. For the fiscal year ended April 2, 2000, Orckit Communications and Westell Technologies accounted for 23.1% and 15.1%, respectively, of our total revenues. For the fiscal year ended March 31, 1999, Com21 and Orckit Communications accounted for 22.6% and 15.7%, respectively, of our total revenues. However, in order to minimize customers' inventory build up and maintain our strong customer relationships, we decided in December 2000 to reschedule and/or cancel semiconductor shipments that our customers had contractually agreed to receive in the six months ended April 1, 2001 and to revise the shipment schedule of the remaining products to Westell Technologies and to a limited number of our other customers in Asia and the United States. Our future success depends in significant part upon the decision of our customers to continue to purchase products from us. Furthermore, it is possible that equipment manufacturers may design and develop internally, or acquire, their own semiconductor technology, rather than continue to purchase semiconductors from third parties like us. If we are not successful in maintaining relationships with key customers and winning new customers, sales of our products may decline. In addition, because a significant portion of our business has been and is expected to continue to be derived from orders placed by a limited number of large customers, variations in the timing of these orders can cause significant fluctuations in our operating results. Because manufacturers of DSL equipment may be reluctant to change their sources of components, if we do not achieve design wins with manufacturers of DSL equipment, we may be unable to secure sales from these customers in the future Once a manufacturer of DSL equipment has designed a supplier's semiconductor into its products, the manufacturer may be reluctant to change its source of semiconductors due to the significant costs associated with qualifying a new supplier. Accordingly, our failure to achieve design wins with manufacturers of DSL equipment which have chosen a competitor's semiconductor could create barriers to future sales opportunities with these manufacturers. Because our customers are not subject to binding agreements, we cannot be certain that we will sell any of our products Achieving a design win with a customer does not create a binding commitment from that customer to purchase our products. Rather, a design win is solely an expression of interest by potential customers in purchasing our products and is not supported by binding commitments of any nature. Accordingly, a customer can choose at any time to discontinue using our products in their designs or product development efforts. Even if our products are chosen to be incorporated into a customer's products, we still may not realize significant revenues from that customer if their products are not commercially successful. In December 2000, we rescheduled and/or cancelled semiconductor shipments that our customers had contractually agreed to receive in the six months ended April 1, 2001 and revised the shipment schedule of the remaining products to Westell Technologies and to a limited number of our other customers in Asia and the United States. Therefore, we cannot be sure that any design win will result in purchase orders for our products, or that these purchase orders will not be later canceled. Our inability to convert design wins into actual sales and any cancellation of a purchase order could have a negative impact on our financial condition and results of operations. 22 Because our customers may cancel orders, we may not be able to recoup expenses incurred in anticipation of sales of our products We work closely with our customers to determine their future product needs and receive a rolling forecast for products. We have incurred and expect to continue to incur expenses based upon these sales forecasts. However, our customer purchase agreements generally contain no minimum purchase requirements and customers typically purchase our products pursuant to short- term purchase orders that may be canceled without charge if notice is given within an agreed-upon period. Therefore, we cannot be sure that the actual product revenues which we will receive will be commensurate with the level of expenses that we will incur based on forecasts we receive from our customers in any future period. As a result, cancellations, deferrals or reductions in pending purchase orders could have a negative impact on our financial condition and results of operations. Because most of our revenues have been and will be derived from a limited number of products, we may not be able to generate sufficient revenues to sustain our business if any of these products fail to gain market acceptance For the fiscal year ended April 1, 2001, approximately 95.5% of our semiconductor revenues were generated from sales of our Helium products. For the fiscal year ended April 2, 2000, approximately 44.6%, 30.9%, and 24.5%, respectively, of our semiconductor revenues were generated from sales of our Helium, Hydrogen, and Proton Family products. We expect that a substantial portion of our total revenues will continue to be derived from our Helium, Helium derivatives and Beryllium. Therefore, broad market acceptance of the Helium, Helium derivatives and Beryllium is critical to our success. We cannot be sure that our products will attain broad market acceptance. The failure of our products to achieve broad market acceptance could result in a decrease in our revenues, which would have a negative impact on our results of operations and financial condition. Because our products typically have lengthy sales cycles, we may experience substantial delays between incurring expenses related to research and development and the generation of sales revenue and may not ultimately sell a large volume of our products It often takes more than one year, occasionally more than two years, for us to realize volume shipments of our semiconductor products after we first contact a customer. We first work with customers to achieve a design win, which may take six months or longer, at which time we sell a source code license. Our customers then complete the design, testing and evaluation of their systems and begin the marketing process, a period which typically lasts an additional three to six months or longer. As a result, a significant period of time may elapse between our sales efforts and our realization of revenues, if any, from volume purchasing of our products by our customers. Because our products are complex, the detection of errors in our products may be delayed, and if we deliver products with defects, our credibility will be harmed, and the sales and market acceptance of our products may decrease Our products are complex and may contain errors, defects and bugs when introduced. If we deliver products with errors, defects or bugs, our credibility and the market acceptance and sales of our products could be significantly harmed. Furthermore, the nature of our products may also delay the detection of any such error or defect. If our products contain errors, defects and bugs, then we may be required to expend significant capital and resources to alleviate these problems. This could result in the diversion of technical and other resources from our other development efforts. Any actual or perceived problems or delays may also adversely affect our ability to attract or retain customers. 23 Because defects in our products may give rise to product liability claims against us, we may be required to incur increased expenses and divert management resources away from our operations The existence of any defects, errors or failures in our products could lead to product liability claims or lawsuits against us or against our customers. In addition, we have agreed to indemnify certain of our customers in certain limited circumstances against liability from defects in our products. A successful product liability claim could result in substantial cost and divert management's attention and resources, which would have a negative impact on our financial condition and results of operations. Although we have not experienced any product liability claims to date, the sale and support of our products entail the risk of these claims. Because we are introducing industry standard compliant chip sets, we may be required to obtain licenses on adverse terms to sell industry standard compliant chip sets We have received correspondence, including a proposed licensing agreement, from Amati Corporation (which was acquired by Texas Instruments) stating that they believe that they own a number of patents that are required to be compliant with the American National Standards Institute, or ANSI, standard specification T1.413. This industry standard is based on the DMT line code. We have introduced products that we believe are compliant with this industry standard, and we may be required to obtain a license to these Amati patents. We are currently evaluating Amati's patents and proposed licensing terms. If these patents are valid and essential to the implementation of products that are compliant with this industry standard, then Amati may be required to offer us a license to use these patents on commercially reasonable, non- discriminatory terms. If these patents are valid, but not essential to the implementation of products that are compliant with this industry standard, and they apply to our products and we do not modify our products so they become non-infringing, then Amati would not be obligated to offer us a license on reasonable terms or at all. If we are not able to agree on license terms and as a result fail to obtain a required license, then we could be sued and potentially be liable for substantial monetary damages or have the sale of our products stopped by an injunction. We could also be subject to similar claims like the Amati claim by third parties in the future. Because we have significant operations in countries outside of the US, we may be subject to political, economic and other conditions affecting such countries that could result in increased operating expenses and regulation of our products Significant portions of our operations occur outside the United States. One of our principal subsidiaries is incorporated under the laws of, and its principal offices are located in, the United Kingdom. We also have a subsidiary and sales office in Taipei, Taiwan and sales offices in several other countries. In addition, on April 27, 2000, we completed the acquisition of Inverness Systems, Ltd, a privately-held corporation based in Israel. Our international operations are subject to a number of risks, including foreign currency exchange rate fluctuations; longer sales cycles; multiple, conflicting and changing governmental laws and regulations; protectionist laws and business practices that favor local competition; difficulties in collecting accounts receivable; and political and economic instability. In addition, in September 1999, Taiwan was affected by a significant earthquake. Recently there have been additional earthquakes and the risk of future earthquakes is significant due to the proximity of major earthquake fault lines in the area. Taiwan has also suffered from political unrest. Any future earthquakes, fire, flooding or other natural disasters, political unrest, labor strikes or work stoppages in Taiwan likely would result in the disruption of our operations at that facility. Finally, as a result of our acquisition of Inverness Systems, we are directly affected by the political, economic and military conditions affecting Israel. Major hostilities involving Israel, including current events, could significantly harm our business. Israel's economy has been subject to numerous destabilizing factors, including low foreign exchange reserves, fluctuations in world commodity prices, military conflicts and civil unrest. Although Israel has entered into various agreements with certain Arab countries and the Palestinian Authority, and various declarations have been signed in connection with efforts to resolve some of the economic and political problems in the Middle East, Israel is currently experiencing political and civil unrest. We cannot predict whether or in what manner these problems will be resolved. In addition, some of the officers and employees of Inverness are currently obligated to perform annual reserve duty in the Israeli armed forces and are subject to 24 being called to active duty at any time under emergency circumstances. We cannot assess or predict the full impact of these obligations on our workforce or business. Because we incur a charge for National Insurance Contribution on any gain in the per share price of our stock for stock options exercised by our United Kingdom employees, a significant rise in our stock price may harm our results of operations and cash flows Under the laws of the United Kingdom, we must record a charge for National Insurance Contribution on options incurred on any gain in our per share price for stock options granted to our United Kingdom employees. The charge is calculated in the United Kingdom as the difference between the market value of our common stock at the close of the period and the exercise price of the option multiplied by a 12.2% tax rate. The calculation is applied to all options issued to our UK employees, vested and unvested. Due to the significant movement in our per share price in the six months ended October 1, 2000, the charge recorded was $4.2 million, creating a cash payment obligation payable upon exercise of vested options by a UK employee. In October 2000, the Emerging Issues Task Force ("EITF") of the Financial Accounting Standards Board ("FASB") reached a consensus on Issue No. 00-16, "Recognition and Measurement of Employer Payroll Taxes on Employee Stock-Based Compensation, whereby employer payroll taxes should be recognized as a liability when the tax obligation is triggered, which is generally the date the stock option is exercised. Through October 1, 2000, we estimated and recorded this liability for the National Insurance Contribution based upon total outstanding stock options held by its employees in the United Kingdom. Beginning in the quarter ended December 31, 2000, we began recording an additional liability only upon the exercise of options granted subsequent to October 1, 2000 to employees in the United Kingdom. No additional liability was recorded in the six month period ended April 1, 2001. Accordingly, a significant rise in our stock price may result in recorded charges that may harm our results of operations and cash payment obligations. Because we sell a significant portion of our products in countries other than the US, we may be subject to political, economic and other conditions affecting such countries that could result in decreased revenue for our products International revenues accounted for 49.6% of our total revenues for the fiscal year ended April 1, 2001, 43.6% for the fiscal year ended April 2, 2000, and 40.3% for the fiscal year ended March 31, 1999. We expect that sales to our international customers will continue to account for a significant portion of our total revenues for at least the next 12 months. Accordingly, we are subject to the political, economic and other conditions affecting countries or jurisdictions other than the United States, including Israel, Europe and Asia. Any interruption or curtailment of trade between the countries in which we operate and their present trading partners, change in exchange rates or a significant downturn in the political, economic or financial condition of these countries could cause demand for and revenue from our products to decrease, cause our costs of doing business to increase or subject us to increased regulation including future import and export restrictions. Because we have expanded rapidly and future expansion may be required, we may lack the ability to manage this growth in our operations We have rapidly and significantly expanded our operations, including the number of our employees, the geographic scope of our activities and our product offerings. Recently, we completed the acquisitions of D2 Technologies, Inverness Systems, Excess Bandwidth, and Agranat Systems. Our continued success will depend significantly on our ability to integrate these new operations and new personnel. We expect that further significant expansion will be required to address potential growth in our customer base and market opportunities. If we are unable to manage growth effectively, we may not be able to take advantage of market opportunities, develop or enhance our products or our technical capabilities, execute our business plan or otherwise respond to competitive pressures or unanticipated requirements. To successfully manage the anticipated growth of our operations, we believe we must effectively be able to: . improve our existing and implement new operational, financial and management information controls, reporting systems and procedures; 25 . hire, train and manage additional qualified personnel; . expand and upgrade our core technologies; and . effectively manage multiple relationships with our customers, suppliers and other third parties. Because Excess Bandwidth has not completed development of its chip designs, we may not be able to effectively compete in the Symmetric DSL market Excess Bandwidth has only recently begun testing of its first communications processor designs. If the designs do not work as intended or require substantial redesign, we may not be able to introduce these communications processors as products and ship them to customers, or may be delayed in our introduction of products. Excess Bandwidth's design of its communications processors is dependent upon the efforts of Debajyoti Pal. The loss of Dr. Pal's services for any reason would delay or prevent the completion of the design of products by Excess Bandwidth. Excess Bandwidth licenses the imbedded microprocessor for its communications processors from MIPS Technologies, Inc. Loss of the MIPS license for any reason would require a redesign of the communications processors currently under development by Excess Bandwidth and could result in delay in introduction of products. If any of these events occur we would not realize significant revenues from the products under development by Excess Bandwidth. We may engage in future acquisitions that could dilute our stockholders' equity and harm our business, results of operations and financial condition Recently, we completed the acquisition of D2 Technologies, Inverness Systems, Excess Bandwidth and Agranat Systems. As part of our business strategy, from time to time, we expect to review opportunities to acquire and may acquire other businesses or products that will complement our existing product offerings, augment our market coverage or enhance our technological capabilities. Although we have no current agreements or negotiations underway with respect to any material acquisitions, we may make acquisitions of businesses, products or technologies in the future. However, we cannot be sure that we will be able to locate suitable acquisition opportunities. Future acquisitions by us could result in the following, any of which could seriously harm our results of operations or the price of our stock: . issuance of equity securities that would dilute our current stockholders' percentages of ownership; . large one-time write-offs; . the incurrence of debt and contingent liabilities; . difficulties in the assimilation and integration of the operations, personnel, technologies, products and the information systems of the acquired companies; . diversion of management's attention from other business concerns; . contractual disputes; . risks of entering geographic and business markets in which we have no or only limited prior experience; and . potential loss of key employees of acquired organizations. Use of our products requires significant training and support and because of our limited resources, we may not be able to support the demand for our products The development of equipment using our products requires significant training and support. If we are unable to provide this training and support for our products, more time may be necessary to complete the implementation process and customer satisfaction may be adversely affected. In addition, our suppliers may not 26 be able to meet increased demand for our products. We cannot be sure that our systems, procedures or controls or those of our suppliers will be adequate to support the anticipated growth in our operations or the demand for our products. This may result in a decline in the sales of our products and have a negative impact on our results of operations. Our executive officers and key personnel are critical to our business, and because there is significant competition for personnel in our industry, we may not be able to attract and retain such qualified personnel Our success depends to a significant degree upon the continued contributions of our executive management team, and our technical, marketing, sales customer support and product development personnel. The loss of significant numbers of such personnel could significantly harm our business, financial condition and results of operations. We do not have any life insurance or other insurance covering the loss of any of our key employees. Because our products are specialized and complex, our success depends upon our ability to attract, train and retain qualified personnel, including qualified technical, marketing and sales personnel. However, the competition for personnel is intense and we may have difficulty attracting and retaining such personnel. In addition, companies in the communications, software and semiconductor industries have frequently made unfair hiring practices claims against competitors who have hired away such companies' personnel. We cannot be sure that these claims will not be made against us in the future as we seek to hire qualified personnel, or that any of these claims would be decided in our favor. We may incur substantial costs in defending ourselves against any such claims, regardless of their merits. We have entered into employment agreements with our executive officers and certain other key employees that provide for set terms of employment. In addition, all of our employees in the United Kingdom and Israel have employment agreements governed by the laws of the United Kingdom and Israel. Our employment agreements do not contain anti-competition clauses. Because the markets in which we compete are highly competitive, and many of our competitors have greater resources us, we cannot be certain that our products will be accepted in the marketplace or capture market share The market for software and communications semiconductor solutions is intensely competitive and characterized by rapid technological change, evolving standards, short product life cycles and price erosion. We expect competition to intensify as current competitors expand their product offerings and new competitors enter the market. Given the highly competitive environment in which we operate, we cannot be sure that any competitive advantages enjoyed by our products would be sufficient to establish and sustain our products in the market. Any increase in price or other competition could result in erosion of our market share, to the extent we have obtained market share, and would have a negative impact on our financial condition and results of operations. We cannot be sure that we will have the financial resources, technical expertise or marketing and support capabilities to continue to compete successfully. We face competition from a variety of vendors, including software and semiconductor companies, which generally vary in size and in the scope and breadth of products and services offered. We also face competition from customers' or prospective customers' own internal development efforts. Many of the companies that compete or may compete in the future against us have longer operating histories, greater name recognition, larger installed customer bases and significantly greater financial, technical and marketing resources. These competitors may also have pre-existing relationships with our customers or potential customers. As a result, they may be able to introduce new technologies, respond more quickly to changing customer requirements or devote greater resources to the development, promotion and sale of their products than we can. Our competitors may successfully integrate the functionality of our software and communication processors into their products and thereby render our products obsolete. Further, in the event of a manufacturing capacity shortage, these competitors may be able to manufacture products when we are unable to do so. 27 We believe our principal competitors include or will include Alcatel Microelectronics, Analog Devices, Broadcom, Centillium Communications, Mindspeed, GlobeSpan, Intel, Lucent Technologies, Motorola and Texas Instruments. In addition, there have been a number of announcements by other semiconductor companies and smaller emerging companies that they intend to enter the market segments adjacent to or addressed by our products, including Broadcom and Ishoni as Helium and Lithium competitors, GlobeSpan as a Beryllium competitor, and Linux shareware as software competitor. Because the markets in which our customers compete are highly competitive, our customers may not be successful and they may not continue to purchase our products Many of our customers face significant competition in their markets. If our customers are unable to successfully market and sell their products that incorporate our products, these customers may cease to purchase our products, which may have a negative impact on our results of operations. Because the markets in which we compete are subject to rapid changes, our products may become obsolete or unmarketable The markets for our products and services are characterized by rapidly changing technology, short product life cycles, evolving industry standards, changes in customer needs, growing competition and new product introductions. If our product development and improvements take longer than planned, the availability of our products would be delayed. Any such delay may render our products obsolete or unmarketable, which would have a negative impact on our ability to sell our products and our results of operations. Because of changing customer requirements and emerging industry standards, we may not be able to achieve broad market acceptance of our products Our success is dependent, in part, on our ability to: . successfully develop, introduce and market new and enhanced products at competitive prices in order to meet changing customer needs; . respond effectively to new technological changes or new product announcements by others; . effectively use and offer leading technologies; and . maintain close working relationships with our key customers. We cannot be sure that we will be successful in these pursuits, that the growth in demand will continue or that our products will achieve market acceptance. Our failure to develop and introduce new products that are compatible with industry standards and that satisfy customer requirements or the failure of our products to achieve broad market acceptance could have a negative impact on our ability to sell our products and our results of operations. Because the development of new products requires substantial time and expense, we may not be able to recover our development costs The pursuit of necessary technological advances and the development of new products require substantial time and expense. Improvements to existing products or the introduction of new products by us or our competitors has the potential to provide lower cost alternatives to our existing products or to render these products obsolete, unmarketable or inoperable. The mere announcement of any improvement or new product could cause potential customers to defer or cancel purchases of existing products and services. Therefore, we cannot be sure that we will be able to recover the costs of the development of our products or succeed in adapting our business to advancements. 28 Because other high-speed data transmission technologies may compete effectively with digital subscriber line services, our products may not achieve anticipated unit growth DSL services are competing with a variety of different broadband data transmission technologies, including cable modems, satellite and other wireless technologies. If any technology that is competing with DSL technology is more reliable, faster, less expensive or has other advantages over DSL technology, then the demand for our semiconductors may decrease, which would have a negative impact on our operating results. Because price competition among our competitors and volume purchases by large customers may result in a decrease in the average per unit selling price of our products, the gross margins for our products may decline We expect that price competition among our competitors and volume purchases of our products at discounted prices will have a negative effect on our gross margin for these products. We anticipate that average per unit selling prices of DSL semiconductors will continue to decline as product technologies mature. Since we do not manufacture our own products, we may be unable to reduce our manufacturing costs in response to declining average per unit selling prices. Many of our competitors are larger and have greater resources than us, and therefore may be able to achieve greater economies of scale and would be less vulnerable to price competition. Further, we expect that average per unit selling prices of our products will decrease in the future due to volume discounts to our large customers. These declines in average per unit selling prices will generally lead to declines in our gross margins for these products. Because the measures on which we rely to protect our intellectual property rights afford only limited protections, we may lose any competitive advantage we may have The measures on which we rely to protect our intellectual property afford only limited protection and we cannot be certain that these safeguards will adequately protect our intellectual property and other valuable competitive information. In addition, the laws of some countries in which we sell or plan to sell our products, including the Peoples' Republic of China, Korea and certain other Asian countries, may not protect our proprietary rights as fully as do the laws of the United States, the United Kingdom or Israel. If we are unable to adequately protect our proprietary rights, we may lose any competitive advantage we may have over our competitors. This may have a negative impact on sales of our products and our results of operations. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or to obtain and use trade secrets or other information that we regard as proprietary. Our competitors may also independently develop similar technologies. Moreover, through our participation in various industry groups, we have entered into cross-licenses for intellectual property necessary to the implementation of certain types of standards-compliant products. Such cross-licenses may limit our ability to enforce our intellectual property rights against competitors. Because our industry is characterized by frequent litigation over intellectual property rights, we may be required to incur substantial expenses and divert management resources The industries in which we compete are characterized by numerous allegations of patent infringement among competitors. Such an infringement claim could be asserted against us or by us in the future. The defense or prosecution of any such claim could result in our incurrence of substantial expenses and may divert significant management attention and other resources away from our operations. In the event of an adverse result in any future litigation or claim, we may be required to: . pay substantial damages, including treble damages if we are held to have willfully infringed on the intellectual property of another; . halt the manufacture, use and sale of infringing products or technology; 29 . forfeit a competitive advantage; . expend significant resources to develop non-infringing technology; or . obtain licenses to the infringing technology, which may not be available on commercially reasonable terms, or at all. Virata has recently been apprised of a lawsuit filed in the Federal Republic of Germany by QPSX Europe GmbH ("QPSX") against Siemens A.G.("Siemens"), for infringement of a European patent QPSX claims to have the right to enforce. Siemens is a licensee of Virata's wholly-owned subsidiary, Virata Israel (formerly Inverness Systems Ltd.), with respect to certain software. The license agreement between Virata Israel and Siemens provides for the indemnification of Siemens against claims of infringement based on Siemens' use of Virata Israel's software. Virata is presently investigating the nature and scope of QPSX's claims and whether indemnification of Siemens is warranted. As yet, Virata has made no determination regarding indemnity and Siemens has not invoked any right of indemnity. QPSX has informed Virata that it believes the lawsuit has a litigation value estimated at $54.6 million. Virata has made no determination of the value of the litigation. If Virata determines that indemnification of Siemens is appropriate, it intends to vigorously defend the QPSX lawsuit. Because our products may be required to meet certain industry standards, we may be required to pay substantial royalties to the owners of the intellectual property underlying the standards In order for us to comply with the International Telecommunications Union V.34, V.90 and ADSL standards, the software embedded in our current and planned future products may use the proprietary technology of various parties advancing or promoting these standards. Where such owners are members of such working group or union, they must provide a license upon reasonable terms, which may include the payment of a reasonable royalty. However, if such owners are not members of such working group or union, there may be no limit on the terms or the amount of the royalty with respect to such proprietary technology. As a result, the cumulative effect of the terms and royalties with respect to the use of the proprietary technology necessary to meet such industry standards could increase the cost of our products to the point that they are no longer competitive and could limit our ability to meet certain industry standards. Because our products and those of our customers are subject to government regulations, changes in current laws or regulations could cause sales of our products to decline The jurisdiction of the Federal Communications Commission, or FCC, extends to the entire U.S. communications industry, including our customers and their products and services that incorporate our products. Future FCC regulations affecting the U.S. communications services industry, our customers or our products may have a negative effect on our business. For example, FCC regulatory policies that affect the availability of data and Internet services may impede our customers' penetration into certain markets or affect the prices that they are able to charge. This may cause sales of our products to decline. In addition, international regulatory bodies have introduced new regulations for the communications industry. Delays caused by our compliance with regulatory requirements may result in order cancellations or postponements of product purchases by our customers, which would have a negative impact on our results of operations and financial condition. Because the Nasdaq stock market is likely to experience extreme price and volume fluctuations, the price of our stock may decline even if our business is doing well The stock markets, and in particular the Nasdaq stock market, have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many technology companies. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. We also expect that the market price of our common stock will fluctuate as a result of variations in our quarterly operating results. These fluctuations may be exaggerated if the trading volume of our 30 common stock is low. In addition, due to the technology-intensive and emerging nature of our business, the market price of our common stock may rise and fall in response to: . announcements of technological or competitive developments; . acquisitions or strategic alliances by us or our competitors; . the gain or loss of a significant customer or order; and . changes in estimates of our financial performance or changes in recommendations by securities analysts. Accordingly, market fluctuations, as well as general economic, political and market conditions such as recessions, interest rate changes or international currency fluctuations, may negatively impact the market price of our common stock. Because of likely fluctuations in the price of our stock we may be subject to class action litigation, which could distract management and result in substantial costs In the past, securities class action litigation has often been brought against companies following periods of volatility in the market price of their securities. We may be the target of similar litigation in the future. Securities litigation could result in substantial costs and divert management's attention and resources from our operations and sales of our products, which would have a negative impact on our financial condition and results of operations. 31 ITEM 2--Properties. In April 2001, we signed a lease agreement for a new corporate headquarters in Santa Clara, California, consisting of approximately 47,432 square feet of office and laboratory space. The lease commenced in June 2001 and expires in August 2004. Our corporate headquarters include administration, sales and marketing, research and development, and operations functions. We also lease the following space for our other facilities:

We believe that our current facilities, together with planned expansions, will be adequate for at least the next twelve months. ITEM 3--Legal Proceedings. We are not currently a party to any material legal proceedings, nor to our knowledge, is any such proceeding contemplated by governmental authorities. ITEM 4--Submission of Matters to A Vote of Security Holders. None. 32 PART II ITEM 5--Market For Registrant's Common Stock and Related Stockholder Matters. Our common stock began trading on The Nasdaq Stock Market's National Market under the symbol "VRTA" effective November 17, 1999. Prior to that date, there was no public market for our Common Stock. The following table sets forth the range of high and low prices for our common stock for each period indicated adjusted to reflect the two-for-one split effective May 18, 2000:

The last reported sale price for our common stock on the Nasdaq National Market was $10.27 per share on June 6, 2001. As of June 6, 2001, there were approximately 285 holders of record of our common stock. We have never declared nor paid any cash dividends on our capital stock. We currently intend to retain any future earnings for use in the operation and expansion of our business, and we do not anticipate paying any cash dividends on our capital stock in the foreseeable future. 33 ITEM 6--Selected Financial Data. SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated financial data should be read in conjunction with the consolidated financial statements and related notes beginning on page 51 of this Annual Report and "Management's Discussion and Analysis of Financial Condition and Results of Operations" beginning on page 36 of this Annual Report. The selected consolidated statement of operations data for each of the three fiscal years ended April 1, 2001, April 2, 2000, and March 31, 1999, and the selected consolidated balance sheet data as of April 1, 2001 and April 2, 2000 are derived from, and qualified by reference to, the audited consolidated financial statements included elsewhere in this Annual Report. The selected consolidated statement of operations data for the fiscal years ended March 31, 1998, and 1997, and selected consolidated balance sheet data as of March 31, 1999, 1998, and 1997 are derived from audited financial statements not included in this Annual Report. Information for the fiscal year ended March 31, 1999 includes the results of operations for RSA Communications since July 17, 1998, the closing date of the acquisition. Information for the fiscal year ended April 2, 2000 includes the results of operations of D2 Technologies since February 10, 2000, the closing date of the acquisition. Information for the fiscal year ended April 1, 2001 includes the results of operations of Inverness Systems since April 27, 2000, the results of operations of Agranat Systems since August 16, 2000, and the results of operations of Excess Bandwidth since August 22, 2000, the closing dates of the acquisitions. Effective October 3, 1999, we changed our fiscal year such that each quarter ends on the Sunday closest to calendar quarter end. 34

35 ITEM 7--Management's Discussion and Analysis of Results of Operations and Financial Condition. This section of this Annual Report includes a number of forward-looking statements that reflect our current views with respect to future events and financial performance. We use words such as "anticipates," "believes," "expects," "future," and "intends," and similar expressions to identify forward-looking statements. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Annual Report. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from historical results or our predictions. These risks are described in "Risk Factors" and elsewhere in this Annual Report. Overview Virata Corporation ("Virata" or "we") provides communications processors and DSL physical-layer chips combined with integrated software modules to manufacturers of equipment utilizing digital subscriber line, or DSL, and broadband wireless technologies. These "integrated software on silicon"(TM) product solutions enable our customers to develop a diverse range of equipment, including modems, gateways, routers, fixed wireless receivers and base stations targeted at the voice and high-speed data network access, or broadband, market. We believe our systems expertise, products and support services enable equipment manufacturers to simplify product development, reduce the time it takes for products to reach the market and focus resources on product differentiation and enhancement. We outsource the manufacturing of our semiconductors, which allows us to focus our resources on the design, development and marketing of our products. We were formed in 1993 as a spin-out from the Olivetti Research Laboratories (now AT&T Laboratories) and until 1995, we were a development-stage company focused primarily on product development. We initially focused on developing and delivering ATM-based, board-level systems primarily for local area network applications. However, in September 1997, we ceased development of our systems products and focused exclusively on expanding our software offering and developing additional semiconductors for the broadband marketplace with a focus on the digital subscriber line, or DSL, market. In July 1998, we acquired RSA Communications, Inc. On November 16, 1999, we reorganized our corporate structure and completed our initial public offering. On February 10, 2000, we completed our acquisition of D2 Technologies Inc., a provider of digital voice and telephony software solutions. On April 27, 2000 we completed our acquisition of Inverness Systems Ltd., a provider of networking software solutions. On August 16, 2000, we completed our acquisition of Agranat Systems, Inc., a provider of Web managed software products. On August 22, 2000, we completed our acquisition of Excess Bandwidth Corporation, a developer of symmetrical DSL physical-layer chips. Effective October 3, 1999, we changed our fiscal year such that each quarter ends on the Sunday closest to the calendar quarter end. On March 21, 2000, our Board of Directors approved a two-for-one split of Virata's common stock that was applicable to stockholders of record on May 4, 2000. The stock split, approved by the Virata's stockholders on May 1, 2000, was effective May 18, 2000. Unless specifically noted otherwise, all references to share and per share data for all periods presented have been adjusted to give effect to this split. On July 13, 2000, we completed our follow-on offering of 6,855,000 shares of common stock, including the exercise of the underwriters' overallotment option, at $71.00 per share. Total proceeds to Virata were approximately $461 million, net of commissions and offering costs. We generate revenues from sales of semiconductors, systems-level products, software licenses, maintenance, royalties and design services. Semiconductor revenues have come from two sources, our Proton family of application specific integrated circuit ("ASIC") products and our ATOM family of application specific standard parts ("ASSP"). Original equipment manufacturers, or OEMs, license our software, which permits them to purchase our semiconductors for use in their products. We support our licensee customers through the sale of maintenance contracts and design services. Since September 1997, we have sold our 36 systems-level products primarily to one customer. Due to our principal customer discontinuing the use of our systems products in fiscal year 2001, our systems- level products will consist only of sales of board-level evaluation systems featuring our latest ASSP products. We generally employ a direct sales model to build a close relationship with customers both prior to and following the execution of a license. In foreign countries such as Korea, Japan, China and certain South American countries, we work with representative firms. It usually takes more than one year, occasionally more than two years, for us to realize volume shipments of our semiconductor products after we first contact a customer. We first work with customers to achieve a design win, which may take six months or longer, at which time we sell a source code license. Our customers then complete the design, testing and evaluation of their systems and begin the marketing process, a period which typically lasts an additional three to six months or longer. As a result, a significant period of time may elapse between our sales efforts and our realization of revenues, if any, from volume purchases of our products by our customers. We generally sell our products based on individual purchase orders. Our customers are not obligated by long- term contracts to purchase our semiconductors and can generally cancel or reschedule orders upon short notice. As of April 1, 2001 and April 2, 2000, our backlog were approximately $24.5 million and $24.9 million, respectively, including the backlog for semiconductors, which were approximately $20.0 million and $20.5 million, respectively. Achieving a design win with a customer does not create a binding commitment from that customer to purchase our products. Rather, it is a decision by a customer to use our products in the design process of their products. A customer can choose at any time to discontinue using our products in their designs or product development efforts. Even if our products are chosen to be incorporated into a customer's products, we may still not realize significant revenues from that customer if their products are not commercially successful. We have a strategy of licensing and partnering with as many key participants in our markets as possible, and we have achieved a significant number of design wins. Nevertheless, some customers will be more successful than others in developing and marketing their products that incorporate our semiconductor products, and it is difficult for us to predict which of these customers will generate revenues for us. Our semiconductor product sales are almost completely dependent upon the relative success of our customers in the marketplace for broadband access products. We have spent considerable resources developing our Beryllium and Helium derivative products for the ADSL market, and we are just beginning to work with potential customers for this product. Our future success will depend, in part, on the success of Beryllium and the Helium derivative products. Our revenues to date have been concentrated with a small number of customers. We expect this concentration to continue. For the fiscal year ended April 1, 2001, Westell Technologies and Siemens accounted for 19.6% and 14.6%, respectively, of our total revenues. For the fiscal year ended April 2, 2000, Orckit Communications and Westell Technologies accounted for 23.1% and 15.1%, respectively, of our total revenues. For the fiscal year ended March 31, 1999, Com21 and Orckit Communications accounted for 22.6% and 15.7%, respectively, of our total revenues. However, in order to minimize customers' inventory build up and maintain our strong customer relationships, we decided in December 2000 to reschedule and/or cancel certain semiconductor shipments that our customers had contractually agreed to receive in the six months ended April 1, 2001, and to revise the shipment schedule of the remaining products to Westell Technologies and to a limited number of our other customers in Asia and the United States. International revenues, from customers located outside of the United States, accounted for 49.6% of our total revenues for the fiscal year ended April 1, 2001, 43.6% for the fiscal year ended April 2, 2000, and 40.3% for the fiscal year ended March 31, 1999. For the fiscal year ended April 1, 2001, sales from customers in Germany and Taiwan represented 15.9% and 13.1% of total revenues, respectively. For the fiscal year ended April 2, 2000, sales from customers in Israel represented 23.3% of total revenues. For the fiscal year ended March 31, 1999, sales from customers in Israel represented 16.5% of total revenues. However, almost all of our international revenues are transacted in U.S. dollars, which reduces our exposure to fluctuations in revenues attributable to changes in foreign currency exchange rates. However, we experience risks inherent in 37 international business. These risks include extended collection time for receivables, reduced ability to enforce contractual obligations and reduced protection of our intellectual property. Our material costs are denominated in U.S. dollars, and our operating expenses are primarily in U.S. dollars, British pounds sterling, and new Israeli shekels.

Our gross margin has fluctuated significantly due primarily to product mix. For the fiscal year ended April 1, 2001, our semiconductor gross margin was 29.4%, our license gross margin was 95.4%, our services and royalty gross margin was 80.9% and our systems gross margin was 47.5%. For the fiscal year ended April 2, 2000, our semiconductor gross margin was 31.3%, our license gross margin was 97.1%, our services and royalty gross margin was 59.3% and our systems gross margin was 66.0%. We believe our gross margin may continue to fluctuate because we expect the introduction of new semiconductor products, increased competition and more consumer-oriented markets may impact pricing. Since inception, we have invested heavily in research and development and have built a worldwide sales force and administration infrastructure, which has contributed to net losses. Additionally, we have chosen to operate principally in the following locations: Cambridge, England; Kfar Saba, Israel; Raleigh, North Carolina; Santa Barbara, California; Maynard, Massachusetts; Santa Clara/Cupertino, California. We believe that our strategy of locating research and development in Cambridge, Raleigh, Maynard, Cupertino and Santa Barbara, has provided access to high quality engineers and contributed to low turnover. However, we incur higher general and administrative expenses associated with multi-site operations. We plan to continue to invest to exploit market opportunities and revenues may not increase at a rate sufficient to achieve and maintain profitability. In September 1997, we implemented a new business strategy and reduced the resources allocated to the systems line of business. We sold our systems products to one principal customer in fiscal year ended April 1, 2001. The systems revenues for the fiscal year ended April 1, 2001 were $2.5 million. However, we will no longer ship the products to this customer as they have discontinued the use of our system products. Our limited operating history in the DSL market makes it difficult to forecast our future operating results accurately. To date, we have not achieved profitability in any quarterly or annual period, and as of April 1, 2001, we had an accumulated deficit of $248.5 million. Although our total revenues have grown in recent quarters, we cannot be certain that our total revenues will increase at a rate sufficient to achieve and maintain profitability. Acquisitions A key element of our business strategy involves expansion through the acquisition of businesses, products or technologies that allow us to reduce the time required to develop new technologies and products and bring them to market, complement our existing product offerings, expand our market coverage, increase our engineering workforce or enhance our technological capabilities. We will continue to evaluate opportunities for strategic acquisitions from time to time, and may make additional acquisitions in the future. During fiscal year 2001, we completed three acquisitions that were accounted for as purchase transactions, for aggregate consideration of $444.3 million. These acquisitions included Inverness Systems, a provider of networking software solutions; Agranat Systems, a supplier of web technologies and networking management software; and Excess Bandwidth, a developer of advanced algorithms and mixed-signal semiconductors for high-bandwidth symmetric DSL applications. Because each of these acquisitions was accounted for as a purchase transaction, the accompanying consolidated financial statements include the results of operations of the acquired companies incurred after their respective acquisition dates. 38 The acquisitions are summarized below (in millions). See Note 4 of the Notes to the Consolidated Financial Statements.

Recent Developments Stockholder Rights Plan On May 8, 2001, Virata adopted a Stockholder Rights Plan and declared a nontaxable dividend of one "right" on each outstanding share of Virata's common stock to Stockholders of record as of May 9, 2001. Director Resignation Bandel Carano, a director of Virata, resigned effective May 12, 2001. On May 22, 2001, the Board of Directors accepted his resignation. The seat is currently vacant. 39 Results of Operations The following table sets forth, for the periods presented, certain data from our consolidated statement of operations expressed as a percentage of total revenues.

40 Fiscal Years Ended April 1, 2001, April 2, 2000, and March 31, 1999 Total Revenues Total revenues increased to $126.3 million for the fiscal year ended April 1, 2001, from $21.8 million for the fiscal year ended April 2, 2000. Total revenues increased to $21.8 million for the fiscal year ended April 2, 2000, from $9.3 million for the fiscal year ended March 31, 1999. Semiconductor revenues increased to $102.8 million for the fiscal year ended April 1, 2001, compared to $14.0 million for fiscal year ended April 2, 2000. For the fiscal year ended April 2, 2000, semiconductor revenues increased to $14.0 million, from $2.8 million for the fiscal year ended March 31, 1999. A significant factor that contributed to this revenue growth included the demand for DSL services, which are being deployed globally by telecom service providers. As a growing number of software licensees began initial trials and deployments of broadband access devices, semiconductor revenues increased to 81.4% of total revenues for the fiscal year ended April 1, 2001, compared to 64.5% of total revenues for the fiscal year ended April 2, 2000. For the fiscal year ended April 1, 2000, semiconductor revenues increased to 64.5% of total revenues compared to 30.1% of total revenues for the fiscal year ended March 31, 1999. License revenues increased to $14.9 million, or 11.8% of total revenues, for the fiscal year ended April 1, 2001, from $3.7 million, or 17.0% of total revenues, for the fiscal year ended April 2, 2000. Significant factors that contributed to this revenue growth include availability of new products, expanding software licensee customer base, additional revenues from the acquisitions of Inverness Systems in April 2000, and Agranat Systems in August 2000, and recording a full year of revenue from the acquisition of D2 Technologies completed in February 2000. License revenues for the fiscal year ended April 2, 2000 increased to $3.7 million, or 17.0% or total revenues, compared to $1.6 million, or 17.6% of total revenues, for the fiscal year ended March 31, 1999. The increases in license revenues were primarily a result of expanding our software licensee customer base and additional license revenues from the acquisition of D2 Technologies. Services and royalty revenues increased to $6.1 million, or 4.8% of total revenues, for the fiscal year ended April 1, 2001, compared to $1.7 million, or 8.0% of total revenues, for the fiscal year ended April 2, 2000. The increase was due primarily to the expansion of our licensee customer base, thus increasing our service revenues; and additional related service and royalty revenues generated by acquisitions of D2 Technologies, Inverness Systems and Agranat Systems. For the fiscal year ended April 1, 2000, services and royalty revenues decreased to $ 1.7 million, or 8.0% of total revenues, compared to $2.4 million, or 25.5% of total revenues, for the fiscal year ended March 31, 1999. The change is due primarily to the reduction in royalty revenues from two customers. Systems revenues increased 7.6% to $2.5 million for the fiscal year ended April 1, 2001, compared to $2.3 million for the fiscal year ended April 2, 2000. Although the systems revenues increased, systems revenue as a percentage of total revenues decreased to 2.0% for the fiscal year ended April 1, 2001 from 10.5% of total revenues for the fiscal year ended April 2, 2000. For the fiscal year ended April 2, 2000, systems revenues decreased 7.3% to $2.3 million, compared to $2.5 million for the fiscal year ended March 31, 1999. For the fiscal year ended April 2, 2000, systems revenue as a percentage of total revenues decreased to 10.5% from 26.8% of total revenues for the fiscal year ended March 31, 1999. This decrease was primarily due to our decision in September 1997 to focus our sales and development efforts on semiconductor devices for the DSL market. We sold our systems products to one principal customer in fiscal years ended April 1, 2001 and April 2, 2001. However, we will no longer ship the products to this customer as they have discontinued the use of our system products. We expect the systems revenues to decrease significantly. Cost of Revenues and Gross Margin Total cost of revenues consists primarily of costs paid to foundry vendors to manufacture our semiconductors, costs attributable to design services and software maintenance and operations expense. Cost of 41 revenues increased to $75.7 million, or 59.9% of total revenues, for the fiscal year ended April 1, 2001, from $11.2 million, or 51.6% of total revenues, for the fiscal year ended April 2, 2000. Cost of revenues increased to $11.2 million, or 51.6% of total revenues, for the fiscal year ended April 2, 2000, from $4.0 million, or 43.2% of total revenues, for the fiscal year ended March 31, 1999. Semiconductor gross margin decreased to 29.4% for the fiscal year ended April 1, 2001, compared to 31.3% for the fiscal year ended April 2, 2000. The decrease primarily reflected a combination of the following factors: 1) the impact of a $9.3 million provision for excess and obsolete inventory related primarily to our Helium products, due to the rescheduled or cancelled customer shipments, and approximately $1.7 million inventory provision was related to the end-of-life transition for our older Hydrogen product, 2) a shift in product mix, and 3) the lower average selling price of Helium products resulting from an increase in sales to higher volume customers. Semiconductor gross margin increased to 31.3% for the fiscal year ended April 2, 2000, from 13.0% for fiscal year ended March 31, 1999. The increase was primarily due to product mix and an increase in sales volume. We believe our gross margin may continue to fluctuate, as semiconductors become a greater percentage of total revenues, and because increased competition and more consumer-oriented markets may put pressure on the average selling prices of our semiconductors. Software license gross margin was 95.4% for the fiscal year ended April 1, 2001, compared to 97.1% for the fiscal year ended April 2, 2000. There were no costs of revenues associated with our software license revenues for the fiscal year ended March 31, 1999. This decrease was primarily due to costs incurred with license contracts assumed following the D2 Technologies, Inverness Systems, and Agranat Systems acquisitions. Services and royalty gross margin was 80.9% for the fiscal year ended April 1, 2001 compared to 59.3% for the fiscal year ended April 2, 2000. The increase in services and royalty gross margins between was the result of a favorable mix of design services revenues and higher margin royalty revenues following the D2 Technologies, Inverness Systems and Agranat Systems acquisitions. Services and royalty revenues gross margin decreased to 59.3% for the fiscal year ended April 2, 2000, from 77.7% for the fiscal year ended March 31, 1999 as a result of costs incurred for design services and higher mix of design services revenues as higher margin royalty revenues decreased. Systems gross margin decreased to 47.5% for the fiscal year ended April 1, 2001, compared to 66.0% for the fiscal year ended April 2, 2000. Systems gross margin improved to 65.9% for the fiscal year ended April 2, 2000 from 57.7% for the fiscal year ended March 31, 1999. The decrease in systems margin was primarily due to fixed operations support related to systems products and a narrower systems product range. Due to our principal customer discontinuing the use of our systems products in fiscal year 2001, our systems gross margin will consist only of sales of board-level evaluation systems featuring our latest ASSP products. Research and Development Expenses Research and development expenses consist primarily of engineering staffing costs and technology license fees. Research and development expenses increased 151.3% to $37.7 million for the fiscal year ended April 1, 2001, from $15.0 million for the fiscal year ended April 2, 2000. Research and development expenses increased 62.1% to $15.0 million for the fiscal year ended April 2, 2000, from $9.3 million for the fiscal year ended March 31, 1999. The increase was primarily due to the addition of research and development personnel as a result of accelerated new product development and the addition of personnel as a result of the acquisitions of D2 Technologies, Inverness Systems, Agranat Systems and Excess Bandwidth. For the fiscal years ended April 1, 2001, April 2, 2000 and March 31, 1999, we recognized amortization of stock compensation of approximately $2.3 million, $0.6 million, and $0.9 million, respectively, for the research and development group. See "Amortization of Stock Compensation" below. For the fiscal years ended April 1, 2001 and April 2, 2000, charges of approximately $0.8 million and $2.0 million, respectively, were recorded for National Insurance Contribution on options for the research and development group. This expense is listed 42 separately in our financial results and is calculated for stock options granted to United Kingdom employees as the difference between the option exercise price and the fair value of the underlying common stock at the close of the period. See "National Insurance Contribution on Options" below. Sales and Marketing Expenses Sales and marketing expenses consist primarily of employee salaries, sales commissions, travel and related costs, promotional materials and trade show expenses. Sales and marketing expenses increased 265.0% to $23.5 million for fiscal year ended April 1, 2001, from $6.4 million for the fiscal year ended April 2, 2000. Sales and marketing expenses increased 105.0% to $6.4 million for fiscal year ended April 2, 2000, from $3.1 million for the fiscal year ended March 31, 1999. The increase was primarily due to the addition of sales and marketing personnel and increased sales commissions associated with higher revenues. For the fiscal years ended April 1, 2001, April 2, 2000 and March 31, 1999, we recognized amortization of stock compensation of approximately $0.7 million, $0.1 million, and $0.2 million, respectively, for the sales and marketing group. See "Amortization of Stock Compensation" below. For the fiscal years ended April 1, 2001 and April 2, 2000, charges of approximately $0.6 million and $1.0 million, respectively, were recorded for National Insurance Contribution on options for the sales and marketing group. See "National Insurance Contribution on Options" below. General and Administrative Expenses General and administrative expenses consist primarily of employee salaries and costs associated with legal, accounting and other professional service fees, bad debt expense as well as general corporate expenses. General and administrative expenses increased 188.3% to $21.9 million for fiscal year ended April 1, 2001, from $7.6 million for the fiscal year ended April 2, 2000. General and administrative expenses increased 30.9% to $7.6 million for fiscal year ended April 2, 2000, from $5.8 million for the fiscal year ended March 31, 1999. The increase was primarily attributable to the to increased staff, inclusion of current expenses related to the former D2 Technologies, Inverness Systems, Agranat Systems and Excess Bandwidth, the businesses acquired in year 2000, and the additional costs of being a publicly traded company. For the fiscal years ended April 1, 2001, April 2, 2000 and March 31, 1999, we recognized amortization of stock compensation of approximately $0.4 million, $0.2 million, and $0.2 million, respectively, for the general and administrative group. See "Amortization of Stock Compensation" below. For the fiscal years ended April 1, 2001 and April 2, 2000, charges of approximately $2.0 million and $1.5 million, respectively, were recorded for National Insurance Contribution on options for the general and administrative group. See "National Insurance Contribution on Options" below. National Insurance Contribution on options We recorded a charge for National Insurance Contribution on options which is based on a tax applied in the United Kingdom on the gain in our stock price for stock options granted to our United Kingdom employees, both vested and unvested. The requirement to book this charge came into effect on April 5, 1999. The charge is calculated on each option granted in the United Kingdom as the difference between the market value of our common stock at the close of the period and the exercise price of the option multiplied by a 12.2% tax rate. Due primarily to the significant movement in our stock price from each reporting date, the charges recorded during the six month period ended October 1, 2000 and the fiscal year ended April 2, 2000 were $4.2 million and $4.5 million, respectively. In October 2000, the Emerging Issues Task Force ("EITF") of the Financial Accounting Standards Board ("FASB") reached a consensus on Issue No. 00-16, "Recognition and Measurement of Employer Payroll Taxes on Employee Stock-Based Compensation", whereby employer payroll taxes should be recognized as a liability when the tax obligation is triggered, which is generally the date the stock option is exercised. Through October 1, 2000, Virata estimated and recorded its liability for the National Insurance Contribution based upon 43 total outstanding stock options held by its employees in the United Kingdom. Beginning in the quarter ended December 31, 2000, Virata began recording an additional liability only upon the exercise of options granted subsequent to October 1, 2000 to employees in the United Kingdom. No additional liability was recorded in the six month period ended April 1, 2001. Amortization of Intangible Assets Amortization of intangible assets expense is related to the intangible assets acquired in the July 1998 acquisition of RSA Communications, the February 2000 acquisition of D2 Technologies, the April 2000 acquisition of Inverness Systems, and the August 2000 acquisitions of Agranat Systems and Excess Bandwidth. Amortization of intangible assets for the fiscal year ended April 1, 2001 was $82.0 million, compared to $4.5 million for the fiscal year ended April 1, 2000, and $0.5 million for the fiscal year ended March 31, 1999. The year to year increase was primarily a result of these recent acquisitions. We are amortizing the intangible assets over the expected lives of the assets of between 24 to 60 months. Amortization of Stock Compensation Through April 1, 2001, we recorded a total of $21.0 million of unearned stock compensation, of which approximately $18.7 million is related to the assumption of unvested stock options from the recent acquisitions of Excess Bandwidth and Agranat Systems. We recognized amortization of stock compensation of $3.4 million for the fiscal year ended April 1, 2001, $0.9 million for the fiscal year ended April 2, 2000, and $1.4 million for the fiscal year ended March 31, 1999. We are amortizing the unearned stock compensation over the vesting period of the related options, generally 48 months. Acquired In-Process Research and Development Expense In connection with acquisitions completed during the fiscal year ended April 1, 2001, we recorded charges of $81.1 million associated with acquired in- process research and development for the fiscal year ended April 1, 2001. The amount was determined by identifying research projects for which technological feasibility had not been established and no alternative future uses existed as of the respective acquisition dates. The values of these projects were charged to operations at the time of acquisition. The acquired in-process research and development for the fiscal year ended April 1, 2001 was attributable to the acquisition of the following companies: $1.2 million to Inverness Systems in April 2000, $564,000 to Agranat Systems in August 2000, and $79.3 million to Excess Bandwidth in August 2000. The acquired in-process research and development of $5.3 million for the fiscal year ended April 2, 2000 was attributable to the acquisition of D2 Technologies, which occurred in February 2000. The acquired in-process research and development of $5.3 million for the fiscal year ended March 31, 1999 was attributable to the acquisition of RSA Communications, which occurred in July 1998. These acquisitions were accounted for as purchase business combinations. Also see Note 4 of the Notes to the Consolidated Financial Statements. Interest Expense Interest expense increased to $401,000 for fiscal year ended April 1, 2001, compared to $200,000 and $155,000 for the fiscal years ended April 2, 2000 and March 31, 1999. The interest expense was primarily related to interest associated with capital equipment under lease. The increase in interest expense is due to additional capital lease obligations assumed from the Excess Bandwidth acquisition in August 2000. Interest and Other Income, Net Interest and other income, net consists primarily of income earned on cash and cash equivalents and short-term investments, and foreign exchange gains and losses. Due to cash provided by our follow-on offering in July 2000, the interest income for the fiscal year ended April 1, 2001 increased to $24.4 million, compared to $1.6 million for the fiscal year ended April 2, 2000, and $786,000 for the fiscal year ended March 31, 1999. 44 For the fiscal year ended April 1, 2001, foreign exchange gain was $158,000. For the fiscal year ended April 2, 2000, foreign exchange gain was $543,000 and an income tax refund was $ 39,000. For the fiscal year ended March 31, 1999 the foreign exchange gain was $432,000, and an income tax refund was $531,000. Losses at RSA Communications, subsequent to its acquisition, allowed for the income tax refund. Income Taxes Since inception, we have incurred net losses for federal and state tax purposes and have not recognized any tax provision or benefit. At April 1, 2001, we had approximately $62.2 million, $45.4 million and $20.5 million in federal, state and foreign net operating loss carryforwards, respectively, to reduce future taxable income. The net operating loss carryforwards expire between 2002 and 2020 for both federal and state purposes, if not utilized. The foreign net operating loss will be carryforward indefinitely. As of April 1, 2001, we had deferred tax assets of $9.2 million, which were fully offset by a valuation allowance. Deferred tax assets consist principally of the federal and state net operating loss carryforwards, capitalized start-up expenditures, accruals and reserves not currently deductible for tax purposes, research and development credits and foreign tax credit carryforwards. Due to uncertainty surrounding the realization of the favorable tax attributes in the future tax returns, we have established a 100% valuation allowance against our deferred tax assets. Accordingly, no tax benefit was recorded in the accompanying consolidated statements of operations. Our ability to use its federal and state net operating loss carryforwards and tax credit carry forwards to offset future taxable income and future taxes, respectively, may be subjected to restrictions due to equity transactions that result in changes in ownership as defined by Internal Revenue Code Section 382 and 383, under the Tax Reform Act of 1986. Quarterly Results of Operations The following table sets forth our consolidated operating results for each of the five quarters ended April 1, 2001. This data has been derived from unaudited consolidated financial statements that, in the opinion of our management, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of this information when read in conjunction with our annual audited consolidated financial statements and notes thereto appearing elsewhere in this Annual Report. These operating results are not necessarily indicative of results of any future period. 45

Liquidity and Capital Resources We have financed our operations primarily through venture capital, corporate investments, and through public offerings of common stock. On November 16, 1999, we completed our initial public offering of 11,500,000 shares of common stock, including the exercise of the underwriters' overallotment option, at $7.00 per share. Total proceeds to us were approximately $73.0 million, net of commissions and offering costs. 47 On July 13, 2000, we completed a follow-on offering of 6,855,000 shares of common stock, including the exercise of the underwriters' overallotment option, at $71.00 per share. Total proceeds to us were approximately $461 million, net of commissions and offering costs. Our cash and cash equivalents together with our short-term investments increased $409.7 million to $487.9 million for the fiscal year ended April 1, 2001. The increase in these accounts was primarily due to cash generated from our July 2000 follow-on offering. Our cash and cash equivalents increased $261.7 million to $321.9 million for the fiscal year ended April 1, 2001. The increase in these accounts was primarily due to cash generated from our November 1999 initial public offering. Our working capital on April 1, 2001 was approximately $497.1 million as compared to $70.6 million on April 2, 2000. Our current ratio increased to 18.0 to 1, as of April 1, 2001, from 4.8 to 1, as of April 2, 2000. Net cash used in operating activities for the fiscal year ended April 1, 2001 of $21.5 million was primarily due to a net loss of $171.8 million, decrease in accrued liabilities of $2.1 million, and increases in accounts receivables, inventories, other assets of $4.7 million, $19.3 million, and $5.5 million, respectively. This was partially offset by depreciation and amortization of $89.6 million, amortization of stock compensation of $3.4 million, acquired in-process research and development expenses in connection with the acquisitions of Inverness Systems, Agranat Systems and Excess Bandwidth of $81.1 million, and increases in accounts payable, and accrued National Insurance Contribution on options of $4.1 million, and $3.2 million, respectively. Net cash used in operating activities for the fiscal year ended April 2, 2000 of $7.0 million was primarily due to net operating losses of $26.1 million, an increase in accounts receivables and other current assets of $4.2 million and $1.6 million respectively, partially offset by depreciation and amortization of $6.3 million, acquired in-process research and development expenses of $5.3 million in connection with the acquisition of D2 Technologies, and increases in accounts payable, accrued liabilities, accrued employee benefits, accrued National Insurance Contribution on options expense, and deferred revenue of $2.8 million, $2.2 million, $1.7 million, $4.5 million, and $1.3 million, respectively. Net cash used in operating activities for the fiscal year ended March 31, 1999 of $9.5 million was primarily due to net operating losses of $17.2 million and a decrease in accrued liabilities of $2.1 million, partially offset by depreciation and amortization of $1.7 million, acquired in-process research and development expenses of $5.3 million in connection with the acquisition of RSA Communications, amortization of stock compensation of $1.4 million and a provision for doubtful accounts of $1.5 million. Net cash used in investing activities was $179.7 million for the fiscal year ended April 1, 2001, which reflected the net purchase of short-term investments of $147.9 million, purchases of investments of $9.6 million, net purchases of property and equipment of $15.7 million, and $6.5 million of cash used in connection with our acquisitions of Inverness Systems, Agranat Systems, and Excess Bandwidth. Net cash used in investing activities was $22.1 million for the fiscal year ended April 2, 2000, which reflected the net purchase of short- term investments of $17.0 million, $3.6 million of cash paid in connection with our acquisition of D2 Technologies net of cash acquired, and net purchases of property and equipment of $1.4 million. Net cash used in investing activities was $8.3 million for the fiscal year ended March 31, 1999, which reflected purchases of property and equipment of $2.1 million, the net cash paid in connection with the acquisition of RSA Communications of $5.1 million and the purchase of short-term investments of $1.0 million. Net cash provided by financing activities was $463.1 million for the fiscal year ended April 1, 2001, attributable primarily to proceeds from the issuance of common stock through our follow-on offering, employee stock purchase plan and employee stock option plan of $464.3 million, partially offset by repayments on capital lease obligations of $1.1 million. Net cash provided by financing activities was $81.1 million for the fiscal year ended April 2, 2000, primarily due to proceeds from the issuance of common stock through our initial public offering and employee stock option plan of $74.1 million, issuance of convertible preferred stock of $8.0 million, partially offset by repayments on capital lease obligations of $1.0 million. Net cash provided by 48 financing activities was $25.6 million for the fiscal year ended March 31, 1999, primarily due to proceeds from the issuance of convertible preferred stock of $25.1 million, proceeds from equipment lease financing of $1.2 million, less repayments on capital lease obligations and bank borrowings of $0.7 million. We had outstanding capital commitments totaling approximately $1.4 million as of April 1, 2001, primarily related to our infrastructure. We plan to continue to invest in our infrastructure, including information systems, in order to gain efficiencies and meet the demands of our markets and customers. We believe our current cash, cash equivalents, and short-term investments will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for the next 12 months. Thereafter, if cash generated from operations is insufficient to satisfy our long-term liquidity requirements, we may seek to sell additional equity or debt securities or to obtain an additional credit facility. If additional funds are raised through the issuance of debt securities, these securities could have rights, preferences and privileges senior to holders of common stock, and the terms of any debt could impose restrictions on our operations. The sale of additional equity or debt securities could result in additional dilution to our stockholders, and additional financing may not be available in amounts or on terms acceptable to us, if at all. If we are unable to obtain this additional financing, we may be required to reduce the scope of our planned product development and marketing efforts, which could harm our business, financial condition and operating results. Recent Accounting Pronouncements In June 1998, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivatives and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. In July 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities--Deferral of the Effective Date of FASB Statement No. 133." SFAS No. 137 deferred the effective date of SFAS No. 133 until fiscal years beginning after June 15, 2000. Virata will adopt SFAS No. 133 during the year ending March 31, 2002. To date, Virata have not engaged in derivative or hedging activities. Virata does not expect the adoption of SFAS No. 133 to have a material effect on its financial position or results of operations. ITEM 7A--Quantitative and Qualitative Disclosures about Market Risk. The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive from our investments without significantly increasing risk. Some of the securities that we may invest in may be subject to market risk. This means that a change in prevailing interest rates may cause the principal amount of the investment to fluctuate. For example, if we hold a security that was issued with a fixed interest rate at the then-prevailing rate and the prevailing interest rate later rises, the principal amount of our investment will probably decline. To minimize this risk in the future, we maintain our portfolio of cash equivalents and short-term investments in a variety of securities, including commercial paper, money market funds, government and corporate debt securities and certificates of deposit. As of April 1, 2001, all of our short-term investments are government or corporate debt securities or high quality commercial paper. In addition, contract maturities of these securities were within one year as of April 1, 2001. See Note 2 of the "Notes to Consolidated Financial Statements". We also have investments in restricted shares of privately-held technology companies. These non-marketable shares are recorded at cost, and are classified on the balance sheet as non-current assets. We do not hold these securities for speculative or trading purposes. We make investments in key business partners and other industry participants in order to establish important strategic relationships, expand existing relationships and achieve a return on our investment. These investments are inherently risky as the markets for the technologies or products these companies have under development are typically in the early stages and may never materialize. As such, we could lose our entire investment in these companies. As of April 1, 2001, the fair value of these investments was $9.6 million. 49 We develop products in the United Kingdom, Israel and the United States and sell in North America, Asia, Israel and Europe. As a result, our financial results could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions. A strengthening of the dollar could make our products less competitive in foreign markets, since all of our sales are currently made in U.S. dollars. Currently, we incur non-dollar denominated operating costs in Europe, Israel and Asia, as well as net assets located in these geographies. At April 1, 2001, approximately 5.2% of our net assets were recorded in non-dollar currencies. We did not purchase nor hold derivative financial instruments as of April 1, 2001. Management believes that the market risk associated with Virata's market risk sensitive instruments as of April 1, 2001 is not significant. 50 ITEM 8--Financial Statements and Supplementary Data. VIRATA CORPORATION INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Schedules other than those listed above have been omitted since either they are not required or the information is included in the financial statements included herewith. 51 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Virata Corporation In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Virata Corporation and its subsidiaries at April 1, 2001 and April 2, 2000, and the results of their operations and their cash flows for each of the three years in the period ended April 1, 2001, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion expressed above. /s/ PricewaterhouseCoopers LLP San Jose, California April 25, 2001 52 VIRATA CORPORATION CONSOLIDATED BALANCE SHEET (in thousands, except share and per share data)

The accompanying notes are an integral part of these consolidated financial statements. 53 VIRATA CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS (in thousands, except per share data)

The accompanying notes are an integral part of these consolidated financial statements. 54 VIRATA CORPORATION CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) (in thousands)

The accompanying notes are an integral part of these consolidated financial statements. 55 VIRATA CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (in thousands)

The accompanying notes are an integral part of these consolidated financial statements. 56 VIRATA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1--The Company and Summary of Significant Accounting Policies: The Company Virata Corporation (the "Company") was formed in 1993 as Advanced Telecommunications Modules Limited, a corporation organized in the United Kingdom, as a spin-off from Olivetti Research Laboratories. In February 1998, the Company changed its name to Virata Limited. The Company is a provider of solutions that integrate communication processors with a suite of software for the digital subscriber line ("DSL") equipment market. In July 1998, the Company completed the acquisition of RSA Communications, Inc. ("RSA Communications"), a corporation organized in North Carolina (see Note 4). RSA Communications was subsequently renamed Virata Raleigh Corporation. In February 2000, the Company completed its acquisition of D2 Technologies, Inc. ("D2 Technologies"), a corporation organized in California (see Note 4). On April 27, 2000, the Company completed the acquisition of Inverness Systems Ltd. ("Inverness Systems"), a corporation organized in Israel and a provider of networking software solutions (see Note 4). On August 16, 2000, the Company completed the acquisition of Agranat Systems, Inc. ("Agranat Systems"), a corporation organized in Massachusetts and a supplier of web technologies and networking management software (see Note 4). On August 22, 2000, the Company completed the acquisition of Excess Bandwidth Corporation ("Excess Bandwidth"), a corporation organized in California and a developer of advanced algorithms and mixed-signal semiconductors for high-bandwidth symmetric DSL applications (see Note 4). The historical financial statements presented are those of Virata Limited, Virata Corporation was created in August 1999. Immediately prior to its initial public offering ("IPO"), Virata Corporation became the holding company of Virata Limited. The reorganization was accounted for on a historical basis. On November 16, 1999, the Company completed its IPO of 11,500,000 shares of common stock, including the exercise of the underwriters' overallotment option, at $7.00 per share. Total proceeds to the Company were $73.0 million, net of commissions and offering costs. Effective October 3, 1999, the Company changed the fiscal year such that each quarter ends on the Sunday closest to the calendar quarter end. Principles of consolidation and basis of presentation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Certain items previously reported in prior years' financial statements have been reclassified to conform with the current year presentation. Stock Split On March 21, 2000, the Company's Board of Directors approved a two-for-one split of the Company's common stock that was applicable to stockholders of record on May 4, 2000. The stock split, approved by the Company's stockholders on May 1, 2000, was effective May 18, 2000. Unless specifically noted otherwise, all references to share and per share data for all periods presented have been adjusted to give effect to this split. 57 VIRATA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Use of estimates The preparation of consolidated financial statements in conformity with generally accepted accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Foreign Currency Translation The functional currency of the Company's foreign subsidiaries is the local currency. Accordingly, the assets and liabilities of the Company's foreign subsidiaries are translated into U.S. dollars at exchange rates in effect at the balance sheet date. Income and expense items are translated at average exchange rates for the period. Foreign currency translation adjustments are included in accumulated other comprehensive income as a separate component of stockholders' deficit. The foreign currency translation adjustments are not adjusted for income taxes as they relate to indefinite investments in non-U.S. subsidiaries. Foreign currency transaction gains and losses are included as a component of other income and expense. For the fiscal years ended April 1, 2001, April 2, 2000, and March 31, 1999, the Company recognized foreign currency translation gains of $158,000, $543,000, and $432,000, respectively. Revenue recognition Revenues from the sale of both semiconductors and systems are recognized upon shipment to customers. Allowances are provided for estimated returns at the time of shipment. The Company recognizes software license revenue under Statement of Position ("SOP") 97-2, Software Revenue Recognition, and SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain Transactions. When contracts contain multiple elements and vendor-specific objective evidence exists for all undelivered elements, the Company accounts for the delivered elements in accordance with the "Residual Method" prescribed by SOP 98-9. Software licenses are generally recognized as revenue upon shipment of the software product. In the event the Company grants customers the right to specified upgrades, license revenue is deferred until delivery of the specific upgrade. If vendor-specific objective evidence of fair value exists for the specified upgrade, then the amount equal to the fair value is deferred. If vendor-specific objective evidence of fair value for the specified upgrade does not exist, the entire license fee is deferred until the delivery of the specified upgrade. The Company recognizes revenues from maintenance and support services provided to licensees ratably over the term of the agreement, generally over one year, and recognizes revenues from design services provided to customers as the services are performed. In December 1999, the Securities Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements", which outlines the basic criteria that must be met to recognize revenue and provides guidance for presentation of revenue and for disclosure related to revenue recognition policies in financial statements filed with the SEC. In June 2000, the SEC issued SAB 101B, "Second Amendment: Revenue Recognition in Financial Statements", ("SAB 101B"). SAB 101B deferred the implementation date of SAB 101 until no later than the fourth fiscal quarter of fiscal years beginning after December 15, 1999. The Company adopted SAB 101 in the fourth quarter of fiscal 2001, effective as of the beginning of the year. The adoption of SAB 101 did not have a material effect on the financial position or results of operations of the Company. 58 VIRATA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Cash and Cash equivalents The Company considers all highly liquid investments purchased with an original maturity of fiscal year or less to be cash equivalents. At April 1, 2001 and April 2, 2000, $313.5 million and $53.3 million, respectively, of money market funds and certificate of deposits, the fair value of which approximates cost, are included in cash and cash equivalents. The Company deposits cash and cash equivalents with high credit quality financial institutions. Investments Short-term investments consist of debt securities with original maturity dates greater than ninety days. The Company's investments are classified as available-for-sale, and are reported at fair value at the balance sheet date. The unrealized gains and losses, net of related taxes, are reported as a component of accumulated other comprehensive income. Management determines the appropriate classification of debt securities at the time of purchase and reassesses the classification at each reporting date. Gains and losses on the sale of available-for-sale investments are determined using the specific- identification method. The Company also has certain minority investments in privately-held technology companies. These non-marketable shares are generally carried at cost, as the Company does not have the ability to exercise significant influence over the operating and financial policies of these companies. These investments are classified on the balance sheet as non-current assets. The Company monitors these investments for impairment and makes appropriate reduction in carrying values when necessary. For all investment securities, unrealized losses that are other than temporary are recognized in net income. The Company does not hold these securities for speculative or trading purposes. Fair value of financial instruments Carrying amounts of certain of the Company's financial instruments, including cash and cash equivalents, short term investments, accounts receivable, accounts payable, and accrued liabilities approximate fair value due to their short maturities. Segment information The Company identifies its operating segments based on business activities, management responsibility and geographical location. During each of the three years in the period ended April 1, 2001, the Company operated in one operating segment. All long-lived assets and all revenues are mainly located or generated in the United States. Concentration of credit risk Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash, cash equivalents, short-term investments, accounts receivable and long-term investments. The Company's accounts receivable are derived from revenues earned primarily from customers located in the United States, Europe and Asia. The Company performs ongoing credit evaluations of its customers' financial condition and, generally, requires no collateral from its customers. The Company maintains an allowance for doubtful accounts receivable based upon the expected collectibility of accounts receivable. 59 VIRATA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The following customers account for 10% or more of total accounts receivable:

The following customers accounted for 10% or more of total revenues:

Revenues from customers located outside the United States were 50% in 2001, 44% in 2000, and 40% in 1999. Inventories Inventories are stated at the lower of cost or market. Cost is determined using standard cost, which approximates actual cost on a first-in, first-out basis. Property and equipment Property and equipment are recorded at cost. Depreciation and amortization are computed on a straight-line basis over the estimated useful lives of the assets, as follows: Computer and network equipment and software........................ 2-3 years Furniture and office equipment..................................... 3-5 years Research and development equipment................................. 2-3 years

Leasehold improvements are amortized on a straight-line basis over the life of the lease, or the useful life of the assets, whichever is shorter. Impairment of long-lived assets The company reviews its long-lived assets for impairment, whenever events or changes in circumstances indicate that the carrying amount of an asset might not be recoverable. When such an event occurs, management determines whether there has been an impairment by comparing the anticipated undiscounted future net cash flows to the related asset's carrying value. If an asset is considered impaired, the asset is written down to fair value, which is determined based either on discounted cash flows or appraised value, depending on the nature of the asset. 60 VIRATA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Intangible assets Intangible assets consist primarily of technology, contracts, customer base, assembled workforce and goodwill, which are being amortized on a straight line basis over their estimated lives ranging from two to five years. Advertising Costs Advertising costs are expensed in the period incurred and were not significant to the results of operations. Net loss per share Basic and diluted net loss per share is computed by dividing the net loss available to holders of common stock for the period by the weighted average number of shares of common stock outstanding during the period. The calculation of diluted net loss per share excludes potential shares of common stock if their effect is anti-dilutive. Potential common stock consists of shares of common stock issuable upon the exercise of stock options and warrants and shares issuable upon conversion of the Series A, B, C, and D convertible preferred stock. The following tables sets forth potential shares of common stock as converted that are not included in the diluted net loss per share calculation above because to do so would be anti-dilutive for the period indicated (in thousands):

Stock compensation The Company accounts for stock compensation arrangements in accordance with provision of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" and complies with the disclosure provisions of Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation." Under APB Opinion No. 25, unearned stock compensation is based on the difference, if any, on the date of the grant, between the fair value of the Company's common stock and the exercise price. Unearned stock compensation is amortized and expensed in accordance with FASB Interpretation No. 28. The Company accounts for stock issued to non-employees in accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force Issue No. 96-18, "Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling, Goods or Services." In March 2000, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 44 ("FIN 44"), Accounting for Certain Transactions Involving Stock Compensation--an Interpretation of APB 25. FIN 44 clarifies the application of Opinion No. 25 for (a) the definition of employee for purposes of applying APB Opinion No. 25, (b) the criteria for determining whether a plan qualifies as a noncompensatory plan, (c) the 61 VIRATA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) accounting consequences of various modifications to the terms of a previously fixed stock option or award, and (d) the accounting for an exchange of stock compensation awards in a business combination. FIN 44 became effective July 1, 2000, but certain conclusions cover specific events that occur after either December 15, 1998, or January 12, 2000. To the extent that this Interpretation covers events occurring during the period after December 15, 1998, or January 12, 2000, but before the effective date of July 1, 2000, the effects of applying this Interpretation are recognized on a prospective basis from July 1, 2000. The adoption of FIN 44 did not have a material effect on the financial position or results of operations. Comprehensive income Comprehensive income consists of foreign currency translation adjustments, and unrealized gains and losses arising from the valuation of short-term investments and is presented in the Consolidated Statement of Stockholders' Equity (Deficit). Income Taxes The Company accounts for income taxes under the liability method. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. Recent accounting pronouncements In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. In July 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities--Deferral of the Effective Date of FASB Statement No. 133." SFAS No. 137 deferred the effective date of SFAS No. 133 until fiscal years beginning after June 15, 2000. The Company will adopt SFAS No. 133 during its year ending March 31, 2002. To date, the Company has not engaged in derivative or hedging activities. The Company does not expect the adoption of SFAS No. 133 to have a material effect on its financial position or results of operations. Note 2--Investments (in thousands): As of April 1, 2001 and April 2, 2000, short-term investments included the following debt securities:

62 VIRATA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Unrealized holding gains and losses of available-for-sale debt securities were not significant and accordingly the amortized cost of these securities approximated fair market value at April 1, 2001 and April 2, 2000. Contract maturities of these securities were within one year as of April 1, 2001. Realized gains and losses on available-for-sale debt securities were not significant for the year ended April 1, 2001 and April 2, 2000. As of April 1, 2001, the Company held restricted shares in some privately- held technology companies, with an aggregate carrying value of $9.6 million, in restricted shares of technology companies. These non-marketable shares are carried at cost, and are classified on the balance sheet as non-current assets. Note 3--Balance Sheet Components (in thousands):

Property and equipment includes $5,900,000 and $3,843,000 of computer equipment and internal-use software under capital leases at April 1, 2001 and April 2, 2000, respectively. Accumulated amortization of assets under capital leases totaled $4,124,000 and $3,044,000 at April 1, 2001 and April 2, 2000, respectively.

63 VIRATA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 4--Acquisitions Fiscal year 2001 The Company acquired Inverness Systems on April 27, 2000. Inverness Systems had offices in Kfar Saba, Israel, and in Marlborough, Massachusetts. Inverness Systems is a software company with expertise spanning many technologies, including ATM, voice over ATM, xDSL, IP Routing, Multi-Protocol Label Switching or MPLS, Frame Relay and Network Simulation. Inverness Systems' source code solutions and network simulation products are designed to facilitate fast-to- market product development programs for advanced communications products. Under the terms of the purchase agreement, 2,006,440 shares of the Company's common stock, with an aggregate value of approximately $77.6 million, based on the fair market value of the Company's common stock of $38.67 per share, were exchanged for all of the issued and outstanding capital stock of Inverness Systems. In addition, all of the outstanding options and warrants to purchase shares of Inverness Systems' capital stock were exchanged for options to purchase 517,896 shares of the Company's common stock with an aggregate fair value of approximately $20.0 million. The Company valued the options using the Black-Scholes option pricing model. Including direct acquisition costs of approximately $750,000, the aggregate purchase price of Inverness Systems was approximately $98.4 million. The acquisition has been accounted for as a purchase business combination. On August 16, 2000, the Company acquired Agranat Systems, which has an office in Maynard, Massachusetts. Agranat Systems is a leading provider of embedded Web management solutions. Through the EmWeb family, Agranat Systems delivers the software technology, development tools, and design support enabling developers to create web-managed products. End users of these products can remotely access, configure, and manage devices or applications via the Internet using a standard web browser interface. Under the terms of the purchase agreement, 430,188 shares of the Company's common stock, with an aggregate value of approximately $23.7 million, based on the fair market value of its common stock of $55.08 per share, were exchanged for all of the issued and outstanding capital stock of Agranat Systems. In addition, all of the outstanding options and warrants to purchase shares of Agranat Systems' capital stock were exchanged for options to purchase 61,064 shares of the Company's common stock with an aggregate fair value of approximately $3.3 million. The Company valued the options using the Black-Scholes option pricing model. Including direct acquisition costs of approximately $200,000, the aggregate purchase price of Agranat Systems was approximately $27.2 million. The acquisition has been accounted for as a purchase business combination. On August 22, 2000, the Company acquired Excess Bandwidth, which has an office in Cupertino, California. Excess Bandwidth develops advanced algorithms for high-bandwidth communications applications and implements these algorithms as communications processors. Product plans include physical layer and mixed signal semiconductors to address each of the modern symmetric DSL technologies including SDSL, HDSL2 and G.shdsl. Under the terms of the agreement, 5,702,731 shares of the Company's common stock, with an aggregate value of approximately $285.0 million, based on the fair market value of its common stock of $49.98 per share, including 1,462,298 shares of the Company's common stock subjected to certain repurchase rights by the Company, were exchanged for all of the issued and outstanding capital stock of Excess Bandwidth. In addition, all of the outstanding options and warrants to purchase shares of Excess Bandwidth's capital stock and other stock-based compensation awards were exchanged for options to purchase 599,553 shares of the Company's common stock with an aggregate fair value of approximately $24.9 million. The Company valued the options and warrants using the Black-Scholes option pricing model. Including direct acquisition costs of approximately 64 VIRATA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) $8.8 million, the aggregate purchase price of Excess Bandwidth was approximately $318.7 million. The acquisition has been accounted for as a purchase business combination. Based on valuations by independent appraisers, the purchase prices of Inverness Systems, Agranat Systems and Excess Bandwidth were allocated as follows (in thousands):

Inverness Systems' completed products were classified into three product groups: ATM products, IP products and NetSIM products. The value of the completed technology is based on the net cash flow forecast, discounted at a cost of capital of 22.6%. The acquired in-process technology is related to IP products, mainly MPLS. The value of the in-process technology is also based on the net cash flow forecast; however, the value of in-process technology was discounted at a higher cost of capital of 27.6% to reflect the uncertainty of its future use. The Company determined that the in-process technology had not reached technological feasibility and, therefore, charged the cost of in- process technology to operations upon acquisition. Agranat Systems' completed products were classified into two product groups: EmWeb products and EmStack products. The value of the completed technology is based on the net cash flow forecast, discounted at a cost of capital of 20.0%. The acquired in-process technology is related to the Universal Plug and Play product. The value of the in-process technology is also based on the net cash flow forecast; however, the value of in-process technology was discounted at a higher cost of capital of 25.0% to reflect the uncertainty of its future use. The Company determined that the in-process technology had not reached technological feasibility and, therefore, charged the cost of in-process technology to operations upon acquisition. Excess Bandwidth's completed products were analog and digital chipsets designed for the HDSL2 and SHDSL markets. The value of the completed technology is based on the net cash flow forecast, discounted at a cost of capital of 22.5%. The acquired in-process technology was classified into two product groups: Chipsets for the CPE market, and Quadsets for the DSLAM market. The value of the in-process technology is also based on the net cash flow forecast; however, the value of in-process technology was discounted at a higher cost of capital of 25.0% for the chipset technology and 27.5% for the Quadset technology to reflect the uncertainty of its future use. The Company determined that the in-process technology had not reached technological feasibility and, therefore, charged the cost of in-process technology to operations upon acquisition. The financial information for the fiscal year ended April 1, 2001 includes the results of operations for Inverness Systems from April 27, 2000, the results of operations for Agranat Systems from August 16, 2000, and the results of operations for Excess Bandwidth from August 22, 2000. 65 VIRATA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The following unaudited pro forma financial information presents the consolidated results of the Company as if the acquisitions had occurred at the beginning of each period, and includes adjustments for amortization of intangible assets. This pro forma financial information is not intended to be indicative of future results. Unaudited pro forma consolidated results of operations are as follows (in thousands, except per share data):

Fiscal year 2000 The Company acquired D2 Technologies, Inc. on February 10, 2000. Based in Santa Barbara, California, D2 Technologies develops, markets and supports innovative digital signal processing (DSP) solutions for the next generation telephony products. D2 Technologies serves the computer and Internet telephony markets with robust and cost-effective DSP solutions. Its customers include some of the largest telecommunications and internet companies in the industry whose markets range from high-capacity telecommunications systems to personal communications products. Under the terms of the merger agreement, 4,396,826 shares of Virata common stock were exchanged for all of the outstanding common stock of D2 Technologies. In addition, employee options to purchase shares of D2 Technologies common stock were exchanged for options to purchase 932,330 shares of Virata common stock. The Company valued the options using the Black-Scholes option pricing model, applying an expected life of four years, a weighted average risk-free rate of 6.64%, an expected dividend yield of zero percent, a volatility of 55% and a deemed fair value of common stock of $18.00 per share. The acquisition has been accounted for as a purchase business combination. The aggregate purchase price is as follows (in thousands): Shares of Virata common stock....................................... $79,143 Options to purchase Virata common stock............................. 13,566 Direct acquisition costs............................................ 4,200 ------- $96,909 =======

Based on a valuation by an independent appraiser, the purchase price of D2 Technologies was allocated as follows: Fair value of assets acquired and liabilities assumed............... $ 1,252 Assembled workforce................................................. 760 Customer base....................................................... 1,001 Contracts........................................................... 1,006 Technology.......................................................... 15,872 In-process research and development................................. 5,324 Goodwill............................................................ 71,695 ------- Total............................................................... $96,909 =======

66 VIRATA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) D2 Technologies has 19 completed products that comprise the completed technology at the date of acquisition. They are classified into five product groups as follows: Telephony Algorithms Echo Cancellation Products Standard Voice Coders Proprietary Voice Coders Fax and Data Products The individual products and algorithms are entirely independent from each other. The value of the completed technology is based on the net cash flow forecast, discounted at a cost of capital of 18.0%. The acquired in-process technology are mainly related to the fax and data products and include the Fax Modem Data Pump, Fax Relay Protocols and Single Sample Echo Cancellers and Standard Voice Coders. The acquired in-process technology is also valued using the net cash flow forecast, discounted at a higher cost of capital of 23.0% to reflect the uncertainty of its future use. The company does not consider it to have reached technological feasibility and accordingly charged it to operations upon acquisition. Financial information for the fiscal year ended April 2, 2000 includes the results of operations for D2 Technologies from February 10, 2000. The following unaudited pro forma financial information presents the consolidated results of the Company as if the acquisitions had occurred at the beginning of each period, and includes adjustments for amortization of intangible assets. This pro forma financial information is not intended to be indicative of future results. Unaudited pro forma consolidated results of operations are as follows (in thousands, except per share data):

Fiscal year 1999 The Company completed its acquisition of RSA Communications Inc. on July 17, 1998. RSA Communications was privately-held and based in Raleigh, North Carolina, specializing in analog modem software development. The Company's acquisition of RSA Communications was accounted for as a purchase business combination. The Company's allocation of RSA Communications' aggregate purchase price to the tangible and identifiable intangible assets acquired in connection with this acquisition were based on fair values as determined by an independent appraiser. The allocation is summarized below (in thousands): In-process research and development.................................. $5,260 Goodwill............................................................. 3,877 Net tangible assets.................................................. 138 ------ Total................................................................ $9,275 ======

67 VIRATA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The total purchase price of $9,275,000 million consisted of 459,700 shares of the Company's common stock valued at $1,417,000 million, 606,500 shares of series D convertible preferred stock valued at $667,000, options to purchase 594,925 shares of common stock valued at $1,505,000 million, cash of $5,332,000 million and acquisition related expenses, consisting primarily of legal and other professional fees, of approximately $354,000. The Company valued the options using the Black-Scholes option pricing model, applying an expected life of four years, a weighted average risk-free rate of 5.47%, an expected dividend yield of zero percent, a volatility of 70% and a deemed fair value of common stock of $0.46 per share. The core technologies acquired in the RSA Communications acquisition were the ADSL PHY software and voiceband modem protocol software. The significant in-process research and development projects include V.90 Modem Software and two software algorithms, the Modem Modulation Software Algorithm and the ADSL Software Algorithm. The valuation of the acquired in-process research and development of $5,260,000 was based on the result of an independent appraisal which was determined using the income-based approach for V.90 Modem Software and the replacement cost method for software algorithms. The acquired in-process technology was not considered to have reached technological feasibility at the time it was acquired and had no alternative future use. Accordingly, the amount was charged to operations at the date of acquisition. The V.90 Modem Software project was completed subsequent to its acquisition in 1998 and has been licensed to one customer. At the time of the acquisition this project was approximately 90% complete, and the fair value assigned to this project was $2.435 million. The Modem Modulation Software Algorithm includes certain software that provides modulation/demodulation functions of a voiceband modem, and certain software for a voiceband modem that provides functions such as control, error correction and data compression. At the time of the acquisition, this project was approximately 90% complete, and the fair value assigned to this project was $2.4 million. This project was subsequently terminated. The ADSL software algorithm is a complete software stack that is compliant with the ITU ADSL standards. The fair value assigned to this project was $425,000 at the time of the acquisition when this project was approximately 35% complete. The project is currently 85% complete and has a remaining expected development cost of $375,000. The remaining risks affecting the timely completion and commercialization of this project are minimal. The remaining uncertainties that might affect the outcome of this project are related to the size of the developing ADSL market. The income method of valuation for the V.90 Modem Software was determined using a modified version of the relief from royalty avoided by the Company upon the purchase of RSA Communications. Royalty rates were estimated based on past contracts and unit sales were estimated based on the size of the total market from industry analysis. The avoided royalty payments by the Company were then calculated for the life of the product. The net cash flow was discounted back to the present value at a risk-adjusted discount rate of 40%. The algorithms which require a special skill set for their development were valued using the replacement cost method which considered costs incurred through the valuation date. The goodwill is being amortized on a straight line basis over the estimated period of benefit of five years. Financial information for the fiscal year ended March 31, 1999 includes the results of operations for RSA Communications from July 17, 2001. 68 VIRATA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The following unaudited pro forma financial information present the consolidated results of the Company as if the acquisition had occurred at the beginning of each period, and includes adjustments for amortization of goodwill. This pro forma financial information is not intended to be indicative of future results. Unaudited pro forma consolidated results of operations are as follows (in thousands, except per share data):

Note 5--National Insurance Contribution on options: The charge for National Insurance Contribution on options is based on a tax applied in the United Kingdom on the gain in our stock price for stock options granted to our United Kingdom employees, both vested and unvested. The requirement to book this charge came into effect on April 5, 1999. The charge is calculated on each option granted in the United Kingdom as the difference between the market value of our common stock at the close of the period and the exercise price of the option multiplied by a 12.2% tax rate. Due primarily to the significant movement in our stock price from each reporting date, the charges recorded during the six month period ended October 1, 2000 and the fiscal year ended April 2, 2000 were $4.2 million and $4.5 million, respectively. In October 2000, the Emerging Issues Task Force ("EITF") of the FASB reached a consensus on Issue No. 00-16, "Recognition and Measurement of Employer Payroll Taxes on Employee Stock-Based Compensation", whereby employer payroll taxes should be recognized as a liability when the tax obligation is triggered, which is generally the date the stock option is exercised. Through October 1, 2000, the Company estimated and recorded its liability for the National Insurance Contribution based upon total outstanding stock options held by its employees in the United Kingdom. Beginning in the quarter ended December 31, 2000, the Company began recording an additional liability only upon the exercise of options granted subsequent to October 1, 2000 to employees in the United Kingdom. No additional liability was recorded in the six month period ended April 1, 2001. Note 6--Income Taxes: No income tax provision was recorded for the three years ended April 1, 2001 because the Company incurred net losses in such periods. 69 VIRATA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Tax effects of temporary differences that give rise to significant portions of deferred tax asset are as follows:

Due to uncertainty surrounding the realization of the favorable tax attributes in the future tax returns, the Company has established a 100% valuation allowance against its deferred tax assets. At such time as it is determined that it is more likely than not that the deferred tax assets are realizable, the valuation allowance will be reduced. At April 1, 2001, the Company has approximately $62.2 million, $45.4 million and $20.5 million in federal, state and foreign net operating loss carryforwards, respectively, to reduce future taxable income. The net operating loss carryforwards expire between 2002 and 2020 for both federal and state purposes, if not utilized. The foreign net operating loss will be carryforward indefinitely. The Company's ability to use its federal and state net operating loss carryforwards and tax credit carry forwards to offset future taxable income and future taxes, respectively, may be subjected to restrictions due to equity transactions that result in changes in ownership as defined by Internal Revenue Code Section 382 and 383, under the Tax Reform Act of 1986. At April 1, 2001, deferred tax assets of approximately $17.9 million pertain to certain net operating loss carryforwards resulting from the exercise and disqualifying dispositions of employee stock options. When recognized, the tax benefits of these loss carryforwards are accounted for as a credit to additional paid-in capital rather than a reduction of the income tax provision. Note 7--Borrowings: A convertible loan in the amount of $2,712,000 was converted to 2,402,710 shares of series D convertible preferred stock valued at $1.10 per share on June 4, 1998. The value of the stock was determined by the series D convertible preferred stock offering price of $1.10, also on June 4, 1998. The loan was drawn in December 1997 bearing interest at the rate of 10% per annum and was due to related parties. In connection with a loan and security agreement, the Company issued a warrant to purchase 35,294 shares of series D convertible preferred stock at an exercise price of $1.70 per share. The Company valued the warrant using the Black-Scholes option pricing model, applying an expected life of 5 years, a weighted average risk free rate of 5.77%, an expected dividend yield of zero percent, a volatility of 70% and a deemed fair value of common stock of $0.95. The Company determined that the fair value of the warrant was not significant at the date of grant. The warrant was exercised and converted into 14,490 shares of the Company's common stock in February 2000. 70 VIRATA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 8--Commitments: Leases The Company leases office space and equipment under noncancelable operating and capital leases with various expiration dates through August 2005. Net rent expense for the years ended April 1, 2001, April 2, 2000, and March 31, 1999 was $2.4 million, $606,000, and $536,000, respectively. The terms of the facility lease provide for rental payments on a graduated scale. The Company recognizes rent expense on a straight-line basis over the lease period, and has accrued for rent expense incurred but not paid. Future minimum lease payments under noncancelable operating and capital leases are as follows (in thousands):

Note 9--Preferred Stock: Under the Company's Certificate of Incorporation, as amended, the Company is authorized to issue 5,000,000 shares of preferred stock. As of April 1, 2001, there are no shares outstanding of our preferred stock outstanding. The Company's certificate of incorporation provides that the preferred stock be divisible into and issuable in one or more series. The rights and preferences of the different series may be established by the Company's Board of directors without further action by Virata stockholders. The Company's Board of directors is authorized with respect to each series to fix and determine, among other things: . its dividend rate; . its liquidation preference; . whether or not the shares will be convertible into, or exchangeable for, any other securities; and . whether or not the shares will have voting rights, and, if so, determine the extent of the voting powers and the conditions under which the shares will vote as a separate class. 71 VIRATA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 10--Follow-on Public Offering: On July 13, 2000, the Company completed its follow-on public offering of 6,855,000 shares of common stock, including the exercise of the underwriters' overallotment option, at $71.00 per share. Total proceeds to the Company were approximately $461 million, net of commissions and offering costs. Note 11--Stock Option Plans: In November 1999, the Company adopted the 1999 Stock Incentive Plan (the "Plan"). The Plan provides for the granting of stock options to employees and consultants of the Company. Options granted under the Plan may be either incentive stock options or nonqualified stock options. Incentive stock options ("ISO") may be granted only to Company employees (including officers and directors who are also employees). Nonqualified stock options ("NSO") may be granted to Company employees and consultants. Options under the Plan may be granted for periods of up to ten years and at prices no less than 85% of the estimated fair value of the shares on the date of grant as determined by the Board of Directors, provided, however, that (i) the exercise price of an ISO and NSO shall not be less than 100% and 85% of the estimated fair value of the shares on the date of grant, respectively, and (ii) the exercise price of an ISO and NSO granted to a 10% shareholder shall not be less than 110% of the estimated fair value of the shares on the date of grant, respectively. To date, options granted generally vest over four years. Options expire at the earlier of 90 days after the employee ceases employment or seven years after the effective date of the grant of the options. Upon the acquisition of D2 Technologies, the Company assumed the stock option plan for D2 Technologies and reserved a total of 932,330 shares of the Company's common stock for issuance under the plan. In fiscal year 2000, the Company assumed the stock option plans for Inverness Systems, Agranat Systems and Excess Bandwidth upon their acquisitions. The Company reserved a total of 517,896 shares, 944,400 shares and 3,830,189 shares of its common stock for issuance under each plan. During the period from April 1, 1996 through November 16, 1999, the date of the Company's initial public offering, the Company recorded $3,392,000 of unearned stock compensation for the excess of the deemed fair market value over the exercise price at the date of grant related to options granted in 1998 and 1999. The compensation expense is being recognized over the option vesting period of four years. The Company amortized $907,000, $1,394,000 and $399,000 for the years ended April 2, 2000, March 31, 1999 and 1998, respectively. In November 1999, the Company adopted the 1999 Employee Stock Purchase Plan ("ESPP") and reserved a total of 1,200,000 shares of the Company's common stock for issuance thereunder, plus an automatic annual increase on the first day of each of our fiscal years beginning in 2001, 2002, 2003, 2004 and 2005 equal to the lesser of (i) 1,000,000 shares, (ii) 1% of the total number of shares of common stock outstanding on the last day of the immediately preceding fiscal year or (iii) an amount unanimously determined by the Board of Directors. Under the ESPP, eligible employees are permitted to contribute up to 15% of their compensation, as defined, to the purchase of the Company's common stock at a price which is equal to the lower of 85% of the fair market value of the common stock at the beginning of each offering period or at the end of each purchase period. In November 1999, the Company adopted the 1999 Non-employee Director Compensation Plan (the "Director's Plan") and reserved a total of 2,000,000 shares of the Company's common stock for issuance thereunder. Each non-employee director who becomes a member of the Board of Directors will initially be granted an option for 80,000 shares of the Company's common stock at an exercise price per share equal to the fair market value of a share of common stock on the date of grant or, if the non-employee director was serving as a board member on November 16, 1999, at an exercise price per share equal to the initial offering price per 72 VIRATA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) share to the public in the Company's initial public offering. These options will vest proportionately each month over a period of four years. On the fourth anniversary and on each anniversary thereafter, each member of the Board of Directors will be granted an option to purchase an additional 20,000 shares of the Company's common stock at an exercise price per share equal to the fair market value of a share of common stock on the date of grant. These options will vest proportionately each month over a period of one year. During 2001, the Virata Board of Directors approved an Exchange Program to give the employees a choice to cancel stock options granted to them under the Plan and the Excess Bandwidth 1998 Equity Incentive Plan that had an exercise price per share of $18.50 or more and a vesting schedule that was not based on or subject to revenue-based performance goals, for new options to purchase equal number of shares of the common stock that the Company will grant under the option plans, upon certain terms and conditions. The new options will be granted on September 7, 2001, and the exercise price will be 85% of market price on that date. No members of Board of Directors were eligible for the program. Options to purchase approximately 4.3 million shares were cancelled on March 8, 2001 under the terms of the Exchange Program. The following table summarizes activity under the Company's plans from March 31, 1998 through April 1, 2001:

The 7,186,550 shares available for option grants as of April 1, 2001, includes the options for approximately 4.3 million shares that were cancelled on March 8, 2001 in connection with the Exchange Program that the Company is obligated to re-grant on September 7, 2001, subject to certain conditions. Additionally, the Company has promised to grant options for approximately 457,000 shares on September 7, to 98 employees who are not executive officers or directors. 73 VIRATA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The total number of options exercisable at April 1, 2001, April 2, 2000, and March 31, 1999 was 3,350,306, 1,798,672, and 1,342,112, respectively. Fair value disclosures If compensation cost for the Company's stock-based compensation plan had been determined based on the fair value at the grant dates for the awards under a method prescribed by SFAS No. 123, the Company's net loss would have been increased to the pro forma amounts indicated below (in thousands, except per share data):

The Company calculated the fair value of each option grant on the date of grant using the Black-Scholes pricing method with the following assumptions: expected dividend yield of zero percent; weighted average expected option term of four years; risk free interest rates of 4.6% to 6.7% and 5.1% to 6.7% and 4.5% to 5.8% and a volatility of 70%, 55%, and 70% for the years ended April 1, 2001, April 2, 2000, and March 31, 1999, respectively. The weighted average fair value of options granted during fiscal year 2001, 2000, and 1999 was $35.96, $7.83, and $0.44, respectively. Warrants for Common Stock In connection with a consulting agreement, the Company issued a warrant to purchase 150,000 shares of common stock for $0.04 per share in July 1997. The Company valued the warrant using the Black-Scholes option pricing model, applying an expected life of five years, a weighted average risk-free rate of 6.62%, an expected dividend yield of zero percent, a volatility of 70% and a deemed fair value of common stock of $0.45. Using the Black-Scholes pricing model, the Company determined that the fair value of the warrant was not significant at the date of grant. The warrant was exercised and converted into 150,000 shares of the Company's common stock in September 1999. In connection with a lease agreement, the Company issued warrants to purchase 69,705 shares of series C convertible preferred stock and 163,636 shares of series D convertible preferred stock for $1.50 and $1.10 per 74 VIRATA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) share, respectively, in the period September 1996 to May 1999. Such warrants are convertible into 101,724 shares of the Company's common stock and are outstanding at April 1, 2001 and expire in the period September 2001 to May 2009. The Company valued the warrants using the Black-Scholes option pricing model, applying an expected life of five years, a weighted average risk-free rate of 4.81% and 6.6%, an expected dividend yield of zero percent, a volatility of 70% and a deemed fair value of common stock between $0.74 and $1.03, respectively. The Company determined that the fair value of the warrants was not significant at the date of grant. In connection with the series D convertible preferred stock financing, the Company issued warrants to purchase 1,595,054 shares of series D convertible preferred stock for $1.10 per share in June 1998. Such warrants are convertible into 748,212 shares of the Company's common stock and are outstanding at April 1, 2001 and expire in June 2003. The Company valued the warrants using the Black-Scholes option pricing model, applying an expected life of five years, a weighted average risk-free rate of 5.52%, an expected dividend yield of zero percent, a volatility of 70% and a deemed fair value of common stock of $0.99. The Company determined that the fair value of the warrants was not significant at the date of grant. Note 12--Employee Benefit Plans The Company has three benefit plans, one in the United Kingdom, and two plans in the United States. The United Kingdom plan includes private health care, permanent health insurance, death in service coverage and a pension arrangement. In addition, under the United Kingdom Plan, the Company matches pension contributions of up to 5% of an employee's salary. Contributions for the years ended April 1, 2001, April 2, 2000, and March 31, 1999 were $197,600, $141,800, and $112,600, respectively. The United States plan includes a medical plan, life insurance, accidental death and dismemberment insurance, long-term disability, IRC Section 125 premium payment plan, COBRA and a 401(k) retirement plan. The Company provides 50% matching contribution to the retirement plan of up to $2,000 per calendar year per employee. Contributions for the year ended April 1, 2001, April 2, 2000 and March 31, 1999 were $499,500, $178,500 and $58,000, respectively. Note 13--Related Party Transactions: The Company had revenues of $617,000, $82,000, and $549,000 during the years ended April 1, 2001, April 2, 2000, and March 31, 1999, to related parties. At April 1, 2001, April 2, 2000, and March 31, 1999, there were accounts receivable from related parties in the amounts of $200,000, $17,600, and $154,000, respectively. The Company made purchases of $62,386,000, $5,786,000, and zero, for the three years ended April 1, 2001, April 2, 2000, respectively, from related parties. At April 1, 2001 and April 2, 2000, there were accounts payable from related parties totaling zero and $1,884,000, respectively. Note 14--Subsequent Events: In April 2001, the Company recognized a pre-tax gain of approximately $0.7 million on proceeds of $2.3 million from a sale of one of its long term equity investments in a privately-held technology company. The invested technology company was acquired by another technology company. In April 2001, the Company signed a lease agreement for new corporate facility in Santa Clara, California, commencing on June 2001. The additional rental commitment for the fiscal year ending March 31, 2002 is approximately $1.7 million. 75 ITEM 9--Changes In And Disagreements With Accountants On Accounting And Financial Disclosure. None. PART III ITEM 10--Directors and Executive Officers of the Registrant. Information required by this Item, other than information regarding the identification of the executive officers and directors, will be set forth under the sections of Virata's Proxy Statement for the 2001 Annual Meeting of Stockholders (the "Proxy Statement") entitled "Election Of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance". The Proxy Statement is expected to be filed with the Securities and Exchange Commission within 120 days of Virata's fiscal year end. Information regarding the identification of Virata's executive officers and directors may be found in the section entitled "Executive Officers and Directors of the Registrant" in Part I of this Form 10- K. ITEM 11--Executive Compensation. The information under the captions "Executive Compensation and Other Matters" and "Stock Options and Bonuses" in the Proxy Statement is incorporated herein by reference. The Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of Virata's fiscal year end. ITEM 12--Security Ownership of Certain Beneficial Owners and Management. The information under the caption "Stock Ownership of Certain Beneficial Owners" of the Proxy Statement is incorporated herein by reference. The Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of Virata's fiscal year end. ITEM 13--Certain Relationships and Related Transactions. The information under the caption "Certain Transactions" of the Proxy Statement is incorporated herein by reference. The Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of Virata's fiscal year end. PART IV ITEM 14--Exhibits, Financial Statement, Schedules and Reports On Form 8-K. (a) 1. Financial Statements See Item 8 of this Annual Report. (a) 2. Financial Statement Schedules See Item 8 and Schedule II of this Annual Report. 76 (a) 3. Exhibits

-------- (1) Filed without schedules. (2) Confidential treatment has been requested for selected sections of this exhibit. (3) A management contract or compensatory plan or arrangement. (b) Reports on Form 8-K. Virata filed the following report on Form 8-K during the quarter ended April 1, 2001: ~~January 25, 2001 Virata announced its financial results for the quarter ending December 31, 2001.~~

(c) Exhibits. Virata hereby files as part of this Form 10-K the Exhibits listed in Item 14(a) 3 above. (d) Financial Statement Schedules Virata hereby files as part of this Form 10-K the Financial Statement Schedules listed in Item 14(a) 2 above. 79 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on this 27th day of June, 2001. VIRATA CORPORATION By: /s/ Charles Cotton ---------------------------------- Charles Cotton Chief Executive Officer and Director POWER OF ATTORNEY KNOWN ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Charles Cotton and Andrew Vought, each of whom may act without joinder of the other, as their true and lawful attorneys-in-fact and agents, each with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:

81 SCHEDULE II VIRATA CORPORATION VALUATION AND QUALIFYING ACCOUNT

82 EXHIBIT INDEX

-------- (1) Filed without schedules. (2) Confidential treatment has been requested for selected sections of this exhibit. (3) A management contract or compensatory plan or arrangement.

VIRATA CORP 10-K