AMATI COMMUNICATIONS CORP, 10-K, 1997-10-31

AMATI COMMUNICATIONS CORP
10-K, 1997-10-31
COMPUTER COMMUNICATIONS EQUIPMENT

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549
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FORM 10-K

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

For the fiscal year ended AUGUST 2, 1997

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

For the transition period from
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Commission file number 0-4187
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AMATI COMMUNICATIONS CORPORATION

(Exact name of registrant as specified in its charter)

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DELAWARE 94-1675494
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

2043 SAMARITAN DRIVE, SAN JOSE, CA 95124
(Address of principal executive (Zip Code)
offices)
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Registrant's telephone number, including area code: (408) 879-2000
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Securities registered pursuant to Section 12(b) of the Act:

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Name of each exchange
Title of each class on which registered
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NONE

Securities registered pursuant to Section 12(g) of the Act:

Title of Class
COMMON STOCK, $.20 Par Value
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for at least the past 90 days.

YES _X_ NO ___

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K / /

The approximate aggregate market value of the registrant's common stock held
by non-affiliates on October 24, 1997 (based upon the closing sales price of
such stock as reported in the National Market by Nasdaq as of such date was
$318,419,763.

As of October 24, 1997, 19,746,962 shares of Registrant's Common Stock were
outstanding.

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AMATI COMMUNICATIONS CORPORATION
1997 FORM 10-K
TABLE OF CONTENTS

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PART I

Item 1. Business.................................................... 2

Item 2. Properties.................................................. 10

Item 3. Legal Proceedings........................................... 10

Item 4. Submission of Matters to a Vote of Security Holders......... 10

PART II

Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 11

Item 6. Selected Financial Data..................................... 11

Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 12

Item 8. Financial Statements and Supplementary Data................. 22

Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 40

PART III

Item 10. Directors and Executive Officers of the Registrant.......... 40

Item 11. Executive Compensation...................................... 42

Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 44

Item 13. Certain Relationships and Related Transactions.............. 45

PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K....................................................... 46

SIGNATURES.............................................................. 50
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PART I

ITEM 1. BUSINESS

Incorporated under the laws of the state of Delaware in 1968 as Microform
Data Systems, Inc., the Company changed its name to ICOT Corporation in 1980. On
November 28, 1995, ICOT Corporation, based in San Jose, California and Amati
Communications Corporation ("Old Amati"), a privately held Mountain View,
California based company completed a merger by which Old Amati became a wholly-
owned subsidiary of the Company. Effective as of the merger, the Company's name
was changed to Amati Communications Corporation, and its common stock began
trading on the Nasdaq National Market under the symbol "AMTX". To accommodate
its recent growth and to consolidate facilities of the merged entities, the
Company moved to a new office in September 1996. The Company's principal offices
are now located at 2043 Samaritan Drive, San Jose, California, 95124 and its
telephone number is (408) 879-2000, fax number is (408) 879-2900 and World Wide
Web site is at : http//www.amati.com.

The Company is a leading developer of advanced transmission equipment
utilizing Discrete Multi-tone ("DMT") technology for Asymmetrical Digital
Subscriber Line ("ADSL") and Very high-speed Digital Subscriber Line ("VDSL")
markets. The Company holds DMT, ADSL and VDSL patents and has entered into
agreements covering its technology, with companies like Alcatel, Analog Devices,
Inc., Motorola, NEC, Northern Telecom, Siemens and Texas Instruments. The
Company's DMT/ADSL products were recently selected by British Columbia Telephone
("BC Tel"), Canada for a proposed roll-out of the first standards based
commercial ADSL services for transmitting high-speed data over existing copper
phone lines, making internet access, interactive services, broadcast quality
video and video-on-demand realizable to subscribers.

The Company is also a provider of network connectivity systems for the
internetworking and Original Equipment Manufacturers ("OEM") markets. These
products are used primarily in two applications:

- International Business Machines Corporation ("IBM") compatible personal
computers ("PCs") to IBM mainframe connectivity applications in Local Area
Networks ("LANs").

- Bridge products for interconnecting Token-Ring LANs, Token-Ring and
Ethernet LANs, and Token-Ring LANs over Wide Area Networks ("WANs").

On September 30, 1997, the Company and Westell Technologies, Inc. entered
into an Agreement and Plan of Merger whereby Amati will become a wholly owned
subsidiary of Westell Technologies, Inc. Westell Technologies, Inc.,
headquartered in Aurora, Illinois, is a holding company for Westell, Inc., a
leading world-wide manufacturer of xDSL systems, Conference Plus, Inc., a
multi-point telecommunications service bureau specializing in conferencing, and
Westell World Wide Services, Inc., a service provider of engineering,
installation and network management. Pursuant to the Agreement and Plan of
Merger, and subject to certain conditions, including the approval of the
transaction by the respective stockholders of both companies, holders of
outstanding Amati Common Stock will receive in the merger 0.9 shares of Westell
Class A Common Stock for each share of Amati Common Stock.

PRODUCTS AND MARKETS

The Company is currently developing products to provide high speed digital
video, voice and data transmission over copper phone lines utilizing DMT
modulation technology. See "Technology" referenced below. Beginning in 1987,
Professor John M. Cioffi, who undertook initial research on DMT technology, and
his graduate students developed the concept of utilizing DMT technology to
transmit large amounts of digital code and multimedia signals over ordinary
telephone lines. This research resulted in three patents, owned by Stanford
University, to which the Company holds an exclusive worldwide royalty-bearing
license.

The Company has developed the DMT technology primarily for ADSL
applications. In 1992, a prototype system was developed with funding from
Northern Telecom to participate in the competition for

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the American National Standards Institute ("ANSI") standard for the ADSL
transmission specification. In 1993, Amati's DMT technology was selected by ANSI
and, as a result, is recognized as the United States standard for ADSL
transmission. In cooperation with ANSI, the European Telecommunications
Standards Institute ("ETSI") has provided an information annex that makes the
appropriate data rate changes for European ADSL service. The Company believes
the award of the ANSI and ETSI standards will increase the market potential for
the Company's products. Because Amati's DMT technology was selected as the
standard for ADSL, it is required to license such technology on a fair and
reasonable basis to third parties who request it.

TECHNOLOGY

The Company's core technology is DMT, a multicarrier modulation technology.
The concept of multicarrier transmission is over 30 years old; however, research
on the Company's DMT technology has been accomplished during the past 8 years.
The Company has exclusive, worldwide royalty-bearing license rights to the DMT
patents owned by Stanford University; since the Company's inception, it has
filed numerous additional patent applications to protect its intellectual
property. The Company considers itself to be the leader in the development of
DMT technology.

The purpose of modulation technology is to transmit a signal over a given
medium as efficiently as possible. This requires minimizing errors in
transmission by avoiding the noise accompanying the chosen medium. In the case
of DMT, the available bandwidth is divided into carriers that reside at
different frequencies. The carriers are measured for their ability to send data
with the bits of information assigned to the carriers based upon their capacity.
Carriers with higher capacity are assigned more bits, while carriers unable to
carry data are turned off. In the case of an ADSL system, the available
bandwidth is 1.1 megahertz (MHz), consisting of 256 carriers of 4 kilohertz
(kHz) bandwidth each.

A DMT system has a transceiver at each end of the line. In the case of ADSL,
there is one transceiver in the telephone company's central office called the
ATU-C (ADSL Transmission Unit-Central office) and one in the subscriber's home
called the ATU-R (ADSL Transmission Unit-Remote). When DMT initializes the ATU-C
by transmitting 256 4 kHz carriers downstream to the ATU-R, the ATU-R measures
the quality of each of the carriers and then decides whether a carrier has
sufficient quality to be used for further transmission and, if so, how much data
this carrier should carry relative to the other carriers that are to be used.
This information is then passed back to the ATU-C via a control channel where
the bits are assigned to the carriers. The system is very adaptive as it will
change the bit assignments should the line characteristics change during
transmission. This procedure maximizes performance by minimizing the probability
of bit error in transmission. Bit errors are typically caused by interference
such as AM radio stations, open-circuited branched telephone lines called bridge
taps and crosstalk from other wires. The system simply assigns fewer or no bits
to carriers at frequencies where the interference occurs.

The initial development of DMT was directed toward transmitting digital
video signals over ordinary copper twisted-pair wires. DMT is also effective
over other media, including coaxial cable and wireless transmission. The Company
believes that in order to design and manufacture commercially acceptable
products, cost and performance improvements beyond what is available with
current technology will be necessary. Accordingly, it has assembled a
microelectronics team that is designing custom integrated semiconductor circuits
utilizing standard Application Specific Integrated Circuit ("ASIC") design
systems and certain technologies beyond ASIC.

ADSL (ASYMMETRICAL DIGITAL SUBSCRIBER LINE)

In the late 1980's, Bellcore, the research entity jointly created and funded
by seven Regional Bell Operating Companies for the development of new
technologies, developed the parameters for ADSL as a high-quality, low-cost
method for transmitting digital video from the central office of the local
telephone company to a subscriber's home over ordinary copper twisted-pair wire.
The term "asymmetric" refers to

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the fact that there is a different data rate in each direction (bi-directional)
of the transmission. The ANSI standard for ADSL sets the data rate at
approximately 6 Mbps to the subscriber's home and approximately 600 Kbps from
the subscriber's home to the central office over 24 and 26 gauge copper
twisted-pair wire for a distance of up to two miles. The practical
implementation of ADSL products will allow the simultaneous transmission of
video, data and voice over the type of copper wire that is currently installed
in most homes in the United States and other developed countries.

ADSL is intended for data dialtone services, such as internet access, as
well as video dialtone services. The potential demand for ADSL is being driven
primarily by the threat to the telephone companies of increased competition as a
result of deregulation, and their desire to provide high speed data transmission
and video services utilizing their existing copper wire plant without having to
invest heavily in more expensive access technologies, such as fiber-optic
systems. Telephone companies are currently performing technical and market
trials of various data, video and multimedia systems. ADSL has the potential of
providing telephone companies with a technology that will enable them to compete
cost-effectively with their main competitors, the interexchange carriers and
cable companies, for high speed internet access and video services.

There are several access transmission technologies that can deliver digital
services to a subscriber's home. The most effective technology, laying
fiber-optic cable to each home, is not practical as a near-term solution from
both cost and time-to-implement perspectives. Therefore, the telephone companies
are reviewing interim strategies such as ADSL, Hybrid Fiber Coax ("HFC"),
fiber-to-the-curb and certain wireless solutions. The Company believes ADSL is
the most effective technology where homes are widely dispersed or where the
"take rates" of the services are low (which is expected as new data and video
services are introduced). ADSL provides the additional advantages of utilizing
the existing copper plant, which avoids trenching streets and subscriber's
properties to lay new coaxial or fiber-optic cables. In addition, ADSL can be
deployed easily on a home-by-home basis. However, ADSL has the disadvantage
relative to fiber-to-the-curb and HFC of offering fewer simultaneous channels,
although telephone office switches may be able to increase the menu of offerings
with ADSL.

The Company's first ADSL product was called Prelude. Prelude was completed
in 1992 and utilized in the various competitions for the ANSI standard, which
was awarded to the Company's DMT technology. This prototype was developed by
engineers with funding by Northern Telecom to prove that a 6 Mbps data rate was
possible over copper wire and to participate in the ANSI standards competition.
Prelude was produced using discrete (off-the-shelf) components. Prelude has been
utilized by telephone companies in 15 countries throughout the world to evaluate
the potential of ADSL, primarily in laboratory trials.

In November 1995, the Company began shipping the Overture series of
transceivers. The Overture 4 is a prototype that does not have a low enough cost
or power consumption for mass deployment and its components are entirely
discrete (off-the-shelf). It can operate at data rates of 1.5, 2, 3, or 4 Mbps
in the downstream (central office to the home) direction and up to 64 Kbps in
the upstream direction, and thus does not meet the ANSI standard for
transmission rates. The Overture 4 is currently participating in field trials,
but is being phased out in favor of the next series called Overture 8.

In March 1996, the Company delivered the Overture 8, a transceiver
characterized by a high bandwidth as defined by the ANSI standards. Currently
installed in a trial of broadcast video in Australia, the Overture 8 is the
first product utilizing custom semiconductors designed by the Company's own
microelectronics group. Overture 8 has two components developed utilizing ASIC
design techniques. The Company believes Overture 8 will be important to the
market because it has the capability to support the requirements delineated in
the ANSI standard, including four downstream channels and three upstream
channels. The downstream data rates using Overture 8 can be as high as 8 Mbps in
various multiples, such as four 2 Mbps channels, and can be channelized in order
to support such services as video conferencing.

In June 1996, a new version of the Overture 8 ADSL/DMT Modem specifically
designed to meet system needs for Internet access was announced. Key to the new
design is the core ADSL/DMT technology

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that enables Internet access at data rates as high as 8 Mbps downstream and 640
Kbps upstream, 60 times faster than basic rate ISDN and up to 250 times faster
than many dial-up modems. The new Overture 8 ADSL/DMT Modem for Internet Access
adds direct Ethernet connectivity, using 10BaseT, to both subscriber and central
office units. This is the first 8 Mbps ADSL modem with Ethernet available
commercially. Moreover, as with all standard ADSL/DMT modems, the new Overture 8
provides the high-speed data transmission over standard phone lines while still
permitting voice traffic on the same connection. The Company's ADSL products
continue to participate successfully in labs and field trials in both
international and domestic markets. The international trials include services
being offered by Post Telephone and Telegraph ("PTT")'s in Europe and
Asia-Pacific, with companies such as Italtel, Tadiran and Samsung. Other trials
include broadcast video installed in Australia and data/video applications in
France. In the US, the company has provided equipment in GTE-Microsoft's
Internet access trials and in NEC-MCI's video broadcast system trials.

In April 1997, the Company shipped its next generation of Overture 8
products, the Model 810, which delivers speeds up to 8 Mbps downstream and 640
Kbps upstream. Its advanced, low power design consumes less than 7W and adjusts
power consumption to line lengths and traffic conditions. This model is designed
to be used as a plug-in for the Allegro Access Concentrator or as a stand-alone
unit for the subscriber.

Another product introduced by the Company is the ADSL View SNMP Manager, a
Graphical User Interface ("GUI") based element manager that permits central site
administration and management of the Company's ADSL network. This Windows-based
view manager can speed service delivery by simplifying provisioning,
reconfiguration and management.

Before the end of fiscal 1997, the Company was selected to provide equipment
to BC Tel, Canada's second largest telecommunications company, for its first
commercial, standards-based ADSL services. These ADSL/DMT products will be used
in the central switching office and by customers and will enable BC Tel to
initially offer services such as high-speed Internet access and high-speed
corporate LAN access to its customers.

VDSL (VERY HIGH-SPEED DIGITAL SUBSCRIBER LINE)

Telephone companies have been placing fiber-optic cables into communities
and are expected to continue to do so at an increasing rate. It is currently not
economically feasible to take the fiber directly to homes and telephone
companies are not expected to do so in the foreseeable future. Access
technologies such as fiber-to-the-curb and fiber-in-the-loop are strategies that
allow telephone companies to run the fiber to some platform or node in the
community and link homes requiring high bandwidth services directly over copper
wire or coaxial cable. The concept of transmitting at such high data rates over
thousands of feet of copper wire is just now becoming a reality. VDSL is used in
conjunction with a fiber-optic backbone to cover the "last mile" as efficiently
as possible. The VDSL market thus requires DMT products that have higher data
rates (25 Mbps to 52 Mbps) over shorter distances (typically 500 to 3,000 feet)
than ADSL products.

The Company believes that DMT technology is superior to other available
modulation technologies for this application and is designing VDSL products
using its microelectronics capability. As with ADSL, VDSL products will be
asymmetrical and are intended to carry video, voice and data simultaneously. The
Company's next VDSL product, called the Piccolo, is expected to operate
asymmetrically at speeds of up to

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25 Mbps. These products are expected to be introduced in 1998 and to compete for
the ANSI standard for VDSL transmission, which has not yet been awarded.

The Company's digital VDSL chip is being designed for utilization in cable
as well as copper transmissions. Management has been very involved in cable
standards activities in an attempt to obtain the endorsement for DMT through the
Institute of Electrical and Electronic Engineers ("IEEE") 802.14 committee,
which has authority over the upstream cable standards. DMT has the unique
capability of optimizing the upstream data rate relative to other technologies
available, although there can be no assurance the Company will win this
endorsement. As the cable market migrates from analog systems to digital with
interactive requirements, a large opportunity for DMT-based systems will exist.
As is true for ADSL products, in order to implement a video service over VDSL
products, other key components, not supplied by the Company, including video
content, a digital switch, a video server, encode/decode equipment and a set-top
box in the subscriber's home, will be required to co-exist in a cost effective
manner.

During fiscal year 1997, the Company reached an agreement with NEC
Corporation to jointly develop the VDSL transceiver offering higher speeds for
shorter subscriber loops. Under this agreement, the Company will provide
DMT/VDSL technology to NEC, which will design and then produce a digital chip
set expected to offer excellent performance including long transmission
distances, robustness against noise, crosstalk environment, and low power
consumption while still offering a cost effective solution. Development efforts
in conjunction with this technology are ongoing.

IBM PRODUCTS

During the past several years, the Company has undertaken several projects
in which it has designed, developed and manufactured custom communications
products for IBM. Pursuant to its principal agreement with IBM, the Company
furnishes engineering, manufacturing, and assembly services for the manufacture
of LAN bridge products in accordance with IBM specifications and upon receipt of
purchase orders for the products. This manufacturing agreement with IBM, amended
in December 1993, has been extended to December 1998. Under the terms of a
second agreement, the Company provided development and support services to IBM
for a custom product. IBM shipped this product in the United States and Canada
in July 1994 and in a number of European and Asian countries thereafter. In
fiscal years 1996 and 1997, the Company received royalty payments from IBM on
sales of this product to end-customers.

Fiscal 1997 sales to IBM accounted for approximately 51% of the Company's
revenues. Since IBM considers product sales and market data confidential, the
Company has very little ability to anticipate future demands. The Company is
highly dependent on sales to IBM and expects that quarterly and annual results
could be volatile due to its dependence on this dominant customer. IBM may
terminate its agreements with the Company upon 30 days' notice without a
significant penalty. Upon termination of the agreements, the Company has
continuing obligations to provide certain products and technical support for a
period of years, at a price then to be negotiated.

CONNECTIVITY PRODUCTS

The Company's PC to Mainframe Connectivity products consist of 3270
emulation products which are Disk Operating System ("DOS") and Microsoft Windows
based software and microcomputer boards (with extensive firmware) that reside in
an IBM or IBM compatible PC, and enable the PC to communicate, access and
transfer data through Systems Networks Architecture ("SNA") to IBM or IBM
compatible mainframes. The Company sells single user and LAN gateway versions of
all its products. LAN gateways allow multiple PC users, attached directly to
Token-Ring, Ethernet and other LANs, to access SNA networks through one shared
link. The Company markets its PC to Mainframe Connectivity products to selected
niche markets: OEMs, Application Program Interface ("API") and strategic
end-user market

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segments of the Windows and DOS Connectivity markets. The Company's connectivity
market share and revenues have been declining in recent years and are expected
to continue to decline.

SALES, MARKETING, SERVICE

With its DMT products, the Company's strategy is to sell to telephone
companies worldwide through large telecommunication suppliers who will integrate
the Company's products into larger systems for their customers. This type of OEM
selling does not require a large sales force. In the PC to Mainframe
Connectivity market, the Company sells to end-users, independent software
vendors, OEM's and through a small network of resellers. In the network
connectivity business, the Company offers a 90-day warranty and post-warranty
support programs. Hardware products are typically serviced on a factory repair
basis. Software support is usually handled by phone consultation or, less often,
by an on-site visit by a systems engineer. The Company employs five persons in
sales, six in customer support, and three in marketing.

Export sales of connectivity products in fiscal 1995, 1996, and 1997
represent 1-2% of total net sales, for each such year, primarily to Western
Europe and Canada. Shipments of the Overture series of transceivers for use in
field trials, primarily to the countries of Germany, Netherlands, France,
Finland and Canada accounted for 11% of total net revenues in fiscal 1997. These
sales are subject to certain controls and restrictions, but the Company has not
experienced any material difficulties related to these sales.

BACKLOG

As of the end of fiscal 1996 and 1997, the Company's backlog was
approximately $2,961,000 and $2,362,000, respectively. The Company anticipates
that all of its current backlog will be filled within the 1998 fiscal year.

MANUFACTURING

Most of the Company's products are assembled at its San Jose, California
facility, where testing, quality assurance and material control activities are
performed. The Company has the capacity to increase its output without further
expansion of its physical plant and warehousing facilities. The Overture series
of transceivers is currently in production, and assembly and testing of this
product is being outsourced. Product quality and reliability is maintained at
vendors' sites through auditing at subcontractors' facilities and inspection of
incoming components.

Electronic and mechanical components, subassemblies and supplies are
purchased from many independent suppliers. Although the Company purchases most
of a given component, subassembly or supply from a single vendor, management
believes that, with a few exceptions, at least one alternative source of supply
is available at comparable cost for each component in its product lines. A few
components are consigned from IBM and there is no alternative source of supply
for these components.

RESEARCH AND DEVELOPMENT

The Company believes that it has a technological leadership position in DMT
modulation technology. Future success, however, is largely dependent on its
ability to maintain this position through the development of new products that
meet a wide range of customer needs. Accordingly, the Company intends to
continue to make substantial investments in research and development. There can
be no assurance that future development efforts will result in commercially
successful products, or that these products will not be rendered obsolete by
changing technology, new industry standards or new product announcements by
others.

The Company had 48 full-time employees engaged in research and development
activities as of August 2, 1997. Its research and development efforts are
expended on the enhancement of existing

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products and for the development of new products in order to meet rapidly
changing customer requirements. These efforts are organized into three main
groups: VLSI, ADSL and VDSL development. Currently, the VLSI group is focused on
efforts for the ADSL and VDSL markets.

Significant activities include the following:

- Development of system level ADSL and VDSL products.

- Development of OEM ADSL and VDSL modules.

- Reducing the cost, power and size of ADSL and VDSL modules and products.

Net research and development expenses totaled $1,595,000 (13% of net sales)
in fiscal 1995, $3,837,000 (32% of net sales) in fiscal 1996 and $8,335,000 (63%
of net sales) in fiscal 1997. Increasing research and development costs in
fiscal 1996 and 1997 are primarily due to the hiring of additional engineers and
introduction of the Company's next generation of the Overture series of ADSL/DMT
modems, access system shelf products, the Allegro access concentrator and the
Model 810. All related research and development expenses are charged to
operations as incurred. Engineering expenses are net of software development
costs capitalized in accordance with Statement of Financial Accounting Standards
("SFAS") No. 86 and of IBM-funded development costs. There was no capitalization
of software development costs in 1995, 1996 and 1997. The amount of funded
development costs totaled $637,000, $589,000 and $494,000, respectively, for
fiscal 1995, 1996 and 1997. The amortization of capitalized software development
costs charged to cost of sales was $310,000 in fiscal 1995, and $246,000 in
fiscal 1996 and 1997.

COMPETITION

Telephone company trials have demonstrated the feasibility of ADSL products.
Two basic ADSL technologies have participated in these trials: the Company's DMT
multicarrier technology and the single Carrier-less Amplitude/Phase modulation
("CAP") technology developed by AT&T Microelectronics Division and sold to
Globespan. DMT and CAP have been rival technologies since the ANSI standards
competition in 1993, which was won by the Company's DMT technology. The Company
believes that its DMT technology is less complex and more cost effective than a
single carrier technology, such as CAP. The trials to date have been run at data
rates of 1.5 Mbps and 2 Mbps, the speeds of Globespan's CAP products. The
Company believes that as products capable of data rates of 6 Mbps and 8 Mbps
become increasingly available, trials will be conducted at those speeds. As the
performance differences between DMT and CAP become greater at higher data rates,
the Company believes that most of the competition at the higher speeds will come
from other competitors using DMT technology.

The Company has entered into agreements with Motorola Corporation and Texas
Instruments ("TI") to develop a standards compliant chip solution for the ADSL
market. The Company has also licensed its technology to Alcatel and Analog
Devices, Inc. who have developed or are developing integrated circuits. The
Company has the right to buy the Motorola chip and the TI chipset at most
favored customer prices. The Company expects customers of these companies to
become competitors with system level DMT products. Other entities with
development efforts underway with DMT technology for the ADSL marketplace
include ORCKIT, Pairgain, ECI, Ericsson and Aware.

To date, the Company is not aware of any ADSL products introduced in the
marketplace that have a cost, power and size structure satisfactory for a mass
deployment to customers. In order to design and manufacture commercially viable
product in this market, a substantial investment in custom integrated
semiconductors must be made. Those suppliers not making such investments will
not be able to compete effectively.

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The PC to Mainframe Connectivity market is highly competitive and is
characterized by rapid advances in technology which result in the frequent
introduction of new products with improved performance characteristics, thereby
subjecting the Company's products to the risk of technological obsolescence. The
Company's ability to compete is dependent on several factors, including:
reliability, product performance, quality, features, distribution channels, name
awareness, customer support, product development capabilities and the ability to
meet delivery schedules. The Company competes, directly or indirectly, with a
broad range of companies, many of whom have significantly greater financial and
other resources. In addition, the Company is competing for a limited and
declining segment of the PC-Connectivity market, which market is itself
declining.

Many companies compete in the PC to Mainframe Connectivity market, including
IBM, Attachmate Corporation, Eicon Group, Inc., Network Software Associates,
Wall Data Incorporated, and Novell Inc. Products and policies of these companies
can adversely affect the Company's competitive position. A large number of the
Company's products interact with IBM equipment and support IBM protocols. Thus,
the development of new products, equipment or communications systems by IBM
could adversely affect its PC to Mainframe Connectivity competitiveness.

PATENTS, TRADEMARKS AND LICENSES

The Company has a policy of seeking patents when appropriate on inventions
concerning new products and improvements as part of its on-going research and
development activities. The Company has a total of 27 patents issued or filed.

The Company principally relies on its technological and engineering
resources to develop its business in an industry where technology changes very
fast. It does, however, consider the use of trademarks, copyrights, license
agreements and non-disclosure agreements as a means to protect its proprietary
technology and, therefore, it intends to seek and maintain protection where
appropriate.

The Company also has several registered trademarks, including "ICOT" and
"OmniPATH" and has copyrights in its software and related documentation, and is
a licensee under three OEM software source code licenses that are used in
connection with the development, maintenance, enhancement, and support of
various PC to Mainframe connectivity products. These licenses pertain to
peripheral products which the Company re-markets to complement or add features
to its core product line.

EMPLOYEES

As of August 2, 1997, the Company had 101 full-time employees, of whom 22
were engaged in manufacturing, 48 in research and development, 14 in marketing
and sales and 17 in general and administrative positions.

Thirteen members of the Company's engineering staff hold doctoral degrees.
The Company also employs a number of consultants who are primarily used in
engineering. Competition for technical personnel in this technology is intense.
In May 1995, the Company entered into an employment agreement with Dr. Cioffi,
its founder and Chief Technical Officer. The agreement provides for Dr. Cioffi
to be employed by the Company until October 1998, while continuing his
obligations as a full-time tenured faculty member at Stanford University.
Stanford University limits the amount of time its faculty can spend on outside
activities.

All employees of the Company are based in the United States. None of its
employees are subject to a collective bargaining agreement, and there have been
no work stoppages due to labor difficulties. The Company believes that its
employee relations are good.

9
<PAGE>
ITEM 2. PROPERTIES

The Company's corporate headquarters and manufacturing facility is located
in San Jose, California. In 1996, the Company moved its corporate, engineering
and manufacturing operations to an approximately 48,700 square foot facility to
consolidate its operations and accommodate its recent growth. The lease for this
facility commenced on July 15, 1996 and expires on July 31, 2001.

The Company's lease for its prior facility in North San Jose expires on July
23, 1999, and has been subleased for the remaining term of the lease. Related
rent and operating cost obligations are covered in full by sublease income.

The Company's wholly owned subsidiary, ICOT International Limited, now
dormant, leases an approximately 6,400 square foot building located in
Wokingham, England. ICOT International Limited ceased its operations in the
United Kingdom in fiscal 1993 as part of the Company's restructuring of its
connectivity business. The lease on the Wokingham facility expires on September
29, 2010. The Company has subleased this facility through December 1998, but
income from this sublease is less than its rental obligations. The Company has
recorded a liability of $454,000, net of anticipated future sublease income, to
cover partial rental obligations related to this facility. The Company believes
that its current facilities are adequate to conduct operations, and that its
facilities are adequate for the future growth of the Company.

ITEM 3. LEGAL PROCEEDINGS

In November 1993, an action was brought against the Company for damages
related to the use of one of the Company's products. The plaintiff filed a suit
claiming repetitive stress injuries resulting from the use of the Company's
products in the course of employment with American Airlines during the period
from May 1981 through July 1991. The plaintiff alleges damages in the amount of
$1 million and has requested punitive damages of $10 million. The Company
believes that the claim is without merit and has tendered defense of this action
to its insurance carriers. In the opinion of management, the outcome of this
litigation will not have a material adverse effect on the Company's financial
position or its results of operations.

Following public announcement of the execution of the Agreement and Plan of
Merger ("Merger Agreement") with Westell Technologies, Inc. ("Westell"), the
first of three substantially similar actions was filed in the Court of Chancery
of the State of Delaware in and for New Castle County against the Company,
Westell and the directors of the Company. Styled CHOPP V. GIBBONS, ET. AL., C.A.
No. 15971-NC, KINNEY V. GIBBONS, ET. AL., C.A. No. 15977-NC; and MENDEL V.
GIBBONS, C.A. No. 15973-NC, the actions, pleaded as putative class actions on
behalf of a purported class of Company stockholders, allege, among other things,
that the directors of the Company breached their fiduciary duties in connection
with approving the Merger Agreement. The actions seek, among other things, to
enjoin the transactions contemplated by the Merger Agreement and damages. The
Company believes these actions are without merit and intends to defend these
actions vigorously.

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

There were no matters submitted to a vote of the Company's security holders
during the fourth quarter of the fiscal year covered by this report.

10
<PAGE>
PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company has one class of stock outstanding, its common stock, which has
a par value of $.20 per share.

The Company's common stock is traded on the Nasdaq National Market under the
symbol "AMTX". The following table sets forth the range of high and low sales
prices for the periods indicated, as reported by the Nasdaq National Market.
These prices do not include retail markups, markdowns, or commissions.
<TABLE>
<CAPTION>
FISCAL 1996 LOW HIGH
- - --------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
First Quarter.............................................................. $ 2.50 $ 6.56
Second Quarter............................................................. 3.19 9.50
Third Quarter.............................................................. 5.25 19.75
Fourth Quarter............................................................. 9.38 36.50

FISCAL 1997 LOW HIGH
- - --------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
First Quarter.............................................................. $ 10.25 $ 25.38
Second Quarter............................................................. 11.75 20.75
Third Quarter.............................................................. 7.13 15.63
Fourth Quarter............................................................. 10.25 15.50
</TABLE>

On August 2, 1997, the Company had approximately 1,577 stockholders of
record. The Company has not paid cash dividends on its common stocks and its
present intention is not to do so.

ITEM 6. SELECTED FINANCIAL DATA

The following selected historical financial data has been derived from the
Company's audited consolidated financial statements. The historical financial
data should be read in conjunction with the Company's consolidated financial
statements and notes thereto.

<TABLE>
<CAPTION>
YEARS ENDED
-------------------------------------------------------
JULY 31, JULY 30, JULY 29, JULY 27, AUGUST 2,
1993 1994 1995 1996 1997
--------- --------- --------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNT)
<S> <C> <C> <C> <C> <C>
SELECTED INCOME STATEMENT DATA:
Net Sales................................................ $ 12,307 $ 8,236 $ 12,040 $ 12,085 $ 13,200
Income (Loss) beforeIncome Taxes......................... $ (5,963) $ 530 $ 1,933 $ (34,035) $ (12,243)
Provision for Income Taxes............................... -- 27 97 43 --
--------- --------- --------- ---------- ----------
Net Income (Loss)........................................ $ (5,963) $ 503 $ 1,836 $ (34,078) $ (12,243)
Net Income (Loss) per Share.............................. $ (.46) $ .04 $ .16 $ (2.21) $ (.66)
SELECTED BALANCE SHEET DATA:
Current Assets........................................... $ 11,188 $ 9,463 $ 7,793 $ 5,182 $ 9,282
Current Liabilities...................................... $ 2,598 $ 2,171 $ 1,591 $ 2,467 $ 5,517
Working Capital.......................................... $ 8,590 $ 7,292 $ 6,202 $ 2,715 $ 3,765
Total Assets............................................. $ 12,936 $ 11,391 $ 12,111 $ 6,241 $ 15,083
Long-term Liabilities.................................... $ 1,099 $ 428 $ 294 $ 2,094 $ 4,540
Stockholders' Equity..................................... $ 9,239 $ 8,792 $ 10,226 $ 1,680 $ 5,026
</TABLE>

11
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

INTRODUCTION

To the extent that the information presented in this Form 10-K discusses
financial projections, information or expectations about the Company's products
or markets, or otherwise makes statements about future events, such statements
are forward-looking and are subject to a number of risks and uncertainties that
could cause actual results to differ materially from the statements made. These
include, among others, successful and timely development and acceptance of new
products, the availability of sufficient funding to complete development of new
products and other factors described below. In addition, such risks and
uncertainties also include the matters identified under the heading "Risk
Factors" below.

OVERVIEW

On November 28, 1995, ICOT Corporation, based in San Jose, California, and
Amati Communications Corporation ("Old Amati"), a privately held Mountain View,
California based company, completed a merger by which Old Amati became a
wholly-owned subsidiary of ICOT Corporation. Effective as of the merger, the
name of the surviving company was changed to Amati Communications Corporation
(the "Company") and its common stock began trading on the Nasdaq National Market
under the symbol "AMTX" on November 29, 1995. In September 1996, the combined
company moved to a new 48,700 square foot building in San Jose, California to
accommodate its growth and consolidate engineering and manufacturing in a single
facility.

HIGHLIGHTS OF THE FISCAL YEAR

- Announced a joint development agreement with NEC Corporation to provide
DMT/VDSL technology in the design and production of a digital chip set for
high-speed over fiber networks.

- Participated in the France Telecom trial to deliver the first broadcast
video service and internet mid-band services with the new Overture 8
ADSL/DMT Modem Design.

- Announced an alliance with Texas Instruments ("TI") to jointly develop and
market DMT technology for ADSL modems based on TI's TMS 320 Digital Signal
Processors ("DSP").

- Introduced the Allegro, the first in the line of products developed by the
Company and the world's first ADSL Access Concentrator designed to enable
the installation of multiple modems and control via a single mechanical
configuration, saving space, consolidating power and providing easy
maintenance.

- Announced a program to integrate Sourcecom's BANC 6000 with the Company's
Allegro to provide an integrated DSLAM and networking platform for high
speed access networks using standard DMT-based ADSL technology.

12
<PAGE>
- Licensed Euristix RACEMAN EMSY Element Management System technology to
provide visibility, status monitoring, basic alarm management, and basic
performance for the Allegro--all in a Windows based graphical user
interface (GUI).

- Announced a strategic development partnership with Siemens AG, a leader in
Asynchronous Transfer Mode (ATM) technology aimed at high speed connection
of ATM to ADSL transmission lines.

- Provided modems at GTE--Microsoft, high speed Internet access and NEC
America-MCI broadcast video trials utilizing DMT/ADSL technology.

- Supplied ADSL equipment to BC TEL, Canada's second largest
telecommunication company, the Company's first commercial service using
DMT products.

RESULTS OF OPERATIONS

FISCAL YEAR 1997 VS. FISCAL YEAR 1996

Total net sales in fiscal 1997 increased 9% to $13,200,000 from sales of
$12,085,000 in the previous fiscal year. Revenues recognized during the current
fiscal quarter include revenues recorded under the Company's previously
announced joint development agreement with NEC Japan. Sales to IBM accounted for
51% of the Company's revenue in fiscal 1997 compared with 69% in fiscal 1996. In
February 1997, the Company signed an extended contract with IBM for the
development and manufacture of its next generation internetworking products. The
Company expects that IBM will continue to account for a substantial portion of
the Company's revenues until development and commercialization of its ADSL and
VDSL products are completed.

In the third quarter of fiscal 1996, the Company first delivered the
Overture 8, which is characterized by a high bandwidth as defined by the ANSI
standards. The Company's ADSL products continue to participate successfully in
labs and field trials in both international and domestic markets. The
international trials include services being offered by Post Telephone and
Telegraph ("PTT")'s in Europe and Asia-Pacific, with companies such as Philips,
Italtel, Tadiran and Samsung. Other trials include broadcast video installed in
Australia and data/video applications in France. In the US, the Company has
provided equipment in GTE's Internet access and remote office connectivity
trials in Washington and Texas. Sales of the Overture series were $1,892,000 and
$1,818,000 in fiscal 1997 and 1996, respectively. In addition, contract revenues
of $3,710,000 in fiscal 1997 and $148,000 in fiscal 1996 were also realized from
customization of products.

In January 1997, the first in a line of products developed by the Company
called the Allegro Access Concentrator, a platform for high density installation
of the Overture 8 DMT modem technology, was shipped to France. This shelf
version uses the Overture 8 modem and offers high-speed concentration of packet
based information or video data streams and multiplexing of multiple data
channels per ADSL modem connection. During the third quarter of fiscal 1997, the
Company introduced its next generation of Overture 8 products, the Model 810,
which delivers speeds up to 8 Mbps downstream and 640 Kbps upstream. Its
advanced, low power design consumes less than 7W and adjusts power consumption
to line lengths and traffic conditions. This model is designed to be used as a
plug-in for the Allegro Access Concentrator or as a stand-alone unit for the
subscriber.

13
<PAGE>
PC to Mainframe Connectivity sales of $864,000 in fiscal 1997 represent a
decline of 53% when compared with the prior fiscal year due to a general decline
in the Company's connectivity market share. The PC to Mainframe Connectivity
market is highly competitive and is characterized by rapid advances in
technology which frequently result in the introduction of new products with
improved performance characteristics, thereby subjecting the Company's products
to risk of technological obsolescence. The Company competes directly or
indirectly with a broad range of companies, many of whom have significantly
greater resources. In addition, the Company is competing for a limited segment
of a declining market.

Gross margin as a percent of sales was 28% for fiscal 1997 compared with 39%
for fiscal 1996. The decrease in margin was primarily attributable to product
mix. Amortization of capitalized software costs charged to cost of sales was
$246,000 in fiscal 1997 and 1996.

Net research and development expenses increased 117% to $8,335,000 in fiscal
1997 when compared to fiscal 1996 largely because of the addition of engineers
and other new employees and the introduction of the Company's new family of
Overture 8 ADSL/DMT modems, access system shelf products and access
concentrators. Maintaining the Company's technology position is largely
dependent on the Company's ability to develop new products that meet a wide
range of customer needs. Research and development efforts for the DMT technology
are grouped into three areas: VLSI, ADSL and VDSL development. All research and
development expenses related to the DMT technology are charged to operations as
incurred. Total engineering expenses are net of funded development costs from
IBM. Funded development costs were $494,000 and $589,000 for fiscal 1997 and
1996, respectively. The Company considers research and development a key element
in its ability to compete and will continue to make investments in product
development to provide high-speed solutions for the future.

Marketing and sales expenses increased by $1,915,000 or 201% in fiscal 1997
when compared with the prior fiscal year. This is primarily due to an increase
in staffing and overseas travel in conjunction with the Overture series
representation in field trials internationally and participation in domestic
trade shows and product promotion. Sales, marketing and customer support
operations of the Company's ADSL products, which cover both domestic and
international markets, is handled by fourteen individuals. The Company's
strategy is to sell to telephone companies worldwide through large
telecommunication suppliers who will integrate the Company's products into
larger systems for their customers. This type of OEM selling does not require a
large sales force.

General and administrative expenses increased by $1,960,000 or 78% in fiscal
1997 when compared with the prior fiscal year. This is primarily due to
occupancy costs related to the move to a larger facility, patent and legal
expenses, and additional corporate staffing.

Interest income decreased to $116,000 in fiscal 1997 compared to $168,000 in
fiscal 1996 due to lower cash balances for investment purposes.

There were no provisions for income taxes for fiscal 1997 compared to
$43,000 for fiscal 1996. Tax provisions for fiscal 1996 were required for
Federal alternative minimum tax and California state taxes due to limitations on
the use of California's loss carryforwards. The Company has provided a valuation
allowance against the deferred tax asset attributable to the net operating
losses due to uncertainties regarding the realization of these assets.

FISCAL YEAR 1996 VS. FISCAL YEAR 1995

Total net sales in fiscal 1996 rose slightly to $12,085,000 from sales in
the previous fiscal year of $12,040,000. Sales to IBM accounted for 69% of the
Company's revenue in fiscal 1996 compared with 83% in fiscal 1995. Royalty
revenues during fiscal year 1996 of $875,000 continue to be derived from a
product developed by the Company for IBM in fiscal 1994. Although dependence on
one dominant customer has been reduced since the merger, the Company expects
that IBM will continue to account for a substantial

14
<PAGE>
portion of the Company's revenues until the Company completes development and
commercialization of its ADSL products. IBM is not obligated to purchase any
specified amounts of products or to provide binding forecasts of product
purchases for any period. Since IBM considers product sales and market data
confidential, the Company has very little ability to forecast future demand.
Furthermore, since IBM has the exclusive responsibility for marketing and
selling the products that the Company develops, results of operations can be
significantly affected by IBM's success in the marketplace.

In November 1995, the Company began shipping its Overture series of
transceivers. The Overture 4 is a prototype that does not have a low enough cost
or power consumption for mass deployment and its components are entirely
discrete (off the shelf). This product is to be phased out in favor of the next
series of transceiver, called Overture 8. In the third quarter of fiscal 1996,
the Company delivered the Overture 8, which is characterized by a high bandwidth
as defined by the ANSI standards. This product is currently installed in its
first field trial of broadcast video in Australia. Sales in fiscal 1996 of
Overture 4 and Overture 8 series field trials were $999,000 and $819,000,
respectively. In addition, contract revenues of $148,000 from customization of
products were also realized in fiscal 1996.

PC to Mainframe Connectivity sales of $1,822,000 in fiscal 1996 represents a
decline of 14% when compared with the same period of the prior fiscal year due
to a general decline in the Company's connectivity market share. The PC to
Mainframe Connectivity market is highly competitive and is characterized by
rapid advances in technology which frequently result in the introduction of new
products with improved performance characteristics, thereby subjecting the
Company's products to risk of technological obsolescence. The Company competes
directly or indirectly with a broad range of companies, many of whom have
significantly greater resources. In addition, the Company is competing for a
limited and declining segment of the market.

Gross margins as a percent of sales were 39% in fiscal 1996 compared with
44% for the same period of fiscal 1995. The decline in margin was primarily
attributable to product mix resulting from shipment of new products to IBM and
costs to complete test trials of the Overture series of transceivers.
Amortization of capitalized software costs charged to cost of sales were
$246,000 in fiscal 1996 and $310,000 in fiscal 1995.

Net research and development expenses increased 141% to $3,837,000 in fiscal
1996 when compared to the same period of fiscal 1995 largely because of the
addition of fifteen Old Amati engineers and the hiring of 20 new employees.
Higher costs in fiscal 1996 are primarily due to the introduction of the
Company's new family of Overture 8 ADSL/DMT modems and Overture 8 Access System
shelf products. From the technology acquired in the merger, the Company believes
it has a technological leadership position in DMT modulation. Maintaining this
position is largely dependent on the Company's ability to develop new products
that meet a wide range of customer needs. Research and development efforts for
the DMT technology are grouped into three areas: the microelectronics group
which is primarily focused on ADSL and VDSL markets; the software group, which
is primarily focused on the development of firmware for the Overture series; and
the hardware group, which is primarily focused on analog and digital design
activities. All research and development expenses related to this technology are
charged to operations as incurred. Expenses are net of funded development costs
from IBM. Funded development costs for fiscal 1996 were $589,000 compared to
$637,000 in fiscal 1995. The Company considers research and development a key
element in its ability to compete and will continue to make investments in
product development and support for IBM.

Marketing and sales expenses rose to $953,000 in fiscal 1996 compared to
$861,000 in fiscal 1995 due to an increase in overseas travel in conjunction
with Overture series participation in field trials internationally. Sales,
marketing and customer support operations of the acquired business, which cover
both domestic and international markets, is handled by five individuals. The
Company's strategy is to sell to

15
<PAGE>
telephone companies worldwide through large telecommunication suppliers who will
integrate the Company's products into larger systems for their customers. This
type of OEM selling does not require a large sales force.

General and administrative expenses increased to $2,519,000 in fiscal 1996
as compared to $1,229,000 in fiscal 1995. This is primarily due to patent
expenses, additional corporate staffing, and occupancy costs associated with the
merger.

Interest income decreased to $168,000 in fiscal 1996 compared to $301,000 in
the same period of fiscal 1995 due to maturities of held-to-maturity
investments.

The provision for income taxes in fiscal 1996 was $43,000 compared to
$97,000 in fiscal 1995. Tax provisions were required for Federal alternative
minimum tax and California state taxes due to limitations on the use of
California's loss carryforwards. The Company has provided a valuation allowance
against the deferred tax asset attributable to the net operating losses due to
uncertainties regarding the realization of these assets.

LIQUIDITY AND CAPITAL RESOURCES

The Company had cash and short term investments of $1,500,000 as of August
2, 1997 compared to $886,000 as of July 27, 1996. During the fiscal period, cash
used for operating activities of $9,927,000 related primarily to the net loss
incurred during the period. Cash used for investing activities of $3,178,000 was
primarily for leasehold improvements associated with the move to a larger
facility to consolidate the Company's operations, and the purchase of short-term
investments as offset by the proceeds from sale of held-to-maturity investments.
Cash provided by financing activities of $13,010,000 resulted primarily from the
completion of an equity financing transaction with an investor group, discussed
below, and proceeds from the exercise of stock options and warrants.

In October 1996, the Company entered into an Investment Agreement (the
"Investment Agreement") with Quantum Industrial Partners LDC, S-C Phoenix
Holdings, L.L.C., Winston Partners, L.P., Winston Partners II LDC and Winston
Partners II L.L.C. (collectively, the "Investors") which provided to the Company
up to $15 million in equity financing in exchange for the issuance of Company
Common Stock and warrants (the "Warrants") to purchase up to 600,000 shares of
Company Common Stock. The Warrants were issued on October 3, 1996 and are
exercisable at any time between December 17, 1996 and December 17, 2001.
Warrants to purchase up to 300,000 shares of Common Stock are exercisable at
$17.45 per share; Warrants to purchase the other 300,000 shares are exercisable
at $25 per share.

As of August 2, 1997, the Company has received $12,500,000 pursuant to this
Investment Agreement and recorded a Stock Subscription Receivable of $2,500,000.
On August 7, 1997, the Company received the final $2,500,000 in equity
financing. In exchange for the $15,000,000 investment in the Company, the
Investors received an aggregate of 1,242,915 shares of the Company's Common
Stock.

On September 30, 1997, the Company and Westell Technologies, Inc. entered
into an Agreement and Plan of Merger whereby Amati will become a wholly owned
subsidiary of Westell Technologies, Inc.Westell Technologies, Inc.,
headquartered in Aurora, Illinois, is a holding company for Westell, Inc., a
leading world-wide manufacturer of XDSL systems, Conference Plus, Inc., a
multi-point telecommunications service bureau specializing in conferencing, and
Westell World Wide Services, Inc., a service provider of engineering,
installation and network management. Pursuant to the Agreement and Plan of
Merger, and subject to certain conditions, including the approval of the
transaction by the respective stockholders of both companies, holders of
outstanding Amati Common Stock will receive in the merger 0.9 shares of Westell
Class A Common Stock for each share of Amati Common Stock.

Pursuant to the Agreement and Plan of Merger with Westell Technologies, Inc.
dated September 30, 1997 and under the provisions of a Loan and Security
Agreement (the "Westell Loan"), Westell Technologies, Inc. can extend financing
to the Company of up to $5,000,000 secured by a promissory note

16
<PAGE>
due on or before September 30, 1999 with interest payable at the following
rates: prime plus 2% for the first $1 million and prime plus 2 1/2% for all
borrowings in excess of $1 million. As of October 24, 1997, $2,000,000 was
outstanding under the Westell Loan.

The Company has a revolving line of credit agreement with a bank which
expires on April 25, 1998. The agreement provides for borrowings up to
$2,000,000 at the bank's prime rate plus .75% (9.25% at August 2, 1997). The
line of credit is collateralized by the accounts receivable of the Company. As
of August 2, 1997, borrowings under this agreement were $428,000. Borrowings
under this agreement are subject to certain debt covenants. At August 2, 1997,
the Company was out of compliance with certain of these covenants relating to
quick ratios and debt to net worth ratios. Acknowledging however, that with the
$2,500,000 of cash received on August 7, 1997 from stock subscriptions
receivable shown on the balance sheet as of fiscal 1997 year-end the Company
will be in compliance, the bank waived all financial covenants in default. In
addition, the Company has a capital lease line of $1,700,000 which was fully
utilized as of August 2, 1997.

The Company's ability to meet its future capital requirements will depend on
many factors, including sales levels, progress in research and development
programs, the establishment of collaborative agreements, and costs of
manufacturing facilities and commercialization activities. While the Company
anticipates that the funding available under the line of credit, capital lease
line and a loan agreement entered into with Westell Technologies, Inc. will be
sufficient to meet its capital requirements through the fiscal year, the Company
may require funding in addition to that available under these agreements, and
may seek additional funding through collaborative agreements or through public
or private sale of securities prior to the commercialization of its ADSL
products

RISK FACTORS

Other than for statements of historical fact, the information about the
Company included or incorporated by reference herein are forward looking
statements that involve risks and uncertainties, including the risks detailed
below.

HISTORY OF LOSSES. The Company had net losses of approximately $12,243,000
for the fiscal year ended August 2, 1997 and approximately $34,078,000
(including a charge related to the merger with old Amati of approximately
$31,554,000) for the fiscal year ended July 27, 1996. The Company is not
expected to operate profitably in the foreseeable future as the Company
continues research, development, production and marketing activities. There can
be no assurance that the Company will ever attain profitability. Any long-term
viability, profitability and growth from the Company's technology will depend
upon successful commercialization of products resulting from its research and
product development activities. Extensive research and development will be
required prior to commercialization of certain products. There can be no
assurance that the Company will be able to develop commercially viable products
from its technology, generate significant revenues and/or achieve profitability.

NEED FOR ADDITIONAL CAPITAL. During 1996, the Company secured a line of
credit for $1,250,000, which was subsequently increased to $2,000,000 and a
capital lease line of $1,500,000, which was subsequently increased to
$1,700,000, and entered into the Investment Agreement with the Investors which
provided the Company with $15 million in equity financing. As of August 7, 1997,
proceeds of $15,000,000 have been received pursuant to this financing agreement.
The Company has also entered into the Westell Loan under which $2,000,000 was
outstanding as of October 24, 1997. The Company's future capital requirements
will depend on many factors, including sales levels, progress in research and
development programs, the establishment of collaborative agreements, and costs
of manufacturing facilities and commercialization activities. The Company may
require funding in addition to that available under its line of credit, capital
lease line, the Investment Agreement and the Westell Loan. There can be no
assurance that such additional funding will be available on acceptable terms, if
at all. If additional funds are required and not available, the Company could be
required to curtail significantly or defer, temporarily or permanently, one

17
<PAGE>
or more of its research and development programs or to obtain funds through
arrangements that may require the Company to relinquish certain technology or
product rights.

MARKET FOR ADSL PRODUCTS STILL UNDER DEVELOPMENT; PRINCIPAL VIDEO ADSL
MARKET OUTSIDE OF THE UNITED STATES. ADSL was developed to transmit digital
video over copper wire and also has application in providing access to the
Internet over copper wire. Although the current infrastructure in the local
distribution networks of telephone companies is based on copper wire, there can
be no assurance that telephone companies will pursue the deployment of ADSL
systems or, if deployment occurs, as to the volume and timing of such
deployment. Significant deployment may be prevented or delayed by a number of
factors, including cost, regulatory barriers, lack of programming content, lack
of consumer demand and the availability of alternative technologies. Access
systems with high performance broadband capability, such as the ADSL system, may
be attractive to telephone companies only to the extent that the telephone
companies plan to offer broadcast video, video-on-demand or Internet access
services which utilize the full features of a high performance local
distribution network. Substantial amounts of time, effort and money will be
required to develop such high performance services. There can be no assurance
that sufficient programming content for video services will be developed to
justify deploying digital video transmission systems, or that programming
content will be both attractive to consumers and offered at prices that will
create a mass market. If such high performances services are offered, and there
is demand for them, there can be no assurance that telephone companies will
select ADSL over competing technologies, such as fiber-to-the-curb, hybrid
fiber-coaxial ("HFC"), and wireless communications. Fiber-to-the curb, HFC and
wireless systems have greater bandwidth than the ADSL products being developed
by the Company. Although Internet access services may provide a market for ADSL
in the United States, because foreign telephone companies currently face less
competition from cable companies than telephone companies face in the United
States, the Company believes that its principal markets for ADSL video
applications will be outside the United States.

PRICE COMPETITIVENESS OF ADSL PRODUCTS. The Company believes that in order
to design and manufacture commercially acceptable ADSL products, cost
improvements beyond those available with current technology will be necessary.
The future success of the Company will depend, in part, on it ability to develop
ADSL products that compete effectively on the basis of price and performance.
Current prices are significantly higher than those that the Company believes
would be necessary for mass deployment of ADSL products. There can be no
assurance that the Company will be successful in developing ADSL products that
can be sold at prices which are viable in the market.

RAPID TECHNOLOGICAL CHANGE; COMPETITION IN THE TELECOMMUNICATION
TRANSMISSION BUSINESS. Competition from existing companies, including major
communications companies, is expected to increase. Most of the Company's
competitors in the communications industry are more established, benefit from
greater market recognition and have greater financial, technical, production and
marketing resources than the Company. Some competitors are developing alternate
access technologies, such as HFC, fiber-to-curb and wireless systems, that may
prove technologically superior or more cost effective than the Company's
technology. There can be no assurance that developments by others will not
render the Company's products or technologies obsolete or noncompetitive or that
the Company will be able to keep pace with new technological developments.

COMPETITION IN THE PC TO MAINFRAME CONNECTIVITY BUSINESS. The PC to
Mainframe Connectivity market is highly competitive and is characterized by
rapid advances in technology which frequently result in the introduction of new
products with improved performance characteristics, thereby subjecting the
Company's products to the risk of technological obsolescence. The Company's
ability to compete is dependent on several factors, including reliability,
product performance, quality, features, distribution channels, name awareness,
customer support, product development capabilities, and the ability to meet
delivery schedules. The Company competes, directly or indirectly, with a broad
range of companies in the PC-Connectivity business, many of whom have
significantly greater financial and other resources. In

18
<PAGE>
addition, the Company is only competing for a limited and declining segment of
the PC-Connectivity market, which is itself declining and expected to continue
to decline. The Company expects revenues from its PC-Connectivity business to
continue to decline.

COMPETITION FOR VDSL STANDARDS. The Company expects to apply its DMT
technology to the development of VDSL products for the transmission of digital
video service in connection with a fiber-optic backbone to cover the distance
from this platform or node to subscribers' homes over copper wire or coaxial
cable. ANSI has not yet awarded the standard for VDSL technology, and the
competition for the American National Standards Institute ("ANSI") standard for
VDSL is expected to be intense. Other companies with greater resources than the
Company, are expected to compete for these standards. There is no assurance that
the Company's DMT technology will be successful in obtaining the ANSI VDSL
standard.

DEPENDENCE ON COMPLEMENTARY PRODUCTS. Widespread use of ADSL and VDSL
products will depend on the commercial availability of other products and
components, including the content, digital switches, servers, encode/decode
equipment, and set-top boxes in subscribers' homes. There can be no assurance
that other suppliers will develop and market these complementary components
effectively or that these components, when combined with the Company's ADSL and
VDSL products, will be a cost-effective means of transmitting data dialtone or
video dialtone services.

DEPENDENCE ON LARGE CUSTOMERS AND SYSTEM INTEGRATORS. The Company expects
to sell many of its telecommunication transmission products to large
telecommunications service companies which serve as integrators for the various
component systems that make up a video-on-demand or multimedia system. These
systems integrators in turn sell the systems to telephone companies for
distribution to their subscribers. The Company is largely dependent on these
systems integrators for the introduction of its products to field trials. There
can be no assurance that systems integrators will select the Company's products
for field trials or, if they do initially select the Company's products, that
they will continue to use them. In addition, telephone companies are generally
reluctant to deploy new technologies available only from a single source,
especially when the supplier is as relatively small as the Company, and often
require the availability of alternative sources before deploying a new
technology. This reluctance may put the Company at a competitive disadvantage
relative to some of its competitors. Further, acceptance of the Company's
products by these customers may require the Company to relinquish rights to its
technology or products. There can be no assurance, however, that even if the
Company were to relinquish such rights to its technology or products, telephone
companies would deploy the Company's ADSL or VDSL products.

CUSTOMER CONCENTRATION; RELIANCE ON SALES TO IBM. Sales to IBM for PC to
Mainframe connectivity and related products accounted for approximately 83%, 69%
and 51% of the Company's net sales in fiscal 1995, 1996 and 1997, respectively.
Since IBM considers product sales and market data confidential, the Company has
very little ability to anticipate future demands and IBM is not obligated to
purchase any specified amount of products. For its PC-Connectivity products, the
Company is highly dependent on sales to IBM and expects that quarterly and
annual results could be volatile due to its dependence on this dominant
customer. In addition, there can be no assurance that IBM will continue to
distribute and support the Company's products. The Company's principal contract
with IBM which originally expired in December 1996, has been extended. Further,
IBM may terminate its agreements with the Company upon 30 days' notice without a
significant penalty.

INTERNATIONAL BUSINESS. The Company expects that sales outside of the
United States will represent a significant portion of its future sales,
especially of the Company's ADSL products. Operations outside of the United
States are subject to various risks, including exposure to currency
fluctuations, the imposition of governmental controls, the need to comply with a
wide variety of foreign and United States export laws, political and economic
instability, trade restrictions, changes in tariffs and taxes, and longer
payment cycles typically associated with international sales. The inability of
the Company to design products to comply

19
<PAGE>
with foreign standards or any significant or prolonged delay in the Company's
international sales could have a material adverse effect on the Company's future
business and results of operations.

REGULATORY MATTERS. Telephone companies, which constitute the initial
primary market for the Company's telecommunication transmission products, and
cable television companies, which may become a future market for such products,
are subject to extensive regulation by both the federal and state governments in
the United States and by foreign governments. Many of these regulations have the
effect of limiting the economic incentive of telephone companies to deploy new
technologies. Restrictions on telephone companies and cable television companies
may materially and adversely affect demand for the products of the Company.
Recent legislation passed by Congress will significantly alter the regulations
on telephone companies and cable companies in the United States, and there can
be no assurance that such legislation will not adversely affect the
commercialization of the Company's products. In addition, both in the United
States and abroad, rates for telecommunications services are governed by tariffs
or licensed carriers that are subject to regulatory approval. These tariffs also
could have a material adverse affect on the demand for the Company's products.

DEPENDENCE ON SUPPLIERS AND THIRD-PARTY MANUFACTURERS. Certain key
components in the Company's products, such as integrated circuits, are currently
available only from single sources. The Company does not have any long-term
supply contracts with its sole source vendors and purchases these components on
a purchase order basis. In addition, certain components and subassemblies for
the Company's products have long lead times. While the Company seeks to
accurately forecast its requirements, inaccuracies in its forecast could result
in shortages or oversupplies of these components. The inability to obtain
sufficient quantities of sole source components or subassemblies as required, or
to develop alternative sources as required in the future, or inaccuracies in
forecasts for long lead time components or subassemblies could result in delays
or reductions in product shipments or product redesigns which would materially
and adversely affect the Company's business, operating results and financial
condition. In addition, increases in the prices of components for which the
Company does not have alternate sources could materially and adversely affect
the Company's operating results.

The Company intends to outsource a portion of its manufacturing operations
to independent third party manufacturers. There are risks associated with the
use of independent manufacturers, including unavailability of or delays in
obtaining adequate supplies of products and reduced control of manufacturing
quality and production costs. There can be no assurance that the Company's third
party manufacturers will provide adequate supplies of quality products on a
timely basis. The inability to obtain such products on a timely basis would have
a material adverse effect on the Company's business, operating results and
financial condition.

PATENTS AND TRADE SECRETS. There can be no assurance that any patents owned
or controlled by the Company will provide commercially significant protection of
the Company's technology or ensure that the Company may not be determined to
infringe valid patents of others. The Company's patents have not been tested in
court, and the validity and scope of the Company's proprietary rights could be
challenged. The Company has also received foreign patents, but since the patent
laws of foreign countries differ from those of the United States, the degree of
protection afforded by any foreign patents may be different from that available
under U.S. patent laws.

The Company also relies on trade secrets and proprietary know-how which it
seeks to protect by confidentiality agreements with its collaborators, employees
and consultants. There can be no assurance that these agreements will not be
breached, that the Company will have adequate remedies for any breach or that
the Company's trade secrets and proprietary know-how will not otherwise become
known or be discovered by competitors.

THE COMPANY'S RSI LAWSUIT. The Company is a defendant in a suit brought in
November 1993 alleging repetitive stress injuries ("RSI") resulting from the use
of the Company's products claiming

20
<PAGE>
$1 million in compensatory and $10 million in punitive damages. The Company has
tendered defense of the suit to its insurance carriers, but there can be no
assurance that the suit will not have a material adverse effect on the financial
position or results of operations of the Company.

POSSIBLE VOLATILITY OF STOCK PRICE; SHARES ELIGIBLE FOR FUTURE SALE. The
market price of the Company's Common Stock has been and may continue to be
highly volatile. Future events, many of which will be beyond the control of the
Company, as well as announcements related to technology and product development
and collaborative arrangements and expected quarterly fluctuations in revenues
and financial results, may have a significant impact on the market price of the
Company's Common Stock. Future sales of Shares by the Selling Stockholders or
sales of the Company's Common Stock by other current stockholders and by option
holders and warrant holders who exercise Company stock options or warrants could
have a depressive effect on the market price of the Company's Common Stock.

21
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors of Amati Communications Corporation:

We have audited the accompanying consolidated balance sheets of Amati
Communications Corporation (a Delaware corporation) and subsidiaries as of
August 2, 1997 and July 27, 1996, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years
ended August 2, 1997, July 27, 1996, and July 29, 1995. 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 generally accepted auditing
standards. 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 financial statements referred to above present fairly,
on all material respects, the financial position of Amati Communications
Corporation and subsidiaries as of August 2, 1997 and July 27, 1996, and the
results of their operations and their cash flows for each of the three years
ended August 2, 1997, July 27, 1996, and July 29, 1995 in conformity with
generally accepted accounting principles.

ARTHUR ANDERSEN LLP

San Jose, California
September 30, 1997

22
<PAGE>
AMATI COMMUNICATIONS CORPORATION

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
JULY 27, AUGUST 2,
1996 1997
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... $ 886 $ 791
Short-term investments.................................. -- 709
Accounts receivable, less allowance of $30 in 1996 and
1997.................................................. 1,524 1,369
Stock subscriptions receivable.......................... -- 2,500
Inventories:
Finished goods........................................ 1 448
Work in process....................................... 890 1,783
Purchased parts....................................... 725 824
------------ ------------
1,616 3,055
------------ ------------
Other current assets.................................... 1,156 858
------------ ------------
Total current assets.................................. 5,182 9,282
------------ ------------
Equipment and leasehold improvements, at cost:
Machinery and equipment............................... 3,436 7,366
Furniture and fixtures................................ 187 161
Leasehold improvements................................ 532 1,862
------------ ------------
4,155 9,389
Less: Accumulated depreciation and amortization........... (3,096) (3,588 )
------------ ------------
Equipment and leasehold improvements, net............... 1,059 5,801
------------ ------------
TOTAL ASSETS.......................................... $ 6,241 $ 15,083
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of capitalized lease obligations..... $ -- $ 728
Trade accounts payable.................................. 486 2,499
Accrued expenses........................................ 1,429 1,714
Deferred revenue........................................ 157 148
Notes payable--bank..................................... -- 428
Notes payable--other.................................... 395 --
------------ ------------
Total current liabilities............................. 2,467 5,517
------------ ------------
Long-term liabilities:
Long term portion of deferred revenue................... 1,800 2,000
Capitalized lease obligations, less current
maturities............................................ -- 2,086
Obligations under lease commitments..................... 294 454
------------ ------------
Total long-term liabilities........................... 2,094 4,540
------------ ------------
Commitments (Note 9)
Stockholders' equity:
Preferred stock--par value $100 per share
Authorized--5,000 shares
Outstanding--none..................................... -- --
Common stock--par value $.20 per share
Authorized--45,000,000 shares
Outstanding--17,692,802 shares in 1996 and 19,692,895
shares in 1997....................................... 3,539 3,939
Additional paid-in capital.............................. 57,631 72,820
Accumulated deficit..................................... (59,490) (71,733 )
------------ ------------
Total Stockholders' equity............................ 1,680 5,026
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............ $ 6,241 $ 15,083
------------ ------------
------------ ------------
</TABLE>

The accompanying notes are an integral part of these consolidated balance
sheets.

23
<PAGE>
AMATI COMMUNICATIONS CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
FOR THE YEARS ENDED
---------------------------------
JULY 29, JULY 27, AUGUST 2,
1995 1996 1997
--------- ---------- ----------
(IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net sales...................................................................... $ 12,040 $ 12,085 $ 13,200
Cost of sales.................................................................. 6,716 7,404 9,554
--------- ---------- ----------
Gross margin................................................................. 5,324 4,681 3,646
--------- ---------- ----------
Operating expenses:
Research and development..................................................... 1,595 3,837 8,335
Marketing and sales.......................................................... 861 953 2,868
General and administrative................................................... 1,229 2,519 4,479
Write off of acquired in-process research and development.................... -- 31,554 --
--------- ---------- ----------
Total operating expenses................................................... 3,685 38,863 15,682
--------- ---------- ----------
Income (loss) from operations................................................ 1,639 (34,182) (12,036)
--------- ---------- ----------
Other income (expense):
Interest income.............................................................. 301 168 116
Interest expense............................................................. (7) (21) (323)
--------- ---------- ----------
Total other income (expense)............................................... 294 147 (207)
--------- ---------- ----------
Income (loss) before provision for income taxes................................ 1,933 (34,035) (12,243)
Provision for income taxes................................................... 97 43 --
--------- ---------- ----------
NET INCOME (LOSS).............................................................. $ 1,836 $ (34,078) $ (12,243)
--------- ---------- ----------
--------- ---------- ----------
NET INCOME (LOSS) PER SHARE.................................................... $ .16 $ (2.21) $ (.66)
--------- ---------- ----------
--------- ---------- ----------
WEIGHTED AVERAGE NUMBER OF COMMON SHARES AND COMMON SHARE EQUIVALENTS.......... 11,491 15,448 18,641
--------- ---------- ----------
--------- ---------- ----------
</TABLE>

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

24
<PAGE>
AMATI COMMUNICATIONS CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
FOR THE YEARS ENDED AUGUST 2, 1997
---------------------------------------------------------
COMMON STOCK
-------------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
--------- --------- --------- ------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance, July 30, 1994................................... 11,956 $ 2,391 $ 33,649 $ (27,248) $ 8,792
Exercise of employee stock options..................... 150 30 132 -- 162
Stock repurchase....................................... (537) (107) (457) -- (564)
Net income............................................. -- -- -- 1,836 1,836
--------- --------- --------- ------------ ----------
Balance, July 29, 1995................................... 11,569 $ 2,314 $ 33,324 $ (25,412) $ 10,226
Exercise of employee stock options..................... 1,238 248 1,327 -- 1,575
Exercise of warrants from merger....................... 231 46 (46) -- --
Issuance of shares from merger......................... 4,655 931 23,026 -- 23,957
Net loss............................................... -- -- -- (34,078) (34,078)
--------- --------- --------- ------------ ----------
Balance, July 27, 1996................................... 17,693 $ 3,539 $ 57,631 $ (59,490 ) $ 1,680
Exercise of employee stock options..................... 596 119 725 -- 844
Exercise of warrants from merger....................... 161 32 (7) -- 25
Equity financing, net of offering costs of $280........ 1,243 249 14,471 -- 14,720
Net loss............................................... -- -- -- (12,243 ) (12,243)
--------- --------- --------- ------------ ----------
--------- --------- --------- ------------ ----------
BALANCE, AUGUST 2, 1997.................................. 19,693 $ 3,939 $ 72,820 $ (71,733 ) $ 5,026
--------- --------- --------- ------------ ----------
--------- --------- --------- ------------ ----------
</TABLE>

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

25
<PAGE>
AMATI COMMUNICATIONS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
FOR THE YEARS ENDED
---------------------------------
JULY 29, JULY 27, AUGUST 2,
1995 1996 1997
--------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss)............................................................... $ 1,836 $ (34,078) $ (12,243)
Adjustments to reconcile net income (loss) to net cash provided by (used for)
operating activities:
Depreciation and amortization............................................... 678 846 1,422
Provision for bad debts..................................................... -- 20 --
Loss on retirement of capital equipment..................................... 41 153 63
Write off of in-process research and development............................ -- 31,554 --
Changes in assets and liabilities:
Decrease (increase) in accounts receivable.................................. (528) 1,340 155
Increase in inventories..................................................... (33) (189) (1,439)
Decrease (increase) in other assets......................................... (316) (194) 62
Increase (decrease) in accounts payable & accrued expenses.................. (315) (599) 2,288
Decrease in other liabilities............................................... (124) -- (235)
--------- ---------- ----------
Total adjustments......................................................... (597) 32,931 2,316
--------- ---------- ----------
NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES............................ 1,239 (1,147) (9,927)
--------- ---------- ----------
Cash Flows from Investing Activities:
Advances to Old Amati and acquisition costs................................... (3,240) (2,266) --
Capital expenditures.......................................................... (61) (757) (2,469)
Purchase of short-term investments............................................ (5,862) -- (3,893)
Proceeds from sale of investments............................................. 8,829 2,425 3,184
--------- ---------- ----------
NET CASH USED FOR INVESTING ACTIVITIES.......................................... (334) (598) (3,178)
--------- ---------- ----------
Cash Flows from Financing Activities:
Equity financing, net of offering costs of $280............................... -- -- 12,220
Proceeds from the exercise of stock options................................... 162 1,575 844
Proceeds from the exercise of treasury warrants............................... -- -- 25
Borrowings--bank line of credit............................................... -- -- 428
Payments on capital lease obligation.......................................... (82) (10) (507)
Stock repurchase.............................................................. (564) -- --
--------- ---------- ----------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES............................ (484) 1,565 13,010
--------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............................ 421 (180) (95)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD................................ 645 1,066 886
--------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD...................................... $ 1,066 $ 886 $ 791
--------- ---------- ----------
--------- ---------- ----------
</TABLE>

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

26
<PAGE>
AMATI COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AUGUST 2, 1997

NOTE 1 OPERATIONS, LIQUIDITY AND PROPOSED MERGER OF THE COMPANY

OPERATIONS

Amati Communications Corporation ("Amati" or the "Company") is a leading
developer of advanced transmission equipment utilizing Discrete Multi-tone
("DMT") technology for the Asymmetrical Digital Subscriber Line ("ADSL"), Very
high-speed Digital Subscriber Line ("VDSL") and cable modem markets. The Company
is the holder of the ADSL/DMT patents and has licensed the technology to
companies such as Motorola, NEC, Nortel and Analog Devices, Inc. The Company is
also a provider of network connectivity systems for the internetworking and OEM
marketplaces, which include local area network gateways, client-based
workstation software and network data communications interfaces. The Company is
subject to a number of risks, including dependence on key employees for
technology development and support, dependence on a few significant customers,
potential competition from larger more established companies, and its ability to
obtain adequate financing to support its growth.

On November 28, 1995, the Company and Amati Communications Corporation ("Old
Amati"), a privately held Mountain View, California based company completed a
merger (the "Merger") by which Old Amati became a wholly-owned subsidiary of the
Company. Effective as of the Merger, the Company's name was changed to Amati
Communications Corporation and its common stock began trading on the Nasdaq
National Market under the symbol "AMTX".

LIQUIDITY

In October 1996, the Company entered into an Investment Agreement (the
"Investment Agreement") with Quantum Industrial Partners LDC, S-C Phoenix
Holdings, L.L.C., Winston Partners, L.P., Winston Partners II LDC and Winston
Partners II L.L.C. (collectively, the "Investors") which provided to the Company
$15 million in equity financing in exchange for the issuance of Company's Common
Stock and warrants (the "Warrants") to purchase up to 600,000 shares of
Company's Common Stock. The Warrants were issued on October 3, 1996 and are
exercisable at any time between December 17, 1996 and December 17, 2001.
Warrants to purchase up to 300,000 shares are exercisable at $17.45 per share;
Warrants to purchase the other 300,000 shares are exercisable at $25 per share.

As of August 2, 1997, the Company has received $12,500,000 pursuant to this
Investment Agreement and recorded a Stock Subscription Receivable of $2,500,000.
In exchange for the $15,000,000 investment in the Company, the Investors
received an aggregate of 1,242,915 shares of the Company's Common Stock. The
Warrants and Common Stock issued in connection with the Investment Agreement
were exempt from the registration requirements of the Securities Act of 1933, as
amended (the "Securities Act"), pursuant to the exemption under Section 4(2) of
the Securities Act. The resale of the shares of Common Stock issued to the
Investors, and the 600,000 shares of Common Stock issuable on exercise of the
Warrants, has been registered by the Company on behalf of the Investors. On
August 7, 1997, the Company received the final $2,500,000 take down in equity
financing.

The Company's ability to meet its future capital requirements will depend on
many factors, including sales levels, progress in research and development
programs, the establishment of collaborative agreements, and costs of
manufacturing facilities and commercialization activities. While the Company
anticipates that the funding available under the line of credit, capital lease
line and a loan agreement entered into with Westell Technologies, Inc. (further
discussed) will be sufficient to meet its capital requirements through the
fiscal year, the Company may require funding in addition to that available under
these

27
<PAGE>
AMATI COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

AUGUST 2, 1997

NOTE 1 OPERATIONS, LIQUIDITY AND PROPOSED MERGER OF THE COMPANY (CONTINUED)
agreements, and may seek additional funding through collaborative agreements or
through public or private sale of securities prior to the commercialization of
its ADSL products.

PROPOSED MERGER

On September 30, 1997, the Company and Westell Technologies, Inc. entered
into an Agreement and Plan of Merger whereby Amati will become a wholly owned
subsidiary of Westell Technologies, Inc., Westell Technologies, Inc.,
headquartered in Aurora, Illinois, is a holding company for Westell, Inc., a
world-wide manufacturer of XDSL systems, Conference Plus, Inc., a multi-point
telecommunications service bureau specializing in conferencing, and Westell
World Wide Services, Inc., a service provider of engineering, installation and
network management. Pursuant to the Agreement and Plan of Merger, and subject to
the approval of the transaction by the respective stockholders of both
companies, holders of outstanding Amati Common Stock will receive in exchange
for each share of Amati Common Stock, 0.9 shares of Westell Class A Common
Stock.

Pursuant to the Agreement and Plan of Merger with Westell Technologies, Inc.
dated September 30, 1997 and under the provisions of a Loan and Security
Agreement, Westell Technologies, Inc. can extend financing to the Company of up
to $5,000,000 secured by a promissory note due on or before September 30, 1999
with interest payable at the following rates: prime plus 2% for the first $1
million and prime plus 2 1/2% for all borrowings in excess of $1 million.

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

CONSOLIDATION

The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.

INVENTORIES

Inventories are stated at the lower of cost (first-in, first-out) or market,
and include materials, labor and manufacturing overhead. Inventory is valued at
currently adjusted standards which approximate actual costs on a first-in,
first-out basis.

DEPRECIATION AND AMORTIZATION

Depreciation and amortization are provided using the straight-line method
over the estimated useful lives of the related assets. Machinery and equipment
and furniture and fixtures generally have lives ranging from 3 to 5 years.
Leasehold improvements are depreciated over the shorter of the lease term or the
useful life.

SOFTWARE DEVELOPMENT COSTS

The Company capitalizes software development costs in accordance with
Statement of Financial Accounting Standards No. 86 ("SFAS 86"). The
capitalization of these costs begins when technological feasibility of the
related product has been achieved, which has been defined as the point in time
that the Company has developed a beta version of the software product.
Capitalization ends when the product is

28
<PAGE>
AMATI COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

AUGUST 2, 1997

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
available for general release to customers. Amortization is computed on an
individual product basis and is the greater of (a) the ratio of current gross
revenues for a product to the total current and anticipated future gross
revenues for that product or (b) the straight-line method over the estimated
economic life of the product. Currently the Company is using an estimated
economic life of three years for all capitalized software costs.

In fiscal 1995, 1996 and 1997, there was no capitalization of software
development costs as the criteria for capitalization had not been met.
Amortization of capitalized software development costs charged to cost of sales
was $310,000 in fiscal 1995 and $246,000 in fiscal 1996 and 1997.

ACCRUED EXPENSES

Accrued expenses include the following:

<TABLE>
<CAPTION>
JULY 27, AUGUST 2,
1996 1997
--------- -----------
<S> <C> <C>
Accrued employee compensation............................................ $ 793 $ 1,035
Other.................................................................... 636 679
--------- -----------
$ 1,429 $ 1,714
--------- -----------
--------- -----------
</TABLE>

REVENUE RECOGNITION

The Company generally recognizes revenue from product sales upon shipment to
the customer. Revenues from software and engineering development services are
recognized as the Company performs the services in accordance with contract
terms. Revenues from maintenance and extended warranty agreements are recognized
ratably over the term of the agreement. The Company also licenses products to
OEMs and recognizes royalties as specified in the license agreement when
shipment of the licensed product by the OEM is reported to the Company. Service
maintenance, warranty and support revenues accounted for less than 1% of the
Company's total revenues.

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

For purposes of the Statements of Cash Flows, cash and cash equivalents are
defined as cash in banks and highly liquid investments with original maturity
dates of three months or less.

Capital lease obligations of $3,307,000 were incurred in fiscal 1997 when
the Company entered into equipment and furniture capital leases. Cash paid for
interest was $7,000, $56,000 and $317,000 for the fiscal years 1995, 1996 and
1997, respectively. Cash paid for income taxes were $20,000, $73,000 and $46,000
for fiscal years 1995, 1996 and 1997, respectively.

SHORT TERM INVESTMENTS

In accordance with SFAS No. 115, the Company has classified all of its
marketable debt securities as held-to-maturity, and has accounted for these
investments at amortized cost. Accordingly, no adjustment for unrealized holding
gains or losses has been reflected in the Company's financial statements. At
August 2, 1997, the Company's held-to-maturity securities of $709,000 consisted
of certificates of deposits

29
<PAGE>
AMATI COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

AUGUST 2, 1997

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
with contractual maturities of less than twelve months and the carrying amount
of these investments approximated market value. These funds, in the form of
standby letters of credit, are restricted as a compensating balance for capital
lease not under the lease line.

FUNDED DEVELOPMENT AGREEMENTS

The Company has entered into certain funded development arrangements with
IBM. These arrangement typically provide funding to the Company to develop on a
best efforts basis certain products or product enhancements which IBM is
interested in reselling to its customers. Under these arrangements, the Company
retains the rights to manufacture the developed products and IBM purchases the
manufactured products from the Company for distribution to IBM's customers. The
arrangements typically include a minimum purchase commitment by IBM if the
development is successful. Costs under these agreements are deferred until the
related development revenues are recognized. Revenues under these agreements are
generally recognized when certain contractual milestones are met. Total revenues
recognized under these agreements were $276,000, $419,000 and $341,000 in fiscal
1995, 1996 and 1997, respectively.

USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS

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

LONG-LIVED ASSETS

Effective July 28, 1996, the Company adopted Statement of financial
Accounting Standards No. 121 ("SFAS No. 121"), ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF. The adoption of
SFAS No. 121 did not have a material impact on the results of operations or the
financial position of the Company.

STOCK COMPENSATION

Effective July 28, 1996, the Company adopted the disclosure provisions of
Statement of Financial Accounting Standards No. 123 ("SFAS No. 123"), ACCOUNTING
FOR STOCK-BASED COMPENSATION. In accordance with the provisions of SFAS No. 123,
the Company applies APB Opinion 25 and related interpretations in accounting for
its stock option plans. Note 6 of these Consolidated Financial Statements
contains a summary of the pro forma effects on reported net income and earnings
per share for fiscal 1997 and 1996 based on the fair value of the options
granted at grant date as prescribed by SFAS No. 123.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130 ("SFAS No. 130"), REPORTING
COMPREHENSIVE INCOME, which becomes effective for fiscal years beginning after
December 15, 1997. The adoption of SFAS No. 130 is not expected to have a
material impact on the results of operations or the financial position of the
Company.

30
<PAGE>
AMATI COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

AUGUST 2, 1997

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Also in June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131 ("SFAS No. 131"), DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE
AND RELATED INFORMATION, which becomes effective for fiscal years beginning
after December 15, 1997. The Company has yet to determine the impact, if any, of
adoption of this new pronouncement.

RECLASSIFICATION

Prior years' amounts in the Consolidated Financial Statements have been
reclassified where necessary to conform to the fiscal 1997 presentation.

NOTE 3 CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS

Financial instruments which may potentially subject the Company to a
concentration of credit risk principally consist of accounts receivable. The
Company generally does not require collateral on accounts receivable as the
majority of the Company's customers are large, well established companies.

Sales of the Overture 4 and Overture 8 series of ADSL transceivers were
$999,000 and $819,000, respectively, in fiscal 1996 and $12,000 and $1,880,000,
respectively, in fiscal 1997. In the Company's VDSL technology, revenues
recognized during the current fiscal year of $3,500,000 related primarily to
contract revenues under a joint development agreement with NEC Japan.

The Company also designs, manufactures and markets data communications
equipment and provides technical support and maintenance services related
thereto. Sales to IBM as a percent of net sales were 83%, 69% and 51% in fiscal
1995, 1996 and 1997, respectively. The Company has a concentration of accounts
receivable with IBM of $600,000 as of August 2, 1997. In February 1997, the
Company signed an extended contract with IBM for the development and manufacture
of its next generation internetworking products. The Company expects that IBM
will continue to account for a substantial portion of its revenues until
development and commercialization of its ADSL products are completed.

Export sales of connectivity products, primarily to Western Europe and
Canada in fiscal 1995, 1996 and 1997, represented 1-2% of total net sales.
Shipments of the Overture series of transceivers primarily to the countries of
Germany, Netherlands, France, Finland and Canada accounted for 11% of total
revenues in fiscal 1997.

NOTE 4 LICENSE AGREEMENTS

The Company has certain license agreements (the "Original Agreements") with
Stanford University and University Ventures II, a California limited investment
partnership, whereby it was granted exclusive worldwide rights to core
technology and was required to further develop commercial applications and
licensed products in the field of use to maintain these agreements. In exchange
for the Original Agreements, the Company agreed to issue 125,000 shares of
Series A convertible preferred stock to each licensor and pay certain royalties
on revenue generated from the licensed technology. Both Original Agreements
contained anti-dilution provisions in the event the Company raised capital from
the sale of stock. The term of the Original Agreements extends to the last
expiration date of the licensed patents. The Company accounted for the license
agreements as a transfer of non-monetary assets from its founders and recorded
the license at the transferor's historical cost basis of zero. On May 1, 1994,
the Original Agreement with Stanford University was revised to include a
one-time fee of $250,000 and an annual

31
<PAGE>
AMATI COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

AUGUST 2, 1997

NOTE 4 LICENSE AGREEMENTS (CONTINUED)
license maintenance fee of $25,000. The revised Original Agreements provide for
Stanford University to receive higher royalties on the Company's revenues.
Stanford University may terminate the agreement if the Company fails to remedy
any conditions causing default, breach or incorrect reporting under the terms
and conditions of the license agreement within thirty days.

NOTE 5 NOTES PAYABLE

The Company had notes payable in the amount of $395,000 at July 27, 1996.
All outstanding notes of $395,000 plus interest of $103,000 were paid on January
31, 1997.

The Company has a revolving line of credit agreement with a bank which
expires on April 25, 1998. The agreement provides for borrowings up to
$2,000,000 at the bank's prime rate plus .75% (9.25 % at August 2, 1997). The
line of credit is collateralized by the accounts receivable of the Company. As
of August 2, 1997, borrowings under this agreement were $428,000. Borrowings
under this agreement are subject to certain debt covenants. At August 2, 1997,
the Company was out of compliance with certain of these covenants relating to
quick ratios and debt to net worth ratios. Acknowledging however, that with the
$2,500,000 of cash received on August 7, 1997 from stock subscriptions
receivable shown on the balance sheet as of fiscal 1997 year-end the Company
will be in compliance, the bank waived all financial covenants in default. In
addition, the Company has a capital lease line of $1,700,000 which was fully
utilized as of August 2, 1997.

NOTE 6 STOCK OPTION PLANS

The Company has four employees' and one non-employee Directors' stock option
plans. The exercise price of options granted under any plan may not be less than
100% of the fair market value of the stock on the date of grant.

An Incentive Stock Option Plan and a Supplemental Stock Option Plan were
adopted by the Company in 1981. Total shares authorized for issuance pursuant to
the Incentive Stock Option Plan and the Supplemental Stock Option Plan were
875,000 shares and 1,025,000 shares, respectively. As of August 2, 1997, options
to purchase up to 30,000 shares have been granted pursuant to these plans and
remain exercisable, and there are no options available for future grant under
these plans. Employee stock options issued under this plan become exercisable at
the rate of 25% after six months from the date of grant and 25% per year
thereafter, unless determined otherwise by the Board of Directors at the time of
grant. Both plans expired in October 1991. The options that have been granted
under these plans expire ten years after grant.

The Board of Directors adopted the 1990 Stock Option Plan on September 14,
1990, and it was approved by the Company's stockholders on December 14, 1990.
The Company is authorized to issue options to purchase up to 900,000 shares of
Company Common Stock pursuant to the 1990 Stock Option Plan. At a special
meeting of the Company's stockholders held on November 10, 1995, the
stockholders approved an amendment to the Company's 1990 Stock Option Plan to
increase the number of shares available for issuance pursuant to this plan in
conjunction with the Agreement of Merger dated August 3, 1995. The Company may
now issue options to purchase an aggregate of up to 3,500,000 shares pursuant to
the amended 1990 Stock Option Plan. As of August 2, 1997, options to purchase up
to 2,946,686 shares have been granted pursuant to this plan, of which options to
purchase up to 1,011,057 shares were

32
<PAGE>
AMATI COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

AUGUST 2, 1997

NOTE 6 STOCK OPTION PLANS (CONTINUED)
exercisable on such date and 3,664 shares were available for future grant under
this plan. Employee stock options issued pursuant to this plan become
exercisable at the rate of 25% one year from the date of the Merger and 25% per
year thereafter. The maximum term of options granted under this plan is ten
years.

The Old Amati 1992 Stock Option Plan and all outstanding and unexercised
options issued pursuant thereto were assumed by the Company upon consummation of
the merger, as approved by the stockholders of the Company on November 20, 1995.
The Company is authorized to grant options of 1,591,234 shares of Company Common
Stock pursuant to this plan. As of August 2, 1997, options to purchase up to
743,051 shares of Company Common Stock have been granted, pursuant to this plan,
including options to purchase up to 317,405 shares which were exercisable as of
such date. There are no shares available for future grants under this plan.
Employee stock options under this plan become exercisable at the rate of 25% one
year from the date of grant and with respect to 1/48 of the number of shares
subject to such option each month thereafter.

On July 12, 1996, the Company adopted the 1996 Stock Option Plan, and
authorized 1,000,000 shares of Company Common Stock. As of August 2, 1997,
options to purchase up to 950,000 shares have been granted, of which options to
purchase up to 314,125 shares were exercisable as of such date and 50,000 shares
were available for future grants under this plan.

The Company adopted a 1990 Non-Employee Directors' Stock Option Plan on
September 14, 1990, which was approved by the Company's stockholders on December
14, 1990. The Company is authorized to issue options to purchase up to an
aggregate of 395,000 shares of the Company's Common Stock pursuant to this plan.
On the date the plan was adopted, each non-employee Director then in office was
granted an option to purchase up to 25,000 shares of Common Stock of the
Company. Each person who is elected for the first time to be a non-employee
Director will automatically be granted an option to purchase 25,000 shares of
the Company's Common Stock pursuant to this plan, which options will be
immediately exercisable. On December 2, 1993, the plan was amended to reduce by
150,000 shares the number of shares available for issuance pursuant to the plan,
leaving 245,000 shares available for grant under this plan. As of August 2,
1997, options to purchase up to 102,500 shares have been granted pursuant to
this plan, of which options to purchase up to 80,000 shares were exercisable as
of such date and 25,000 shares were available for future grants under this plan.
On September 1 of each year commencing September 1, 1991, an option to purchase
10,000 shares of the Company's common stock are automatically granted to each
non-employee Director then in office. Beginning with grants made to each
continuing non-employee Director in office on September 1, 1996, each person
shall receive an option to purchase up to 20,000 shares of the Company's Common
Stock. Grants are automatically made annually under this plan. These options
become exercisable at the rate of 25% after six months from the date of grant
and 25% per year thereafter. These options expire ten years after grant.

In accordance with the disclosure requirements of SFAS No. 123, if the
Company had elected to recognize compensation cost based on the fair value of
the options granted at grant date as prescribed, income and earnings per share
would have been reduced to the pro forma amounts indicated in the table below.
The pro forma effect on net income for fiscal 1996 and 1997 is not
representative of the pro forma

33
<PAGE>
AMATI COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

AUGUST 2, 1997

NOTE 6 STOCK OPTION PLANS (CONTINUED)
effect on net income in future years because it does not take into consideration
pro forma compensation expense related to grants made prior to fiscal 1996.

<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
(IN THOUSANDS,
EXCEPT PER SHARE
AMOUNTS)
Net loss--as reported................................................... $ 34,078 $ 12,243
Net loss--pro forma..................................................... $ 37,116 $ 18,336
Loss per share--as reported............................................. $ 2.21 $ .66
Loss per share--pro forma............................................... $ 2.40 $ .98
</TABLE>

The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions:

<TABLE>
<S> <C>
Expected dividend yield....................................... 0.0%
Expected stock volatility..................................... 112.28%
5.62 -
Risk-free interest rate....................................... 6.52%
Expected life of options from grant date...................... 4 years
</TABLE>

The weighted average fair value of options granted during 1996 and 1997 were
$5.39 and $11.55 per share, respectively.

Stock option activity under these plans was as follows:

<TABLE>
<CAPTION>
OPTIONS OPTION PRICE
OUTSTANDING PER SHARE
----------- --------------
<S> <C> <C>
Balance, July 30, 1994.......................................... 1,095,275
Granted......................................................... 160,000 $ 1.19 - $2.03
Exercised....................................................... (150,250) $ 0.75 - $1.53
Canceled........................................................ (66,100) $ 0.75 - $1.88
-----------
</TABLE>

<TABLE>
<CAPTION>
WEIGHTED AVERAGE
EXERCISE PRICE
-----------------
<S> <C> <C>
Balance, July 29, 1995........................................ 1,038,925 $ 1.09
Granted....................................................... 4,876,145 $ 6.61
Exercised..................................................... (1,238,077) $ 6.64
Canceled...................................................... (28,444) $ 1.09
-----------
Balance, July 27, 1996........................................ 4,648,549 $ 5.67
Granted....................................................... 765,250 $ 15.06
Exercised..................................................... (594,836) $ 5.36
Canceled...................................................... (46,726) $ 6.57
-----------
Balance, August 2, 1997....................................... 4,772,237 $ 6.40
-----------
-----------
</TABLE>

34
<PAGE>
AMATI COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

AUGUST 2, 1997

NOTE 6 STOCK OPTION PLANS (CONTINUED)
The following table summarizes information about fixed stock options
outstanding at August 2, 1997:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------------------- OPTIONS EXERCISABLE
WEIGHTED -----------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- - ----------------- ----------- --------------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
$ 0.01 - $ 1.22 248,890 6.15 $ 0.52 161,041 $ 0.69
$ 1.28 - $ 4.19 678,912 7.20 $ 1.40 403,602 $ 1.39
$ 4.25 - $ 4.94 2,026,735 8.33 $ 4.77 587,520 $ 4.66
$ 6.63 - $10.75 1,186,325 8.62 $ 8.43 458,075 $ 7.91
$10.88 - $24.75 631,375 9.09 $ 15.54 108,813 $ 15.81
----------- --- ----------- ---------- -----------
$ 0.01 - $24.75 4,772,237 8.23 $ 6.40 1,719,051 $ 5.09
----------- --- ----------- ---------- -----------
----------- --- ----------- ---------- -----------
</TABLE>

On August 2, 1997, there were 4,772,237 shares of Company Common Stock
reserved for issuance upon the exercise of outstanding options and 78,664 shares
of Common Stock reserved for future grants under all stock option plans.

NOTE 7 INCOME TAXES

As of August 2, 1997, the Company's tax net operating loss carryforwards for
federal tax purposes were approximately $45,066,000. The United States Tax
Reform Act of 1986 contains provisions which limit the amount of net operating
loss carryforwards which may be utilized in any given fiscal year when a
significant change in ownership interest occurs. These carryforwards expire in
various amounts through fiscal 2012. The Company also has certain tax credit
carryforwards of $1,650,000 which expire in various amounts through the year
2012. The United States Tax Reform Act of 1986 contains provisions that may
limit the net operating loss carryforwards and research and development credits
available to be used in any given year should certain events occur.

The Company has an additional $2,234,000 of net operating loss carryforwards
which were acquired in connection with a fiscal 1988 acquisition. The change in
ownership of the acquired company will affect the availability and timing of the
amount of prior losses to be used to offset taxable income in future years.
These carryforwards expire in various amounts through the year 2005.

As of August 2, 1997, the Company also has net operating loss carryforwards
of approximately $10,000,000 available to offset future California state taxable
income. These carryforwards expire in various amounts through the year 2002. The
Company also has certain California tax credit carryforwards of $330,000.

35
<PAGE>
AMATI COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

AUGUST 2, 1997

NOTE 7 INCOME TAXES (CONTINUED)
The provision for income taxes is as follows (in thousands):

<TABLE>
<CAPTION>
JULY 29, JULY 27, AUGUST 2,
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Provision for income taxes:
Current federal............................................... $ 39 $ 17 $ --
Current state................................................. 58 26 --
--- --- -----------
Total provision for income taxes.............................. $ 97 $ 43 $ --
--- --- -----------
--- --- -----------
</TABLE>

The difference between the Company's effective income tax rate and the
Federal statutory rate is as follows:

<TABLE>
<CAPTION>
JULY 29, JULY 27, AUGUST 2,
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Statutory federal income tax rate........................... 34% (34)% (34)%
State income tax rate, net of federal benefit.............. 7 7 (6)
Change in valuation allowance.............................. (36) 32 40
--- --- -----
Income tax rate............................................ 5% 5% --
--- --- -----
--- --- -----
</TABLE>

The major components of the net deferred tax asset are as follows (in
thousands):

<TABLE>
<CAPTION>
JULY 27, AUGUST 2,
1996 1997
--------- -----------
<S> <C> <C>
Deferred tax assets:
Cumulative temporary differences...................................... $ 1,468 $ 3,056
Tax credits........................................................... 1,395 1,839
Net operating loss carryforwards...................................... 9,496 16,693
Other accruals........................................................ 118 --
--------- -----------
Total assets........................................................ 12,477 21,588
Valuation allowance................................................... (12,392) (21,427)
--------- -----------
Net deferred income tax asset......................................... 85 161
Less deferred tax liabilities:
Capitalized software expenditures..................................... 85 161
--------- -----------
Total liabilities................................................... 85 161
--------- -----------
Total net deferred tax assets........................................... $ 0 $ 0
--------- -----------
--------- -----------
</TABLE>

NOTE 8 NET INCOME (LOSS) PER SHARE

Net income (loss) per share is based on the weighted average number of
shares outstanding of common stock and common stock equivalents (when dilutive)
using the treasury stock method. No

36
<PAGE>
AMATI COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

AUGUST 2, 1997

NOTE 8 NET INCOME (LOSS) PER SHARE (CONTINUED)
common stock equivalents have been included in 1996 and 1997 because the effect
would be to decrease the loss per share.

In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 128 ("SFAS No. 128"), "Earnings Per Share", which simplifies the
standards for computing earnings per share previously found in Accounting
Principles Board Opinion No. 15 ("APB No. 15"). SFAS No. 128 replaces the
presentation of primary earnings per share with a presentation of basic earnings
per share, which excludes dilution. SFAS No. 128 also requires dual presentation
of basic and diluted earnings per share on the face of the income statement for
all entities with complex capital structures and requires a reconciliation.
Diluted earnings per share is computed similarly to fully diluted earnings per
share pursuant to APB No. 15. SFAS No. 128 must be adopted for financial
statements issued for periods ending after December 15, 1997, including interim
periods; earlier application is not permitted. SFAS No. 128 requires restatement
of all prior period earnings per share presented. The Company does not
anticipate that SFAS No. 128 will have a material impact on its earnings per
share calculation.

NOTE 9 LEASE COMMITMENTS

Future minimum lease payments under capital leases, together with the
present value of those payments and the aggregate annual rental commitments
under non-cancelable operating leases as of August 2, 1997, are shown as
follows:

<TABLE>
<CAPTION>
OPERATING LEASES
--------------------------
<S> <C> <C> <C>
RENTALS
RECEIVABLE
CAPITAL RENTAL UNDER
FISCAL YEAR LEASES PAYMENTS SUBLEASES
- - ------------------------------------------------------------- --------- ----------- -------------
1998......................................................... $ 1,019 $ 1,027 $ 258
1999......................................................... 1,019 1,033 252
2000......................................................... 866 862 --
2001......................................................... 433 886 --
2002......................................................... 88 97 --
Thereafter................................................... -- 621 --
--------- ----------- -----
Total minimum lease payments................................. $ 3,425 $ 4,526 $ 510
----------- -----
----------- -----
Less amount representing interest............................ (611)
---------
Present value of future minimum lease payments............... $ 2,814
---------
---------
</TABLE>

Total rent expense for all operating leases amounted to approximately
$1,038,000, $971,000 and $1,623,000 in fiscal 1995, 1996 and 1997, respectively.
Rent expense in fiscal 1995, 1996 and 1997 is before sublease income of
$297,000, $137,000 and $333,000.

NOTE 10 LITIGATION

In November 1993, an action was brought against the Company for damages
related to the use of the Company's products. The plaintiff filed a suit
claiming repetitive stress injuries resulting from the use of

37
<PAGE>
AMATI COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

AUGUST 2, 1997

NOTE 10 LITIGATION (CONTINUED)
the Company's product in the course of employment with American Airlines from
the period May 1981 through July 1991. The plaintiff alleges damages in the
amount of $1 million and seeks punitive damages of $10 million. The Company
believes that the claim is without merit and has tendered defense of this action
to its insurance carriers. In the opinion of management, the outcome of this
litigation will not have a material adverse effect on the Company's financial
position or its results of operations.

NOTE 11 SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

Quarterly information is for the years ended July 27, 1996 and August 2,
1997.
<TABLE>
<CAPTION>
FISCAL 1996 QUARTER ENDED
---------------------------------------------------
OCTOBER 28, JANUARY 27, APRIL 27, JULY 27,
1995 1996 1996 1996
------------- ------------ --------- -----------
<S> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net Sales...................................................... $ 3,354 $ 2,524 $ 3,756 $ 2,451
Gross Profit................................................... $ 1,514 $ 978 $ 1,576 $ 613
Net Income (Loss).............................................. $ 816 $ (32,199) $ (498) $ (2,197)
Net Income (Loss) Per Share.................................... $ 0.07 $ (2.12) $ (0.03) $ (0.13)

FISCAL 1997 QUARTER ENDED
---------------------------------------------------
NOVEMBER 2, FEBRUARY 1, MAY 3, AUGUST 2,
1996 1997 1997 1997
------------- ------------ --------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net Sales...................................................... $ 4,513 $ 3,012 $ 3,663 $ 2,012
Gross Profit................................................... $ 2,426 $ 899 $ 1,621 $ (1,300)
Net Loss....................................................... $ (746) $ (2,786) $ (2,293) $ (6,418)
Net Loss Per Share............................................. $ (0.04) $ (0.15) $ (0.12) $ ( 0.33)
</TABLE>

NOTE 12 ACQUISITION OF OLD AMATI

On November 28, 1995, the Company acquired all of the outstanding shares of
Amati Communications Corporation ("Old Amati") for approximately $29.5 million.
The purchase price consisted of the issuance of 2.6 million shares of the
Company's Common Stock in exchange for all shares of Old Amati common stock, 1.5
million shares of the Company's Common Stock in exchange for all shares of Old
Amati Series A preferred stock, Warrants for the purchase of up to 1.1 million
shares of the Company's Common Stock in exchange for all Old Amati warrants, and
options to purchase up to 1.6 million shares of the Company's Common Stock in
exchange for all options to purchase Old Amati common stock. The purchase price
also includes registration and other acquisition costs of $0.8 million, total
cash advances to Old Amati prior to the merger of $5.6 million and is net of the
estimated proceeds from the assumed exercise of Old Amati options and warrants
of $3.3 million.

The transaction was accounted for using the purchase method of accounting.
The Company allocated the purchase price to the net assets based upon their
estimated fair values. The fair values of tangible assets acquired and
liabilities assumed were $1.2 million and $3.2 million, respectively. The
balance of the purchase price, $31.6 million, was charged to earnings to
write-off in-process research and development that had not reached technological
feasibility and had no alternative future uses.

38
<PAGE>
AMATI COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

AUGUST 2, 1997

NOTE 12 ACQUISITION OF OLD AMATI (CONTINUED)
The following table reflects unaudited pro forma combined results of
operations of the Company and Old Amati on the basis that the acquisition had
taken place and the related charge, noted above, was recorded at the beginning
of the fiscal year of the period presented:

<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
--------------------------
<S> <C> <C>
JULY 29, JULY 27,
1995 1996
------------ ------------
(IN THOUSANDS EXCEPT PER
SHARE DATA)
Revenues.......................................................... $ 13,092 $ 13,512
Net Loss.......................................................... $ (35,666) $ (36,527)
Net Loss per Share................................................ $ (2.21) $ (2.15)
Number of shares used in computation.............................. 16,146 17,008
</TABLE>

In management's opinion, the unaudited pro-forma combined results of
operations are not necessarily indicative of the actual results that would have
occurred had the acquisition been consummated at the beginning of 1996 or of
future operations of the combined companies under the ownership and management
of the Company.

39
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The Executive Officers and Directors of the Company during the fiscal year
and their ages as of the date of filing of the Form 10-K Registration Statement
are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
- - --------------------------------------- --- -----------------------------------------------
<S> <C> <C>
Dr. James Gibbons...................... 65 Chairman of the Board
Donald L. Lucas........................ 67 Director
James Steenbergen...................... 50 President, Chief Executive Officer, Chief
Financial Officer, Director
Dr. John Cioffi........................ 40 Chief Technical Officer, Founder, Director
Aamer Latif............................ 39 Director
Christopher Barnes..................... 48 Vice President of European Sales
Benjamin Berry......................... 48 Vice President of Marketing
David Bivolcic......................... 40 Senior Vice President
Ronald Carlini......................... 58 Vice President of Corporate Development
Joseph Grady, Jr....................... 50 Vice President of Worldwide Sales
James Hood............................. 56 Vice President of Engineering
Teresita Medel......................... 49 Treasurer, Secretary and Controller
</TABLE>

Dr. James Gibbons served as Chairman of the Board of Directors of Old Amati
since 1992. Dr. Gibbons is a Special Counsel to the President of Stanford
University and served as the Dean of the School of Engineering at Stanford
University from 1984 to 1996. Dr. Gibbons currently serves on the Board of
Directors of Lockheed Corporation, Raychem Corporation, Centigram Corporation,
El Paso Natural Gas Company and Cisco Systems, Incorporated. Dr. Gibbons was
elected as Chairman of the Company's Board effective December 4, 1995.

Mr. Donald L. Lucas, a venture capitalist, has been a Director of the
Company since 1968. He is also a director of Cadence Design Systems, Inc.,
Coulter Pharmaceutical, Inc., Macromedia, Inc., Oracle Corp., Racotek, Inc.,
Transcend Services, Inc., and Tricord Systems, Incorporated.

Mr. James Steenbergen, President and CEO, has been Chief Executive Officer
and President for several high-technology companies involved in the manufacture
and development of systems for the telecommunications industry. These companies
include Optilink Corporation, SRX and Granger Associates. Mr. Steenbergen became
CEO and was elected to the Company's Board effective December 4, 1995.

Dr. John Cioffi, Chief Technical Officer, is the founder of Old Amati and
also served as Vice President of Engineering, Chief Technical Officer and
Director of Old Amati. Dr. Cioffi has also been a Professor of Electrical
Engineering at Stanford University since 1986. Dr. Cioffi sits on the technical
boards of C-Cube Microsystems, Inc., and has served on the technical staffs of
Bell Laboratories Inc. and IBM's Almaden Research Laboratories. Dr. Cioffi was
elected to the Company's Board effective December 4, 1995.

Mr. Aamer Latif was elected President, Chief Executive Officer, Chief
Financial Officer and Director of the Company in May 1993; he was elected
Chairman in July 1995 and served in that capacity until December 1995. Prior to
1993, Mr. Latif served in various positions in Engineering with the Company
since 1980. He resigned as an officer of the Company on November 27, 1995.

40
<PAGE>
Mr. Christopher Barnes, Vice President of European Sales, joined the Company
in July 1996. Mr. Barnes has extensive experience in global high technology
markets, having previously been responsible for international sales in various
leading communications companies, including Marconi UK, DSC Communications and
Telesciences.

Mr. Benjamin Berry, Vice President of Marketing since December 1995, was
previously Vice President of Marketing and Business Development for Digital Link
Corporation, a manufacturer of high-speed data communications equipment from
1989 until 1994. He has also been a Division Manager at Granger Associates and a
Member of Technical Staff for Bell Laboratories.

Mr. David Bivolcic was elected Senior Vice President of the Company in May
1993. Prior to that, he served as the Company's Vice President, Operations since
December 1989.

Mr. Ronald Carlini, Vice President of Corporate Development, came to the
Company after holding a variety of senior management positions in the computer
and telecommunications industries, including General Manager and Executive Vice
President at ADACOM Corporation; General Manager and Vice President of Telex
Corporation; and Division Account Marketing Manager at IBM Corporation.

Mr. Joseph Grady, Jr., served as Old Amati's Vice President of Worldwide
Sales from August of 1994 until the merger with the Company, and continues in
that position with the Company. Previously, Mr. Grady served as Assistant Vice
President of Sales of Newbridge Networks Corporation from 1992 to 1994. Mr.
Grady served as Manager of Distribution, Sales and Development for Octel
Communications Corporation from 1991 to 1992. Mr. Grady also served as Vice
President of Telephone Company Sales for Racal Data Communications Inc. for 1985
to 1991.

Mr. James Hood, Vice President of Engineering since January 1996, has thirty
years of industry experience. He previously served as President and Executive
Officer of MERET Optical Communications, Inc. from 1992 through 1993. Prior to
that, he was President and Chief executive Officer of CATEL Telecommunications
Inc.

Ms. Teresita Medel was elected Secretary of the Company in December 1994.
She has served as Treasurer and Controller of the Company since July 1993. Prior
to 1993, she had served as the Company's Accounting Manager since 1979.

41
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION

The following table shows certain information concerning compensation paid
and earned during the fiscal years ended July 29, 1995, July 27, 1996 and August
2, 1997 to the Chief Executive Officer and the other four most highly
compensated Executive Officers of the Company whose salary and bonus exceeded
$100,000.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION SECURITIES
--------------------------------- UNDERLYING
NAME AND BONUS($) OPTIONS/ ALL OTHER
PRINCIPAL POSITION YEAR SALARY($) EARNED SARS(#) COMPENSATION($)
- - --------------------------------------------------- --------- --------- ----------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
James Steenbergen.................................. 1997 185,000 -(1) 6,864(2)
President, CEO, CFO 1996 124,994 75,000 500,000 4,125(2)

David J. Bivolcic.................................. 1997 145,000 25,375(1) 306(3)
Senior Vice President 1996 142,638 50,000 165,000 198(3)
1995 132,000 57,000 198(3)

James D. Hood...................................... 1997 145,000 43,500(1) 1,238(3)
Vice President of Engineering 1996 88,428 30,000 200,000

Benjamin Berry..................................... 1997 135,000 20,250(1) 6,522(2)
Vice President of Marketing 1996 87,577 34,000 200,000 4,000(2)

Christopher Barnes................................. 1997 120,000 84,000(1) 218(3)
Vice President of 1996 2,307 160,000
International Sales
</TABLE>

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

(1) Bonuses for fiscal year 1997 approved by the Board of Directors, subject to
completion of the proposed merger with Westell. The Board of Directors
determined that the bonus payable to Mr. Steenbergen for fiscal 1997 should
be determined by Westell following such merger.

(2) Car allowances and payments made by the Company for premiums on group life
insurance policies for Messrs. Steenbergen and Berry.

(3) Payments made by the Company for premiums on group life insurance policies
for Messrs. Bivolcic, Barnes and Hood.

42
<PAGE>
The following table sets forth certain information regarding options
exercised during the last fiscal year and held at the end of such year by the
Executive Officers named in the Summary Compensation Table.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION VALUES
FISCAL YEAR 1997

<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
FY-END(#) FY-END($)
SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE(#) REALIZED($)(1) UNEXERCISABLE UNEXERCISABLE(2)
- - ---------------------------------- ----------------- ------------- ------------------- ------------------------
<S> <C> <C> <C> <C>
James Steenbergen................. 0 $ 0 237,500/250,000 $2,256,250/$2,375,000

David J. Bivolcic................. 8,250 $ 90,534 49,250/117,500 $231,648/$400,875

James D. Hood..................... 0 $ 0 80,000/100,000 $449,600/$562,000

Benjamin Berry.................... 4,000 $ 40,730 90,000/100,000 $618,300/$687,000

Christopher Barnes................ 0 $ 0 40,000/120,000 $0/$0
</TABLE>

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

(1) Value realized is the aggregate market value of the underlying securities at
exercise date less the aggregate exercise price.

(2) Aggregate market value of underlying securities at fiscal year-end less the
aggregate exercise price of "in the money" options. On August 2, 1997, the
closing price for the company's common stock was reported on the Nasdaq
National Market System was $13.75.

In the fiscal year ended August 2, 1997, no options were granted to the named
executive officers.

BOARD COMPENSATION

The Company has a policy of reimbursing directors for reasonable travel and
related expenses incurred in attending Board and Committee meetings. Donald L.
Lucas, a director of the Company received $27,000 in fiscal 1997 in consulting
fees for services rendered to the Company.

Directors who are not employees of the Company or an affiliate of the
Company are eligible to participate in the Company's 1990 Non-Employee
Directors' Stock Option Plan. Pursuant to such plan, (i) each individual elected
to the Company's Board as a non-employee Director for the first time is granted
an option to purchase up to 25,000 shares of the Company's Common Stock at an
exercise price equal to the fair market value of such stock on the date of
grant; and (ii) each non-employee Director then in office (other than
individuals receiving first-time grants as described in (i) above) receives an
option to purchase 20,000 shares of the Company's Common Stock on September 1,
at an exercise price equal to the fair market value of the Common Stock on such
date. Grants are automatically made annually under this plan. In lieu of
participating in the 1990 Non-Employee Directors' Stock Option Plan on an annual
basis, Dr. James Gibbons received a one-time grant of an option to purchase up
to 25,000 shares of the Company's Common Stock under this plan and an additional
option to purchase up to 125,000 shares pursuant to the 1990 Supplemental Stock
Option Plan, both at an exercise price equal to the fair market value of the
Company's Common Stock on the date of grant of such options.

43
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth the number of shares of the Company's Common
Stock beneficially owned as of October 2, 1997, by (i) each stockholder known to
the Company to be a beneficial owner of more than 5% of the Company's Common
Stock, (ii) each director, and (iii) each executive officer named in the Summary
Compensation Table below, and (iv) all executive officers and directors as a
group. Except as otherwise indicated, each of the listed persons or entities has
sole voting and investment power with respect to the shares listed as
beneficially owned by them, subject to community property laws, where
applicable.

NAME AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP(1)

<TABLE>
<CAPTION>
PERCENT OF CLASS
-----------------
<S> <C> <C>
Dr. John Cioffi............................................. 1,617,978(2) 9.1
Dr. James Gibbons........................................... 367,507(3) 2.1

Donald L. Lucas............................................. 54,716(4) *

Aamer Latif................................................. 75,000(5) *

James Steenbergen........................................... 237,500(6) 1.3

Christopher Barnes.......................................... 41,250(7) *

Benjamin Berry.............................................. 91,000(8) *

David Bivolcic.............................................. 49,250(9) *

James Hood.................................................. 80,000(10) *

All directors and executive officers, as a group
(12 persons).............................................. 2,885,041(11) 16.3
</TABLE>

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

* Less than 1%.

(1) Based upon information supplied or confirmed by officers, directors and the
principal stockholders. The percentage of class assumes the exercise of all
options and warrants held by the named individual that are exercisable on
October 2, 1997, or within sixty days thereafter, but not the exercise of
any other options or warrants that are outstanding.

(2) Includes 618,950 shares that are deemed beneficially owned by Dr. Cioffi by
virtue of options held by him that are exercisable within 60 days of October
2, 1997.

(3) Includes 147,880 shares that are deemed beneficially owned by Dr. Gibbons by
virtue of options held by him that are exercisable within 60 days of October
2, 1997.

(4) Includes 30,000 shares that are deemed beneficially owned by Mr. Lucas by
virtue of options held by him that are exercisable within 60 days of October
2, 1997. Also includes 23,716 shares that are held in a living trust for Mr.
Lucas and his wife. As trustee of the joint trusts, Mr. Lucas holds voting
and investment power with respect to such shares.

(5) Includes 75,000 shares that are deemed beneficially owned by Mr. Latif by
virtue of options held by him that are exercisable within 60 days of October
2, 1997.

(6) Includes 237,500 shares that are deemed beneficially owned by Mr.
Steenbergen by virtue of options held by him that are exercisable within 60
days of October 2, 1997.

(7) Includes 40,000 shares that are beneficially owned by Mr. Barnes that are
exercisable within 60 days of October 2, 1997.

44
<PAGE>
(8) Includes 90,000 shares that are deemed beneficially owned by Mr. Berry by
virtue of options held by him that are exercisable within 60 days of October
2, 1997.

(9) Includes 49,250 shares that are deemed beneficially owned by Mr. Bivolcic by
virtue of options held by him that are exercisable within 60 days of October
2, 1997.

(10) Includes 80,000 shares that are deemed beneficially owned by Mr. Hood by
virtue of options held by him that are exercisable within 60 days of October
2, 1997.

(11) In addition to the shares indentified in footnotes (2) through (10) above,
also includes 270,840 shares that are deemed beneficially owned by virtue of
options that are exercisable within 60 days of October 2, 1997.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission.
Officers, directors and greater than ten percent stockholders are required by
regulations to furnish the Company with copies of all Section 16(a) forms they
file.

Based solely on its review of the copies of such forms received by the
Company during fiscal year 1997 and written representations from certain
reporting persons, the Company believes that all Section 16(a) filing
requirements applicable to all officers, directors, and greater than ten percent
beneficial owners were complied with during fiscal year 1997.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

None.

45
<PAGE>
PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) (1) INDEX TO FINANCIAL STATEMENTS

The following consolidated financial statements are included in Part II,
Item 8:

<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Public Accountants......................................................... 22
Consolidated Balance Sheets as of July 27, 1996 and August 2, 1997............................... 23
Consolidated Statements of Operations for the Three Years Ended August 2, 1997................... 24
Consolidated Statements of Stockholders' Equity for the Three Years Ended August 2, 1997......... 25
Consolidated Statements of Cash Flows for the Three Years Ended August 2, 1997................... 26
Notes to Consolidated Financial Statements....................................................... 27
</TABLE>

(2) INDEX TO FINANCIAL STATEMENT SCHEDULES

<TABLE>
<S> <C>
Schedule II Valuation and Qualifying Accounts................................. 49
</TABLE>

All other schedules called for under Regulation S-X are omitted because they
are not applicable, not required, or required information is immaterial or is
shown in the financial statements or notes thereto.

(3) INDEX TO EXHIBITS

See section (c).

(b) REPORTS ON FORM 8-K

Form 8K filed on October 3, 1997 with respect to the Proposed Merger with
Westell Technologies, Inc.

<TABLE>
<C> <S> <C>
2.1 The Amended and Restated Agreement and Plan of Reorganization and Incorporated
Merger among Registrant, Amati Communications Corporation and IA by Reference
Acquisition Corporation, dated August 3, 1995 and the Amendment
thereto dated October 6, 1995 are filed as Exhibit 2.1 to the
Registrant's Form S-4 Registration Statement File No. 33-62023 dated
October 16, 1995.

3.1 Restated Certification of Incorporation filed with the Delaware Incorporated
Secretary of State of November 17, 1989 is filed as Exhibit 3.1 to by Reference
Registrant's Form 10-K Annual Report for its fiscal year ended July
28, 1990.

3.2 By-Laws as amended through July 21, 1989 are filed as Exhibit 3(iii) Incorporated
to Registrant's Form 10-K Annual Report for its fiscal year ended July by Reference
29, 1989.

10.1* 1981 Incentive Stock Option Plan as amended through October 12, 1987, Incorporated
is filed as Exhibit 10(iii) to Registrant's Form 10-K Annual Report by Reference
for its fiscal year ended August 1, 1987.

10.2* 1981 Supplemental Stock Option Plan as amended through October 12, Incorporated
1987, is filed as Exhibit 10(iv) to Registrant's Form 10-K Annual by Reference
Report for its fiscal year ended August 1, 1987.
</TABLE>

46
<PAGE>
<TABLE>
<C> <S> <C>
10.3 Lease dated August 27, 1985 between Registrant and Zanker/North Pointe Incorporated
Associates with respect to Registrant's facilities at 3801 Zanker by Reference
Road, San Jose, California is filed as Exhibit 10(xiii) to
Registrant's Form 10-K Annual Report for its fiscal year ended August
3, 1985.

10.4* 1985 Director's Stock Option Plan as amended through December 11, 1987 Incorporated
is filed as Exhibit 28 to Registrant's Form S-8 Registration Statement by Reference
File No. 33-21103.

10.5 Lease amendment dated September 19, 1990 between Registrant and Incorporated
Zanker/ North Pointe Associates with respect to Registrant's by Reference
facilities at 3801 Zanker Road, San Jose, California is filed as
Exhibit 10.6 to Registrant's Form 10-K Annual Report for its fiscal
year ended July 28, 1990.

10.6* 1990 Stock Option Plan adopted September 14, 1990 is filed as Exhibit Incorporated
10.8 to Registrant's Form 10-K Annual Report for its fiscal year ended by Reference
July 28, 1990.

10.7* 1990 Non-Employee Director's Stock Option Plan adopted September 14, Incorporated
1990 is filed as Exhibit 10.9 to Registrant's Form 10-K annual Report by Reference
for its fiscal year ended July, 28, 1990.

10.8 Manufacturing Agreement dated October 9, 1989 between Registrant and Incorporated
International Business Machines Corporation is filed as Exhibit 10.9 by Reference
to Registrant's Form 10-K Annual Report for its fiscal year ended July
27, 1991 as amended.

10.9 Lease dated February 10, 1994 between Registrant and Zanker/North Incorporated
Pointe Associates with respect to Registrant's facilities at 3801 by Reference
Zanker, San Jose, California is filed as Exhibit 10.9 to Registrant's
Form 10-K Annual Report for its fiscal year ended July 30, 1994.

10.10 Registration Rights Agreement is filed as Exhibit 10.1 to Registrant's Incorporated
Form S-3 dated March 8, 1996. by Reference

10.11* Affiliate's Agreement between the Registrant and Dr. John Cioffi is Incorporated
filed as Exhibit 10.3 to Registrant's Form S-3 dated March 8, 1996. by Reference

10.12* Severance Agreement dated May 15, 1995, amended August 12, 1995 Incorporated
between Registrant and Aamer Latif is filed as Exhibit 10.15 to by Reference
Registrant's Form 10-Q for the quarter ended October 28, 1995.

10.13 License Agreement dated January 1, 1992 between Registrant and Incorporated
Stanford University and University Ventures II, a California limited by Reference
investment partnership, is filed as Exhibit 10.16 to the Registrant's
Form 10-Q for the quarter ended January 27, 1996. (Confidential
treatment has been requested with respect to specific portions of this
exhibit).

10.14 License Agreement dated March 16, 1995 between Registrant and Motorola Incorporated
is filed as Exhibit 10.17 to the Registrant's Form 10-Q for the by Reference
quarter ended January 27, 1996. (Confidential treatment has been
requested with respect to specific portions of this exhibit).

10.15* Employment Agreement dated May 5, 1995 with Dr. John Cioffi is filed Incorporated
as Exhibit 10.18 to the Registrant's Form 10-Q for the quarter ended by Reference
January 27, 1996.
</TABLE>

47
<PAGE>
<TABLE>
<C> <S> <C>
10.16 Lease dated July 15, 1996 between Registrant and Berg and Berg Incorporated
Developers with respect to Registrant's facilities at 2043 Samaritan by Reference
Drive, San Jose is filed as Exhibit 10.16 to Registrant's Form 10-K
annual report for its fiscal year ended July 27, 1996.

10.17* 1996 Stock Option Plan adopted July 12, 1996 is filed as Exhibit 10.17 Incorporated
to Registrant's Form 10-K annual report for its fiscal year ended July by Reference
27, 1996.

10.18 Investment Agreement dated October 3, 1996 among Registrant, Quantum Incorporated
Industrial Partners LDC, S-C Phoenix Holdings, L.L.C., Winston by Reference
Partners L.P., Winston Partners II LDC, and Winston Partners II L.L.C.
is filed as Exhibit 4.1 to Registrant's Form S-3 dated October 8,
1996.

10.19 Form of Class A Warrant is filed as Exhibit 4.2 to Registrant's Form Incorporated
S-3 dated October 8, 1996. by Reference

10.20 Form of Class B Warrant is filed as Exhibit 4.3 to Registrant's Form Incorporated
S-3 dated October 8, 1996. by Reference

10.21 Registration Rights Agreement dated October 3, 1996 among Registrant Incorporated
and Quantum Industrial Partners LDC, S-C Phoenix Holdings, L.L.C., by Reference
Winston Partners L.P., Winston Partners II LDC, and Winston Partners
II L.L.C. is filed as Exhibit 4.4 to Registrant's Form S-3 dated
October 8, 1996.

10.22 Agreement and Plan of Merger dated September 30, 1997 between Amati Incorporated
Communications Corporation and Westell Technologies, Inc. and Kappa by Reference
Acquisition Corporation is filed as Exhibit 2.1 to the Registrant's
Form 8-K dated September 30, 1997.

21.1 A list of Registrant's subsidiaries is filed as Exhibit 21.1 hereto.

23.1 Consent of Independent Public Accountants is filed as Exhibit 23.1
hereto.

23.2 Independent Public Accountants report on schedules is filed as Exhibit
23.2 hereto.

24.0 Power of Attorney (see page 50).
</TABLE>

The exhibits not filed herewith were previously filed with the Commission as
indicated and are hereby incorporated by reference.

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

* Management Contracts or Compensatory Plans.

48
<PAGE>
SCHEDULE II

AMATI COMMUNICATIONS CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)

<TABLE>
<CAPTION>
BALANCE
AT CHARGED CHARGED BALANCE AT
BEGINNING TO COSTS & TO OTHER END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNT DEDUCTIONS PERIOD
- - ------------------------------------------------------- ----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Year ended July 29, 1995............................. $ 25 $ -- $ -- $ (4)(1) $ 21
Year ended July 27, 1996............................. $ 21 $ 20 $ 5 $ (16)(1) $ 30
Year ended August 2, 1997............................ $ 30 $ -- $ -- $ -- $ 30

ACCRUED RESTRUCTURING CHARGE:
Year ended July 29, 1995............................. $ 841 $ -- $ -- $ (547)(2) $ 294
Year ended July 27, 1996............................. $ 294 $ -- $ -- $ -- $ 294
Year ended August 2, 1997............................ $ 294 $ 160 $ -- $ -- $ 454
</TABLE>

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

(1) Uncollectible accounts written off

(2) Usage

49
<PAGE>
SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, on October 29, 1997.

<TABLE>
<S> <C> <C>
AMATI COMMUNICATIONS CORPORATION

By: /s/ JAMES E. STEENBERGEN
-----------------------------------------
James E. Steenbergen
PRESIDENT, CHIEF EXECUTIVE OFFICER,
AND CHIEF FINANCIAL OFFICER
</TABLE>

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints James Steenbergen and Teresita Medel, or either
of them, with the power of substitution, his attorney in fact, to sign any
amendments to this Registration Statement and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that each of said
attorney-in-fact, or his substitute or substitutes, may do or cause to be done
by virtue hereof.

Pursuant to the requirements of the Securities Act of 1934, this Report has
been signed by the following persons in the capacities and on the dates
indicated.

SIGNATURE CAPACITY DATE
- - ------------------------------ -------------------------- -------------------

/s/ DR. JAMES GIBBONS
- - ------------------------------ Chairman of the Board October 29, 1997
Dr. James Gibbons
/s/ DONALD L. LUCAS
- - ------------------------------ Director October 29, 1997
Donald L. Lucas
/s/ DR. JOHN CIOFFI
- - ------------------------------ Director October 29, 1997
Dr. John Cioffi
/s/ AAMER LATIF
- - ------------------------------ Director October 29, 1997
Aamer Latif
President, Chief Executive
Officer and Chief
/s/ JAMES STEENBERGEN Financial Officer
- - ------------------------------ (Principal Executive October 29, 1997
James Steenbergen Officer) (Principal
Financial Officer)
Treasurer, Secretary and
/s/ TERESITA MEDEL Corporate Controller
- - ------------------------------ (Principal Accounting October 29, 1997
Teresita Medel Officer)

<PAGE>
EXHIBIT 21.1

LIST OF REGISTRANT'S SUBSIDIARIES

<TABLE>
<CAPTION>
NAME FEDERAL ID NUMBER
- - ---------------------------------------------------------------------- ----------------------
<S> <C>
PATHWAY DESIGN, INC. 04-2780945
MICROFILM PUBLISHING COMPANY 52-0893118
IA ACQUISITION CORPORATION 77-0440943
</TABLE>

<PAGE>
EXHIBIT 23.1

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the incorporation of
our report included in this Form 10-K, into the Company's previously filed
Registration Statements File Nos. 2-76324, 2-88042, 2-94922, 33-2525, 33-21102,
33-41465 and 33-65395 on Form S-8 and Nos. 333-01187, 333-13659, 333-17905 and
333-29081 on Form S-3.

ARTHUR ANDERSEN LLP

San Jose, California
October 30, 1997

<PAGE>
EXHIBIT 23.2

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

We have audited in accordance with generally accepted auditing standards,
the financial statements of Amati Communications Corporation included in this
Form 10-K and have issued our report thereon dated September 30, 1997. Our audit
was made for the purpose of forming an opinion on the basic financial statements
taken as a whole. The schedule listed in the index above is presented for
purposes of complying with the Securities and Exchange Commission's rules and is
not part of the basic financial statements. This schedule has been subjected to
the auditing procedures applied in the audit of the basic financial statements
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.

ARTHUR ANDERSEN LLP

San Jose, California
September 30, 1997

<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-02-1997
<PERIOD-START> JUL-28-1996
<PERIOD-END> AUG-02-1997
<CASH> 791
<SECURITIES> 709
<RECEIVABLES> 1399
<ALLOWANCES> 30
<INVENTORY> 3055
<CURRENT-ASSETS> 9282
<PP&E> 9389
<DEPRECIATION> 3588
<TOTAL-ASSETS> 15083
<CURRENT-LIABILITIES> 5517
<BONDS> 0
0
0
<COMMON> 3939
<OTHER-SE> 1087
<TOTAL-LIABILITY-AND-EQUITY> 15083
<SALES> 13200
<TOTAL-REVENUES> 13200
<CGS> 9554
<TOTAL-COSTS> 9554
<OTHER-EXPENSES> 15682
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 323
<INCOME-PRETAX> (12243)
<INCOME-TAX> 0
<INCOME-CONTINUING> (12243)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12243)
<EPS-PRIMARY> (0.66)
<EPS-DILUTED> (0.66)

</TABLE>