Research and Development.  Research and development expenses consist primarily of salaries and related expenses of employees engaged in research, design and development activities.  They also include consulting fees, prototype equipment expenses and the cost of related supplies. Research and development expenses increased $1.0 million, or 82.4%, to $2.2 million, or 19.8% of net revenues, for the three months ended March 31, 2001, from $1.2 million, or 26.3% of net revenues, for the same period in 2000.  The increase in research and development expense dollars was primarily due to the hiring of additional engineers, and the development of product prototypes as the Company continued to advance the development of new products.

          Interest Income.  Interest income for the three months ended March 31, 2001 was $476,000, as compared to none for the same period in 2000.  The interest income earned during the three months ended March 31, 2001 was the result of investing the net proceeds received from the Company’s initial public offering in June 2000.

          Income Taxes.  The provision for income taxes for the three months ended March 31, 2001 was $619,000, or an effective tax rate of 35.0%, as compared to none for the same period in 2000.  The Company did not record a benefit from income taxes related to the net loss during the three months ended March 31, 2000 due to uncertainty, at that time, as to whether it was more likely than not that the deferred tax assets related to the net loss during the period would be recovered.  Management determined during the second quarter of 2000 that the deferred tax assets would be recovered and, as a result, recognized the tax benefits during the period.

          Cost Management Program.  Due to an overall slowdown in the semiconductor industry, the Company adopted a cost management program in March 2001 that included material cost reductions, a reduction in temporary and contract staff, a decrease in discretionary spending and overtime, and a 10% executive pay cut.  In April 2001, the Company announced a work force reduction affecting approximately 9% of the Company’s employees.

Liquidity and Capital Resources

Cash and Cash Equivalents and Working Capital

          As of March 31, 2001 the Company had cash and cash equivalents of $7.1 million, as compared to $3.1 million at December 31, 2000.  The increase in cash and cash equivalents was primarily due to cash flow generated from operating activities and the reinvestment of maturities of short-term investments in cash equivalents.

          As of March 31, 2001 the Company’s working capital increased $1.0 million to $37.9 million, from $36.9 million at December 31, 2000.  The improvement in working capital was primarily due to the cash that was generated from operating activities, partially offset by the decrease in short-term investments.  The Company believes that existing working capital, anticipated cash flows from operations and its line of credit will be adequate to satisfy projected operating and capital requirements through the foreseeable future.  However, to the extent the Company grows more rapidly than expected, the Company may need additional cash to finance its operating and investing activities.

Cash Flows

          During the three months ended March 31, 2001, net cash provided by operating activities was $2.6 million, which resulted primarily from decreased accounts receivable and increased accounts payable and other accrued liabilities, partially offset by increased inventory.  Net cash provided by investing activities was $1.3 million, primarily due to $11.5 million of proceeds from maturities of investments, partially offset by $9.2 million of purchased investments and $870,000 for additions to property and equipment.  Net cash provided by financing activities was $24,000 from the proceeds received from exercises of employee stock options.

          During the three months ended March 31, 2000, net cash used in operating activities was $666,000, which resulted primarily from increased accounts receivable and inventories, partially offset by increased accounts payable and customer deposits.  Net cash used in investing activities was $432,000 for additions to property and equipment.  Net cash provided by financing activities was $1.1 million primarily from $768,000 of increased borrowings under the Company’s line of credit and $327,000 from checks issued in excess of the Company’s bank balance.

Fluctuations in Quarterly Results of Operations

          The Company’s operating results have historically been subject to significant quarterly and annual fluctuations. The Company anticipates that factors affecting future operating results will include the timing of significant orders, the timing of new product announcements and releases by the Company or its competitors, patterns of capital spending by customers, market acceptance of new or enhanced versions of products and pricing changes. In addition, the timing and level of the Company’s research and development expenditures could cause quarterly results to fluctuate. A substantial portion of the Company’s annual revenues comes from sales to a relatively small number of customers. The Company’s revenues and operating results for a period may be affected by the timing of orders received or orders shipped during a period.

Impact of Accounting Standards

Statement of Financial Accounting Standards (SFAS) No. 133; Accounting for Derivative Instruments and Hedging Activities became effective for the Company in January 2001.  SFAS No. 133 requires all derivatives to be recognized as assets or liabilities on the balance sheet and measured at fair value on a mark-to-market basis.  This applies whether the derivatives are stand–alone instruments, such as forward currency exchange contracts and interest rate swaps or collars, or embedded derivatives, such as call options contained in convertible debt investments.  Along with the derivatives, the underlying hedged items are also to be marked to market on an ongoing basis.  These market value adjustments are to be included either in net income (loss) in the statement of operations or in other comprehensive income (and accumulated in shareholders' equity), depending on the nature of the transaction.  The adoption of SFAS No. 133 did not have an effect on the results of operations or financial position of the Company.