CENTILLIUM COMMUNICATIONS INC
POS462C, 2000-05-24
TELEPHONE & TELEGRAPH APPARATUS
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<PAGE>


   As filed with the Securities and Exchange Commission on May 24, 2000
                                                      Registration No. 333-30772
- - - - - - --------------------------------------------------------------------------------
- - - - - - --------------------------------------------------------------------------------
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                --------------

                              Post-Effective

                            Amendment No. 1 to
                                    FORM S-1
                             REGISTRATION STATEMENT
                                     UNDER
                           THE SECURITIES ACT OF 1933
                                --------------
                        Centillium Communications, Inc.
             (Exact name of Registrant as specified in its charter)
<TABLE>
 <S>                            <C>                           <C>
           Delaware                         3661                       94-3263530
 (State or other jurisdiction
              of                (Primary Standard Industrial        (I.R.S. Employer
       incorporation or
        organization)            Classification Code Number)     Identification Number)
</TABLE>

                            47211 Lakeview Boulevard
                           Fremont, California 94538
                                 (510) 771-3700
  (Address, including zip code, and telephone number, including area code, of
                   Registrant's principal executive offices)

                                --------------
                                  Faraj Aalaei
                            Chief Executive Officer
                            47211 Lakeview Boulevard
                           Fremont, California 94538
                                 (510) 771-3700
 (Name, address, including zip code, and telephone number, including area code,
                             of agent for service)

                                --------------
                                   Copies to:

<TABLE>
<S>                                            <C>
           Arthur F. Schneiderman                              Shane M. Byrne
             Michael J. Danaher                              Matthew R. Gemello
              Stephen M. Welles                                 Lora D. Blum
                Paul A. Okada                         Brobeck, Phleger & Harrison LLP
              Micheal J. Reagan                              Spear Street Tower
      Wilson Sonsini Goodrich & Rosati                           One Market
          Professional Corporation                    San Francisco, California 94105
             650 Page Mill Road                                (415) 442-0900
         Palo Alto, California 94304
               (650) 493-9300
</TABLE>
                                --------------
   Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
   If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
   If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
   If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
   If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
   If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]

                        CALCULATION OF REGISTRATION FEE
<TABLE>
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<CAPTION>
                                                    Proposed Maximum
Title of Each Class of Securities       Amount       Offering Price       Proposed Maximum            Amount of
        to be Registered           to be Registered    Per Share     Aggregate Offering Price(1) Registration Fee(2)
- - - - - - --------------------------------------------------------------------------------------------------------------------
<S>                                <C>              <C>              <C>                         <C>
Common Stock, $0.001 par value..      4,600,000          $19.00              $87,400,000               $23,598
- - - - - - --------------------------------------------------------------------------------------------------------------------
- - - - - - --------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated pursuant to Rule 457(a) of the Securities Act of 1933 solely for
    the purpose of computing the amount of the registration fee.
(2) $29,146 of the Registration Fee was previously paid.

                                --------------
   The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall hereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to such Section 8(a),
may determine.

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<PAGE>


                                4,000,000 Shares

                               [Centillium logo]

                        Centillium Communications, Inc.
                                  Common Stock

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

   Prior to this offering, there has been no public market for our common
stock. Our common stock has been approved for listing on The Nasdaq Stock
Market's National Market under the symbol "CTLM."

   The underwriters have an option to purchase a maximum of 600,000 additional
shares to cover over-allotments of shares.

   Investing in our common stock involves risks. See "Risk Factors" on page 4.

<TABLE>
<CAPTION>
                                                         Underwriting
                                                          Discounts
                                              Price to       and      Proceeds to
                                               Public    Commissions   Centillium
                                            ------------ ------------ ------------
<S>                                         <C>          <C>          <C>
Per Share..................................    $19.00       $1.33        $17.67
Total...................................... $76,000,000   $5,320,000  $70,680,000
</TABLE>

   Delivery of the shares of common stock will be made on or about May 30,
2000.

   Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.

Credit Suisse First Boston

                        Robertson Stephens

                                                            Salomon Smith Barney

               The date of this prospectus is May 23, 2000.
<PAGE>

                                  -----------

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                      Page
                                      ----
<S>                                   <C>
Prospectus Summary..................    1
Risk Factors........................    4
You Should Not Rely on Forward-
 Looking Statements.................   10
Use of Proceeds.....................   10
Dividend Policy.....................   10
Capitalization......................   11
Dilution............................   12
Selected Consolidated Financial
 Data...............................   13
Management's Discussion and Analysis
 of Financial Condition and Results
 of Operations......................   14
</TABLE>
<TABLE>
<CAPTION>
                                   Page
                                   ----
<S>                                <C>
Business.........................   24
Management.......................   36
Related Party Transactions.......   44
Principal Stockholders...........   46
Description of Capital Stock.....   48
Shares Eligible for Future Sale..   51
Underwriting.....................   53
Notice to Canadian Residents.....   55
Legal Matters....................   56
Experts..........................   56
Additional Information...........   56
Index To Consolidated Financial
 Statements......................  F-1
</TABLE>

                                  -----------

   You should rely only on the information contained in this document or to
which we have referred you. We have not authorized anyone to provide you with
information that is different. This document may only be used where it is legal
to sell these securities. The information in this document may only be accurate
on the date of this document.




                     Dealer Prospectus Delivery Obligation

   Until June 18, 2000 (25 days after the commencement of this offering), all
dealers that effect transactions in these securities, whether or not
participating in this offering, may be required to deliver a prospectus. This
is in addition to the dealer's obligation to deliver a prospectus when acting
as an underwriter and with respect to unsold allotments or subscriptions.
<PAGE>

                               PROSPECTUS SUMMARY

   The following summary highlights basic information about us and this
offering contained more fully elsewhere in this prospectus. You should read
this entire prospectus carefully, including the section entitled "Risk Factors"
and the financial statements and the related notes to those statements included
in this prospectus. This prospectus contains forward-looking statements that
involve risks and uncertainties.

                        Centillium Communications, Inc.

   Centillium delivers products that enable broadband communications to the
home and business. We currently sell DSL products and we are leveraging our DSL
technology and expertise to develop products for the emerging voice over data
networks and home networking markets.

   Digital subscriber line or DSL technology provides high-speed data
transmission using the local telephone company's existing copper wire
infrastructure. DSL equipment is installed at both ends of the copper wire--at
the telephone company's central office facility and at the end-user's home or
business. Each of our DSL products consists of a set of two semiconductors and
related software that form the core of the DSL equipment used at each end of
the copper wire.

   As telephone companies and other network access providers have begun to
deploy DSL services, demand is emerging for complementary technologies such as
voice over data networks and home networking. Voice over data networks
technology enables the transmission of voice conversations over communications
networks originally designed for data transmission only. Voice over data
networks technology also enables the transmission of multiple voice channels as
well as data over a single copper line previously capable of transmitting only
one voice channel. Home networking enables users to share information
technology resources throughout the home. Broadband equipment manufacturers
that seek to serve the DSL, voice over data networks and home networking
markets must develop solutions to meet constantly evolving technology and
networking standards, size and power constraints, and short product life-
cycles. We believe that our products help equipment manufacturers compete in
these markets by providing flexibility due to our programmable architecture,
efficient design, low power consumption and fast time to market.

   We outsource the manufacturing of our products, which allows us to focus our
resources on design, development and marketing efforts within our target
markets. To date, we have shipped our products to 13 customers. Our largest
customers, based on revenue earned in the three months ended March 31, 2000,
are Sumitomo Electric Industries, Lucent Technologies, Copper Mountain
Networks, and NEC, which represented 39.1%, 26.9%, 12.3% and 7.5% of our
revenues for such period, respectively.

   We were incorporated in February 1997. We have a limited operating history
and we have not reported an operating profit for any year since our
incorporation. We expect to continue to incur net losses for the foreseeable
future.

   Our principal executive offices are located at 47211 Lakeview Boulevard,
Fremont, CA 94538 and our telephone number is (510) 771-3700.

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

   Centillium, CopperLite, CopperFlite and Optimizer are our common law
trademarks. This prospectus also makes reference to trademarks of other
companies.

                                       1
<PAGE>

                                  The Offering

<TABLE>
 <C>                                                <S>
 Common stock offered in this offering............. 4,000,000 shares
 Common stock offered in the private placement..... 700,000 shares to three
                                                    investors as follows:
                                                    500,000 to CTI Limited,
                                                    100,000 to NEC Corporation
                                                    and 100,000 to Sterlingsat
                                                    Television Limited.
 Common stock to be outstanding after this offering
  and the private placement........................ 32,137,747 shares
 Use of proceeds................................... For general corporate
                                                    purposes and working
                                                    capital, including expected
                                                    operating expenses. See
                                                    "Use of Proceeds."
 Nasdaq National Market symbol..................... CTLM
</TABLE>

   The total number of outstanding shares of our common stock above is based
on:

  .  11,987,511 shares of our common stock outstanding as of March 31, 2000;
     and

  .  the automatic conversion of all outstanding shares of preferred stock
     upon completion of this offering into 15,450,236 additional shares of
     common stock.

   The total number of outstanding shares of our common stock above does not
include:

  .  2,831,840 shares of common stock issuable upon the exercise of
     outstanding stock options as of March 31, 2000 at a weighted average
     exercise price of $3.44 per share;

  .  26,750 shares of common stock issuable upon the exercise of outstanding
     warrants as of March 31, 2000 at a weighted average exercise price of
     $4.00 per share;

  .  5,814,042 shares of common stock available for issuance under our 1997
     Stock Plan following this offering; and

  .  500,000 additional shares of common stock available for issuance under
     our 2000 Employee Stock Purchase Plan immediately following this
     offering.

   Unless otherwise specifically stated, information throughout this
prospectus:

  .  reflects the conversion of all outstanding shares of preferred stock
     into shares of common stock automatically upon completion of this
     offering; and

  .  assumes no exercise of the underwriter's over-allotment option.

                                       2
<PAGE>

                   Summary Consolidated Financial Information

<TABLE>
<CAPTION>
                            Period from        Fiscal Year          Three Months
                         February 21, 1997 Ending December 31,    Ended March 31,
                          (inception) to   ---------------------  -----------------
                         December 31, 1997   1998        1999      1999      2000
                         ----------------- ---------  ----------  -------  --------
                          (in thousands except per share data)      (unaudited)
<S>                      <C>               <C>        <C>         <C>      <C>
Consolidated Statement
 of Operations Data:
Total revenues..........      $   300      $     752  $    3,744  $    50  $  4,723
Operating loss..........      $(2,102)     $  (9,722) $  (20,781) $(3,452) $(10,312)
Net loss................      $(1,937)     $  (9,256) $  (19,749) $(3,427) $(10,058)
Deemed dividend on
 Series B convertible
 preferred stock........      $(2,800)     $     --   $      --   $   --   $    --
                              -------      ---------  ----------  -------  --------
Net loss applicable to
 common stockholders....      $(4,737)     $  (9,256) $  (19,749)  (3,427) $(10,058)
Historical basic and
 diluted net loss per
 share applicable to
 common stockholders....      $ (0.59)     $   (1.15) $    (2.23) $ (0.42) $  (1.03)
Shares used to compute
 basic and diluted net
 loss per share
 applicable to common
 stockholders...........        8,000          8,056       8,842    8,227     9,808
Pro forma basic and
 diluted net loss per
 share applicable to
 common stockholders....                              $    (0.91)          $  (0.40)
                                                      ==========           ========
Shares used to compute
 pro forma basic and
 diluted net loss per
 share applicable to
 common stockholders....                                  21,755             25,258
                                                      ==========           ========
</TABLE>

<TABLE>
<CAPTION>
                                                        March 31, 2000
                                                 -----------------------------
                                                                    Pro Forma
                                                 Actual  Pro Forma As Adjusted
                                                 ------- --------- -----------
                                                   (unaudited, in thousands)
<S>                                              <C>     <C>       <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents and short-term
 investments.................................... $23,358  $23,358   $106,088
Working capital................................. $21,350  $21,350   $104,080
Total assets.................................... $33,724  $33,724   $116,454
Long-term debt and capital lease obligations,
 less current portion........................... $   417  $   417   $    417
Total stockholders' equity...................... $26,250  $26,250   $108,980
</TABLE>

   See note 1 of notes to consolidated financial statements for an explanation
of the determination of the number of shares used in computing per share data.

   The pro forma amounts above reflect the conversion of 15,450,236 shares of
preferred stock into the same number of shares of common stock upon the
completion of this offering.

   The pro forma as adjusted amounts above give effect to the sale of 4,000,000
shares of common stock in this offering and the sale of 700,000 shares of
common stock in the private placement, in each case at an offering price of
$19.00 per share, after deducting underwriting discounts and commissions and
estimated offering expenses.

   In our discussion throughout this prospectus, references to the year ended
December 31, 1997 refer to the period from February 21, 1997 (inception)
through December 31, 1997.


                                       3
<PAGE>

                                  RISK FACTORS

   You should carefully consider the risks described below before making a
decision to purchase our common stock. You may lose all or part of your
investment. If any of the following risks actually occur, our business,
financial condition or results of operations could be harmed. If that happens,
the trading price of our common stock could decline.

We commenced operations in April 1997, and our limited operating history
selling products to the broadband communications market makes it difficult to
evaluate our business and future prospects.

   We commenced operations in April 1997 and did not begin to generate revenue
from shipment of products until the third quarter of 1999. We are still in the
early stages of our development, which makes it difficult to evaluate our
future prospects and increases the risk that we will be unable to build a
sustainable business. You must consider our prospects in light of the risks and
difficulties we will encounter as an early stage company competing in a new and
rapidly evolving market. Many of these risks are described under the sub-
headings below. We may not successfully address any or all of these risks and
our business strategy may not be successful.

We have a history of losses, we expect future losses, and we may not achieve or
maintain profitability.

   We have not reported an operating profit for any year since our
incorporation and have experienced net losses of approximately $1.9 million,
$9.3 million, and $19.7 million for the years ended December 31, 1997, 1998,
and 1999, respectively. Additionally, we experienced a net loss of $10.1
million for the three month period ended March 31, 2000. We expect to continue
to incur net losses for the foreseeable future, and these losses may be
substantial. Unless we are able to generate significant revenues from future
sales of our products, we will not be able to build a sustainable business.

We continue to rapidly expand our operations, and our failure to manage our
growth could harm our business.

   We have rapidly and significantly expanded our operations, including
increasing the number of our employees from 71 in June 1999 to 176 at the end
of April 2000. This expansion is placing a significant strain on our
managerial, operational and financial resources. Further, Faraj Aalaei, our
Chief Executive Officer, has only recently been appointed to this position. As
a result, he may not yet be fully integrated into his new position. We expect
that further significant expansion will be required to address growth in our
customer base and market opportunities. Failure to manage our growth could harm
our business.

Competition for qualified personnel in the semiconductor and telecommunications
industries is intense, and if we are not successful in attracting and retaining
these personnel, we will not be able to execute our business plan.

   Competition for qualified personnel in the semiconductor and
telecommunications industries is intense, and we may not be successful in
attracting and retaining personnel. We are actively searching for research and
development engineers, who are in short supply. Our business will be harmed if
we encounter delays in hiring these additional engineers. Furthermore,
competitors and others have in the past and may in the future attempt to
recruit our employees. We do not have employment contracts with any of our key
personnel nor do we maintain key person life insurance on our key personnel.

                                       4
<PAGE>

We depend on third party foundries to manufacture, assemble and test our
products and we may not be able to obtain sufficient capacity to support our
business.

   We do not own or operate a semiconductor fabrication facility. We rely on
Mitsubishi Electric, United Microelectronics Corporation and Taiwan
Semiconductor Corporation to manufacture our products. In addition, we
generally do not have contracts with these foundries guaranteeing the
availability of capacity. We may experience delays in the future and we cannot
be sure that we will be able to obtain semiconductors within the time frames
and in the volumes required by us at an affordable cost or at all. Any
disruption in the availability of semiconductors or any problems associated
with the delivery, quality or cost of the fabrication assembly and testing of
our products could significantly hinder our ability to deliver our products to
our customers and would result in a decrease in sales of our products.

We depend on sole source suppliers for several key components of our products.

   We obtain certain parts, components and packaging used in the delivery of
our products from sole sources of supply. For example, we obtain certain
semiconductor wafers from Mitsubishi Electric. If we fail to obtain components
in sufficient quantities when required, and are unable to meet customer demand,
our business could be harmed, as our customers would consider purchasing
products from our competitors. We also rely on United Microelectronics
Corporation to manufacture our analog silicon wafers. Developing and
maintaining these strategic relationships with our vendors is critical for us
to be successful.

   Any of our sole source suppliers may:

  .  enter into exclusive arrangements with our competitors;

  .  stop selling their products or components to us at commercially
     reasonable prices;

  .  refuse to sell their products or components to us at any price; or

  .  may be subject to production disruptions such as earthquakes.

Sales of our products are dependent on the widespread adoption of broadband
access services, especially DSL. If the demand for broadband access service
does not increase as expected, we may not be able to generate substantial
sales.

   Sales of our products depend on the increased use and widespread adoption of
broadband access services, and DSL services in particular, and the ability of
telecommunications service providers to market and sell broadband access
services. Our business would be harmed, and our results of operations and
financial condition would be adversely affected if the use of broadband access
services does not increase as anticipated. Certain critical factors will likely
continue to affect the development of the broadband access service market.
These factors include:

  .  inconsistent quality and reliability of service;

  .  lack of availability of cost-effective, high-speed service;

  .  lack of interoperability among multiple vendors' network equipment;

  .  congestion in service providers' networks; and

  .  inadequate security.

                                       5
<PAGE>

Because other broadband technologies may compete effectively with DSL services,
our products may not capture market share.

   DSL services are competing with a variety of different broadband data
transmission technologies, including cable modems, satellite and other wireless
technologies. If any technology that is competing with DSL technology is more
reliable, faster, less expensive or has other advantages over DSL technology,
then the demand for our DSL products may decrease.

Our markets are highly competitive and many of our competitors are established
and have greater resources than us.

   The market for software and communications semiconductor solutions is
intensely competitive. Given our early stage of development, there is a
substantial risk that we will not have the financial resources, technical
expertise or marketing and support capabilities to compete successfully. We
believe our principal competitors include or will include Alcatel
Microelectronics, Analog Devices, Conexant Systems, GlobeSpan, Lucent
Microelectronics, STMicroelectronics, and Texas Instruments. These competitors
have longer operating histories, greater name recognition, larger installed
customer bases and significantly greater financial, technical and marketing
resources than we have. They may be able to introduce new technologies, respond
more quickly to changing customer requirements or devote greater resources to
the development, promotion and sale of their products than we can. Further, in
the event of a manufacturing capacity shortage, these competitors may be able
to manufacture products when we are unable to do so.

Our current products do not interoperate with certain products offered by
suppliers to our customers and are subject to evolving industry standards. If
our products do not interoperate with our target customers' networks or an
industry standard that achieves market acceptance, sales of our products will
decline.

   Our products do not interoperate with the equipment of certain network
equipment vendors who supply our target customers. In some cases, these network
equipment vendors sell proprietary or non-interoperable systems to our target
customers with which our products will not function. In these cases, potential
customers who wish to purchase DSL products and who have purchased other
network equipment that does not function with our DSL products may not purchase
our products.

   Also, the emergence of new industry standards, whether through adoption by
official standards committees or widespread use by our target customers, could
require us to redesign our products. If such standards become widespread and
our products do not meet these standards, our customers and potential customers
would not purchase our products.

Because our products are components of other equipment, if broadband equipment
manufacturers do not incorporate our products in their equipment, we may not be
able to generate sales of our products in volume quantities.

   Our products are not sold directly to the end-user, rather they are
components of other products. As a result, we rely upon equipment manufacturers
to design our products into their equipment. We further rely on this equipment
to be successful. If equipment that incorporates our products is not accepted
in the marketplace, we may not achieve sales of our products in volume
quantities, which would have a negative impact on our results of operations.

Because manufacturers of communications equipment may be reluctant to change
their sources of components, if we do not achieve design wins with such
manufacturers, we may be unable to secure sales from these customers in the
future.

   Once a manufacturer of communications equipment has designed a supplier's
semiconductor into its products, the manufacturer may be reluctant to change
its source of semiconductors due to the significant costs

                                       6
<PAGE>

associated with qualifying a new supplier. Accordingly, our failure to achieve
design wins with equipment manufacturers which have chosen a competitor's
semiconductor could create barriers to future sales opportunities with these
manufacturers.

A design win from a customer is not a guarantee of future sales to that
customer.

   Achieving a design win with a customer does not create a binding commitment
from that customer to purchase our products. Rather, a design win is solely an
expression of interest by potential customers in purchasing our products and is
not supported by binding commitments of any nature. Accordingly, a customer can
choose at any time to discontinue using our products in their designs or
product development efforts. Even if our products are chosen to be incorporated
into a customer's products, we still may not realize significant revenues from
that customer if their products are not commercially successful. Our inability
to convert design wins into actual sales and any cancellation of a purchase
order could have a negative impact on our financial condition and results of
operations.

We depend on a few customers and if we lose any of them our sales and
operations will suffer.

   We sell our DSL products primarily to network equipment manufacturers. For
the year ended December 31, 1999, sales to Sumitomo Electric Industries
accounted for 34.4% of our revenues and sales to NEC accounted for 21.1% of our
revenues. For the three months ended March 31, 2000, sales to Sumitomo Electric
Industries, Lucent Technologies and Copper Mountain Networks accounted for
39.1%, 26.9% and 12.3%, respectively, of our revenues. We do not have formal
long-term agreements with these customers relating to the sale of our products,
but rather sell our products to them on an order-by-order basis. We expect to
continue to be dependent upon a relatively small number of large customers in
future periods, although the specific customers may vary from period to period.
If we are not successful in maintaining relationships with key customers and
winning new customers, our business and results of operations will suffer.

We derive a substantial amount of our revenues from international sources, and
difficulties associated with international operations could harm our business.

   A substantial portion of our revenues has been derived from customers
located outside of the United States. In 1999, 81.6% of our sales were to
customers located in Asia. We may be unable to successfully overcome the
difficulties associated with international operations. These difficulties
include:

  .  difficulties staffing and managing foreign operations;

  .  changes in regulatory requirements;

  .  licenses, tariffs and other trade barriers;

  .  political and economic instability;

  .  difficulties obtaining governmental approvals for products; and

  .  compliance with a wide variety of complex foreign laws and treaties.

Our future success will depend in part on our ability to protect our
proprietary rights and the technologies used in our principal products, and if
we do not enforce and protect our intellectual property, our business will be
harmed.

   We rely on a combination of patent, copyright and trademark laws, trade
secrets, confidentiality provisions and other contractual provisions to protect
our proprietary rights. However, these measures afford only limited protection.
Our failure to adequately protect our proprietary rights may adversely affect
us. Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or to obtain and use trade secrets
or other information that we regard as proprietary.


                                       7
<PAGE>

Because our operating results from quarter to quarter will fluctuate, the price
of our stock may decline.

   Our revenues, expenses and operating results have fluctuated in the past and
are likely to fluctuate significantly in the future on a quarterly and an
annual basis due to a number of factors, many of which are outside our control.
For example, our results of operations could be negatively affected by the
following:

  .  the timing and size of purchase orders from, and shipments to, our
     customers;

  .  unexpected delays in introducing new or enhanced products, including
     manufacturing delays;

  .  the volume and average cost of products manufactured; and

  .  the timing and size of expenses, including expenses of developing new
     products and product improvements.

Because the sales cycle for our products typically lasts up to one year, and
may be subject to delays, it is difficult to forecast sales for any given
period.

   If we fail to realize forecasted sales for a particular period, our stock
price will likely decline and could decline significantly. The sales cycle of
our products is lengthy and typically involves a detailed initial technical
evaluation of our products by our prospective customers, followed by the
design, construction and testing of prototypes incorporating our products. Only
after these steps are complete will we receive a purchase order from a customer
for volume shipments. This process generally takes from 9 to 12 months, and may
last longer. Given this lengthy sales cycle, it is difficult to accurately
predict when sales to a particular customer will occur.

   In addition, we may experience unexpected delays in orders from customers,
which may prevent us from realizing forecasted sales for a particular period.
Our products are typically sold to equipment manufacturers, who incorporate our
products in the products that they in turn sell to consumers or to network
service providers. As a result, any delay by our customers, or by our
customers' customers, in the manufacture or distribution of their products,
will result in a delay for orders of our products. For example, in the fourth
quarter of 1999, we expected to receive an order from a customer for a shipment
of one of our products. Due to a temporary shortage of a particular component
of the customer's product, the customer was forced to delay the manufacture of
its product, and therefore delayed placing their purchase order with us.

You will experience immediate dilution of $15.61 per share and you will be
diluted further as outstanding stock options are exercised.

   The initial public offering price of $19.00 per share is substantially
higher than the current book value per share of our outstanding common stock.
As a result, you will experience immediate dilution of approximately $15.61 per
share in the book value of our common stock from the price you pay for our
common stock. In addition, we have issued a large number of options to acquire
common stock at prices significantly below the initial public offering price.
As of March 31, 2000, options to purchase 2,831,840 shares of our common stock
were outstanding, with a weighted average exercise price of $3.44 per share. As
these options are exercised, you will be diluted further.

Because our principal stockholders and management may have the ability to
control stockholder votes, the premium over market price that an acquiror might
otherwise pay may be reduced and any merger or takeover may be delayed.

   Immediately following the offering, our officers and directors and their
affiliates will own or control approximately 24.4% of our common stock
(assuming no purchases of shares of common stock in this offering by our
officers and directors and their affiliates). Accordingly, our officers and
directors and their affiliates, as a group, may have the ability to control the
election of a majority of the members of our board of directors and the outcome
of corporate actions requiring stockholder approval. This concentration of
ownership may have the effect of delaying, deferring or preventing a change in
control of us, or may impede a merger, consolidation,

                                       8
<PAGE>

takeover or other business combination involving us. This concentration of
ownership could also adversely affect our stock's market price or lessen any
premium over market price that an acquiror might otherwise pay.

The large number of shares eligible for public sale after this offering could
cause our stock price to decline.

   If our stockholders sell substantial amounts of our common stock--including
shares issued upon the exercise of outstanding options--in the public market
following this offering, the market price of our common stock could fall. These
sales also might make it more difficult for us to sell equity or equity
securities in the future at a time and price that we deem appropriate. The
shares in this offering will be freely tradable immediately upon completion of
this offering. In addition, upon the expiration of lock-up agreements on the
181st day after completion of this offering, 25,512,353 of shares of common
stock held by existing stockholders will be freely tradable. In addition,
Credit Suisse First Boston Corporation may, at its discretion and without
notice, release existing stockholders from these lock-up agreements. These
releases could involve the release of a specified percentage of all shares
subject to lock-up agreements or the release of an individual's shares for
liquidity concerns that apply only to that individual. Other conditions that
could lead to a lock-up release include an increase in our share price and
market demand for shares of our common stock. A private placement of 700,000
shares will occur immediately prior to the closing of this offering. These
shares will become eligible for sale on the public market one year from the
date of this prospectus or earlier upon registration under the Securities Act.
Sales of these shares in the future, whether due to early release from lockup
agreements, termination of these agreements of expiration of holding periods,
could cause the market price of the our common stock to decline. For a more
detailed discussions of when shares will become freely tradable, see "Shares
Eligible for Future Sale."

                                       9
<PAGE>

               YOU SHOULD NOT RELY ON FORWARD-LOOKING STATEMENTS

   This prospectus, including the sections entitled "Prospectus Summary," "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business," contains forward-looking statements.
These statements relate to future events or our future financial performance
and involve known and unknown risks, uncertainties and other factors that may
cause our or our industry's actual results, levels of activity, performance or
achievements to be materially different from any future results, levels of
activity, performance or achievements expressed or implied by the forward-
looking statements. These risks and other factors include those listed under
"Risk Factors" and elsewhere in this prospectus. In some cases, you can
identify forward-looking statements by terminology such as "may," "will,"
"should," "expect," "plan," "anticipate," "believe," "estimate," or the
negative of these terms or other comparable terminology. These statements are
only predictions. In evaluating these statements, you should specifically
consider various factors, including the risks outlined under "Risk Factors."

   Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements.

                                USE OF PROCEEDS

   We expect to receive net proceeds of approximately $82.7 million from the
sale of the 4,000,000 shares of common stock in this offering and the sale of
700,000 shares of common stock in the private placement (or approximately $93.3
million if the underwriters' over-allotment option is exercised in full), at an
offering price of $19.00 per share, after deducting underwriting discounts and
commissions and estimated offering expenses.

   We expect to use the net proceeds from this offering for working capital and
general corporate purposes. We expect these purposes to include funding our
business operations, which are currently generating negative cash flow, hiring
additional engineering and technical personnel, and expanding our facilities.
We are not currently able to estimate the allocation of proceeds specifically.
Accordingly, our management will have considerable discretion in the
application of the net proceeds, and may apply the net proceeds in ways which
do not increase our operating results or our market value. You will not have
the opportunity, as part of your investment decision, to assess whether the
proceeds are being used appropriately. Pending application of the net proceeds,
we intend to invest the proceeds in interest-bearing investment-grade
securities.


                                DIVIDEND POLICY

   We have never declared or paid any dividends on our capital stock. We
currently expect to retain future earnings, if any, for use in the operation
and expansion of our business and do not anticipate paying any cash dividends
in the foreseeable future.

                                       10
<PAGE>

                                CAPITALIZATION

   The following table sets forth our actual capitalization as of March 31,
2000 on the following three bases:

  .  our actual capitalization derived from our financial statements as of
     March 31, 2000;

  .  on a pro forma basis to give effect to the conversion of all shares of
     preferred stock into 15,450,236 shares of common stock automatically
     upon completion of this offering; and

  .  on an as adjusted basis to reflect (a) the sale of 4,000,000 shares of
     our common stock in this offering at an initial offering price of $19.00
     per share and the receipt by us of the estimated proceeds, after
     deducting underwriting discounts and commissions and estimated offering
     expenses and (b) the sale of 700,000 shares of common stock in the
     private placement at a price of $19.00 per share.

   You should read this table in conjunction with our Financial Statements and
the accompanying Notes, Selected Financial Data, and Management's Discussion
and Analysis included elsewhere in this prospectus.

<TABLE>
<CAPTION>
                                                        March 31, 2000
                                                --------------------------------
                                                                      Pro Forma
                                                 Actual   Pro Forma  As Adjusted
                                                --------  ---------  -----------
                                                (in thousands except share and
                                                       per share data)
<S>                                             <C>       <C>        <C>
Current portion of long-term debt and capital
 lease obligations............................. $    662  $    662    $    662
                                                --------  --------    --------
Long-term debt and other liabilities...........      561       561         561
                                                --------  --------    --------
Stockholders' equity:
  Preferred stock, $0.001 par value: none
   authorized, none outstanding (actual);
   10,000,000 authorized, none outstanding (pro
   forma and pro forma as adjusted)(1).........      --        --          --
  Convertible preferred stock, $0.001 par
   value: 15,630,000 authorized, 15,450,236
   outstanding (actual); none authorized, none
   outstanding (pro forma and pro forma as
   adjusted)...................................       15       --          --
  Common stock, $0.001 par value: 32,000,000
   authorized, 11,987,511 outstanding (actual);
   100,000,000 authorized, 27,437,747
   outstanding (pro forma); 100,000,000
   authorized, 32,137,747 outstanding (pro
   forma as adjusted)(1).......................       12        27          32
Additional paid-in capital.....................  104,081   104,081     186,806
Stockholder notes receivable...................     (440)     (440)       (440)
Accumulated other comprehensive income.........      (15)      (15)        (15)
Deferred compensation..........................  (33,603)  (33,603)    (33,603)
Accumulated deficit............................  (43,800)  (43,800)    (43,800)
                                                --------  --------    --------
  Total stockholders' equity...................   26,250    26,250     108,980
                                                --------  --------    --------
    Total capitalization....................... $ 27,473  $ 27,473    $110,203
                                                ========  ========    ========
</TABLE>
- - - - - - --------------------
(1) Upon completion of this offering, our certificate of incorporation will be
    amended to authorize 100,000,000 shares of common stock and 10,000,000
    shares of undesignated preferred stock.

   The data in the table above excludes:

  .  2,831,840 shares of common stock issuable upon the exercise of
     outstanding stock options as of March 31, 2000 at a weighted average
     exercise price of $3.44 per share;

  .  26,750 shares of common stock issuable upon the exercise of outstanding
     warrants as of March 31, 2000 at a weighted average exercise price of
     $4.00 per share;

  .  5,814,042 shares of common stock available for issuance under our 1997
     Stock Plan following this offering; and

  .  500,000 additional shares of common stock available for issuance under
     our 2000 Employee Stock Purchase Plan immediately following this
     offering.


                                      11
<PAGE>

                                    DILUTION

   If you invest in our common stock, your interest will be diluted to the
extent of the difference between the public offering price per share of our
common stock and the pro forma net tangible book value per share of common
stock after this offering.

   Our pro forma net tangible book value as of March 31, 2000 was $26.3 million
or $.96 per share of common stock. Net tangible book value per share represents
the amount of our total tangible assets less total liabilities, divided by the
pro forma number of 27,437,747 shares of common stock outstanding after giving
effect to the conversion of all outstanding shares of preferred stock into
common stock upon completion of this offering. Dilution in net tangible book
value per share represents the difference between the amount per share paid by
purchasers of shares of common stock in this offering and the net tangible book
value per share of common stock immediately after the completion of this
offering and the private placement. After giving effect to the sale of the
4,000,000 shares of common stock in this offering and the 700,000 shares
offered in the private placement at an offering price of $19.00 per share, and
after deducting underwriting discounts and estimated offering expenses, our pro
forma net tangible book value as of March 31, 2000 would have been $109.0
million or approximately $3.39 per share. This represents an immediate increase
in net tangible book value of $2.43 per share to existing stockholders and an
immediate dilution of $15.61 per share to new investors, or approximately 82.2%
of the assumed initial public offering price of $19.00 per share. The following
table illustrates this per share dilution:

<TABLE>
<S>                                                                <C>   <C>
Assumed initial public offering price per share...................       $19.00
  Pro forma net tangible book value per share at March 31, 2000
   before the offering............................................ $0.96
  Increase per share attributable to new investors in this
   offering....................................................... $2.43
                                                                   -----
Net tangible book value per share after this offering.............       $ 3.39
                                                                         ------
Dilution per share to new investors...............................       $15.61
                                                                         ======
</TABLE>

   The following table shows on a pro forma basis after giving effect to this
offering, as of March 31, 2000, the number of shares of common stock purchased
from us, the total consideration paid to us, and the average price per share
paid by existing stockholders by investors participating in the private
placement, and by the investors purchasing shares of common stock in this
offering (at an offering price of $19.00 per share before deducting the
underwriting discounts and commissions and estimated offering expenses):

<TABLE>
<CAPTION>
                          Shares Purchased  Total Consideration
                         ------------------ -------------------- Average Price
                           Number   Percent    Amount    Percent   Per Share
                         ---------- ------- ------------ ------- -------------
<S>                      <C>        <C>     <C>          <C>     <C>
Existing stockholders... 27,437,747  85.4%  $ 58,568,000  39.6%     $ 2.13
Private placements......    700,000   2.2%    13,300,000   9.0%     $19.00
New investors in the
 offering...............  4,000,000  12.4%    76,000,000  51.4%     $19.00
                         ----------  ----   ------------  ----      ------
  Total................. 32,137,747   100%   147,868,000   100%     $ 4.60
                         ==========  ====   ============  ====      ======
</TABLE>

   The foregoing discussion and table are based on actual shares outstanding on
March 31, 2000 and assume no exercise of any stock options or warrants
outstanding as of such date. As of March 31, 2000, there were options and
warrants outstanding to purchase 2,831,840 and 26,750 shares of common stock,
respectively, at a weighted average exercise price of $3.44 and $4.00 per
share, respectively. To the extent any of these options or warrants are
exercised, there will be further dilution to investors.

                                       12
<PAGE>

                      SELECTED CONSOLIDATED FINANCIAL DATA

   The selected consolidated financial data below should be read in conjunction
with the consolidated financial statements and related notes and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this prospectus. The statement of operations data for the
period from February 21, 1997 (inception) to December 31, 1997 and for the
years ended December 31, 1998 and 1999 and the balance sheet data as of
December 31, 1998 and 1999 are derived from, and are qualified by reference to,
the audited consolidated financial statements and related notes appearing
elsewhere in this prospectus. The balance sheet data as of December 31, 1997
are derived from audited financial statements not appearing in this prospectus.
The statement of operations data for the three month periods ended March 31,
1999 and 2000 and the balance sheet data as of March 31, 2000 are derived from
unaudited consolidated financial statements included in this prospectus and, in
our opinion, include all adjustments, consisting only of normal recurring
adjustments, which are necessary for a fair presentation of the results of
operations as of and for the relevant period. Historical results are not
necessarily indicative of results that may be expected for any future period.

<TABLE>
<CAPTION>
                             Period from      Years Ended        Three Months
                          February 21, 1997   December 31,     Ended March 31,
                           (inception) to   -----------------  -----------------
                          December 31, 1997  1998      1999     1999      2000
                          ----------------- -------  --------  -------  --------
                                 (in thousands, except per share data)
<S>                       <C>               <C>      <C>       <C>      <C>
Consolidated Statement
 of Operations Data:
Revenues:
 Product................       $   --       $   --   $  2,509  $   --   $  4,723
 Technology
  development...........           300          752     1,235       50       --
                               -------      -------  --------  -------  --------
 Total revenues.........           300          752     3,744       50     4,723
Cost of revenues........           --           --      3,118      --      3,483
                               -------      -------  --------  -------  --------
Gross profit............           300          752       626       50     1,240
Operating expenses:
 Research and
  development...........         1,844        7,913    13,357    2,306     6,017
 Sales and marketing....           341        1,466     3,823      700     2,773
 General and
  administrative........           217        1,095     4,227      496     2,762
                               -------      -------  --------  -------  --------
 Total operating
  expenses..............         2,402       10,474    21,407    3,502    11,552
                               -------      -------  --------  -------  --------
Operating loss..........        (2,102)      (9,722)  (20,781)  (3,452)  (10,312)
Interest income, net....           165          466     1,032       25       254
                               -------      -------  --------  -------  --------
Net loss................        (1,937)      (9,256)  (19,749)  (3,427)  (10,058)
Deemed dividend on
 Series B convertible
 preferred stock........        (2,800)         --        --       --        --
                               -------      -------  --------  -------  --------
Net loss applicable to
 common stockholders....       $(4,737)     $(9,256) $(19,749) $(3,427) $(10,058)
                               =======      =======  ========  =======  ========
Historical basic and
 diluted net loss per
 share applicable to
 common stockholders....       $ (0.59)     $ (1.15) $  (2.23) $ (0.42) $  (1.03)
                               =======      =======  ========  =======  ========
Shares used to compute
 basic and diluted net
 loss per share
 applicable to common
 stockholders...........         8,000        8,056     8,842    8,227     9,808
                               =======      =======  ========  =======  ========
Pro forma basic and
 diluted net loss per
 share applicable to
 common stockholders....                             $  (0.91)          $  (0.40)
                                                     ========           ========
Shares used to compute
 pro forma basic and
 diluted net loss per
 share applicable to
 common stockholders....                               21,755             25,258
                                                     ========           ========
</TABLE>

<TABLE>
<CAPTION>
                                            December 31,       March 31, 2000
                                       ----------------------- ---------------
                                                                         Pro
                                        1997    1998    1999   Actual   Forma
                                       ------- ------- ------- ------- -------
                                            (in thousands)
<S>                                    <C>     <C>     <C>     <C>     <C>
Balance Sheet Data:
Cash and cash equivalents and short-
 term investments..................... $13,645 $ 7,926 $28,313 $23,358 $23,358
Working capital....................... $12,537 $ 6,686 $26,043 $21,350 $21,350
Total assets.......................... $16,339 $12,010 $35,587 $33,724 $33,724
Liabilities........................... $ 2,183 $ 2,751 $ 5,532 $ 7,474 $ 7,474
Total stockholders' equity............ $14,156 $ 9,259 $30,055 $26,250 $26,250
</TABLE>

   See note 1 of notes to consolidated financial statements for an explanation
of the determination of the weighted average common and common equivalent
shares used to compute net loss per share.

   The pro forma amounts above reflect the conversion of all outstanding shares
of preferred stock into 15,450,236 shares of common stock upon completion of
this offering.

                                       13
<PAGE>

                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

   We provide system-level products that enable broadband communications to the
home and business enterprise. We serve the DSL market and plan to leverage our
communications technology and expertise to serve the voice over data networks
and home networking markets before the end of this year. Our current customers
are broadband access equipment vendors who manufacture DSL equipment for use in
the phone companies' communications infrastructure or DSL modems for Internet
or other network access in a home or small business.

   We were incorporated on February 21, 1997 and commenced operations on April
1, 1997. Consequently, our results of operations for and as of the year ended
December 31, 1997 include organizational activities and operations for the
period from February 21, 1997 (inception) through December 31, 1997. In our
discussion below, references to the year ended December 31, 1997 refer to the
period from February 21, 1997 (inception) through December 31, 1997. During the
period from February 1997 through June 1999 we were a development stage company
focused on developing our initial products, recruiting personnel, building our
corporate infrastructure and raising capital, and therefore had no product
revenue. In 1999, we began shipping our CopperLite CO and CopperLite CPE
families of products and recorded our first significant product revenues in the
third quarter. We emerged from the development stage at that time. During 1999,
we also increased our investment in research and development, sales and
marketing, operations and our general and administrative infrastructure.

   Our revenues currently are derived from the sale of our DSL products which
include the CopperLite CO, CopperLite CPE and Optimizer families of products.
To date, we have generated a substantial portion of our revenues from a limited
number of customers. Our top two customers in 1999 were Sumitomo Electric
Industries and NEC who accounted for 34.4% and 21.1%, respectively, of our 1999
revenues. In addition, for the three months ended March 31, 2000, sales to
Sumitomo Electric Industries, Lucent Technologies and Copper Mountain Networks
accounted for 39.1%, 26.9% and 12.3%, respectively, of our revenues. While we
are seeking to diversify our customer base, we cannot assure you that these
efforts will be successful.

   Historically, we have received significant revenues under best efforts
technology development agreements. Revenues under these agreements represent
payments we received for the performance of contract engineering services.
Under these agreements, we generally received payments upon the completion of
contractual milestones. We are not required to refund any payments under the
contracts.

   Our policy is to recognize revenue under technology development agreements
when applicable contractual milestones have been met, including deliverables,
and in any case, revenue recognized does not exceed the amount that would be
recognized using the percentage of completion method. In this regard, the
timing of technology development revenue depends on the timing of completion of
milestones under individual agreements. We believe that technology development
revenue will not be significant after 1999.

   We have focused our initial sales and marketing efforts on Asian and North
American communications equipment manufacturers. During 1999 and for the three
month period ended March 31, 2000, 81.6% and 51.2% of our sales were to Asia,
respectively. While we are developing our European sales organization and are
continuing to develop our North American sales organization, we expect that the
majority of our revenues will be derived from Asia for the foreseeable future.
We currently sell through our direct sales force in Japan, Singapore and North
America and through our representatives in Korea and Taiwan. International
revenues are denominated solely in U.S. dollars, which reduces our exposure to
foreign currency exchange risks.

   We recognize product revenue at the time of shipment to customers when no
significant obligations remain. Allowances are provided for estimated returns
at the time of shipment. In circumstances where we have not shipped the final
version of our product, or when a customer has delayed its acceptance of our
product, we defer recognition of the revenue associated with the given product
at the time of shipment. This deferred revenue is recognized when the final
version of the product is delivered or upon acceptance by the customer. As of
December 31, 1999, we had $122,000 in deferred revenue which was comprised
primarily of

                                       14
<PAGE>

prepayments from certain customers. As of March 31, 2000, we had $125,000 in
deferred revenue which was comprised primarily of unearned technology
development fees.

   It usually takes more than one year for us to realize volume shipments of
our products after we first contact a customer. We first work with customers to
achieve a design win, which may take six months or longer. Our customers then
complete the design, testing and evaluation of their systems and begin the
marketing process, a period which typically lasts an additional three to six
months or longer. As a result, a significant period of time may elapse between
our sales efforts and our realization of revenues, if any, from volume
purchases of our products by our customers. Our customers are not obligated by
long-term contracts to purchase our products and can generally cancel or
reschedule orders on short notice.

   We outsource the fabrication, assembly and testing of our products.
Accordingly, a significant portion of our cost of revenues consists of payments
to our manufacturing partners. Costs of revenues also encompass our internal
manufacturing and operations functions and a portion of our information systems
and facilities costs.

   Research and development expenses consist primarily of salaries and related
personnel costs, fees paid to consultants and outside service providers,
prototype costs related to the fabrication of our silicon chips, and
depreciation associated with software development tools and amortization of
deferred compensation. We expense our research and development costs as they
are incurred. Several components of our research and development effort require
significant expenditures, the timing of which can cause significant quarterly
variability in our expenses. For example, we require a substantial number of
prototypes to build and test our complex products and therefore, incur
significant prototype costs. Because our research and development is key to our
future success, we intend to significantly increase our research and
development expenditures in future periods.

   Sales and marketing expenses consist primarily of salaries, commissions, and
related expenses for personnel engaged in marketing, sales, customer service
and applications engineering support functions, costs associated with
promotional and other marketing expenses, as well as amortization of deferred
compensation. We intend to expand our direct and indirect sales operations
substantially, both domestically and internationally, in order to increase
market awareness, support customer requirements, and increase orders for our
products. We expect that sales and marketing expenses will increase over the
next year as we hire additional sales and marketing personnel, initiate
additional marketing programs to support our products and establish sales
offices in additional domestic and international locations. We intend to expand
our use of independent manufacturers' representatives. To date, we have entered
into agreements with only a small number of representatives and we believe that
to be successful, we must reach agreement with additional representatives in
several countries. In addition, the complexity of our products and the
applications support necessary for successful interoperability and customer
specific applications requires highly trained customer service and support
personnel. We expect to significantly expand our customer service and support
organization to meet these requirements.

   General and administrative expenses consist primarily of salaries and
related expenses for executives, finance, accounting, facilities, information
services, human resources, recruiting expenses, professional fees, other
corporate expenses, and amortization of deferred compensation. We expect
general and administrative expenses to increase as we add personnel and incur
additional costs related to the growth of our business and our operation as a
public company.

   In connection with the grant of certain stock options and equity
compensation to our employees, technical advisors and directors, we have
recorded deferred compensation expense of $42.5 million. Deferred compensation
represents the difference between the grant price and the deemed fair value of
our common stock options granted during these periods. Deferred compensation
expense is being amortized using the graded vesting method, in accordance with
Statement of Financial Accounting Standards No. 123 and FASB Interpretation No.
28, over the vesting period of each respective option, generally four years.
Under the graded vesting method, each option grant is separated into portions
based on their vesting terms which results in acceleration of amortization
expense for the overall award. The accelerated amortization pattern results in

                                       15
<PAGE>

expensing approximately 59% of the total award in year 1, 25% in year 2, 12% in
year 3 and 4% in year 4. Unamortized deferred compensation is presented as a
reduction of stockholders' equity. See note 7 of notes to consolidated
financial statements for more information about the deferred compensation
expense.

   We have not reported an operating profit for any year since our
incorporation and have experienced net losses of approximately $1.9 million,
$9.3 million, and $19.7 million for the years ended December 31, 1997, 1998,
and 1999, respectively. Additionally, we experienced a net loss of $10.1
million for the three month period ended March 31, 2000. We expect to continue
to incur net losses for the foreseeable future, and these losses may be
substantial. Further, we expect to incur substantial negative cash flow in the
future.

Results of Operations

   The following table sets forth, for the periods presented, certain data from
our consolidated statement of operations expressed as a percentage of total
revenues.

<TABLE>
<CAPTION>
                                                                  Three
                                               Years Ended       Months
                                Period From     December       Ended March
                             February 21, 1997     31,             31,
                              (Inception) to   -------------   -------------
                             December 31, 1997  1998    1999    1999    2000
                             ----------------- ------   ----   ------   ----
<S>                          <C>               <C>      <C>    <C>      <C>
As a Percentage of Total
 Revenues:
Total revenues..............        100 %         100 %  100 %    100 %  100 %
Cost of revenues............          0             0     83        0     74
                                   ----        ------   ----   ------   ----
Gross profit................        100           100     17      100     26
Operating expenses:
  Research and development..        615         1,052    357    4,612    127
  Sales and marketing.......        114           195    102    1,400     59
  General and
   administrative...........         72           146    113      992     58
                                   ----        ------   ----   ------   ----
    Total operating
     expenses...............        801         1,393    572    7,004    245
Operating loss..............       (701)       (1,293)  (555)  (6,904)  (218)
Interest income.............         71            77     34      150      8
Interest expense............        (16)          (15)    (6)    (100)    (2)
                                   ----        ------   ----   ------   ----
Net loss....................       (646)%      (1,231)% (527)% (6,854)% (213)%
                                   ====        ======   ====   ======   ====
</TABLE>

Three months ended March 31, 1999 and 2000

 Revenues

   Our revenues increased to $4.7 million for the three months ended March 31,
2000 compared to $50,000 for the three months ended March 31, 1999. The
increase reflects increasing unit shipments as we continue to ramp deliveries
of our initial products. Revenues for the first quarter of 1999 consisted
solely of technology development revenues. We had no technology development
revenues in the first quarter of 2000. Our major customers for the three months
ended March 31, 2000 were Sumitomo Electric Industries, Lucent Technologies and
Copper Mountain Networks, Inc. with 39.1%, 26.9% and 12.3% of total revenues,
respectively. Revenues to international customers comprised 54% of our revenues
for the three months ended March 31, 2000.

 Cost of revenues

   Cost of revenues was $3.5 million in the three months ended March 31, 2000
resulting in a gross margin of 26%. The amortization of deferred compensation
included in manufacturing spending for the three months ended March 31, 2000
was $218,000. As our revenues increase during our early stage of product
shipments, we incur proportionally high manufacturing costs due to relatively
low volumes to absorb overhead costs, including amortization of deferred
compensation.

                                       16
<PAGE>

 Research and Development Expenses

   Research and development expenditures increased 161% to $6.0 million for the
three months ended March 31, 2000 as compared to $2.3 million for the three
months ended March 31, 1999. The increase was primarily due to the addition of
engineering personnel and an increase of $1.9 million in the amortization of
deferred compensation.

 Sales and Marketing Expenses

   Sales and marketing expenditures increased 296% to $2.8 million for the
three months ended March 31, 2000 as compared to $700,000 for the three months
ended March 31, 1999. The increase was due to the addition of personnel and an
increase of $1.0 million in the amortization of deferred compensation.

 General and Administrative Expenses

   General and administrative expenditures increased 457% to $2.8 million for
the three months ended March 31, 2000 from $496,000 for the three months ended
March 31, 1999. This increase was due to the addition of personnel and the
associated payroll and related costs, and an increase of $1.5 million in the
amortization of deferred compensation. Additionally, general and administrative
expense for the three months ended March 31, 2000 includes $225,000 for
severance costs related to the termination of a former officer.

 Amortization of Deferred Compensation

   During the three months ended March 31, 2000, we recorded $22.3 million of
deferred stock compensation in connection with option grants made to a
significant number of new and existing employees. Amortization of deferred
compensation increased from $127,000 for the three months ended March 31, 1999
to $4.7 million for the three months ended March 31, 2000. The following table
details the amount of deferred compensation included in expenses.

<TABLE>
<CAPTION>
                                               Expenses
                                              Excluding
                                             Amortization Amortization
                                             of Deferred  of Deferred   Total
                                             Compensation Compensation Expenses
                                             ------------ ------------ --------
<S>                                          <C>          <C>          <C>
For the three months ended March 31, 2000
Cost of revenues............................   $ 3,265       $  218    $ 3,483
Research and development....................     4,076        1,941      6,017
Sales and marketing.........................     1,749        1,024      2,773
General and administrative..................     1,204        1,558      2,762
                                               -------       ------    -------
  Total.....................................   $10,294       $4,741    $15,035
                                               =======       ======    =======
For the three months ended March 31, 1999
Research and development....................   $ 2,234       $   72    $ 2,306
Sales and marketing.........................       684           16        700
General and administrative..................       457           39        496
                                               -------       ------    -------
  Total.....................................   $ 3,375       $  127    $ 3,502
                                               =======       ======    =======
</TABLE>

 Interest Income

   Interest income increased 379% to $359,000 for the three months ended March
31, 2000 as compared to $75,000 for the three months ended March 31, 1999. The
increase was primarily due to larger cash balances resulting from the issuance
of preferred stock in April 1999.

                                       17
<PAGE>

 Interest Expense

   Interest expense increased 110% to $105,000 for the three months ended March
31, 2000 as compared to $50,000 for the three months ended March 31, 1999. The
increase was primarily due to the use of the line of credit.

Years Ended December 31, 1997, 1998 and 1999

 Revenues

   In 1997 and 1998, all of our revenue was derived from technology development
efforts and services. We received payments from potential future customers to
develop our technologies in such a way that also provided for their
requirements. This revenue was received primarily as an incentive for us to
continue this development effort. We believe we will recognize little or no
technology development revenue for the foreseeable future.

   Revenues increased from $300,000 in 1997 to $752,000 in 1998 and increased
to $3.7 million in 1999. The increase in 1998 was attributable to increased
technology development revenues. The increase in 1999 was attributable to a
further increase in technology development revenue to $1.2 million and the
initial shipments of our products which generated significant revenues
beginning in the third quarter of 1999.

 Cost of Revenues

   The costs associated with our technology development revenues are closely
related to the costs of our ongoing research and development activities.
Generally, the incremental costs of providing any deliverables under our
technology development arrangements are not easily distinguishable from the
costs of our ongoing activities. The total incremental costs of our technology
development revenues are generally not significant. All such costs related to
technology development revenues for each of the years ended December 31, 1997,
1998 and 1999 have been included in research and development in our statements
of operations. Cost of revenues, which reflects costs of product revenues, was
$3.1 million in 1999.

 Research and Development Expenses

   Research and development expenses increased from $1.8 million in 1997 to
$7.9 million in 1998 and increased to $13.4 million in 1999. The increases in
1998 and 1999 were due primarily to additions in engineering personnel,
increased usage of materials necessary to build prototypes, increases in
depreciation resulting from the additional purchases of laboratory equipment
and software development tools and an increase in amortization of deferred
compensation.

 Sales and Marketing Expenses

   Sales and marketing expenses increased from $341,000 in 1997 to $1.5 million
in 1998 and increased further to $3.8 million in 1999. These increases were due
primarily to the addition of personnel, an increase in marketing activity such
as customer visits and attendance at trade shows and an increase in
amortization of deferred compensation.

 General and Administrative Expenses

   General and administrative expenses increased from $217,000 in 1997 to $1.1
million in 1998 and increased to $4.2 million in 1999. These increases were due
primarily to the addition of personnel in the accounting, human resources,
information services and facilities functions and an increase in amortization
of deferred compensation. The increase in 1999 was also due to our move to
larger facilities in September 1999. During 1999, we charged $150,000 to bad
debt expense to establish a reserve for unidentified potential bad debt
exposures. The amount was determined in consideration of the early stage of our
customer relationships.

                                       18
<PAGE>

 Amortization of Deferred Compensation

   During 1998 and 1999 we recorded a total of $20.2 million of deferred stock
compensation. Amortization of deferred stock compensation increased from zero
in 1997 to $69,000 in 1998 and increased to $4.1 million in 1999. Deferred
stock compensation is being amortized using the graded vesting method in
accordance with FAS 123 and FAS Interpretation 28, over the vesting period of
each respective option, generally four years. Under the graded vesting method,
each option grant is separated into portions based on their vesting terms which
results in acceleration of amortization expense for the overall award. The
accelerated amortization pattern results in expensing approximately 59% in year
1, 25% in year 2, 12% in year 3 and 4% in year 4.

 Interest Income

   Interest income increased from $214,000 in 1997 to $582,000 in 1998 and
increased to $1.3 million in 1999. These increases were due to higher cash and
cash equivalent balances resulting from successful preferred stock financings
in 1998 and 1999.

 Interest Expense

   Interest expense increased from $49,000 in 1997 to $116,000 in 1998 and
increased to $242,000 in 1999. These increases were due to higher average
outstanding debt balances during 1998 and outstanding balances under our
working capital line of credit during 1999.

 Deemed Dividend

   In connection with Series B3 convertible preferred stock financings in July
and September 1997, we issued rights to certain stockholders, which provided
for the purchase of 2,000,000 shares of Series B1 convertible preferred stock
at $2.00 per share and 800,000 shares of Series B2 convertible preferred stock
at $2.50 per share. The rights were immediately exercisable and expired
approximately one year after their initial grant. We recorded noncash deemed
dividends of $2.8 million for 1997, representing the fair value of the rights
issued, which reduced income available to common stockholders. No such
dividends were recorded in 1998 or 1999.

                                       19
<PAGE>

Quarterly Results of Operations

   Our quarterly results of operations fluctuate from period-to-period
depending on factors such as the timing of significant expenditures for
prototype development, the success of our initial sales efforts, the timing of
significant design wins and orders, and period-to-period difficulties that may
be encountered with our manufacturing subcontractors. We believe that period-
to-period comparisons of our financial results should not be relied upon to
predict future results. We may experience significant fluctuations in period-
to-period operating results.

   The following table presents certain quarterly financial information derived
from our statements of operations and such data as a percentage of revenues for
the four quarters ended December 31, 1999 and the quarter ended March 31, 2000.
This data has been derived from unaudited consolidated financial statements. In
our opinion these statements include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the information
when read in conjunction with our annual audited consolidated financial
statements and related notes appearing elsewhere in this prospectus. These
operating results are not necessarily indicative of results of any future
period.

<TABLE>
<CAPTION>
                                       Three Months Ended
                            ------------------------------------------------
                            Mar 31,   Jun 30,   Sep 30,   Dec 31,   Mar 31,
                             1999      1999      1999      1999       2000
                            -------   -------   -------   -------   --------
                                     (dollars in thousands)
<S>                         <C>       <C>       <C>       <C>       <C>
Revenues:
  Product.................. $     0   $     0   $   651   $ 1,858   $  4,723
  Technology development...      50       655       200       330          0
                            -------   -------   -------   -------   --------
    Total revenues.........      50       655       851     2,188      4,723
Cost of revenues...........       0         0     1,108     2,010      3,483
                            -------   -------   -------   -------   --------
Gross profit...............      50       655      (257)      178      1,240
Operating expenses:
  Research and
   development.............   2,306     3,238     3,501     4,312      6,017
  Sales and marketing......     700       440       770     1,913      2,773
  General and
   administrative..........     496       732     1,148     1,851      2,762
                            -------   -------   -------   -------   --------
    Total operating
     expenses..............   3,502     4,410     5,419     8,076     11,552
                            -------   -------   -------   -------   --------
Operating loss.............  (3,452)   (3,755)   (5,676)   (7,898)   (10,312)
Interest income, net.......      25       260       491       256        254
                            -------   -------   -------   -------   --------
Net loss................... $(3,427)  $(3,495)  $(5,185)  $(7,642)  $(10,058)
                            =======   =======   =======   =======   ========

As a Percentage of Total
 Revenues
Revenues:
  Product..................       0 %       0 %      76 %      85 %      100 %
  Technology development...     100       100        24        15          0
                            -------   -------   -------   -------   --------
    Total revenues.........     100       100       100       100        100
Cost of revenues...........       0         0       130        92         74
                            -------   -------   -------   -------   --------
Gross profit...............     100       100       (30)        8         26
Operating expenses:
  Research and
   development.............   4,612       494       411       197        127
  Sales and marketing......   1,400        67        90        87         59
  General and
   administrative..........     992       112       135        85         58
                            -------   -------   -------   -------   --------
    Total operating
     expenses..............   7,004       673       637 %     369        245 %
Operating loss.............  (6,904)     (573)     (667)     (361)      (218)
Interest income, net.......      50        40        58        12          5
                            -------   -------   -------   -------   --------
Net loss...................  (6,854)%    (534)%    (609)%    (349)%     (213)%
                            =======   =======   =======   =======   ========
</TABLE>

                                       20
<PAGE>

   Technology development revenues fluctuated during the four quarters ending
December 31, 1999 and the quarter ended March 31, 2000 based primarily on the
timing of contracts from our customers for contract engineering services and
completion of milestones under the contracts. This portion of our business will
diminish in the future and we expect that technology development revenue will
not be a significant portion of our total revenue after March 31, 2000.

   We commenced product shipments and recorded our first related revenue in the
third quarter of 1999. Product revenues increased from the third quarter of
1999 to the fourth quarter of 1999 and increased further to the first quarter
2000 primarily due to increasing unit sales and deliveries to additional
customers. Future product revenue will vary in part on the timing of orders
from our customers.

   Costs of revenues in the third and fourth quarters of 1999 and the first
quarter of 2000 reflect the early stage of our production efforts. Because a
portion of our manufacturing costs are fixed, low initial production volumes
cause high per-unit allocation of manufacturing overhead costs. As our
production volumes increase, we expect costs of revenue to decline as a
percentage of revenue.

   Operating expenses increased in each of the four quarters of 1999 and
further increased to the first quarter of 2000 as we transitioned from a
development stage company to our initial production and customer deliveries.
The increase was due to hiring of new personnel and increases in amortization
of deferred compensation.

Liquidity and Capital Resources

   Since inception, we have financed our operations primarily through private
sales of approximately $55.8 million of convertible preferred stock, net of
offering costs. We also generated $2.3 million from the exercise of stock
options and have secured additional financing through capital leases and
secured debt.

   Cash used for operations increased from $7.8 million in 1998 to $12.2
million in 1999. This increase was primarily due to an increase in our net loss
from $9.3 million in 1998 to $19.7 million in 1999. Cash used for operations
increased from $2.6 million for the three months ended March 31, 1999 to $4.7
million for the three months ended March 31, 2000. This increase was primarily
due to the increase in quarterly net losses.

   Cash generated from financing activities increased from $4.8 million in 1998
to $35.6 million in 1999. This increase is due primarily to the sale of $35.6
million in convertible preferred stock in 1999. Cash generated from financing
activities of $1.3 million as compared to cash used in financing activities of
$108,000 was primarily due to the proceeds from the exercise of stock options
for $1.5 million.

   Cash and cash equivalents, and short-term investments increased from $7.9
million on December 31, 1998 to $28.3 million on December 31, 1999. This
increase was due primarily to the receipt of $35.6 million from the sale of
preferred stock. Cash and cash equivalents and short term investments decreased
from $28.3 million as of December 31, 1999 to $23.4 million as of March 31,
2000 due primarily to purchases of fixed assets and cash used in operations at
$4.7 million.

   Accounts receivable were $2.6 million on March 31, 2000. Our customers are
billed at the time of shipment, typically with payment terms of thirty days.
Generally, customers have paid us within the payment terms.

   We maintain a $5.0 million revolving credit agreement with Mitsubishi
Electric to finance wafer inventory purchases. The interest rate under the
credit agreement was based on the lender's internal interest rate, which was
required to be at least 1.00% below the prime rate on the date of invoice
(7.25% at December 31, 1999), generally thirty days after receipt of the
wafers. The credit agreement expires on January 31, 2001, subject to automatic
extensions thereafter from year to year. As of March 31, 2000, $2.9 million was
outstanding under the agreement.

   We expect to devote substantial capital resources to continue our research
and development efforts, to hire and expand our sales, support, marketing, and
product development organizations, to expand marketing

                                       21
<PAGE>

programs, to establish additional facilities worldwide and to fund other
general corporate activities. We currently anticipate that the net proceeds
from this offering, together with our current cash, cash equivalents, and short
term investments will be sufficient to meet our anticipated cash needs for
working capital and capital expenditures for at least the next 12 months.

   If the proceeds of this offering, together with our existing cash balances
and cash flow expected from future operations, are not sufficient to meet our
liquidity needs, we will need to raise additional funds. If adequate funds are
not available on acceptable terms or at all, we may not be able to take
advantage of market opportunities, develop or enhance new products, pursue
acquisitions that would complement our existing product offerings or enhance
our technical capabilities, execute our business plan or otherwise respond to
competitive pressures or unanticipated requirements.

Year 2000 Compliance

   As of the date of this prospectus, we have not experienced any significant
disruptions related to Year 2000 issues, nor do we expect to experience any
Year 2000-related disruptions in the operation of our systems. To our
knowledge, none of our customers have experienced any Year 2000-related issues
with our products. Additionally, to our knowledge, none of our manufacturing,
assembly or testing partners or our other suppliers have experienced any
material Year 2000 problems. Although most Year 2000 problems should have
become evident on January 1, 2000, additional Year 2000-related problems may
become evident only after that date. For example, some software programs may
have difficulty resolving the so-called "century leap year" algorithm which
will also occur during the Year 2000. We will continue to monitor our mission
critical computer applications and those of our suppliers and vendors
throughout the year, to ensure that any late Year 2000 matters that may arise
are promptly addressed. We do not expect to incur any significant costs
relating to Year 2000 matters.

Qualitative and Quantitative Disclosures About Market Risk

   The primary objective of our investment activities is to preserve principal
while concurrently maximizing the income we receive from our investments
without significantly increasing risk. Some of the securities that we may
invest in may be subject to market risk. This means that a change in prevailing
interest rates may cause the principal amount of the investment to fluctuate.
For example, if we hold a security that was issued with a fixed interest rate
at the then-prevailing rate and the prevailing interest rate later rises, the
current value of the principal amount of our investment will decline. To
minimize this risk in the future, we intend to maintain our portfolio of cash
equivalents and short-term investments in a variety of securities, including
commercial paper, money market funds, government and non-government debt
securities and certificates of deposit. In general, money market funds are not
subject to market risk because the interest paid on such funds fluctuates with
the prevailing interest rate. As of December 31, 1999, all of our investments
were in money market funds, or high quality commercial paper, government and
non-government debt securities and auction rate preferred stock. A hypothetical
100 basis point increase in interest rates would result in an approximate
$138,000 decrease in the fair value of our available-for-sale securities as of
December 31, 1999. See note 2 of the notes to the consolidated financial
statements.

Recent Accounting Pronouncements

   In March 1998, the AICPA issued SOP No. 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use. SOP No. 98-1 requires
entities to capitalize certain costs related to internal-use software once
certain criteria have been met. We adopted SOP 98-1 for the fiscal year ending
December 31, 1999. The adoption did not have a material impact on our financial
position or results of operations.

   In April 1998, the AICPA issued SOP No. 98-5, Reporting on the Costs of
Start-Up Activities. SOP No. 98-5 requires that all start-up costs related to
new operations must be expensed as incurred. In addition, all start-up costs
that were capitalized in the past must be written off when SOP No. 98-5 is
adopted.

                                       22
<PAGE>

We adopted SOP 98-5 for the fiscal year ending December 31, 1999. The adoption
did not have a material impact on our financial position or results of
operations

   In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
establishes accounting methods for derivative financial instruments and hedging
activities related to those instruments, as well as other hedging activities.
Because we do not currently hold any derivative instruments and do not engage
in hedging activities, we expect that the adoption of SFAS No. 133 will not
have a material impact on our financial position, results of operations or cash
flows. We will be required to implement SFAS No. 133 for the year ending
December 31, 2001.

                                       23
<PAGE>

                                    BUSINESS

Introduction

   Centillium delivers products that enable broadband communications to the
home and business. We provide broadband equipment vendors with system-level
products for the DSL market and are leveraging our core technology and
expertise to develop products for complementary markets which share common
technologies and customers. We plan to release products before the end of this
year that target the voice over data networks and home networking markets. Our
core technology and expertise have enabled us to establish a viable long-term
product roadmap within these three complementary markets.

Industry Overview

Growing Demand for High-Speed Network Access Creating Last Mile Bottleneck

   The volume of traffic transmitted over communications networks has grown
dramatically in recent years. Consumers are seeking low-cost, high-speed access
to Internet content and other services that require transmission of large
amounts of data such as highly graphical Web sites, audio, video and high-speed
data. Businesses have even greater requirements for high-speed access in order
to implement electronic commerce strategies or Web-based business models and to
provide telecommuting employees with the same capabilities they would
experience at the office.

   As more consumers and businesses have begun to rely on the Internet and
communications networks, the demand for access to these networks has
accelerated. As a result, the number of devices and access lines leading into
these networks has undergone dramatic growth. International Data Corporation,
or IDC, estimates that in 1997, 15 million or 15% of United States' households
had two or more access lines and that this number will grow to 34 million or
30% of United States' households by 2002. A significant number of these
additional access lines are being used to access the Internet and other
communications networks. According to IDC, today nearly 70 million or 86%, of
home Internet users worldwide access the Internet via traditional analog
telephone lines. In addition, the demand for access is increasing as more and
more small businesses, self-employed individuals, and corporate telecommuters
are regularly accessing the Internet and other communications networks. IDC
estimates that there are 27 million households with at least one person doing
some business-related work from home. Many users are demanding the same access
speeds from their home offices that they experience at corporate locations.

   To meet the demand for high-speed, broadband data transmission, network
access providers continue to upgrade the main transmission channels, or
backbone, of their networks with faster equipment. While this network backbone
is now capable of delivering data at very high speeds, an access bottleneck
continues to exist between the telephone companies' central offices and the
end-users' homes or offices. These copper line connections between the central
office and the end-user are commonly known as the last mile. The last mile
infrastructure was originally designed for low-speed analog voice traffic
rather than high-speed digital data transmission. As a result, access to the
Internet and private communications networks over the copper wire
infrastructure of the last mile has typically been limited to data transmission
rates of up to 56 kilobits per second using standard dial-up analog modems. At
this rate, several minutes may be required to access a media-rich Web site, and
several hours may be required to transfer or download large files.

New Competition Driving Digital Subscriber Line Technologies as a Bottleneck
Solution

   The local phone companies have continued to offer higher speed access
services based on older technologies. However, the historical pricing structure
has limited these services to larger businesses and has limited incentives for
phone companies to deploy alternative technologies. The competitive environment
started to change with the passage of the Federal Telecommunications Act of
1996 and was accelerated with the merger of AT&T and TCI. The Federal
Telecommunications Act intensified the competitive environment by requiring
local phone companies to lease portions of their networks, including the last
mile, to other

                                       24
<PAGE>

telecommunications service providers. These changes in competitive structures
coincided with the maturation of  DSL technology enabling high bandwidth data
networking over the existing last mile of copper infrastructure. As a result, a
number of companies, including Covad Communications, MCI WorldCom, NorthPoint
Communications, Rhythms NetConnections and Sprint, are now deploying high-speed
access services using DSL technologies to businesses and residences over the
copper infrastructure owned by the local phone companies. In addition, AT&T has
announced plans to offer broadband and interactive services, including
telephone services, on a broad scale over TCI's cable systems over the next few
years. In response to these competitive pressures, and in an effort to increase
revenues and maintain their existing customer base, local phone companies are
now also aggressively committing their resources to deploy DSL services.

   DSL enables data transmission speeds of 128 kilobits per second to 52
megabits per second using the existing local loop copper wire infrastructure.
DSL delivers "always on" availability, eliminating the tedious dial-up process
associated with traditional analog modem technologies. DSL equipment is
deployed at each end of the copper wire and the transmission speed depends on
the length and condition of the existing wire as well as the capabilities of
the DSL equipment.

High-Speed Access Driving Demand for New Networking Technologies

   As network access providers begin to deploy high-speed data access across
the last mile to businesses and residences, opportunities for additional
networking technologies have emerged. Two of these technologies are voice over
data networks, which allows integrated transmission of voice and data, and home
networking, which enables users to share high bandwidth resources throughout
the home.

   Voice Over Data Networks

   Voice over data networks technology enables voice signals to be transmitted
over networks originally designed for data transmission. Voice over data
networks technology compresses voice signals into discrete packets of data
which can be more efficiently transmitted. As a result, multiple voice
channels, as well as data, can be transmitted over a single copper line
previously capable of transmitting only one voice channel.

   This technology represents a substantial opportunity for small to medium
sized businesses to significantly reduce their costs for telephone services and
for residences to easily add additional phone numbers. Voice over data networks
technology allows network access providers to offer both data and currently
more lucrative voice services to these businesses and residences. According to
Dataquest, while North American data services revenues from annual recurring
retail subscriptions are projected to grow at a rate of 27% from 1999 to 2003
and were estimated to be $27 billion in 1999, revenues from telecommunications
services in North America in 1999 were estimated to be $207 billion.

   Home Networking

   As high-speed access is more fully deployed, as the price of personal
computers continues to decline and as the availability of network enabled
devices and applications increases, opportunities are emerging for vendors to
offer cost effective home networking solutions. Home networking allows multiple
users to share high bandwidth resources throughout the home. This provides
consumers with cost savings from sharing hardware, software and high-speed
Internet access, allowing a broader range of home computing applications, and
increased convenience. According to Cahners In-Stat Group, the reasons
consumers cited for desiring to own a home network were:

  .  Internet access sharing;

  .  printer sharing;

  .  file sharing;

                                       25
<PAGE>

  .  connecting laptop to work;

  .  home control;

  .  multiplayer gaming;

  .  distributed video; and

  .  remote monitoring or security.

   Emerging home networking technologies include both the Home Phoneline
Networking Association or HPNA standard, which uses the existing telephone
wiring of a home, and other standards based on wireless technology. Both of
these solutions eliminate the need to add additional network wiring throughout
the home.

The Challenges for Equipment Manufacturers and Network Access Providers

   The commitment of equipment manufacturers and network access providers to
solve the access bottleneck and develop the broadband access market has created
a number of opportunities and challenges. As the bandwidth bottleneck eases,
allowing greater data throughput at a lower cost, there is an emerging demand
for new cost- and time-saving technologies, such as voice over data networks
and home networking. However, the challenges of solving the bottleneck and
providing these emerging applications remain significant. These challenges
include the following:

   Constantly evolving technology and networking standards. Communications
equipment manufacturers face significant challenges to ensure that their
products interoperate with counterpart products of other manufacturers based on
the same technology. Manufacturers often work together to create
interoperability standards for products based on new technologies. However,
changes in the market landscape or improvements in a given technology can cause
changes to these standards, often requiring existing equipment to be upgraded
or replaced.

   Size constraints. The size of the components and systems necessary to enable
DSL is critical for several reasons. DSL equipment must physically fit within
the local telephone company's existing infrastructrure. For example,
residential phone lines often terminate at a digital loop carrier, which is a
fixed size box, holding equipment that aggregates a neighborhood's phone lines
onto a higher speed channel for transmission to the central office. When a
digital loop carrier is upgraded for DSL access, the physical size of the box
limits the amount of DSL equipment which can be installed without replacing the
digital loop carrier. In addition, high-speed modems for laptops and other
mobile high-speed access equipment must meet ever smaller size constraints.

   Power constraints. Low power consumption is critical for the addition of new
equipment within existing communications systems. Service providers' equipment
is often limited by a fixed level of available power, and any additions of
equipment must operate efficiently within those limitations. Also, consumers
desire high-speed modems which can be powered directly by their personal
computer or laptop, without the need for external power supplies. This requires
modems to function using low levels of power.

   Shorter product life-cycles. The adoption of new communications technologies
is driving the need for more rapid introduction of new communications products.
In this rapidly evolving environment, communications equipment manufacturers
and their suppliers must have the flexibility to respond quickly in order to
maintain market leadership.

   To meet these challenges, manufacturers of broadband voice and data
communication equipment require vendors who provide "system-level" products.
System-level products integrate components into a single product that are
typically sold separately, such as digital integrated circuits, combined
digital and analog integrated circuits, and communications software. System-
level products allow equipment manufacturers to reduce the time it takes for
their products to reach the market and to focus their resources on adding
features which differentiate their products from those of their competitors.

                                       26
<PAGE>

Solution

   We provide system-level products that enable broadband communications to the
home and business. Our products integrate our programmable digital signal
processor, our mixed-signal semiconductor, our digital semiconductor and our
related software. We currently serve the DSL market and are leveraging our
programmable digital signal processor, algorithms and systems expertise to
develop products for complementary markets. We plan to release products that
target the voice over data networks and home networking markets before the end
of this year. This expertise has enabled us to establish a viable long-term
product roadmap within these three complementary markets. Key features of our
solution include:

   Flexibility due to programmable digital signal processor. Our products are
designed based on our software-upgradable, proprietary digital signal
processor, which performs the calculations necessary to encode or decode
digital data for transmission over a network. The primary set of processing
instructions, or algorithms, contained in our digital signal processor are
implemented with software, as opposed to hardware that cannot be reprogrammed.
As a result, our solution allows remote upgrade of digital signal processor
algorithms, eliminating the need for costly hardware replacements and ensuring
adaptability to evolving industry standards and flexibility to meet evolving
demand for new features. The in-house expertise we have built while developing
our programmable digital signal processor enables us to quickly offer
customization for each customer's unique requirements throughout the life cycle
of their products.

   High level of semiconductor integration reduces size. Our ability to
efficiently combine a number of functions into a single integrated circuit
allows us to eliminate the need for peripheral components such as additional
microprocessors and external memory, which substantially reduces the size of
our customers' products. For example, one of our DSL products supports eight
phone lines, or ports, with just two integrated circuits, compared to competing
products which can require from 15 to 32 integrated circuits to service the
same number of ports. This reduced size allows our customers'
DSL infrastructure products to support a greater number of subscriber lines for
a given amount of space at the telephone company's central office.
Additionally, we believe our business card-sized DSL modem is currently the
smallest product of its type commercially available.

   Low power consumption. According to TeleChoice, our DSL solution offers the
lowest per port power consumption in the industry. For our DSL modem products,
low power consumption means that the modem can be powered by a desktop or
laptop computer without an external power supply. For our DSL infrastructure
products, lower power consumption allows network access providers to support a
greater number of DSL lines within equipment supported by a fixed amount of
available power. Our products also feature built-in sleep-mode power management
to ensure operational efficiency.

   System-level products deliver fast time-to-market. We believe our products
offer the most complete system-level solutions available to our target
customers. Instead of obtaining integrated circuits, software and algorithms
from different vendors and integrating the components themselves, our customers
can use our solutions to deliver their products with little additional time or
use of engineering resources. This complete solution provides manufacturers
with the competitive edge they need to ensure fast time-to-market while
retaining the flexibility to differentiate their products.

Strategy

   Our objective is to be the leading provider of system-level products for
equipment manufacturers serving the broadband communications markets. Key
elements of our strategy include the following:

   Target complementary high-growth broadband communications markets. Our
strategy is to focus on complementary, high-growth broadband communications
markets and to develop system-level solutions for applications in those
markets. Our initial products are designed for the DSL infrastructure equipment
market and DSL end-user equipment market. We are also leveraging our core
technologies to design and develop products for the voice over data networks
and home networking markets. By targeting these complementary

                                       27
<PAGE>

markets, which share common technologies and customers, we are able to more
effectively utilize our existing engineering, sales and marketing resources.

   Strengthen and expand relationships with strategic customers. We have
established customer relationships with key equipment manufacturers, including
Advanced Fibre Communications, Copper Mountain Networks, Creative Technology,
Lucent Technologies, NEC and Sumitomo Electric Industries. We have shipped DSL
products to each of these manufacturers, and have recognized approximately $6.8
million in revenues from sales to this group during the period from January 1,
1999 through March 31, 2000. During this period, sales to Advanced Fibre
Communications accounted for 2.4% of our total revenues, sales to Copper
Mountain Networks accounted for 9.9% of our total revenues, sales to Creative
Technology accounted for 2.1% of our total revenues, sales to Lucent
Technologies accounted for 15.0% of our total revenues, sales to NEC accounted
for 13.5% of our total revenues, and sales to Sumitomo Electric accounted for
37.0% of our total revenues. We do not have long-term agreements with these
customers relating to the sale of our products. Rather, they purchase our
products on an order-by-order basis. These companies are market and technology
leaders within the broadband communications market and selling products to
these companies provides references for our products which help to secure
future sales. Collaborating with these industry leaders also helps us to
enhance our technological capabilities. We believe these strategic
relationships are essential to our continued growth and the further development
and acceptance of our technologies.

   Extend technology leadership. We have invested substantial resources to
establish our technology leadership. We believe we are the first company to
deliver a DSL infrastructure product which manages multiple ports and the first
to deliver a set of the two primary semiconductors for a DSL modem which
requires less than one watt of power. An important element of our technological
leadership is our programmable digital signal processor and associated
processing instructions, or algorithms, which are optimized for high bandwidth
communications applications. This core technology can be extended through the
manipulation of algorithms and software to develop multiple communications
products for complementary markets.

   Leverage system-level expertise. Many of our system-level engineers have
previous experience as employees of communication equipment manufacturers and
are therefore very familiar with the requirements of, and challenges faced by,
our customers. We combine this system-level engineering expertise with our
expertise in integrated circuit, digital signal processor, and software design
to develop products that allow our customers to optimize time-to-market,
performance, and systems cost.

   Pursue strategic acquisitions. Our strategy is to enhance our growth
capability by pursuing selective acquisitions. This strategy allows us to more
rapidly obtain complementary technologies and engineering talent and to access
key markets and customer relationships. We believe completing selective
acquisitions will be important to remain competitive as a complete solutions
provider to manufacturers of broadband communications equipment.

Products

   We currently target the DSL market with our DSL infrastructure equipment and
end-user equipment products and we are leveraging our technological expertise
by developing products for markets that are complementary to the DSL market. We
have plans to release products before the end of this year that target the
voice over data networks and home networking markets.

DSL Products

   Each of our DSL products consists of two semiconductor chips--a mixed-signal
chip and a digital chip--and related software. The mixed-signal chip translates
signals between analog and digital formats. Our single mixed-signal chip
replaces the multiple components used in competing solutions. Our digital chip
incorporates our proprietary software programmable digital signal processor,
which provides flexibility for enhancements and upgrades.

   The following features are common to each of our DSL products:

  .  ADSL. Our DSL products are based on a type of DSL technology known as
     asymmetrical DSL or ADSL. ADSL technology provides substantially faster
     transmission of data from the network to the

                                       28
<PAGE>

     end-user than from the user to the network. This tradeoff works to the
     consumer's advantage in that most users typically download more data
     from the network than they send to the network.

  .  Full rate ADSL / G.lite. Each of our DSL products is designed for use
     with either the full rate ADSL standard or the G.lite standard. G.lite
     is a version of ADSL which provides slower transmission speeds than full
     rate ADSL but is easier to install at the consumer's home.

  .  Regional transmission standards. Our standard DSL products conform to
     transmission standards used throughout most of the world. Our
     "Universal" DSL products also conform to the DSL transmission standard
     most commonly used in Japan.

 DSL Infrastructure Products

   We offer two families of DSL infrastructure products: CopperLite CO and
CopperFlite CO. Our CopperLite products are designed for use with the G.lite
standard and our CopperFlite products are designed for use with both the full
rate ADSL and G.lite standards. We began shipping our CopperLite CO products
in the third quarter of 1999, and we expect to begin shipment of our
CopperFlite CO products in the first half of this year.

   Our DSL infrastructure products are designed for use in the following types
of DSL equipment:

  .  DSLAM. A DSL access multiplexer, or DSLAM, aggregates the data traffic
     from a substantial number of home telephone lines for transmission
     through a data network.

  .  Central office switch. A central office switch is a device that enables
     telephone subscribers to dial and make a connection with any other
     subscriber in the telephone network.

  .  Remote terminal. A remote terminal is a generic name for
     telecommunications equipment that is located outside the telephone
     company's central office facility.


<TABLE>
<CAPTION>
 Product        Key Features                                     Introduction Date

 <C>            <S>                                              <C>
 CopperLite CO  G.lite                                           3rd quarter 1999
                Supports 8 ports
- - - - - - ----------------------------------------------------------------------------------
 Universal      G.lite                                           3rd quarter 1999
 CopperLite CO  Supports 4 ports
                Compatible with Japanese regional transmission
                 standard
- - - - - - ----------------------------------------------------------------------------------
 CopperFlite CO Full rate ADSL and G.lite                        1st quarter 2000
                Supports 4 ports
- - - - - - ----------------------------------------------------------------------------------
 Universal      Full rate ADSL and G.lite                        1st half 2000
 CopperFlite CO Supports 4 ports
                Compatible with Japanese regional transmission
                 standard
</TABLE>


   DSL End-User Equipment Products

   We offer four families of DSL end-user equipment products: CopperLite CPE,
CopperFlite CPE, Optimizer and Flite Optimizer.

   Our CopperLite CPE products are designed for use with the G.lite standard
and our CopperFlite CPE products are designed for use with both the full rate
ADSL and G.lite standards. We began shipping our CopperLite CPE products in
1999 and we expect to begin shipping our CopperFlite CPE product in the first
half of 2000.

                                      29
<PAGE>

   Our CopperLite CPE and CopperFlite CPE products are deployed for use as a
subsystem for devices which distribute network access for multiple appliances.
Examples of these devices include the following:

  .  Integrated access device / residential gateway. An integrated access
     device and a residential gateway combine multiple voice and data
     channels for transmission from a home or small business to the telephone
     company's central office.

  .  Set-top box. A set-top box processes transmissions from the traditional
     cable television infrastructure and delivers digital signals which can
     include voice, video or Internet access.

  .  Bridge / router. A bridge or router is a device that resides between
     network segments and forwards data to its appropriate destination.


<TABLE>
<CAPTION>
Product                  Key Features                                    Introduction Date

<S>                      <C>                                             <C>
                                                                          3rd quarter
CopperLite CPE--UTOPIA   G.lite                                           1999
- - - - - - ------------------------------------------------------------------------------------------
                                                                          3rd quarter
Universal                G.lite                                           1999
CopperLite CPE--UTOPIA   Compatible with Japanese regional transmission
                          standard
- - - - - - ------------------------------------------------------------------------------------------
CopperFlite CPE--UTOPIA  Full rate ADSL and G.lite                        1st half 2000
- - - - - - ------------------------------------------------------------------------------------------
Universal                Full rate ADSL and G.lite                        2nd half 2000
                         Compatible with Japanese regional transmission
CopperFlite CPE--UTOPIA  standard
</TABLE>


   Our Optimizer products are designed for use with the G.lite standard and our
Flite Optimizer products are designed for use with both the full rate ADSL and
G.lite standards. Both of these products are deployed for use as either an
internal or external modem for a laptop or personal computer. These products
can also be deployed within a set-top box, which is a device that processes
transmissions from the traditional cable television infrastructure and delivers
digital signals which can include voice, video or Internet access.


<TABLE>
<CAPTION>
 Product              Key Features                                     Introduction Date

 <C>                  <S>                                              <C>
 Optimizer--PCI       G.lite                                           4th quarter 1999
                      Compatible with dial-up soft modem
- - - - - - ----------------------------------------------------------------------------------------
 Universal            G.lite                                           1st quarter 2000
 Optimizer--PCI       Compatible with Japanese regional transmission
                       standard
                      Compatible with dial-up soft modem
- - - - - - ----------------------------------------------------------------------------------------
 Optimizer--USB       G.lite                                           3rd quarter 1999
                      Directly powered by user's computer
- - - - - - ----------------------------------------------------------------------------------------
 Universal            G.lite                                           4th quarter 1999
 Optimizer--USB       Compatible with Japanese regional transmission
                       standard
                      Directly powered by user's computer
- - - - - - ----------------------------------------------------------------------------------------
 Flite Optimizer--PCI Full rate ADSL and G.lite                        1st half 2000
                      Compatible with dial-up soft modem
- - - - - - ----------------------------------------------------------------------------------------
 Universal            Full rate ADSL and G.lite                        2nd half 2000
 Flite Optimizer--PCI Compatible with Japanese regional transmission
                       standard
                      Compatible with dial-up soft modem
- - - - - - ----------------------------------------------------------------------------------------
 Flite Optimizer--USB Full rate ADSL and G.lite                        1st half 2000
                      Directly powered by user's computer
- - - - - - ----------------------------------------------------------------------------------------
 Universal            Full rate ADSL and G.lite                        2nd half 2000
 Flite Optimizer--USB Compatible with Japanese regional transmission
                       standard
                      Directly powered by user's computer
</TABLE>


                                       30
<PAGE>

Voice Over Data Networks Products

   We have near-term plans to offer products which enable voice transmissions
over data networks. Voice over data networks technology allows multiple
telephone channels to be compressed and transmitted simultaneously with data
over a single copper line which previously carried only one telephone channel.
It also allows voice transmissions to be delivered over networks originally
designed to deliver only data. Today's data networks are based on efficient,
cost effective transmission methodologies. Applying technology which allows the
transmission of voice over the more efficient data networks could potentially
reduce the cost of voice transmissions. These data networks use several
different transmission standards, such as asynchronous transfer mode or ATM,
frame relay and Internet protocol.

   We plan to begin shipments of our first voice over data networks
transmission product, Entropia CO, in the second half of this year. Entropia CO
will be marketed to manufacturers of broadband infrastructure products for
inclusion in equipment such as DSLAMs and gateways. Entropia CO will support
the ATM transmission standard only.

   We are also developing a product, to be called Entropia CPE, for use in
voice-enabling equipment installed at the end-user's home or business. Examples
of such equipment are an integrated access device, or IAD, which aggregates
multiple voice and data channels from a home or business for transmission over
the data network, and a private branch exchange, or PBX, which is a computer
server that manages telephone calls in medium to large businesses. We expect to
begin shipments of Entropia CPE in the second half of this year.

   We expect to release Entropia products that support the frame relay and
Internet protocol standards as well as the ATM standard in the year 2001.


<TABLE>
<CAPTION>
                                                      Introduction
 Product       Transmission Standards                 Date

 <C>           <C>                                    <S>
 Entropia CO   ATM                                    2nd half 2000
- - - - - - -------------------------------------------------------------------
 Entropia CPE  ATM                                    2nd half 2000
- - - - - - -------------------------------------------------------------------
 Entropia -VoX ATM, frame relay and Internet protocol 2001
</TABLE>


Home Networking Products

   We plan to offer products for the home networking market before the end of
this year. Our first home networking product will consist of a set of two
semiconductors and related software that will be used with a user's home
computer or laptop. Home networking allows multiple users to share high
bandwidth resources throughout the home. This provides consumers with cost
savings from sharing hardware, software and high-speed Internet access and
allows a broader range of home computing applications as well as increased
convenience. Emerging home networking technologies include the Home Phoneline
Networking Association or HPNA standard, which uses the existing telephone
wiring of a home, and other standards based on wireless technology. These
solutions eliminate the need to add additional network wiring throughout the
home.

Technology

   Our primary competitive advantage is found in our technology expertise in
several key areas. These areas of expertise include our system-level knowledge,
our programmable digital signal processor, our signal processing algorithms,
our digital chip design capability, our mixed-signal chip design capability and
our system-level software. Together, these capabilities have enabled us to
provide system-level communications products which have:

  .  flexibility due to programmability;

  .  low power consumption; and

  .  small size.

                                       31
<PAGE>

   System-level knowledge. Most of our system-level engineers have previous
experience as employees of communication equipment manufacturers and are
therefore very familiar with the requirements of and challenges faced by our
customers. We combine this system-level engineering expertise with our
expertise in integrated circuit, digital signal processor, algorithm, and
software design to develop products that allow our customers to optimize time-
to-market, performance, and systems cost.

   Software programmable digital signal processor. A cornerstone of our
technology is our internally developed, software programmable digital signal
processor. A digital signal processor, as it relates to communications
applications, encodes digital data for transmission over bandwidth limited
media such as copper telephone lines, and recovers the encoded data at the
receiving end. Our software programmable digital signal processor is optimized
for communications applications and provides high processing bandwidth with low
power requirements. This digital signal processor can be programmed for several
different applications such as DSL, voice over packet and home networking. We
currently use this core technology in every product line that is being
developed within our company. This software programmable digital signal
processor technology gives us the advantage of field programmability and
upgradability of devices for future standards.

   Signal processing algorithms. A key component of our continued success is
the expertise that we have developed in the areas of communications algorithms.
Communications algorithms are the processes and techniques used to transform a
digital data stream into a specially-conditioned analog signal suitable for
transmission across copper telephone wires. Our signal processing engineers,
many of whom are PhDs, have a thorough understanding of and practical
experience in the process of transmitting and receiving a digital data stream
in analog form. We also have significant experience developing algorithms which
enable voice compression, echo cancellation and telephony signal processing.
This expertise has allowed our engineers to design highly efficient algorithms
which enable us to produce high performance, reprogrammable and low power
consuming products.

   Digital chip design. We have digital chip design experts with many years of
experience in the area of high complexity and high-speed digital chip
development. We perform both the logic design and the physical layout design
for our products. All of our chips are designed and manufactured using the
latest development tools and silicon process technologies. This design
expertise has enabled us to develop our high performance, low-power-consuming
digital chips.

   Mixed-signal chip design. Our team of analog engineers has developed
numerous analog circuits for the communications industry and has substantial
experience in signal conversion techniques. This experience has enabled us to
develop our mixed-signal chip. This mixed-signal chip translates signals
between analog and digital formats. We believe our mixed-signal chip contains
the highest level of integration in the industry, replacing the multiple
components used in competing DSL solutions and also supporting multiple
telephone lines for DSL infrastructure products.

   System software. Our software engineers have expertise in developing code
that addresses the needs of network equipment manufacturers and service
providers. Our knowledge of network operation and architectures allows us to
write software that ensures that our products are interoperable with
communications equipment vendors' products. In addition, our understanding of
various operating systems and personal computer environments allows us to
create software that provides for simple installation and operation.

                                       32
<PAGE>

Customers

   We have sold our products to the broadband access equipment vendors listed
below. We have recognized at least $15,000 in revenue during the twelve month
period ended March 31, 2000 from each of the customers listed.

<TABLE>
  <S>                      <C>                             <C>
  Market Sectors                                      Company

  DSL Infrastructure       Advanced Fibre Communications   Mitsubishi Electric
   Equipment               Copper Mountain Networks        Nortel Networks
                           LG Information and              Sumitomo Electric Industries
                           Communications
                           Lucent Technologies             Sungmi Telecom Electronics
                           NEC
- - - - - - ---------------------------------------------------------------------------------------
  DSL End-User Equipment   Askey Computer                  NEC
                           CIS Technology                  Sumitomo Electric Industries
                           Creative Technology             Xpeed
</TABLE>


   For the year ended December 31, 1999, Sumitomo Electric Industries and NEC
were our largest customers and accounted for 34.4% and 21.1%, respectively, of
our total revenue. In addition, for the period ended March 31, 2000, Sumitomo
Electrics Industries, Lucent Technologies, Copper Mountain Networks and NEC
accounted for 39.1%, 26.9%, 12.3% and 7.5%, respectively, of our total
revenues. We do not have formal long-term agreements with these customers
relating to the sale of our products, but rather sell our products to them on
an order-by-order basis.

   We have achieved design wins, but have not yet received orders for product
shipments, from several additional companies including Accelerated Networks,
Interspeed, and Aztech Systems. We count a design win after a company has
purchased one of our reference designs, sampled our products, and indicated an
interest in purchasing our products.

Sales and Marketing

   Our sales and marketing strategy is to achieve design wins with technology
leaders in each of our targeted broadband communications markets by, among
other things, providing superior application and engineering support. We
believe that providing comprehensive product service and support is critical to
shortening our customers' design cycles and maintaining a competitive position
in our targeted markets. We market and sell our products through our direct
sales force and through our independent manufacturers' representatives. Our
sales managers are dedicated to principal customers to promote close
cooperation and communication. Representatives support the sales managers by
providing leads, nurturing customer relationships, closing design wins and
securing customer orders.

   We manage a number of marketing programs designed to communicate our
capabilities and benefits to broadband access equipment manufacturers. Our Web
site is an important marketing tool where a wide range of information is
available including product information, white papers, application notes, press
releases, and contributed articles. In addition, we participate in industry
trade shows, technical conferences and technology seminars, conduct press tours
and publish technical articles in industry journals.

Research and Development

   We have assembled a core team of experienced engineers and technologists,
many of whom are leaders in their particular field or discipline. Our engineers
and technologists have collectively co-authored 66 patents and 15 published
papers and hold 76 advanced degrees, including 21 PhDs. As of April 24, 2000,
we had 128 employees with engineering degrees. These employees are involved in
advancing our core technologies, as well as applying these core technologies to
product development activities in our targeted markets.

                                       33
<PAGE>

   We believe that the achievement of higher levels of integration,
functionality and performance and the introduction of new products in our
target markets is essential to our growth. As a result, we plan to increase
research and development staffing levels in 2000 and 2001. Research and
development expense for 1997, 1998 and 1999 was approximately $1.8 million,
$7.9 million and $13.4 million, respectively. Research and development expense
for the three month periods ending March 31, 1999 and 2000 was approximately
$2.3 million and $6.0 million, respectively.

Operations and Manufacturing

   We outsource the fabrication, assembly and testing of our semiconductor
devices. This fabless model allows us to focus our resources on the design,
development and marketing of our products. We manage the production of our
chips through our operations and manufacturing services group which is
comprised of six functions. These functions include technology engineering,
analog test engineering, digital test engineering, quality and reliability,
manufacturing and information systems and facilities.

   We source our semiconductor fabrication from three of the world's largest
foundries: Mitsubishi Electric, United Microelectronics Corporation and Taiwan
Semiconductor Manufacturing Corporation. Our manufacturing strategy is to
qualify and utilize multiple facilities within a given foundry partner for the
fabrication of a given semiconductor device. This second source strategy seeks
to ensure production and performance consistency, both of which are critical
for our products while maintaining multiple channels of supply.

   The primary vendor for the assembly and testing of our products is ST
Assembly Test Services. We have qualified and utilized other vendors as a
second source for the packaging and testing of our products. Amkor/Anam Group
and Siliconware Precision Industries Company, Limited provide additional
assembly services, and additional testing services are provided by Digital
Testing Services and Advanced Semiconductor Engineering.

Competition

   Although we produce system-level products, we primarily compete with vendors
of semiconductor devices for the DSL market. We believe that the principal
factors of competition for semiconductor vendors to these markets are product
capabilities, level of integration, performance and reliability, power
consumption, price, time-to-market, system cost, intellectual property,
customer support and reputation. We believe we compete favorably with respect
to each of these factors.

   We compete with a number of major domestic and international suppliers of
semiconductors for both DSL central office and customer premises equipment and
with suppliers of semiconductors for equipment enabling voice over packet. Our
principal competitors that supply semiconductors for the DSL market include
Alcatel Microelectronics, Analog Devices, Conexant Systems, GlobeSpan, Lucent
Microelectronics, STMicroelectronics and Texas Instruments.

   Many of our competitors operate their own fabrication facilities and have
longer operating histories and presence in key markets, greater name
recognition, access to larger customer bases and significantly greater
financial, sales and marketing, manufacturing, distribution, technical and
other resources. As a result, our competitors may be able to adapt more quickly
to new or emerging technologies and changes in customer requirements or devote
greater resources to the promotion and sale of their products. Current and
potential competitors have established or may establish financial or strategic
relationships among themselves or with existing or potential customers,
resellers or other third parties. Accordingly, it is possible that new
competitors or alliances among competitors could emerge and rapidly acquire
significant market share. In addition, our competitors may in the future
develop technologies that more effectively address the transmission of digital
information through existing analog infrastructures at a lower cost. We cannot
assure you that we will be able to compete successfully against current or
potential competitors, or that competition will not have a material adverse
effect on our business, financial condition and results of operations.


                                       34
<PAGE>

Intellectual Property

   We rely on a combination of copyright, patent, trademark, trade secret and
other intellectual property law, nondisclosure agreements and other protective
measures to protect our proprietary rights. We also utilize unpatented
proprietary know-how and trade secrets and employ various methods to protect
such intellectual property. To date, we have been granted two U.S. patents and
have an additional 20 U.S. patent applications pending and two additional
international patent applications pending.

   Although we employ a variety of intellectual property in the development and
manufacturing of our products, we believe that none of such intellectual
property is individually critical to our current operations. However, taken as
a whole, we believe our intellectual property rights are significant and that
the loss of all or a substantial portion of such rights could have a material
adverse effect on our results of operations. There can be no assurance that our
intellectual property protection measures will be sufficient to prevent
misappropriation of our technology. In addition, the laws of many foreign
countries do not protect our intellectual properties to the same extent as the
laws of the United States. From time to time, we may desire or be required to
renew or to obtain licenses from others in order to further develop and market
commercially viable products effectively. There can be no assurance that any
necessary licenses will be available on reasonable terms.

   In December 1999 we entered into a license agreement with MIPS Technologies
to use their core processor. The agreement expires in December 2004. None of
our products currently shipping use the MIPS core processor, however we plan to
use the MIPS core processor in several of our future products.

Employees

   As of March 31, 2000, we had a total of 151 employees, of whom 97 are
engineers. Seventy-eight of our employees have advanced degrees including 17
PhDs. None of our employees is represented by a labor union. We have not
experienced any work stoppages, and we consider our relations with our
employees to be good. Our future performance depends in significant part upon
the continued service of our key personnel, none of whom is bound by an
employment agreement requiring service for any definite period of time. Our
future success also depends on our continued ability to attract, integrate,
retain and motivate highly qualified sales, technical and managerial personnel.
Competition for such qualified personnel is intense.

Facilities

   Our principal executive and corporate offices are located in Fremont,
California, in approximately 40,000 square feet of leased office space under a
lease that expires in April 2004. In addition, under this lease we have the
option to lease an additional 17,500 square feet. We also have an option to
extend the term of this lease for an additional 5 years, through April 2009. We
believe our space is adequate for our current operations and that additional
leased space can be obtained on commercially reasonable terms if needed.

Legal Proceedings

   We are not currently a party to any material legal proceedings.

                                       35
<PAGE>

                                   MANAGEMENT

Executive Officers and Directors

   The following table sets forth certain information with respect to our
executive officers and directors as of March 31, 2000.

<TABLE>
<CAPTION>
 Name                                 Age Position
 ----                                 --- --------
 <C>                                  <C> <S>
 Faraj Aalaei........................  39 Chief Executive Officer and Director
 Shahin Hedayat......................  39 President and Director
                                          Vice President and Chief Financial
 John W. Luhtala.....................  57 Officer
 Surendra B. Mandava.................  42 Vice President, Engineering
 Jon S. Sherburne....................  49 Vice President, Worldwide Sales
 William F. Mackenzie................  33 Vice President, Operations
 Kamran Elahian......................  45 Director and Chairman of the Board
 Irwin Federman(1)...................  64 Director
 Robert C. Hawk(1)(2)................  60 Director
 Lip-Bu Tan(1)(2)....................  40 Director
</TABLE>
- - - - - - ---------------------
(1) Member of the audit committee.
(2) Member of the compensation committee.

   Faraj Aalaei is our Chief Executive Officer and one of our co-founders. Mr.
Aalaei served as our Vice President, Marketing and Business Development, from
our inception in February 1997 until January 2000, when he was named Chief
Executive Officer. Prior to helping found our company, Mr. Aalaei was the
Director of Access Products at Fujitsu Network Communications, Inc., a designer
and manufacturer of fiber-optic transmission and broadband switching platforms,
from October 1993 to March 1997. Mr. Aalaei also designed advanced
telecommunications products at AT&T Bell Laboratories, a telecommunications
company, from May 1985 to October 1993. Mr. Aalaei received a B.S. in
Electrical Engineering from Wentworth Institute of Technology, an M.S. in
Electrical Engineering from the University of Massachusetts and an M.B.A. from
the University of New Hampshire.

   Shahin Hedayat is our President and one of our co-founders. Mr. Hedayat
served as our Vice President, Engineering, Chief Technical Officer and a
Director from our inception in February 1997 until January 2000, when he was
named President. Mr. Hedayat has more than 15 years experience in the
semiconductor industry. From September 1985 to February 1997, Mr. Hedayat held
various positions at Cirrus Logic, including Vice President of Engineering for
Computer Telephony products. He was the architect of V.32bis and V.34 products,
which achieved multi-million unit shipments. Mr. Hedayat holds six U.S.
patents. Mr. Hedayat holds a B.S. and an M.S. in Electrical Engineering from
the University of Michigan at Ann Arbor.

   John W. Luhtala joined us as Vice President and Chief Financial Officer in
December 1999. From January 1997 to December 1999, Mr. Luhtala was Senior Vice
President, Operations, and Chief Financial Officer at the Santa Cruz Operation
(SCO), a supplier of UNIX operating systems. From May 1996 to December 1996,
Mr. Luhtala was Chief Financial Officer and Vice President of Mergers,
Acquisitions, and Joint Ventures for SyQuest Technology, a manufacturer of
removable cartridge disk drives. Before SyQuest, Mr. Luhtala spent nine years
with Amdahl Corporation in various financial management positions, including
International Treasury Manager, Director of Finance for Amdahl France,
Assistant Controller, and Director of Finance for Compatible Systems. Prior to
Amdahl, Mr. Luhtala held various international and domestic management
positions with Sensormatic Electronics, US Leasing International, and
Richardson-Vicks. Mr. Luhtala holds a B.A. from Bradley University, a J.D. from
New York University and an M.B.A. from Stanford University.

   Surendra B. Mandava is one of our co-founders, and has served as our Vice
President, Engineering, since December 1999. He had served as our Director of
Design Engineering since we commenced operations in

                                       36
<PAGE>

February 1997. From November 1992 to February 1997, Mr. Mandava held various
positions at Cirrus Logic, including Manager, Integrated Circuit Design. Mr.
Mandava holds a M.S. in Electrical Engineering from the Indian Institute of
Technology and a B.S. in Electronics & Communications from the Regional
Engineering College in Trichy, India.

   Jon S. Sherburne has served as our Vice President for Worldwide Sales since
September 1999. From October 1997 to September 1999, Mr. Sherburne was Vice
President of Worldwide Sales at Maker Communications, Inc. From September 1988
to September 1997, Mr. Sherburne spent nine years with VLSI Technology in
various positions, including Director of Apple Worldwide Sales, Vice President
of North American Computer and Government Sales and Technology Centers, and
Vice President of Western U.S. Sales and Technology Centers. Prior to VLSI,
Sherburne held various management and engineering positions at Advanced Micro
Devices and Texas Instruments.

   William F. Mackenzie has served as our Vice President, Operations and
Manufacturing Services since May 1998. Mr. Mackenzie was Corporate Director of
Customer Quality and Reliability Systems at LSI Logic from March 1996 to May
1998 and worked at LSI Canada as Director of Operations from August 1990 to
March 1996. Mr. Mackenzie also served as Manager of Process Engineering,
Motorola Semiconductors, Inc. in Scotland. Mr. Mackenzie holds a B.Sc. (Hon.)
in Applied Physics from the University of Strathclyde in Scotland.

   Kamran Elahian is one of our co-founders and has served as Chairman of the
Board since we started operations in April 1997. Mr. Elahian has co-founded ten
Silicon Valley companies since 1981, including CAE Systems, a computer-aided
engineering software company, Cirrus Logic, a semiconductor company, and
Momenta Corporation, a pen-based computer company. Mr. Elahian is also co-
founder and chairman of NeoMagic, a multimedia accelerator IC company,
Planetweb, an Internet appliance software company, Actelis Networks, a
broadband communications system company, Cahoots, an Internet software company,
KangarooNet, a knowledge management software company and Schools Online, a non-
profit organization providing PCs and Internet connections to schools through
the U.S. and several other countries. In addition, Mr. Elahian is a general
partner in Global Catalyst Partners, a Palo Alto-based venture capital fund.
Mr. Elahian holds a B.S. in Computer Science, a B.S. in Mathematics and an M.E.
in Computer Graphics from the University of Utah.

   Irwin Federman has served on our Board of Directors since May 1998. Mr.
Federman has been a general partner of U.S. Venture Partners, a venture capital
firm, since April 1990. Mr. Federman serves on the boards of directors of
SanDisk Corporation, a solid-state storage system company, Komag, Inc., a
storage media manufacturer, MMC Networks, Inc., a network system component
company, Netro Corporation, a wireless communication equipment company,
CheckPoint Software Technologies, Ltd., a network security software company,
QuickLogic Corporation, a semiconductor company, and several privately-held
companies. He holds a B.S. in Economics from Brooklyn College and an honorary
Doctorate of Engineering Science from Santa Clara University.

   Robert C. Hawk has served on our Board of Directors since November 1997. Mr.
Hawk is President of Hawk Communications, Inc., a telecommunications company,
and recently retired as President and Chief Executive Officer of U.S. West
Multimedia Communications, Inc., where he headed the cable, data and telephone
communications business from 1985 to 1996. Previously, he was President of the
Carrier Division of U.S. West. Mr. Hawk also served as Vice President of
Marketing and Strategic Planning for CXC Corporation, and as a director of
Advanced Systems Development for AT&T/American Bell, a telecommunications
company. Mr. Hawk currently serves on the boards of Xylan Corporation, PairGain
Technologies, Inc., Premisys Communications, Concord Communications, and
Radcom, Inc. Mr. Hawk holds a B.A. in Business Administration from the
University of Iowa and an M.B.A. from the University of San Francisco.

   Lip-Bu Tan has served on our Board of Directors since April 1997. Since
1984, Mr. Tan has been a General Partner of the Walden Group and Chairman of
Walden International Investment Group. Mr. Tan is

                                       37
<PAGE>

currently a director of Creative Technology Ltd., MediaRing.com, Inc.,
Integrated Silicon Solutions, Inc., and several privately-held companies. Mr.
Tan holds a B.S. in Physics from Nanyang University, Singapore, an M.S. in
Nuclear Engineering from the Massachusetts Institute of Technology and an
M.B.A. from the University of San Francisco.

Board of Directors

   Our board of directors currently consists of six members. Each director
holds office until his or her term expires or until his or her successor is
duly elected and qualified. Upon completion of this offering, our amended and
restated certificate of incorporation and bylaws will provide for a classified
board of directors. In accordance with the terms of our certificate, our board
of directors will be divided into three classes whose terms will expire at
different times. The three classes will be comprised of the following
directors:

  .  Class I consists of Robert C. Hawk and Irwin Federman, who will serve
     until the annual meeting of stockholders to be held in 2001;

  .  Class II consists of Kamran Elahian and Lip-Bu Tan, who will serve until
     the annual meeting of stockholders to be held in 2002; and

  .  Class III consists of Faraj Aalaei and Shahin Hedayat, who will serve
     until the annual meeting of stockholders to be held in 2003.

   At each annual meeting of stockholders beginning with the 2001 annual
meeting, the successors to directors whose terms will then expire will be
elected to serve from the time of election and qualification until the third
annual meeting following election and until their successors have been duly
elected and qualified. Any additional directorships resulting from an increase
in the number of directors will be distributed among the three classes so that,
as nearly as possible, each class will consist of an equal number of directors.

Committees

   Our board of directors has an audit committee and a compensation committee.
The audit committee consists of Irwin Federman, Robert Hawk and Lip-Bu Tan. The
audit committee reviews our internal accounting procedures, consults with and
reviews the services provided by our independent accountants and makes
recommendations to the board of directors regarding the selection of
independent accountants. The compensation committee consists of Lip-Bu Tan and
Robert Hawk. The compensation committee reviews and recommends to the board of
directors the salaries, incentive compensation and benefits of our officers and
employees and administers our stock plans and employee benefit plans.

Compensation Committee Interlocks and Insider Participation

   Our board of directors established the compensation committee in April 1999.
Prior to establishing the compensation committee, our board of directors as a
whole performed the functions delegated to the compensation committee. No
member of our compensation committee has served as a member of the board of
directors or compensation committee of any entity that has one or more
executive officers serving as a member of our board of directors or
compensation committee. Since the formation of the compensation committee, none
of its members has been our officer or employee.

Director Compensation

   Effective upon the closing of this offering, our non-employee directors will
be eligible to receive grants of options to purchase our common stock pursuant
to a fixed formula under our 1997 Stock Plan, as amended. Upon the closing of
this offering, each current non-employee director will automatically receive an
option to purchase 20,000 shares of our common stock. Each individual that
becomes a non-employee director following this offering will be granted an
option to purchase 20,000 shares of our common stock on the date that such

                                       38
<PAGE>

person becomes a director. The shares subject to each of these options will
vest and become fully exercisable in equal annual installments over a four year
period following the date of grant. Additionally, beginning at our annual
meeting of stockholders to be held in 2001 and at each successive annual
stockholder meeting, each non-employee director who has previously served at
least six consecutive months prior thereto will receive an option to purchase
5,000 shares of our common stock. The shares subject to these annual option
grants will fully vest and become fully exercisable on the first anniversary of
the date of grant. The exercise price per share for all options automatically
granted to directors under our 1997 Stock Plan, as amended, will be equal to
the market price of our common stock on the date of grant and will have a ten
year term, but will generally terminate within a specified time following the
date the option holder ceases to be a director or consultant.

   Employee directors are eligible to participate in our 2000 Employee Stock
Purchase Plan and to receive discretionary grants under our 1997 Stock Plan, as
amended.

Executive Compensation

 Summary Compensation Table

   The following table sets forth information regarding compensation for the
fiscal year ended December 31, 1999 that we paid for services rendered by our
current Chief Executive Officer, our other executive officers who earned more
than $100,000 during 1999 and our former Chief Executive Officer.

<TABLE>
<CAPTION>
                                                                     Long-Term
                                                        Annual      Compensation
                                                     Compensation      Awards
                                                   ---------------- ------------
                                                                     Securities
                                                                     Underlying
Name and Principal Position                         Salary   Bonus    Options
- - - - - - ---------------------------                        -------- ------- ------------
<S>                                                <C>      <C>     <C>
Faraj Aalaei(1)................................... $144,139 $20,000       --
 Chief Executive Officer

Shahin Hedayat.................................... $145,022     --        --
 President

William F. Mackenzie.............................. $148,822     --     30,000
 Vice President, Operations

Surendra B. Mandava............................... $127,771     --        --
 Vice President, Engineering

Travis White(2)................................... $225,000  50,000       --
 Former Chief Executive Officer
</TABLE>
- - - - - - ---------------------
(1) Mr. Aalaei became our Chief Executive Officer in January 2000. All
    information in this table relates to compensation paid to Mr. Aalaei during
    1999 for his services as Vice President, Marketing and Business
    Development.

(2) Mr. White was our Chief Executive Officer from April 1998 through January
    2000. All information in this table relates to compensation paid to Mr.
    White during 1999 for his services as Chief Executive Officer.

 Option Grants in 1999

   During 1999, we granted options to purchase an aggregate of 2,106,600 shares
of our common stock to our employees, directors and consultants. All options
were granted under our 1997 Stock Plan at exercise prices equal to the fair
market value of our common stock on the date of grant, as determined in good
faith by our board of directors.

   Of the executive officers named in the table above, only Mr. Mackenzie
received a grant of options during 1999. The following table sets forth
information relating to Mr. Mackenzie's grant, including the potential
realizable value of the grant at the end of the option term assuming that the
fair market value of our common

                                       39
<PAGE>

stock appreciates from the midpoint of the offering price at assumed rates of
5% and 10% over the option term. The assumed 5% and 10% rates of stock price
appreciation are provided in accordance with rules of the SEC and do not
represent our estimate or projection of our future common stock price.

<TABLE>
<CAPTION>
                                                                                 Potential Realizable
                                                                       Current     Value at Assumed
                         Number of  % of Total                       Value Based    Annual Rates of
                         Securities   Options                        on Assumed   Stock Appreciation
                         Underlying Granted to  Exercise              Offering      for Option Term
                           Option    Employees    Price   Expiration  Price of   ---------------------
Name                       Grant    During 1999 Per Share    Date      $19.00       5%         10%
- - - - - - ----                     ---------- ----------- --------- ---------- ----------- --------- -----------
<S>                      <C>        <C>         <C>       <C>        <C>         <C>       <C>
William F. Mackenzie....   30,000       1.4%      $1.60    8/12/09    $522,000    $880,500  $1,430,400
</TABLE>

 Option Grants in 2000

   The table below shows the options granted to our executive officers during
the period from January 1, 2000, through the date of this prospectus, and sets
forth the current value of the option grants based on an initial public
offering price of $19.00 per share. All options were granted under our 1997
Stock Plan at exercise prices equal to the fair market value of our common
stock on the date of grant, as determined in good faith by our board of
directors.

<TABLE>
<CAPTION>
                                  Number of
                                  Securities                      Current Value
                                  Underlying Exercise                Based on
                                    Option     Price   Expiration Offering Price
Name                                Grant    Per Share    Date      of $19.00
- - - - - - ----                              ---------- --------- ---------- --------------
<S>                               <C>        <C>       <C>        <C>
Faraj Aalaei.....................  500,000    $ 5.00    2/10/10     $7,000,000
                                   150,000    $10.00    4/13/10     $1,350,000
Shahin Hedayat...................  400,000    $19.00    5/23/10             $0
Surendra B. Mandava..............  200,000    $19.00    5/23/10             $0
William F. Mackenzie.............  160,000    $19.00    5/23/10             $0
John W. Luhtala..................   10,000    $19.00    5/23/10             $0
</TABLE>

 Aggregate Option Exercises in 1999 and Option Values at December 31, 1999

   The following table sets forth information concerning stock options held by
the executive officers named in the summary compensation table above at
December 31, 1999. The value of unexercised in-the-money options is based on a
value of $3.00 per share, the fair market value of our common stock at December
31, 1999, as determined by our board, less the per share exercise price. All
options were granted under our 1997 Stock Plan.

<TABLE>
<CAPTION>
                                                       Number of Securities                Value of Unexercised
                                                  Underlying Unexercised Options          In-the-Money Options at
                                                       at December 31, 1999                  December 31, 1999
                         Shares Acquired  Value   ------------------------------------   -------------------------
                           On Exercise   Realized  Exercisable         Unexercisable     Exercisable Unexercisable
                         --------------- -------- -----------------   ----------------   ----------- -------------
<S>                      <C>             <C>      <C>                 <C>                <C>         <C>
William F. Mackenzie....      65,625       --                 117,500                --  $  305,500       --
                              21,875
Travis White............     150,000       --                 506,757                --  $1,317,569       --
                             125,000
</TABLE>

   The shares acquired by Messrs. Mackenzie and White during 1999 upon exercise
of options are subject to repurchase options by us which lapse as the shares
vest. There was no value realized by Messrs. Mackenzie or White upon exercise
of these options because the fair market value on the date of exercise had not
changed from the fair market value on the date of grant, as determined by our
board.

   All options issued under our 1997 Stock Plan to our executive officers are
immediately exercisable upon grant, although the shares issued upon exercise
are subject to our right to repurchase them, which right lapses

                                       40
<PAGE>

over time as the shares vest. Therefore, all options held by Messrs. Mackenzie
and White as of December 31, 1999 were exercisable, subject to our repurchase
option.

Benefit Plans

 1997 Stock Plan

   Our 1997 Stock Plan was adopted by the board of directors and our
stockholders in March 1997. In July 1997, the 1997 Stock Plan was amended to
increase the number of shares of common stock available for issuance under the
plan from 1,000,000 to 2,000,000. In March 1998, the 1997 Stock Plan was
further amended to increase the number of shares of common stock available for
issuance under the plan to 2,930,257. In May 1998, the 1997 Stock Plan was
amended to further increase the number of shares of common stock available for
issuance under the plan to 5,430,257. The 1997 Stock Plan was further amended
in December 1999 to increase the number of shares available for issuance under
the plan to 6,930,257 shares.

   As of March 31, 2000, options to purchase an aggregate of 2,831,840 shares
were outstanding, 3,860,551 shares of common stock had been purchased pursuant
to exercises of stock options and stock purchase rights and 244,299 shares were
available for future grant.

   In April 2000, our board of directors amended and restated the 1997 Stock
Plan to:

  .  Increase the number of shares of common stock available for issuance
     under the plan to 12,500,000;

  .  Provide for the number of shares available for issuance under the plan
     to be increased annually, on the first day of each fiscal year beginning
     in 2001, by an additional amount equal to 6.0% of the number of
     outstanding shares of common stock on the date of the annual increase;
     and

  .  Provide for the automatic grants of stock options to non-employee
     directors. See "Management-- Board of Directors--Director Compensation."

Our stockholders approved these amendments in April 2000.

   Our 1997 Stock Plan provides for the grant of incentive stock options (as
defined in Section 422 of the Internal Revenue Code) to employees and
nonstatutory stock options and stock purchase rights to employees, directors
and consultants. This plan may be administered by the board of directors or a
committee appointed by the board. The committee may make final and binding
determinations regarding the terms and conditions of the awards granted,
including the exercise price, the number of shares subject to the award and the
exercisability thereof, forms of agreement for use under the plan and
interpretation of plan terms.

   The committee determines the exercise price of options granted under the
1997 Stock Plan, but with respect to non-statutory stock options intended to
qualify as "performance based compensation" within the meaning of 162(m) of the
Internal Revenue Code, and all incentive stock options the exercise price must
at least equal the fair market value of our common stock on the date of grant.
However, for any employee holding more than 10% of the voting power of all
classes of our stock, the exercise price will be no less than 110% of the fair
market value. The committee determines the term of options granted under the
1997 Stock Plan, except the term of incentive stock options may not exceed ten
years.

   An optionee whose relationship with us or any related corporation ceases for
any reason, other than death or total and permanent disability, may generally
exercise options in the three-month period following such cessation, unless
such options terminate or expire sooner. The three-month period is generally
extended to twelve months for terminations due to death or total and permanent
disability. In the event of our merger with or into another corporation or the
sale of substantially all of our assets, the successor company may either
assume or substitute outstanding options or stock purchase rights. If any
optionee's stock purchase rights are not assumed or substituted, the committee
will provide notice to each optionee that he or she has the right to exercise
the option, or stock purchase right as to all shares subject to the option or
stock purchase right for a period of 15 days from the date of such notice. The
1997 Stock Plan will terminate in 2010, unless sooner terminated by the board
of directors.

                                       41
<PAGE>

   The price to be paid for the shares granted pursuant to stock purchase is
determined by the committee. We are generally granted a repurchase option
exercisable on the voluntary or involuntary termination of the purchaser's
employment with us for any reason, including death or disability. The
repurchase price shall be the original purchase price paid by the purchaser.
The repurchase option shall lapse at a rate determined by the committee. Once
the stock purchase right has been exercised, the purchaser shall have the
rights equivalent to those of a stockholder.

  Automatic option grants to non-employee directors. The 1997 Stock Plan
generally provides for an automatic initial grant of an option to purchase
20,000 shares of our common stock to each person who first becomes a non-
employee director on or after the effective date of this offering. After the
initial grant, each non-employee director will automatically be granted
subsequent options to purchase 5,000 shares of our common stock each year on
the date of our annual stockholder's meeting, if on such date he or she has
served on our board of directors for at least six months. Each initial option
grant and each subsequent option grant shall have a term of 10 years. Each
initial option grant will fully vest in equal annual installments over the four
year period from the grant date, and each subsequent option grant will fully
vest on the first anniversary of the grant date. The exercise price of all
options will be 100% of the fair market value per share of our common stock on
the date of grant.

 2000 Employee Stock Purchase Plan

   Our board of directors adopted our 2000 Employee Stock Purchase Plan in
February 2000. This plan provides our employees with an opportunity to purchase
our common stock through accumulated payroll deductions. A total of 500,000
shares of common stock has been reserved for issuance under the purchase plan.
In addition, the purchase plan provides for annual increases in the number of
shares available for issuance under the purchase plan on the first day of each
fiscal year, beginning in 2001, equal to the lesser of 1% of the outstanding
shares of common stock on the first day of the fiscal year or 400,000 shares or
such lesser amount as may be determined by the board. The board of directors or
a committee appointed by the board administers the purchase plan. The board or
its committee has full and exclusive authority to interpret the terms of the
purchase plan and determine eligibility.

   Employees are eligible to participate if they are customarily employed by us
or any participating subsidiary for at least 20 hours per week and more than
five months in any calendar year. However, an employee may not be granted an
option to purchase stock under the purchase plan if such an employee:

  .  immediately after grant owns stock possessing five percent or more of
     the total combined voting power or value of all classes of our capital
     stock; or

  .  whose rights to purchase stock under our employee stock purchase plan
     accrues at a rate which exceeds $25,000 worth of stock for each calendar
     year.

   Our purchase plan is intended to qualify under Section 423 of the Internal
Revenue Code and contains consecutive six month offering periods. The offering
periods generally start on the first trading day on or after May 1 and November
1 of each year, except for the first such offering period which commences on
the first trading day on or after the effective date of this offering and ends
on the last trading day on or after October 31, 2000.

   The purchase plan permits participants to purchase common stock through
payroll deductions of up to 10.0% of the participant's "compensation."
Compensation is defined as the participant's base straight time gross earnings
and commissions but excludes payments for overtime, shift premium payments,
incentive compensation, incentive payments, bonuses and other compensation. The
maximum number of shares a participant may purchase during a single offering
period is 5,000 shares.

   Amounts deducted and accumulated by the participant are used to purchase
shares of common stock at the end of each offering period. The price of stock
purchased under the purchase plan is generally 85% of the lower of the fair
market value of the common stock (i) at the beginning of the offering period or
(ii) at the end of the

                                       42
<PAGE>

offering period. Participants may end their participation at any time during an
offering period, and they will be paid their payroll deductions to date.
Participation ends automatically upon termination of employment with us.

   A participant may not transfer rights granted under the purchase plan other
than by will, the laws of descent and distribution or as otherwise provided
under the purchase plan.

   The purchase plan provides that, if we merge with or into another
corporation or sell substantially all of our assets, the successor corporation
will assume or substitute for each outstanding purchase right. If the successor
corporation refuses to assume or substitute for the outstanding purchase
rights, the offering period then in progress will be shortened, and a new
exercise date will be set.

   The purchase plan will terminate in 2010. However, the board of directors
has the authority to amend or terminate the purchase plan, except that, subject
to some exceptions described in the purchase plan, no such action may adversely
affect any outstanding rights to purchase stock under the purchase plan.

 401(k) Plan

   In March 1997, we adopted a 401(k) Profit Sharing Plan and Trust covering
our eligible employees. The 401(k) Profit Sharing Plan and Trust excludes
nonresident alien employees. The 401(k) Profit Sharing Plan and Trust is
intended to qualify under Section 401(k) of the Internal Revenue Code, so that
contributions to the 401(k) Profit Sharing Plan and Trust by employees or by us
and the investment earnings thereon are not taxable to the employees until
withdrawn. If our 401(k) Profit Sharing Plan and Trust qualifies under Section
401(k) of the United States tax code, our contributions will be deductible by
us when made. Our employees may elect to reduce their current compensation by
up to the statutorily prescribed annual limit of $10,500 in 2000 and to have
those funds contributed to the 401(k) Profit Sharing Plan and Trust. The 401(k)
Profit Sharing Plan and Trust permits us, but does not require us, to make
additional matching contributions on behalf of all participants. To date, we
have not made any contributions to the 401(k) Profit Sharing Plan and Trust.

Limitations on Liability and Indemnification

   Our certificate of incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Delaware law provides that directors
of a corporation will not be personally liable for monetary damages for breach
of their fiduciary duties as directors, except liability for the following:

  .  any breach of their duty of loyalty to the corporation or its
     stockholders;

  .  acts or omissions not in good faith or which involve intentional
     misconduct or a knowing violation of law;

  .  unlawful payments of dividends or unlawful stock repurchases or
     redemptions; or

  .  any transaction from which the director derived an improper personal
     benefit.

   This limitation of liability does not apply to liabilities arising under the
federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or rescission.

   Our certificate of incorporation and bylaws provide that we shall indemnify
our directors and executive officers and may indemnify our other officers and
employees and other agents to the fullest extent permitted by law. We believe
that indemnification under our bylaws covers at least negligence and gross
negligence on the part of indemnified parties. Our bylaws also permit us to
secure insurance on behalf of any officer, director, employee or other agent
for any liability arising out of his or her actions in such capacity,
regardless of whether the bylaws would permit indemnification. We have entered
into agreements to indemnify our directors, executive officers and controller,
in addition to indemnification provided for in our bylaws. These agreements,
among other things, provide for indemnification of our directors and executive
officers for certain expenses (including attorneys' fees), judgments, fines and
settlement amounts incurred by any such person in any action or proceeding,
including any action by or in our rights, arising out of such person's services
as a director or executive officer to us, any of our subsidiaries or any other
company or enterprise to which the person provides services at our request. We
believe that these provisions and agreements are necessary to attract and
retain qualified persons as directors and executive officers.

                                       43
<PAGE>

                          RELATED PARTY TRANSACTIONS

Sales of Stock

   Since our inception in February 1997, we have issued and sold shares of our
capital stock in private placement transactions as follows:

  .  8,000,000 shares of restricted common stock at a price of $0.001 per
     share in February 1997;

  .  1,680,000 shares of Series A preferred stock at a price of $0.50 per
     share in April 1997;

  .  500,000 shares of Series B1 preferred stock at a price of $2.00 per
     share in September 1997;

  .  1,500,000 shares of Series B1 preferred stock at a price at $2.00 per
     share in June 1998;

  .  800,000 shares of Series B2 preferred stock at a price of $2.50 per
     share in July 1997;

  .  972,250 shares of Series B3 preferred stock at $4.00 per share in July
     1997;

  .  1,151,482 shares of Series B3 at a price of $4.00 per share in September
     1997;

  .  1,127,000 shares of Series B3 preferred stock at a purchase price of
     $4.00 per share in October 1997;

  .  108,750 shares of Series B3 preferred stock at a price of $4.00 per
     share in April 1998; and

  .  7,610,754 shares of Series C preferred stock at a price of $5.00 per
     share in April 1999.

   We recorded noncash deemed dividends of $2,800,000 for the year ended
December 31, 1997, to reflect the value of rights granted to certain
stockholders to purchase 2,000,000 shares of Series B1 preferred stock at
$2.00 per share and 800,000 shares of Series B2 preferred stock at $2.50 per
share, both less than the $4.00 per share price received for the Series B3
preferred stock. The rights were exercised in July 1997, September 1997 and
June 1998, as reflected above. See note 7 of the notes to the financial
statements.

   All shares of preferred stock will convert into common stock on a 1-for-1
basis on the closing of this offering.

   The following table summarizes the shares of capital stock purchased by
executive officers, directors and 5% stockholders in these private placement
transactions, although this table does not necessarily reflect currently
outstanding amounts:

<TABLE>
<CAPTION>
                          Restricted Series A  Series B1 Series B2 Series B3 Series C
                            Common   Preferred Preferred Preferred Preferred Preferred
   Name of Purchaser        Stock      Stock     Stock     Stock     Stock     Stock
   -----------------      ---------- --------- --------- --------- --------- ---------
<S>                       <C>        <C>       <C>       <C>       <C>       <C>
Kamran Elahian..........  1,573,187       --         --       --        --         --
Shahin Hedayat..........  2,510,493       --         --       --        --         --
Faraj Aalaei............  1,305,440       --         --       --        --         --
Surendra B. Mandava.....  1,305,440       --         --       --        --         --
Anthony O'Toole.........  1,305,440       --         --       --        --         --
Robert C. Hawk..........        --        --         --       --        --      15,000
Entities affiliated with
 Walden International
 Investment Group.......        --    500,000  1,000,000      --    325,000    550,000
Entities affiliated with
 U.S. Venture Partners..        --    500,000  1,000,000      --    250,000    550,000
Entities affiliated with
 Vertex Management......        --        --         --   800,000   500,000    380,000
The Chase Manhattan
 Bank, as Trustee for
 the First Plaza Group
 Trust..................        --        --         --       --        --   1,600,000
</TABLE>

Affiliated Relationships

   Mr. Tan, a member of our board of directors, is affiliated with Walden
International Investment Group. Mr. Federman, a member of our board of
directors, is affiliated with U.S. Venture Partners.

                                      44
<PAGE>

Grants of Options

   From our inception in February 1997 through the date of this prospectus, we
have granted options to purchase our common stock to our directors and
executive officers as follows:

<TABLE>
<CAPTION>
                                               Date of  Number of Exercise Price
                      Name                      Grant    Options    Per Share
                      ----                     -------- --------- --------------
   <S>                                         <C>      <C>       <C>
   Robert C. Hawk............................. 11/24/97   49,500      $ 0.40
                                                5/23/00   20,000      $19.00
   William F. Mackenzie.......................  6/16/98  175,000      $ 0.40
                                                8/12/99   30,000      $ 1.60
                                                5/23/00  160,000      $19.00
   Jon S. Sherburne........................... 10/13/99  215,000      $ 2.00
   John W. Luhtala............................  12/9/99  175,000      $ 3.00
                                                5/23/00   10,000      $19.00
   Faraj Aalaei...............................  2/10/00  500,000      $ 5.00
                                                4/13/00  150,000      $10.00
   Shahin Hedayat.............................  5/23/00  400,000      $19.00
   Kamran Elahian.............................  5/23/00  260,000      $19.00
   Surendra B. Mandava........................  5/23/00  200,000      $19.00
   Irwin Federman.............................  5/23/00   20,000      $19.00
   Lip-Bu Tan.................................  5/23/00   20,000      $19.00
</TABLE>

Offers of Employment

   John W. Luhtala, our Chief Financial Officer, is party to an offer letter
with us dated November 30, 1999. Under the terms of the offer letter, in the
event that we experience a change in control, following which Mr. Luhtala's
employment is terminated or his duties significantly reduced, the vesting of
Mr. Luhtala's stock options will be accelerated by one year.

   Jon S. Sherburne, our Vice President for Worldwide Sales, is party to an
offer letter with us dated August 17, 1999. Under the terms of the offer
letter, in the event we experience a change in control, following which Mr.
Sherburne's employment is terminated or his duties significantly reduced, the
vesting of Mr. Sherburne's stock options will be accelerated by one year.

Indemnification Agreements

   We have entered into indemnification agreements with each of our directors
and executive officers. Such indemnification agreements will require us to
indemnify our directors and executive officers to the fullest extent permitted
by Delaware law.

Agreement with Former Chief Executive Officer

   Travis White, our former Chief Executive Officer, resigned his position as
Chief Executive Officer in January 2000. Additionally, his employment
terminated on March 31, 2000. In connection with the termination of Mr. White's
employment relationship with us, we entered into an Agreement and Mutual
Release with Mr. White on February 2, 2000. Under the terms of the agreement,
in exchange for a release by Mr. White of all potential claims against us, we
have agreed to pay Mr. White a total of $225,000 over the next year. On
Mr. White's termination date, 211,064 options with an option price of $0.40 per
share were accelerated and fully vested as provided by his original employment
agreement and in accordance with the terms of his original option grant.

Future Agreements

   We believe that all of the transactions set forth above were made on terms
no less favorable to us than could have been obtained from unaffiliated third
parties. We intend that all future transactions, including loans, between us
and our officers, directors, principal stockholders and their affiliates will
be approved by a majority of the board of directors, including a majority of
the independent, disinterested outside directors on the board of directors, and
will be on terms no less favorable to us than could be obtained from
unaffiliated third parties.

                                       45
<PAGE>

                             PRINCIPAL STOCKHOLDERS

   The following table sets forth information known to us with respect to the
beneficial ownership of our common stock as of March 31, 2000 and as adjusted
to reflect the sale of common stock offered hereby by the following:

  .  each stockholder known by us to own beneficially more than 5% of our
     common stock;

  .  each of our executive officers named in the compensation table above;

  .  each of our directors; and

  .  all directors and executive officers as a group.

   As of March 31, 2000, there were 27,437,747 shares of our common stock
outstanding, assuming that all outstanding preferred stock has been converted
into common stock. Except as otherwise indicated, we believe that the
beneficial owners of the common stock listed below, on the information
furnished by such owners, have sole voting power and investment power with
respect to such shares. Beneficial ownership is determined in accordance with
the rules of the Securities and Exchange Commission. In computing the number of
shares beneficially owned by a person and the percent ownership of that person,
shares of common stock subject to options or warrants held by that person that
are currently exercisable or will become exercisable within 60 days after March
31, 2000 are deemed outstanding, while such shares are not deemed outstanding
for purposes of computing percent ownership of any other person. Unless
otherwise indicated in the footnotes below, the persons and entities named in
the table have sole voting and investment power with respect to all shares
beneficially owned, subject to community property laws where applicable. The
address for those individuals for which an address is not otherwise indicated
is Centillium Communications, Inc., 47211 Lakeview Boulevard, Fremont, CA
94538.

<TABLE>
<CAPTION>
                                              Percentage of Shares
                          Shares Beneficially  Beneficially Owned  Percentage of Shares
    Name or Group of          Owned Prior         Prior to the      Beneficially Owned
   Beneficial Owners        to the Offering         Offering        After the Offering
   -----------------      ------------------- -------------------- --------------------
<S>                       <C>                 <C>                  <C>
5% Stockholders
Entities affiliated with
 Walden International
 Investment Group(1)....       2,375,000               8.7%                 7.4%
 750 Battery Street #700
 San Francisco, CA 94111
Entities affiliated with
 U.S. Venture
 Partners(2)............       2,300,000               8.4%                 7.2%
 2180 Sand Hill Road
 Menlo Park, CA 04025
Entities affiliated with
 Vertex Management(3)...       1,680,000               6.1%                 5.2%
 Three Lagoon Drive,
  Suite 220
 Redwood City, CA 94065
The Chase Manhattan
 Bank, as Trustee for
 the First Plaza Group
 Trust..................       1,600,000               5.8%                 5.0%
 767 Fifth Avenue
 New York, NY 10153

Anthony O'Toole(4)......       1,305,440               4.8%                 4.1%

Directors and Executive
 Officers
Shahin Hedayat..........       2,510,493               9.1%                 7.8%
Faraj Aalaei(5).........       1,805,440               6.6%                 5.6%
Kamran Elahian..........       1,573,187               5.7%                 4.9%
Surendra B. Mandava.....       1,305,440               4.8%                 4.1%
Jon S. Sherburne(6).....         215,000               0.8%                 0.7%
William F.
 Mackenzie(7)...........         205,000               0.7%                 0.6%
John W. Luhtala(8)......         175,000               0.6%                 0.5%
Robert C. Hawk(9).......          64,500               0.2%                 0.2%
All directors and
 executive officers as a
 group (8 persons)......       7,854,060              28.6%                24.4%
</TABLE>


                                       46
<PAGE>

- - - - - - ---------------------
(1) Consists of 1,115,910 shares held by Pacven Walden Ventures III, L.P.,
    675,000 shares held by Seed Ventures II, Ltd., 212,727 shares held by Asian
    Ventures Capital Investment Corporation, 196,363 shares held by TWG
    Investment LDC, 135,000 shares held by O,W&W Investments Ltd., and 40,000
    shares held by OCBC, Wearnes & Walden Investments (Singapore) Ltd.

(2) Consists of 2,070,000 shares held by U.S. Ventures V, L.P., 115,000 shares
    held by USVP V International, L.P., 62,900 shares held by 2180 Associates
    Fund V, L.P., and 52,100 shares held by USVP V Entrepreneur Partners L.P.

(3) Consists of 650,000 shares held by Vertex Technology Fund Pte. Ltd, 650,000
    shares held by Vertex Asia Limited, and 380,000 shares held by Vertex
    Technology Fund II Limited.

(4) Mr. O'Toole is one of our co-founders, and is also currently one of our
    employees.

(5) Includes 500,000 shares underlying options that are immediately exercisable
    subject to a repurchase option by us which lapses as the shares vest.

(6) Consists of shares received on early exercise of stock options. These
    shares are subject to a repurchase option by us which lapses as the shares
    vest.

(7) Consists of 87,500 shares received on early exercise of stock options,
    which shares are subject to a repurchase option by us which lapses as the
    shares vest, and an additional 117,500 shares underlying options that are
    immediately exercisable subject to a repurchase option by us which lapses
    as the shares vest.

(8) Consists of shares underlying options that are immediately exercisable
    subject to a repurchase option by us which lapses as the shares vest.

(9) Consists of 49,500 shares received on early exercise of stock options,
    which shares are subject to a repurchase option by us which lapses as the
    shares vest, and 15,000 shares of Series C preferred stock.

                                       47
<PAGE>

                          DESCRIPTION OF CAPITAL STOCK

General

   Our certificate of incorporation that becomes effective upon the closing of
this offering authorizes the issuance of up to 100,000,000 shares of common
stock, $0.001 par value, and authorizes the issuance of 10,000,000 shares of
undesignated preferred stock, $0.001 par value. From time to time, our board of
directors may establish the rights and preferences of the preferred stock. As
of March 31, 2000, 11,987,511 shares of common stock were issued and
outstanding and held by 135 stockholders, and 15,450,236 shares of preferred
stock were issued and outstanding and held by 164 stockholders. Upon the
closing of this offering, all outstanding shares of preferred stock will
convert into an aggregate of 15,450,236 shares of common stock. The following
description of our capital stock is, by necessity, not complete. We encourage
you to refer to our certificate of incorporation and bylaws, which are included
as exhibits to the registration statement of which this prospectus forms a
part, and applicable provisions of Delaware law for a more complete
description.

Common Stock

   Each holder of common stock is entitled to one vote for each share held on
all matters to be voted upon by the stockholders and there are no cumulative
voting rights. Subject to preferences that may be applicable to any outstanding
preferred stock, holders of common stock are entitled to receive ratably such
dividends, if any, as may be declared from time to time by the board of
directors out of funds legally available for that purpose. See "Dividend
Policy." In the event of our liquidation, dissolution or winding up, the
holders of common stock are entitled to share in our assets remaining after the
payment of liabilities and the satisfaction of any liquidation preference
granted to the holders of any outstanding shares of preferred stock. Holders of
common stock have no preemptive or conversion rights or other subscription
rights. There are no redemption or sinking fund provisions applicable to the
common stock. The rights, preferences and privileges of the holders of common
stock are subject to, and may be adversely affected by the rights of the
holders of shares of any series of preferred stock that we may designate in the
future.

Preferred Stock

   The board of directors has the authority, without action by the
stockholders, to designate and issue preferred stock in one or more series and
to designate the rights, preferences and privileges of each series, which may
be greater than the rights of the common stock. It is not possible to state the
actual effect of the issuance of any shares of preferred stock upon the rights
of holders of the common stock until the board of directors determines the
specific rights of the holders of such preferred stock. However, the effects
might include, among other things:

  .  restricting dividends on the common stock;

  .  diluting the voting power of the common stock;

  .  impairing the liquidation rights of the common stock; or

  .  delaying or preventing a change in control of our company without
     further action by the stockholders.

   Upon the closing of this offering, no shares of preferred stock will be
outstanding, and we have no present plans to issue any shares of preferred
stock.

Registration Rights of Certain Holders

   After this offering, holders of shares of common stock and shares of common
stock issuable upon exercise of outstanding warrants (the "registrable
securities") or their transferees are entitled to certain rights with respect
to the registration of such shares under the Securities Act. These rights are
provided under the terms of an agreement between us and the holders of the
registrable securities. Beginning 180 days following the date of

                                       48
<PAGE>

this prospectus, holders of at least 20% of the registrable securities may
require, on no more than two occasions, that we use our best efforts to
register the registrable securities for public resale. We are obligated to
register these shares only if the outstanding registrable securities have an
anticipated public offering price of at least $25,000,000. Also, holders of
registrable securities may require, no more than once during any six-month
period, that we register their shares for public resale on Form S-3 or similar
short-form registration if the value of the securities to be registered is at
least $2,000,000. Furthermore, in the event we elect to register any of our
shares of common stock for purposes of effecting any public offering, the
holders of registrable securities are entitled to include their shares of
common stock in that registration, but we may reduce the number of shares
proposed to be registered in view of market conditions. These registration
rights have been waived with respect to this offering. We will bear all
expenses in connection with any registration, other than underwriting discounts
and commissions. All registration rights will terminate five years following
the consummation of this offering, or with respect to each holder of
registrable securities, at such time as the holder is entitled to sell all then
held shares in any 90-day period under Rule 144 of the Securities Act.

Certain Charter and Bylaw Provisions and Delaware Law

   Certain provisions of Delaware law and our certificate of incorporation and
bylaws could make the following more difficult:

  .  our acquisition by a tender offer;

  .  our acquisition by a proxy contest; or

  .  the removal of our incumbent officers and directors.

   These provisions, summarized below, are expected to discourage certain types
of coercive takeover practices and inadequate takeover bids. These provisions
are also designed to encourage persons seeking to acquire control of us to
first negotiate with our board of directors. We believe that the benefits of
increased protection of our potential ability to negotiate with the proponent
of an unfriendly or unsolicited proposal to acquire or restructure outweighs
the disadvantages of discouraging such proposals because negotiation of such
proposals could result in an improvement of their terms.

 Classified Board

   Our board of directors is divided into three classes. The directors in each
class will serve for a three-year term, with our stockholders electing one
class each year. This system of electing and removing directors may tend to
discourage a third party from making a tender offer or otherwise attempting to
obtain control of us, because it generally makes it more difficult for
stockholders to replace a majority of the directors.

 Restrictions on Persons Able to Call Stockholder Meetings

   Under our bylaws, only the board of directors, the chairman of the board and
the president may call special meetings of stockholders.

 Advance Notification of Stockholder Nominations and Proposals Required

   Our bylaws establish advance notice procedures for stockholder proposals and
the nomination of candidates for election as directors, other than nominations
made by or at the direction of the board of directors or a committee of the
board.

 Delaware Anti-takeover Law

   We are subject to Section 203 of the Delaware General Corporation Law, an
anti-takeover law. In general, Section 203 prohibits a publicly-held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years following the date the person became
an interested

                                       49
<PAGE>

stockholder, unless the business combination or the transaction in which the
person became an interested stockholder is approved in a prescribed manner.
Generally, a business combination includes a merger, asset or stock sale, or
other transaction resulting in a financial benefit to the interested
stockholder. Generally, an interested stockholder is a person who, together
with its affiliates and associates, owns or within three years prior to the
determination of interested stockholder status, did own, 15% or more of a
corporation's voting stock. The existence of this provision may have an anti-
takeover effect with respect to transactions not approved in advance by the
board of directors, including discouraging attempts that might result in a
premium over the market price for the shares of common stock held by
stockholders.

 Stockholder Action By Written Consent Eliminated

   Our certificate of incorporation eliminates the right of stockholders to act
by written consent without a meeting.

 Undesignated Preferred Stock

   The authorization of undesignated preferred stock makes it possible for the
board of directors to issue preferred stock with voting or other rights or
preferences that could impede the success of any attempt to change our control.
These and other provisions may have the effect of deferring hostile takeovers
or delaying changes in our control or management.

Transfer Agent and Registrar

   The transfer agent and registrar for the common stock is Chase Mellon
Shareholder Services, L.L.C.

                                       50
<PAGE>

                        SHARES ELIGIBLE FOR FUTURE SALE

   Prior to this offering, there has been no public market for our stock.
Future sales of substantial amounts of our common stock in the public market
following this offering or the possibility of such sales occurring could
adversely affect market prices for our common stock or could impair our ability
to raise capital through an offering of equity securities. Furthermore, since
no shares will be available for sale shortly after this offering because of
contractual and legal restrictions on resale as described below, sales of
substantial amounts of our common stock in the public after these restrictions
lapse could adversely affect the prevailing market price and our ability to
raise equity capital in the future.

   Upon completion of this offering, we will have 32,137,747 shares of common
stock outstanding (assuming conversion of all of the currently outstanding
shares of preferred stock) based on shares outstanding as of March 31, 2000 and
assuming no exercise of the underwriters' over-allotment option and no exercise
of outstanding options. Of these shares, all of the shares sold in this
offering will be freely transferable without restriction under the Securities
Act, unless these shares are purchased by "affiliates" as that term is used
under the Securities Act and the Regulations promulgated thereunder.

   Of these shares, the remaining 27,437,747 shares as of March 31, 2000, which
were sold by us in reliance on exemptions from the registration requirements of
the Securities Act, are restricted securities within the meaning of Rule 144
under the Securities Act and become eligible for sale in the public market as
follows:

  .  no shares will be eligible for immediate sale on the date the
     registration statement of which this prospectus is a part is declared
     effective;

  .  no shares will be eligible for sale prior to 180 days from the date the
     registration statement of which this prospectus is a part is declared
     effective; and

  .  beginning 181 days after the effective date, 25,512,353 shares will
     become eligible for sale, subject to the provisions of Rules 144 or 701,
     upon the expiration of agreements not to sell such shares entered into
     between the underwriters and such stockholders.

   As of March 31, 2000, options to purchase a total of 2,831,840 shares of
common stock, all of which were issued under the 1997 Stock Plan, were
outstanding and exercisable. All of the shares subject to options are subject
to lock-up agreements. An additional 244,299 shares of common stock were
available as of March 31, 2000 for future option grants or direct issuances
under the 1997 Stock plan. Any shares subject to lock-up agreements may be
released at any time without notice by the underwriters.

   In general, under Rule 144 as currently in effect, a person (or group of
persons whose shares are aggregated), including an affiliate, who has
beneficially owned restricted shares for at least one year is entitled to sell,
within any three-month period commencing 90 days after the date of completion
of this offering, a number of shares that does not exceed the greater of 1% of
the then outstanding shares of common stock (approximately 321,000 shares
immediately after this offering), or the average weekly trading volume in the
common stock during the four calendar weeks preceding such sale, subject to the
filing of a Form 144 with respect to such sale and certain other limitations
and restrictions. In addition, a person who is not deemed to have been our
affiliate at any time during the 90 days preceding a sale and who has
beneficially owned the shares proposed to be sold for at least two years, would
be entitled to sell such shares without regard to the requirements described
above.

   Any of our employees, officers or directors of or consultant who purchased
his or her shares prior to the date of completion of this offering or who holds
vested options as of that date pursuant to a written compensatory plan or
contract is entitled to rely on the resale provisions of Rule 701, which
permits non-affiliates to sell their Rule 701 shares without having to comply
with the public-information, holding-period, volume-limitation or notice
provisions of Rule 144 and permits affiliates to sell their Rule 701 shares
without having to comply with Rule 144's holding-period restrictions, in each
case commencing 90 days after the date of completion of this offering.

                                       51
<PAGE>

   We have agreed that we will not offer, sell, contract to sell, pledge or
otherwise dispose of, directly or indirectly, or file with the Securities and
Exchange Commission a registration statement under the Securities Act of 1933
relating to any shares of our common stock or securities convertible into or
exchangeable or exercisable for any shares of our common stock, or publicly
disclose the intention to make any such offer, sale, pledge, disposition or
filing, without the prior written consent of Credit Suisse First Boston
Corporation for a period of 180 days after the date of this prospectus, except
issuances pursuant to the exercise of employee stock options outstanding on the
date hereof.

   Our officers, directors and stockholders have agreed that they will not
offer, sell, contract to sell, pledge or otherwise dispose of, directly or
indirectly, any shares of our common stock or securities convertible into or
exchangeable or exercisable for any shares of our common stock, enter into a
transaction which would have the same effect, or enter into any swap, hedge or
other arrangement that transfers, in whole or in part, any of the economic
consequences of ownership of our common stock, whether any such aforementioned
transaction is to be settled by delivery of our common stock or such other
securities, in cash or otherwise, or publicly disclose the intention to make
any such offer, sale, pledge or disposition, or to enter into any such
transaction, swap, hedge or other arrangement, without, in each case, the prior
written consent of Credit Suisse First Boston Corporation for a period of 180
days after the date of this prospectus.

   As soon as practicable after the effective date of the registration
statement of which this prospectus is a part, we intend to file a registration
statement on Form S-8 under the Securities Act to register shares of common
stock issuable under our 1997 Stock Plan and our 2000 Employee Stock Purchase
Plan, thus permitting the resale of such shares by non-affiliates in the public
market without restriction under the Securities Act. Such registration
statement will become effective immediately upon filing.

   Prior to this offering, there has been no public market for our common
stock, and any sale of substantial amounts in the open market may adversely
affect the market price of our common stock offered hereby.

                                       52
<PAGE>

                                  UNDERWRITING

   Under the terms and subject to the conditions contained in an underwriting
agreement dated May 23, 2000, we have agreed to sell to the underwriters named
below, for whom Credit Suisse First Boston Corporation, FleetBoston Robertson
Stephens Inc. and Salomon Smith Barney Inc. are acting as representatives, the
following respective numbers of shares of common stock:

<TABLE>
<CAPTION>
                                                                       Number of
   Underwriters                                                         Shares
   ------------                                                        ---------
   <S>                                                                 <C>
   Credit Suisse First Boston Corporation............................. 1,805,000
   FleetBoston Robertson Stephens Inc.  ..............................   902,500
   Salomon Smith Barney Inc. .........................................   902,500
   Chase Securities Inc...............................................    65,000
   E*Offering Corp....................................................    65,000
   W.R. Hambrecht + Co., LLC..........................................    65,000
   Invemed Associates LLC.............................................    65,000
   Lehman Brothers Inc................................................    65,000
   Brad Peery Inc.....................................................    65,000
                                                                       ---------
       Total.......................................................... 4,000,000
                                                                       =========
</TABLE>

   The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that, if an underwriter defaults, the
purchase commitments of non-defaulting underwriters may be increased or the
offering of common stock may be terminated.

   We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to 600,000 additional shares at the initial public offering price
less the underwriting discounts and commissions. The option may be exercised
only to cover any over-allotments of common stock.

   The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a concession of $0.80 per share. The
underwriters and selling group members may allow a discount of $0.10 per share
on sales to other broker/dealers. After the initial public offering, the public
offering price and concession and discount to broker/dealers may be changed by
the representatives.

   The following table summarizes the compensation and estimated expenses we
will pay.

<TABLE>
<CAPTION>
                                       Per Share                     Total
                             ----------------------------- -------------------------
                                                            Without
                                Without          With        Over-         With
                             Over-allotment Over-allotment allotment  Over-allotment
                             -------------- -------------- ---------- --------------
   <S>                       <C>            <C>            <C>        <C>
   Underwriting Discounts
    and Commissions paid by
    us.....................     $  1.33        $  1.33     $5,320,000   $6,118,000
   Expenses payable by us..     $0.3125        $0.2717     $1,250,000   $1,250,000
</TABLE>

   The expenses of the offering that are payable by us are estimated to be
$1,250,000.

   The underwriters have informed us that they do not expect discretionary
sales to exceed 5% of the shares of common stock being offered.

   A prospectus in electronic format may be made available on the Web sites
maintained by one or more of the underwriters participating in this offering.
The representatives may agree to allocate a number of shares to underwriters
for sale to their online brokerage account holders. Internet distributions will
be allocated by the underwriters that will make Internet distributions on the
same basis as other allocations. E*TRADE Securities, Inc. is an online
broker/dealer that has received an allocation of shares of common stock through
its affiliate E*Offering Corp.

                                       53
<PAGE>

   We and our executive officers, directors and certain other of our security
holders have agreed not to offer, sell, contract to sell, announce an intention
to sell, pledge or otherwise dispose of, directly or indirectly, or file with
the Securities and Exchange Commission a registration statement under the
Securities Act relating to, any shares of common stock or securities
convertible into or exchangeable or exercisable for any common stock without
the prior written consent of Credit Suisse First Boston Corporation for a
period of 180 days after the date of this prospectus.

   The underwriters have reserved for sale at the initial public offering price
up to 200,000 shares of the common stock for employees, directors and certain
other persons associated with us who have expressed an interest in purchasing
common stock in this offering. The number of shares available for sale to the
general public in this offering will be reduced to the extent these persons
purchase the reserved shares. Any reserved shares not so purchased will be
offered by the underwriters to the general public on the same terms as the
other shares.

   We have agreed to indemnify the underwriters against liabilities under the
Securities Act, or contribute to payments which the underwriters may be
required to make in that respect.

   We have applied the shares of common stock quoted on The Nasdaq Stock
Market's National Market under the symbol "CTLM."

   We and the underwriters have agreed to indemnify each other against
liabilities, including liabilities under the Securities Act.

   Prior to this offering, there has been no public market for our common
stock. The initial public offering price will be determined by negotiation
between us and the underwriters. The principal factors to be considered in
determining the public offering price include:

  .  the information in this prospectus and otherwise available to the
     underwriters;

  .  the history and the prospects for the industry in which we will compete;

  .  the ability of our management;

  .  the prospects for our future earnings;

  .  the present state of our development and our current financial
     condition;

  .  the general condition of the securities markets at the time of this
     offering; and

  .  the recent market prices of, and the demand for, publicly traded common
     stock of generally comparable companies.

   We cannot be sure that the initial public offering price will correspond to
the price at which the common stock will trade in the public market following
this offering or that an active trading market for the common stock will
develop and continue after this offering.

   The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions, and penalty bids in accordance with Regulation
M under the Exchange Act.

  .  Over-allotment involves syndicate sales in excess of the offering size,
     which creates a syndicate short position.

  .  Stabilizing transactions permit bids to purchase the underlying security
     so long as the stabilizing bids do not exceed a specified maximum.

  .  Syndicate covering transactions involve purchases of the common stock in
     the open market after the distribution has been completed in order to
     cover syndicate short positions.

  .  Penalty bids permit the representatives to reclaim a selling concession
     from a syndicate member when the common stock originally sold by the
     syndicate member is purchased in a syndicate covering transaction to
     cover syndicate short positions.

These stabilizing transactions, syndicate covering transactions and penalty
bids may cause the price of the common stock to be higher than it would
otherwise be in the absence of these transactions. These transactions may be
effected on The Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.

                                       54
<PAGE>

                          NOTICE TO CANADIAN RESIDENTS

Resale Restrictions

   The distribution of our common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are effected. Accordingly, any resale of the common
stock in Canada must be made in accordance with applicable securities laws
which will vary depending on the relevant jurisdiction, and which may require
resales to be made in accordance with available statutory exemptions or
pursuant to a discretionary exemption granted by the applicable Canadian
securities regulatory authority. Purchasers are advised to seek legal advice
prior to any resale of our common stock.

Representations of Purchasers

   Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to us and the dealer from whom the
purchase confirmation is received that (i) the purchaser is entitled under
applicable provincial securities laws to purchase the common stock without the
benefit of a prospectus qualified under the securities laws, (ii) where
required by law, the purchaser is purchasing as principal and not as agent, and
(iii) the purchaser has reviewed the text above under "Resale Restrictions."

Rights of Action (Ontario Purchasers)

   The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.

Enforcement of Legal Rights

   All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be
possible for Canadian purchasers to effect service of process within Canada
upon the issuer or such person. All or a substantial portion of the assets of
the issuer and these persons may be located outside of Canada and, as a result,
it may not be possible to satisfy a judgment against the issuer or these
persons in Canada or to enforce a judgment obtained in Canadian courts against
such issuer or persons outside of Canada.

Notice to British Columbia Residents

   A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that the purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by such purchaser in this offering. This report must be
in the form attached to British Columbia Securities Commission Blanket Order
BOR #95/17, a copy of which may be obtained from us. Only one report must be
filed in respect of common stock acquired on the same date and under the same
prospectus exemption.

Taxation and Eligibility for Investment

   Canadian purchasers of common stock should consult with their own legal and
tax advisors with respect to the tax consequences of an investment in the
common stock in their particular circumstances and with respect to the
eligibility of the common stock for investment by the purchaser under relevant
Canadian legislation.

                                       55
<PAGE>

                                 LEGAL MATTERS

   The validity of the common stock offered hereby will be passed upon for us
by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto,
California. Legal matters will be passed upon for the underwriters by Brobeck,
Phleger & Harrison LLP, San Francisco, California. As of the date of this
prospectus, WS Investment Company 97A, an investment partnership composed of
certain current and former members of and persons associated with Wilson
Sonsini Goodrich & Rosati, Professional Corporation, and a current member of
Wilson Sonsini Goodrich & Rosati, Professional Corporation, collectively own
150,000 shares of preferred stock.

                                    EXPERTS

   Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements and schedule at December 31, 1998 and 1999, and for the
period from February 21, 1997 (inception) through December 31, 1997, and for
the years ended December 31, 1998 and 1999. We have included our financial
statements and schedule in the prospectus and elsewhere in the registration
statement in reliance on Ernst & Young LLP's report, given on their authority
as experts in accounting and auditing.

                             ADDITIONAL INFORMATION

   We have filed with the Securities and Exchange Commission, Washington, D.C.,
a registration statement on Form S-1 under the Securities Act with respect to
the shares of common stock offered hereby. This prospectus does not contain all
the information set forth in the registration statement and the exhibits and
schedules thereto. For further information with respect to us and our common
stock, reference is made to the registration statement and to the exhibits and
schedules filed therewith. You may inspect a copy of the registration statement
without charge at the Public Reference Room of the SEC at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain
information about the operation of the Public Reference Room by calling the SEC
at 1-800-SEC-0330. You may obtain copies of all or any portion of the
registration statement from the Public Reference Room upon payment of
prescribed fees. The SEC maintains a Web site at http://www.sec.gov that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the SEC.

                                       56
<PAGE>

                        CENTILLIUM COMMUNICATIONS, INC.

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<S>                                                                        <C>
Report of Ernst & Young LLP, Independent Auditors.........................  F-2
Consolidated Balance Sheets...............................................  F-3
Consolidated Statements of Operations.....................................  F-4
Consolidated Statements of Stockholders' Equity...........................  F-5
Consolidated Statements of Cash Flows.....................................  F-8
Notes to Consolidated Financial Statements................................  F-9
</TABLE>

                                      F-1
<PAGE>

               REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Centillium Communications, Inc.

   We have audited the accompanying consolidated balance sheets of Centillium
Communications, Inc. as of December 31, 1998 and 1999, and the related
consolidated statements of operations, stockholders' equity, and cash flows
for the period from February 21, 1997 (inception) to December 31, 1997 and for
the years ended December 31, 1998 and 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

   We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

   In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Centillium
Communications, Inc. at December 31, 1998 and 1999, and the results of its
operations and its cash flows for the period from February 21, 1997
(inception) to December 31, 1997 and for the years ended December 31, 1998 and
1999, in conformity with accounting principles generally accepted in the
United States.

                                                              Ernst & Young LLP

San Jose, California
February 9, 2000

                                      F-2
<PAGE>

                        CENTILLIUM COMMUNICATIONS, INC.

                          CONSOLIDATED BALANCE SHEETS
                (In Thousands, Except Share and Per Share Data)

<TABLE>
<CAPTION>
                                                                           Pro Forma
                                                                         Stockholders'
                                             December 31,                  Equity at
                                           ------------------   March      March 31,
                                             1998      1999    31, 2000      2000
                                           --------  --------  --------  -------------
                                                                    (Unaudited)
                ASSETS
 <S>                                       <C>       <C>       <C>       <C>
 Current assets:
   Cash and cash equivalents..........     $  2,816  $  3,202  $ 11,663
   Short-term investments.............        5,110    25,111    11,695
   Accounts receivable, net of
    allowance for doubtful
    accounts of $150 at December 31,
    1999 and $200 at March 31, 2000...          --        915     2,632
   Inventories........................          --      1,211     1,207
   Other current assets...............          257       515     1,066
                                           --------  --------  --------
     Total current assets.............        8,183    30,954    28,263
 Property and equipment, net..........        3,784     4,531     5,317
 Other assets.........................           43       102       144
                                           --------  --------  --------
       Total assets...................     $ 12,010  $ 35,587  $ 33,724
                                           ========  ========  ========
<CAPTION>
 LIABILITIES AND STOCKHOLDERS' EQUITY

 <S>                                       <C>       <C>       <C>       <C>
 Current liabilities:
   Working capital line of credit.....     $    --   $  2,044  $  2,861
   Accounts payable...................          128       810     1,687
   Accrued payroll and related
    expenses..........................          388       900     1,002
   Accrued liabilities................          171       325       576
   Deferred revenue...................           75       122       125
   Capital lease obligations--current
    portion...........................          209       160       107
   Current portion of long-term debt..          526       550       555
                                           --------  --------  --------
       Total current liabilities......        1,497     4,911     6,913
 Capital lease obligations--long-term
  portion.............................          169       --        --
 Long-term debt.......................        1,066       549       417
 Other liabilities....................           19        72       144
 Commitments
 Stockholders' equity:
 Preferred Stock, $0.001 par value:
   Authorized shares--None actual and
    10,000,000 pro forma
 Issued and outstanding shares--None
  actual and pro forma                          --        --        --     $    --
 Convertible preferred stock, $0.001
  par value:
   Authorized shares 15,630,000 actual
    and none pro forma
   Issued and outstanding shares
    7,839,482 in 1998,
    15,450,236 in 1999 and at March
    31, 2000, and none pro forma
    (aggregate liquidation preference
    of $58,332 at December 31, 1999
    and March 31, 2000)...............            8        15        15         --
 Common stock, $0.001 par value:
   Authorized shares 32,000,000 actual
    and 100,000,000 pro forma.........
   Issued and outstanding shares
    8,505,600 in 1998, 10,318,841 in
    1999, 11,987,511 at March 31, 2000
    and 27,437,747 pro forma..........            9        10        12          27
 Additional paid-in capital...........       23,681    80,270   104,081     104,081
 Stockholder notes receivable.........          --       (430)     (440)       (440)
 Accumulated other comprehensive
  income..............................          --        (25)      (15)        (15)
 Deferred compensation................         (446)  (16,043)  (33,603)    (33,603)
 Accumulated deficit..................      (13,993)  (33,742)  (43,800)    (43,800)
                                           --------  --------  --------    --------
       Total stockholders' equity.....        9,259    30,055    26,250    $ 26,250
                                           --------  --------  --------    ========
       Total liabilities and
        stockholders' equity..........     $ 12,010  $ 35,587  $ 33,724
                                           ========  ========  ========
</TABLE>
                            See accompanying notes.

                                      F-3
<PAGE>

                        Centillium Communications, Inc.

                     Consolidated Statements of Operations
                     (In Thousands, Except Per Share Data)

<TABLE>
<CAPTION>
                           Period From
                           February 21,     Years Ended        Three Months
                         1997 (Inception)   December 31,     Ended March 31,
                         to December 31,  -----------------  -----------------
                               1997        1998      1999     1999      2000
                         ---------------- -------  --------  -------  --------
                                                               (unaudited)
<S>                      <C>              <C>      <C>       <C>      <C>
Product revenues........     $            $   --   $  2,509  $   --   $  4,723
Technology development
 revenues...............         300          752     1,235       50       --
                             -------      -------  --------  -------  --------
    Total revenues......         300          752     3,744       50     4,723
Cost of revenues........         --           --      3,118      --      3,483
                             -------      -------  --------  -------  --------
Gross profit............         300          752       626       50     1,240

Operating expenses:
  Research and
   development..........       1,844        7,913    13,357    2,306     6,017
  Sales and marketing...         341        1,466     3,823      700     2,773
  General and
   administrative.......         217        1,095     4,227      496     2,762
                             -------      -------  --------  -------  --------
    Total operating
     expenses...........       2,402       10,474    21,407    3,502    11,552
                             -------      -------  --------  -------  --------
Operating loss..........      (2,102)      (9,722)  (20,781)  (3,452)  (10,312)
Interest income.........         214          582     1,274       75       359
Interest expense........         (49)        (116)     (242)     (50)     (105)
                             -------      -------  --------  -------  --------
Net loss................      (1,937)      (9,256)  (19,749)  (3,427)  (10,058)
Deemed dividend on
 Series B convertible
 preferred stock........      (2,800)         --        --       --        --
                             -------      -------  --------  -------  --------
Net loss applicable to
 common stockholders....     $(4,737)     $(9,256) $(19,749) $(3,427) $(10,058)
                             =======      =======  ========  =======  ========
Historical basic and
 diluted net loss per
 share applicable to
 common stockholders....     $ (0.59)     $ (1.15) $  (2.23) $ (0.42) $  (1.03)
                             =======      =======  ========  =======  ========
Shares used to compute
 basic and diluted net
 loss per share
 applicable to common
 stockholders...........       8,000        8,056     8,842    8,227     9,808
                             =======      =======  ========  =======  ========
Pro forma basic and
 diluted net loss per
 share applicable to
 common stockholders....                           $  (0.91)          $  (0.40)
                                                   ========           ========
Shares used to compute
 pro forma basic and
 diluted net loss per
 share applicable to
 common stockholders....                             21,755             25,258
                                                   ========           ========
</TABLE>

                                      F-4
<PAGE>

                        Centillium Communications, Inc.

                Consolidated Statements of Stockholders' Equity
                       (In Thousands, Except Share Data)

<TABLE>
<CAPTION>
                    Convertible                                                                        Accumulated
                  Preferred Stock    Common Stock   Additional              Stockholders'                 Other         Total
                  ---------------- ----------------  Paid-In     Deferred       Notes     Accumulated Comprehensive Stockholders'
                   Shares   Amount  Shares   Amount  Capital   Compensation  Receivable     Deficit      Income        Equity
                  --------- ------ --------- ------ ---------- ------------ ------------- ----------- ------------- -------------
<S>               <C>       <C>    <C>       <C>    <C>        <C>          <C>           <C>         <C>           <C>
 Cash proceeds
  from issuance
  of common
  stock..........        --  $ --  8,000,000  $ 8    $    --      $ --          $  --       $    --       $ --         $     8
 Cash proceeds
  from issuance
  of Series A
  convertible
  preferred
  stock, net of
  issuance
  costs.......... 1,680,000     2        --    --        817        --            --            --          --             819
 Issuance of
  warrants to
  purchase Series
  B3 convertible
  preferred
  stock..........       --     --        --    --         24        --            --            --          --              24
 Issuance of
  Series B3
  convertible
  preferred stock
  and associated
  rights for cash
  and
  stockholders
  note
  receivable, net
  of issuance
  costs.......... 3,250,732     3        --    --     12,977        --           (728)          --          --          12,252
 Noncash deemed
  dividends to
  Series B1 and
  B2
  stockholders...       --     --        --    --      2,800        --            --         (2,800)        --             --
 Cash proceeds
  from exercise
  of right to
  purchase Series
  B2 convertible
  preferred
  stock, net of
  issuance
  costs..........   800,000     1        --    --      1,993        --            --            --          --           1,994
 Cash proceeds
  from exercise
  of right to
  purchase Series
  B1 convertible
  preferred
  stock, net of
  issuance
  costs..........   500,000     1        --    --        995        --            --            --          --             996
 Exercise of
  option to
  purchase common
  stock for
  stockholders'
  note
  receivable.....       --     --     45,000   --         18        --            (18)          --          --             --
 Noncash issuance
  of common stock
  for services
  and other......       --     --      5,000   --        --         --            --            --          --             --
 Net loss and
  comprehensive
  net loss.......       --     --        --    --        --                       --         (1,937)        --          (1,937)
                  ---------  ----  ---------  ---    -------      -----         -----       -------       ----         -------
Balance at
 December 31,
 1997............ 6,230,732     7  8,050,000    8     19,624        --           (746)       (4,737)        --          14,156
 Cash proceeds
  from payments
  on
  stockholders'
  notes
  receivable.....       --     --        --    --        --         --            746           --          --             746
 Noncash issuance
  of common stock
  for services
  and other......       --     --     29,850   --         15        --            --            --          --              15
 Cash proceeds
  from issuance
  of Series B3
  convertible
  preferred
  stock, net of
  issuance
  costs..........   108,750    --        --    --        434        --            --            --          --             434
</TABLE>

                                      F-5
<PAGE>

                        Centillium Communications, Inc.

          Consolidated Statements of Stockholders' Equity--Continued
                       (In Thousands, Except Share Data)

<TABLE>
<CAPTION>
                     Convertible                                                                          Accumulated
                   Preferred Stock    Common Stock     Additional              Stockholders'                 Other
                  ----------------- ------------------  Paid-In     Deferred       Notes     Accumulated Comprehensive
                    Shares   Amount   Shares    Amount  Capital   Compensation  Receivable     Deficit      Income
                  ---------- ------ ----------  ------ ---------- ------------ ------------- ----------- -------------
<S>               <C>        <C>    <C>         <C>    <C>        <C>          <C>           <C>         <C>
 Issuance of
 warrants to
 purchase Series
 B3 convertible
 preferred
 stock...........        --    --          --     --         11          --          --            --          --
 Cash proceeds
 from exercise of
 rights to
 purchase Series
 B1 convertible
 preferred stock,
 net of issuance
 costs...........  1,500,000    1          --     --      2,998          --          --            --          --
 Exercise of
 options to
 purchase common
 stock for cash..        --    --      425,750     1         84          --          --            --          --
 Deferred
 compensation
 related to stock
 option grants...        --    --          --     --        515         (515)        --            --          --
 Amortization of
 deferred
 compensation....        --    --          --     --        --            69         --            --          --
 Net loss and
 comprehensive
 net loss........        --    --          --     --        --                       --         (9,256)        --
                  ----------  ---   ----------   ---    -------     --------       -----      --------       ----
Balance at
December 31,
1998.............  7,839,482    8    8,505,600     9     23,681         (446)        --        (13,993)        --
 Noncash issuance
 of common stock
 for services and
 other...........        --    --       97,643    --        173          --          --            --          --
 Cash proceeds
 from issuance of
 Series C
 convertible
 preferred stock,
 net of issuance
 costs...........  7,610,754    7          --     --     35,568          --          --            --          --
 Exercise of
 options to
 purchase common
 stock for cash
 and notes.......        --    --    1,719,348     1      1,149          --         (430)          --          --
 Repurchase of
 unvested
 shares..........        --    --       (3,750)   --         (2)         --          --            --          --
 Deferred
 compensation
 related to stock
 option grants...        --    --          --     --     19,701      (19,701)        --            --          --
 Amortization of
 deferred
 compensation....        --    --          --     --        --         4,104         --            --          --
 Net loss........        --    --          --     --        --           --          --        (19,749)        --
 Unrealized loss
 on available
 for-sale
 investments.....        --    --          --     --        --           --          --            --         (25)
 Total
 comprehensive
 net loss........        --    --          --     --        --           --          --            --          --
                  ----------  ---   ----------   ---    -------     --------       -----      --------       ----
Balance at
December 31,
1999............. 15,450,236  $15   10,318,841   $10    $80,270     $(16,043)      $(430)     $(33,742)      $(25)
<CAPTION>
                      Total
                  Stockholders'
                     Equity
                  -------------
<S>               <C>
 Issuance of
 warrants to
 purchase Series
 B3 convertible
 preferred
 stock...........         11
 Cash proceeds
 from exercise of
 rights to
 purchase Series
 B1 convertible
 preferred stock,
 net of issuance
 costs...........      2,999
 Exercise of
 options to
 purchase common
 stock for cash..         85
 Deferred
 compensation
 related to stock
 option grants...        --
 Amortization of
 deferred
 compensation....         69
 Net loss and
 comprehensive
 net loss........     (9,256)
                  -------------
Balance at
December 31,
1998.............      9,259
 Noncash issuance
 of common stock
 for services and
 other...........        173
 Cash proceeds
 from issuance of
 Series C
 convertible
 preferred stock,
 net of issuance
 costs...........     35,575
 Exercise of
 options to
 purchase common
 stock for cash
 and notes.......        720
 Repurchase of
 unvested
 shares..........         (2)
 Deferred
 compensation
 related to stock
 option grants...        --
 Amortization of
 deferred
 compensation....      4,104
 Net loss........    (19,749)
 Unrealized loss
 on available
 for-sale
 investments.....        (25)
                  -------------
 Total
 comprehensive
 net loss........    (19,774)
                  -------------
Balance at
December 31,
1999.............    $30,055
</TABLE>

                                      F-6
<PAGE>

                        Centillium Communications, Inc.

          Consolidated Statements of Stockholders' Equity--Continued
                       (In Thousands, Except Share Data)

<TABLE>
<CAPTION>
                      Convertible                                                                          Accumulated
                    Preferred Stock    Common Stock     Additional              Stockholders'                 Other
                   ----------------- ------------------  Paid-In     Deferred       Notes     Accumulated Comprehensive
                     Shares   Amount   Shares    Amount  Capital   Compensation  Receivable     Deficit      Income
                   ---------- ------ ----------  ------ ---------- ------------ ------------- ----------- -------------
<S>                <C>        <C>    <C>         <C>    <C>        <C>          <C>           <C>         <C>
 Noncash issuance
 of common stock
 for services
 (unaudited).....         --   --           900   --            5         --          --            --         --
 Exercise of
 options to
 purchase common
 stock for cash
 and notes
 (unaudited).....         --   --     1,670,453     2       1,506         --          (10)          --         --
 Repurchase of
 unvested shares
 (unaudited).....         --   --        (2,683)  --           (1)        --          --            --         --
 Deferred
 compensation
 related to stock
 option grants
 (unaudited).....         --   --           --    --       22,301     (22,301)        --            --         --
 Amortization of
 deferred
 compensation
 (unaudited).....         --   --           --    --          --        4,741         --            --         --
 Net loss
 (unaudited).....         --   --           --    --          --          --          --        (10,058)       --
 Unrealized gain
 on available-
 for-sale
 investments
 (unaudited).....         --   --           --    --          --          --          --            --          10
Total
comprehensive net
loss
(unaudited)......         --   --           --    --          --          --          --            --         --
                   ----------  ---   ----------   ---    --------    --------       -----      --------       ----
Balance at March
31, 2000
(unaudited)......  15,450,236  $15   11,987,511   $12    $104,081    $(33,603)      $(440)     $(43,800)      $(15)
                   ==========  ===   ==========   ===    ========    ========       =====      ========       ====
<CAPTION>
                       Total
                   Stockholders'
                      Equity
                   -------------
<S>                <C>
 Noncash issuance
 of common stock
 for services
 (unaudited).....           5
 Exercise of
 options to
 purchase common
 stock for cash
 and notes
 (unaudited).....       1,498
 Repurchase of
 unvested shares
 (unaudited).....          (1)
 Deferred
 compensation
 related to stock
 option grants
 (unaudited).....         --
 Amortization of
 deferred
 compensation
 (unaudited).....       4,741
 Net loss
 (unaudited).....     (10,058)
 Unrealized gain
 on available-
 for-sale
 investments
 (unaudited).....          10
                   -------------
Total
comprehensive net
loss
(unaudited)......     (10,048)
                   -------------
Balance at March
31, 2000
(unaudited)......    $(26,250)
                   =============
</TABLE>

                                      F-7
<PAGE>

                        CENTILLIUM COMMUNICATIONS, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In Thousands)

<TABLE>
<CAPTION>
                                                                 Three Months
                             Period From      Years Ended           Ended
                          February 21, 1997   December 31,         March 31
                           (Inception) to   -----------------  -----------------
                          December 31, 1997  1998      1999     1999      2000
                          ----------------- -------  --------  -------  --------
                                                                 (unaudited)
<S>                       <C>               <C>      <C>       <C>      <C>
Operating activities
Net loss................       $(1,937)     $(9,256) $(19,749) $(3,427) $(10,058)
Adjustments to reconcile
 net loss to net cash
 used in operating
 activities:
  Depreciation and
   amortization
   expense..............            83        1,231     2,258      498       749
  Amortization of
   deferred
   compensation.........           --            69     4,104      127     4,741
  Amortization of
   warrants issued in
   conjunction with debt
   and other............             6            6        10        2         2
  Issuance of common
   stock for services
   and other............           --            15       173      --          5
  Changes in operating
   assets and
   liabilities:
   Accounts receivable..           --           --       (915)     --     (1,717)
   Inventories .........           --           --     (1,211)     --          4
   Other current
    assets..............          (352)          95      (258)     --       (551)
   Other assets.........          (136)          93       (59)       1       (42)
   Working capital line
    of credit...........           --           --      2,044      --        817
   Accounts payable.....           610         (482)      682      269       877
   Accrued payroll and
    related expenses....           187          201       512     (155)      102
   Deferred revenue.....           --            75        47       92         3
   Accrued liabilities..            62          109       154     (46)       251
   Other liabilities....           --            19        53        6        72
                               -------      -------  --------  -------  --------
Net cash used in
 operating activities...        (1,477)      (7,825)  (12,155)  (2,633)  (4,745)
Investing activities
Purchases of short-term
 investments............        (4,013)      (8,837)  (27,626)  (1,015)   (3,329)
Sales and maturities of
 short-term
 investments............           --         7,740     7,600    2,900    16,755
Purchases of property
 and equipment..........        (1,732)      (2,721)   (3,005)    (451)   (1,535)
                               -------      -------  --------  -------  --------
Net cash used in
 investing activities...        (5,745)      (3,818)  (23,031)   1,434    11,891
Financing activities
Principal payments on
 capital leases.........           (55)        (203)     (223)     (54)      (54)
Proceeds from borrowings
 under long-term debt
 obligations............           --         1,000       --       --        --
Principal payments on
 long-term debt
 obligations............           --          (234)     (498)    (122)    (128)
Proceeds from issuance
 of common stock, net of
 repurchases............             8           85       718       68     1,497
Proceeds from
 stockholders note
 receivable.............           --           746       --       --        --
Proceeds from issuance
 of note payable........           840          --        --       --        --
Proceeds from issuance
 of preferred stock.....        16,061        3,433    35,575      --        --
                               -------      -------  --------  -------  --------
Net cash provided (used)
 by financing
 activities.............        16,854        4,827    35,572     (108)    1,315
                               -------      -------  --------  -------  --------
Net increase (decrease)
 in cash and cash
 equivalents............         9,632       (6,816)      386   (1,307)    8,461
Cash and cash
 equivalents at
 beginning of period....           --         9,632     2,816    2,816     3,202
                               -------      -------  --------  -------  --------
Cash and cash
 equivalents at end of
 period.................       $ 9,632      $ 2,816  $  3,202  $ 1,509  $ 11,663
                               =======      =======  ========  =======  ========
Supplemental disclosures
 of cash flow
 information
Cash paid for interest..       $    19      $   111  $    244  $    50  $    105
Supplemental disclosures
 of non-cash
 transactions
Issuance of warrants in
 conjunction with debt
 and other..............       $    24      $    11  $    --       --   $    --
Property and equipment
 acquired under capital
 lease..................       $   557      $    88  $    --       --   $    --
Noncash deemed dividends
 to Series B
 stockholders...........       $ 2,800      $   --   $    --       --   $    --
Issuance of common stock
 for note receivable....       $   746      $   --   $    430      --   $     10
Deferred compensation
 related to stock option
 grants.................       $   --       $   515  $ 19,701  $   670  $ 22,301
</TABLE>

                            See accompanying notes.

                                      F-8
<PAGE>

                        CENTILLIUM COMMUNICATIONS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies

 Nature of Operations

   Centillium Communications, Inc. (Centillium or the Company) was incorporated
in California on February 21, 1997 for the purpose of developing, producing,
and marketing semiconductor devices for equipment manufacturers serving the
broadband communications markets. The Company has focused initially on
developing products designed for the digital subscriber line (DSL) central
office and customer premises market. In December 1999, the Company
reincorporated in Delaware. Share amounts in the accompanying financial
statements have been restated to retroactively reflect the impact of the
reincorporation.

   During the period from February 1997 through June 1999, Centillium was a
development stage company. Operating activities during this period were related
primarily to the design and development of our initial products, building our
corporate infrastructure, establishing relationships with customers and
suppliers, and raising capital. The Company began significant customer
shipments in the third quarter of 1999 and exited the development stage at that
time.

   Centillium has incurred significant losses since inception and, as of March
31, 2000, had an accumulated deficit of approximately $43,800,000 (unaudited)
including a net loss for the year ended December 31, 1999 of $19,749,000 and a
net loss for the three months ended March 31, 2000 of $10,058,000 (unaudited).

 Principles of Consolidation

   The consolidated financial statements include all the accounts of the
Company and those of its wholly-owned subsidiary. All significant intercompany
accounts and transaction have been eliminated.

 Interim Financial Information

   The financial information at March 31, 2000 and for the three months ended
March 31, 2000 and 1999 is unaudited, but includes all adjustments (consisting
of normal recurring adjustments) that Centillium considers necessary for a fair
presentation of its consolidated financial position at such date and its
consolidated operating results and cash flows for those periods. Operating
results for the three months ended March 31, 2000 are not necessarily
indicative of the results that may be expected for the entire year or any
future period.

 Use of Estimates

   The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

 Revenue Recognition

   Revenues related to product sales are generally recognized when the products
are shipped to the customer, title has transferred and no significant
obligations remain. In circumstances where the customer has delayed its
acceptance of our product, we defer recognition of the revenue until
acceptance. Generally, the Company's customers do not have rights to return,
however our products are warranted to be free from defect for a period of one
year. A provision is made for warranty returns as shipments are made. To date,
such returns have not been material.

   The Company has also performed research and product development work under
best efforts technology development agreements. Revenues under technology
development agreements are recognized when applicable

                                      F-9
<PAGE>

                        CENTILLIUM COMMUNICATIONS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

contractual milestones have been met, including deliverables, and in any case,
does not exceed of the amount that would be recognized using the percentage-of-
completion method. Due to technological risk factors, the costs of these
development agreements are expensed as incurred and were included in research
and development expenses in the accompanying statements of operations.

 Concentrations of Credit Risk

   Financial instruments that potentially subject the Company to significant
concentration of credit risk consist principally of cash, cash equivalents,
short-term investments, and accounts receivable. The Company places its short-
term investments in high-credit quality financial institutions. The Company is
exposed to credit risk in the event of default by these institutions to the
extent of the amount recorded on the balance sheet. Accounts receivable are
billed in U. S. currency derived from revenues earned from customers primarily
located in Japan and the United States. The Company performs ongoing credit
evaluations of its customers' financial condition and generally does not
require collateral, but obtains letters of credit or prepayments as deemed
necessary. The Company maintains reserves for potential credit losses, and
historically, such losses have been immaterial.

 Customer Concentrations

   The Company's customers, which account for more than 10% of revenues in each
respective year are as follows:

<TABLE>
<CAPTION>
                                  Period From      Years Ended
                               February 21, 1997  December 31,
                              (Inception) Through ---------------   Three Months Ended
                               December 31, 1997   1998     1999      March 31, 2000
                              ------------------- ------   ------   ------------------
                                                                       (unaudited)
     <S>                      <C>                 <C>      <C>      <C>
     Mitsubishi Electric.....          50%            60%       *            *
     NEC.....................          --             10%      21%           *
     Sumitomo Electric.......          50%            13%      34%          39%
     Sungmi Telecom
      Electronics............          --             15%       *            *
     Lucent Technologies.....          --             --       --           27%
     Copper Mountain
      Networks...............          --             --       --           12%
</TABLE>
- - - - - - ---------------------
* Represents less than 10% of revenues.

 Cash Equivalents and Short-Term Investments

   The Company invests its excess cash in money market accounts and debt
instruments and considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents. Cash
equivalents are recorded at cost, which approximates fair value.

   Investments with an original maturity at the time of purchase of over three
months are classified as short-term investments. Under the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," management
classifies investments as available-for-sale at the time of purchase and
periodically reevaluates such designation. At December 31, 1998 and 1999, all
of the Company's investments in debt securities were classified as available-
for-sale with changes in market value recorded as unrealized gains and losses
in accumulated other comprehensive income until their disposition. Realized
gains and losses and declines in value judged to be other than temporary on
available-for-sale securities are included in interest income. The cost of
securities sold is based on the specific-identification method.

                                      F-10
<PAGE>

                        CENTILLIUM COMMUNICATIONS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


 Inventories

   Inventory is stated at the lower of cost (first in, first out) or market.
The components of inventory are as follows (in thousands):

<TABLE>
<CAPTION>
                                                        December 31,
                                                        ------------  March 31,
                                                        1998   1999     2000
                                                        ----- ------ -----------
                                                                     (unaudited)
     <S>                                                <C>   <C>    <C>
     Inventories:
     Work-in-process................................... $ --  $  486      672
     Finished goods....................................   --     725      535
                                                        ----- ------   ------
                                                        $ --  $1,211   $1,207
                                                        ===== ======   ======
</TABLE>

 Property and Equipment

   Property and equipment are carried at cost less accumulated depreciation.
Property and equipment are depreciated for financial reporting purposes using
the straight-line method over the assets' estimated useful lives of three
years. Leasehold improvements are amortized using the straight-line method over
the shorter of the useful lives of the assets or the terms of the leases.

   Property and equipment are as follows (in thousands):

<TABLE>
<CAPTION>
                                                   December 31,
                                                  ----------------   March 31,
                                                   1998     1999       2000
                                                  -------  -------  -----------
                                                                    (unaudited)
   <S>                                            <C>      <C>      <C>
   Equipment and software........................ $ 4,882  $ 7,567    $ 8,904
   Furniture and fixtures........................     165      352        424
   Leasehold improvements........................      51      184        310
                                                  -------  -------    -------
                                                    5,098    8,103      9,638
   Accumulated depreciation and amortization.....  (1,314)  (3,572)    (4,321)
                                                  -------  -------    -------
   Property and equipment, net................... $ 3,784  $ 4,531    $ 5,317
                                                  =======  =======    =======
</TABLE>

 Development Costs

   In accordance with Financial Accounting Standards Board Statement No. 86,
"Accounting for Costs of Computer Software to be Sold, Leased or Otherwise
Marketed," costs incurred in the research and development of the software
embedded in our products are expensed as incurred until technological
feasibility has been established. The Company believes its current process for
developing software is essentially completed concurrently with the
establishment of technological feasibility which is evidenced by a working
model which includes the semiconductor device and embedded software;
accordingly, development costs incurred after the establishment of
technological feasibility have not been material and, therefore, have been
expensed.

 Advertising Costs

   The Company expenses advertising costs as incurred. Advertising expense was
not significant for the period from February 21, 1997 (inception) to December
31, 1997 or for the years ended December 31, 1998 and 1999.

 Comprehensive Net Loss

   During the year ended December 31, 1998, the Company adopted the Financial
Accounting Standard Board's Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" (FAS 130). FAS 130 establishes standards
for the reporting and display of comprehensive income and its

                                      F-11
<PAGE>

                        CENTILLIUM COMMUNICATIONS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

components in a full set of general purpose financial statements. The Company's
comprehensive net loss was the same as its net loss for the period from
February 21, 1997 (inception) to December 31, 1997 and for the year ended
December 31, 1998. Comprehensive loss for the year ended December 31, 1999
includes the net unrealized loss on available-for-sale investments.

 Net Loss Per Share

   Basic and diluted net loss per common share is presented in conformity with
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (FAS
128), for all periods presented. Pursuant to the Securities and Exchange
Commission Staff Accounting Bulletin No. 98, common stock and convertible
preferred stock issued or granted for nominal consideration prior to the
anticipated effective date of the Company's initial public offering must be
included in the calculation of basic and diluted net loss per common share as
if they had been outstanding for all periods presented.

   In accordance with FAS 128, basic and diluted net loss per share have been
computed using the weighted average number of shares of common stock
outstanding during the period, less shares subject to repurchase. Pro forma
basic and diluted net loss per share, as presented in the statements of
operations, have been computed as described above and also gives effect, under
Securities and Exchange Commission guidance, to the conversion of the
convertible preferred stock (using the if-converted method) from the original
date of issuance.

   The following table presents the computation of basic and diluted and pro
forma basic and diluted net loss per share (in thousands, except per share
amounts):

<TABLE>
<CAPTION>
                             Period From
                          February 21, 1997   Years Ended        Three Months
                             (Inception)      December 31,     Ended March 31,
                               Through      -----------------  -----------------
                          December 31, 1997  1998      1999     1999      2000
                          ----------------- -------  --------  -------  --------
                                                                 (unaudited)
<S>                       <C>               <C>      <C>       <C>      <C>
Net loss applicable to
 common stockholders....       $(4,737)     $(9,256) $(19,749) $(3,427) $(10,058)
                               =======      =======  ========  =======  ========
Basic and diluted:
Weighted average shares
 of common stock
 outstanding............         8,001        8,205     9,363    8,576    11,027
Less weighted average
 shares subject to
 repurchase(1)..........             1          149       521      349     1,219
                               -------      -------  --------  -------  --------
Weighted average shares
 used in computing basic
 and diluted, net loss
 per share applicable to
 common stockholders....         8,000        8,056     8,842    8,227     9,808
                               =======      =======  ========  =======  ========
Basic and diluted net
 loss per share
 applicable to common
 stockholders...........       $ (0.59)     $ (1.15) $  (2.23) $ (0.42) $  (1.03)
                               =======      =======  ========  =======  ========
Pro forma:
Shares used above.......                                8,842              9,808
Pro forma adjustment to
 reflect weighted
 average effect of the
 assumed conversion of
 convertible preferred
 stock..................                               12,913             15,450
                                                     --------           --------
Shares used in computing
 pro forma basic and
 diluted, net loss per
 share applicable to
 common stockholders....                               21,755             25,258
                                                     ========           ========
Pro forma basic and
 diluted net loss per
 share applicable to
 common stockholders....                             $  (0.91)          $  (0.40)
                                                     ========           ========
</TABLE>
- - - - - - ---------------------
(1) The weighted average period over which repurchase options lapse is
    approximately 3.9 years, 2.9 years and 2.5 years for the period from
    February 21, 1997 (inception) through December 31, 1997 and for the years
    ended December 31, 1998 and 1999, respectively.

                                      F-12
<PAGE>

                        CENTILLIUM COMMUNICATIONS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   The Company has excluded all outstanding warrants, stock options, and shares
subject to repurchase by the Company from the calculation of basic and diluted
net loss per share because these securities are antidilutive for all periods
presented. Options and warrants to purchase 1,774,000, 3,385,007, 3,417,007 and
2,858,590 shares of common stock have been excluded for the period from
February 21, 1997 (inception) through December 31, 1997, for the years ended
December 31, 1998 and 1999 and for the three month period ended March 31, 2000,
respectively.

 Business Segment Information

   Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" (FAS 131). FAS 131 superseded Statement of Financial
Accounting Standards No. 14 "Financial Reporting for Segments of a Business
Enterprise" (FAS 14). FAS 131 establishes standards for the way that public
business enterprises report on information about operating segments in annual
financial statements and interim financial reports. FAS 131 also establishes
standards for related disclosures about products and services, geographic
areas, and major customers.

 Unaudited Pro Forma Stockholders' Equity

   If the offering contemplated by the Company is consummated, each share of
convertible preferred stock outstanding will automatically be converted into
one share of common stock. Unaudited pro forma stockholders' equity at March
31, 2000, is adjusted for the assumed conversion of convertible preferred stock
based on the shares of convertible preferred stock outstanding at March 31,
2000 disclosed on the balance sheet, and the restatement of our certificate of
incorporation to reflect 100,000,000 authorized shares of common stock and
10,000,000 authorized shares of undesignated preferred stock.

   Unaudited basic and diluted pro forma net loss per share, as presented in
the consolidated statements of operations, has been computed using the weighted
average number of common shares outstanding, adjusted to include the pro forma
effects of the conversion of the preferred stock to common stock as if such
conversion had occurred on January 1, 1999 for the year ended December 31,
1999, or at the date of original issuance, if later.

 Stock-Based Compensation

   As described in Note 7, the Company has elected to account for its employee
stock plan in accordance with Accounting Principles Board opinion No. 25,
"Accounting For Stock Issued to Employees" (APB opinion No. 25 ), and to adopt
the disclosure-only provisions as required under statement of Financial
Accounting Standards No. 123, "Accounting For Stock-Based Compensation" (FAS
123).

   The Company accounts for stock issued to non-employees in accordance with
the provisions of FAS 123 and Emerging Issues Task Force Issue No. 96-18,
"Accounting for Equity Instruments That are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services." Direct grants of
shares of common stock are made to certain advisors and consultants to the
Company for past services with no vesting or future performance obligations.
The fair value of such grants is immediately charged to expense in accordance
with EITF 96-18.

 New Accounting Pronouncements

   In March 1998, the AICPA issued Statement of Position No. 98-1, "Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use" (SOP
98-1). SOP 98-1 requires entities to capitalize certain costs related to
internal-use software once certain criteria have been met. SOP 98-1 is
effective for years beginning after December 15, 1998. The Company adopted SOP
98-1 for the fiscal year ending December 31, 1999. The adoption of SOP 98-1 did
not have a material impact on the Company's financial position or results of
operations.

                                      F-13
<PAGE>

                        CENTILLIUM COMMUNICATIONS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   In April 1998, the AICPA issued Statement of Position No. 98-5, "Reporting
on the Costs of Start-Up Activities" (SOP 98-5). SOP 98-5 requires that all
start-up costs related to new operations must be expensed as incurred. In
addition, all start-up costs that were capitalized in the past must be written
off when SOP 98-5 is adopted. The Company implemented SOP 98-5 on January 1,
1999. The adoption of SOP 98-5 did not have a material impact on its financial
position or results of operations.

   In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (FAS 133). FAS 133 establishes accounting methods for
derivative financial instruments and hedging activities related to those
instruments as well as other hedging activities. The Company will be required
to implement FAS 133 for the fiscal year ending December 31, 2001. Because the
Company does not currently hold any derivative instruments and does not engage
in hedging activities, the Company does not expect that the adoption of FAS 133
will have a material impact on its financial position or results of operations.

 Reclassifications

   Certain prior year balances have been reclassified to conform to current
year presentation.

                                      F-14
<PAGE>

                        CENTILLIUM COMMUNICATIONS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


2. Cash Equivalents and Short-Term Investments

   All debt securities held by the Company as of December 31, 1998 and 1999 and
as of March 31, 2000, mature within one year. The estimated fair market values
of cash equivalents and short-term investments are based on quoted market
prices. Cash equivalents and short-term investments as of December 31, 1998 and
1999 and March 31, 2000 (unaudited) were as follows (in thousands):

<TABLE>
<CAPTION>
                                                  December 31, 1998
                                     -------------------------------------------
                                                 Gross      Gross     Estimated
                                     Amortized Unrealized Unrealized Fair Market
                                       Cost       Gain       Loss       Value
                                     --------- ---------- ---------- -----------
<S>                                  <C>       <C>        <C>        <C>
Cash equivalents:
  Money market funds................  $ 1,312    $ --       $ --       $ 1,312
  Corporate debt securities.........      500      --         --           500
                                      -------    -----      -----      -------
                                        1,812      --         --         1,812
                                      -------    -----      -----      -------
Short-term investments:
  Corporate debt securities.........    2,910      --         --         2,910
  Obligations of U.S. government and
   affiliated agencies..............    1,000      --         --         1,000
  Auction rate preferred stock and
   other............................    1,200      --         --         1,200
                                      -------    -----      -----      -------
                                        5,110      --         --         5,110
                                      -------    -----      -----      -------
    Total cash equivalents and
     short-term investments.........  $ 6,922    $ --       $ --       $ 6,922
                                      =======    =====      =====      =======
<CAPTION>
                                                  December 31, 1999
                                     -------------------------------------------
                                                 Gross      Gross     Estimated
                                     Amortized Unrealized Unrealized Fair Market
                                       Cost       Gain       Loss       Value
                                     --------- ---------- ---------- -----------
<S>                                  <C>       <C>        <C>        <C>
Cash equivalents:
  Money market funds................  $   970    $ --       $ --       $   970
                                      -------    -----      -----      -------
Short-term investments:
  Commercial paper..................    7,945      --          (4)       7,941
  Corporate debt securities.........   10,997      --         (11)      10,986
  Obligations of U.S. government and
   affiliated agencies..............    5,994      --         (10)       5,984
  Auction rate preferred stock and
   other............................      200      --         --           200
                                      -------    -----      -----      -------
                                       25,136      --         (25)      25,111
                                      -------    -----      -----      -------
    Total cash equivalents and
     short-term investments.........  $26,106    $ --       $ (25)     $26,081
                                      =======    =====      =====      =======
</TABLE>

<TABLE>
<CAPTION>
                                              March 31, 2000 (unaudited)
                                       -----------------------------------------
                                                                       Estimated
                                                   Gross      Gross      Fair
                                       Amortized Unrealized Unrealized  Market
                                         Cost       Gain       Loss      Value
                                       --------- ---------- ---------- ---------
<S>                                    <C>       <C>        <C>        <C>
Cash equivalents
  Money market funds..................  $ 8,217     $ --       $ --     $ 8,217
                                        -------     ----       ----     -------
Short-term investments
  Corporate debt securities...........    6,010       --        (11)      5,999
  Obligations of US government and
   affiliated agencies................    4,000       --         (4)      3,996
  Auction rate preferred stock and
   other..............................    1,700       --         --       1,700
                                        -------     ----       ----     -------
                                         11,710       --        (15)     11,695
                                        -------     ----       ----     -------
    Total cash equivalents and short-
     term investments.................  $19,927     $ --       $(15)    $19,912
                                        =======     ====       ====     =======
</TABLE>

                                      F-15
<PAGE>

                        CENTILLIUM COMMUNICATIONS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   Realized gains and losses are included in interest income and interest
expense, respectively, and were not significant for the period from February
21, 1997 (inception) to December 31, 1997 or for the years ended December 31,
1998 and 1999 or for the three month period ending March 31, 2000 (unaudited).

3. Working Capital Line of Credit

   The Company maintains a revolving credit agreement ("Credit Agreement") with
Mitsubishi International. The Credit Agreement is used to provide 90 day
extended credit terms to finance wafer inventory purchases. Borrowings of up to
$5,000,000 under the Credit Agreement are permitted. The interest rate under
the Agreement was based on the lender's internal interest rate, which was
required to be at least 1.00% below the prime rate on the date of invoice
(7.25% at December 31, 1999), generally thirty days after receipt of the
wafers. The Company also pays a commission of 2.00% on all purchases. The
Credit Agreement expires on January 31, 2001, subject to automatic extensions
thereafter from year to year unless either party gives a termination notice.
Under the terms of the Credit Agreement, Mitsubishi International maintains a
security interest in all inventory, cash and investments, and accounts and
notes receivable of the Company. The Credit Agreement contains standard events
of default which if triggered can permit Mitsubishi International to declare
all amounts outstanding under the Credit Agreement immediately due and payable.
Such events of default include failure to comply with the terms of the Credit
Agreement, bankruptcy and default and acceleration of any other indebtedness of
the Company. As of December 31, 1999 and March 31, 2000, $2,044,000 and
$2,861,000 (unaudited), respectively, was outstanding under the agreement.

4. Deferred Revenue

   During the year ended December 31, 1998, the Company entered into a
technology development agreement with a strategic partner that called for the
Company to receive cash payments from the strategic partner as the Company
reached certain milestones as defined under the technology development
agreement. At December 31, 1998 the Company recorded $75,000 of deferred
revenue related to milestones under the agreement that were pending acceptance
by the customer. Final acceptance of all milestones was received in 1999.

   At December 31, 1999, the Company recorded $122,000 in deferred revenue
which related to advance payments for unfilled orders. At March 31, 2000, the
Company recorded $125,000 (unaudited) in deferred revenue which related
primarily to unearned technology development fees.

5. Long-Term Debt Obligations

   In April 1998, the Company entered into an agreement with a bank and a
financial institution, which allows the Company to make multiple draws up to
$1,000,000 for the purchase of equipment. The facility bears interest at the
U.S. Treasury note yield plus 2.50% per annum (7.30% at December 31, 1999).
Draws under the facility are payable via principal and interest payments made
ratably over a forty-two month period from the initial draw date. The Company
had approximately $962,000 and $706,000 outstanding against the equipment
facility as of December 31, 1998 and 1999, respectively, and no remaining
amount was available as the aggregate draw under the facility had reached
$1,000,000 during the year ended 1999. At the end of the equipment facility's
term, the Company is obligated to make an additional payment of total facility
draws multiplied by 15% ($150,000 as of December 31, 1998 and 1999). The
Company is recording the additional payment as interest expense over the life
of the related long-term obligation. The Company has accrued approximately
$4,000 and $46,000 relating to this additional payment as of December 31, 1998
and 1999, respectively.

                                      F-16
<PAGE>

                        CENTILLIUM COMMUNICATIONS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   In conjunction with the equipment facility described above, the Company
issued a warrant to the bank and to the financial institution to purchase 1,800
and 9,450 shares, respectively, of the Company's Series B3 convertible
preferred stock at an exercise price of $4.00 per share. The warrants are
immediately exercisable and will expire at the later of 10 years after the date
of grant or five years after the closing of the Company's initial public
offering. The fair value is not material for reporting purposes.

   In September 1997, the Company negotiated a $1,000,000 term loan with a bank
to finance equipment purchases. The term loan bears interest at the bank's
prime rate plus 0.25% per annum (8.75% at December 31, 1999). The note is
payable via monthly interest payments until April 1998 at which time the
Company began making thirty-six equal monthly payments of principal and
interest. As of December 31, 1998 and 1999, the Company had approximately
$626,000 and $347,000 outstanding against the term loan, respectively.

   In conjunction with the term loan described above, the Company issued a
warrant for the purchase of 5,000 shares of the Company's Series B3 convertible
preferred stock at an exercise price of $4.00 per share. The warrant is
immediately exercisable and will expire after September 25, 2002. The fair
value is not material for reporting purposes.

   Outstanding borrowings under the long-term debt obligations are secured by
all of the Company's assets. The long-term debt obligations contain affirmative
and negative covenants and will, among other things, limit the Company's
ability to incur additional debt, pay cash dividends, or purchase or sell
certain assets. The obligations also require the Company to restrict certain
acquisitions, mergers, consolidations, or similar transactions.

   Maturities under the Company's long-term debt obligations at December 31,
1999 are as follows (in thousands):

<TABLE>
     <S>                                                                    <C>
     2000.................................................................. $550
     2001.................................................................. $409
     2002.................................................................. $140
</TABLE>

6. Commitments

   The Company leases its primary facility under an operating lease that
expires in April 2004. Additionally, the Company leases certain software under
an operating lease that expires in September 2001. Rental expense was
approximately $57,000 for the period from February 21, 1997 (inception) to
December 31, 1997 and $341,000 and $642,000 for the years ended December 31,
1998 and 1999.

   The Company leases certain equipment under a non-cancelable capital lease
agreement. Equipment under the agreement that was included in property and
equipment was approximately $644,000 and $636,000 at December 31, 1998 and
1999, respectively. The related accumulated amortization was approximately
$227,000 and $440,000 at December 31, 1998 and 1999, respectively. Amortization
expense related to assets under capital lease is included with depreciation
expense. In addition, the related equipment secures the capital lease, and the
Company is required to maintain liability and property damage insurance.

   In July 1997, the Company issued a warrant in conjunction with the capital
lease agreement mentioned above. The warrant is immediately exercisable and
allows the holder to purchase 10,500 shares of the Company's Series B3
convertible preferred stock at an exercise price of $4.00 per share. The
warrant expires after June 30, 2004. The fair value assigned to the warrant is
not material for financial reporting purposes.

                                      F-17
<PAGE>

                        CENTILLIUM COMMUNICATIONS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   Future minimum lease payments under the Company's operating leases and
capital lease at December 31, 1999 are approximately as follows (in thousands):

<TABLE>
<CAPTION>
                                                               Operating Capital
                                                                 Lease    Lease
                                                               --------- -------
   <S>                                                         <C>       <C>
   2000.......................................................  $1,079    $165
   2001.......................................................   1,236     --
   2002.......................................................     960     --
   2003.......................................................   1,008     --
   2004.......................................................     437     --
                                                                ------    ----
   Total minimum payments.....................................  $4,720     165
                                                                ======
   Less amount representing interest..........................              (5)
                                                                          ----
   Total principal balance of capital lease obligation........            $160
                                                                          ====
</TABLE>

   The Company does not own or operate a fabrication facility and substantially
all of its wafer requirements are currently supplied by foundries located in
Asia. The Company's purchase obligations to these foundries are based on wafer
supply agreements or noncancelable purchase orders. As of December 31, 1999,
the Company's noncancelable purchase obligation is $706,000.

7. Stockholders' Equity

 Convertible Preferred Stock

   Series A, B1, B2, B3, and C convertible preferred stockholders generally
have the same voting rights as common stockholders and will generally vote with
common stockholders as a single class except when electing members of the
Company's Board of Directors.

   When electing directors, the holders of shares of Series B convertible
preferred stock, voting as a class, are entitled to elect two directors; the
holders of common stock, voting as a class, shall be entitled to elect
two directors; and the holders of all classes of capital stock, voting as a
single class (on an as-converted to common stock basis), shall be entitled to
elect any remaining directors.

   In the event of any voluntary or involuntary liquidation of the Company,
Series A, B1, B2, B3, and C stockholders are entitled to a per share
liquidation preference of $0.50, $2.00, $2.50, $4.00, and $5.00, respectively,
plus accrued dividends, if any.

   The holders of Series A, B1, B2, B3, and C convertible preferred shares are
entitled to noncumulative cash dividends of $0.04, $0.16, $0.20, $0.32, and
$0.40 per share, respectively, when and if declared by the Board of Directors.
No cash dividends have been declared through December 31, 1999. The following
is a summary of outstanding convertible preferred shares at December 31, 1999
(excludes outstanding Series B3 convertible preferred stock warrants):

<TABLE>
<CAPTION>
                                                  Convertible Preferred Shares
                                                  -----------------------------
                                                   Authorized     Outstanding
                                                  -------------- --------------
  <S>                                             <C>            <C>
  Series A.......................................      1,680,000      1,680,000
  Series B1......................................      2,000,000      2,000,000
  Series B2......................................        800,000        800,000
  Series B3......................................      3,500,000      3,359,482
  Series C.......................................      7,650,000      7,610,754
                                                  -------------- --------------
                                                      15,630,000     15,450,236
                                                  ============== ==============
</TABLE>

                                      F-18
<PAGE>

                        CENTILLIUM COMMUNICATIONS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   Each convertible preferred share is convertible at the option of the holder
into one share of common stock, subject to adjustments for future dilution. The
convertible preferred shares automatically convert into common stock at the
then applicable conversion rate upon the earlier of (a) the underwritten public
offering of the Company's common stock at an offering price of at least $8.00
per share of common stock with gross proceeds not less than $25,000,000 or (b)
the date on which the Company obtains the consent of at least two-thirds of the
then outstanding shares of Series A, B1, B2, B3, and C stockholders. The
Company has fully reserved shares of common stock for issuance upon the
conversion of Series A, B1, B2, B3, and C convertible preferred stock.

 Convertible Preferred Stock Rights

   In connection with Series B3 convertible preferred stock financings in July
and September 1997, the Company issued rights to certain stockholders which
provided for the purchase of 2,000,000 shares of Series B1 convertible
preferred stock at $2.00 per share and 800,000 shares of Series B2 convertible
preferred stock at $2.50 per share. The rights were immediately exercisable and
expired approximately one year after their initial grant. The Company recorded
noncash deemed dividends of $2,800,000 for the period from February 21, 1997
(inception) to December 31, 1997, representing the fair value of the rights
issued.

 Common Stock Reserved

   Common stock reserved is as follows at December 31, 1999:

<TABLE>
     <S>                                                              <C>
     Common stock options............................................  3,390,257
     Series B3 convertible preferred stock warrants..................     26,750
     Convertible preferred stock..................................... 15,450,236
                                                                      ----------
                                                                      18,867,243
                                                                      ==========
</TABLE>

   In March 1997, the Board of Directors approved a stock option plan that
authorized the grant of options to purchase up to 2,000,000 shares of the
Company's common stock. During the years ended December 31, 1998 and 1999
respectively, the Company's Board of Directors authorized an additional
3,430,257 shares and 1,500,000 shares of the Company's common stock for the
stock option plan. The plan is administered by the Board of Directors and
provides for incentive stock options or nonqualified stock options to be issued
to employees, directors, and consultants of the Company. Prices for incentive
stock options may not be less than the fair value of the common stock at the
date of grant. Prices for nonqualified stock options may not be less than 85%
of the fair value of the common stock at the date of grant. Options are
immediately exercisable and generally vest over a period of four years from the
date of grant. Any unvested stock issued is subject to repurchase by the
Company at the original issuance price upon termination of the option holder's
employment. Unexercised options expire ten years after the date of grant.

 Deferred Compensation

   During the years ended December 31, 1998 and 1999, the Company recorded
deferred compensation of approximately $515,000 and $19,701,000, respectively.
This deferred compensation represents the difference between the grant price
and the deemed fair value for financial statement reporting purposes of the
Company's common stock options granted during these periods. Deferred
compensation expense is being amortized using the graded vesting method, in
accordance with FAS 123 and FAS Interpretation No. 28, over the vesting period
of each respective option, generally four years. Under the graded vesting
method, each option grant is separated into portions based on their vesting
terms which results in acceleration of amortization expense for the overall
award. The accelerated amortization pattern results in expensing approximately
59% of the total award in year 1, 25% in year 2, 12% in year 3 and 4% in year
4.

                                      F-19
<PAGE>

                        CENTILLIUM COMMUNICATIONS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   Deferred compensation expense was allocated among the associated expense
categories as follows (in thousands):

<TABLE>
<CAPTION>
                                                       Years Ended  Three Months
                                                       December 31,    Ended
                                                       ------------   March 31
                                                       1998   1999     2000,
                                                       ----- ------ ------------
                                                                    (unaudited)
<S>                                                    <C>   <C>    <C>
Cost of sales......................................... $ --  $  134    $  218
Research and development..............................    29  1,749     1,941
Sales and marketing...................................     5    821     1,024
General and administrative............................    35  1,400     1,558
                                                       ----- ------    ------
                                                       $  69 $4,104    $4,741
                                                       ===== ======    ======
</TABLE>

   The following is a summary of additional information with respect to the
stock option plan:

<TABLE>
<CAPTION>
                                                    Options Outstanding and
                                                          Exercisable
                                                  ----------------------------
                                       Options      Number        Weighted
                                      Available       of      Average Exercise
                                      for Grant     Shares         Price
                                      ----------  ----------  ----------------
<S>                                   <C>         <C>         <C>
Options authorized...................  2,000,000         --        $ --
Options granted...................... (1,803,500)  1,803,500       $0.25
Options exercised....................        --      (45,000)      $0.40
                                      ----------  ----------       -----
Balance at December 31, 1997.........    196,500   1,758,500       $0.25
Options authorized...................  3,430,257         --        $ --
Options granted...................... (2,166,757)  2,166,757       $0.40
Options exercised....................        --     (425,750)      $0.19
Options canceled.....................    141,250    (141,250)      $0.35
                                      ----------  ----------       -----
Balance at December 31, 1998.........  1,601,250   3,358,257       $0.35
Options authorized...................  1,500,000         --        $ --
Options granted...................... (2,106,600)  2,106,600       $1.80
Options exercised....................        --   (1,719,348)      $0.67
Options available due to repurchase
 of unvested shares..................      3,750         --        $0.40
Options canceled.....................    355,252    (355,252)      $0.30
                                      ----------  ----------       -----
Balance at December 31, 1999.........  1,353,652   3,390,257       $1.09
Options granted (unaudited).......... (1,381,500)  1,381,500       $5.62
Options exercised (unaudited)........        --   (1,670,453)      $0.90
Options available due to repurchase
 of unvested shares (unaudited)......      2,683         --        $0.40
Options canceled (unaudited).........    269,464    (269,464)      $0.79
                                      ----------  ----------       -----
Balance at March 31, 2000
 (unaudited).........................    244,299   2,831,840       $3.44
                                      ==========  ==========       =====
</TABLE>

                                      F-20
<PAGE>

                        CENTILLIUM COMMUNICATIONS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   In addition, the following table summarizes information about stock options
that were outstanding and exercisable at December 31, 1999:

<TABLE>
<CAPTION>
                                          Options Outstanding and Exercisable
                                       -----------------------------------------
                                        Number      Weighted
      Range of                            of        Average     Weighted Average
   Exercise Prices                      Shares   Exercise Price Contractual Life
   ---------------                     --------- -------------- ----------------
   <S>                                 <C>       <C>            <C>
   $0.05-$0.60........................ 1,990,407     $0.36            8.22
   $1.00-$1.60........................   639,250     $1.49            9.48
   $1.80-$3.00........................   760,600     $2.66            9.78
                                       ---------
                                       3,390,257     $1.09            8.81
                                       =========
</TABLE>

   The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB Opinion No. 25), and
related interpretations in accounting for its employee stock options because,
as discussed below, the alternative fair value accounting provided for under
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" (FAS 123), requires use of option valuation models that
were not developed for use in valuing employee stock options. Under APB Opinion
No. 25, when the exercise price of the Company's employee stock options equals
the market price of the underlying stock on the date of grant, no compensation
expense is recognized.


   The option valuation models used to fair value options under FAS 123 were
developed for use in estimating the fair value of traded options that have no
vesting restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions, including the
expected life of the option. Because the Company's employee stock options have
characteristics significantly different from those of traded options and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.

   Pro forma information regarding net loss is required by FAS 123, which also
requires that the information be determined as if the Company has accounted for
its employee stock options granted during the period from February 21, 1997
(inception) to December 31, 1997 and the years ended December 31, 1998 and 1999
under the fair value method of FAS 123. The fair value for these options was
estimated at the date of grant using the minimum value method with the
following weighted average assumptions: weighted average risk-free interest
rates of 6.02%, 5.14%, and 5.50% for the period from February 21, 1997
(inception) to December 31, 1997 and the years ended December 31, 1998 and
1999, respectively; no dividend yields or volatility factors of the expected
market price of the Company's common stock; a weighted average expected life of
the option of five years for the period from February 21, 1997 (inception) to
December 31, 1997 and for the year ended December 31, 1998; and a weighted
average expected life of the option of four years for the year ended December
31, 1999.

                                      F-21
<PAGE>

                        CENTILLIUM COMMUNICATIONS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   For purposes of FAS 123 pro forma disclosures, the estimated fair value of
the options is amortized to expense over the options' vesting period. Had
compensation expense for the Company's stock option plan been determined on the
fair value at the grant dates for awards under the plan consistent with the
method of FAS 123, the Company's net loss would have been increased to the
following approximate FAS 123 pro forma amounts:

<TABLE>
<CAPTION>
                                              Period From      Years Ended
                                           February 21, 1997   December 31,
                                            (Inception) to   -----------------
                                           January 31, 1997   1998      1999
                                           ----------------- -------  --------
<S>                                        <C>               <C>      <C>
FAS 123 Pro forma net loss applicable to
 common stockholders......................      $(4,747)     $(9,415) $(20,075)
FAS 123 Pro forma basic and diluted net
 loss per share applicable to
 common shareholders......................      $ (0.59)     $ (1.17) $  (2.27)
</TABLE>

   The options' weighted average grant date fair value, which is the value
assigned to the options under FAS 123, was approximately $0.05 for the period
from February 21, 1997 (inception) to December 31, 1997 and $0.24 and $0.36 for
the years ended December 31, 1998 and 1999, respectively.

   The pro forma impact of options on the net losses for the period from
February 21, 1997 (inception) to December 31, 1997 and the years ended December
31, 1998 and 1999 is not representative of the effects on net income (loss) for
future years, as future years will include the effects of options vesting as
well as the impact of multiple years of stock option grants. The full effect of
FAS 123 will not be fully reflected until fiscal 2001.

 Stockholders' Notes Receivable

   In November 1999, the Company issued 215,000 shares of common stock in
connection with the exercise of an employee stock option at an exercise price
of $2.00 per share in return for a full recourse note receivable for $430,000.
The note bears interest at 6.00% per annum and is due October 2004. Under the
terms of the employee's employment agreement, payment may be required earlier
in connection with certain events including an initial public offering by the
Company or termination of the employee.

8. Income Taxes

   Due to operating losses and the inability to recognize the benefits
therefrom, there is no provision for income taxes for the period from February
21, 1997 (inception) to December 31, 1997 and for the years ended December 31,
1998 and 1999.

   The difference between the provision for income taxes and the amount
computed by applying the federal statutory income tax rate of 34% to income
before taxes is explained as follows:

<TABLE>
<CAPTION>
                                                     Inception
                                                      to 1997   1998    1999
                                                     --------- ------  ------
<S>                                                  <C>       <C>     <C>
Tax (benefit) at federal statutory rate.............   (659)   (3,147) (6,715)
Loss for which no tax benefit is currently
 recognizable.......................................    659     3,147   6,715
                                                       ----    ------  ------
  Total tax provision...............................    -0-       -0-     -0-
                                                       ====    ======  ======
</TABLE>

   As of December 31, 1999, the Company has $23,000,000 of net operating loss
carryforwards for federal and state purposes. The Company also has federal and
state research and development tax credit carryforwards of approximately
$900,000 and $600,000, respectively. The net operating losses and credit carry
forwards will expire at various dates beginning in the years 2005 through 2019,
if not utilized.

                                      F-22
<PAGE>

                        CENTILLIUM COMMUNICATIONS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   Utilization of the net operating losses may be subject to a substantial
annual limitation due to the ownership change limitations provided by the
Internal Revenue Code of 1986, as amended, and similar state provisions. The
annual limitation may result in the expiration of net operating losses and tax
credit carry forwards before full utilization.

   Deferred taxes reflect the net tax effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Significant components of the
Company's deferred taxes consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                Period From
                                                February 21,
                                                    1997
                                                (Inception)
                                                  Through      Years Ended
                                                December 31,   December 31,
                                                ------------ -----------------
                                                    1997      1998      1999
                                                ------------ -------  --------
<S>                                             <C>          <C>      <C>
Deferred tax liabilities:
 Other.........................................   $  (217)   $  (182) $   (197)
Deferred tax assets:
 Net operating losses..........................       950      4,310     9,100
 Tax credit carryforwards......................       240        950     1,296
 Reserves and accruals.........................        37        142     2,173
                                                  -------    -------  --------
Total deferred tax assets......................     1,227      5,402    12,569
 Valuation allowance...........................    (1,010)    (5,220)  (12,372)
                                                  -------    -------  --------
Net deferred tax assets........................       217        182       197
Net deferred taxes.............................   $    --    $    --  $     --
                                                  =======    =======  ========
</TABLE>

   Financial Accounting Standards Board Statement No. 109 provides for the
recognition of deferred tax assets if realization of such assets is more likely
than not. Based upon the weight of available evidence, which includes the
Company's historical operating performance and the reported cumulative net
losses to date, the Company has provided a full valuation allowance against its
deferred tax assets.

   The valuation allowance increased by approximately $1,010,000, $4,210,000
and $7,152,000 for the period from February 21, 1997 (inception) through
December 31, 1997 and for the years ended December 31, 1998 and 1999,
respectively. The increase in the valuation allowance for all periods presented
is due to the requirement to provide a full valuation allowance against the
increasing deferred tax assets.

9. Business Segment Information

   The Company operates in one business segment, the sale of products for the
DSL market, which it sells primarily to original equipment manufacturers and
companies in the communications industries.

   The Chief Executive Officer has been identified as the Chief Operating
Decision Maker (CODM) because he has final authority over resource allocation
decisions and performance assessment. The CODM does not receive discrete
financial information about the individual components.

                                      F-23
<PAGE>

                        CENTILLIUM COMMUNICATIONS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   The Company's customers, who account for more than 10% of revenues in each
respective period, are as follows:

<TABLE>
<CAPTION>
                                      Period From
                                      February 21,
                                          1997                          Three
                                      (Inception)   Years Ended        Months
                                        Through    December 31,         Ended
                                      December 31, ---------------    March 31,
                                          1997      1998     1999       2000
                                      ------------ ------   ------   -----------
                                                                     (unaudited)
   <S>                                <C>          <C>      <C>      <C>
   Mitsubishi Electric...............      50%         60%       *        *
   NEC...............................      --          10%      21%       *
   Sumitomo Electric.................      50%         13%      34%       39%
   Sungmi Telecom Electronics........      --          15%       *        *
   Lucent Technologies...............      --          --       --        27%
   Copper Mountain...................      --          --        *        12%
</TABLE>
   * Represents less than 10% of revenues.

   Revenues by geographic region were as follows (in thousands):

<TABLE>
<CAPTION>
                                         Period From
                                         February 21,                   Three
                                             1997       Years Ended    Months
                                        (Inception) to  December 31,    Ended
                                         December 31,  -------------  March 31,
                                             1997      1998   1999      2000
                                        -------------- ------------- -----------
                                                                     (unaudited)
   <S>                                  <C>            <C>   <C>     <C>
   Revenues:
   United States.......................      $ --      $  -- $   686   $2,164
   Asia................................       300        752   3,055    2,420
   Other...............................        --         --       3      139
                                             ----      ----- -------   ------
   Total...............................      $300      $ 752 $ 3,744   $4,723
                                             ====      ===== =======   ======
</TABLE>

10. 401(k) Profit Sharing Plan and Trust

   The Company has adopted a 401(k) Profit Sharing Plan and Trust that allows
eligible employees to make contributions subject to certain limitations. The
Company may make discretionary contributions based on profitability as
determined by the Board of Directors. There was no amount contributed by the
Company to the plan and for the period from February 21, 1997 (inception) to
December 31, 1997 and the years ended December 31, 1998 and 1999.

11. Related Party Transactions

   During the period from February 21, 1997 (inception) to December 31, 1997,
the Company recognized revenue of $300,000 in connection with two separate
technology development agreements with two separate Series B3 convertible
preferred stockholders. There were no amounts due or due from the Series B3
convertible preferred shareholders at December 31, 1997. During the year ended
December 31, 1998 and 1999, the Series B3 convertible preferred stockholders'
ownership interests were diluted as a result of subsequent Company financings
and are no longer considered related parties.

                                      F-24
<PAGE>

                        CENTILLIUM COMMUNICATIONS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


12. Subsequent Events

 Initial Public Offering

   In February 2000, the Board of Directors approved the filing of a
Registration Statement with the Securities and Exchange Commission permitting
the Company to sell common stock to the public. Upon completion of the initial
public offering, the Company's Certificate of Incorporation will be amended to
authorize 100,000,000 shares of common stock and 10,000,000 shares of preferred
stock.

 2000 Employee Stock Purchase Plan

   In February 2000, the Board of Directors approved the 2000 Employee Stock
Purchase Plan (the Purchase Plan). A total of 500,000 shares of common stock
has been reserved for issuance under the Purchase Plan. In addition, the
Purchase Plan provides for automatic annual increases on the first day of each
of the Company's fiscal years beginning on January 1, 2001 equal to the lesser
of 400,000 shares or 1% of the Company's outstanding common stock on the date
of the annual increase, or a lesser number of shares determined by the Board of
Directors. The plan was approved by the stockholders in April 2000.

 Officer Resignation

   The Company's former Chief Executive Officer resigned from his position as
Chief Executive Officer in January 2000. In connection with his resignation,
the Company entered into an Agreement and Mutual Release on February 2, 2000.
Under the terms of the agreement, his employment will terminate on March 31,
2000. As of such termination date, approximately 211,000 options with an
exercise price of $0.40 per share will accelerate and be fully vested in
accordance with his original employment agreement. Additionally, the Company
will pay severance totalling $225,000.

 1997 Stock Plan

   In April 2000, the Board of Directors and stockholders approved an increase
in the number of shares reserved for issuance under the 1997 Stock Plan by
5,569,743 shares. In addition, the Board of Directors and stockholders approved
an automatic increase in the number of shares reserved under the Plan on the
first day of the Company's fiscal year beginning on January 1, 2001 equal to 6%
of the Company's outstanding common stock on the date of the annual increase.

                                      F-25
<PAGE>



                               [Centillium logo]
<PAGE>

                                    PART II

                     INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13. Other Expenses of Issuance and Distribution

   The following table sets forth the costs and expenses other than
underwriting discounts and commissions, payable by Centillium Communications,
Inc. in connection with the sale of common stock being registered. All amounts
are estimates except the SEC registration fee and the NASD filing fee.

<TABLE>
   <S>                                                               <C>
   SEC registration fee............................................. $   29,146
   NASD filing fee..................................................     11,540
   Nasdaq National Market listing fee...............................    100,000
   Printing and engraving costs.....................................    200,000
   Legal fees and expenses..........................................    400,000
   Accounting fees and expenses.....................................    400,000
   Blue Sky fees and expenses.......................................      3,000
   Transfer Agent and Registrar fees................................     20,000
   Miscellaneous expenses...........................................     86,314
                                                                     ----------
     Total.......................................................... $1,250,000
                                                                     ==========
</TABLE>

Item 14. Indemnification of Directors and Officers

   Section 145 of the Delaware General Corporation Law permits a corporation to
include in its charter documents, and in agreements between the corporation and
its directors and officers, provisions expanding the scope of indemnification
beyond that specifically provided by the current law.

   Article 13 of our Amended and Restated Certificate of Incorporation provides
for the indemnification of directors to the fullest extent permissible under
Delaware law.

   Article 12 of our Amended and Restated Bylaws provides for the
indemnification of officers, directors and third parties acting on behalf of
the Registrant if such person acted in good faith and in a manner reasonably
believed to be in and not opposed to our best interest, and, with respect to
any criminal action or proceeding, the indemnified party had no reason to
believe his or her conduct was unlawful.

   We have entered into indemnification agreements with its directors and
executive officers, in addition to indemnification provided for in our Amended
and Restated Bylaws, and intends to enter into indemnification agreements with
any new directors and executive officers in the future.

Item 15. Recent Sales of Unregistered Securities

   During the last three years, we have sold unregistered securities to a
limited number of persons as described below:

  .  In April 1997, we sold in the aggregate 1,680,000 shares of unregistered
     Series A Preferred Stock at a price per share of $0.50 to certain
     investors for aggregate cash consideration of $840,000.

  .  In September 1997 and June 1998, we sold in the aggregate 2,000,000
     shares of unregistered Series B1 Preferred Stock at a price per share of
     $2.00 to certain investors for aggregate cash consideration of
     $4,000,000.

  .  In July 1997, we sold in the aggregate 800,000 shares of unregistered
     Series B2 Preferred Stock at a price per share of $2.50 to certain
     investors for aggregate cash consideration of $2,000,000.

  .  In July 1997, September 1997, October 1997 and April 1998, we sold in
     the aggregate 3,359,482 shares of unregistered Series B3 Preferred Stock
     at a price per share of $4.00 to certain investors for aggregate cash
     consideration of $13,437,928.

                                      II-1
<PAGE>

  .  In April 1999, we sold in the aggregate 7,610,754 shares of unregistered
     Series C Preferred Stock at a price per share of $5.00 to certain
     investors for aggregate cash consideration of $38,053,770.

  .  In May 1997 we issued a warrant to Lighthouse Capital Partners II, L.P.
     for 10,500 shares of Series B3 preferred stock at an exercise price of
     $4.00 per share;

  .  In September 1997 we issued a warrant to Silicon Valley Bank for 5,000
     shares of Series B3 preferred stock at an exercise price of $4.00 per
     share;

  .  In April 1998 we issued a warrant to MMC/GATX Partnership No. 1 for
     9,450 shares of Series B3 preferred stock at an exercise price of $4.00
     per share; and

  .  In April 1998 we issued a warrant to Silicon Valley Bank for 1,800
     shares of Series B3 preferred stock at an exercise price of $4.00 per
     share.

   We relied upon Section 4(2) of the Securities Act in each of the private
placement transactions listed above. We determined, based on information
received from the investors, including questionnaires and representations
contained in the purchase agreements, that each investor was either an
accredited investor or had such knowledge and experience in financial matters
such that he or she was capable of evaluating the merits and risks of the
investments. All recipients either received adequate information about
Centillium or had access, through employment or other relationships, to such
information. The recipients of securities in each transaction represented their
intention to acquire the securities for investment only and not with a view to
or for sale in connection with any distribution thereof and appropriate legends
were affixed to the share certificates and other instruments issued in such
transactions.

                                      II-2
<PAGE>

Item 16. Exhibits and Financial Statement Schedules

  (a) Exhibits

<TABLE>
<CAPTION>
 Exhibit
  Number
 -------
 <C>      <S>
  1.1     Form of Underwriting Agreement

  3.1(a)* Certificate of Incorporation of the Registrant, as currently in
           effect

  3.1(b)* Amended and Restated Certificate of Incorporation of the Registrant
           to be filed upon completion of the offering

  4.1     Specimen certificate of common stock

  4.2(a)* Bylaws of the Registrant as currently in effect

  4.2(b)* Bylaws of the Registrant as in effect upon completion of the offering
  5.1     Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation

 10.1*    Form of Indemnification Agreement between the Registrant and each of
           its directors and officers
 10.2*    1997 Stock Plan

 10.3*    2000 Employee Stock Purchase Plan

 10.4*    Second Amended and Restated Investors' Rights Agreement dated as of
           April 30, 1999 between the Registrant and the stockholders named
           therein

 10.5*    Lease, dated August 16, 1999, between the Registrant and Renco
           Investment Company

 10.6*    Trade Financing Agreement, dated February 1, 1999, between the
           Registrant and Mitsubishi International Corporation

 10.7*    Cooperation Agreement, dated March 2, 1998, between the Registrant
           and Sungmi Telecom Electronics Co., Ltd.

 10.8*    Cooperation Agreement, dated November 30, 1997, between the
           Registrant and Askey Computer Corporation

 10.9*    Cooperation Agreement, dated October 15, 1997, between the Registrant
           and Sumitomo Electric Industries, Ltd.

 10.10*   Addendum to Cooperation Agreement, dated April 20, 1999, between the
           Registrant and Sumitomo Electric Industries, Ltd.

 10.11*   Cooperation Agreement, dated April 3, 1998, between the Registrant
           and NEC Corporation

 10.12*   Addendum to Cooperation Agreement, dated February 23, 1999, between
           the Registrant and NEC Corporation

 10.13*   Co-Development Agreement, dated October 15, 1997, between the
           Registrant and Mitsubishi Electric Corporation

 10.14*   Addendum to Co-Development Agreement, dated June 21, 1999, between
           the Registrant and Mitsubishi Electric Corporation

 10.15*   Cooperation Agreement, dated August 25, 1997, between the Registrant
           and Mitsubishi Electric Corporation

 10.16*   Wafer Supply Agreement, dated April 22, 1999, between the Registrant
           and Mitsubishi Electronics America

 10.17*   Agreement and Mutual Release dated February 2, 2000 between the
           Registrant and A. Travis White

 10.18*   Offer letter between the Registrant and John W. Luhtala dated
           November 30, 1999

 10.19*   Offer letter between the Registrant and Jon S. Sherburne dated August
           17, 1999

</TABLE>


                                      II-3
<PAGE>

<TABLE>
<CAPTION>
 Exhibit
 Number
 -------
 <C>     <S>
 10.20*  Technical Services Consulting Agreement, dated March 19, 1998, between
          Registrant and Mitsubishi Corporation

 10.21*  Foundry Agreement, dated March 7, 2000, between Registrant and United
          Microelectronics Corporation

 10.22*  Assembly and Test Services Agreement, dated February 28, 2000, between
          Registrant and ST Assembly and Test Services, Ltd.

 23.1    Consent of Ernst & Young LLP, Independent Auditors

 23.2    Consent of Counsel (see Exhibit 5.1)

 24.1*   Power of Attorney (see page II-5)

 27.1*   Financial Data Schedules
</TABLE>
- - - - - - ---------------------
*  Previously filed.

  (b) Financial Statement Schedules

<TABLE>
<CAPTION>
   Schedule                                       Page
   --------                                       ----
   <C>                                            <S>
   Schedule II--Valuation and Qualifying Accounts
</TABLE>

   Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.

Item 17. Undertakings

   The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.

   Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions referenced in Item 14 of
this Registration Statement or otherwise, the Registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer, or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by a
director, officer or controlling person in connection with the securities being
registered hereunder, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.

   The undersigned Registrant hereby undertakes that:

     (1) For purposes of determining any liability under the Securities Act,
  the information omitted from the form of Prospectus filed as part of this
  Registration Statement in reliance upon Rule 430A and contained in a form
  of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
  497(h) under the Securities Act shall be deemed to be part of this
  Registration Statement as of the time it was declared effective.

     (2) For the purpose of determining any liability under the Securities
  Act, each post-effective amendment that contains a form of Prospectus shall
  be deemed to be a new registration statement relating to the securities
  offered therein, and the offering of such securities at that time shall be
  deemed to be the initial bona fide offering thereof.

                                      II-4
<PAGE>

                                   SIGNATURES

   Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this amendment to the Registration Statement on Form
S-1 to be signed on its behalf by the undersigned, thereunto duly authorized,
in the City of Fremont, State of California, on the 23rd day of May, 2000.

                                          CENTILLIUM COMMUNICATIONS, INC.

                                             *
                                          By: _________________________________
                                             Faraj Aalaei, Chief Executive
                                             Officer

   Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:

<TABLE>
<CAPTION>
                  Name                             Title               Date
                  ----                             -----               ----
 <C>                                    <S>                        <C>
 *                                      Chief Executive Officer    May 23, 2000
 ______________________________________ and Director (Principal
 Faraj Aalaei                           Executive Officer)

 /s/ John W. Luhtala                    Vice President and Chief   May 23, 2000
 ______________________________________ Financial Officer
 John W. Luhtala                        (Principal Financial and
                                        Accounting Officer)
 *                                      President and Director     May 23, 2000
 ______________________________________
 Shahin Hedayat

 *                                      Director                   May 23, 2000
 ______________________________________
 Kamran Elahian

 *                                      Director                   May 23, 2000
 ______________________________________
 Irwin Federman

 *                                      Director                   May 23, 2000
 ______________________________________
 Robert C. Hawk

 *                                      Director                   May 23, 2000
 ______________________________________
 Lip-Bu Tan
</TABLE>

*By: /s/ John W. Luhtala
  ------------------------------
     John W. Luhtala

     Attorney-in-fact

                                      II-5
<PAGE>

                        CENTILLIUM COMMUNICATIONS, INC.

                                  SCHEDULE II

                       VALUATION AND QUALIFYING ACCOUNTS
                                 (in thousands)

<TABLE>
<CAPTION>
                                           Additions
                                Balance at Charged to
                                Beginning  Costs and   Deductions  Balance at
                                of Period   Expenses   Write-Offs End of Period
                                ---------- ----------  ---------- -------------
<S>                             <C>        <C>         <C>        <C>
Allowance for Doubtful
 Accounts
Period from February 21, 1997
 (Inception) to
 December 31, 1997............    $  --      $  --       $  --       $   --
Year ended December 31, 1998..    $  --      $  --       $  --       $   --
Year ended December 31, 1999..    $  --      $ 150(1)    $  --       $  150
</TABLE>
- - - - - - ---------------------
(1)  The 1999 balance represents a reserve for unidentified bad debt exposures.
<PAGE>

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
 Exhibit
  Number
 -------
 <C>      <S>
  1.1     Form of Underwriting Agreement

  3.1(a)* Certificate of Incorporation of the Registrant, as currently in
           effect

  3.1(b)* Amended and Restated Certificate of Incorporation of the Registrant
           to be filed upon completion of the offering

  4.1     Specimen certificate of common stock

  4.2(a)* Bylaws of the Registrant as currently in effect

  4.2(b)* Bylaws of the Registrant as in effect upon completion of the offering
  5.1     Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation

 10.1*    Form of Indemnification Agreement between the Registrant and each of
           its directors and officers
 10.2*    1997 Stock Plan

 10.3*    2000 Employee Stock Purchase Plan

 10.4*    Second Amended and Restated Investors' Rights Agreement dated as of
           April 30, 1999 between the Registrant and the stockholders named
           therein

 10.5*    Lease, dated August 16, 1999, between the Registrant and Renco
           Investment Company

 10.6*    Trade Financing Agreement, dated February 1, 1999, between the
           Registrant and Mitsubishi International Corporation

 10.7*    Cooperation Agreement, dated March 2, 1998, between the Registrant
           and Sungmi Telecom Electronics Co., Ltd.

 10.8*    Cooperation Agreement, dated November 30, 1997, between the
           Registrant and Askey Computer Corporation

 10.9*    Cooperation Agreement, dated October 15, 1997, between the Registrant
           and Sumitomo Electric Industries, Ltd.

 10.10*   Addendum to Cooperation Agreement, dated April 20, 1999, between the
           Registrant and Sumitomo Electric Industries, Ltd.

 10.11*   Cooperation Agreement, dated April 3, 1998, between the Registrant
           and NEC Corporation

 10.12*   Addendum to Cooperation Agreement, dated February 23, 1999, between
           the Registrant and NEC Corporation

 10.13*   Co-Development Agreement, dated October 15, 1997, between the
           Registrant and Mitsubishi Electric Corporation

 10.14*   Addendum to Co-Development Agreement, dated June 21, 1999, between
           the Registrant and Mitsubishi Electric Corporation

 10.15*   Cooperation Agreement, dated August 25, 1997, between the Registrant
           and Mitsubishi Electric Corporation

 10.16*   Wafer Supply Agreement, dated April 22, 1999, between the Registrant
           and Mitsubishi Electronics America

 10.17*   Agreement and Mutual Release dated February 2, 2000 between the
           Registrant and A. Travis White

 10.18*   Offer letter between the Registrant and John W. Luhtala dated
           November 30, 1999

 10.19*   Offer letter between the Registrant and Jon S. Sherburne dated August
           17, 1999

 10.20*   Technical Services Consulting Agreement, dated March 19, 1998,
           between Registrant and Mitsubishi Corporation

</TABLE>
<PAGE>

<TABLE>
<CAPTION>
 Exhibit
 Number
 -------
 <C>     <S>
 10.21*  Foundry Agreement, dated March 7, 2000, between Registrant and United
          Microelectronics Corporation

 10.22*  Assembly and Test Services Agreement, dated February 28, 2000, between
          Registrant and ST Assembly and Test Services, Ltd.

 23.1    Consent of Ernst & Young LLP, Independent Auditors

 23.2    Consent of Counsel (see Exhibit 5.1)

 24.1*   Power of Attorney (see page II-5)

 27.1*   Financial Data Schedules
</TABLE>
- - - - - - ---------------------
*  Previously filed.


<PAGE>

                        4,000,000 Shares of Common Stock

                        Centillium Communications, Inc.

                                  Common Stock

                             UNDERWRITING AGREEMENT
                             ----------------------




                                                                    May 23, 2000


CREDIT SUISSE FIRST BOSTON CORPORATION
FLEETBOSTON ROBERTSON STEPHENS INC.
SALOMON SMITH BARNEY INC.
 As Representatives of the Several Underwriters,
  c/o Credit Suisse First Boston Corporation,
  Eleven Madison Avenue,
  New York, N.Y. 10010-3629

Dear Sirs:


     1.  Introductory. Centillium Communications, Inc., a Delaware
corporation ("Company"), proposes to issue and sell 4,000,000 shares ("Firm
Securities") of its common stock ("Securities") and also proposes to issue and
sell to the Underwriters, at the option of the Underwriters, an aggregate of not
more than 600,000 additional shares ("Optional Securities") of its Securities as
set forth below. The Firm Securities and the Optional Securities are herein
collectively called the "Offered Securities". As part of the offering
contemplated by this Agreement, Salomon Smith Barney Inc. (the "Designated
Underwriter") has agreed to reserve out of the Firm Securities purchased by it
under this Agreement, up to 240,000 shares, for sale to the Company's directors,
officers, employees and other parties associated with the Company (collectively,
"Participants"), as set forth in the Prospectus (as defined herein) under the
heading "Underwriting" (the "Directed Share Program"). The Firm Securities to be
sold by the Designated Underwriter pursuant to the Directed Share Program (the
"Directed Shares") will be sold by the Designated Underwriter pursuant to this
Agreement at the public offering price. Any Directed Shares not subscribed for
by the end of the business day on which this Agreement is executed will be
offered to the public by the Underwriters as set forth in the Prospectus. The
Company hereby agrees with the several Underwriters named in Schedule A hereto
("Underwriters") as follows:
<PAGE>

     2.  Representations and Warranties of the Company. The Company represents
and warrants to, and agrees with, the several Underwriters that:

           (a)  A registration statement (No. 333-30772) relating to the Offered
     Securities, including a form of prospectus, has been filed with the
     Securities and Exchange Commission ("Commission") and either (i) has been
     declared effective under the Securities Act of 1933 ("Act") and is not
     proposed to be amended or (ii) is proposed to be amended by amendment or
     post-effective amendment. If such registration statement ("initial
     registration statement") has been declared effective, either (i) an
     additional registration statement ("additional registration statement")
     relating to the Offered Securities may have been filed with the Commission
     pursuant to Rule 462(b) ("Rule 462(b)") under the Act and, if so filed, has
     become effective upon filing pursuant to such Rule and the Offered
     Securities all have been duly registered under the Act pursuant to the
     initial registration statement and, if applicable, the additional
     registration statement or (ii) such an additional registration statement is
     proposed to be filed with the Commission pursuant to Rule 462(b) and will
     become effective upon filing pursuant to such Rule and upon such filing the
     Offered Securities will all have been duly registered under the Act
     pursuant to the initial registration statement and such additional
     registration statement.  If the Company does not propose to amend the
     initial registration statement or if an additional registration statement
     has been filed and the Company does not propose to amend it, and if any
     post-effective amendment to either such registration statement has been
     filed with the Commission prior to the execution and delivery of this
     Agreement, the most recent amendment (if any) to each such registration
     statement has been declared effective by the Commission or has become
     effective upon filing pursuant to Rule 462(c) ("Rule 462(c)") under the Act
     or, in the case of the additional registration statement, Rule 462(b). For
     purposes of this Agreement, "Effective Time" with respect to the initial
     registration statement or, if filed prior to the execution and delivery of
     this Agreement, the additional registration statement means (i) if the
     Company has advised the Representatives that it does not propose to amend
     such registration statement, the date and time as of which such
     registration statement, or the most recent post-effective amendment thereto
     (if any) filed prior to the execution and delivery of this Agreement, was
     declared effective by the Commission or has become effective upon filing
     pursuant to Rule 462(c), or (ii) if the Company has advised the
     Representatives that it proposes to file an amendment or post-effective
     amendment to such registration statement, the date and time as of which
     such registration statement, as amended by such amendment or post-effective
     amendment, as the case may be, is declared effective by the Commission. If
     an additional registration statement has not been filed prior to the
     execution and delivery of this Agreement but the Company has advised the
     Representatives that it proposes to file one, "Effective Time" with respect
     to such additional registration statement means the date and time as of
     which such registration statement is filed and becomes effective pursuant
     to Rule 462(b). "Effective Date" with respect to the initial registration
     statement or the additional registration statement (if any) means the date
     of the Effective Time thereof. The initial registration statement, as
     amended at its Effective Time, including all information contained in the
     additional registration statement (if any) and deemed to be a part of the
     initial registration statement as of the Effective Time of the additional
     registration statement pursuant to the General Instructions of the Form on
     which it is filed and including all information (if any) deemed to be a
     part of the initial registration statement as of its Effective Time
     pursuant to Rule 430A(b) ("Rule

                                       2
<PAGE>

     430A(b)") under the Act, is hereinafter referred to as the "Initial
     Registration Statement". The additional registration statement, as amended
     at its Effective Time, including the contents of the initial registration
     statement incorporated by reference therein and including all information
     (if any) deemed to be a part of the additional registration statement as of
     its Effective Time pursuant to Rule 430A(b), is hereinafter referred to as
     the "Additional Registration Statement". The Initial Registration Statement
     and the Additional Registration Statement are herein referred to
     collectively as the "Registration Statements" and individually as a
     "Registration Statement". The form of prospectus relating to the Offered
     Securities, as first filed with the Commission pursuant to and in
     accordance with Rule 424(b) ("Rule 424(b)") under the Act or (if no such
     filing is required) as included in a Registration Statement, is hereinafter
     referred to as the "Prospectus". No document has been or will be prepared
     or distributed in reliance on Rule 434 under the Act.

           (b)  If the Effective Time of the Initial Registration Statement is
     prior to the execution and delivery of this Agreement: (i) on the Effective
     Date of the Initial Registration Statement, the Initial Registration
     Statement conformed in all respects to the requirements of the Act and the
     rules and regulations of the Commission ("Rules and Regulations") and did
     not include any untrue statement of a material fact or omit to state any
     material fact required to be stated therein or necessary to make the
     statements therein not misleading, (ii) on the Effective Date of the
     Additional Registration Statement (if any), each Registration Statement
     conformed, or will conform, in all respects to the requirements of the Act
     and the Rules and Regulations and did not include, or will not include, any
     untrue statement of a material fact and did not omit, or will not omit, to
     state any material fact required to be stated therein or necessary to make
     the statements therein not misleading and (iii) on the date of this
     Agreement, the Initial Registration Statement and, if the Effective Time of
     the Additional Registration Statement is prior to the execution and
     delivery of this Agreement, the Additional Registration Statement each
     conforms, and at the time of filing of the Prospectus pursuant to Rule
     424(b) or (if no such filing is required) at the Effective Date of the
     Additional Registration Statement in which the Prospectus is included, each
     Registration Statement and the Prospectus will conform, in all respects to
     the requirements of the and the Rules and Regulations, and neither of such
     documents includes, or will include, any untrue statement of a material
     fact or omits, or will omit, to state any material fact required to be
     stated therein or necessary to make the statements therein not misleading.
     If the Effective Time of the Initial Registration Statement is subsequent
     to the execution and delivery of this Agreement: on the Effective Date of
     the Initial Registration Statement, the Initial Registration Statement and
     the Prospectus will conform in all respects to the requirements of the Act
     and the Rules and Regulations, neither of such documents will include any
     untrue statement of a material fact or will omit to state any material fact
     required to be stated therein or necessary to make the statements therein
     not misleading, and no Additional Registration Statement has been or will
     be filed. The two preceding sentences do not apply to statements in or
     omissions from a Registration Statement or the Prospectus based upon
     written information furnished to the Company by any Underwriter through the
     Representatives specifically for use therein, it being understood and
     agreed that the only such information is that described as such in Section
     7(b) hereof.

                                       3
<PAGE>

           (c)  The Company has been duly incorporated and is an existing
     corporation in good standing under the laws of the State of Delaware, with
     power and authority (corporate and other) to own its properties and conduct
     its business as described in the Prospectus; and the Company is duly
     qualified to do business as a foreign corporation in good standing in all
     other jurisdictions in which its ownership or lease of property or the
     conduct of its business requires such qualification, except where the
     failure to be so qualified would not have a material adverse effect on the
     condition (financial or other), business, properties or results of
     operations of the Company and its subsidiaries taken as a whole ("Material
     Adverse Effect").

           (d)  Each subsidiary of the Company has been duly incorporated and is
     an existing corporation in good standing under the laws of the jurisdiction
     of its incorporation, with power and authority (corporate and other) to own
     its properties and conduct its business as described in the Prospectus; and
     each subsidiary of the Company is duly qualified to do business as a
     foreign corporation in good standing in all other jurisdictions in which
     its ownership or lease of property or the conduct of its business requires
     such qualification, except where the failure to be so qualified would not
     have a Material Adverse Effect; all of the issued and outstanding capital
     stock of each subsidiary of the Company has been duly authorized and
     validly issued and is fully paid and nonassessable; and the capital stock
     of each subsidiary owned by the Company, directly or through subsidiaries,
     is owned free from liens, encumbrances and defects.

           (e)  The Offered Securities and all other outstanding shares of
     capital stock of the Company have been duly authorized; all outstanding
     shares of capital stock of the Company are, and, when the Offered
     Securities have been delivered and paid for in accordance with this
     Agreement on each Closing Date (as defined below), such Offered Securities
     will have been, validly issued, fully paid and nonassessable and will
     conform to the description thereof contained in the Prospectus; and the
     stockholders of the Company have no preemptive rights with respect to the
     Securities.

           (f)  Except as disclosed in the Prospectus, there are no contracts,
     agreements or understandings between the Company and any person that would
     give rise to a valid claim against the Company or any Underwriter for a
     brokerage commission, finder's fee or other like payment in connection with
     this offering.

           (g)  Except as disclosed in the Prospectus, there are no contracts,
     agreements or understandings between the Company and any person granting
     such person the right to require the Company to file a registration
     statement under the Act with respect to any securities of the Company owned
     or to be owned by such person or to require the Company to include such
     securities in the securities registered pursuant to a Registration
     Statement or in any securities being registered pursuant to any other
     registration statement filed by the Company under the Act.

           (h)  The Offered Securities have been approved for listing on the
     Nasdaq Stock Market's National Market subject to notice of issuance.

           (i)  No consent, approval, authorization, or order of, or filing
     with, any governmental agency or body or any court is required for the
     consummation of the

                                       4
<PAGE>

     transactions contemplated by this Agreement in connection with the issuance
     and sale of the Offered Securities by the Company, except such as have been
     obtained and made under the Act and such as may be required under state
     securities laws.

           (j)  The execution, delivery and performance of this Agreement, and
     the issuance and sale of the Offered Securities will not result in a breach
     or violation of any of the terms and provisions of, or constitute a default
     under, any statute, any rule, regulation or order of any governmental
     agency or body or any court, domestic or foreign, having jurisdiction over
     the Company or any subsidiary of the Company or any of their properties, or
     any agreement or instrument to which the Company or any such subsidiary is
     a party or by which the Company or any such subsidiary is bound or to which
     any of the properties of the Company or any such subsidiary is subject, or
     the charter or by-laws of the Company or any such subsidiary, except that
     in the case of clause (ii), such breaches or violations as would not,
     either individually or in the aggregate, have a Material Adverse Effect,
     and the Company has full power and authority to authorize, issue and sell
     the Offered Securities as contemplated by this Agreement.

           (k)  This Agreement has been duly authorized, executed and delivered
     by the Company.

           (l)  Except as disclosed in the Prospectus, the Company and its
     subsidiaries have good and marketable title to all real properties and all
     other properties and assets owned by them, in each case free from liens,
     encumbrances and defects that would materially affect the value thereof or
     materially interfere with the use made or to be made thereof by them; and
     except as disclosed in the Prospectus, the Company and its subsidiaries
     hold any leased real or personal property under valid and enforceable
     leases with no exceptions that would materially interfere with the use made
     or to be made thereof by them.

           (m)  The Company and its subsidiaries possess adequate certificates,
     authorities or permits issued by appropriate governmental agencies or
     bodies necessary to conduct the business now operated by them and have not
     received any notice of proceedings relating to the revocation or
     modification of any such certificate, authority or permit that, if
     determined adversely to the Company or any of its subsidiaries, would
     individually or in the aggregate have a Material Adverse Effect.

           (n)  No labor dispute with the employees of the Company or any
     subsidiary exists or, to the knowledge of the Company, is imminent that
     might have a Material Adverse Effect.

           (o)  The Company and its subsidiaries own, possess or can acquire on
     reasonable terms, adequate trademarks, trade names and other rights to
     inventions, know-how, patents, copyrights, confidential information and
     other intellectual property (collectively, "intellectual property rights")
     necessary to conduct the business now operated by them, or presently
     employed by them, and have not received any notice of infringement of or
     conflict with asserted rights of others with respect to any intellectual
     property

                                       5
<PAGE>

     rights that, if determined adversely to the Company or any of its
     subsidiaries, would individually or in the aggregate have a Material
     Adverse Effect.

           (p)  Except as disclosed in the Prospectus, neither the Company nor
     any of its subsidiaries is in violation of any statute, any rule,
     regulation, decision or order of any governmental agency or body or any
     court, domestic or foreign, relating to the use, disposal or release of
     hazardous or toxic substances or relating to the protection or restoration
     of the environment or human exposure to hazardous or toxic substances
     (collectively, "environmental laws"), owns or operates any real property
     contaminated with any substance that is subject to any environmental laws,
     is liable for any off-site disposal or contamination pursuant to any
     environmental laws, or is subject to any claim relating to any
     environmental laws, which violation, contamination, liability or claim
     would individually or in the aggregate have a Material Adverse Effect; and
     the Company is not aware of any pending investigation which might lead to
     such a claim.

           (q)  Except as disclosed in the Prospectus, there are no pending
     actions, suits or proceedings against or affecting the Company, any of its
     subsidiaries or any of their respective properties that, if determined
     adversely to the Company or any of its subsidiaries, would individually or
     in the aggregate have a Material Adverse Effect, or would materially and
     adversely affect the ability of the Company to perform its obligations
     under this Agreement, or which are otherwise material in the context of the
     sale of the Offered Securities; and no such actions, suits or proceedings
     are threatened or, to the Company's knowledge, contemplated.

           (r)  The financial statements included in each Registration Statement
     and the Prospectus present fairly the financial position of the Company and
     its consolidated subsidiaries as of the dates shown and their results of
     operations and cash flows for the periods shown, and such financial
     statements have been prepared in conformity with the generally accepted
     accounting principles in the United States applied on a consistent basis
     and the schedules included in each Registration Statement present fairly
     the information required to be stated therein.

           (s)  Except as disclosed in the Prospectus, since the date of the
     latest audited financial statements included in the Prospectus there has
     been no material adverse change, nor any development or event involving a
     prospective material adverse change, in the condition (financial or other),
     business, properties or results of operations of the Company and its
     subsidiaries taken as a whole, and, except as disclosed in or contemplated
     by the Prospectus, there has been no dividend or distribution of any kind
     declared, paid or made by the Company on any class of its capital stock.

           (t)  The Company is not and, after giving effect to the offering and
     sale of the Offered Securities and the application of the proceeds thereof
     as described in the Prospectus, will not be an "investment company" as
     defined in the Investment Company Act of 1940.

           (u)  Neither the Company nor any of its affiliates does business with
     the government of Cuba or with any person or affiliate located in Cuba
     within the meaning of Section 517.075, Florida Statutes and the Company
     agrees to comply with such

                                       6
<PAGE>

     Section if prior to the completion of the distribution of the Offered
     Securities it commences doing such business.

           (v)  Furthermore, the Company represents and warrants to the
     Underwriters that (i) the Registration Statement, the Prospectus and any
     preliminary prospectus comply, and any further amendments or supplements
     thereto will comply, with any applicable laws or regulations of foreign
     jurisdictions in which the Prospectus or any preliminary prospectus, as
     amended or supplemented, if applicable, are distributed in connection with
     the Directed Share Program, and that (ii) no authorization, approval,
     consent, license, order, registration or qualification of or with any
     government, governmental instrumentality or court, other than such as have
     been obtained, is necessary under the securities law and regulations of
     foreign jurisdictions in which the Directed Shares are offered outside the
     United States.

           (w)  The Company has not offered, or caused the Underwriters to
     offer, any offered Securities to any person pursuant to the Directed Share
     Program with the specific intent to unlawfully influence (i) a customer or
     supplier of the Company to alter the customer's or supplier's level or type
     of business with the Company or (ii) a trade journalist or publication to
     write or publish favorable information about the Company or its products.

     3.  Purchase, Sale and Delivery of Offered Securities.  On the basis of
the representations, warranties and agreements herein contained, but subject to
the terms and conditions herein set forth, the Company agrees to sell to the
Underwriters, and the Underwriters agree, severally and not jointly, to purchase
from the Company, at a purchase price of $           per share, the respective
numbers of shares of Firm Securities set forth opposite the names of the
Underwriters in Schedule A hereto.

     The Company will deliver the Firm Securities to the Representatives for the
accounts of the Underwriters, against payment of the purchase price in Federal
(same day) funds by official bank check or checks or wire transfer to an account
at a bank acceptable to Credit Suisse First Boston Corporation ("CSFBC") drawn
to the order of the Company at the office of Wilson Sonsini Goodrich & Rosati,
P.C. ("WSGR"), at 9:30 A.M., New York time, on May 30, 2000, or at such other
time not later than seven full business days thereafter as CSFBC and the Company
determine, such time being herein referred to as the "First Closing Date". For
purposes of Rule 15c6-1 under the Securities Exchange Act of 1934, the First
Closing Date (if later than the otherwise applicable settlement date) shall be
the settlement date for payment of funds and delivery of securities for all the
Offered Securities sold pursuant to the offering. The certificates for the Firm
Securities so to be delivered will be in definitive form, in such denominations
and registered in such names as CSFBC requests and will be made available for
checking and packaging at the office of WSGR at least 24 hours prior to the
First Closing Date.

     In addition, upon written notice from CSFBC given to the Company from time
to time not more than 30 days subsequent to the date of the Prospectus, the
Underwriters may purchase all or less than all of the Optional Securities at the
purchase price per Security to be paid for the Firm Securities. The Company
agrees to sell to the Underwriters the number of shares of Optional Securities
specified in such notice and the Underwriters agree, severally and not jointly,
to purchase such Optional Securities. Such Optional Securities shall be
purchased for the account

                                       7
<PAGE>

of each Underwriter in the same proportion as the number of shares of Firm
Securities set forth opposite such Underwriter's name bears to the total number
of shares of Firm Securities (subject to adjustment by CSFBC to eliminate
fractions) and may be purchased by the Underwriters only for the purpose of
covering over-allotments made in connection with the sale of the Firm
Securities. No Optional Securities shall be sold or delivered unless the Firm
Securities previously have been, or simultaneously are, sold and delivered. The
right to purchase the Optional Securities or any portion thereof may be
exercised from time to time and to the extent not previously exercised may be
surrendered and terminated at any time upon notice by CSFBC to the Company.

     Each time for the delivery of and payment for the Optional Securities,
being herein referred to as an "Optional Closing Date", which may be the First
Closing Date (the First Closing Date and each Optional Closing Date, if any,
being sometimes referred to as a "Closing Date"), shall be determined by CSFBC
but shall be not later than five full business days after written notice of
election to purchase Optional Securities is given. The Company will deliver the
Optional Securities being purchased on each Optional Closing Date to the
Representative for the accounts of the several Underwriters, against payment of
the purchase price therefor in Federal (same day) funds by official bank check
or checks or wire transfer to an account at a bank acceptable to CSFBC drawn to
the order of the Company, at the office of WSGR.   The certificates for the
Optional Securities being purchased on each Optional Closing Date will be in
definitive form, in such denominations and registered in such names as CSFBC
requests upon reasonable notice prior to such Optional Closing Date and will be
made available for checking and packaging at the office of WSGR at a reasonable
time in advance of such Optional Closing Date.

     4.  Offering by Underwriters. It is understood that the several
Underwriters propose to offer the Offered Securities for sale to the public as
set forth in the Prospectus.

     5.  Certain Agreements of the Company. The Company agrees with the several
Underwriters that:

           (a)  If the Effective Time of the Initial Registration Statement is
     prior to the execution and delivery of this Agreement, the Company will
     file the Prospectus with the Commission pursuant to and in accordance with:

     Subparagraph (1) (or, if applicable and if consented to by CSFBC,
     subparagraph (4)) of Rule 424(b) not later than the earlier of (A) the
     second business day following the execution and delivery of this Agreement
     or (B) the fifteenth business day after the Effective Date of the Initial
     Registration Statement.

     The Company will advise CSFBC promptly of any such filing pursuant to Rule
     424(b). If the Effective Time of the Initial Registration Statement is
     prior to the execution and delivery of this Agreement and an additional
     registration statement is necessary to register a portion of the Offered
     Securities under the Act but the Effective Time thereof has not occurred as
     of such execution and delivery, the Company will file the additional
     registration statement or, if filed, will file a post-effective amendment
     thereto with the Commission pursuant to and in accordance with Rule 462(b)
     on or prior to 10:00 P.M., New York time, on the date of this Agreement or,
     if earlier, on or prior to the time the

                                       8
<PAGE>

     Prospectus is printed and distributed to any Underwriter, or will make such
     filing at such later date as shall have been consented to by CSFBC.

           (b)  The Company will advise CSFBC promptly of any proposal to amend
     or supplement the initial or any additional registration statement as filed
     or the related prospectus or the Initial Registration Statement, the
     Additional Registration Statement (if any) or the Prospectus and will not
     effect such amendment or supplementation without CSFBC's consent; and the
     Company will also advise CSFBC promptly of the effectiveness of each
     Registration Statement (if its Effective Time is subsequent to the
     execution and delivery of this Agreement) and of any amendment or
     supplementation of a Registration Statement or the Prospectus and of the
     institution by the Commission of any stop order proceedings in respect of a
     Registration Statement and will use its best efforts to prevent the
     issuance of any such stop order and to obtain as soon as possible its
     lifting, if issued.

           (c)  If, at any time when a prospectus relating to the Offered
     Securities is required to be delivered under the Act in connection with
     sales by any Underwriter or dealer, any event occurs as a result of which
     the Prospectus as then amended or supplemented would include an untrue
     statement of a material fact or omit to state any material fact necessary
     to make the statements therein, in the light of the circumstances under
     which they were made, not misleading, or if it is necessary at any time to
     amend the Prospectus to comply with the Act, the Company will promptly
     notify CSFBC of such event and will promptly prepare and file with the
     Commission, at its own expense, an amendment or supplement which will
     correct such statement or omission or an amendment which will effect such
     compliance. Neither CSFBC's consent to, nor the Underwriters' delivery of,
     any such amendment or supplement shall constitute a waiver of any of the
     conditions set forth in Section 6.

           (d)  As soon as practicable, but not later than the Availability Date
     (as defined below), the Company will make generally available to its
     securityholders an earnings statement covering a period of at least 12
     months beginning after the Effective Date of the Initial Registration
     Statement (or, if later, the Effective Date of the Additional Registration
     Statement) which will satisfy the provisions of Section 11(a) of the Act.
     For the purpose of the preceding sentence, "Availability Date" means the
     45th day after the end of the fourth fiscal quarter following the fiscal
     quarter that includes such Effective Date, except that, if such fourth
     fiscal quarter is the last quarter of the Company's fiscal year,
     "Availability Date" means the 90th day after the end of such fourth fiscal
     quarter.

           (e)  The Company will furnish to the Representatives copies of each
     Registration Statement (4 of which will be signed and will include all
     exhibits), each related preliminary prospectus, and, so long as a
     prospectus relating to the Offered Securities is required to be delivered
     under the Act in connection with sales by any Underwriter or dealer, the
     Prospectus and all amendments and supplements to such documents, in each
     case in such quantities as CSFBC requests. The Prospectus shall be so
     furnished on or prior to 3:00 P.M., New York time, on the business day
     following the later of the execution and delivery of this Agreement or the
     Effective Time of the Initial Registration Statement. All other documents
     shall be so furnished as soon as available.

                                       9
<PAGE>

     The Company will pay the expenses of printing and distributing to the
     Underwriters all such documents.

           (f)  The Company will arrange for the qualification of the Offered
     Securities for sale under the laws of such jurisdictions as CSFBC
     designates and will continue such qualifications in effect so long as
     required for the distribution.

           (g)  During the period of 10 years hereafter, the Company will
     furnish to the Representatives and, upon request, to each of the other
     Underwriters, as soon as practicable after the end of each fiscal year, a
     copy of its annual report to stockholders for such year; and the Company
     will furnish to the Representatives (i) as soon as available, a copy of
     each report and any definitive proxy statement of the Company filed with
     the Commission under the Securities Exchange Act of 1934 or mailed to
     stockholders, and (ii) from time to time, such other information concerning
     the Company as CSFBC may reasonably request.

           (h)  The Company will pay all expenses incident to the performance of
     its obligations under this Agreement, for any filing fees and other
     expenses (including fees and disbursements of counsel) incurred in
     connection with qualification of the Offered Securities for sale under the
     laws of such jurisdictions as CSFBC designates and the printing of
     memoranda relating thereto for the filing fee incident to, and the
     reasonable fees and disbursements of counsel to the Underwriters in
     connection with, the review by the National Association of Securities
     Dealers, Inc. of the Offered Securities, for any travel expenses of the
     Company's officers and employees and any other expenses of the Company in
     connection with attending or hosting meetings with prospective purchasers
     of the Offered Securities and for expenses incurred in distributing
     preliminary prospectuses and the Prospectus (including any amendments and
     supplements thereto) to the Underwriters.

           (i)  For a period of 180 days after the date of the initial public
     offering of the Offered Securities, the Company will not offer, sell,
     contract to sell, pledge or otherwise dispose of, directly or indirectly,
     or file with the Commission a registration statement under the Act relating
     to, any additional shares of its Securities or securities convertible into
     or exchangeable or exercisable for any shares of its Securities, or
     publicly disclose the intention to make any such offer, sale, pledge,
     disposition or filing, without the prior written consent of CSFBC except in
     grants of employee stock options pursuant to the terms of a plan in effect
     on the date hereof, issuances of Securities pursuant to the exercise of
     such options or the exercise of any other employee stock options
     outstanding on the date hereof.

           (j)  In connection with the Directed Share Program, the Company will
     ensure that the Directed Shares will be restricted to the extent required
     by the National Association of Securities Dealers, Inc. (the "NASD") or the
     NASD rules from sale, transfer, assignment, pledge or hypothecation for a
     period of three months following the date of the effectiveness of the
     Registration Statement. The Designated Underwriter will notify the Company
     as to which Participants will need to be so restricted. The Company will
     direct the transfer agent to place stop transfer restrictions upon such
     securities for such period of time.

                                       10
<PAGE>

           (k)  The Company will pay all fees and disbursements of counsel
     incurred by the Underwriters in connection with the Directed Shares Program
     and stamp duties, similar taxes or duties or other taxes, if any, incurred
     by the underwriters in connection with the Directed Share Program.

       Furthermore, the company covenants with the Underwriters that the company
     will comply with all applicable securities and other applicable laws, rules
     and regulations in each foreign jurisdiction in which the Directed Shares
     are offered in connection with the Directed Share Program.

     6.  Conditions of the Obligations of the Underwriters. The obligations of
the several Underwriters to purchase and pay for the Firm Securities on the
First Closing Date and the Optional Securities to be purchased on each Optional
Closing Date will be subject to the accuracy of the representations and
warranties on the part of the Company herein, to the accuracy of the statements
of Company officers made pursuant to the provisions hereof, to the performance
by the Company of its obligations hereunder and to the following additional
conditions precedent:

           (a)  The Representatives shall have received a letter, dated the date
     of delivery thereof (which, if the Effective Time of the Initial
     Registration Statement is prior to the execution and delivery of this
     Agreement, shall be on or prior to the date of this Agreement or, if the
     Effective Time of the Initial Registration Statement is subsequent to the
     execution and delivery of this Agreement, shall be prior to the filing of
     the amendment or post-effective amendment to the registration statement to
     be filed shortly prior to such Effective Time), of Ernst & Young LLP
     confirming that they are independent public accountants within the meaning
     of the Act and the applicable published Rules and Regulations thereunder
     and stating to the effect that:

           (i)  in their opinion the financial statements and schedules examined
           by them and included in the Registration Statements comply as to form
           in all material respects with the applicable accounting requirements
           of the Act and the related published Rules and Regulations;

           (ii) on the basis of a reading of the latest available interim
           financial statements of the Company, inquiries of officials of the
           Company who have responsibility for financial and accounting matters
           and other specified procedures, nothing came to their attention that
           caused them to believe that:

                        (A)  at the date of the latest available balance sheet
                read by such accountants, or at a subsequent specified date not
                more than three business days prior to the date of this
                Agreement, there was any change in the capital stock or any
                increase in short-term indebtedness or long-term debt of the
                Company and its consolidated subsidiaries or, at the date of the
                latest available balance sheet read by such accountants, there
                was any decrease in consolidated net current assets or net
                assets, as compared with amounts shown on the latest balance
                sheet included in the Prospectus; or

                                       11
<PAGE>

                        (B)  for the period from the closing date of the latest
                income statement included in the Prospectus to the closing date
                of the latest available income statement read by such
                accountants there were any decreases, as compared with the
                corresponding period of the previous year in consolidated net
                sales or net operating income in the total or per share amounts
                of consolidated net income;

           except in all cases set forth in clauses (A) and (B) above for
           changes, increases or decreases which the Prospectus discloses have
           occurred or may occur or which are described in such letter; and

           (iii) they have compared specified dollar amounts (or percentages
           derived from such dollar amounts) and other financial information
           contained in the Registration Statements (in each case to the extent
           that such dollar amounts, percentages and other financial information
           are derived from the general accounting records of the Company and
           its subsidiaries subject to the internal controls of the Company's
           accounting system or are derived directly from such records by
           analysis or computation) with the results obtained from inquiries, a
           reading of such general accounting records and other procedures
           specified in such letter and have found such dollar amounts,
           percentages and other financial information to be in agreement with
           such results, except as otherwise specified in such letter.

     For purposes of this subsection, (i) if the Effective Time of the Initial
     Registration Statement is subsequent to the execution and delivery of this
     Agreement, "Registration Statements" shall mean the initial registration
     statement as proposed to be amended by the amendment or post-effective
     amendment to be filed shortly prior to its Effective Time, (ii) if the
     Effective Time of the Initial Registration Statement is prior to the
     execution and delivery of this Agreement but the Effective Time of the
     Additional Registration is subsequent to such execution and delivery,
     "Registration Statements" shall mean the Initial Registration Statement and
     the additional registration statement as proposed to be filed or as
     proposed to be amended by the post-effective amendment to be filed shortly
     prior to its Effective Time, and (iii) "Prospectus" shall mean the
     prospectus included in the Registration Statements.

           (b)  If the Effective Time of the Initial Registration Statement is
     not prior to the execution and delivery of this Agreement, such Effective
     Time shall have occurred not later than 10:00 P.M., New York time, on the
     date of this Agreement or such later date as shall have been consented to
     by CSFBC. If the Effective Time of the Additional Registration Statement
     (if any) is not prior to the execution and delivery of this Agreement, such
     Effective Time shall have occurred not later than 10:00 P.M., New York
     time, on the date of this Agreement or, if earlier, the time the Prospectus
     is printed and distributed to any Underwriter, or shall have occurred at
     such later date as shall have been consented to by CSFBC. If the Effective
     Time of the Initial Registration Statement is prior to the execution and
     delivery of this Agreement, the Prospectus shall have been filed with the
     Commission in accordance with the Rules and Regulations and Section 5(a) of
     this Agreement. Prior to such Closing Date, no stop order suspending the
     effectiveness of a Registration Statement shall have been issued and no
     proceedings for

                                       12
<PAGE>

     that purpose shall have been instituted or, to the knowledge of the Company
     or the Representatives, shall be contemplated by the Commission.

           (c)  Subsequent to the execution and delivery of this Agreement,
     there shall not have occurred (i) any change, or any development or event
     involving a prospective change, in the condition (financial or other),
     business, properties or results of operations of the Company and its
     subsidiaries taken as one enterprise which, in the judgment of a majority
     in interest of the Underwriters including the Representatives, is material
     and adverse and makes it impractical or inadvisable to proceed with
     completion of the public offering or the sale of and payment for the
     Offered Securities; (ii) any downgrading in the rating of any debt
     securities of the Company by any "nationally recognized statistical rating
     organization" (as defined for purposes of Rule 436(g) under the Act), or
     any public announcement that any such organization has under surveillance
     or review its rating of any debt securities of the Company (other than an
     announcement with positive implications of a possible upgrading, and no
     implication of a possible downgrading, of such rating); (iii) any material
     suspension or material limitation of trading in securities generally on the
     New York Stock Exchange, or any setting of minimum prices for trading on
     such exchange, or any suspension of trading of any securities of the
     Company on any exchange or in the over-the-counter market; (iv) any banking
     moratorium declared by U.S. Federal or, New York authorities; or (v) any
     outbreak or escalation of major hostilities in which the United States is
     involved, any declaration of war by Congress or any other substantial
     national or international calamity or emergency if, in the judgment of a
     majority in interest of the Underwriters including the Representatives, the
     effect of any such outbreak, escalation, declaration, calamity or emergency
     makes it impractical or inadvisable to proceed with completion of the
     public offering or the sale of and payment for the Offered Securities.

           (d)  The Representatives shall have received an opinion, dated such
     Closing Date, of Wilson Sonsini Goodrich & Rosati, Professional
     Corporation, counsel for the Company, to the effect that:

                (i)   The Company has been duly incorporated and is an existing
           corporation in good standing under the laws of the State of Delaware,
           with corporate power and authority to own its properties and conduct
           its business as described in the Prospectus; and the Company is duly
           qualified to do business as a foreign corporation in good standing in
           all other jurisdictions in which its ownership or lease of property
           or the conduct of its business requires such qualification, except
           where the failure to be so qualified would not have a Material
           Adverse Effect;

                (ii)  The Offered Securities delivered on such Closing Date and
           all other outstanding shares of the Common Stock of the Company have
           been duly authorized and validly issued, are fully paid and
           nonassessable and conform to the description thereof contained in the
           Prospectus; and the stockholders of the Company have no preemptive
           rights with respect to the Securities;

                (iii) Except as disclosed in the Prospectus, there are no
           contracts, agreements or understandings known to such counsel between
           the Company and

                                       13
<PAGE>

           any person granting such person the right to require the Company to
           file a registration statement under the Act with respect to any
           securities of the Company owned or to be owned by such person or to
           require the Company to include such securities in the securities
           registered pursuant to the Registration Statement or in any
           securities being registered pursuant to any other registration
           statement filed by the Company under the Act;

                (iv)  The Company is not and, after giving effect to the
           offering and sale of the Offered Securities and the application of
           the proceeds thereof as described in the Prospectus, will not be an
           "investment company" as defined in the Investment Company Act of
           1940.

                (v)   No consent, approval, authorization or order of, or filing
           with, any governmental agency or body or any court is required for
           the consummation of the transactions contemplated by this Agreement
           in connection with the issuance or sale of the Offered Securities by
           the Company, except such as have been obtained and made under the Act
           and such as may be required under state securities laws;

                (vi)  The execution, delivery and performance of this Agreement
           and the issuance and sale of the Offered Securities will not result
           in a breach or violation of any of the terms and provisions of, or
           constitute a default under, any statute, any rule, regulation or
           order of any governmental agency or body or any court having
           jurisdiction over the Company or any subsidiary of the Company or any
           of their properties, or any agreement or instrument known to such
           counsel to which the Company or any such subsidiary is a party or by
           which the Company or any such subsidiary is bound or to which any of
           the properties of the Company or any such subsidiary is subject, or
           the charter or by-laws of the Company or any such subsidiary, and the
           Company has full power and authority to authorize, issue and sell the
           Offered Securities as contemplated by this Agreement;

                (vii) The Initial Registration Statement was declared effective
           under the Act as of the date and time specified in such opinion, the
           Additional Registration Statement (if any) was filed and became
           effective under the Act as of the date and time (if determinable)
           specified in such opinion, the Prospectus either was filed with the
           Commission pursuant to the subparagraph of Rule 424(b) specified in
           such opinion on the date specified therein or was included in the
           Initial Registration Statement or the Additional Registration
           Statement (as the case may be), and, to the best of the knowledge of
           such counsel, no stop order suspending the effectiveness of a
           Registration Statement or any part thereof has been issued and no
           proceedings for that purpose have been instituted or are pending or
           contemplated under the Act, and each Registration Statement and the
           Prospectus, and each amendment or supplement thereto, as of their
           respective effective or issue dates, complied as to form in all
           material respects with the requirements of the Act and the Rules and
           Regulations; such counsel have no reason to believe that any part of
           a Registration Statement or any amendment thereto, as of its
           effective date or as of such Closing Date, contained any untrue
           statement of a

                                       14
<PAGE>

           material fact or omitted to state any material fact required to be
           stated therein or necessary to make the statements therein not
           misleading or that the Prospectus or any amendment or supplement
           thereto, as of its issue date or as of such Closing Date, contained
           any untrue statement of a material fact or omitted to state any
           material fact necessary in order to make the statements therein, in
           the light of the circumstances under which they were made, not
           misleading; the descriptions in the Registration Statements and
           Prospectus of statutes, legal and governmental proceedings and
           contracts and other documents are accurate and fairly present the
           information required to be shown; and such counsel do not know of any
           legal or governmental proceedings required to be described in a
           Registration Statement or the Prospectus which are not described as
           required or of any contracts or documents of a character required to
           be described in a Registration Statement or the Prospectus or to be
           filed as exhibits to a Registration Statement which are not described
           and filed as required; it being understood that such counsel need
           express no opinion as to the financial statements or other financial
           data contained in the Registration Statements or the Prospectus; and

                (viii) This Agreement has been duly authorized, executed and
           delivered by the Company.

           (e)  The Representatives shall have received an opinion, dated such
     Closing Date, of Fenwick & West LLP, patent counsel for the Company, to the
     effect that:

           (i)   The Company is listed in the records of the United States
           Patent and Trademark Office as the holder of record of the patents
           listed on a schedule to such opinion (the "Patents") and each of the
           applications listed on a schedule to such opinion (the
           "Applications"). To the knowledge of such counsel, there are no
           claims of third parties to any ownership interest or lien with
           respect to any of the Patents or Applications. Such counsel is not
           aware of any material defect in form in the preparation or filing of
           the Applications on behalf of the Company. To the knowledge of such
           counsel, the Applications are being pursued by the Company. To the
           knowledge of such counsel, the Company owns as its sole property the
           Patents and pending Applications;

           (ii)  The Company is listed in the records of the appropriate foreign
           offices as the sole holder of record of the foreign patents listed on
           a schedule to such opinion (the "Foreign Patents") and each of the
           applications listed on a schedule to such opinion (the "Foreign
           Applications"). Such counsel knows of no claims of third parties to
           any ownership interest or lien with respect to the Foreign Patents or
           Foreign Applications. Such counsel is not aware of any material
           defect of form in the preparation or filing of the Foreign
           Applications on behalf of the Company. To the knowledge of such
           counsel, the Foreign Applications are being pursued by the Company.
           To the knowledge of such counsel, the Company owns as its sole
           property the Foreign Patents and pending Foreign Applications;

           (iii) Such counsel knows of no reason why the Patents or Foreign
           Patents are not valid as issued. Such counsel has no knowledge of any
           reason why any patent to

                                       15
<PAGE>

           be issued as a result of any Application or Foreign Application would
           not be valid or would not afford the Company useful patent protection
           with respect thereto;

           (iv) As to the statements under the captions "Risk Factors -- "Our
           future success will depend in part on our ability to protect our
           proprietary rights and the technologies used in our principal
           products, and if we do not enforce and protect our intellectual
           property, our business will be harmed," "Business -- Intellectual
           Property" and "Business-Legal Proceedings" nothing has come to the
           attention of such counsel which caused them to believe that the
           above-mentioned sections of the Registration Statement and any
           amendment or supplement thereto made available and reviewed by such
           counsel, at the time the Registration Statement became effective and
           at all times subsequent thereto up to and on the Closing Date and on
           any later date on which Option Securities are to be purchased,
           contained any untrue statement of a material fact or omitted to state
           a material fact required to be stated therein or necessary to make
           the statements therein, in light of the circumstances under which
           they were made, not misleading; and

           (v)  Such counsel knows of no material action, suit, claim or
           proceeding relating to patents, patent rights or licenses, trademarks
           or trademark rights, copyrights, collaborative research, licenses or
           royalty arrangements or agreements or trade secrets, know-how or
           proprietary techniques, including processes and substances, owned by
           or affecting the business or operations of the Company which are
           pending or threatened against the Company or any of its officers or
           directors.

           (f)  The Representatives shall have received from Brobeck, Phleger &
     Harrison LLP, counsel for the Underwriters, such opinion or opinions, dated
     such Closing Date, with respect to the incorporation of the Company, the
     validity of the Offered Securities delivered on such Closing Date, the
     Registration Statements, the Prospectus and other related matters as the
     Representatives may require, and the Company shall have furnished to such
     counsel such documents as they request for the purpose of enabling them to
     pass upon such matters.

           (g)  The Representatives shall have received a certificate, dated
     such Closing Date, of the President or any Vice President and a principal
     financial or accounting officer of the Company in which such officers, to
     the best of their knowledge after reasonable investigation, shall state
     that: the representations and warranties of the Company in this Agreement
     are true and correct; the Company has complied with all agreements and
     satisfied all conditions on its part to be performed or satisfied hereunder
     at or prior to such Closing Date; no stop order suspending the
     effectiveness of any Registration Statement has been issued and no
     proceedings for that purpose have been instituted or are contemplated by
     the Commission; the Additional Registration Statement (if any) satisfying
     the requirements of subparagraphs (1) and (3) of Rule 462(b) was filed
     pursuant to Rule 462(b), including payment of the applicable filing fee in
     accordance with Rule 111(a) or (b) under the Act, prior to the time the
     Prospectus was printed and distributed to any Underwriter; and, subsequent
     to the dates of the most recent financial

                                       16
<PAGE>

     statements in the Prospectus, there has been no material adverse change,
     nor any development or event involving a prospective material adverse
     change, in the condition (financial or other), business, properties or
     results of operations of the Company and its subsidiaries taken as a whole
     except as set forth in or contemplated by the Prospectus or as described in
     such certificate.

           (h)  The Representatives shall have received a letter, dated such
     Closing Date, of Ernst & Young LLP which meets the requirements of
     subsection (a) of this Section, except that the specified date referred to
     in such subsection will be a date not more than three days prior to such
     Closing Date for the purposes of this subsection.

           (i)  On or prior to the date of this Agreement, the Representatives
     shall have received lockup letters from each of the executive officers and
     directors of the Company.

The Company will furnish the Representatives with such conformed copies of such
opinions, certificates, letters and documents as the Representatives reasonably
request.  CSFBC may in its sole discretion waive on behalf of the Underwriters
compliance with any conditions to the obligations of the Underwriters hereunder,
whether in respect of an Optional Closing Date or otherwise.

     7.  Indemnification and Contribution. (a) The Company will indemnify and
hold harmless each Underwriter, its partners, directors and officers and each
person, if any, who controls such Underwriter within the meaning of Section 15
of the Act, against any losses, claims, damages or liabilities, joint or
several, to which such Underwriter may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in any Registration Statement,
the Prospectus, or any amendment or supplement thereto, or any related
preliminary prospectus, or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, and will reimburse
each Underwriter for any legal or other expenses reasonably incurred by such
Underwriter in connection with investigating or defending any such loss, claim,
damage, liability or action as such expenses are incurred; provided, however,
that the Company will not be liable in any such case to the extent that any such
loss, claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement in or omission or alleged omission from
any of such documents in reliance upon and in conformity with written
information furnished to the Company by any Underwriter through the
Representatives specifically for use therein, it being understood and agreed
that the only such information furnished by any Underwriter consists of the
information described as such in subsection (b) below.

     The Company agrees to indemnify and hold harmless the Designated
Underwriter and each person, if any, who controls the Designated Underwriter
within the meaning of either Section 15 of the Securities Act or Section 20 of
the Exchange Act (the "Designated Entities"), from and against any and all
losses, claims, damages and liabilities (including, without limitation, any
legal or other expenses reasonably incurred in connection with defending or
investigating any such action or claim) (i) caused by any untrue statement or
alleged untrue statement of a material fact contained in any material prepared
by or with the consent of the Company for distribution to Participants in
connection with the Directed Share Program or

                                       17
<PAGE>

caused by any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading; (ii) caused by the failure of any Participant to pay for and accept
delivery of Directed Shares that the Participant agreed to purchase; or (iii)
related to, arising out of, or in connection with the Directed Share Program,
other than losses, claims, damages or liabilities (or expenses relating thereto)
that are finally judicially determined to have resulted from the bad faith or
gross negligence of the Designated Entities.

     (b)  Each Underwriter will severally and not jointly indemnify and hold
harmless the Company, its directors and officers and each person, if any who
controls the Company within the meaning of Section 15 of the Act, against any
losses, claims, damages or liabilities to which the Company may become subject,
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
any Registration Statement, the Prospectus, or any amendment or supplement
thereto, or any related preliminary prospectus, or arise out of or are based
upon the omission or the alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, in each case to the extent, but only to the extent, that such untrue
statement or alleged untrue statement or omission or alleged omission was made
in reliance upon and in conformity with written information furnished to the
Company by such Underwriter through the Representatives specifically for use
therein, and will reimburse any legal or other expenses reasonably incurred by
the Company in connection with investigating or defending any such loss, claim,
damage, liability or action as such expenses are incurred, it being understood
and agreed that the only such information furnished by any Underwriter consists
of (i) the following information in the Prospectus furnished on behalf of each
Underwriter: the concession and reallowance figures appearing in the fourth
paragraph under the caption "Underwriting" and the information contained in the
seventh paragraph ("The underwriters have informed us...offered"), the eighth
paragraph ("A prospectus in electronic format...E*Offering Corp.") and the
fifteenth paragraph ("The representatives may engage...at any time") under the
caption "Underwriting."

     (c)  Promptly after receipt by an indemnified party under this Section of
notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against the indemnifying party under
subsection (a) or (b) above, notify the indemnifying party of the commencement
thereof; but the omission so to notify the indemnifying party will not relieve
it from any liability which it may have to any indemnified party otherwise than
under subsection (a) or (b) above. In case any such action is brought against
any indemnified party and it notifies the indemnifying party of the commencement
thereof, the indemnifying party will be entitled to participate therein and, to
the extent that it may wish, jointly with any other indemnifying party similarly
notified, to assume the defense thereof, with counsel satisfactory to such
indemnified party (who shall not, except with the consent of the indemnified
party, be counsel to the indemnifying party), and after notice from the
indemnifying party to such indemnified party of its election so to assume the
defense thereof, the indemnifying party will not be liable to such indemnified
party under this Section for any legal or other expenses subsequently incurred
by such indemnified party in connection with the defense thereof other than
reasonable costs of investigation. Notwithstanding anything contained herein to
the contrary, if indemnity may be sought pursuant to the last paragraph in
Section 7 (a) hereof in respect of such action or proceeding, then in addition
to such separate firm for the indemnified parties, the indemnifying party shall
be liable for the reasonable fees and expenses of not more

                                       18
<PAGE>

than one separate firm (in addition to any local counsel) for the Designated
Underwriter for the defense of any losses, claims, damages and liabilities
arising out of the Directed Share Program, and all persons, if any, who control
the Designated Underwriter within the meaning of either Section 15 of the Act of
Section 20 of the Exchange Act. No indemnifying party shall, without the prior
written consent of the indemnified party, effect any settlement of any pending
or threatened action in respect of which any indemnified party is or could have
been a party and indemnity could have been sought hereunder by such indemnified
party unless such settlement (i) includes an unconditional release of such
indemnified party from all liability on any claims that are the subject matter
of such action and (ii) does not include a statement as to, or an admission of,
fault, culpability or a failure to act by or on behalf of an indemnified party.

     (d)  If the indemnification provided for in this Section is unavailable or
insufficient to hold harmless an indemnified party under subsection (a) or (b)
above, then each indemnifying party shall contribute to the amount paid or
payable by such indemnified party as a result of the losses, claims, damages or
liabilities referred to in subsection (a) or (b) above (i) in such proportion as
is appropriate to reflect the relative benefits received by the Company on the
one hand and the Underwriters on the other from the offering of the Securities
or (ii) if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault of
the Company on the one hand and the Underwriters on the other in connection with
the statements or omissions which resulted in such losses, claims, damages or
liabilities as well as any other relevant equitable considerations. The relative
benefits received by the Company on the one hand and the Underwriters on the
other shall be deemed to be in the same proportion as the total net proceeds
from the offering (before deducting expenses) received by the Company bear to
the total underwriting discounts and commissions received by the Underwriters.
The relative fault shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company or the Underwriters and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
untrue statement or omission. The amount paid by an indemnified party as a
result of the losses, claims, damages or liabilities referred to in the first
sentence of this subsection (d) shall be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any action or claim which is the subject of this
subsection (d). Notwithstanding the provisions of this subsection (d), no
Underwriter shall be required to contribute any amount in excess of the amount
by which the total price at which the Securities underwritten by it and
distributed to the public were offered to the public exceeds the amount of any
damages which such Underwriter has otherwise been required to pay by reason of
such untrue or alleged untrue statement or omission or alleged omission. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The Underwriters' obligations in
this subsection (d) to contribute are several in proportion to their respective
underwriting obligations and not joint.

     (e)  The obligations of the Company under this Section shall be in addition
to any liability which the Company may otherwise have and shall extend, upon the
same terms and conditions, to each person, if any, who controls any Underwriter
within the meaning of the Act; and the obligations of the Underwriters under
this Section shall be in addition to any liability which the respective
Underwriters may otherwise have and shall extend, upon the same terms

                                       19
<PAGE>

and conditions, to each director of the Company, to each officer of the Company
who has signed a Registration Statement and to each person, if any, who controls
the Company within the meaning of the Act.

     8.  Default of Underwriters.  If any Underwriter or Underwriters default in
their obligations to purchase Offered Securities hereunder on either the First
or any Optional Closing Date and the aggregate number of shares of Offered
Securities that such defaulting Underwriter or Underwriters agreed but failed to
purchase does not exceed 10% of the total number of shares of Offered Securities
that the Underwriters are obligated to purchase on such Closing Date, CSFBC may
make arrangements satisfactory to the Company for the purchase of such Offered
Securities by other persons, including any of the Underwriters, but if no such
arrangements are made by such Closing Date, the non-defaulting Underwriters
shall be obligated severally, in proportion to their respective commitments
hereunder, to purchase the Offered Securities that such defaulting Underwriters
agreed but failed to purchase on such Closing Date. If any Underwriter or
Underwriters so default and the aggregate number of shares of Offered Securities
with respect to which such default or defaults occur exceeds 10% of the total
number of shares of Offered Securities that the Underwriters are obligated to
purchase on such Closing Date and arrangements satisfactory to CSFBC and the
Company for the purchase of such Offered Securities by other persons are not
made within 36 hours after such default, this Agreement will terminate without
liability on the part of any non-defaulting Underwriter or the Company, except
as provided in Section 9 (provided that if such default occurs with respect to
Optional Securities after the First Closing Date, this Agreement will not
terminate as to the Firm Securities or any Optional Securities purchased prior
to such termination). As used in this Agreement, the term "Underwriter" includes
any person substituted for an Underwriter under this Section. Nothing herein
will relieve a defaulting Underwriter from liability for its default.

     9.  Survival of Certain Representations and Obligations.  The respective
indemnities, agreements, representations, warranties and other statements of the
Company or its officers and of the several Underwriters set forth in or made
pursuant to this Agreement will remain in full force and effect, regardless of
any investigation, or statement as to the results thereof, made by or on behalf
of any Underwriter, the Company or any of their respective representatives,
officers or directors or any controlling person, and will survive delivery of
and payment for the Offered Securities. If this Agreement is terminated pursuant
to Section 8 or if for any reason the purchase of the Offered Securities by the
Underwriters is not consummated, the Company shall remain responsible for the
expenses to be paid or reimbursed by it pursuant to Section 5 and the respective
obligations of the Company and the Underwriters pursuant to Section 7 shall
remain in effect, and if any Offered Securities have been purchased hereunder
the representations and warranties in Section 2 and all obligations under
Section 5 shall also remain in effect. If the purchase of the Offered Securities
by the Underwriters is not consummated for any reason other than solely because
of the termination of this Agreement pursuant to Section 8 or the occurrence of
any event specified in clause (iii), (iv) or (v) of Section 6(c), the Company
will reimburse the Underwriters for all out-of-pocket expenses (including fees
and disbursements of counsel) reasonably incurred by them in connection with the
offering of the Offered Securities.

     10. Notices. All communications hereunder will be in writing and, if sent
to the Underwriters, will be mailed, delivered or telegraphed and confirmed to
the Representatives, c/o Credit Suisse First Boston Corporation, Eleven Madison
Avenue, New York, N.Y. 10010-3629, Attention: Investment Banking Department--
Transactions Advisory Group, or, if sent to the

                                       20
<PAGE>

Company, will be mailed, delivered or telegraphed and confirmed to it at 47211
Lakeview Boulevard, Fremont, CA 94538, Attention: Chief Financial Officer;
provided, however, that any notice to an Underwriter pursuant to Section 7 will
be mailed, delivered or telegraphed and confirmed to such Underwriter.

     11.  Successors. This Agreement will inure to the benefit of and be binding
upon the parties hereto and their respective successors and the officers and
directors and controlling persons referred to in Section 7, and no other person
will have any right or obligation hereunder.

     12.  Representation of Underwriters.  The Representatives will act for the
several Underwriters in connection with this financing, and any action under
this Agreement taken by the Representatives jointly or by CSFBC will be binding
upon all the Underwriters.

     13.  Counterparts.  This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all such
counterparts shall together constitute one and the same Agreement.

     14.  Applicable Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of New York, without regard to principles
of conflicts of laws.

     The Company hereby submits to the non-exclusive jurisdiction of the Federal
and state courts in the Borough of Manhattan in The City of New York in any suit
or proceeding arising out of or relating to this Agreement or the transactions
contemplated hereby.


                     (This space intentionally left blank)

                                       21
<PAGE>

     If the foregoing is in accordance with the Representatives' understanding
of our agreement, kindly sign and return to the Company one of the counterparts
hereof, whereupon it will become a binding agreement between the Company and the
several Underwriters in accordance with its terms.


                                                Very truly yours,

                                                Centillium Communications, Inc.

                                                By______________________________
                                                  John W. Luhtala
                                                  Vice President and
                                                  Chief Financial Officer


The foregoing Underwriting Agreement is hereby confirmed and accepted as of the
date first above written.

CREDIT SUISSE FIRST BOSTON CORPORATION
FLEETBOSTON ROBERTSON STEPHENS INC.
SALOMON SMITH BARNEY INC.

      Acting on behalf of themselves and as
      the  Representatives of the several
      Underwriters


  By  CREDIT SUISSE FIRST BOSTON CORPORATION


  By______________________________________
               [Insert title]

                                       22
<PAGE>

                                   SCHEDULE A



<TABLE>
<CAPTION>
                                                                              Number of
                             Underwriter                                   Firm Securities
                             -----------                               ------------------------
<S>                                                                    <C>
Credit Suisse First Boston Corporation...............................                 1,805,000

FleetBoston Robertson Stephens Inc...................................                   902,500

Salomon Smith Barney Inc.............................................                   902,500

Chase Securities Inc.................................................                    65,000

E*Offering Corp......................................................                    65,000

W.R. Hambrecht + Co., LLC............................................                    65,000

Invemed Associates LLC...............................................                    65,000

Lehman Brothers Inc..................................................                    65,000

Brad Peery Inc.......................................................                    65,000
               Total.................................................                 4,000,000
                                                                                    ===========
</TABLE>


                                       23

<PAGE>

                                                                     EXHIBIT 4.1

                      [LOGO OF CENTILLIUM COMMUNICATIONS]
NUMBER                                                               SHARES
CTL
                                 COMMON STOCK
                         INCORPORATED UNDER THE LAWS
                           OF THE STATE OF DELAWARE

  THIS CERTIFICATE IS TRANSFERABLE                    CUSIP 152319 10 9
IN NEW YORK, NY AND RIDGEFIELD PARK, NJ     SEE REVERSE FOR CERTAIN DEFINITIONS


  THIS IS TO CERTIFY THAT



  is the owner of

    fully paid and non-assessable shares, $.001 par value, of COMMON STOCK, of

========================CENTILLIUM COMMUNICATIONS, INC.========================

(hereinafter called the "Corporation"), transferable on the books of the
Corporation in person, or by duly authorized attorney, upon surrender of this
certificate properly endorsed. This certificate is not valid until countersigned
by the Transfer Agent and registered by a Registrar.
    WITNESS the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.

Dated:


             [CORPORATE SEAL OF CENTILLIUM COMMUNICATIONS, INC.]


/s/ Arthur Schneiderman                                 /s/ Faraj Aalaei
SECRETARY                                             CHIEF EXECUTIVE OFFICER


                                                COUNTERSIGNED AND REGISTERED:
                                     CHASEMELLON SHAREHOLDER SERVICES, L.L.C.


                                                               TRANSFER AGENT
                                                                AND REGISTRAR
                                                     BY
                                                         AUTHORIZED SIGNATURE


<PAGE>

                           [REVERSE OF CERTIFICATE]

                        CENTILLIUM COMMUNICATIONS, INC.

The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:

<TABLE>
<CAPTION>


<S>       <C>                                       <C>
TEN COM - as tenants in common                         UNIF GIFT MIN ACT - _______Custodian_____________
TEN ENT - as tenants by the entireties                                     (Cust)             (Minor)
JT TEN  - as joint tenants with right                                       under Uniform Gifts to Minors
          of survivorship and not as tenants                                Act________________
          in common                                                                (State)

</TABLE>

    Additional abbreviations may also be used though not in the above list.

     For value received, _____________ hereby sell, assign and transfer unto

_______________________________________

PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
_______________________________________


__________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)

_____________________________________________________________________________

_____________________________________________________________________________

____________________________________________________________________ Shares
of the capital stock represented by the within Certificate, and
do hereby irrevocably constitute and appoint

____________________________________________________________________Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.

Dated_______________________________


                               ________________________________________________
                        NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST
                                CORRESPOND WITH THE NAME AS WRITTEN UPON THE
                                FACE OF THE CERTIFICATE IN EVERY PARTICULAR,
                                WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE
                                WHATEVER.

Signature Guaranteed:




By_____________________________________________
THE SIGNATURE(S) MUST BE GUARANTEED BY AN
ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCK-
BROKERS, SAVINGS AND LOAN ASSOCIATIONS AND
CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED
SIGNATURE GUARANTEE MEDALLION PROGRAM). PURSUANT
TO S.E.C. RULE 17Ad-15.










<PAGE>

                                                                     Exhibit 5.1

                 [WILSON SONSINI GOODRICH & ROSATI LETTERHEAD]

                                  May 23, 2000

Centillium Communications, Inc.
47211 Lakeview Boulevard
Fremont, CA 94538

   RE: REGISTRATION STATEMENT ON FORM S-1

Ladies and Gentlemen:

   We have examined the Registration Statement on Form S-1 filed by you with
the Securities and Exchange Commission on February 18, 2000 (Registration No.
333-30772) (the "Registration Statement"), in connection with the registration
under the Securities Act of 1933, as amended, of up to 4,600,000 shares of your
Common Stock, par value $0.001 per share (the "Shares"). The Shares include an
over-allotment option granted to the underwriters of the offering to purchase
600,000 shares. We understand that the Shares are to be sold to the
underwriters of the offering for resale to the public as described in the
Registration Statement. As your legal counsel, we have examined the proceedings
taken, and are familiar with the proceedings proposed to be taken, by you in
connection with the sale and issuance of the Shares.

   It is our opinion that the Shares have been duly authorized and that, upon
completion of the proceedings being taken or contemplated by us, as your
counsel, to be taken prior to the issuance of the Shares, including the
proceedings being taken in order to permit such transaction to be carried out
in accordance with applicable state securities laws, the Shares, when issued
and sold in the manner described in the Registration Statement and in
accordance with the resolutions adopted by the Board of Directors of the
Company, legally and validly issued, fully paid and nonassessable.

   We consent to the use of this opinion as an exhibit to the Registration
Statement and further consent to the use of our name wherever appearing in the
Registration Statement, including the prospectus constituting a part thereof,
and any amendments thereto.

                                          Very truly yours

                                          /s/ WILSON SONSINI GOODRICH & ROSATI
                                              Professional Corporation

<PAGE>

                                                                    Exhibit 23.1

               CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

   We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated February 9, 2000, in Post-Effective Amendment No. 1
to the Registration Statement (Form S-1 No. 333-30772) and related Prospectus
of Centillium Communications, Inc.

   Our audits also included the financial statement schedule listed in Item
16(b) of Post-Effective Amendment No. 1 to the Registration Statement. This
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion based on our audits. In our opinion, the financial
statement schedule referred to above, when considered in relation to the basic
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.

                                                           /s/ Ernst & Young LLP

San Jose, California

May 23, 2000


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