10-Q 1 d10q.txt FORM 10-Q -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE - ACT OF 1934 For the quarterly period ended September 30, 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 or other jurisdiction of incorporation (IRS Employer or organization) 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 --------------- 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 [ ] As of November 1, 2001, there were 64,137,337 shares of the Registrant's Common Stock outstanding, par value $0.001. -------------------------------------------------------------------------------- TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION ITEM 1 - Condensed Consolidated Financial Statements VIRATA CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET (in thousands, unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements. _______________________ (A) The information in this column is derived from Virata Corporation's audited financial statements for the fiscal year ended April 1, 2001. 1 VIRATA CORPORATION CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (in thousands, except per share data) (unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements. 2 VIRATA CORPORATION CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (in thousands, unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements. 3 VIRATA CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 1--Basis of Presentation Virata Corporation ("Virata" or "Company") provides communications processors and 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. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not contain all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting of only normal recurring adjustments, considered necessary for a fair presentation of the Company's financial condition as of September 30, 2001, the results of its operations for the three and six months ended September 30, 2001, and October 1, 2000, and cash flows for the six months ended September 30, 2001 and October 1, 2000. These financial statements should be read in conjunction with the Company's audited financial statements, including the notes thereto, and the other information set forth therein which is included in the Company's Annual Report on Form 10-K for the fiscal year ended April 1, 2001. Operating results for the three and the six months ended September 30, 2001 are not necessarily indicative of the operating results that may be expected for the fiscal year ending March 31, 2002. Note 2--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 ("SAB") No. 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 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 year 2001, effective as of the beginning of the calendar year. The adoption of SAB 101 did not have a material effect on the financial position or results of operations of the Company. Note 3--Earnings Per Share Net loss per share The Company computes net loss per share in accordance with Statement of Financial Accounting Standards, ("SFAS") No. 128, "Earnings per Share" and the SEC SAB 98. Under the provisions of SFAS No. 128 and SAB 98, basic and diluted net loss per share is computed by dividing the net loss available to holders of common 4 VIRATA CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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. Note 4--Investments Short-term investments consist of debt securities with original maturity dates greater than ninety days and less than one year. Debt securities with original maturity dates greater than one year are classified on the balance sheet as non-current assets. In accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities", 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. As of September 30, 2001 and April 1, 2001, the Company held $251.6 million and $166.0 million of debt securities, respectively. Of these securities, $176.7 million and $166.0 million, respectively, were classified as short-term investments on the Company's consolidated balance sheet. The debt securities held by the Company consisted primarily of commercial paper, and U.S. and foreign corporate debt securities. 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 September 30, 2001 and April 1, 2001. Contract maturities of these securities were within two years as of September 30, 2001. Realized gains and losses on available-for-sale debt securities were not significant for the three and the six months ended September 30, 2001 and October 1, 2000. As of September 30, 2001, the Company held restricted shares in some privately-held technology companies, with an aggregate carrying value of $8.8 million. These non-marketable shares are carried at cost, and are classified on the balance sheet as non-current assets. Note 5--Balance Sheet Components (in thousands)

5 VIRATA CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Sept 30, April 1, 2001 2001 ------------ ------------- (unaudited) Intangible assets: Goodwill ................................. $ 317,506 $ 317,506 Assembled workforce ...................... 3,574 3,574 Contracts ................................ 5,961 5,961 Customer base ............................ 5,596 5,596 Technology ............................... 102,634 102,634 Tradename ................................ 60 60 --------- --------- 435,331 435,331 Less: Accumulated amortization ........... (143,849) (88,384) --------- --------- $ 291,482 $ 346,947 ========= ========= Note 6--Non-Cash Compensation Charges The components of the non-cash compensation charges in the operating expenses are as follows:

Note 7--National Insurance Contributions on Options The charge (recovery) for National Insurance Contributions on options is based on a tax applied in the United Kingdom on the gain in our stock options for options granted to our United Kingdom employees, both vested and unvested. Through October 1, 2000, the charge was 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. 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. Prior to October 1, 2000, the Company estimated and recorded its liability for the National Insurance Contributions based upon total outstanding stock options held by its employees in the United Kingdom. Beginning in the quarter ended December 31, 2000, the 6 VIRATA CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Company would have recorded an additional liability only upon the exercise of options granted to employees in the United Kingdom subsequent to October 1, 2000, after the existing reserve had been exhausted. No additional liability has been recorded since the quarter ended October 1, 2000. Since October 2000, the grant of new options to employees have been made under the condition that any liability to Employer's National Insurance Contributions arising on the exercise of the option will be borne by the employee. In May 2001, legislation went into effect in the United Kingdom whereby the liability for National Insurance Contributions on any options to employees in the United Kingdom granted between April 6, 1999 and May 19, 2000 may be limited by making a payment for National Insurance Contributions with regard to such grants. The amount on which National Insurance Contributions are payable in connection with these options is limited to the difference between the market value of our common stock on November 7, 2000 and the exercise price of the options. During the quarter ended September 30, 2001, the Company paid $1.5 million to settle National Insurance Contributions liability with respect to the majority of the Company's option grants. The accrued liability in excess of this amount was released as a $5.6 million adjustment to the Company's results of operations for the three and six months ended September 30, 2001. The settlement of this liability removes the need for any further reserves to be made in respect of National Insurance Contributions for these options and eliminates the uncertainty of the future liability. Note 8--Restructuring Costs In June 2001, the Company recorded restructuring costs related to the consolidation of excess facilities, which included the closure of certain corporate facilities in the U.S. and the United Kingdom. The Company recorded a restructuring charge of $6.0 million for excess facilities relating primarily to lease termination and non-cancelable lease costs. The lease costs represent future lease payments subsequent to closure less estimated sublease income. Amounts related to the net lease expense due to the consolidation of facilities will be paid over the respective lease terms through 2007. Note 9--Comprehensive Loss (in thousands) The components of comprehensive loss, net of tax, are as follows:

Note 10--Recent Accounting Pronouncements In July 2001, the FASB issued SFAS No. 141, "Business Combinations". SFAS No. 141 requires the implementation of the purchase method of accounting for business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method. In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets", which is effective for the Company's fiscal year ending March 31, 2003. SFAS No. 142 requires, among other things, the discontinuance of goodwill amortization. In addition, the standard includes provisions upon adoption for the reclassification of certain existing recognized intangibles as goodwill, reassessment of the useful lives of existing recognized intangibles, reclassification of certain intangibles out of previously reported goodwill and the testing for impairment of existing goodwill and other intangibles. The Company is currently assessing, but has not yet determined the impact of SFAS No. 142 on its financial position and results of operations. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which is effective for the Company beginning fiscal 2003. This Statement supersedes SFAS No. 121 and APB 30, however, this Statement retains the requirement of Opinion 30 to report discontinued operations separately 7 VIRATA CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) from continuing operations and extends that reporting to a component of an entity that either has been disposed of (by sale, by abandonment, or in a distribution to owners) or is classified as held for sale. This Statement addresses financial accounting and reporting for the impairment of certain long-lived assets and for long-lived assets to be disposed of. Management does not expect the adoption of SFAS No. 144 to have a material impact on the Company's financial position and results of operations. Note 11- Subsequent Event On October 1, 2001, Virata entered into a definitive Agreement and Plan of Merger (the "merger agreement") with GlobeSpan, Inc. ("GlobeSpan") and Wine Acquisition Corp. ("Merger Sub."), a wholly-owned subsidiary of GlobeSpan, to effectuate a strategic "merger of equals" between Virata and GlobeSpan. Pursuant to the merger agreement, Merger Sub. will be merged with and into Virata with Virata continuing as the surviving corporation and becoming a wholly-owned subsidiary of GlobeSpan. The combined company will be named GlobeSpan Virata, Inc. (the "combined company"). As a result of the merger, each share of common stock of Virata outstanding immediately prior to the effective time of the merger will be automatically converted into the right to receive 1.02 validly issued, fully paid and nonassessable shares of common stock of GlobeSpan (the "exchange ratio"). In addition, each option to purchase capital stock of Virata which is outstanding under Virata's existing stock option plans will be converted into an option to purchase GlobeSpan common stock on the same terms and conditions as currently exist, provided that the number of shares and the exercise price subject to such option will be adjusted to reflect the exchange ratio. The consummation of the merger is subject to regulatory approvals, approval by the stockholders of both Virata and GlobeSpan and other customary closing conditions. Significant stockholders of both companies, who own or will own approximately 10% of the outstanding shares, have agreed to vote in favor of the transaction (the "stockholders agreement"). The merger will be accounted for under the purchase method of accounting and is expected to be tax-free to Virata stockholders. However, there can be no guarantee that the merger or the other transactions contemplated under the merger agreement will close by any particular date, if at all. On October 1, 2001, Virata adopted an amendment to the Rights Agreement, dated May 2, 2001, between Virata and American Stock Transfer & Trust Company (the "rights agreement"), as Rights Agent, which excepted the transactions contemplated by the merger agreement and the stockholders agreement between Virata's stockholders and GlobeSpan from triggering the rights under the rights agreement and provided for the termination of the rights agreement at the effective time of the merger. 8 ITEM 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations. Overview Virata Corporation ("Virata", "we" or the "Company") provides communications processors and physical-layer chips combined with integrated software modules to manufacturers of equipment utilizing 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 generate revenues from sales of semiconductors, systems-level products, software licenses, maintenance, royalties and design services. Semiconductor revenues come from 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 systems-level products primarily to one customer. This principal customer discontinued its use of our systems products in fiscal year 2001, and, as a result, our systems-level products currently consist only of sales of board-level evaluation systems featuring our latest ASSP products. Our revenues to date have been concentrated with a small number of customers. We expect this concentration to continue for the foreseeable future. For the three months ended September 30, 2001, Ambit Microsystems and Siemens A.G. accounted for 63.1% and 11.9% of our total revenues, respectively. For the three months ended October 1, 2000, Westell Technologies accounted for 33.5% of our total revenues. For the six months ended September 30, 2001, Ambit Microsystems and Siemens A.G. accounted for 57.9% and 15.4% of our total revenues, respectively. For the six months ended October 1, 2000, Westell Technologies accounted for 33.7% of our total revenues. International revenues, from customers located outside of the U.S., accounted for 95.2% of our total revenues for the three months ended September 30, 2001, and 41.1% for the three months ended October 1, 2000. For the six months ended September 30, 2001, and October 1, 2000, international revenues accounted for 94.5% and 35.7%, respectively, of our total revenues. For the three months ended September 30, 2001, sales to customers in Taiwan and Germany represented 74.2% and 12.4% of our total revenues, respectively. For the six months ended September 30, 2001, sales to customers in Taiwan and Germany represented 63.0% and 16.0% of our total revenues, respectively. For the three and six months ended October 1, 2000, sales to customers in Taiwan represented 13.3% and 13.1% of our total revenues, respectively. 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 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 limited operating history in the DSL market makes it difficult to accurately forecast our future operating results. To date, we have not achieved profitability in any quarterly or annual period, and we had an accumulated deficit of $323.0 million as of September 30, 2001. Although our total revenues have grown in fiscal 2001, we cannot be certain that our total revenues will increase at a rate sufficient to achieve and maintain profitability. 9 Recent Developments On October 1, 2001, Virata entered into a definitive Agreement and Plan of Merger with GlobeSpan and Merger Sub., a wholly-owned subsidiary of GlobeSpan, to effectuate a strategic "merger of equals" between Virata and GlobeSpan. Pursuant to the merger agreement, Merger Sub. will be merged with and into Virata with Virata continuing as the surviving corporation and becoming a wholly-owned subsidiary of GlobeSpan. The combined company will be named GlobeSpan Virata, Inc. As a result of the merger, each share of common stock of Virata outstanding immediately prior to the effective time of the merger will be automatically converted into the right to receive 1.02 validly issued, fully paid and nonassessable shares of common stock of GlobeSpan. In addition, each option to purchase capital stock of Virata which is outstanding under Virata's existing stock option plans will be converted into an option to purchase GlobeSpan common stock on the same terms and conditions as currently exist, provided that the number of shares and the exercise price subject to such option will be adjusted to reflect the exchange ratio. The consummation of the merger is subject to regulatory approvals, approval by the stockholders of both Virata and GlobeSpan and other customary closing conditions. Significant stockholders of both companies, who own or will own approximately 10% of the outstanding shares, have agreed to vote in favor of the transaction. The merger will be accounted for under the purchase method of accounting and is expected to be tax-free to Virata stockholders. However, there can be no guarantee that the merger or the other transactions contemplated under the merger agreement will close by any particular date, if at all. On October 1, 2001, Virata adopted an amendment to the rights agreement, dated May 2, 2001, between Virata and American Stock Transfer & Trust Company, as Rights Agent, which excepted the transactions contemplated by the merger agreement and the stockholders agreement between Virata's stockholders and GlobeSpan from triggering the rights under the rights agreement and provided for the termination of the rights agreement at the effective time of the merger. Forward-looking Statements This Quarterly Report contains 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," "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 Quarterly 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 Quarterly Report. These statements are based on plans, estimates and projections at the time we make the statements, and no undue reliance should be placed on them. We assume no obligation to revise or update the forward-looking statements contained in this Quarterly Report to reflect events or circumstances after the date hereof. Results of Operations Where more than one significant factor contributed to changes in results from year to year, we have quantified material factors throughout this Management Discussion and Analysis of Financial Condition and Results of Operations where practicable. Total Revenues Total revenues decreased 28.4% from $42.2 million for the three months ended October 1, 2000 to $30.2 million for the three months ended September 30, 2001. Total revenues decreased 27.8% from $69.9 million for the six months ended October 1, 2000, to $50.5 million for the six months ended September 30, 2001. The decrease between the two three-month periods and the two six-month periods was primarily attributable to delays in expected DSL rollouts, and our customers' inventory buildup in the second half of fiscal year 2001. As a result, certain customers rescheduled or cancelled shipments in Asia and the U.S. and revised the shipment schedules of their remaining orders. In addition, the slowdown in the U.S. economy and delays in expected DSL rollouts decreased the number of new software licensees. 10 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, software maintenance and operations expense. Cost of revenues decreased to $15.0 million, or 49.8% of total revenues, for the three months ended September 30, 2001, compared to $22.3 million, or 52.8% of total revenues, for the three months ended October 1, 2000. Cost of revenues increased to $26.4 million, or 52.3% of total revenues, for the six months ended September 30, 2001, compared to $37.2 million, or 53.2% of total revenues, for the six months ended October 1, 2000. Total gross margin increased to 50.2% for the three months ended September 30, 2001, from 47.2% for the three months ended October 1, 2000. For the six months ended September 30, 2001, total gross margin increased to 47.7% from 46.8% for the six months ended October 1, 2000. The increase in semiconductor gross margin between the two three-month periods and the two six-month periods was primarily due to the following factors: 1) changes in the manufacturing process resulting in improved yields on newer products; 2) a continuing shift in product mix to our higher margin products, such as the shift from our older Helium product to the newer Helium derivative products; and 3) inventory reserves were reduced by $4.1 million in the three months ended September 30, 2001, and $5.3 million in the six months ended September 30, 2001, due to the sale of excess inventory reserved in the prior fiscal year and the write off of inventory previously reserved. Of this movement $3.8 million was released to the results of operations for the three months ended September 30, 2001 and $3.7 million for the six months ended September 30, 2001. In the comparative periods of fiscal year 2001, we made reserves against our discontinued products, of which there were no significant subsequent sales. Our gross margin may continue to be influenced by increased competition and more consumer-oriented markets may impact average selling price. Research and Development Expenses Research and development expenses consist primarily of engineering staffing costs and technology license fees. Research and development expenses increased 73.0% to $15.2 million for the three months ended September 30, 2001, from $8.8 million for the three months ended October 1, 2000. Research and development expenses increased 101.9% to $29.3 million for the six months ended September 30, 2001, from $14.5 million for the six months ended October 1, 2000. The increase was primarily due to the addition of research and development personnel as a result of accelerated new product development, technology license fees, and the addition of personnel as a result of the acquisitions of Inverness Systems, Ltd., now known as Virata Israel ("Inverness Systems"), Agranat Systems, Inc. ("Agranat Systems") and Excess Bandwidth Corp ("Excess Bandwidth"). The increase was partially offset by the $1.8 million credit recorded for National Insurance Contributions on options for the research and development group. For the three months ended September 30, 2001, and October 1, 2000, we recognized amortization of stock compensation of $1.6 million and $428,000, respectively, for the research and development group. For the six months ended September 30, 2001, and October 1, 2000, we recognized amortization of stock compensation of $2.7 million and $478,000, respectively, for the research and development group. See "Amortization of Stock Compensation" below. For the three and six months ended September 30, 2001, a credit of $1.8 million was recorded for National Insurance Contributions on options for the research and development group. For the three and six month periods ended October 1, 2000, charges of $352,000 and $1.0 million, respectively, were recorded for National Insurance Contribution on options for the research and development group. See "National Insurance Contributions 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 decreased 27.1% to $4.6 million for the three months ended September 30, 2001, from $6.3 million for the three months ended October 1, 2000. Sales and marketing expenses decreased 10.7% to $10.1 million for the six months ended September 30, 2001, from $11.3 million for the six months ended October 1, 2000. The decrease was primarily due to the $1.2 million credit recorded for National Insurance Contributions on options for the sales and marketing group and decreased sales commissions associated with lower revenues. For the three months ended September 30, 2001, and October 1, 2000, we recognized amortization of stock compensation of $794,000 and $113,000, respectively, for the sales and marketing group. For the six months ended September 30, 2001, and October 1, 2000, we recognized amortization of stock compensation of $923,000 and $163,000, respectively, for the sales and marketing group. See "Amortization of Stock Compensation" below. For the three and six months ended September 30, 2001, a credit of $1.2 million was recorded for National Insurance 11 Contributions on options for the sales and marketing group. For the three and six month periods ended October 1, 2000, charges of $236,000 and $781,000, respectively, were recorded for National Insurance Contribution on options for the sales and marketing group. See "National Insurance Contributions 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 decreased 64.6% to $2.1 million for the three months ended September 30, 2001, from $5.8 million for the three months ended October 1, 2000. General and administrative expenses decreased 33.1% to $7.1 million for the six months ended September 30, 2001, from $10.5 million for the six months ended October 1, 2000. The decrease was primarily attributable to the $2.6 million credit recorded for National Insurance Contributions on options for the general and administrative group. For the three months ended September 30, 2001, and October 1, 2000, we recognized amortization of stock compensation of $578,000 and $82,000, respectively, for the general and administrative group. For the six months ended September 30, 2001, and October 1, 2000, we recognized amortization of stock compensation of $766,000 and $132,000, respectively, for the general and administrative group. See "Amortization of Stock Compensation" below. For the three and six months ended September 30, 2001, a credit of $2.6 million was recorded for National Insurance Contributions on options for the general and administrative group. For the three and six month periods ended October 1, 2000, charges of $1.1 million and $2.5 million, respectively, were recorded for National Insurance Contribution on options for the general and administrative group. See "National Insurance Contributions on Options" below. National Insurance Contributions on Options We recorded a charge (recovery) for National Insurance Contributions on options, which is based on a tax applied in the United Kingdom on the gain in our stock options for options granted to our United Kingdom employees, both vested and unvested. Through October 1, 2000, the charge was 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. In October 2000, the 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. Prior to October 1, 2000, the Company estimated and recorded its liability for the National Insurance Contributions based upon total outstanding stock options held by its employees in the United Kingdom. Beginning in the quarter ended December 31, 2000, the Company would have recorded an additional liability only upon the exercise of options granted to employees in the United Kingdom subsequent to October 1, 2000, after the existing reserve had been exhausted. No additional liability has been recorded since the quarter ended October 1, 2000. Since October 2000, the grant of new options to employees have been made under the condition that any liability to Employer's National Insurance Contributions arising on the exercise of the option will be borne by the employee. In May 2001, legislation went into effect in the United Kingdom whereby the liability for National Insurance Contributions on any options to employees in the United Kingdom granted between April 6, 1999 and May 19, 2000 may be limited by making a payment for National Insurance Contributions with regard to such grants. The amount on which National Insurance Contributions are payable in connection with these options is limited to the difference between the market value of our common stock on November 7, 2000 and the exercise price of the options. During the quarter ended September 30, 2001, the Company paid $1.5 million to settle National Insurance Contributions liability with respect to the majority of the Company's option grants. The accrued liability in excess of this amount was released as a $5.6 million adjustment to the Company's results of operations for the three and six months ended September 30, 2001. The settlement of this liability removes the need for any further reserves to be made in respect of National Insurance Contributions for these options and eliminates the uncertainty of the future liability. 12 Restructuring Costs In June 2001, we recorded restructuring costs related to the consolidation of excess facilities, which included the closure of certain corporate facilities in the U.S. and the United Kingdom. We recorded a restructuring charge of $6.0 million for excess facilities relating primarily to lease termination and non-cancelable lease costs. The lease costs represent future lease payments subsequent to closure less estimated sublease income. Amount related to the net lease expense due to the consolidation of facilities will be paid over the respective lease terms through 2007. 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 three months ended September 30, 2001 was $27.5 million, compared to $16.6 million for the three months ended October 1, 2000. Amortization of intangible assets for the six months ended September 30, 2001 was $55.5 million, compared to $26.5 million for the six months ended October 1, 2000. The increase in both the two three-month periods and the two six-month periods was primarily a result of these acquisitions. We are amortizing the intangible assets over the expected lives of the assets of between 24 to 60 months. Amortization of Stock Compensation 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 stock option plans 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. Options to purchase 4.3 million shares were cancelled on March 8, 2001 under the terms of the Exchange Program. The new options were granted on September 7, 2001, and the exercise price was 85% of market price on that date. We recorded an additional $6.6 million of unearned stock compensation related to the 15% discount between the market price and the exercise price on September 7, 2001. Through July 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 acquisitions of Excess Bandwidth and Agranat Systems. We recognized amortization of stock compensation expense of $3.0 million for the three months ended September 30, 2001, and $623,000 for the three months ended October 1, 2000. We recognized amortization of stock compensation expense of $4.4 million for the six months ended September 30, 2001, and $773,000 for the six months ended October 1, 2000. The increase was primarily due to the $1.6 million amortization of stock compensation expense related to the 25% immediate vesting of the new options granted under the Exchange Program, and the additional amortization from the Excess Bandwidth and Agranat Systems acquisitions. 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 There was no acquired in-process research and development expense for the three and six months ended September 30, 2001. In connection with acquisitions completed during the six months ended October 1, 2000, we recorded charges of $79.9 million and $81.1 million associated with acquired in-process research and development for the three and six month periods ended October 1, 2000, respectively. 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 three and six months ended October 1, 2000 were attributable to the acquisitions 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. These acquisitions were accounted for as purchase business combinations. 13 Interest and Other Income, Net Interest and other income, net consists primarily of income earned on cash and cash equivalents, marketable investments, interest expense, and foreign exchange gains and losses. Due primarily to lower interest rates and our portfolio mix, interest income for the three months ended September 30, 2001 decreased to $5.0 million, compared to $7.3 million for the three months ended October 1, 2000. Interest income for the six months ended September 30, 2001 increased to $10.2 million, from $8.4 million for the six months ended October 1, 2000. This increase was due primarily to cash provided by our follow-on offering that was completed in July 2000. Liquidity and Capital Resources We have financed our operations primarily through venture capital, corporate investments and 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 $73.0 million, net of commissions and offering costs. 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 $461 million, net of commissions and offering costs. Our cash and cash equivalents together with our short-term investments decreased $70.5 million to $417.5 million for the six months ended September 30, 2001. The decrease in these accounts was primarily due to the purchase of long-term marketable investments. Our cash and cash equivalents decreased $81.1 million to $240.8 million for the six months ended September 30, 2001. Our working capital at September 30, 2001 was $407.7 million as compared to $497.1 million at April 1, 2001. Our current ratio decreased to 14.5 to 1, as of September 30, 2001, from 18.0 to 1, as of April 1, 2001. Net cash provided by operating activities for the six months ended September 30, 2001 of $8.8 million was primarily attributed to non-cash expenses including the provision for doubtful accounts and returns of $1.4 million, depreciation and amortization of $59.7 million, and amortization of stock compensation of $4.4 million. Cash provided was also due to a decrease in accounts receivable, inventories and other assets of $6.6 million, $13.2 million, and $1.1 million, respectively, and an increase in accrued liabilities of $10.6 million, partially offset by a net loss of $74.5 million, an increase in other current assets of $3.1 million, and a decrease in accounts payable and accrued National Insurance Contribution on options of $3.9 million and $7.2 million, respectively. Net cash provided by operating activities for the six months ended October 1, 2000 of $883,000 was primarily attributed to non-cash expenses including the depreciation and amortization of $29.2 million, and acquired in-process research and development expense in connection with the acquisitions of Inverness Systems, Agranat Systems and Excess Bandwidth of $81.1 million. Cash provided was also due to a decrease in other current assets of $1.2 million, and increases in accounts payable, accrued liabilities, and accrued National Insurance Contribution on options of $12.3 million, $3.1 million, and $4.2 million, respectively, partially offset by a net loss of $103.1 million, increases in accounts receivables, and inventories, of $18.4 million, and $10.2 million, respectively. Net cash used in investing activities was $92.4 million for the six months ended September 30, 2001, which reflected the net purchase of short-term investments of $10.6 million, purchase of investments of $74.1 million, and net purchase of property and equipment of $7.7 million. Net cash used in investing activities was $389.6 million for the six months ended October 1, 2000, which reflected $376.2 million net purchase of short-term investments, $2.0 million of purchase of investments, net purchase of property and equipment of $4.9 million, and $6.5 million of cash used in connection with our acquisitions of Inverness Systems, Agranat Systems, and Excess Bandwidth. Net cash provided by financing activities was $2.3 million for the six months ended September 30, 2001. Net cash provided by financing activities was attributable primarily to proceeds from the issuance of common stock through our employee stock purchase plan and employee stock option plan of $2.5 million. Net cash provided by financing activities was $462.0 million for the six months ended October 1, 2000, 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 $462.5 million. 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 14 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 July 2001, the FASB issued SFAS No. 141, "Business Combinations". SFAS No. 141 requires the implementation of the purchase method of accounting for business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method. In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets", which is effective for the Company's fiscal year ending March 31, 2003. SFAS No. 142 requires, among other things, the discontinuance of goodwill amortization. In addition, the standard includes provisions upon adoption for the reclassification of certain existing recognized intangibles as goodwill, reassessment of the useful lives of existing recognized intangibles, reclassification of certain intangibles out of previously reported goodwill and the testing for impairment of existing goodwill and other intangibles. The Company is currently assessing, but has not yet determined the impact of SFAS No. 142 on its financial position and results of operations. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which is effective for the Company beginning fiscal 2003. This Statement supersedes SFAS No. 121 and APB 30, however, this Statement retains the requirement of Opinion 30 to report discontinued operations separately from continuing operations and extends that reporting to a component of an entity that either has been disposed of (by sale, by abandonment, or in a distribution to owners) or is classified as held for sale. This Statement addresses financial accounting and reporting for the impairment of certain long-lived assets and for long-lived assets to be disposed of. Management does not expect the adoption of SFAS No. 144 to have a material impact on the Company's financial position and results of operations. Risk Factors The risks described below and other information included in this Quarterly 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. Unless specifically noted, reference to Virata in the discussion below are references to Virata and its subsidiaries. Risk Factors Relating to our Business and Industry 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 been introduced only recently. 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. 15 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 $323.0 million at September 30, 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. 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; 16 . 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 dominant 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 results of operations. 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. 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 17 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. 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 18 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, MystiCom, Ltd, 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 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 six months ended September 30, 2001, Ambit Microsystems and Siemens A.G. accounted for 57.9% and 15.4% of our total revenues, respectively. For the six months ended October 1, 2000, Westell Technologies accounted for 33.7% of our total revenues. However, due to our customers' inventory buildup in the second half of fiscal 2001, certain customers rescheduled or cancelled shipments in Asia and the U.S. and revised the shipment schedules of their remaining orders. 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 the second half of fiscal year 2001 and the six months ended September 30, 2001, we rescheduled and/or cancelled semiconductor shipments that our customers had contractually agreed to receive and revised the shipment schedule of the remaining orders to a limited number of our customers in Asia and the U.S. 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 19 sales and any cancellation of a purchase order could have a negative impact on our financial condition and results of operations. 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 six months ended September 30, 2001, 96.1% of our semiconductor revenues were generated from sales of our Helium and Helium derivative products. For the six months ended October 1, 2000, 87.5% of our semiconductor revenues were generated from sales of our Helium products. We expect that a substantial portion of our total revenues will continue to be derived from our Helium and Beryllium product families. Therefore, broad market acceptance of these product families 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. 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. 20 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 third parties claims similar to the Amati claim in the future. Because we have significant operations in countries outside of the U.S., 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 U.S. We have subsidiaries in the United Kingdom, Taiwan and Israel and sales offices in several other countries. These 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. 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 would likely result in the disruption of our operations at that facility. Further, we will be 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. We cannot predict whether or in what manner these problems will be resolved. In addition, some of the officers and employees of Inverness Systems, our Israeli subsidiary, are currently obligated to perform annual reserve duty in the Israeli armed forces and are subject to 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 sell a significant portion of our products in countries other than the U.S., 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 94.5% our total revenues for the six months ended September 30, 2001, and 35.7% for the six months ended October 1, 2000. 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 U.S., 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. We completed the acquisitions of D2 Technologies, 21 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; . 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. The combined company could be subject to class action litigation due to stock price volatility, which, if it occurs, will distract management and result in substantial costs, and could result in judgments against the combined company In the past, securities class action litigation has often been brought against companies following periods of volatility in the market price of their securities. The combined company may be the target of similar litigation in the future. Securities litigation could result in substantial costs and divert management's attention and resources, which could cause serious harm to the combined company's business, financial condition and results of operations. We may engage in future acquisitions that could dilute our stockholders' equity and harm our business, results of operations and financial condition 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. We may make acquisitions of businesses, products or technologies in the future. However, we cannot be sure that we will be able to locate additional 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. 22 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 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, respectively. 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 than we do, 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. 23 We believe our principal competitors include or will include Alcatel Microelectronics, Analog Devices, Broadcom, Centillium Communications, Mindspeed, Intel, 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 Intel and Texas Instruments as Helium and Lithium competitors, 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. 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. 24 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 U.S., 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 for 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; . 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 that QPSX claims to have the right to enforce. Siemens is a licensee of Virata's wholly-owned subsidiary, Virata Israel (formerly Inverness Systems), 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 25 $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 scenario 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 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. 26 Risk Factors Relating to the Proposed Merger with GlobeSpan In addition to the risks described above, which may also apply to GlobeSpan and, if the proposed merger is completed, the combined company, the risks described below relating to the proposed merger should be carefully considered. If the conditions to the merger are not met, the merger will not occur Specified conditions must be satisfied or waived in order to complete the merger. The conditions that must be satisfied or waived are described in detail in the Agreement and Plan of Merger, dated as of October 1, 2001. We cannot assure that each of the conditions will be satisfied. If the conditions are not satisfied or waived, the merger will not occur or will be delayed, and we may lose some or all of the intended benefits of the merger. We may not be able to obtain the required regulatory approvals for completion of the merger We cannot complete the merger until we give notification and furnish information to the Federal Trade Commission and the Antitrust Division of the Department of Justice and observe a statutory waiting period requirement. We have filed together with GlobeSpan the required notification and report forms with the Federal Trade Commission and the Antitrust Division as of October 15, 2001. At any time before or after the effective time of the merger, the Federal Trade Commission, the Antitrust Division or any state or competition authority of another country could take any action under the applicable antitrust or competition laws as it deems necessary or desirable. Private parties may also institute legal actions under the antitrust laws under some circumstances. These actions could include seeking to enjoin the completion of the merger. Regulators may take action that could affect, delay or prohibit the merger or negatively effect the combined company and stockholders may not be able to change their vote in the event of any such action The statutory waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, has not expired and there can be no assurance that regulators will terminate or allow the waiting period to expire without seeking additional information, taking action to prohibit the merger or conditioning the merger on restrictions that would negatively impact the combined company. Any such action may have the effect of delaying, changing the terms of or preventing the merger. In addition, if the necessary stockholder approvals are obtained prior to any such regulatory action that could have an effect on the merger or the combined company, stockholders may not have the opportunity to re-vote or change their vote. Our stockholders will receive 1.02 shares of GlobeSpan common stock in exchange for each share of our common stock in the merger, regardless of changes in the relative market value of our common stock and GlobeSpan common stock Each share of our common stock will be exchanged for 1.02 shares of GlobeSpan common stock upon completion of the merger. This exchange ratio is a fixed number and the merger agreement does not contain any provision to adjust this ratio for changes in the market price of either our common stock or GlobeSpan common stock. Neither party is permitted to terminate the merger agreement solely because of changes in the market price of their own or the other party's common stock. Consequently, the specific dollar value of GlobeSpan common stock to be received by our stockholders will depend on the market value of GlobeSpan at the time of completion of the merger and may decrease from the date of the merger agreement or the approval by the stockholders. We cannot predict or give any assurances as to the market price of GlobeSpan common stock at any time before the merger or of the stock of the combined company after the merger. The prices of our common stock and the GlobeSpan common stock may vary because of factors such as: . changes in the our business, operating results or prospects; . changes in the business, operating results or prospects of GlobeSpan; . actual or anticipated variations in quarterly results of operations; . market assessments of the likelihood that the merger will be completed; . the timing of the completion of the merger; . sales of our common stock or GlobeSpan common stock; 27 . additions or departures of key personnel; . announcements of significant acquisitions, strategic partnerships, joint ventures or capital commitments; . conditions or trends in the telecommunications industry; . announcements of technological innovations or the discontinuation of products or services by made by us, by GlobeSpan, or our respective competitors or customers; . changes in market valuations of other telecommunications companies; . the prospects of post merger operations; . regulatory considerations; . general market and economic conditions. If the merger is successfully completed, the holders of our common stock will become holders of GlobeSpan common stock. GlobeSpan business differs from our business, and GlobeSpan's results of operations, as well as the practice of GlobeSpan common stock, may be effected by factors different than those affecting our results of operations and the price of our common stock. We may not achieve the potential benefits from the merger, which may have a material adverse effect on the combined company's business, financial and operating results We entered into the merger agreement with GlobeSpan with the expectation that the merger will result in benefits to the combined company arising out of the creation of the global provider of a broad range of integrated circuits and software for DSL applications to communications equipment manufacturers. To realize any benefits or synergies from the merger, the combined company will face the following post-merger challenges: . combining product and service offerings effectively and efficiently; . retaining and assimilating the management, employees and sales forces of each company; . selling the existing product of each company for the other company's customers; . retaining existing customers, strategic partners and suppliers of each company; . developing new products that utilize the assets and resources of both companies; . realizing expected cost savings and synergies for the merger; and . developing and maintaining consistent standards, controls, procedures, policies and information systems. If the combined company is not successful in addressing these and other challenges, then the benefits of the merger will not be realized and, as a result, the combined company's common stock may be adversely effected. Further, we cannot assure that the growth rate of the combined company will equal the historic growth rate we have experienced. The market price of the combined company's common stock may decline as a result of the merger The market price of the combined company's common stock may decline as a result of the merger for a number of reasons, including if: . the integration of GlobeSpan and Virata is not completed in a timely and efficient manner; . the combined company does not achieve the perceived benefits of the merger as rapidly or to the extent anticipated by financial or industry analysts; . the effect of the merger on the combined company's financial results is not consistent with the expectations of financial or industry analysts; or . significant stockholders of GlobeSpan and Virata decide to dispose of their shares following completion of the merger. 28 Our officers and directors have interests different from the interests of our stockholders that may have influenced them to support or approve the merger The directors and officers of GlobeSpan and Virata have entered into arrangements which may create interests in the merger that are different from, or in addition to, our stockholders' interests, including the following: . several of our non-employee directors hold stock options that will accelerate upon the merger; . some of our officers have employment agreements that provide for bonus payments in the event of a transaction such as the merger; . GlobeSpan has agreed that its board of directors will take all action necessary so that as of the effective time, the board of directors of GlobeSpan will consist of eight members, four of whom will be designated by GlobeSpan and four of whom will be designated by us; . we have agreed and GlobeSpan has entered into contracts providing that Armando Geday will serve as the combined company's president and chief executive officer and that Charles Cotton will serve as the combined company's executive chairman of the board for one year following the merger and non-executive chairman afterwards; . GlobeSpan has agreed to indemnify each present and former Virata officer and director against liabilities arising out of such person's services as an officer or director; . GlobeSpan will maintain officers' and directors' liability insurance to cover any such liabilities for the next six years; and . we have agreed to use commercially reasonable efforts to enter into new employment arrangements with specified key employees. For the above reasons, our directors and officers may have been more likely to support and recommend the approval of the merger agreement than if they did not hold these interests. Our stockholders should consider whether these interests may have influenced these directors and officers to support or recommend the merger. Uncertainty regarding the merger and the effects of the merger could cause our customers, strategic partners or key employees to delay or defer decisions Our customers and strategic partners, in response to the announcement of the merger, may delay or defer decisions, which could have a material adverse effect on our business, regardless of whether the merger is ultimately completed. Similarly, our current and prospective employees may experience uncertainty about their future roles with the combined company, which may adversely affect our ability to attract and retain key management, sales, marketing and technical personnel. Further, if the merger is terminated and we seek another merger or business combination, there can be no assurance that we will be able to find a partner on terms similar to those provided for in the merger agreement. While the merger agreement is in effect, and subject to very narrowly defined exceptions, each party is prohibited from soliciting, initiating, encouraging or entering into certain extraordinary transactions, such as a merger, sale of assets or other business combination with any third party which may discourage any other strategic partner from making an offer to us superior to the proposed merger. Because the combined company will have larger revenues and operations, third parties, who have potential litigation claims against either us or GlobeSpan and have decided not to pursue those claims against the individual companies, may consider asserting those claims against the combined company We believe that the combined company will have significantly greater revenues, operations in more countries and potentially more employees than either ourselves or GlobeSpan individually. As a result, it can be expected that some third parties who believe that they have claims against either GlobeSpan or us, but who chose not to assert those claims because of the size of the individual companies, may now believe that those claims against the larger combined company are advantageous. 29 ITEM 3 -- Quantitative and Qualitative Disclosures about Market Risk. The primary objective of Virata's 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 likely decline. To minimize this risk in the future, we maintain our portfolio of cash equivalents and marketable investments in a variety of securities, including commercial paper, money market funds, government and corporate debt securities and certificates of deposit. As of September 30, 2001, all of our marketable investments are government or corporate debt securities or high quality commercial paper. In addition, contract maturities of these securities were within two years as of September 30, 2001. See Note 4 of the "Notes to Condensed 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 September 30, 2001, the fair value of these investments was $8.8 million. We develop products in the United Kingdom, Israel and the U.S. 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 on net assets located in these geographies. On September 30, 2001, approximately 5.9% of our net assets were recorded in non-U.S. dollar currencies. We did not purchase or hold derivative financial instruments as of September 30, 2001. Management believes that the market risk associated with Virata's market risk sensitive instruments as of September 30, 2001 is not significant. 30 PART II - OTHER INFORMATION ITEM 1 - Legal Proceedings. Virata is not currently a party to any material legal proceedings. ITEM 2 - Changes In Securities and Use of Proceeds. None. ITEM 3 - Defaults Upon Senior Securities. None. ITEM 4 - Submission Of Matters To A Vote Of Security Holders. The Company held its Annual Meeting of Shareholders on August 21, 2001. At the meeting, the Company's stockholders approved the following matters: 1. The election of three directors of the Company for three year terms or until their successor are duly elected and qualified. Votes For Withheld ------------- ------------ Martin Jackson 46,792,789 5,113,121 Patrick Sayer 51,463,398 442,512 Giuseppe Zocco 51,485,498 420,412 2. The ratification of the selection of the firm of PricewaterhouseCoopers LLP to serve as independent auditors of the Company for the fiscal year ending March 31, 2002.

3. The Proposal to approve amendments to the Company's Amended and Restated 1999 Stock Incentive Plan to increase the aggregate number of shares of the common stock of the Company currently issuable under the plan from 15.6 million to 17.6 million shares, and provide for an automatic annual increase in the number of shares that may be issued under the plan.

ITEM 5 - Other Information. None. 31 ITEM 6 - Exhibits And Reports On Form 8-K. Exhibits Exhibit ------- Number Description ------ ----------- 3.1 Amended and Restated Certificate of Incorporation of Virata Corporation (incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended April 2, 2000) ....... 3.2 Certificate of Amendment of Amended and Restated Certificate of Incorporation of Virata Corporation (incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended April 2, 2000) ............................................... 3.3 Bylaws of Virata Corporation, as amended to date (incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended April 2, 2000) ................................... 4.1 Specimen form of Virata Corporation's Common Stock Certificate (incorporated by reference to the 1999 Form S-1) ................... 4.2 Form of Rights Agreement, dated as of May 2, 2001, between Virata Corporation and American Stock Transfer and Trust Company, as Rights Agent, which includes as Exhibit A the Form of Right Certificate, Form of Assignment and Form of Election to Purchase (incorporated by reference to the Registrant's Registration Statement on Form 8-K filed May 8, 2001) ........................... 4.3 Form of Certificate of Designations of Series A Preferred Stock (incorporated by reference to the Registrant's Registration Statement on Form 8-K filed May 8, 2001) ........................... 10.1 Amendment One to the Technology License Agreement between ARM Limited and Virata Ltd., dated as of January 5, 2001 (1) ........... 10.2 Technology License Agreement between MystiCom Limited and Virata Ltd., dated as of December 22, 2000 (1) ............................ (1) Confidential treatment has been requested for selected sections of this exhibit. Reports on Form 8-K The Registrant filed two reports on Form 8-K during the three months ended September 30, 2001. Information regarding the items reported on is as follows: Filing Date Item Reported On ----------- ---------------- July 31, 2001 The Company announced its fiscal year 2002 first quarter financial results for the period ended July 1, 2001. August 23, 2001 The Company disclosed information relating to its understanding of the DSL market in Asia and to comment specifically on its position in the major markets in the region. 32 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Virata Corporation Date: November 14, 2001 By: /s/ Charles Cotton ----------------------------- Charles Cotton Chief Executive Officer (Principal Executive Officer) Date: November 14, 2001 By: /s/ Andrew Vought ------------------------------ Andrew Vought Chief Financial Officer, Senior Vice President Finance and Administration and Secretary (Principal Financial and Accounting Officer) 33 EXHIBIT INDEX

VIRATA CORP 10-Q