UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~June~~September 30, 2002

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File No. 000-31259

INTEGRATED TELECOM EXPRESS, INC.

(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization) 77-0403748 (I.R.S. Employer Identification Number)

Delaware		77-0403748
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

400 Race Street, San Jose, California (Address of principal executive offices) 95126 (Zip Code)

10121 Miller Avenue, Suite 202 Cupertino, California		95014
(Address of principal executive offices)		(Zip Code)

(408) ~~792~~257-~~0797~~3243

(Registrant’s telephone number, including area code)

~~N/A~~ Former address: 400 Race Street, San Jose, California 95126

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by 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 ¨

The registrant had 42,627,112 shares of common stock outstanding as of ~~August~~November 97, 2002.

INTEGRATED TELECOM EXPRESS, INC.

INDEX

		Page No.
PART I FINANCIAL INFORMATION
PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited):
	Balance Sheets as of June 30, 2002 and December 31, 2001	3
	Balance Sheets as of September 30, 2002 and December 31, 2001	3
	Statements of Operations for the Three Months and the Six Months Ended June 30, 2002 and 2001	4
	Statements of Operations for the Three Months and the Nine Months Ended September 30, 2002 and 2001	4
	Statements of Cash Flows for the Six Months Ended June 30, 2002 and 2001	5
	Statements of Cash Flows for the Nine Months Ended September 30, 2002 and 2001	5
	Notes to Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1314
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	2022
PART II OTHER INFORMATION
Item 4.	Controls and Procedures	22
Item 1.	Legal Proceedings	21
PART II	OTHER INFORMATION
Item 6.	Exhibits and Reports on Form 8-K	21
Item 1.	Legal Proceedings	23
	Signatures	22
Item 6.	Exhibits and Reports on Form 8-K	23
	Signatures	24
	Certification	25

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

INTEGRATED TELECOM EXPRESS, INC.

BALANCE SHEETS

(In Thousands, Except Par Value)

(Unaudited)

	June 30, 2002			December 31, 2001
	September 30, 2002			December 31, 2001
ASSETS
Current assets:
Cash and cash equivalents	$	~~112~~107,~~532~~654		$	119,278
Accounts receivable, net of allowance for doubtful accounts of $90 and $141		25			1,515
Accounts receivable, net of allowance for doubtful accounts of $80 and $141		—			1,515
Inventories, net		52244			1,819
Prepaid expenses and other current assets		~~427~~1,338			1,084
Total current assets		~~113~~109,~~036~~236			123,696
Property and equipment, net		~~273~~188			8,877
Licenses, net		—			2,903
Other assets		2,660			2,660
Total assets	$	~~115~~112,~~969~~084		$	138,136
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	~~1,463~~294		$	2,348
Accrued expenses and other liabilities		~~648~~316			3,281
Payable for licenses		~~750~~—			1,250
Current portion of obligations under capital leases		693			1,437
Total current liabilities		31,~~554~~303			8,316
Long-term liabilities		767			482
Deferred rent liability		909			482
Total liabilities		42,~~321~~212			8,798
Stockholders’ equity:
Preferred stock, $0.001 par value; 5,000 shares authorized; no shares issued and outstanding		—			—
Common stock, $0.001 par value; 200,000 shares authorized; 42,627 and 42,744 shares issued and outstanding		43			42
Additional paid-in capital		216,~~880~~289			223,726
Deferred stock-based compensation		(54,~~506~~351	)		(9,273	)
Notes receivable from stockholders		(7072	)		(361	)
Accumulated deficit		(99102,~~699~~037	)		(84,796	)
Total stockholders’ equity		~~111~~109,~~648~~872			129,338
Total liabilities and stockholders’ equity	$	~~115~~112,~~969~~084		$	138,136

The accompanying notes are an integral part of these financial statements.

INTEGRATED TELECOM EXPRESS, INC.

STATEMENTS OF OPERATIONS

(In Thousands, Except Per Share Amounts)

(Unaudited)

For the Three Months Ended June 30,

For the Six Months Ended June 30,

For the Three Months Ended September 30,

For the Nine Months Ended September 30,

2002

2001

2002

2001

Net revenue

~~1,233~~313

43,~~303~~234

5,~~256~~569

1114,~~228~~462

Cost of revenue

~~917~~29

2,~~625~~398

2,~~957~~986

810,~~216~~614

Gross profit

~~316~~284

~~1,678~~836

2,~~299~~583

3,~~012~~848

Operating expenses:

Research and development

~~2,886~~142

5,~~420~~809

6,~~056~~198

1016,~~964~~772

Sales and marketing

~~668~~369

~~1,062~~965

1,~~208~~577

23,~~621~~586

General and administrative

2,~~503~~127

1,~~896~~934

46,~~159~~286

35,~~922~~856

Deferred stock-based compensation

~~(825~~564

)

~~1,755~~148

(2,~~892~~328

)

45,~~904~~052

Impairment loss on assets

~~9,203~~—

~~1,800~~—

9,203

1,800

Total operating expenses

143,~~435~~202

118,~~933~~856

1720,~~734~~936

2433,~~211~~066

Loss from operations

(142,~~119~~918

)

(108,~~255~~020

)

(1518,~~435~~353

)

(2129,~~199~~218

)

Other income (expenses), net:

Interest income

~~533~~506

1,~~537~~147

1,~~097~~603

34,~~581~~728

Other, net

~~(528~~74

)

(~~120~~54

)

(~~565~~491

)

(~~108~~162

)

1,417

532

3,473

580

1,093

1,112

4,566

Net loss

(142,~~114~~338

)

(86,~~838~~927

)

(1417,~~903~~241

)

(1724,~~726~~652

)

Basic and diluted net loss per share

(0.3305

)

(0.2116

)

(0.3540

)

(0.4258

)

Shares used in computing basic and diluted net loss per share

42,~~707~~590

42,~~582~~630

42,~~697~~661

42,~~548~~575

The accompanying notes are an integral part of these financial statements.

INTEGRATED TELECOM EXPRESS, INC.

STATEMENTS OF CASH FLOWS

(In Thousands)

(Unaudited)

	For the Six Months Ended June 30,
	For the Nine Months Ended September 30,
	2002			2001
Cash flows from operating activities:
Net loss	$	(1417,~~903~~241	)	$	(1724,~~726~~652	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		1,~~618~~625			34,~~022~~646
Deferred stock-based compensation		(2,~~892~~328	)		45,~~950~~057
Impairment loss on assets		9,203			1,800
Loss on sales of assets		~~503~~431			—
Changes in operating assets and liabilities:
Accounts receivable		1,~~490~~515			34,~~649~~340
Inventories		1,~~688~~496			34,~~602~~459
Prepaid expenses and other current assets		~~648~~(265	)		~~200~~1,294
Other assets		—			(3,~~599~~503	)
Accounts payable		(~~885~~2,054	)		(3,~~035~~857	)
Accrued expenses and other liabilities		(23,~~882~~819	)		(65,~~755~~980	)
Net cash used in operating activities		(611,~~412~~437	)		(1316,~~892~~396	)
Cash flow from investing activities:
Proceeds from sales of assets		~~418~~565			—
Purchases of property, equipment and licenses		(121	)		(67,~~951~~450	)
Net cash provided by (used in) investing activities		~~297~~444			(67,~~951~~450	)
Cash flows from financing activities:
Principal payments on capital lease obligations		(744	)		(~~484~~875	)
Repayment of notes receivable from stockholders		58			—
Proceeds from issuance of common stock, net		55			~~247~~312
Net cash used in financing activities		(631	)		(~~237~~563	)
Net decrease in cash and cash equivalents		(611,~~746~~624	)		(2124,~~080~~409	)
Cash and cash equivalents at beginning of period		119,278			149,073
Cash and cash equivalents at end of period	$	~~112~~107,~~532~~654		$	~~127~~124,~~993~~664
Supplemental disclosure of non-cash financing activities:
Repurchase of common stock for repayment of notes receivable from stockholders (see Note 3)	$	240		$	—177

The accompanying notes are an integral part of these financial statements.

INTEGRATED TELECOM EXPRESS, INC.

NOTES TO FINANCIAL STATEMENTS

1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company

Integrated Telecom Express, Inc. (the “Company”, formerly Integrated Technology Express, Inc.) was incorporated in California in May 1995 and reincorporated in Delaware in September 1999. The Company provides integrated circuit and software products to the broadband access communications equipment industry. The Company’s products include integrated circuits, software, production designs, network interface cards and test systems that enable communications equipment manufacturers to provide high-speed, cost-effective asymmetric digital subscriber line, or ADSL, equipment to communications service providers and their customers. The industry in which the Company operates is characterized by rapid technological change and significant volatility of product prices.

United Microelectronics Corporation (“UMC”), a public company in Taiwan, directly and indirectly owned 28.4% of the Company’s outstanding common stock at ~~June~~September 30, 2002.

Recent Developments

On April 19, 2002, the Company announced that its Board of Directors deemed advisable the ~~dissolution~~liquidation and dissolution of the Company and ~~approved~~ adopted a Plan of Complete Liquidation and Dissolution, subject to stockholder approval and ratification ~~by the Company’s stockholders at a special meeting that would be held on a future date set by the Board of Directors~~. In connection with the proposed liquidation, the Company expects to liquidate all assets, including its inventories, property and equipment and intellectual property. ~~In addition, the Company may consider various legal alternatives to liquidating the Company, including bankruptcy under Chapter 7 or Chapter 11 of the federal bankruptcy code.~~

On ~~June~~October 138, 2002, ~~the~~prior ~~Company~~to seeking stockholder approval and ~~Real Communications,~~ratification ~~Inc.~~of ~~entered~~the ~~into~~Plan of anComplete ~~Asset~~Liquidation ~~Purchase~~and ~~Agreement~~Dissolution, ~~pursuant~~the toCompany ~~which~~filed ~~Real~~a ~~Communications,~~voluntary ~~Inc.~~petition ~~agreed~~for torelief ~~purchase,~~under ~~subject~~Chapter to11 ~~the~~of ~~terms~~Title ~~and~~11 ~~conditions~~ of the ~~Asset~~United ~~Purchase~~States ~~Agreement~~Code, ~~some~~or ofthe Bankruptcy Code, in the ~~Company’s~~United ~~assets~~States ~~for~~Bankruptcy aCourt ~~cash~~for ~~purchase price~~the District of $1Delaware under Case No.5 ~~million~~02-12945 (PJW), or the ~~“Asset~~Bankruptcy ~~Sale”)~~Case. AsPursuant ~~certain~~to sections 1107(a) and 1108 of the Bankruptcy Code, the Company’s ~~directors~~is ~~and~~continuing ~~officers~~to ~~may~~operate ~~become~~its ~~stockholders~~business ofand ~~Real~~manage ~~Communications,~~its ~~Inc.,~~property ~~which~~as ~~may~~a ~~create~~debtor ~~potential~~in ~~conflicts~~possession subject to the jurisdiction of ~~interest~~the Bankruptcy Court. In the Bankruptcy Case, the ~~Asset~~Company ~~Sale~~has isproposed ~~subject~~a plan to ~~approval~~ liquidate and ~~ratification~~dissolve by the Company’s, ~~stockholders~~or the Chapter 11 Plan. The ~~Asset~~Chapter ~~Sale~~11 Plan is ~~also~~subject ~~conditioned~~to ~~upon~~approval ~~stockholder~~by ~~approval~~eligible ~~and~~voting ~~ratification~~parties, ofincluding ~~the~~unsecured ~~Plan~~creditors and stockholders of ~~Complete~~the ~~Liquidation~~Company, and ~~Dissolution~~confirmation by the Bankruptcy Court. The ~~assets~~Company’s Board of Directors chose to bepursue ~~sold~~the previously announced plan to ~~Real~~liquidate ~~Communications,~~and ~~Inc.~~dissolve ~~consist~~the ofCompany ~~all~~ under the protection of the ~~Company’s~~Bankruptcy ~~intellectual~~Code ~~property~~for ~~rights~~a variety of reasons, aswhich ~~well~~the asBoard ~~rights~~of inDirectors ~~the~~believe ~~Company’s~~would ~~customer~~enable ~~information~~the ~~sufficient~~Company to ~~permit~~maximize ~~Real~~the ~~Communications,~~amount ~~Inc.~~of capital to ~~continue~~be returned to ~~support~~its stockholders and expedite the ~~Company’s~~distribution ~~existing~~of ~~customers,~~cash ~~rights~~to inits stockholders. Accordingly, the Company’s ~~Etherlink~~is ~~project,~~not pursuing the Plan of Complete Liquidation and ~~certain~~Dissolution ~~related~~formulated ~~equipment~~prior to the Bankruptcy Case, ~~tools~~but ~~and~~is ~~inventories~~rather pursuing a liquidation under the Bankruptcy Code pursuant to the Chapter 11 Plan.

In ~~consideration~~conjunction ofwith its bankruptcy filing, the ~~Board~~ ofCompany ~~Directors’~~has ~~decision~~requested tovarious ~~liquidate~~types ~~the~~of ~~Company~~relief, among which the Company ~~evaluated~~seeks authority to reject the ~~recoverability~~facility oflease for its ~~long-lived~~former ~~assets,~~corporate office ~~including~~in ~~property~~San ~~and~~Jose, ~~equipment~~California, ~~and~~effective ~~licenses~~October 31, ~~and~~2002. ~~determined~~The Company believes that ~~their~~it ~~carrying~~does ~~values~~not ~~were~~require ~~impaired.~~the ~~Accordingly,~~use of the ~~Company~~ ~~recorded~~entire anfacility, ~~impairment~~which ~~loss~~has ofapproximately $948,144 square feet, while it winds down its operations.2 ~~million~~The inCompany ~~the~~has ~~second~~relocated ~~quarter~~and, with approval of ~~2002~~the toBankruptcy ~~write~~Court, ~~down~~entered ~~these~~into ~~long~~a one-~~lived~~year ~~assets~~lease tofor ~~their~~its ~~estimated~~new ~~current~~corporate ~~fair~~office ~~values~~consisting of approximately 3,558 square feet. ~~See~~The ~~further~~new ~~details~~lease incommenced ~~Note~~on 5November ~~below~~1, 2002.

~~The~~On ~~accompanying~~October ~~unaudited~~28, ~~financial~~2002, ~~statements are presented on a going concern basis. Upon~~ the ~~approval~~landlord of the ~~proposed liquidation by stockholders, the~~ Company’s ~~will~~former ~~adopt~~corporate ~~liquidation~~office ~~accounting~~filed ina ~~preparation~~motion ofwith ~~its~~the ~~financial~~Bankruptcy ~~statements,~~Court ~~which~~to ~~will~~seek ~~reflect~~dismissal of the ~~estimated~~Bankruptcy ~~net~~Case. ~~realizable~~The ~~value~~Company ofanticipates that ~~its~~the ~~net~~Bankruptcy ~~assets~~Court ~~and~~will ~~account~~hear ~~for~~the ~~expenses~~landlord’s ~~necessary~~motion to ~~complete~~dismiss the ~~proposed~~Bankruptcy ~~liquidation. Liquidation~~Case ~~expenses may include, among others, employee severance~~ and ~~related~~the ~~costs,~~Company’s ~~penalties~~motion ~~for~~to ~~terminating~~reject the facility lease, ~~customer~~for ~~service~~its ~~obligations~~former ~~and~~corporate ~~legal~~office ~~and~~in ~~accounting~~January ~~fees~~2003.

INTEGRATED TELECOM EXPRESS, INC.

NOTES TO FINANCIAL STATEMENTS—(Continued)

~~Unaudited~~As ~~Interim~~a ~~Financial~~consequence ~~Statements~~of the bankruptcy filing, all pending claims and litigation against the Company are stayed automatically in accordance with the Bankruptcy Code. Absent further order of the Bankruptcy Court, no party may take any action to recover any pre-petition claims, enforce any lien against or obtain possession of any property from the Company. Bar dates for filing proof of claim against the Company have been set for December 31, 2002 for all creditors other than governmental units and April 7, 2003 for governmental units.

~~The~~In ~~accompanying~~conjunction ~~unaudited~~with ~~financial~~its ~~statements~~bankruptcy ~~as of June 30~~filing, ~~2002~~the ~~and~~Company ~~for~~has ~~the~~also ~~three~~filed ~~months~~a ~~and~~motion, or the ~~six~~Bid ~~months~~Procedures ~~ended June 30~~Motion, ~~2002~~with ~~and 2001~~the ~~have~~Bankruptcy ~~been~~Court ~~prepared pursuant~~ to ~~the~~establish ~~rules~~bidding procedures ~~and~~for ~~regulations~~the sale of the ~~Securities~~Company’s ~~and Exchange Commission for interim financial reporting~~assets. The ~~unaudited~~Bankruptcy ~~interim~~Court ~~financial~~approved ~~statements~~the ~~have~~Bid ~~been~~Procedures ~~prepared~~Motion on ~~the~~October ~~same basis as the annual financial statements and~~30, in2002. ~~the~~Prior ~~opinion~~to ofits ~~management,~~bankruptcy ~~reflect all adjustments~~filing, ~~which~~on ~~include~~June ~~only normal recurring adjustments~~13, ~~necessary~~2002 ~~to present fairly~~ the Company’s ~~financial~~and ~~position~~Real ~~as of June 30~~Communications, ~~2002~~Inc., ~~the~~a ~~results~~company of ~~its~~which ~~operations for the~~certain ~~three~~of ~~months and~~ the ~~six~~Company’s ~~months~~directors ~~ended~~and ~~June~~officers ~~30,~~may ~~2002~~become ~~and 2001~~stockholders, ~~and~~entered ~~its~~into ~~cash~~an ~~flows~~Asset ~~for~~Purchase ~~the~~Agreement ~~six~~pursuant ~~months~~to ~~ended~~which ~~June~~Real 30Communications, ~~2002 and 2001~~Inc. ~~These~~agreed ~~financial~~to ~~statements~~purchase ~~and~~some ~~notes~~of ~~thereto~~the ~~are~~Company’s ~~unaudited~~assets ~~and~~for ~~should~~a becash ~~read~~purchase inprice ~~conjunction~~of ~~with the audited financial~~$1.5 ~~statements~~million, ~~for~~subject to the ~~year~~terms ~~ended~~and ~~December~~conditions ~~31,~~of ~~2001 included in~~ the ~~Company’s~~Asset ~~Annual~~Purchase ~~Report on Form 10-K~~Agreement. The ~~balance~~assets ~~sheet~~to asbe ofsold ~~December~~to ~~31,~~Real ~~2001 was derived from the audited financial statements~~Communications, ~~but~~Inc. ~~does~~consist ~~not~~of ~~include~~ all ~~disclosures~~of ~~required~~the ~~by generally~~Company’s ~~accepted~~intellectual ~~accounting~~property ~~principles.~~rights, ~~The~~as ~~results~~well ~~for~~as ~~the~~rights ~~three~~in ~~months~~the ~~and~~Company’s ~~the~~customer information ~~six~~sufficient ~~months~~to ~~ended~~permit ~~June~~Real 30Communications, ~~2002~~Inc. ~~are~~to ~~not~~continue ~~necessarily~~to ~~indicative~~support of the ~~expected~~Company’s ~~results~~existing ~~for~~customers, ~~any~~rights ~~other~~in ~~interim period or~~ the ~~year~~Company’s ~~ending~~Etherlink ~~December 31~~project, ~~2002.~~and ~~Certain~~certain ~~prior period~~related ~~balances~~equipment, ~~have~~tools ~~been~~and ~~reclassified to conform to the current period presentation~~inventories.

The assets subject to bidding procedures under the Bankruptcy Case include those assets pertaining to the Asset Purchase Agreement with Real Communications, Inc. While the Company believes that it has secured the highest and best offer from Real Communications, Inc., the bidding procedures approved by the Bankruptcy Court are designed to ensure that the Company has received the highest and best offer for such assets and that the successful bidder will obtain the protections of the Bankruptcy Code as a good faith purchaser. The Bankruptcy Court has scheduled a hearing on the proposed sale of assets on November 15, 2002. Eligible parties under the Bankruptcy Case, however, may seek to delay such hearing to allow additional time to evaluate the proposed asset sale. Bankruptcy Court approval of the proposed sale of assets will substitute for the Company’s original plan to obtain stockholder approval and ratification of the transaction with Real Communications, Inc.

On October 17, 2002, the Company’s common stock listing was transferred from the Nasdaq National Market to the OTC Bulletin Board, and the stock symbol under the OTC Bulletin Board is “ITXIQ”.

In consideration of the Board of Directors’ decision to liquidate the Company, the Company evaluated the recoverability of its long-lived assets, including property and equipment and licenses, and determined that their carrying values were impaired. Accordingly, the Company recorded an impairment loss of $9.2 million in the second quarter of 2002 to write down these long-lived assets to their estimated current fair values. See further details in Note 5 below.

Financial Statement Presentation

The accompanying unaudited financial statements as of September 30, 2002 and for the three months and the nine months ended September 30, 2002 and 2001 have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission for interim financial reporting. The unaudited interim financial statements have been prepared on the same basis as the annual financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the Company’s financial position as of September 30, 2002, the results of its operations for the three months and the nine months ended September 30, 2002 and 2001, and its cash flows for the nine months ended September 30, 2002 and 2001. These financial statements and notes thereto are unaudited and should be read in conjunction with the audited financial statements for the year ended December 31, 2001 included in the Company’s Annual Report on Form 10-K. The balance sheet as of December 31, 2001 was derived from the audited financial statements, but does not include all disclosures required by generally accepted accounting principles. The results for the three months and the nine months ended September 30, 2002 are not necessarily indicative of the expected results for any other interim period or the year ending December 31, 2002. Certain prior period balances have been reclassified to conform to the current period presentation.

INTEGRATED TELECOM EXPRESS, INC.

NOTES TO FINANCIAL STATEMENTS—(Continued)

The accompanying unaudited financial statements are presented on a going concern basis. Effective October 8, 2002, the date of the bankruptcy filing, the Company adopted the liquidation basis of accounting, and future financial statements will be prepared in accordance with AICPA Statement of Position 90-7, “Financial Reporting by Entities in Reorganization under the Bankruptcy Code.” The liquidation basis of accounting requires the Company to accrue an estimate for all liabilities related to expenses to be incurred during the wind down period. In addition, assets are stated at their estimated net realizable value, and liabilities are stated at their anticipated settlement amounts. Accordingly, the accompanying unaudited financial statements do not reflect any adjustments to the carrying value of assets or amounts of liabilities that might be necessary as a result of the bankruptcy filing.

Management Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Recent Accounting Pronouncements

In July 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 141, “Business Combinations” (“SFAS 141”) and Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). SFAS 141 requires all business combinations to be accounted for using the purchase method of accounting and is effective for all business combinations initiated after June 30, 2001. SFAS 142 requires goodwill intangible assets having indefinite lives to be reviewed annually for impairment under certain circumstances and written down when impaired, rather than being amortized as previous standards required. SFAS 142 is effective for fiscal years beginning after December 15, 2001. The implementation of SFAS 141 and SFAS 142 did not have a significant impact on the Company’s financial condition or results of operations.

In October 2001, the FASB issued Statement of Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”). SFAS 144 supercedes Statement of Accounting Standards No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of” (“SFAS 121”). However, it retains the fundamental provisions of SFAS 121 for (1) the recognition and measurement of the impairment of long-lived assets to be held and used and (2) the measurement of long-lived assets to be disposed of by sale. SFAS 144 develops a single accounting model for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired assets and consequently amends Accounting Principles Board Opinion No. 30, “Reporting Results of Operations-Reporting the Effects of Disposal of a Division of a Business.” Additionally, SFAS 144 expands the scope of discontinued operations to include all components of an entity with operations that (1) can be distinguished from the rest of the entity and (2) will be eliminated from the ongoing operations of the entity in a disposal transaction. SFAS 144 is effective for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years. The implementation of SFAS 144 did not have a significant impact on the Company’s financial condition or results of operations.

INTEGRATED TELECOM EXPRESS, INC.

NOTES TO FINANCIAL STATEMENTS—(Continued)

In July 2002, the FASB issued Statement of Accounting Standards No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”). SFAS 146 nullifies the guidance of the Emerging Issues Task Force (“EITF”) in EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)”. Under EITF Issue No. 94-3, an entity recognized a liability for an exit cost on the date that the entity committed itself to an exit plan. In SFAS 146, the FASB acknowledges that an entity’s commitment to a plan does not, by itself, create a present obligation to other parties that meets the definition of a liability and requires that a liability for a cost that is associated with an exit or disposal activity be recognized when the liability is incurred. It also establishes that fair value is the objective for the initial measurement of the liability. SFAS 146 will be effective for exit or disposal activities that are initiated after December 31, 2002. The Company expects that the adoption of SFAS 146 will not have any impact on its financial condition or results of operations.

2. BALANCE SHEET DETAILS

The following tables provide details of selected balance sheet items (in thousands):

	June 30, 2002		December 31, 2001
	September 30, 2002		December 31, 2001
	(Unaudited)
Inventories, net:
Work in progress	$	—148	$	16
Finished goods		5296		1,803
	$	52244	$	1,819
Prepaid expenses and other current assets:
Prepaid insurance expense	$	948	$	363
Prepaid rent expense		222		213
Other		168		508
	$	1,338	$	1,084
Other assets:
Restricted cash	$	2,455	$	2,455
Other		205		205
	$	2,660	$	2,660
Accrued expenses and other liabilities:
Compensation and benefits	$	396	$	925
Customer deposits	$	170	$	1,500
Customer deposits		87		1,500
Compensation and benefits		—		925
Deferred revenue		—		281
Other		~~165~~146		575
	$	~~648~~316	$	3,281

Restricted cash represents a security deposit in the form of a letter of credit as required under the lease agreement for the Company’s former corporate headquarters in San Jose, California. The letter of credit is to be maintained until such time the Company has achieved six consecutive quarters of operational profitability.

INTEGRATED TELECOM EXPRESS, INC.

NOTES TO FINANCIAL STATEMENTS—(Continued)

3. NOTES RECEIVABLE FROM STOCKHOLDERS

Notes receivable from stockholders consisted of full recourse loans to a former executive officer of the Company and a member of the Company’s Board of Directors, who used the loan proceeds to exercise stock options to purchase the Company’s common stock. The aggregate balance of the principal and accrued interest on these loans was $361,000 as of December 31, 2001.

On June 28, 2002, the Company and the director entered into an Agreement to Prepay and Cancel Promissory Notes (the “Agreement”), pursuant to which the loans to the director, including the principal balance of $262,000 and accrued interest of $36,222, were paid in full by a cash payment of $58,222 and a transfer of 150,000 shares of the Company’s common stock from the director to the Company. The 150,000 shares had an aggregate fair market value of $240,000 based on the prevailing trading price of $1.60 per share on the date immediately before the Agreement was executed. Under the terms of the Agreement, the amount of the final settlement will be adjusted to reflect the actual liquidation proceeds ifwhen the Company’s ~~stockholders~~completes ~~approve~~its ~~the~~distribution ~~proposed~~of ~~plan~~assets ofpursuant to the liquidation plan. If the actual liquidation proceeds are greater than $1.60 per share (the amount used to compute the director’s initial cash payment to satisfy the loans), the Company will pay the director the excess amount. If the liquidation proceeds are less than $1.60 per share, the director will pay the Company the shortfall amount. The settlement amount will be measured at each financial reporting date, and a receivable from or payable to the director will be recorded. Changes in the settlement amount will be recorded as other income or expense. As of September 30, 2002, the Company recorded a receivable of $21,000 from the director based on the prevailing trading price of $1.46 per share.

As of ~~June~~September 30, 2002, the remaining balance of the notes receivable from stockholders was $7072,000, which represented the principal and accrued interest of the full recourse loan to a former executive officer of the Company. The loan, which is secured by 21,000 shares of the Company’s common stock, bears interest at three-month LIBOR plus 2%, adjustable on a quarterly basis, and its principal and accrued interest are due in June 2004.

4. DEFERRED STOCK-BASED COMPENSATION

Deferred stock-based compensation expenses were related to stock options granted to the Company’s employees and consultants under the following functions (in thousands):

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2002			2001	~~2001~~		2002			2001
	(Unaudited)			(Unaudited)	~~(Unaudited)~~		(Unaudited)			(Unaudited)
Research and development	$	~~(1,268~~103	)	$	$(750	~~922~~)	$	(2,~~629~~526	)	$	21,~~157~~407
Sales and marketing		~~(114~~48	)		285	~~115~~		(~~926~~878	)		~~814~~1,099
General and administrative		~~557~~413			613	~~718~~		~~663~~1,076			12,~~933~~546
	$	~~(825~~564	)	$	$148	~~1,755~~	$	(2,~~892~~328	)	$	45,~~904~~052

~~For~~10 the three months and the six months ended June 30, 2002, the Company recorded a benefit of $825,000 and $2,892,000, respectively, from reversals of deferred stock-based compensation expense associated with unvested stock options canceled during the periods.

INTEGRATED TELECOM EXPRESS, INC.

NOTES TO FINANCIAL STATEMENTS—(Continued)

5. IMPAIRMENT LOSS ON ASSETS

On April 18, 2002, the Company’s Board of Directors deemed advisable the liquidation and dissolution of the Company and adopted a Plan of Complete Liquidation and Dissolution. In consideration of the Board of Directors’ decision, the Company evaluated the recoverability of its long-lived assets, including property and equipment and licenses, in accordance with SFAS 144 and determined that their carrying values were impaired. Accordingly, the Company recorded an impairment loss of $9.2 million in the second quarter of 2002 to write down these long-lived assets to their estimated current fair values. The Company estimated that the impaired assets had an aggregate fair value of $273,000 as of June 30, 2002. The fair value of these impaired assets was estimated based on the sales price of similar assets that were sold to third parties during the second quarter of 2002, sales proceeds expected to be received from pending sale transactions, or other market value information that was readily available. To the extent that an impaired asset is not transferable and cannot be sold or in cases where the Company is not expecting to locate any buyer, assets were fully written off.

6. RESTRUCTURING EXPENSES

In November 2001, the Company announced a restructuring program to streamline operations and reduce costs. The restructuring program included a worldwide workforce reduction, restructuring of certain business functions and closure of the facility in Hsin Chu, Taiwan, which was one of the Company’s two research and development facilities. As a result of the workforce reduction, the Company terminated approximately 50 employees worldwide and recorded a charge of $842,000 for severance and fringe benefits in the fourth quarter of 2001, which was paid in full as of June 30, 2002. In connection with the closure of the Hsin Chu facility, the Company recorded a charge of $1,489,000, of which $175,000 was the cost of terminating the office lease and $1,314,000 was the write-off of the facility’s leasehold improvements and other fixed assets. The office lease for the Hsin Chu facility was terminated on March 31, 2002.

The following table summarizes the activities related to accrued restructuring expenses in the fourth quarter of 2001 and in 2002 (in thousands):

	Total Charges		Noncash Charges			Cash Payments in 2001			Balance at December 31, 2001		Cash Payments in 2002			Balance at ~~June~~September 30, 2002
											(Unaudited)			(Unaudited)
Workforce reduction	$	842	$	—		$	(743	)	$	99	$	(99	)	$	—
Closure of facility		1,489		(1,314	)		(175	)		—		—			—
	$	2,331	$	(1,314	)	$	(918	)	$	99	$	(99	)	$	—

1011

INTEGRATED TELECOM EXPRESS, INC.

NOTES TO FINANCIAL STATEMENTS—(Continued)

7. NET LOSS PER SHARE

The following table sets forth the computation of basic and diluted net loss per share for the period indicated (in thousands, except per share amounts):

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2002			2001			2002			2001
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
Numerator:
Net loss	$	(142,~~114~~338	)	$	(86,~~838~~927	)	$	(1417,~~903~~241	)	$	(1724,~~726~~652	)
Denominator:
Shares used in computing basic and diluted net loss per share		42,~~707~~590			42,~~582~~630			42,~~697~~661			42,~~548~~575
Basic and diluted net loss per share attributable to common stockholders	$	(0.3305	)	$	(0.2116	)	$	(0.3540	)	$	(0.4258	)
Antidilutive securities including options, warrants, convertible preferred stock and restricted stock rights not included in net loss per share calculation		1211,~~628~~397			1316,~~686~~100			1211,~~628~~397			1316,~~686~~100

8. CONCENTRATIONS

Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash, cash equivalents and accounts receivable. Substantially all of the Company’s cash and cash equivalents are currently maintained with two major financial institutions in the United States. The Company limits its cash investments to those that are short-term and low risk. At times, deposits held with banks may exceed federally insured limits.

Concentration of credit risk with respect to accounts receivable is generally limited due to the Company’s on-going evaluation of its customers’ credit worthiness and the established long-term relationship with certain customers. In addition, the Company generally requires a letter of credit to be established by customers in foreign countries before shipment of products is made to these customers.

For the three months ended September ~~June~~ 30, 2002, sales to ~~five~~two customers accounted for 1851.05%, ~~14.6%, 13.9%, 13.6%~~ and 1238.23%, respectively, of net revenue; and for the ~~six~~nine months ended ~~June~~September 30, 2002, sales to one customer accounted for 5148.23% of net revenue. For the three months ended ~~June~~ September 30, 2001, sales to three customers accounted for 2658.13%, 12.6% and 1011.06%, respectively, of net revenue; and for the ~~six~~nine months ended ~~June~~September 30, 2001, sales to two customers accounted for 2938.03% and 1011.19%, respectively, of net revenue.

As of ~~June~~September 30, 2002, ~~receivables~~a receivable from ~~two customers~~one customer accounted for ~~69.9~~100% ~~and 15.2%, respectively,~~ of the gross ~~accounts~~ receivable balance. As of ~~June~~September 30, 2001, receivables from ~~two~~three customers accounted for 4854.2%, 29.3% and 3510.03%, respectively, of the gross accounts receivable balance.

1112

INTEGRATED TELECOM EXPRESS, INC.

NOTES TO FINANCIAL STATEMENTS—(Continued)

9. GEOGRAPHIC INFORMATION

The Company operates in one business segment, which is to design, develop and sell integrated circuits and software solutions to the broadband access communications equipment industry. The Company’s net revenue was attributable to the following countries or regions (in thousands):

	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2002		2001		2002		2001
	(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)
Asia:
South Korea	$	~~369~~—	$	~~1,416~~946	$	1,353	$	67,~~824~~741
Taiwan		~~770~~168		~~353~~386		1,~~097~~265		~~436~~829
Other Asian countries		11—		~~135~~8		59		~~219~~225
		1,150		1,904		2,509		7,479
		168		1,340		2,677		8,795
United States		83145		21,~~399~~886		2,~~747~~892		24,~~232~~154
Europe		—		—8		—		1,~~517~~513
	$	~~1,233~~313	$	43,~~303~~234	$	5,~~256~~569	$	1114,~~228~~462

Substantially all of the Company’s assets as of ~~June~~September 30, 2002 and December 31, 2001 were located in the United States.

10. LEGAL PROCEEDINGS

In November 2001, a complaint captioned Richmon v. Integrated Telecom Express, Inc., No. 01-CV-10108 was filed in federal district court for the Southern District of New York, on behalf of a putative class of persons who purchased the Company’s common stock between August 18, 2000 and December 6, 2000. An amended complaint was filed in April 2002. The amended complaint generally alleges that various investment bank underwriters engaged in improper and undisclosed activities related to the allocation of shares in the Company’s initial public offering of securities and subsequently issued false and misleading analyst reports. The complaint brings claims for violation of several provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934 against those underwriters and also against the Company and various of the Company’s present and former officers and directors. Similar lawsuits concerning more than 300 other companies’ initial public offerings have been filed and coordinated as In re Initial Public Offering Securities Litigation, No. 21 MC 92. The defendants have filed motions to dismiss. The Company believes that the claims against the Company are without merit and intend to defend this lawsuit vigorously. While the outcome of these claims is currently not determinable, the Company ~~does~~expects ~~not expect that the ultimate costs~~ to resolve these claims ~~will~~through its ~~have~~Bankruptcy ~~a material adverse effect on the Company’s financial position, results of operations or cash flows~~Case.

In addition to the lawsuit mentioned above, from time to time, the Company may become involved in litigation relating to claims arising from its ordinary course of business. The Company is not currently a party to any material legal proceedings of this nature.

1213

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This report, including without limitation the following discussion, contains certain forward-looking statements (as such term is defined in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934) and information relating to us that are based on the beliefs of our management as well as assumptions made by and information currently available to our management. These forward-looking statements include but are not limited to those statements identified by the words “anticipate”, “believe”, “expect”, “intend”, “will” and similar expressions, as they relate to us or our management.

The forward-looking statements contained in this report reflect our judgment as of the date of this report with respect to future events, the outcome of which is subject to certain risks, including the factors set forth under the heading “Risk Factors”, which may have a significant impact on our business, operating results or financial condition. Investors are cautioned that these forward-looking statements are inherently uncertain. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results or outcomes may vary materially from those described in this report. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of these forward-looking statements. We undertake no obligation to update these forward-looking statements. Our stockholders should carefully review the cautionary statements contained in this report, including those set forth under the heading “Risk Factors”.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and related notes included in Item 1 of this report and with the audited financial statements and related notes and management’s discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the year ended December 31, 2001.

Overview

We provide integrated circuit and software products to the broadband access communications equipment industry. Our products include integrated circuits, software, production designs, network interface cards, or NICs, and test systems that enable communications equipment manufacturers to provide high-speed, cost-effective asymmetric digital subscriber line, or ADSL, equipment to communications service providers and their customers. Our software includes programs that enable the basic function of our integrated circuits and reference designs, and that provide access to the Internet, permitting equipment utilizing our solutions to communicate with telecommunication service providers’ central office equipment. We were incorporated in California in May 1995 and reincorporated in Delaware in September 1999.

During March and April 2002, our Board of Directors held a total of seven meetings to explore and discuss strategic alternatives. On April 18, 2002, our Board of Directors deemed advisable the liquidation and dissolution of the Company and adopted a Plan of Complete Liquidation and Dissolution, subject to stockholder approval and ratification ~~by our stockholders at a special meeting that would be held on a future date set by the Board of Directors~~. In reaching its decision, ~~the~~our Board of Directors considered a number of factors, including our ~~recent~~ financial performance, prevailing economic conditions and the unsuccessful efforts to sell or merge the Company. In connection with the proposed liquidation, we terminated the majority of our employees during May and June 2002 and retained a limited number of personnel necessary to facilitate the liquidation process. Our headcount was 22 as of June 30, 2002, decreased from 81 prior to the Board of Directors’ decision to liquidate the Company. Furthermore, we expect to liquidate all assets, including our inventories, property and equipment and intellectual property. In addition to the Plan of Complete Liquidation and Dissolution, we may consider various legal alternatives to liquidating the Company, including bankruptcy under Chapter 7 or Chapter 11 of the federal bankruptcy code.

OnIn ~~June~~connection ~~13, 2002, we entered into an Asset Purchase Agreement~~ with ~~Real~~the ~~Communications, Inc.,~~proposed ~~pursuant~~liquidation toannounced ~~which~~in ~~Real~~April ~~Communications~~2002, ~~Inc.~~we terminated ~~agreed to purchase, subject to~~ the ~~terms~~majority ~~and conditions~~ of ~~the Asset Purchase Agreement, some of~~ our ~~assets~~employees ~~for~~and retained a ~~cash~~limited ~~purchase~~number ~~price~~ of ~~$1.5~~personnel ~~million~~necessary ~~(the~~to ~~“Asset~~facilitate ~~Sale”). Some or all of~~ the ~~following~~ ~~individuals~~liquidation ~~may become stockholders of Real Communications, Inc~~process.: ~~Daniel~~As ~~Chen, the Chairman~~ of ~~our~~September ~~Board of Directors~~30, ~~Kenyon Mei~~2002, our ~~Chief~~total ~~Operating~~headcount ~~Officer,~~was ~~and Jow Peng~~15, ~~our~~decreased ~~Vice~~from ~~President~~81 ofprior ~~Business Development. (Real Communications, Inc. and the above mentioned individuals are referred~~ to as “Affiliated Purchasers”). We believe that stockholder approval of the Asset Sale is not required by the Delaware General Corporation Law. Moreover, the members of the Affiliated Purchasers who are on our Board of Directors ~~did not participate in any deliberations of the Board of Directors regarding the proposed Asset Sale, and the proposed Asset Sale was approved by a majority of the non-management, non-affiliated~~’ ~~independent~~decision ~~directors~~to ~~who~~liquidate ~~have no relationship with~~ the ~~members of the Affiliated Purchasers who are on the Board of Directors~~Company. ~~Nevertheless~~Furthermore, ~~because of the potential conflicts of interest of the Affiliated Purchasers,~~ we expect to ~~seek,~~liquidate ~~and~~all ~~the terms~~assets, ofincluding ~~the~~our ~~Asset Purchase Agreement provide that the Asset Sale is conditioned upon~~inventories, ~~stockholder~~property ~~approval. The terms of the Asset Purchase Agreement provide that the Asset Sale is also conditioned upon stockholders approval~~ and ~~ratification~~equipment ~~of the Plan of Complete Liquidation~~ and ~~Dissolution. The assets to be sold to Real Communications, Inc. consist of all of our~~ intellectual property. ~~rights, as well as rights in our customer information sufficient to permit Real~~

13On October 8, 2002, prior to seeking stockholder approval and ratification of the Plan of Complete Liquidation and Dissolution, we filed a voluntary petition for relief under Chapter 11 of Title 11 of the United States Code, or the Bankruptcy Code, in the United States Bankruptcy Court for the District of Delaware under Case No. 02-12945 (PJW), or the Bankruptcy Case. Pursuant to sections 1107(a) and 1108 of the Bankruptcy Code, we are continuing to operate our business and manage our property as a debtor in possession subject to the jurisdiction of the Bankruptcy Court. In the Bankruptcy Case, we have proposed a plan to liquidate and dissolve the Company, or the Chapter 11 Plan. The Chapter 11 Plan is subject to approval by eligible voting parties, including unsecured

~~Communications~~creditors and stockholders of the Company, ~~Inc~~and confirmation by the Bankruptcy Court. After careful deliberation, our Board of Directors chose to pursue ~~continue~~the previously announced plan to ~~support~~liquidate ~~our~~and ~~existing~~dissolve ~~customers~~the Company under the protection of the Bankruptcy Code for a variety of reasons, ~~rights~~which inour Board of Directors believe would enable us to maximize the amount of capital to be returned to our ~~Etherlink~~stockholders ~~project~~and expedite the distribution of cash to our stockholders. Accordingly, we are not pursuing the Plan of Complete Liquidation and ~~certain~~Dissolution ~~related~~formulated ~~equipment~~prior to the Bankruptcy Case, ~~tools~~but ~~and~~are rather pursuing a liquidation under the ~~inventories~~Bankruptcy Code pursuant to the Chapter 11 Plan.

~~The~~In ~~accompanying~~conjunction ~~unaudited~~with ~~financial~~our ~~statements~~bankruptcy ~~are~~filing, ~~presented~~we onhave arequested various ~~going~~types ~~concern~~of ~~basis.~~relief, ~~Upon~~among ~~the approval~~which ofwe ~~the~~seek ~~proposed~~authority ~~liquidation~~to byreject ~~stockholders,~~the wefacility ~~will~~lease ~~adopt~~for ~~liquidation~~our ~~accounting~~former corporate office in ~~preparation~~San ofJose, ~~our~~California, ~~financial~~effective ~~statements~~October 31, ~~which~~2002. ~~will~~We ~~reflect~~believe ~~the~~that ~~estimated~~we ~~net~~do ~~realizable~~not ~~value~~require the use of ~~our~~the ~~net~~entire ~~assets~~facility, ~~and~~which ~~account~~has approximately ~~for~~48,144 ~~expenses~~square ~~necessary~~feet, ~~to complete~~while ~~the~~we ~~proposed~~wind ~~liquidation.~~down ~~Liquidation~~our ~~expenses~~operations. ~~may~~We ~~include,~~have ~~among~~relocated ~~others~~and, ~~employee~~with ~~severance~~approval ~~and~~of ~~related~~the ~~costs~~Bankruptcy Court, ~~penalties~~entered ~~for~~into ~~terminating~~a ~~facility~~one-year lease for our new corporate office consisting of approximately 3,558 ~~customer~~square ~~service~~feet. ~~obligations~~The ~~and~~new lease ~~legal~~commenced ~~and~~on ~~accounting~~November ~~fees~~1, 2002.

On October 28, 2002, the landlord of our former corporate office filed a motion with the Bankruptcy Court to seek dismissal of the Bankruptcy Case. We anticipate that the Bankruptcy Court will hear the landlord’s motion to dismiss the Bankruptcy Case and our motion to reject the facility lease for our former corporate office in January 2003.

As a consequence of our bankruptcy filing, all pending claims and litigation against us are stayed automatically in accordance with the Bankruptcy Code. Absent further order of the Bankruptcy Court, no party may take any action to recover any pre-petition claims, enforce any lien against or obtain possession of any property from us. Bar dates for filing proof of claim against us have been set for December 31, 2002 for all creditors other than governmental units and April 7, 2003 for governmental units.

In conjunction with our bankruptcy filing, we have also filed a motion, or the Bid Procedures Motion, with the Bankruptcy Court to establish bidding procedures for the sale of our assets. The Bankruptcy Court approved the Bid Procedures Motion on October 30, 2002. Prior to our bankruptcy filing, on June 13, 2002, we and Real Communications, Inc. entered into an Asset Purchase Agreement pursuant to which Real Communications, Inc. agreed to purchase some of our assets for a cash purchase price of $1.5 million (the “Asset Sale”), subject to the terms and conditions of the Asset Purchase Agreement. Some or all of the following individuals may become stockholders of Real Communications, Inc.: Daniel Chen, the Chairman of our Board of Directors, Kenyon Mei, our former Chief Operating Officer, and Jow Peng, our former Vice President of Business Development. (Real Communications, Inc. and the above mentioned individuals are referred to as “Affiliated Purchasers”.) We believe that stockholder approval of the Asset Sale is not required by the Delaware General Corporation Law. Moreover, the members of the Affiliated Purchasers who are on our Board of Directors did not participate in any deliberations of the Board of Directors regarding the proposed Asset Sale, and the proposed Asset Sale was approved by a majority of the non-management, non-affiliated independent directors who have no relationship with the members of the Affiliated Purchasers who are on the Board of Directors. Nevertheless, because of the potential conflicts of interest of the Affiliated Purchasers, we had planned to seek, and the terms of the Asset Purchase Agreement provide that the Asset Sale is conditioned upon, stockholder approval. The terms of the Asset Purchase Agreement provide that the Asset Sale is also conditioned upon stockholders approval and ratification of the Plan of Complete Liquidation and Dissolution. The assets to be sold to Real Communications, Inc. consist of all our intellectual property rights, as well as rights in our customer information sufficient to permit Real Communications, Inc. to continue to support our existing customers, rights in our Etherlink project, and certain related equipment, tools and inventories.

The assets subject to bidding procedures under the Bankruptcy Case include those assets pertaining to the Asset Sale. While we believe that we have secured the highest and best offer from Real Communications, Inc., the bidding procedures approved by the Bankruptcy Court are designed to ensure that we have received the highest and best offer for such assets and that the successful bidder will obtain the protections of the Bankruptcy Code as a good faith purchaser. The Bankruptcy Court has scheduled a hearing on the proposed sale of assets on November 15, 2002. Eligible parties under the Bankruptcy Case, however, may seek to delay such hearing to allow additional time to evaluate the proposed asset sale. Bankruptcy Court approval of the sale of assets will substitute for our original plan to obtain stockholder approval and ratification of the transaction with Real Communications, Inc.

On October 17, 2002, our common stock listing was transferred from the Nasdaq National Market to the OTC Bulletin Board, and our stock symbol under the OTC Bulletin Board is “ITXIQ”.

The accompanying unaudited financial statements are presented on a going concern basis. Effective October 8, 2002, the date of the bankruptcy filing, we adopted the liquidation basis of accounting, and future financial statements will be prepared in accordance with AICPA Statement of Position 90-7, Financial Reporting by Entities in Reorganization under the Bankruptcy Code. The liquidation basis of accounting requires us to accrue an estimate for all liabilities related to expenses to be incurred during the wind down period. In addition, assets are stated at their estimated net realizable value, and liabilities are stated at their anticipated settlement amounts. Accordingly, the accompanying unaudited financial statements do not reflect any adjustments to the carrying value of assets or amounts of liabilities that might be necessary as a result of the bankruptcy filing.

Results of Operations

Net Revenue. Net revenue for the ~~second~~third quarter of 2002 was $~~1.2 million~~313,000, decreased by $32.19 million from the ~~second~~third quarter of 2001. Net revenue for the first ~~six~~nine months of 2002 was $5.36 million, decreased by $58.9 million from the first ~~six~~nine months of 2001. ~~The~~Throughout ~~decrease~~2001 ~~in net revenue for the second quarter~~ and the first ~~six~~quarter ~~months~~ of 2002, ~~from~~we ~~the~~experienced ~~corresponding~~a ~~periods~~continuous ~~in 2001 was primarily due to continuing~~ decrease in demand for our Apollo products and severe pricing pressure in Asia. In addition, ~~net~~since ~~revenue~~we ~~for~~announced the ~~second quarter of 2002 was negatively impacted by our announcement of the~~ proposed liquidation of the Company onin April ~~19,~~ 2002~~. Since we announced the proposed liquidation~~, we have focused on liquidating all remaining inventories byon ~~selling~~hand. ~~them~~As toa ~~existing~~result ~~customers~~of atthese ~~prices~~negative ~~lower~~factors, ~~than~~the ~~that~~sales ~~prior~~volume toand the ~~announcement,~~average ~~resulting~~selling price in athe ~~further~~third ~~decline~~quarter inand the ~~average~~first ~~selling~~nine ~~price~~months of ~~our~~2002 ~~Apollo~~decreased ~~products compared~~significantly tofrom the prior ~~quarters~~periods. The decrease in net revenue for the first ~~six~~nine months of 2002 was partially offset by $2.7 million of revenue from sales of ADSL line testers, which were first introduced in the fourth quarter of 2001. We currently expect to complete the sale of ~~the~~all remaining inventories before the end of ~~the third quarter of~~ 2002, and werecord ~~expect~~approximately ~~that net revenue~~$550,000 ~~if any, for the third quarter~~ of ~~2002~~net ~~will~~revenue bein ~~substantially lower than that for~~ the ~~second~~fourth quarter of 2002.

Cost of Revenue and Gross Margin. Gross margin was 2691% in the ~~second~~third quarter of 2002, ~~compared~~and ~~to 39~~46% in the ~~second~~first ~~quarter~~nine months of ~~2001.~~2002, ~~The~~which ~~decrease in gross margin~~ was ~~primarily~~significantly ~~attributable~~higher tothan the ~~negative~~gross ~~factors~~margin ~~described above, including the severe pricing pressure~~ in ~~Asia~~prior ~~and~~periods. Since the ~~further reduction in the average selling price subsequent to our~~ announcement of ~~the~~our proposed liquidation., ~~Such~~we ~~decrease~~were ~~was~~able ~~partially~~to ~~offset~~sell bycertain ~~sales~~obsolete of inventories, which were previously written off, ~~with~~at a total sales price of approximately $178,000 in the third quarter of 2002 and $240,000 in the second quarter of 2002. As these inventories had been written off and had no carrying value, the entire sales proceeds ~~of these inventories~~ contributed to the gross profit ~~for the second quarter of 2002~~.

~~Gross~~The ~~margin~~increase ~~was 44%~~ in the ~~first~~gross ~~six~~margin ~~months of 2002, compared to 27%~~ in the first ~~six~~nine months of ~~2001.~~2002 ~~The improvement in the gross margin~~ was ~~primarily~~also ~~due~~attributable to the introduction of the ADSL line testers, which ~~have~~had higher gross margin than Apollo products. In addition, starting January 2002, we are no longer subject to the payment of minimum royalties as previously required by the licensing agreement with Alcatel, and royalties incurred for licensed technologies will be based on a percentage of our revenue in accordance with the respective royalty agreements. Minimum royalty under the licensing agreement with Alcatel was $1.5 million for the entire year of 2001, or $~~750,000~~1.13 million for the first ~~six~~nine months in 2001, as compared to a total of $176,000 of royalties incurred for the first nine ~~six~~ months of 2002 ~~in the total of $153,000~~. Furthermore, during the first quarter of 2001, we recorded a charge of $759,000, which was to provide reserve for adverse purchase commitments for our Apollo chipset products at the time. No such provision was necessary in ~~the first six months of~~ 2002.

Research and Development. Research and development expenses were $~~2.9~~142,000 ~~million~~ for the third ~~second~~ quarter of 2002 and $6.12 million for the first ~~six~~nine months of 2002, decreased from $5.48 million and $1116.08 million for the corresponding periods in 2001. The decrease was primarily attributable to the restructuring in the fourth quarter of 2001 and the termination of substantially all research and development personnel and related activities subsequent to the Board of Directors’ decision to liquidate the Company on April 18, 2002.

Comparing the ~~second~~third quarter of 2002 to the same period in 2001, compensation expenses, excluding severance, decreased by $12.1 3 million, professional fees and non-recurring engineering expenses decreased by $~~719,000~~1.2 million in total, and depreciation and facility expenses decreased by $1.09 million in total. Comparing the first ~~six~~nine months of 2002 to the same period in 2001, compensation expenses, excluding severance, decreased by $24.58 million, professional fees and non-recurring expenses decreased by $12.35 million in total, and depreciation and facility expenses decreased by $2.9 million in total. In addition, during the second quarter of 2002, we settled a claim by a vendor in an amount which was $475,000 less than the accrual originally set up for that purpose. The decrease in

1416

expenses decreased by $1.1 million in total. In addition, during the second quarter of 2002, we settled a claim by a vendor in an amount which was $475,000 less than the accrual originally set up for that purpose. The decrease in expenses described above was partially offset by severance expense of $1.1 million and $105,000 related to employees terminated in the second quarter and the third quarter of 2002, respectively.

Sales and Marketing. Sales and marketing expenses were $~~668~~369,000 for the ~~second~~third quarter of 2002 and $1.26 million for the first ~~six~~nine months of 2002, decreased from $~~1.1~~965,000 ~~million~~ and $23.6 million for the corresponding periods in 2001. The decrease was primarily attributable to the decline in sales volume in 2002 compared to 2001 and the termination of the majority of the sales personnel and sales and marketing activities subsequent to the Board of Directors’ decision to liquidate the Company on April 18, 2002.

Comparing the ~~second~~third quarter of 2002 to the same period in 2001, compensation expenses, excluding severance, decreased by $~~181~~484,000, travel, promotion and tradeshow related expenses decreased by $~~202~~50,000 in total, and depreciation and facility expenses decreased by $~~145~~186,000 in total. Comparing the first ~~six~~nine months of 2002 to the same period in 2001, compensation expenses, excluding severance, decreased by $~~973~~1.5 million,~~000,~~ travel, promotion and tradeshow related expenses decreased by $~~256~~306,000 in total, and depreciation and facility expenses decreased by $~~199~~393,000 in total. The decrease in expenses described above was partially offset by severance expense of $195,000 and $199,000 related to employees terminated in the second quarter and the third quarter of 2002, respectively.

General and Administrative. General and administrative expenses were $2.51 million for the ~~second~~third quarter of 2002 and $6.3 million for the first nine months of 2002, increased from $1.9 million and $5.9 million for the ~~same~~corresponding ~~period~~periods in 2001. The increase in the third quarter of 2002 was ~~partly~~primarily due to an increase in ~~compensation~~depreciation and facility expenses of $~~253~~616,000 ~~primarily~~in ~~related~~total toand severance ~~the~~expense ~~hiring~~ of ~~the~~$37,000, ~~new~~partially ~~chief~~offset ~~executive~~by ~~officer~~a ~~and~~decrease ~~the~~in ~~implementation~~compensation ofexpenses, ~~the~~excluding ~~executive bonus program~~severance, ~~both~~ of ~~which~~$147,000 ~~were~~and ~~not~~a decrease in ~~place~~professional ~~until~~fees ~~September~~of ~~2001~~$320,000. The ~~balance~~increase ofin the ~~increase~~ first nine months of 2002 was primarily due to an increase in ~~professional~~depreciation ~~fees~~and facility expenses of $~~320~~809,000 ~~for~~in ~~legal~~total and ~~investment~~severance ~~banking~~expense ~~services~~of ~~performed~~$60,000, partially offset by a decrease in ~~conjunction~~compensation ~~with~~expense, ~~our~~excluding ~~efforts~~severance, toof ~~identify~~$263,000 and ~~evaluate~~a ~~various~~decrease ~~strategic~~in ~~alternatives~~bad debt expense of $186,000.

~~General~~Facility ~~and~~expenses ~~administrative~~are ~~expenses~~allocated ~~were~~to ~~$4.2~~each ~~million~~department ~~for~~based on the ~~first~~headcount ~~six~~at ~~months~~the end of ~~2002,~~each ~~increased~~month. ~~from~~There ~~$3.9~~was ~~million~~only ~~for~~one employee each in the ~~same~~research ~~period~~and ~~in 2001.~~development ~~The~~and ~~increase~~the ~~was~~sales ~~primarily~~and ~~due~~marketing todepartments anat ~~increase~~the inbeginning ~~professional~~of ~~fees~~the third quarter of ~~$359~~2002,~~000~~ ~~for~~and ~~legal~~both ~~and~~were ~~investment~~terminated ~~banking~~during ~~services~~the ~~performed~~third inquarter ~~conjunction~~of ~~with~~2002. ~~our~~Consequently, ~~efforts~~substantially toall ~~identify~~facility ~~and~~related ~~evaluate~~charges ~~various~~were allocated ~~strategic~~to ~~alternatives,~~the ~~partially~~general ~~offset~~and byadministrative ~~a decrease~~department induring ~~compensation~~the ~~expenses~~third quarter of ~~$116~~2002. On November 1,~~000~~ 2002, ~~which~~we ~~was~~relocated ~~related~~our corporate headquarters to a ~~severance~~smaller ~~payment~~facility, toand awe ~~former~~expect ~~executive~~that ~~officer~~future infacility expenses be significantly lower than the current ~~first~~level ~~quarter~~as a result of ~~2001~~the relocation.

WeDeferred ~~currently~~Stock-based ~~expect~~Compensation. For the ~~that~~third ~~total~~quarter ~~operating~~of ~~expenses~~2002, ~~excluding~~we recorded a deferred stock-based compensation, ~~will~~expense ~~decrease~~of $564,000, increased from $148,000 for the ~~current~~same ~~level,~~period asin we2001 ~~have~~due ~~terminated~~to the ~~majority~~modification of ~~our~~certain ~~personnel~~stock ~~and~~option ~~our activities~~agreements ~~are~~during ~~limited~~the ~~primarily~~second toquarter ~~selling~~of ~~any~~2002. ofFor ~~our~~the first ~~remaining~~nine ~~assets~~months of 2002, ~~preparing~~we ~~for~~recorded ~~the~~a ~~special~~net ~~meeting~~benefit of ~~stockholders~~$2.3 ~~and~~million ~~preparing~~from toreversals ~~make~~of ~~distributions~~deferred stock-based compensation expense associated with unvested stock options that were canceled due to ~~our~~employee ~~stockholders~~terminations.

Deferred Stock-based Compensation. For the second quarter and the first six months of 2002, we recorded a benefit of $825,000 and $2.9 million, respectively, from reversals of deferred stock-based compensation expense associated with unvested stock options canceled during the periods.

Impairment Loss on Assets. In consideration of the Board of Directors’ decision to liquidate the Company, we determined that the carrying values of our long-lived assets, including property and equipment and licenses, were impaired. Accordingly, we recorded an impairment loss of $9.2 million in the second quarter of 2002 to reflect the write-down of these assets to their estimated current fair values. During the second quarter of 2001, we recorded an impairment loss of $1.8 million, as we discontinued certain research and development projects and determined that license fees and prepaid royalties related to the licensed technologies used in these projects were impaired.

Other Income (Expenses), Net. Other income (expenses), net, for the ~~second~~third quarter and the first ~~six~~nine months of 2002 decreased from the corresponding periods in 2001. The decrease was primarily due to a significant decrease in interest income, as the aggregate balance of cash and cash equivalents decreased from $~~128~~124.07 million at ~~June~~September 30, 2001 to $~~112~~107.57 million at ~~June~~September 30, 2002 and interest rates declined steadily throughout 2001 and 2002. In addition, we recorded a loss on sales of assets of $~~503~~431,000 in total related to furniture and computer and testing equipment sold during the second ~~quarter~~and the third quarters of 2002.

1517

Liquidity and Capital Resources

Cash and cash equivalents were $~~112~~107.57 million as of ~~June~~September 30, 2002, compared to $119.3 million as of December 31, 2001. Net cash used in operating activities in the ~~first~~ ~~six~~first nine months of 2002 was $611.4 million, which was primarily attributable to net loss before non-cash items of $68.53 million and a decrease in accounts payable and accrued liabilities of $35.89 million in total, partially offset by ~~decreases~~a indecrease ~~accounts~~in accounts receivable of $1.5 million, ~~inventories of $1.7 million~~ and ~~prepaid~~a ~~and~~decrease ~~other~~in ~~current~~inventories ~~assets~~ of $~~648,000~~1.5 million.

Proceeds from sales of assets in the first ~~six~~nine months of 2002 totaled $565,000, which were related to sales of furniture and computer and testing equipment subsequent to our Board of Directors’ decision to liquidate the Company on April 18, 2002. We currently estimate that proceeds from future sales of the remaining assets, including inventories, intellectual property and equipment, approximate $~~1.6~~2 million, of which ~~is principally related to the proposed Asset Sale to be approved by our stockholders~~$1.5 Ifmillion ~~the proposed Asset Sale~~ is ~~not~~related ~~approved by our stockholders, there can be no assurance that we will receive an offer~~ to ~~purchase~~ the ~~remaining assets at a price comparable to the price offered by the~~ Asset Sale, ~~and~~mentioned ~~there can be no assurance that the remaining assets can be sold at all~~above.

~~The~~On ~~outstanding~~October ~~balance~~4, of2002, ~~capital~~we ~~lease~~set ~~obligations~~up atan ~~June~~escrow ~~30,~~fund ~~2002~~of ~~was~~ $~~693~~3.5 million,~~000,~~ which is ~~expected~~solely for the purposes of making payments to beJames ~~paid~~Regel, our President and Chief Executive Officer, and James Williams, our Chief Financial Officer, in ~~full~~accordance aswith the terms of ~~December~~their 31second amended and restated employment agreements. Distributions from the escrow fund to settle our obligations under these employment agreements will be made no later than September 1, ~~2002~~2003, and any remaining balance in the escrow fund will be returned to us.

In ~~connection~~conjunction with ~~the~~our ~~proposed~~bankruptcy ~~liquidation~~filing, we ~~expect~~ tohave ~~liquidate~~filed ~~all~~a ofmotion with the ~~remaining~~Bankruptcy ~~assets,~~Court ~~including~~to ~~our~~reject ~~inventories,~~the ~~property~~facility ~~and~~lease ~~equipment~~for ~~and~~our ~~intellectual~~former ~~property.~~corporate Weoffice ~~also~~in ~~expect~~San toJose, ~~incur~~California, ~~and~~effective ~~pay~~October ~~liquidation expenses~~31, in2002. ~~addition~~We tobelieve ~~payments~~that ofwe do ~~ongoing~~not ~~operating~~require ~~expenses~~the ~~and~~use ~~settlement~~ of ~~existing~~the ~~and~~entire ~~potential~~facility, ~~obligations.~~which ~~Liquidation~~has ~~expenses~~approximately ~~may include~~48,144 ~~among~~square ~~others~~feet, ~~employee~~while ~~severance~~we ~~and~~wind ~~related~~down ~~costs,~~our ~~penalties~~operations. ~~for~~We ~~terminating~~anticipate ~~facility~~that ~~lease,~~the ~~customer~~Bankruptcy ~~service~~Court ~~obligations~~will ~~and~~hear ~~legal~~our ~~and~~motion ~~accounting~~to ~~fees~~reject the facility lease in January 2003. As of ~~December 31,~~September ~~2001~~30, 2002, future minimum lease payments for the remaining term of the facility lease ~~of our corporate headquarters~~ totaled approximately $2927.86 million. ~~While~~We wehave ~~cannot~~relocated ~~currently~~and ~~make~~entered into a ~~precise~~one-year ~~estimate~~lease offor ~~these~~our ~~expenses,~~new wecorporate ~~believe~~office ~~that~~consisting ~~our~~of ~~current~~approximately ~~cash~~3,558 square feet. ~~and~~The ~~cash~~new ~~equivalents~~lease, ~~together~~which ~~with~~commenced ~~proceeds~~on ~~from~~November ~~future~~1, ~~sales~~2002, requires an advance payment of the ~~remaining~~one-year ~~assets,~~base ~~will~~rent beof ~~sufficient~~approximately to$85,400 ~~pay~~and ~~for~~ the ~~above~~security ~~expenditures~~deposit of $25,000.

We are currently reviewing all other executory contracts and unexpired leases to determine which commitments will be assumed or rejected as allowed by the Bankruptcy Code. As of September 30, 2002, the outstanding balance of our capital lease obligations was $693,000, and future lease payments on other operating leases (which are unrelated to facilities) totaled approximately $70,000.

As part of our bankruptcy filing, we have determined and filed with the Bankruptcy Court the amounts we owed to our creditors. Additional claims may also be filed with the Bankruptcy Court by our creditors or other entities. While the ultimate amount of allowable claims is presently unknown, we believe that our current cash and cash equivalents, together with proceeds from future sales of the remaining assets, will be sufficient to settle all obligations.

Impact of Recent Accounting Pronouncements

In July 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 141, “Business Combinations” (“SFAS 141”) and Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). SFAS 141 requires all business combinations to be accounted for using the purchase method of accounting and is effective for all business combinations initiated after June 30, 2001. SFAS 142 requires goodwill and other intangible assets having indefinite lives to be reviewed annually for impairment under certain circumstances and written down when impaired, rather than being amortized as previous standards required. SFAS 142 is effective for fiscal years beginning after December 15, 2001. The implementation of SFAS 141 and SFAS 142 did not have a significant impact on our financial condition or results of operations.

1618

and measurement of the impairment of long-lived assets to be held and used and (2) the measurement of long-lived assets to be disposed of by sale. SFAS 144 develops a single accounting model for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired assets and consequently amends Accounting Principles Board Opinion No. 30, “Reporting Results of Operations-Reporting the Effects of Disposal of a Division of a Business.” Additionally, SFAS 144 expands the scope of discontinued operations to include all components of an entity with operations that (1) can be distinguished from the rest of the entity and (2) will be eliminated from the ongoing operations of the entity in a disposal transaction. SFAS 144 is effective for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years. The implementation of SFAS 144 did not have a significant impact on our financial condition or results of operations.

In July 2002, the FASB issued Statement of Accounting Standards No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”). SFAS 146 nullifies the guidance of the Emerging Issues Task Force (“EITF”) in EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)”. Under EITF Issue No. 94-3, an entity recognized a liability for an exit cost on the date that the entity committed itself to an exit plan. In SFAS 146, the FASB acknowledges that an entity’s commitment to a plan does not, by itself, create a present obligation to other parties that meets the definition of a liability and requires that a liability for a cost that is associated with an exit or disposal activity be recognized when the liability is incurred. It also establishes that fair value is the objective for the initial measurement of the liability. SFAS 146 will be effective for exit or disposal activities that are initiated after December 31, 2002. We expect that the adoption of SFAS 146 will not have any impact on our financial condition or results of operations.

~~RISK~~Risk ~~FACTORS~~Factors

You should carefully consider the risks described below and all of the information contained in this report. If any of the following risks actually occur, our plan to liquidate and dissolve could be harmed, and you may lose all or part of your investment in our common stock. In addition, to the extent we continue our operations pending our liquidation and dissolution, we will continue to face the risks described under the heading “Risk Factors” in our annual report on Form 10-K for the year ended December 31, 2001. If any of those risks actually occur, our business, financial condition and results of operation could be harmed. You should also carefully consider those risks.

WE CANNOT ASSURE YOU OF THE AMOUNT, IF ANY, OF ANY DISTRIBUTION TO OUR STOCKHOLDERS ~~UNDER~~IN ~~THE~~CONNECTION ~~PLAN~~WITH OFOUR ~~COMPLETE~~ LIQUIDATION AND DISSOLUTION.

Liquidation and dissolution may not create value to our stockholders or result in any remaining capital for distribution to our stockholders. We cannot assure you of the precise nature and amount of any distribution to our stockholders ~~pursuant~~in toconnection with our ~~Plan~~liquidation ofand ~~Complete~~dissolution, ~~Liquidation~~pursuant ~~and~~to ~~Dissolution,~~our orChapter ~~the~~11 Plan or otherwise. Uncertainties as to the precise net value of our non-cash assets and the ultimate amount of our liabilities make it impracticable to predict the aggregate net value, if any, ultimately distributable to our stockholders. The aggregate net value, if any, ultimately distributable to you ~~under the Plan~~ may be ~~lower~~ lower or higher than the amount you would receive if you sold your shares of our common stock prior to ~~the~~distribution ~~time~~pursuant weto ~~file~~our ~~the~~Chapter ~~Certificate~~11 ofPlan ~~Dissolution~~or ~~with~~our ~~the~~liquidation ~~Delaware~~and ~~Secretary of State~~dissolution. The actual nature and amount of all distributions will depend in part upon our ability to convert our remaining non-cash assets into cash. We may not be successful in selling our non-cash assets, in which case we may not generate meaningful cash, if any, to return to our stockholders.

THE PROCEEDS FROM ANY SALES OF OUR NON-CASH ASSETS MAY BE LESS THAN ANTICIPATED.

~~Sales~~Under our Bankruptcy Case, sales of our non-cash assets will be made on terms ~~approved by our Board of Directors~~ and ~~may~~procedures besubject ~~conducted~~to approval by ~~competitive~~the ~~bidding,~~Bankruptcy ~~public sales or privately negotiated sales~~Court. The prices at which we will be able to sell our various non-cash assets will depend largely on factors beyond our control, including, without limitation, the condition of financial markets, the availability of financing to prospective purchasers of the assets, regulatory approvals, public market perceptions, and limitations on transferability of certain non-cash assets. In addition, we may not obtain as high a price for a particular asset as we might secure if we were not in liquidation. Furthermore, many of our non-cash assets, particularly our intellectual property, will decline in value over time, and we may not be able to consummate the sale of these assets in time to generate meaningful value, which could be returned to our stockholders.

WE19 ~~MAY NOT BE ABLE TO SETTLE ALL OF OUR OBLIGATIONS TO CREDITORS.~~

We have certain current and future obligations to creditors. These include, without limitation, long-term contractual obligations associated with facilities leases and business agreements with customers and other third parties. Among other things, the lease for our principal office has a term expiring in February 2011, and future minimum lease payments for the remaining term of this lease totaled approximately $29.8 million as of December 31, 2001. As part of the wind down process, we will attempt to settle our obligations with our creditors and are currently exploring all our options in this regard. We may not, however, succeed in doing so. If we cannot reach an agreement with a creditor concerning an obligation, that creditor may choose to bring a lawsuit against us. Any litigation could delay or even prevent us from completing the Plan. Moreover, amounts required to settle our obligations will reduce the amount of remaining capital available for distribution to stockholders.

WE MAY NOT BE ABLE TO SETTLE ALL OF OUR OBLIGATIONS TO CREDITORS.

We have certain current and future obligations to creditors. These include, without limitation, long-term contractual obligations associated with facilities leases and business agreements with customers and other third parties. Among other things, the lease for our former corporate office has a term expiring in February 2011, and future minimum lease payments for the remaining term of this lease totaled approximately $27.6 million as of September 30, 2002. We may not be able to settle all of our obligations to creditors, and amounts required to settle our obligations will reduce the amount of remaining capital available for distribution to stockholders. Any litigation with creditors could delay us from liquidating and dissolving, and the landlord of our former corporate office has filed a motion with the Bankruptcy Court to seek dismissal of our Bankruptcy Case.

WE WILL CONTINUE TO INCUR CLAIMS, LIABILITIES AND EXPENSES WHICH WILL REDUCE THE AMOUNT AVAILABLE FOR DISTRIBUTION TO STOCKHOLDERS.

Claims, liabilities and expenses from operations (such as operating costs, salaries, income taxes, payroll and local taxes, legal and accounting fees and miscellaneous office expenses) will continue to be incurred as we wind down. These expenses will reduce the amount of assets available for ultimate distribution to stockholders. If available cash and amounts received on the sale of non-cash assets are not adequate to provide for our obligations, liabilities, expenses and claims, we may not be able to distribute meaningful cash, or any cash at all, to our stockholders.

In November 2001, a complaint captioned Richmon v. Integrated Telecom Express, Inc., No. 01-CV-10108 was filed in federal district court for the Southern District of New York, on behalf of a putative class of persons who purchased our common stock between August 18, 2000 and December 6, 2000. An amended complaint was filed in April 2002. The amended complaint generally alleges that various investment bank underwriters engaged in improper and undisclosed activities related to the allocation of shares in our initial public offering of securities and subsequently issued false and misleading analyst reports. The complaint brings claims for violation of several provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934 against those underwriters and also against us and various of our present and former officers and directors. Similar lawsuits concerning more than 300 other companies’ initial public offerings have been filed and coordinated as In re Initial Public Offering Securities Litigation, No. 21 MC 92. The defendants have filed motions to dismiss. We believe that the claims against us are without merit and intend to defend this lawsuit vigorously. Pendency of this litigation matter can be expected to result in expenses to us and the diversion of management time and other resources, the extent of which cannot be quantified with any reasonable accuracy given the stage of this litigation matter. If these parties are successful in their claims against us, we may be liable for significant damages, which would substantially reduce, or eliminate, amounts available for distribution to our stockholders.

DISTRIBUTION OF ASSETS, IF ANY, TO OUR STOCKHOLDERS COULD BE DELAYED.

Although ~~our~~we ~~Board~~have ~~of Directors has~~ not established a firm timetable for distributions to our stockholders, ~~the~~we ~~Board~~intend ofto ~~Directors~~make ~~intends~~such distributions as promptly as practicable, subject to contingencies inherent in winding down our business, toand ~~make~~our ~~such~~Bankruptcy ~~distributions as promptly as practicable~~Case. ~~However,~~We we are currently unable to predict the precise timing of any distribution ~~pursuant to our wind down~~. The timing of distribution will depend on and could be delayed by, among other things, the timing of sales of our non-cash assets, claim settlements with creditors, ~~and~~ the litigation matter described above. Additionally, a creditor could seek an injunction against the making of distributions to our stockholders on the ground that the amounts to be distributed were needed to provide for the payment of our liabilities and ~~expenses.~~proceedings ~~Additionally, we could seek protection from creditors~~ under ~~the~~our ~~federal~~Bankruptcy ~~bankruptcy code~~Case. ~~Any action of this type could delay or substantially diminish, or eliminate, the amount available for distribution to our stockholders.~~

IFOUR WESTOCK ~~FAIL~~TRANSFER TOBOOKS ~~CREATE~~WILL ANCLOSE ~~ADEQUATE~~ON ~~CONTINGENCY~~THE ~~RESERVE~~CONFIRMATION ~~FOR~~DATE ~~PAYMENT~~ OF OUR ~~EXPENSES~~CHAPTER ~~AND~~11 ~~LIABILITIES~~PLAN, ~~OUR~~AFTER ~~STOCKHOLDERS~~WHICH ~~COULD~~IT BEWILL ~~HELD~~NOT ~~LIABLE~~BE POSSIBLE FOR ~~PAYMENT~~STOCKHOLDERS TO TRADE OUR ~~CREDITORS~~ ~~OF EACH SUCH STOCKHOLDER’S PRO RATA SHARE OF AMOUNTS OWED TO THE CREDITORS IN EXCESS OF THE CONTINGENCY RESERVE, UP TO THE AMOUNT ACTUALLY DISTRIBUTED TO SUCH STOCKHOLDER~~STOCK.

IfOur ~~the~~Chapter 11 Plan isprovides ~~ratified and approved by the stockholders~~that, weat ~~will file a Certificate of Dissolution with~~ the ~~State~~close of ~~Delaware~~business ~~dissolving~~on ~~the~~its ~~Company.~~confirmation ~~Pursuant to the Delaware General Corporation law~~date, we will ~~continue~~close toour ~~exist~~stock ~~for~~transfer ~~three~~books ~~years~~and discontinue ~~after~~recording ~~the~~transfers ~~dissolution~~of ~~becomes~~our ~~effective~~common orstock. ~~for~~After ~~such~~this ~~longer~~date, ~~period~~certificates asrepresenting ~~the~~our ~~Delaware~~common ~~Court~~stock ~~of Chancery~~ shall ~~direct,~~not ~~for~~be ~~the~~assignable ~~purpose~~or oftransferable ~~prosecuting~~on ~~and~~our ~~defending~~books ~~suits~~except ~~against us~~by ~~and~~will, ~~enabling~~intestate ussuccession ~~gradually~~or tooperation ~~close~~of ~~our~~law. ~~business,~~The toproportionate interests ~~dispose~~ of ~~our~~all ~~property,~~of ~~to discharge~~ our ~~liabilities and to distribute to our~~ stockholders ~~any~~shall ~~remaining~~be ~~assets.~~fixed ~~Under~~on the ~~Delaware~~basis ~~General~~of ~~Corporation~~their ~~Law,~~respective instock ~~the~~holdings ~~event~~at wethe ~~fail~~close toof ~~create~~business ~~an adequate~~on ~~contingency~~this ~~reserve~~date, ~~for payment of our expenses~~ and, ~~liabilities~~afterwards, ~~during~~any ~~this~~distributions ~~three-year~~made ~~period,~~by ~~each~~us ~~stockholder~~shall ~~could~~ be ~~held~~made ~~liable~~solely ~~for payment~~ to ~~our~~the ~~creditors~~stockholders of ~~such~~record ~~stockholder’s~~at ~~pro~~the ~~rata share of amounts owed to creditors in~~close ~~excess~~ of ~~the~~business ~~contingency~~on ~~reserve~~this date, ~~up to the amount actually distributed to such stockholder.~~

1820

~~However,~~except ~~the~~as ~~liability~~may ~~of any stockholder would~~ be ~~limited~~necessary to ~~the~~reflect ~~amounts previously~~subsequent ~~received~~transfers byrecorded such stockholder from us (and from any liquidating trust or trusts) in the dissolution. Accordingly, in such event a stockholder could be required to return all distributions previously made to such stockholder. In such event, a stockholder could receive nothing from us under the Plan. Moreover, in the event a stockholder has paid taxes on ~~amounts~~our ~~previously~~books ~~received,~~as a ~~repayment of all or a portion of such amount could~~ result ~~in a stockholder incurring a net tax cost if the stockholder’s repayment~~ of anany ~~amount~~assignments ~~previously distributed does not cause a commensurate reduction in taxes payable. There can be no assurance that the contingency reserve established~~ by us will, beintestate ~~adequate~~succession toor operation ~~cover~~of ~~any expenses and liabilities~~law.

OUR STOCK TRANSFER BOOKS WILL CLOSE ON THE DATE WE FILE THE CERTIFICATE OF DISSOLUTION WITH THE DELAWARE SECRETARY OF STATE, AFTER WHICH IT WILL NOT BE POSSIBLE FOR STOCKHOLDERS TO PUBLICLY TRADE OUR STOCK.

We intend to close our stock transfer books and discontinue recording transfers of our common stock at the close of business on the date we file the Certificate of Dissolution with the Delaware Secretary of State. After this date, certificates representing our common stock shall not be assignable or transferable on our books except by will, intestate succession or operation of law. The proportionate interests of all of our stockholders shall be fixed on the basis of their respective stock holdings at the close of business on this date, and, afterwards, any distributions made by us shall be made solely to the stockholders of record at the close of business on this date, except as may be necessary to reflect subsequent transfers recorded on our books as a result of any assignments by will, intestate succession or operation of law.

WE DO NOT EXPECT TO RECOGNIZE MUCH REVENUE FOLLOWING THE ANNOUNCEMENT OF OUR INTENT TO WIND DOWN.

Except for revenue resulting from the sale of our remaining inventory, we do not expect to recognize much, if any, additional revenue. Furthermore, it may be difficult to collect receivables now that we have announced our intent to wind down.

WE WILL CONTINUE TO INCUR THE EXPENSES OF COMPLYING WITH PUBLIC COMPANY REPORTING REQUIREMENTS.

We have an obligation to continue to comply with the applicable reporting requirements of the Securities Exchange Act of 1934, as amended, even though compliance with such reporting requirements is economically burdensome. In order to curtail expenses, we intend to, after filing our Certificate of Dissolution, seek relief from the Securities and Exchange Commission from the reporting requirements under the Exchange Act. We anticipate that, if such relief were granted, we would continue to file current reports on Form 8-K to disclose material events relating to our liquidation and dissolution along with any other reports that the Securities and Exchange Commission might require. However, the Securities and Exchange Commission may not grant any such relief.

IF WE FAIL TO RETAIN THE SERVICES OF CERTAIN KEY PERSONNEL, ~~THE~~ OUR CHAPTER 11 PLAN AND LIQUIDATION AND DISSOLUTION MAY NOT SUCCEED.

The success of ~~the~~our Chapter 11 Plan, if approved, and liquidation and dissolution depends in large part upon our ability to retain the services of certain of our current officers. The retention of James Regel, our Chief Executive Officer, and James Williams, our Chief Financial Officer, and certain other qualified personnel is particularly difficult under our current circumstances. Failure to retain these personnel could harm the implementation of ~~the~~our ~~Plan~~liquidation and dissolution. If we fail to retain these personnel, we will need to hire others to oversee our liquidation and dissolution, which could involve substantial additional compensation expenses, if such other personnel are available at all.

19WE MAY NOT REALIZE THE BENEFITS WE DESIRE TO ACHIEVE FROM OUR BANKRUPTCY PROCESS.

While our Board of Directors chose to pursue the previously announced plan to liquidate and dissolve the Company under the protection of the Bankruptcy Code for a variety of reasons, including to enable us to maximize the amount of capital to be returned to our stockholders and expedite the distribution of cash to our stockholders, we cannot guarantee that these benefits will ultimately be realized from our Bankruptcy Case. In addition, the landlord of our former corporate office has filed a motion to dismiss our Bankruptcy Case. Furthermore, the bankruptcy process involves substantial costs and expenses, including without limitation legal and professional fees, which would reduce the amount of capital available for distribution to our stockholders. We cannot guarantee that the benefits, if any, that may be realized from the bankruptcy process will outweigh such costs and expenses.

WE ARE NO LONGER LISTED ON THE NASDAQ NATIONAL MARKET AND THE MARKET IN OUR STOCK MAY NOT CONTINUE.

Our common stock listing was transferred from the Nasdaq National Market to the OTC Bulletin Board in October 2002. This has reduced the market and liquidity of our common stock and consequently may adversely affect the ability of our stockholders and brokers/dealers to purchase and sell our shares in an orderly manner or at all. Trading in our common stock through market makers and quotation on the OTC Bulletin Board entails other risks. Due in part to the decreased trading price of our common stock and reduced analyst coverage, the trading price of our common stock may change quickly, and market makers may not be able to execute trades as quickly as they could when the common stock was listed on the Nasdaq National Market.

~~OUR~~WE ~~STOCKHOLDERS~~MAY ~~COULD~~NOT ~~VOTE~~OBTAIN ~~AGAINST~~APPROVAL ~~THE~~OF OUR CHAPTER 11 PLAN.

Our ~~stockholders~~Chapter ~~could~~11 ~~vote against the~~ Plan. Ifis wesubject doto ~~not obtain stockholder~~ approval ofby ~~liquidation~~eligible ~~and~~voting ~~dissolution~~parties, weincluding ~~would~~unsecured ~~have~~creditors ~~to continue~~and ~~our~~stockholders ~~business~~of ~~operations~~the ~~from~~Company. aThese ~~difficult~~parties ~~position,~~could invote ~~light~~against it ~~of our announced intent to liquidate~~ and ~~dissolve.~~propose ~~Among other things,~~ a ~~substantial~~different ~~majority~~plan ofthat ~~our~~is ~~employees~~less ~~will~~favorable ~~have~~to ~~been terminated~~you, ~~and~~including ~~customer~~a ~~relationships~~plan ~~will~~that ~~have~~effects ~~been severely~~distribution ~~strained. Prospective employees, customers and other third parties may refuse~~ to ~~form~~stockholders ~~relationships~~later or ~~conduct business with us if they have no confidence~~ in ~~our~~reduced ~~future~~amounts.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

There have been no changes in financial market risk as discussed in our Annual Report on Form 10-K for the year ended December 31, 2001.

20 Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Based on their evaluation as of a date within 90 days of the filing date of this Quarterly Report on Form 10-Q, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934 (the “Exchange Act”) are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission’s rules and forms.

Change in Internal Controls

There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. There were no significant deficiencies or material weaknesses, and therefore there were no corrective actions taken.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings

On October 8, 2002, the Company filed a voluntary petition for relief under Chapter 11 of Title 11 of the United States Code in the United States Bankruptcy Court for the District of Delaware under Case No. 02-12945 (PJW), or the Bankruptcy Case. Pursuant to sections 1107(a) and 1108 of the Bankruptcy Code, the Company is continuing to operate its business and manage its property as a debtor in possession subject to the jurisdiction of the Bankruptcy Court.

In November 2001, a complaint captioned Richmon v. Integrated Telecom Express, Inc., No. 01-CV-10108 was filed in federal district court for the Southern District of New York, on behalf of a putative class of persons who purchased our common stock between August 18, 2000 and December 6, 2000. An amended complaint was filed in April 2002. The amended complaint generally alleges that various investment bank underwriters engaged in improper and undisclosed activities related to the allocation of shares in our initial public offering of securities and subsequently issued false and misleading analyst reports. The complaint brings claims for violation of several provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934 against those underwriters and also against us and various of our present and former officers and directors. Similar lawsuits concerning more than 300 other companies’ initial public offerings have been filed and coordinated as In re Initial Public Offering Securities Litigation, No. 21 MC 92. The defendants have filed motions to dismiss. We believe that the claims against us are without merit and intend to defend this lawsuit vigorously.

In addition to the lawsuit mentioned above, from time to time, we may become involved in litigation relating to claims arising from our ordinary course of business. We are not currently a party to any material legal proceedings of this nature.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

Exhibit Number		Description
10.48		James G. Regel Amended and Restated Employment Agreement, dated May 16, 2002, between the Registrant and James G. Regel.
10.53		Addendum to Offer Letter, dated June 12, 2002, between the Registrant and Jow Peng.
10.49		James E. Williams Amended and Restated Employment Agreement, dated May 16, 2002, between the Registrant and James E. Williams.
10.54		Second Amended and Restated Employment Agreement, dated October 4, 2002 between the Registrant and James G. Regel.
10.50		Addendum to Offer Letter, dated June 12, 2002, between the Registrant and Kenyon Mei.
10.55		Second Amended and Restated Employment Agreement, dated October 4, 2002 between the Registrant and James E. Williams.
10.51		Addendum to Offer Letter, dated June 14, 2002, between the Registrant and James Stair.
99.1		Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
10.52		Asset Purchase Agreement, dated June 13, 2002, between the Registrant and Real Communications, Inc.
99.1		Certification of Chief Executive Officer and Chief Financial Officer.

(b) Reports on Form 8-K

We filed Form 8-K dated April 19, 2002 with the Securities and Exchange Commission in connection with our Board of Directors’ approval of the Plan of Complete Liquidation and Dissolution of the CompanyNone.

2123

SIGNATURES

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

INTEGRATED TELECOM EXPRESS, INC. By: /s/ JAMES WILLIAMS James Williams Senior Vice President of Finance and Chief Financial Officer (Principal Financial and Accounting Officer)

		INTEGRATED TELECOM EXPRESS, INC.

Date:	November 14, 2002	By:	/s/ JAMES WILLIAMS
			James Williams Senior Vice President of Finance and Chief Financial Officer (Principal Financial and Accounting Officer)

~~Date:~~24 ~~August 13, 2002~~

22Table of Contents

CERTIFICATION

I, James G. Regel, certify that:

I have reviewed this quarterly report on Form 10-Q of Integrated Telecom Express, Inc.;

Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: November 14, 2002


By:		/s/ James G. Regel
Name:		James G. Regel
Title:		Chief Executive Officer

I, James E. Williams, certify that:

I have reviewed this quarterly report on Form 10-Q of Integrated Telecom Express, Inc.;

evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

Date: November 14, 2002


By:		/s/ James E. Williams
Name:		James E. Williams
Title:		Chief Financial Officer

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