UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

(Mark One)

[x]   Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
      Exchange Act of 1934 for the quarterly period ended June 30, 2004

[_]   Transition Report Pursuant to Section 13 or 15(d) of the Securities
      Exchange Act of 1934


                        Commission file number: 000-31863

                     COMPUTER ACCESS TECHNOLOGY CORPORATION
             (exact name of registrant as specified in its charter)

<TABLE>
<CAPTION>
<S>                                                                   <C>
                              Delaware                                             77-0302527
   (State or other jurisdiction of incorporation or organization)     (I.R.S. Employer Identification No.)

                  3385 Scott Boulevard, Santa Clara
                             California                                              95054
              (Address of principal executive offices)                             (Zip Code)
</TABLE>

                                 (408) 727-6600
              (Registrant's telephone number, including area code)

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

                                 Yes [X] No [_]

      Indicate by check mark whether the registrant is an accelerated  filer (as
defined in Rule 12b-2 of the Exchange Act.)

                                 Yes [_] No [X]

      As of July 31,  2004,  there were  19,672,151  shares of the  registrant's
Common Stock outstanding.


                                       1
<PAGE>

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

                     COMPUTER ACCESS TECHNOLOGY CORPORATION

                      CONDENSED CONSOLIDATED BALANCE SHEETS
                            (UNAUDITED, IN THOUSANDS)

<TABLE>
<CAPTION>
                                                         JUNE 30,      DECEMBER 31,
                                                          2004            2003
                                                         --------      ------------
<S>                                                      <C>             <C>
                               ASSETS

Current assets:
     Cash and cash equivalents ...................       $ 18,176        $ 34,116
     Short-term investments ......................          2,617           1,055
     Trade accounts receivable, net ..............          3,000           3,180
     Inventories .................................          1,592             907
     Other current assets ........................            615             675
                                                         --------        --------
         Total current assets ....................         26,000          39,933
Long-term investments ............................         24,779           9,367
Property and equipment, net ......................            980             768
Purchased intangibles ............................             98             167
Other assets .....................................            135             114
                                                         --------        --------
                                                         $ 51,992        $ 50,349
                                                         ========        ========

              LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
     Accounts payable ............................       $    795        $    393
     Accrued expenses ............................          3,131           2,921
     Accrued restructuring .......................             15              29
     Deferred revenue ............................            581             535
                                                         --------        --------
          Total current liabilities ..............          4,522           3,878
Stockholders' equity:
     Common stock ................................             20              19
     Additional paid-in capital ..................         54,008          53,643
     Treasury stock ..............................         (1,048)         (1,048)
     Deferred stock-based compensation ...........             --             (32)
     Unrealized loss on investments ..............           (312)             --
     Accumulated deficit .........................         (5,198)         (6,111)
                                                         --------        --------
         Total stockholders' equity ..............         47,470          46,471
                                                         --------        --------
                                                         $ 51,992        $ 50,349
                                                         ========        ========
</TABLE>

                             See accompanying notes.

                                       2
<PAGE>

                     COMPUTER ACCESS TECHNOLOGY CORPORATION

                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
               (UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                      THREE MONTHS                    SIX MONTHS
                                                     ENDED JUNE 30,                  ENDED JUNE 30,
                                                 -----------------------        -----------------------
                                                   2004           2003            2004           2003
                                                 --------       --------        --------       --------
<S>                                              <C>            <C>             <C>            <C>
Revenue ..................................       $  4,896       $  3,856        $  9,541       $  7,118
Cost of revenue ..........................            862            800           1,686          1,473
                                                 --------       --------        --------       --------
Gross profit .............................          4,034          3,056           7,855          5,645
                                                 --------       --------        --------       --------

Operating expenses:
     Research and development ............          1,569          1,302           3,191          2,642
     Sales and marketing .................          1,515          1,214           2,798          2,377
     General and administrative ..........            590            592           1,277          1,276
     Amortization of purchased intangibles             26             26              52             52
                                                 --------       --------        --------       --------

          Total operating expenses .......          3,700          3,134           7,318          6,347
                                                 --------       --------        --------       --------
Income (loss) from operations ............            334            (78)            537           (702)
Other income, net ........................            218            198             376            359
                                                 --------       --------        --------       --------
Income (loss) before income taxes ........            552            120             913           (343)
Income taxes .............................             --             --              --             --
                                                 --------       --------        --------       --------
Net income (loss) ........................       $    552       $    120        $    913       $   (343)
                                                 ========       ========        ========       ========
Net income (loss) per share:
     Basic ...............................       $   0.03       $   0.01        $   0.05       $  (0.02)
                                                 ========       ========        ========       ========
     Diluted .............................       $   0.03       $   0.01        $   0.04       $  (0.02)
                                                 ========       ========        ========       ========
Weighted average shares outstanding:
     Basic ...............................         19,551         19,442          19,509         19,411
                                                 ========       ========        ========       ========
     Diluted .............................         20,718         19,980          20,688         19,411
                                                 ========       ========        ========       ========
</TABLE>

                             See accompanying notes.

                                       3
<PAGE>

                     COMPUTER ACCESS TECHNOLOGY CORPORATION

                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                            (UNAUDITED, IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                                   SIX MONTHS
                                                                                                  ENDED JUNE 30,
                                                                                            ------------------------
                                                                                              2004            2003
                                                                                            --------        --------
<S>                                                                                         <C>             <C>
Cash flows from operating activities:
    Net income (loss) ...............................................................       $    913        $   (343)
    Adjustments to reconcile net income (loss) to net cash from operating activities:
       Depreciation and amortization ................................................            316             397
       Amortization of acquired developed technology ................................             17              18
       Amortization of purchased intangibles ........................................             52              52
       Amortization of deferred stock-based compensation ............................             32             158
       Amortization of premium on investments .......................................            160             262
       Changes in assets and liabilities:
           Trade accounts receivable ................................................            180            (600)
           Inventories ..............................................................           (685)            206
           Other assets .............................................................             60             962
           Accounts payable .........................................................            402          (1,100)
           Accrued expenses .........................................................            197             (46)
           Accrued restructuring ....................................................            (14)           (229)
           Deferred revenue .........................................................             46               7
           Deferred rent ............................................................             13              --
                                                                                            --------        --------
                  Net cash provided by (used in) operating activities ...............          1,689            (256)
                                                                                            --------        --------
Cash flows from investing activities:
    Purchase of short-term investments ..............................................         (2,633)         (4,392)
    Sale of short-term investments ..................................................          1,053           4,900
    Acquisition of property and equipment ...........................................           (528)           (270)
    Purchase of long-term investments ...............................................        (15,866)             --
    Other long-term assets ..........................................................            (21)            120
                                                                                            --------        --------
                  Net cash provided by (used in) investing activities ...............        (17,995)            358
                                                                                            --------        --------
Cash flows from financing activities:
    Proceeds from exercise of stock options .........................................            239             145
    Proceeds from employee stock purchase plan ......................................            127              70
    Repurchases of common stock .....................................................             --            (465)
                                                                                            --------        --------
                  Net cash provided by (used in) financing activities ...............            366            (250)
                                                                                            --------        --------
Net decrease in cash and cash equivalents ...........................................        (15,940)           (148)
Cash and cash equivalents at beginning of period ....................................         34,116          30,846
                                                                                            --------        --------
Cash and cash equivalents at end of period ..........................................       $ 18,176        $ 30,698
                                                                                            ========        ========
</TABLE>

                             See accompanying notes

                                       4
<PAGE>

                     COMPUTER ACCESS TECHNOLOGY CORPORATION

            CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                  (UNAUDITED, IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>

                                                    COMMON STOCK
                                             --------------------------                  ADDITIONAL      DEFERRED
                                                                           TREASURY       PAID-IN       STOCK-BASED
                                               SHARES        AMOUNT         STOCK         CAPITAL      COMPENSATION
                                            -----------    -----------   -----------    -----------    -----------
<S>                                         <C>            <C>           <C>            <C>            <C>
Balance as of December 31, 2002 .........    19,425,625    $        19   $        --    $    53,210    $      (324)
Exercise of common stock options ........       159,543             --            --            145             --
Issuance of common stock through employee
     stock purchase plan ................        32,890             --            --             70             --
Stock repurchase ........................      (164,420)            --          (448)            --             --
Deferred stock-based compensation .......            --             --            --            (36)            16
Amortization of deferred stock-based
     compensation .......................            --             --            --             --            178

Net loss ................................            --             --            --             --             --
                                            -----------    -----------   -----------    -----------    -----------
Balance as of June 30, 2003 .............    19,453,638    $        19   $      (448)   $    53,389    $      (130)
                                            ===========    ===========   ===========    ===========    ===========
</TABLE>

<TABLE>
<CAPTION>

                                               ACCUMULATED     RETAINED
                                                 OTHER         EARNINGS
                                              COMPREHENSIVE  (ACCUMULATED
                                              INCOME (LOSS)    DEFICIT)        TOTAL
                                              -------------   -----------    -----------
<S>                                           <C>             <C>            <C>
Balance as of December 31, 2002 .........     $        --     $    (5,703)   $    47,202
Exercise of common stock options ........              --              --            145
Issuance of common stock through employee
     stock purchase plan ................              --              --             70
Stock repurchase ........................              --             (17)          (465)
Deferred stock-based compensation .......              --              --            (20)
Amortization of deferred stock-based
     compensation .......................              --              --            178

Net loss ................................              --            (343)          (343)
                                              -----------     -----------    -----------
Balance as of June 30, 2003 .............     $        --     $    (6,063)   $    46,767
                                              ===========     ===========    ===========
</TABLE>

<TABLE>
<CAPTION>

                                                    COMMON STOCK
                                             --------------------------                  ADDITIONAL      DEFERRED
                                                                           TREASURY       PAID-IN       STOCK-BASED
                                               SHARES        AMOUNT         STOCK         CAPITAL      COMPENSATION
                                            -----------    -----------   -----------    -----------    -----------
<S>                                         <C>            <C>           <C>            <C>            <C>
Balance as of December 31, 2003 .........    19,409,529    $       19    $   (1,048)     $   53,643     $      (32)
Exercise of common stock options ........       120,096             1            --             238             --
Issuance of common stock through employee
     stock purchase plan ................        56,174            --            --             127             --
Amortization of deferred stock-based
     compensation .......................            --            --            --              --             32
Net Income ..............................            --            --            --              --             --
Change in unrealized loss on investments             --            --            --              --             --
Comprehensive income ....................            --            --            --              --             --
                                            -----------    ----------    ----------     -----------    -----------
Balance as of June 30, 2004 .............    19,585,799    $       20    $   (1,048)     $   54,008     $       --
                                            ===========    ==========    ==========     ===========    ===========
</TABLE>

<TABLE>
<CAPTION>

                                               ACCUMULATED      RETAINED
                                                 OTHER          EARNINGS
                                              COMPREHENSIVE   (ACCUMULATED
                                              INCOME (LOSS)     DEFICIT)        TOTAL
                                              -------------   ----------     ----------
<S>                                           <C>             <C>            <C>
Balance as of December 31, 2003 .........     $          --   $   (6,111)    $   46,471
Exercise of common stock options ........                --           --            239
Issuance of common stock through employee
     stock purchase plan ................                --           --            127
Amortization of deferred stock-based
     compensation .......................                --           --             32
Net Income ..............................                --          913            913
Change in unrealized loss on investments               (312)          --           (312)
Comprehensive income ....................                --           --            601
                                              -------------   ----------     ----------
Balance as of June 30, 2004 .............     $        (312)  $   (5,198)    $   47,470
                                              =============   ==========     ==========
</TABLE>

                             See accompanying notes.

                                       5
<PAGE>

NOTE 1 - BUSINESS

Business

      Computer  Access   Technology   Corporation  is  a  provider  of  advanced
verification systems for existing and emerging digital communications standards.
Our products are used by  semiconductor,  system and software  companies at each
phase of  their products' lifecycles  from  development  through  production and
market deployment.

      We have expertise in the Bluetooth,  Fibre Channel, 1394, InfiniBand,  PCI
Express,  SCSI,  Serial ATA,  Serial  Attached  SCSI and USB  standards  and are
actively engaged with our customers  throughout their development and production
processes in order to deliver  solutions  that meet their needs.  Utilizing  our
easy to use,  color-coded  expert analysis  software,  the CATC  Trace(TM),  our
development   products   generate,   capture,   filter  and  analyze  high-speed
communications  traffic,  allowing our customers to quickly discover and correct
persistent  and  intermittent  errors and flaws in their  product  designs.  Our
production products are used during the manufacturing process to ensure that our
customers'  products  comply with standards and operate with other  devices,  as
well as assist system manufacturers to download software onto new computers.

      We have  two  reportable  operating  segments:  development  products  and
production products.  Further segment and geographic  information is included in
Note 7 of the Notes to Condensed  Consolidated  Financial Statements included in
this report.

      Computer Access  Technology  Corporation was incorporated in California in
1992 and  reincorporated  in Delaware in 2000. Our  headquarters  are located at
3385 Scott Boulevard,  Santa Clara,  California  95054. We maintain a World Wide
Web site at www.catc.com. The reference to this World Wide Web site address does
not constitute incorporation by reference of the information contained therein.

      Our Annual Report on Form 10-K,  quarterly  reports on Form 10-Q,  current
reports on Form 8-K, all  amendments to those reports,  and the Proxy  Statement
for our annual meeting of stockholders  are made available,  free of charge,  on
our website as soon as reasonably  practicable after the reports have been filed
with or furnished to the Securities and Exchange Commission (the "SEC").

Interim Financial Information and Basis of Presentation

      The accompanying  unaudited condensed consolidated financial statements as
of June 30, 2004, and for the three and six months ended June 30, 2004 and 2003,
respectively,  have been  prepared  in  accordance  with  accounting  principles
generally  accepted  in the  United  States of  America  for  interim  financial
statements and pursuant to the rules and  regulations of the SEC and include the
accounts  of  Computer  Access  Technology  Corporation  and  its  wholly  owned
subsidiaries  (collectively,  "Computer  Access  Technology  Corporation" or the
"Company").  Intercompany  accounts and  transactions  have been  eliminated  in
consolidation. Certain information and footnote disclosures normally included in
annual consolidated  financial statements prepared in accordance with accounting
principles  generally  accepted  in the  United  States  of  America  have  been
condensed or omitted  pursuant to SEC rules and  regulations.  In the opinion of
management,  the unaudited condensed  consolidated  financial statements reflect
all adjustments  (consisting only of normal recurring adjustments) necessary for
a fair  presentation  of the  condensed  consolidated  balance sheet at June 30,
2004, the condensed  consolidated operating results for the three and six months
ended June 30, 2004 and 2003, the condensed  consolidated cash flows for the six
months ended June 30, 2004 and 2003 and the condensed consolidated statements of
stockholders'  equity for the six months  ended June 30, 2004 and 2003.  Certain
reclassifications  have been made to prior year  balances in order to conform to
the  current  year's  presentation.   These  unaudited  condensed   consolidated
financial  statements  should be read in conjunction with the Company's  audited
consolidated  financial statements and notes thereto for the year ended December
31, 2003.

      The unaudited  condensed  consolidated  balance sheet at December 31, 2003
has been derived from the audited consolidated financial statements at that date
but does not include all of the information and footnotes  required by generally
accepted  accounting  principles  in the United  States of America for  complete
financial statements.

Concentrations of credit risk

      Revenue and accounts receivable from customers comprising more than 10% of
revenue or trade accounts receivable are summarized as follows:


                                       6
<PAGE>


                                                         SIX MONTHS ENDED
                                                             JUNE 30,
                                                         ----------------
                                                          2004      2003
                                                          ----      ----
Revenue:
    Company A ......................................       17%       18%
    Company B ......................................       14%       17%


                                                        JUNE 30,  DECEMBER 31,
                                                           2004      2003
                                                        --------  ------------
Accounts receivable:
    Company A ......................................       17%       15%
    Company B ......................................       14%       13%
    Company C ......................................        *        10%

---------
  *less than 10% of revenue or trade accounts receivable for the period.


NOTE 2 - COMPREHENSIVE INCOME (LOSS)

      Comprehensive  income  (loss) is defined as changes in equity of a company
from  transactions,  other  events  and  circumstances,  excluding  transactions
resulting from investments by owners and distributions to owners.

      The  following  table sets forth  comprehensive  net income (loss) for the
periods indicated (in thousands):

<TABLE>
<CAPTION>
                                              THREE MONTHS ENDED  SIX MONTHS ENDED
                                                    JUNE 30,         JUNE 30,
                                              ------------------  ----------------
                                                2004      2003    2004     2003
                                                -----    -----   -----    -----
<S>                                             <C>      <C>     <C>      <C>
    Net income (loss) .......................   $ 552    $ 120   $ 913    $(343)
                                                =====    =====   =====    =====

Other comprehensive income:
   Change in unrealized gains and (losses) on
       available-for-sale securities ........    (312)      --    (312)      --
                                                -----    -----   -----    -----

    Comprehensive income (loss) .............   $ 240    $ 120   $ 601    $(343)
                                                =====    =====   =====    =====
</TABLE>


NOTE 3 - STOCK-BASED COMPENSATION

   Stock-based compensation

      In connection with certain stock option grants in 2000, 1999 and 1998, the
Company recorded deferred  stock-based  compensation  totaling $14,393,000 which
represented the difference  between the exercise price and the deemed fair value
at the date of grant  and is being  recognized  over the  vesting  period of the
related  options.  All  amortization of deferred  stock-based  compensation  was
recognized  as of March 31,  2004.  Accordingly,  no  amortization  of  deferred
stock-based compensation was recognized in the three months ended June 30, 2004.
Amortization of deferred stock-based  compensation was $32,000 in the six months
ended  June  30,  2004,  of  which  $6,000  was  included  in cost  of  revenue.
Amortization of deferred  stock-based  compensation  was $96,000 and $158,000 in
the three  months  ended June 30, 2003 and the six months  ended June 30,  2003,
respectively,  of which  $15,000 and $18,000 was  included in cost of revenue in
the three  months  ended June 30, 2003 and the six months  ended June 30,  2003,
respectively.

   Fair value disclosures

      The  Company  has  adopted  the  disclosure  provisions  of  Statement  of
Financial  Accounting  Standard  ("SFAS") No. 148,  "Accounting  for Stock-Based
Compensation,  Transition and  Disclosure."  This statement amends SFAS No. 123,
"Accounting for Stock-Based  Compensation,"  to provide  alternative  methods of
transition  for a voluntary  change to the fair value based method of accounting
for  stock-based  compensation  and requires  prominent  disclosure  in both the
annual and interim financial statements of the method of accounting used and the
financial impact of stock-based compensation.  As permitted by SFAS No. 123, the
Company  accounts  for stock  options  granted as  prescribed  under  Accounting
Principles  Board Opinion No. 25,  "Accounting  for Stock Issued to  Employees,"
which recognizes compensation cost based upon the intrinsic value of the award.


                                       7
<PAGE>

      The  weighted-average  fair values of options  granted during the quarters
ended June 30, 2004 and 2003 were $2.06 and $2.01,  and for the six months ended
June 30, 2004 and 2003 were $2.15, and $1.78,  respectively.  In determining the
fair value of options granted in each of the periods, the Company used the Black
Scholes option pricing model and assumed the following:

<TABLE>
<CAPTION>
                                                               THREE MONTHS ENDED                        SIX MONTHS ENDED
                                                                   JUNE 30,                                 JUNE 30,
                                                  ---------------------------------------- ----------------------------------------
                                                         2004                 2003                2004                 2003
                                                  -------------------- ------------------- -------------------- -------------------
<S>                                               <C>                  <C>                 <C>                  <C>
           Expected life (in years).............          5                    5                    5                   5
           Risk-free interest rate..............        3.67%                2.63%             3.01%-3.67%          2.29-2.78%
           Volatility...........................         35%                  77%                35-42%               53-77%
           Dividend yield.......................         0%                    0%                  0%                   0%
</TABLE>

      Had  compensation  costs been determined  based upon the fair value at the
grant date for awards under the Company's  stock option plans,  consistent  with
the  methodology  prescribed  under SFAS No. 123,  the  Company's  pro forma net
income  (loss) and pro forma basic and diluted net income (loss) per share under
SFAS No. 123 would have been (in thousands, except per share data):

<TABLE>
<CAPTION>
                                                               THREE MONTHS ENDED              SIX MONTHS ENDED
                                                                     JUNE 30,                      JUNE 30,
                                                             ----------------------        ----------------------
                                                               2004           2003           2004           2003
                                                             -------        -------        -------        -------
<S>                                                          <C>            <C>            <C>            <C>
Net income (loss), as reported .......................       $   552        $   120        $   913        $  (343)
    Add: Amortization of deferred stock-based
    compensation included in as reported net loss ....            --             96             32            158

    Deduct:  Stock-based employee compensation expense
    determined under fair value based method for all
    grants ...........................................          (524)          (472)        (1,023)        (1,156)
                                                             -------        -------        -------        -------
    Net income (loss), pro forma .....................       $    28        $  (256)       $   (78)       $(1,341)
                                                             =======        =======        =======        =======
Net income (loss) per share, as reported
    Basic ............................................       $  0.03        $  0.01        $  0.05        $ (0.02)
                                                             =======        =======        =======        =======
    Diluted ..........................................       $  0.03        $  0.01        $  0.04        $ (0.02)
                                                             =======        =======        =======        =======
Net income (loss) per share, pro forma
    Basic and diluted ................................       $  0.00        $ (0.01)       $ (0.00)       $ (0.07)
                                                             =======        =======        =======        =======
</TABLE>

NOTE 4 - NET INCOME (LOSS) PER SHARE

      The Company  computes net income (loss) per share in accordance  with SFAS
No. 128, "Earnings per Share," and SEC Staff Accounting Bulletin ("SAB") No. 98.
Under the provisions of SFAS No. 128 and SAB No. 98, basic net income (loss) per
share is computed by dividing  net income  (loss) for the period by the weighted
average  number of shares of common  stock  outstanding  during the period.  The
calculation of diluted net loss per share excludes potential common stock if its
effect is anti-dilutive.  Potential common stock consists of incremental  common
shares issuable upon the exercise of stock options.


                                       8
<PAGE>

      The following  table sets forth the  computation  of basic and diluted net
income (loss) per share for the periods indicated (in thousands except per share
data):

<TABLE>
<CAPTION>
                                                               THREE MONTHS ENDED             SIX MONTHS ENDED
                                                                     JUNE 30,                      JUNE 30,
                                                            -----------------------       -----------------------
                                                               2004           2003           2004           2003
                                                            --------       --------       --------       --------
<S>                                                          <C>            <C>            <C>            <C>
Numerator:
    Net income (loss) ...............................       $    552       $    120       $    913       $   (343)
                                                            ========       ========       ========       ========
Denominator:
    Weighted average shares outstanding .............         19,551         19,442         19,509         19,441
                                                            --------       --------       --------       --------
    Denominator for basic calculation ...............         19,551         19,442         19,509         19,441
    Dilutive effect of stock options ................          1,167            538          1,179             --
                                                            --------       --------       --------       --------
    Denominator for diluted calculation .............         20,718         19,980         20,688         19,441
                                                            ========       ========       ========       ========

Net income (loss) per share:
    Basic ...........................................       $   0.03       $   0.01       $   0.05       $  (0.02)
                                                            ========       ========       ========       ========
    Diluted .........................................       $   0.03       $   0.01       $   0.04       $  (0.02)
                                                            ========       ========       ========       ========

Total common stock equivalents, related to options
   outstanding, excluded from the computation of
   earnings per share as their effect is antidilutive          2,426          2,813          2,397          2,921
                                                            ========       ========       ========       ========
</TABLE>


NOTE 5 - INVENTORIES

      Inventories consist of the following (in thousands):

                                    AS OF JUNE 30,      AS OF DECEMBER 31,
                                       2004                   2003
                                    --------------      ------------------
Raw materials ................         $  577               $  334
Work in progress .............            624                  250
Finished goods ...............            391                  323
                                    --------------      ------------------
                                       $1,592               $  907
                                    ==============      ==================

NOTE 6 - INCOME TAXES

      The Company's  effective  income tax rate was 0.0% in the quarters and six
months  ended June 30, 2004 and June 30,  2003,  as the Company  provided a full
valuation  allowance  against its net deferred tax assets through June 30, 2004.
As of June 30, 2004, the Company continued to carry a full valuation against its
net deferred tax assets,  as it has  determined  that it is more likely than not
that such  amounts  will not be  realized  through  taxable  income  from future
operations, or by carry-back to prior year's taxable income.

NOTE 7 - REPORTABLE SEGMENTS AND GEOGRAPHIC INFORMATION

      The Company  has two  reportable  segments  categorized  by product  type:
development products and production products.  Development products are advanced
verification  systems  that assist  product  developers  to  efficiently  design
reliable  and  interoperable  systems  and  devices.   Production  products  are
production  verification  systems and connectivity  solutions designed to assist
manufacturers  in the volume  production  of reliable  devices and systems.  The
Company has no inter-segment revenue.

      The Company  analyzes  segment  revenue and cost of revenue,  but does not
allocate operating expenses,  including stock-based  compensation,  or assets to
segments.  Accordingly,  the Company has presented only revenue and gross profit
by segment.

                                       9
<PAGE>

Segment information (in thousands):

<TABLE>
<CAPTION>

                                                                                         UNALLOCATED
                                                   DEVELOPMENT       PRODUCTION          STOCK-BASED
                                                    PRODUCTS          PRODUCTS       COMPENSATION EXPENSE      TOTAL
                                                    --------        -----------      --------------------    ---------
<S>                                               <C>               <C>              <C>                     <C>
Three Months Ended June 30, 2004
     Segment revenue from external customers          $4,654            $  242             $   --             $4,896
     Segment gross profit ..................          $3,882            $  152             $   --             $4,034

Three Months Ended June 30, 2003
     Segment revenue from external customers          $3,571            $  285             $   --             $3,856
     Segment gross profit ..................          $2,901            $  170             $  (15)            $3,056

Six Months Ended June 30, 2004
     Segment revenue from external customers          $9,070            $  471             $   --             $9,541
     Segment gross profit ..................          $7,565            $  296             $   (6)            $7,855

Six Months Ended June 30, 2003
     Segment revenue from external customers          $6,370            $  748             $   --             $7,118
     Segment gross profit ..................          $5,231            $  432             $  (18)            $5,645
</TABLE>

Geographic information (in thousands):

                                                                     LONG-LIVED
                                                       REVENUE         ASSETS
                                                       -------       ----------

Three Months Ended June 30, 2004
     North America ...........................          $ 2,811        $25,992
     Europe ..................................              519             --
     Asia ....................................            1,566             --
     Rest of world ...........................               --             --
                                                        -------        -------
         Total ...............................          $ 4,896        $25,992
                                                        =======        =======

Three Months Ended June 30, 2003
           North America .....................          $ 1,907        $   872
           Europe ............................              525             --
           Asia ..............................            1,424             --
           Rest of world .....................               --             --
                                                        -------        -------
               Total .........................          $ 3,856        $   872
                                                        =======        =======

Six Months Ended June 30, 2004
     North America ...........................          $ 4,931        $25,992
     Europe ..................................            1,083             --
     Asia ....................................            3,527             --
     Rest of world ...........................               --             --
                                                        -------        -------
         Total ...............................          $ 9,541        $25,992
                                                        =======        =======

Six Months Ended June 30, 2003
           North America .....................          $ 3,167        $   872
           Europe ............................              965             --
           Asia ..............................            2,980             --
           Rest of world .....................                6             --
                                                        -------        -------
               Total .........................          $ 7,118        $   872
                                                        =======        =======


The increases in  long-lived  assets held in North America for the three and six
months ended June 30, 2004  reflect the  increases  in the  Company's  long-term
investments.  Revenues are  attributed to regions  based on delivery  locations.
Sales to international customers accounted for 42.6% and 50.5% of revenue during
the quarters ended June 30, 2004 and 2003, respectively, and 48.3% and 55.5% for
the six months ended June 30, 2004 and 2003, respectively.


                                       10
<PAGE>

NOTE 8 - WARRANTIES

      The Company offers  warranties on certain products and records at the time
of shipment an estimate for the future costs  associated  with warranty  claims.
The  Company  accrues  these  costs  based upon  historical  experience  and its
estimate  of the  level of future  warranty  costs.  The  Company  assesses  the
adequacy of its warranty reserve on a quarterly basis and makes adjustments,  if
needed.

      The following table reconciles the changes in our warranty reserve for the
six months ended June 30, 2004 (in thousands):

Balance as of December 31, 2003 ............................          $ 125
Accrual for warranty for sales made during
  the six months ended June 30, 2004                                    182
Warranty costs for the six months ended June 30, 2004 ......             (1)
Warranty expirations during the six months ended
  June 30, 2004 ............................................           (181)
                                                                      -----
Total ......................................................          $ 125
                                                                      =====


NOTE 9 - RECENT ACCOUNTING PRONOUNCEMENTS

      On March 31, 2004,  the  Financial  Accounting  Standards  Board  ("FASB")
issued  a  proposed  Statement,  "Share-Based  Payment,  an  amendment  of  FASB
Statements Nos. 123 and 95," that addresses  accounting for share-based  payment
transactions in which an enterprise  receives  employee services in exchange for
either equity instruments of the enterprise or liabilities that are based on the
fair value of the enterprise's  equity instruments or that may be settled by the
issuance of such equity instruments.  The proposed statement would eliminate the
ability to account for share-based  compensation  transactions  using Accounting
Principles  Board  ("APB")  Opinion  No.  25,  "Accounting  for Stock  Issued to
Employees," and generally would require that such  transactions be accounted for
using a  fair-value-based  method and recognized as expenses in our consolidated
statement of operations.  The proposed  standard would require that the modified
prospective  method be used,  which  requires  that the fair value of new awards
granted from the beginning of the year of adoption,  plus unvested awards at the
date of adoption, be expensed over the vesting period. In addition, the proposed
statement  encourages  companies to use the  "binomial"  approach to value stock
options,  which  differs from the  Black-Scholes  option  pricing  model that we
currently  use. The  recommended  effective  date of the  proposed  standard for
public companies is for fiscal years beginning after December 15, 2004.

      Should this  proposed  statement be finalized in its current form, it will
have a significant impact on our consolidated statement of operations as we will
be  required  to  expense  the fair value of our stock  option  grants and stock
purchases under our employee stock purchase plan rather than disclose the impact
on our  consolidated  net income (loss) within our footnotes,  as is our current
practice.  In addition,  the proposed standard will have a significant impact on
our  consolidated  cash  flows  from  operations,  as we  will  be  required  to
reclassify  our tax benefit on the exercise of employee  stock options from cash
flows from operating activities to cash flows from financing activities.


                                       11
<PAGE>


ITEM 2. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

      This  Quarterly  Report and  certain  information  incorporated  herein by
reference contain forward-looking statements within the "safe harbor" provisions
of the  Private  Securities  Litigation  Reform  Act  of  1995.  All  statements
contained  in  this  Quarterly  Report  that  are  not  purely   historical  are
forward-looking statements,  including, without limitation, statements regarding
our expectations,  objectives, anticipations, plans, hopes, beliefs, intentions,
or  strategies  regarding  the  future.   Forward-looking   statements  are  not
guarantees of future performance and are subject to risks and uncertainties that
could cause actual results to differ materially from the results contemplated by
the forward-looking  statements.  Forward-looking  statements  include,  without
limitation, the statements regarding:

      o     Our anticipation that revenue from sales of our Universal Serial Bus
            (USB)  products  will  decrease as the markets for our USB  products
            mature;

      o     Our belief that the development of emerging communications standards
            and technological change has influenced and is likely to continue to
            influence  our   quarterly   and  annual   revenue  and  results  of
            operations;

      o     Our  expectation  that our  operating  cash flow  requirements  will
            increase in the future in connection  with the  expanding  scope and
            level of our activities;

      o     Our belief that our current cash,  cash  equivalents  and short-term
            investments  together with funds  generated from  operations will be
            sufficient  to meet our  working  capital  and  capital  expenditure
            requirements for the next 12 months;

      o     Our belief  that our  quarterly  and annual  operating  results  are
            likely to fluctuate  significantly  in the future;

      o     Our belief that our future  revenue  growth relies on our ability to
            successfully design,  manufacture and sell new products into new and
            established markets;

      o     Our belief that we must work closely with core or promoter companies
            in our target  markets  to gain  valuable  insights  into new market
            demands,  obtain  early access to standards as they develop and help
            us design new or enhanced products;

      o     Our expectation that we will encounter  increased  competition as we
            expand our product portfolio into new and existing markets;

      o     Our  anticipation  that the average  selling  prices of our products
            will  decrease  in the future in  response to such things as product
            introductions  or  enhancements  by us or our  competitors,  product
            discounting  on  volume  purchase   orders  or  additional   pricing
            pressures;

      o     Our belief  that we must  continue  to develop  and  introduce  on a
            timely basis new products that can be sold at higher average selling
            prices;

      o     Our belief that developments  related to the  Sarbanes-Oxley  Act of
            2002 will  increase our legal  compliance  and  financial  reporting
            costs,  make it more  difficult and more  expensive for us to obtain
            director and officer liability insurance, and may cause us to accept
            reduced  coverage  or incur  substantially  higher  costs to  obtain
            coverage;

      o     Our  expectations  to  continue to review  opportunities  to acquire
            other  businesses  or  technologies   that  complement  our  current
            products,  expand our markets, enhance our technical capabilities or
            otherwise offer growth opportunities;

      o     Our intent to continue the  development  and expansion of our direct
            sales   organization   and  our   indirect   distribution   channels
            domestically and internationally;

      o     Our  anticipation  that revenue from  international  operations will
            continue to represent a substantial portion of our revenue;

      o     Our belief  that our  products  do not  infringe  any other  party's
            intellectual  property  rights in any way that would have a material
            adverse effect on our operations;


                                       12
<PAGE>


      o     Our anticipation that all of our earnings,  if any, will be retained
            for development and expansion of our business;

      o     Our belief  that as the  economy  expands the demand for certain key
            components  used in our products will increase such that we may need
            to  order  larger  quantities  of  these  components   earlier  than
            forecasted or risk delays in product shipments to our customers;

      o     Our  anticipation  that we will  not pay any cash  dividends  on our
            common stock in the foreseeable future; and

      o     Our belief that the amount of ultimate liability,  if any, for legal
            proceedings  and claims  will not  materially  affect our  financial
            position, results of operations, or liquidity.

      These  forward-looking  statements are subject to risks and  uncertainties
that could  cause  actual  results  to differ  materially  from those  stated or
implied by the  forward-looking  statements.  For a detailed  description of the
risks  associated  with our business  that could cause actual  results to differ
from  those  stated  or  implied  in such  forward-looking  statements,  see the
disclosure  contained under the heading "Risk Factors" in this Quarterly  Report
as well as such other risks and  uncertainties as are detailed in our Securities
and Exchange  Commission  reports and filings.  All  forward-looking  statements
included in this quarterly  Report are based on  information  available to us on
the date of this  Quarterly  Report,  and we assume no  obligation to update the
forward-looking  statements,  or to update the reasons why actual  results could
differ from those projected in the forward-looking statements.

      The following "Management's Discussion and Analysis of Financial Condition
and Results of  Operations"  should be read in  conjunction  with the  unaudited
condensed consolidated financial statements and notes thereto included in Item 1
of this Quarterly Report and "Management's  Discussion and Analysis of Financial
Condition and Results of  Operations"  contained in our Form 10-K filed with the
Securities and Exchange  Commission on February 20, 2004, as amended by our Form
10-K/A filed on March 3, 2004.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

      The  discussion  and analysis of our  financial  condition  and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance  with  accounting  principles  generally  accepted in the
United  States  of  America.  The  preparation  of  our  consolidated  financial
statements in conformity with generally accepted accounting  principles requires
our  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  consolidated  financial  statements and reported
amounts of revenues and expenses  during the reporting  period.  Actual  results
could  differ  from  those  estimates.  We  base  our  estimates  on  historical
experience  and on various  other  assumptions  that we believe to be reasonable
under  the  circumstances,  the  results  of which  form the  basis  for  making
judgments  about the  carrying  values of assets  and  liabilities  that are not
readily  apparent  from  other  sources.   We  believe  the  following  critical
accounting  policies,  among others,  affect the more significant  judgments and
estimates used in the preparation of our consolidated financial statements.

      REVENUE  RECOGNITION.  Due  to the  significant  software  content  of our
products,  we have adopted Statement of Position ("SOP") 97-2,  Software Revenue
Recognition.  Under SOP 97-2,  we  recognize  revenue on sales to  distributors,
resellers and direct customers upon shipment,  provided that there is persuasive
evidence of an arrangement, the product has been delivered and title has passed,
the fee is fixed or determinable  and collection of the resulting  receivable is
reasonably  assured.  We  do  not  provide  distributors,  resellers  or  direct
customers  price  protection,  and only  provide  limited  rights  of  return or
exchange. Generally, our distributors do not maintain inventory; however, to the
extent they do, we have the right,  but not the  obligation,  under the terms of
our  distributor  agreements  to  repurchase  inventory  at the sales price upon
termination of the relationship. We review distributor inventory levels, if any,
quarterly to ensure that any potential  repurchases  are not  material.  When we
have shipped products,  but some elements  essential to the functionality of the
products have not been  completed,  revenue and  associated  cost of revenue are
deferred until all essential elements have been delivered.  Software maintenance
support revenue is deferred and recognized ratably over the maintenance  support
period.  Provisions  for warranty  costs are  recorded at the time  products are
shipped.


                                       13
<PAGE>

      CASH EQUIVALENTS,  SHORT-TERM INVESTMENTS AND LONG-TERM  INVESTMENTS.  Our
cash equivalents, short-term investments and long-term investments are placed in
portfolios  managed by  professional  money  management  firms under  investment
guidelines we have established. These guidelines address the critical objectives
of preservation of principal,  avoiding  inappropriate  concentrations,  meeting
liquidity  requirements and maximizing after-tax returns. We classify all highly
liquid investments with original maturities from the date of purchase of 90 days
or less as cash equivalents. Those with original maturities greater than 90 days
but less than one year are classified as short-term investments,  and those with
an  original  maturity  greater  than  one  year  are  classified  as  long-term
investments.   Our  cash  equivalents   short-term   investments  and  long-term
investments consist  principally of investments in commercial paper,  investment
quality  corporate  and  municipal  bonds,  money market  funds,  collateralized
mortgage obligations and U.S. government agency securities.

      INCOME  TAXES.  We account for income  taxes under the  liability  method,
which  requires,  among other  things,  that we record  deferred  tax assets and
liabilities  for temporary  differences  between the tax bases of our assets and
liabilities  and  their  financial  statement  reported  amounts.  In  addition,
deferred  tax  assets are  recorded  for the future  benefit  of  utilizing  net
operating  losses and research and  development  credit  carry-forwards.  A full
valuation  allowance is provided  against  deferred tax assets unless it is more
likely than not that they will be realized.  In the three months ended  December
31,  2002,  we provided a full  valuation  allowance  for our net  deferred  tax
assets. As of June 30, 2004, we continue to maintain a full valuation  allowance
against our net deferred tax assets.

      INTANGIBLE  ASSETS.  Our purchased  intangible  assets total $98,000 as of
June 30,  2004.  We are  required to reduce the  carrying  value of these assets
whenever events or changes in circumstances  indicate that the carrying value of
these assets may not be recoverable.  In order to make such adjustments,  we are
required  to make  assumptions  about  the value of these  assets in the  future
including  future  prospects  for  earnings  and cash  flows  of the  businesses
underlying  these  investments.  Judgments and assumptions  about the future are
complex,  subjective  and can be  affected  by a variety  of  factors  including
industry  and  economic   trends,   our  market  position  and  the  competitive
environment  in  which  we  operate.  Although  we  believe  our  judgments  and
assumptions are reasonable and appropriate,  different judgments and assumptions
could materially impact our reported financial results.

OVERVIEW

      We are a provider  of  advanced  verification  systems  for  existing  and
emerging  digital  communications  standards  such as Bluetooth,  Fibre Channel,
1394, InfiniBand, PCI Express, SCSI, Serial ATA, Serial Attached SCSI and USB.

      Our products are used by semiconductor,  computer systems,  software, data
storage,  communications,  automotive  and aerospace  companies at each phase of
their  products'  lifecycles  from  development  through  production  and market
deployment.  Our  verification  systems  consist of  development  and production
products that accurately monitor communications traffic and diagnose operational
problems to ensure that  products  comply with  standards and operate with other
devices.  We currently  outsource most of the  manufacturing  of our products so
that we may concentrate  our resources on the design,  development and marketing
of our existing and new products.

      We  report  our  revenue  and  gross  profit  in  two  business  segments:
development products and production products. In the three months ended June 30,
2004,  revenue from our  development  products was $4.7 million and revenue from
our production products was $242,000. Historically, we have generated a majority
of our revenue from  products for the USB standard.  We anticipate  that revenue
from sales of our USB products will decrease as the markets for our USB products
mature. Consequently,  we rely on our ability to generate growth in revenue with
our new product offerings in other  communications  standards in order to offset
any decreases in revenues from the USB standard.

      We  sell  our  products  to  technology,  infrastructure  and  application
companies through our direct sales force and indirectly through our distributors
and manufacturers'  representatives.  Historically, a substantial portion of our
revenue has been derived from customers  outside of North America.  In the three
months ended June 30, 2004, 42.6% of our revenue was derived from  international
customers,  of which  12.8% was  derived  from  customers  in Japan,  19.1% from
customers in other parts of Asia, and 10.6% from customers in Europe. All of our
revenue and  accounts  receivable  are  denominated  in U.S.  dollars.  Although
seasonality  affects  many of our  target  markets,  to  date  our  revenue  and
financial condition as a whole have not been materially impacted by seasonality.
However,  as we  continue  to expand our  product  offerings  into new  markets,
seasonality effects may become material.


                                       14
<PAGE>

      The  development of emerging  communications  standards and  technological
change has  influenced  and is likely to continue to influence our quarterly and
annual revenue and results of  operations.  Our future revenue is dependent upon
the continued growth in capital spending by our existing and potential customers
for our types of products.  Our product development and marketing strategies are
focused on working closely with promoter companies and communications  standards
groups to gain early access to new communications standards and technologies. We
invest  heavily in the research,  development  and marketing of our products for
emerging  communications  standards,  often before these  standards  have gained
widespread  industry  acceptance and before we generate revenue related to these
investments.  Additionally, the adoption rates for our new products by customers
in our target markets are unpredictable  and subject to substantial  risks, most
of which  are  beyond  our  control.  Accordingly,  if the  markets  for our new
products do not materialize or materialize later than we expect,  our ability to
sustain or increase revenue may be harmed.

RESULTS OF OPERATIONS

      The following table presents selected consolidated  financial data for the
periods indicated as a percentage of revenue:

<TABLE>
<CAPTION>
                                                      THREE MONTHS                SIX MONTHS
                                                     ENDED JUNE 30,             ENDED JUNE 30,
                                                   -----------------          -----------------
                                                   2004         2003          2004         2003
                                                   ----         ----          ----         ----
<S>                                               <C>          <C>           <C>          <C>
Consolidated Statement of Operations Data:
Revenue ..................................         100.0%       100.0%        100.0%       100.0%
Cost of Revenue ..........................          17.6         20.7          17.7         20.7
                                                   -----        -----         -----        -----
       Gross profit ......................          82.4         79.3          82.3         79.3
                                                   -----        -----         -----        -----

Operating expenses:
  Research and development ...............          32.0         33.8          33.4         37.1
  Sales and marketing ....................          30.9         31.5          29.3         33.4
  General and administrative .............          12.1         15.4          13.4         17.9
  Amortization of purchased intangibles ..           0.5          0.7           0.5          0.7
                                                   -----        -----         -----        -----
       Total operating expenses ..........          75.5         81.4          76.6         89.1
                                                   -----        -----         -----        -----
Income (loss) from operations ............           6.9         (2.0)          5.7         (9.8)
Other income, net ........................           4.4          5.1           3.9          5.0
                                                   -----        -----         -----        -----
Income (loss) before income taxes ........          11.3          3.1           9.6         (4.8)
Income taxes .............................           0.0          0.0           0.0          0.0
                                                   -----        -----         -----        -----
Net income (loss) ........................          11.3%         3.1%          9.6%        (4.8)%
                                                   =====        =====         =====        =====
</TABLE>


RESULTS OF OPERATIONS IN THE QUARTERS ENDED JUNE 30, 2004 AND 2003

      Revenue.  Our revenue was $4.9  million in the three months ended June 30,
2004,  compared to $3.9  million in the three  months  ended June 30,  2003,  an
increase of 27.0%. New product revenue  increases of $1.5 million were partially
offset by  decreases  in sales of certain  existing  products of  $442,000.  The
decrease in sales of existing  products  was  primarily  the result of decreased
sales of  certain  InfiniBand  products  and  reduced  demand for  certain  SCSI
development  products due to the maturity and stability of the  protocol.  Going
forward,  we expect continuing  declines in certain USB and SCSI development and
USB production  product revenues as these  communication  standards  continue to
mature. Revenue from international customers represented 42.6% of revenue in the
three  months ended June 30, 2004 and 50.5% of revenue in the three months ended
June 30, 2003.

      Cost of Revenue and Gross Profit. Our gross profit was $4.0 million in the
three  months  ended June 30, 2004  compared to $3.1 million in the three months
ended June 30, 2003, an increase of 32.0%. Our gross margin percentage was 82.4%
in the three months ended June 30, 2004 and 79.3% in the three months ended June
30, 2003. The increase in gross margin percentage was primarily the result of an
increase in  development  product  sales as a  percentage  of total  revenue and
reduced  manufacturing  costs of certain  products.  Our higher margin  business
segment,  development  products,  increased as a percentage  of total revenue by
2.4%.


                                       15
<PAGE>

      Research and Development.  Our research and development expenses were $1.6
million in the three months ended June 30, 2004  compared to $1.3 million in the
three months ended June 30, 2003, an increase of 20.5%. Research and development
expenses  represented  32.0% of revenue in the three  months ended June 30, 2004
and 33.8% of  revenue in the three  months  ended June 30,  2003.  Research  and
development expenses for the three months ended June 30, 2003 include $53,000 of
amortization  of  deferred  stock-based  compensation.  There  were  no  similar
expenses in the three months  ended June 30, 2004.  The increase in expenses was
primarily  due  to  increased  personnel  and  related  costs  of  approximately
$253,000. In addition, as a result of a reorganization of our technical services
department  approximately  $120,000  for  certain  customer  service  costs were
included in research  and  development  expenses for the three months ended June
30, 2004.  Such  customer  service  costs were  included in sales and  marketing
expenses  prior to the first three  months of 2004.  The  percentage  of revenue
decrease for the three months ended June 30, 2004 was primarily due to increased
revenues  partially  offset by the increase in expenses  noted in this paragraph
when compared to the three months ended June 30, 2003.

      Sales and Marketing. Our sales and marketing expenses were $1.5 million in
the three  months  ended June 30,  2004  compared  to $1.2  million in the three
months ended June 30, 2003, an increase of 24.8%.  Sales and marketing  expenses
represented  30.9% of revenue in the three  months ended June 30, 2004 and 31.5%
in the three months ended June 30, 2003.  Sales and  marketing  expenses for the
three  months ended June 30, 2003 include  $21,000 of  amortization  of deferred
stock-based  compensation.  There were no similar  expenses in the three  months
ended June 30, 2004.  The increase in expenses was  primarily due to an increase
in the commissions earned by our manufacturers'  representatives of $189,000 and
increased  consulting  costs of  $115,000,  partially  offset by a reduction  of
approximately  $120,000 for certain customer service costs that were included in
sales and marketing expenses prior to the first three months of 2004 and are now
included in research and development expenses.

      General and Administrative.  Our general and administrative  expenses were
$590,000 in the three  months  ended June 30,  2004  compared to $592,000 in the
three  months  ended  June  30,  2003.  General  and   administrative   expenses
represented  12.1% of revenue in the three  months ended June 30, 2004 and 15.4%
in the three months ended June 30, 2003. General and administrative expenses for
the three months ended June 30, 2003 include $7,000 of  amortization of deferred
stock-based  compensation.  There were no similar  expenses in the three  months
ended June 30, 2004.  The  percentage  of revenue  decrease for the three months
ended June 30, 2004,  when compared to the three months ended June 30, 2003, was
primarily due to the impact of increased revenues.

      Other Income. Other income was $218,000 in the three months ended June 30,
2004  compared to $198,000 in the three months ended June 30, 2003,  an increase
of 10.1%.  This increase  resulted from increased  interest income earned on the
investment of excess cash balances,  primarily  associated  with higher interest
rates earned on increased investment in instruments with longer maturities.

      Income  Taxes.  We have  incurred no  provision  for income  taxes for the
quarters ended June 30, 2004 and June 30, 2003. As of June 30, 2004, we continue
to maintain a full valuation  allowance  against our net deferred tax assets, as
we have determined that it is more likely than not that such amounts will not be
realized through taxable income from future operations or by carry-back to prior
years' taxable income.

RESULTS OF OPERATIONS IN THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003

      Revenue.  Our  revenue was $9.5  million in the six months  ended June 30,
2004,  compared  to $7.1  million in the six  months  ended  June 30,  2003,  an
increase of 34.0%. New product revenue  increases of $2.9 million were partially
offset by  decreases  in sales of certain  existing  products of  $430,000.  The
decrease in sales of existing  products  was  primarily  the result of decreased
sales  of  certain  InfiniBand   products,   reduced  demand  for  certain  SCSI
development  products  due to the  maturity  and  stability  of the protocol and
reduced demand for USB production  products due to the maturity and stability of
the  protocol  components  incorporated  into  end-user  products.  Revenue from
international  customers  represented  48.3% of revenue in the six months  ended
June 30, 2004 and 55.5% of revenue in the six months ended June 30, 2003.

      Cost of Revenue and Gross Profit. Our gross profit was $7.9 million in the
six months ended June 30, 2004  compared to $5.6 million in the six months ended
June 30, 2003, an increase of 39.1%.  Our gross margin  percentage  was 82.3% in
the six months  ended June 30,  2004 and 79.3% in the six months  ended June 30,
2003.  The increase in gross margin  percentage  was  primarily the result of an
increase in  development  product  sales as a  percentage  of total  revenue and
reduced  manufacturing  costs of certain  products.  Our higher margin  business
segment,  development  products,  increased as a percentage  of total revenue by
5.6%.


                                       16
<PAGE>

      Research and Development.  Our research and development expenses were $3.2
million in the six months  ended June 30, 2004  compared to $2.6  million in the
six months ended June 30, 2003, an increase of 20.8%.  Research and  development
expenses  represented 33.4% of revenue in the six months ended June 30, 2004 and
37.1% of revenue in the six months ended June 30, 2003. Research and development
expenses  for the six  months  ended  June 30,  2004 and June 30,  2003  include
$19,000  and  $85,000 of  amortization  of  deferred  stock-based  compensation,
respectively.  The increase in expenses was primarily due to increased personnel
and related  costs of  approximately  $537,000.  In  addition,  as a result of a
reorganization of our technical services department  approximately  $230,000 for
certain  customer  service  costs were  included  in  research  and  development
expenses for the six months ended June 30, 2004.  Such  customer  service  costs
were included in sales and marketing  expenses  prior to the first six months of
2004. The percentage of revenue  decrease for the six months ended June 30, 2004
was primarily due to the impact of increased  revenues  partially  offset by the
increase in expenses  noted in this  paragraph  when  compared to the six months
ended June 30, 2003.

      Sales and Marketing. Our sales and marketing expenses were $2.8 million in
the six months  ended June 30, 2004  compared to $2.4  million in the six months
ended  June 30,  2003,  an  increase  of  17.7%.  Sales and  marketing  expenses
represented  29.3% of revenue in the six months ended June 30, 2004 and 33.4% of
revenue in the six months ended June 30, 2003. Sales and marketing  expenses for
the six months ended June 30, 2004 and June 30, 2003 include  $2,000 and $40,000
of amortization of deferred stock-based compensation, respectively. The increase
in expenses was  primarily due to an increase in the  commissions  earned by our
manufacturers'  representatives of $290,000 and increased  personnel and related
costs of approximately $77,000, partially offset by a reduction of approximately
$230,000  for certain  customer  service  costs that were  included in sales and
marketing  expenses prior to the first three months of 2004 and are now included
in research and development expenses. The percentage of revenue decrease for the
six months  ended June 30,  2004 was  primarily  due to the impact of  increased
revenues  partially  offset by the increase in expenses  noted in this paragraph
when compared to the six months ended June 30, 2003.

      General and Administrative.  Our general and administrative  expenses were
$1.3  million in the six months  ended June 30, 2004 and in the six months ended
June 30, 2003. General and administrative  expenses represented 13.4% of revenue
in the six months ended June 30, 2004 and 17.9% in the six months ended June 30,
2003. General and administrative expenses for the six months ended June 30, 2004
and June 30,  2003  include  $5,000 and  $15,000  of  amortization  of  deferred
stock-based  compensation,  respectively  The percentage of revenue decrease for
the six months ended June 30, 2004 was  primarily due to the impact of increased
revenues when compared to the six months ended June 30, 2003.

      Other  Income.  Other income was $376,000 in the six months ended June 30,
2004  compared to $359,000 in the six months ended June 30, 2003, an increase of
4.7%.  This  increase  resulted  from  increased  interest  income earned on the
investment of excess cash balances,  primarily  associated  with higher interest
rates earned on increased investment in instruments with longer maturities.

      Income  Taxes.  We have incurred no provision for income taxes for the six
months ended June 30, 2004 and June 30, 2003.  As of June 30, 2004,  we continue
to maintain a full valuation  allowance  against our net deferred tax assets, as
we have determined that it is more likely than not that such amounts will not be
realized through taxable income from future operations or by carry-back to prior
years' taxable income.

LIQUIDITY AND CAPITAL RESOURCES

      Generally,  we expect our operating cash flow  requirements to increase in
the future in connection  with the expanding  scope and level of our activities.
Since our  inception,  we have financed our  operations  primarily  through cash
flows from operating  activities.  In November 2000, we received net proceeds of
$38.3 million from the initial public offering of our Common Stock.

      In the six  months  ended  June  30,  2004,  cash  provided  by  operating
activities  of $1.7 million was  primarily the result of net income of $913,000,
non-cash expenses associated with depreciation of $316,000, decreases in related
assets and liabilities for working capital purposes of $199,000, amortization of
premium on  investments  of $160,000,  amortization  of acquired  intangibles of
$52,000,  amortization  of deferred  stock based  compensation  of $32,000,  and
amortization  of other acquired  developed  technology of $17,000.  Cash used in
investing  activities was $18.0 million,  primarily  relating to the purchase of
long-term  investments of $15.9 million, the purchase of short-term  investments
of $2.6 million and capital  expenditures of $528,000,  partially  offset by the
sale of  short-term  investments  of $1.1  million.  Cash  provided by financing
activities  was  $366,000,  consisting  of proceeds  from the  exercise of stock
options  of  $239,000  and the  sale of stock  pursuant  to our  employee  stock
purchase plan of $127,000.


                                       17
<PAGE>

      In the six months ended June 30, 2003,  cash used in operating  activities
of $256,000 was  primarily the result of our net loss of $343,000 and a decrease
in related  assets and  liabilities  for working  capital  purposes of $800,000,
offset by non-cash expenses  associated with depreciation  expenses of $397,000,
amortization of premium on short-term  investments of $262,000,  amortization of
deferred stock-based  compensation of $158,000,  amortization of other purchased
intangibles  of  $52,000  and  the  amortization  of  other  acquired  developed
technology  of $18,000.  Cash  provided by investing  activities  was  $358,000,
related  to the  sale of  short-term  investments  of  $4.9  million  and  other
long-term assets of $120,000,  offset by the purchase of short-term  investments
of $4.4 million and capital  expenditures  of  $270,000.  Cash used in financing
activities was $250,000,  consisting of repurchases of common stock of $465,000,
offset by the proceeds  from the  exercise of stock  options of $145,000 and the
sale of stock pursuant to our employee stock purchase plan of $70,000.

      As of June 30, 2004, we had cash,  cash  equivalents  and  investments  of
$45.6 million,  working capital of $21.5 million and no debt. We have no capital
lease obligations,  and we had future minimum lease payments under our operating
leases of approximately $1.5 million.

      We  believe  that  our  current  cash,  cash  equivalents  and  short-term
investments,  together with funds generated from operations,  will be sufficient
to meet our working capital and capital expenditure requirements for the next 12
months.  In the future,  we may find it necessary to obtain additional equity or
debt financing. If we desire to raise additional funds, we may not be able to do
so on  acceptable  terms or at all.  In  addition,  if we issue new  securities,
stockholders  might  experience  dilution and the holders of the new  securities
might  have  rights,  preferences  or  privileges  senior  to those of  existing
stockholders.

RISK FACTORS

      Stated below,  elsewhere in this Quarterly Report,  and in other documents
we file  with the  Securities  and  Exchange  Commission  (SEC)  are  risks  and
uncertainties  that could cause  actual  results to differ  materially  from the
results contemplated by the forward-looking statements contained in this report.
The occurrence of any of the developments or risks identified below may make the
occurrence of one or more of the other risk factors below more likely to occur.

RISKS RELATED TO OUR BUSINESS

OUR FUTURE  OPERATING  RESULTS ARE  UNPREDICTABLE  AND LIKELY TO FLUCTUATE  FROM
QUARTER TO QUARTER.  IF WE FAIL TO MEET THE EXPECTATIONS OF SECURITIES  ANALYSTS
OR INVESTORS, OUR STOCK PRICE WILL LIKELY DECLINE SIGNIFICANTLY.

      Our quarterly and annual operating results have fluctuated in the past and
are likely to fluctuate  significantly in the future due to a number of factors,
some of which are wholly or  partially  outside  our  control.  Accordingly,  we
believe that  period-to-period  comparisons of our results of operations  should
not be relied upon as  indications  of future  performance.  Some of the factors
that could cause our operating results to fluctuate include:

      o     changes in the volume of our product sales;

      o     changes in the average selling prices of our products;

      o     the timing, reduction, or deferral of customer orders or purchases;

      o     seasonality in some of our target markets;

      o     competitive product announcements;

      o     the  amount  and  timing  of  our  operating  expenses  and  capital
            expenditures;

      o     the effectiveness of our manufacturing cost reduction efforts;

      o     variability of our customers' product lifecycles;

      o     shifts in our sales toward lower-margin products; and

      o     cancellations,  changes  or  delays  of  deliveries  to  us  by  our
            manufacturers and suppliers.

      If our  operating  results  fall  below  the  expectations  of  securities
analysts  or  investors,  the  trading  price of our Common  Stock  will  likely
decline, possibly significantly.


                                       18
<PAGE>

WE DEPEND UPON WIDESPREAD MARKET ACCEPTANCE OF OUR PRODUCTS,  AND OUR RESULTS OF
OPERATIONS WILL SUFFER IF THE MARKET DOES NOT ACCEPT OUR PRODUCTS.

      A significant  percentage of our revenue derives from Universal Serial Bus
(USB) product sales.  However,  we expect a decline in USB product sales, due to
the  maturity  of the  product  line,  that  we  expect  will  continue  for the
foreseeable  future.  Factors that may affect our USB product  sales include the
continued  growth of markets for the development of USB compliant  devices,  the
performance and pricing of our USB products, and the availability, functionality
and price of competing products. Many of these factors are beyond our control.

      Our future  revenue growth relies on our ability to  successfully  design,
manufacture and sell new products into new and established markets.  Competition
for product sales in these markets is typically  intense and our competitors are
often firmly  established.  If we are unable to gain significant market share in
these  markets,  our  ability  to  increase  revenue  is likely to be  adversely
effected.  If we are unable to grow revenue,  our operating results will suffer,
and the trading price of our common stock may decline significantly.

IF WE FAIL TO KEEP PACE WITH RAPID  TECHNOLOGICAL  CHANGE AND EVOLVING  INDUSTRY
STANDARDS, OUR PRODUCTS COULD BECOME LESS COMPETITIVE OR OBSOLETE.

      The markets for our  products  are  characterized  by rapid  technological
change, frequent new product introductions, changes in customer requirements and
evolving industry standards. We may cease to be competitive if we fail to timely
introduce new products or product  enhancements  that address these factors.  To
continue to introduce new products and product  enhancements  on a timely basis,
we must:

      o     quickly  identify  emerging   technological  trends  in  our  target
            markets, including new communications standards;

      o     accurately define and design new products or product enhancements to
            meet market needs;

      o     develop or license the  underlying  core  technologies  necessary to
            create  new  products  and  product  enhancements;   and

      o     respond   effectively   to   technological   changes   and   product
            introductions by our competitors.

      If we fail to timely identify, develop, manufacture, market or support new
or enhanced products  successfully,  our competitors could gain market share, or
our new or enhanced products might not gain market acceptance.

NEW OR ENHANCED PRODUCT  DEVELOPMENT DELAYS COULD HARM OUR OPERATING RESULTS AND
OUR COMPETITIVE POSITION.

      The development of new, technologically advanced products is a complex and
uncertain   process   requiring  high  levels  of  innovation,   highly  skilled
engineering and development personnel and accurate anticipation of technological
and market trends.  Consequently,  product development delays are typical in our
industry.  If we fail to timely  introduce a product  for an emerging  standard,
customers may defer or cancel orders on existing products  expecting the release
of a new or enhanced product,  and our operating  results could suffer.  Product
development  delays may result  from  numerous  factors,  including:

      o     changing product specifications and customer requirements;

      o     unanticipated engineering complexities;

      o     difficulties  with or delays by contract  manufacturers or suppliers
            of key components or technologies;

      o     difficulties  in allocating  engineering  resources  and  overcoming
            resource limitations; and

      o     difficulties in hiring and retaining necessary technical personnel.

IF WE DEVOTE  RESOURCES  TO  DEVELOPING  PRODUCTS  FOR  EMERGING  COMMUNICATIONS
STANDARDS THAT ULTIMATELY ARE NOT WIDELY ACCEPTED, OUR BUSINESS COULD BE HARMED.

      Our future  growth  depends upon our ability to develop,  manufacture  and
sell in volume  advanced  verification  systems for  existing,  emerging and yet
unforeseen  communications  standards.  We have  little or no  control  over the
conception,  development  or adoption  of new  standards.  Moreover,  even as it
relates to currently emerging standards, the markets are rapidly evolving and we
have   virtually  no  ability  to  impact  the  adoption  of  those   standards.
Consequently, there is significant uncertainty as to whether markets for new and
emerging standards ultimately will develop at all or, if they do develop,  their
potential  size or future  growth rate.  We may incur  significant  expenses and
dedicate  significant  time and resources to develop products for standards that
fail to gain broad  acceptance.  For  example,  we spent four years from 1992 to
1995 developing products for the ACCESS.bus  technology,  a standard designed to
connect peripheral  devices to computers,  which did not gain market acceptance.
Failure  of a  standard  for  which  we  devote  substantial  resources  to gain
widespread acceptance would likely harm our business.


                                       19
<PAGE>

INCREASED COMPETITION,  NEW PRODUCT INTRODUCTIONS BY COMPETITORS,  AND OUR ENTRY
INTO NEW AND ESTABLISHED  MARKETS MAY DECREASE THE AVERAGE SELLING PRICES OF OUR
PRODUCTS, REVENUE AND MARKET SHARE.

      The markets for advanced verification products for emerging communications
standards are highly competitive.  We compete with numerous companies in each of
our various markets, and we expect the number of competitors,  some of which may
be current customers, and the intensity of competition to increase. Any of these
existing  or  future  competitors  may  have  substantially  greater  financial,
technical,  marketing and distribution resources and brand name recognition.  If
companies develop competing products or form alliances with or acquire companies
offering  competing  products,  any of which  address  our target  markets  more
effectively or at a lower cost, even if those products do not have  capabilities
comparable to our products, they could be formidable competitors.

      We continue to experience  increased  competition in our principal markets
and, as we expand our product portfolio into other new and existing markets,  we
expect to  encounter  similar  competitive  forces in those  markets.  Increased
competition  could result in significant price erosion,  reduced revenue,  lower
margins  and loss of market  share,  any of which would  significantly  harm our
business.  As a result,  we anticipate  that the average  selling  prices of our
products  will  decrease  in the future in  response  to such  things as product
introductions or enhancements by us or our competitors,  product  discounting on
volume  purchase  orders or  additional  pricing  pressures.  We believe we must
continue to timely develop and introduce new products that can be sold at higher
average  selling  prices.  Failure to do so would  likely  cause our revenue and
gross margins to decline.

WE CONTINUE TO FACE UNCERTAINTY  RELATING TO ECONOMIC  CONDITIONS  AFFECTING OUR
CUSTOMERS.

      We face  uncertainty  in the degree to which the current  global  economic
climate will  continue to negatively  affect growth and capital  spending by our
existing  and  potential  customers.  We continue  to  experience  instances  of
customers  delaying or deferring orders and longer lead times to close sales. If
global  economic  conditions  do not improve,  or if they worsen,  our business,
operating results and financial condition will be adversely impacted.

VARIATIONS IN OUR REVENUE MAY CAUSE FLUCTUATIONS IN OUR OPERATING RESULTS.

      We may experience delays generating or recognizing revenue for a number of
reasons.  Historically,  we carry little  backlog and our revenue in any quarter
has depended upon orders booked and shipped in that quarter. Customers may delay
scheduled  delivery  dates and cancel orders  without  significant  penalty.  In
addition,  even if we ship orders,  generally accepted accounting principles may
require us to defer recognition of revenue until a later date. Because we budget
our operating  expenses on anticipated  revenue trends and a high  percentage of
our expenses  are fixed in the short term,  any delay in  generating  forecasted
revenue could have a significant negative impact on our operating results.

IF WE FAIL TO MAINTAIN  AND EXPAND OUR  RELATIONSHIPS  WITH THE CORE OR PROMOTER
COMPANIES IN OUR TARGET MARKETS, WE MAY HAVE DIFFICULTY DEVELOPING AND MARKETING
OUR PRODUCTS.

      It is  important  to our  success to  establish,  maintain  and expand our
relationships  with technology and  infrastructure  leader companies  developing
emerging communications standards in our target markets. We believe we must work
closely with these companies to gain valuable  insights into new market demands,
obtain  early  access to  standards  as they  develop  and help us design new or
enhanced products.  Generally,  we do not enter into contracts  obligating these
companies to work or share their  technology.  Industry  leaders could choose to
work with other companies in the future.  If we fail to establish,  maintain and
expand our industry  relationships,  we could lose  first-mover  advantage  with
respect to emerging  standards,  and it would likely be more difficult for us to
develop and market products that address these standards.


                                       20
<PAGE>

OUR EXECUTIVE OFFICERS,  DIRECTORS,  PHILIPS SEMICONDUCTORS AND CERTAIN ENTITIES
AFFILIATED  WITH THEM OWN A LARGE  PERCENTAGE OF OUR VOTING  STOCK,  WHICH COULD
HAVE THE EFFECT OF DELAYING OR PREVENTING A CHANGE IN OUR CONTROL.

      As  of  July  31,  2004,  our  executive  officers,   directors,   Philips
Semiconductors and certain entities  affiliated with or beneficially  controlled
by them owned  approximately  7,165,842  shares or  approximately  36.41% of our
outstanding  shares of common stock,  excluding  398,047  shares of common stock
held  in our  treasury  acquired  primarily  pursuant  to our  Stock  Repurchase
Program.  These stockholders,  acting together, can exercise significant control
regarding  matters  requiring  stockholder  approval,  including the election or
removal of directors and the approval of mergers or other  business  combination
transactions.  This concentration of ownership could have the effect of delaying
or  preventing  a change in our  control  or  otherwise  discouraging  potential
acquirers from attempting to obtain control, which in turn could have an adverse
effect on the market price of our common stock or prevent our stockholders  from
realizing a premium over the market price for their shares of common stock.  Our
repurchase  of shares  of our  common  stock  pursuant  to our Stock  Repurchase
Program  discussed  under the caption in "Part I, Item 1, Note 12" in our annual
report  on Form  10-K for the year  ended  December  31,  2003,  filed  with the
Securities and Exchange Commission (SEC) on February 20, 2004, as amended by our
Form 10-K/A filed with the SEC on March 3, 2004, may increase their control over
us.

A  TRANSITION  IN OUR  MANAGEMENT  COULD CAUSE  SUBSTANTIAL  DISRUPTIONS  TO OUR
BUSINESS AND OPERATIONS.

      On July 22, 2004,  we announced the  retirement of one of our  co-founders
and  our  Chief  Executive  Officer,  Dan  Wilnai  and new  appointments  to the
executive management team and Board of Directors.  President and Chief Financial
Officer,  Carmine  Napolitano,  was promoted and given the  additional  title of
Chief  Executive  Officer along with his  appointment to the Board of Directors.
Former Director of Finance and Administration, Jason LeBeck was promoted to Vice
President and Chief  Financial  Officer,  and John T. Rossi,  Vice  President of
Finance  and Chief  Financial  Officer  of  OmniVision  Technologies,  Inc.  was
appointed to the Board of Directors. Substantial disruptions to our business and
operations may still occur during this transition.

INCREASED   COSTS   ASSOCIATED   WITH   CORPORATE   GOVERNANCE   COMPLIANCE  MAY
SIGNIFICANTLY IMPACT OUR RESULTS OF OPERATIONS.

      The Sarbanes-Oxley Act of 2002 (the "Act") requires changes in some of our
corporate governance and securities disclosure or compliance practices. That Act
also  requires  the SEC to  promulgate  new rules on a variety of  subjects,  in
addition to rule proposals already made, and Nasdaq has revised and continues to
revise  its  requirements   for   Nasdaq-listed   companies.   We  expect  these
developments to increase our legal compliance and financial  reporting costs. We
also expect these developments to make it more difficult and expensive to obtain
director and officer  liability  insurance,  and may cause us to accept  reduced
coverage or incur substantially higher premiums to obtain coverage.

      These  developments  could make it more  difficult  for us to attract  and
retain  qualified  members on our board of  directors,  or  qualified  executive
officers. We are presently evaluating and monitoring regulatory developments and
cannot estimate the timing or magnitude of additional costs. To the extent these
costs are  significant,  our general and  administrative  expenses are likely to
increase as a percentage of revenue,  which would negatively  impact our results
of operations.

THE  LOSS OF KEY  MANAGEMENT  PERSONNEL,  ON  WHOSE  KNOWLEDGE,  LEADERSHIP  AND
TECHNICAL  EXPERTISE  WE  RELY,  COULD  CAUSE  SIGNIFICANT  DISRUPTIONS  IN  OUR
OPERATIONS AND HARM OUR ABILITY TO EXECUTE OUR BUSINESS PLAN.

      Our success  depends heavily upon the continued  contributions  of our key
management personnel, whose knowledge, leadership and technical expertise may be
time-consuming  and  difficult  to  replace.  Moreover,  all of  our  personnel,
including our  executive  staff,  are employed on an "at will" basis.  We do not
maintain key person  insurance on any of our personnel.  If we were to terminate
or lose the services of any of our key  personnel and were unable to timely hire
qualified  replacements,  our  ability to  execute  our  business  plan would be
harmed. Even if we were able to hire qualified replacements,  we would expect to
experience operational  disruptions and inefficiencies.  In addition,  employees
who leave our company may subsequently compete against us.

OUR PRODUCTS MAY CONTAIN DEFECTS THAT CAUSE US TO INCUR  SIGNIFICANT  CORRECTIVE
COSTS,  DIVERT OUR ATTENTION  FROM PRODUCT  DEVELOPMENT  EFFORTS AND RESULT IN A
LOSS OF CUSTOMERS.

      Highly  complex  products  such  as our  verification  systems  frequently
contain defects when they are first  introduced or as new versions are released.
If  any of  our  products  contain  defects  or  have  reliability,  quality  or
compatibility  problems,  our  reputation  may be damaged and  customers  may be
reluctant to buy our products.  In addition,  these  defects could  interrupt or
delay sales.  We may have to invest  significant  capital and other resources to
alleviate these problems.  If any problem  remains  undiscovered  until after we
have  commenced  commercial  production of a new product,  we may be required to
incur  additional  development  costs and product recall,  repair or replacement
costs.  These  problems may also result in claims against us by our customers or
others. In addition, these problems may divert our technical and other resources
from other development efforts.


                                       21
<PAGE>

IF OUR DISTRIBUTORS AND MANUFACTURERS'  REPRESENTATIVES DO NOT ACTIVELY SELL OUR
PRODUCTS, OUR PRODUCT SALES MAY DECLINE.

      Historically, we have relied on manufacturers' representatives to sell our
products domestically and on distributors to sell our products  internationally.
A  substantial  number of our  products are sold  through our  distributors  and
manufacturers'    representatives.    Our   distributors   and    manufacturers'
representatives   generally   offer   products  from   multiple   manufacturers.
Accordingly,   there  is  a  risk  that  our  distributors  and   manufacturers'
representatives  may  give  higher  priority  to  selling  products  from  other
suppliers and reduce their efforts to sell our products.  Our  distributors  and
manufacturers'  representatives  may not  market  our  products  effectively  or
continue to devote the  resources  necessary to  successfully  sell,  market and
support our products.  Our  distributors  may on occasion  build  inventories in
anticipation  of  substantial  growth in sales and,  if growth does not occur as
rapidly as anticipated,  they may subsequently  decrease their product orders. A
slowdown in orders from our distributors or manufacturers' representatives could
reduce our revenue in any given quarter and cause  fluctuations in our operating
results.

      In addition,  sales to our  distributors  are initiated by purchase orders
rather than long-term commitments.  The loss of any major distributor, the delay
of significant orders from our distributors,  or the failure of our distributors
to timely pay for  products  purchased  could  result in  decreased  or deferred
recognition of revenue.

IF WE ARE  UNABLE TO EXPAND OUR  DIRECT  SALES  OPERATIONS  AND  INDIRECT  SALES
CHANNELS OR SUCCESSFULLY MANAGE OUR EXPANDED SALES ORGANIZATION,  OUR OPERATIONS
MAY BE HARMED.

      We intend to  continue  development  and  expansion  of our  direct  sales
organization   and  our  indirect   distribution   channels   domestically   and
internationally.  Managing our sales organization and distribution  channels has
become  more  complex  as we  have  expanded  both  our  product  lines  and our
geographic presence.  As a result, it has also become increasingly critical that
we optimize our sales operations around complementary products and users. We may
be unable to expand our  direct  sales  organization  or  distribution  channels
successfully or manage them optimally,  and the cost of any expansion may exceed
the revenue generated.

      Moreover,  our  historical   distribution  channel  strategy  may  not  be
appropriate  for the successful sale and marketing of our products in new target
markets.  Consequently,  in order to increase market share in those markets,  we
may have to attempt new, creative and previously untested  methodologies.  These
new methodologies may be time-consuming to develop,  difficult to implement, and
ultimately unsuccessful, which could negatively impact our revenues.

SHIFTS IN OUR PRODUCT MIX MAY RESULT IN DECLINES IN GROSS MARGINS.

      Our gross margins vary by product,  with gross margins generally higher on
our development products than our production products. Our overall gross margins
might  fluctuate  from period to period as a result of shifts in product mix and
the  channels  through  which  we sell our  products,  the  introduction  of new
products and product or changes in costs.

WE DEPEND ON CONTRACT  MANUFACTURERS  FOR SUBSTANTIALLY ALL OF OUR MANUFACTURING
REQUIREMENTS  AND IF  THESE  MANUFACTURERS  FAIL TO  PROVIDE  US  WITH  ADEQUATE
SUPPLIES OF  HIGH-QUALITY  PRODUCTS,  OUR COMPETITIVE  POSITION,  REPUTATION AND
BUSINESS COULD BE HARMED.

      We  currently  rely  on  four  contract   manufacturers  for  all  of  our
manufacturing  requirements  other  than final  assembly,  testing  and  quality
assurance on our lower volume,  higher margin products. We do not have long-term
contracts  with  any  of  these  manufacturers.  All  purchase  commitments  and
obligations  between us and our contract  manufacturers  are on a purchase order
basis. As a result,  our  manufacturers  could refuse to continue to manufacture
all or some of our  products  or attempt to change  the terms  under  which they
manufacture our products. Previously, we experienced delays in product shipments
from some of our  manufacturers,  which forced us to delay product  shipments to
customers.  We may experience  similar future delays or other problems,  such as
inferior  quality  and  insufficient  quantity of  products,  any of which could
significantly harm our business. We intend to introduce new products and product
enhancements  regularly,  which  will  require  that we rapidly  achieve  volume
production by coordinating  our efforts with those of our suppliers and contract
manufacturers.  The inability of our  manufacturers to provide adequate supplies
of high quality products or the loss of any manufacturer  could cause a delay in
our ability to timely fulfill orders.


                                       22
<PAGE>

ANY ACQUISITIONS THAT WE UNDERTAKE COULD BE DIFFICULT TO INTEGRATE,  DISRUPT OUR
BUSINESS, DILUTE STOCKHOLDER VALUE AND HARM OUR OPERATING RESULTS.

      We expect to continue to review  opportunities to acquire other businesses
or  technologies  that  complement  our current  products,  expand our  markets,
enhance our technical  capabilities or otherwise offer growth opportunities.  If
we make any acquisitions,  we could issue stock that would dilute the percentage
ownership  of our  existing  stockholders,  incur  substantial  debt  or  assume
contingent  liabilities.  For example,  we issued  360,000  shares of our common
stock in connection  with our  acquisition of Verisys in June 2002. In addition,
in the three months ended September 30, 2002, we recorded a goodwill  impairment
of $1.4 million,  and a partial impairment  write-down of $194,000 for purchased
intangible  assets  from  our  purchase  of  Verisys.   Moreover,   the  Verisys
acquisition and other potential acquisitions involve numerous risks, including:

      o     assimilating the purchased operations, technologies or products;

      o     costs or accounting charges associated with the acquisition;

      o     diversion of management's attention from our existing business;

      o     adverse effects on existing  business  relationships  with suppliers
            and customers;

      o     entering markets in which we have little or no prior experience; and

      o     potential loss of key employees of purchased businesses.


IF WE FAIL TO ACCURATELY FORECAST OUR SUPPLY NEEDS, OUR COSTS MAY INCREASE OR WE
MAY BE UNABLE TO TIMELY SHIP PRODUCTS.

      We  purchase  components  used in the  manufacture  of our  products  from
several key sources.  We depend on these  sources to timely  deliver  components
based  on  twelve-month  rolling  forecasts  that we  provide.  Lead  times  for
materials  and  components  vary  significantly  and depend on  factors  such as
specific  supplier  requirements,  contract terms and current market demand.  We
believe that as the economy  expands the demand for certain key components  used
in our products will  increase such that we may need to order larger  quantities
of these components  earlier than forecasted or risk delays in product shipments
to our customers. If we overestimate our component requirements,  we may develop
excess inventory, increasing costs. If we underestimate our requirements, we may
be unable to timely fulfill orders.

WE DEPEND ON SOLE SOURCE  SUPPLIERS FOR SEVERAL KEY PRODUCT  COMPONENTS,  AND WE
MAY LOSE SALES IF THEY FAIL TO TIMELY MEET OUR NEEDS.

      We obtain some parts,  components  and packaging used in our products from
sole  sources of supply.  If these  suppliers  are unable to meet our demand for
components  at  reasonable  costs or if we are  unable to obtain an  alternative
source at an equivalent price, our ability to timely and  cost-effectively  ship
products will be harmed. In addition,  because we rely on purchase orders rather
than long-term contracts with our sole source suppliers,  we cannot predict with
certainty  our  ability to obtain  components  over the long term.  Furthermore,
qualifying  additional  suppliers could be  time-consuming,  expensive,  and may
increase  the  likelihood  of  errors  or  defects.  If we are  unable to obtain
components or receive a smaller  allocation of components than necessary to meet
demand, customers could choose to purchase competing products.

IF WE ARE UNABLE TO RETAIN AND MOTIVATE OUR PERSONNEL,  OUR  OPERATIONS  WILL BE
IMPAIRED.

      To be  successful  and  maintain a high level of quality,  we will need to
retain  and  motivate  highly  skilled  personnel.  If we are unable to retain a
sufficient number of qualified employees, our operations may be impaired. We may
have even greater  difficulty  retaining  employees  if  employees  perceive the
equity component of our compensation  package to be less valuable as a result of
market fluctuations in the price of our common stock.


                                       23
<PAGE>

ECONOMIC,  POLITICAL AND OTHER RISKS  ASSOCIATED  WITH  INTERNATIONAL  SALES AND
OPERATIONS COULD ADVERSELY AFFECT SALES.

      Because we sell our products  worldwide,  our business is subject to risks
associated  with doing  business  internationally.  We  recognized  42.6% of our
revenue from sales to international customers in the three months ended June 30,
2004. We anticipate that revenue from international  operations will continue to
represent a  substantial  portion of our revenue.  In  addition,  several of our
manufacturers' facilities and suppliers are located outside the United States of
America.  Accordingly,  our  future  results  could be harmed  by a  variety  of
factors, including:

      o     changes in a specific  country's  or region's  political or economic
            conditions, particularly in emerging markets;

      o     trade   protection   measures   and   import  or  export   licensing
            requirements;

      o     potentially negative consequences from changes in tax laws;

      o     difficulty in staffing and managing widespread operations;

      o     changes in foreign currency exchange rates;

      o     differing labor regulations;

      o     war,  actual or threatened  acts of terrorism,  other  international
            conflicts  and  the  resulting  military,   economic  and  political
            responses  (including,  without  limitation,  war between  sovereign
            nations) as well as  heightened  security  measures  which may cause
            significant disruption to commerce worldwide;

      o     limited  protection of intellectual  property in some  international
            markets; and

      o     unexpected changes in regulatory requirements.

IF WE FAIL TO MANAGE OUR OPERATIONS EFFECTIVELY, OUR BUSINESS COULD SUFFER.

      Our ability to offer products and implement our business plan successfully
in a rapidly evolving market requires effective planning and management. Failure
by our  management  or  personnel  to properly  allocate  resources  to meet our
current and future needs as well as unforeseen  complications and inefficiencies
in planning our operations can adversely  impact the morale of our personnel and
lead to further  complications and operational  inefficiencies.  If this were to
occur, our profitability or financial position could be negatively  impacted and
our operating results could suffer.

OUR  HEADQUARTERS  AND  OUR  CONTRACT  MANUFACTURERS  ARE  LOCATED  IN  NORTHERN
CALIFORNIA, ASIA AND OTHER AREAS WHERE NATURAL DISASTERS MAY OCCUR.

      Currently,   our   corporate   headquarters   and  some  of  our  contract
manufacturers  are  located  in  Northern  California  and  our  other  contract
manufacturers  are located in Asia.  Northern  California and Asia  historically
have been vulnerable to natural  disasters and other risks, such as earthquakes,
fires, floods, power loss and  telecommunications  failure,  which at times have
disrupted  the  local  economy  and  posed   physical   risks  to  our  and  our
manufacturers'  properties. We do not have redundant,  multiple site capacity in
the event of a natural disaster.

CLAIMS THAT WE INFRINGE THIRD-PARTY INTELLECTUAL PROPERTY RIGHTS COULD RESULT IN
SIGNIFICANT EXPENSES OR RESTRICTIONS ON OUR ABILITY TO SELL OUR PRODUCTS.

      Our industry is  characterized  by uncertain and conflicting  intellectual
property claims and frequent litigation,  especially regarding patent rights. We
cannot be certain that our products do not or will not infringe  issued  patents
or the intellectual  property rights of others.  In fact, we expect that we will
be subject to  infringement  claims as the number of products and competitors in
our  markets  grows  and  the   functionality   of  products   further  overlap.
Historically,  patent applications in the United States of America have not been
publicly  disclosed until the patent is issued, and we may not be aware of filed
patent  applications  that relate to our products or technology.  If patents are
later  issued in  connection  with  these  applications,  we may be  liable  for
infringement.  Periodically,  other parties,  including some of our competitors,
may  assert  patent,  copyright  and other  rights to  technologies  in  various
jurisdictions that are important to our business.  Any claims asserting that our
products infringe or may infringe the rights of third parties,  including claims
arising through our contractual indemnification of our customers,  regardless of
their merit or resolution, would likely be costly and time-consuming, divert the
efforts of our technical and management personnel, cause product shipment delays
or  require  us to enter  into  royalty  or  licensing  agreements.  Royalty  or
licensing agreements,  if required,  may not be available on terms acceptable to
us, or at all.

      At present, we do not believe that our products infringe any other party's
intellectual  property  rights in any way that  would  have a  material  adverse
effect on our  operations.  However,  if any material  claims arise and if these
claims  cannot be resolved  through a license or similar  arrangement,  we could
become a party to  litigation.  The  results of any  litigation  are  inherently
uncertain.  In the event of an  adverse  result in any  litigation,  we could be
required to pay substantial damages,  including treble damages if we are held to
have willfully infringed,  to cease the manufacture,  use and sale of infringing
products, to expend significant resources to develop non-infringing  technology,
or to obtain  licenses to the  infringing  technology.  In  addition,  lawsuits,
regardless of their  success,  would likely be  time-consuming  and expensive to
resolve and would divert management time and attention from our business.


                                       24
<PAGE>

ANY FAILURE TO PROTECT OUR INTELLECTUAL  PROPERTY  ADEQUATELY MAY  SIGNIFICANTLY
HARM OUR BUSINESS.

      We  protect  our  proprietary  processes,  software,  know-how  and  other
intellectual property and related rights through copyrights, patents, trademarks
and the maintenance of trade secrets,  including  entering into  confidentiality
agreements. Our success and ability to compete depend in part on our proprietary
technology.  However,  we cannot provide any assurance that other companies will
not develop  technologies that are similar to our technology.  We currently have
three registered patents and three patent applications pending, although patents
may not issue as a result of these or other patent applications.  Any patent may
be  successfully  challenged  or  invalidated,  or may  not  provide  us  with a
significant   competitive   advantage.   Despite  our  efforts  to  protect  our
intellectual property rights,  existing laws in the United States of America and
in  differing  international  jurisdictions  and  our  contractual  arrangements
provide only  limited  protection.  Unauthorized  parties may attempt to copy or
otherwise  obtain and use our products or  technology.  Third parties may breach
confidentiality agreements or other protective contracts with us, and we may not
be able to enforce our rights in the event of these breaches.

      Monitoring  the  unauthorized  use of our products is difficult and may be
expensive,  and we  cannot  be  certain  that  the  steps we take  will  prevent
unauthorized use of our intellectual property, particularly in foreign countries
where the laws may not protect our proprietary  rights as fully as in the United
States of America.  We may incur  substantial  costs to protect our intellectual
property rights, including pursuing remedies in court. We may become involved in
legal proceedings  against other parties,  which may also cause other parties to
assert  claims  against  us.  In  the  future,   we  may  be  unable  to  detect
infringements and may lose competitive  position in our markets before we do so.
In addition, competitors may design around our technologies or develop competing
technologies.  The laws of other countries in which we market our products might
offer little or no effective protection of our proprietary  technology.  Reverse
engineering,  unauthorized copying or other  misappropriation of our proprietary
technology  could enable third  parties to benefit from our  technology  without
payment, which could significantly harm our business. Our failure to enforce and
protect  our  intellectual  property  rights or any  adverse  change in the laws
protecting intellectual property rights could harm our business.

CHANGES  IN  EXISTING  LAWS  OR  REGULATIONS  OR THE  ENACTMENT  OF NEW  LAWS OR
REGULATIONS COULD IMPEDE PRODUCT SALES.

      We and many of our customers and their products are subject to regulations
and   standards   set   by  the   Federal   Communications   Commission   (FCC).
Internationally,  many of our customers and their  products may also be required
to comply with regulations  established by authorities in various countries.  We
are  required to  determine  to what extent our  products  may be subject to FCC
standards  and  regulations  and to  what  extent  we  are  required  to  obtain
certification  from the FCC directly or from  authorized  third-parties.  We are
also  required to maintain  in good  standing  any  equipment  certification  we
receive from the FCC or an FCC-approved  party. In addition,  the regulations in
force both in the  United  States of America  and in foreign  jurisdictions  may
change.  Failure  to comply  with  applicable  regulations  or to obtain  timely
domestic or foreign  regulatory  approvals or certificates  could  significantly
harm our business.

RISKS RELATED TO OUR EQUITY

FUTURE SALES OF SUBSTANTIAL AMOUNTS OF OUR COMMON STOCK BY US OR BY OUR EXISTING
STOCKHOLDERS COULD CAUSE OUR STOCK PRICE TO FALL.

      Additional  equity  financings  or  other  share  issuances  by  us  could
adversely  affect  the  market  price of our  common  stock.  Sales by  existing
stockholders  of a large  number  of shares of our  common  stock in the  public
trading  market (or in private  transactions)  including  sales by our executive
officers, directors or Philips Semiconductors Inc. and the sale of shares issued
in connection with strategic  alliances,  or the perception that such additional
sales could occur, could cause the market price of our common stock to drop.


                                       25
<PAGE>

LOW DAILY TRADING VOLUMES FOR OUR COMMON STOCK MAY MAKE IT DIFFICULT TO PURCHASE
OR SELL OUR COMMON STOCK AND CAN RESULT IN SIGNIFICANT PRICE VOLATILITY.

      The  market  price of our common  stock has been  highly  volatile  and is
likely to  continue  to be  volatile.  We  receive  only  limited  attention  by
securities analysts, and there frequently occurs an imbalance between supply and
demand in the public trading market for our common stock due to limited  trading
volumes.  Investors  should  consider an investment in our common stock as risky
and should only  purchase  our common  stock if they can  withstand  significant
losses.  Factors affecting our common stock price include:

      o     fluctuations in our operating results;

      o     announcements  of   technological   innovations  or  new  commercial
            products by us or our competitors;

      o     published   reports  by  securities   analysts;

      o     general market conditions;

      o     announcements by us or our competitors of significant  acquisitions,
            strategic partnerships or joint ventures;

      o     our cash position and cash commitments; and

      o     additions or departures of key personnel.

      Additionally,  some  companies  with  volatile  market  prices  for  their
securities  have been subject to securities  class action lawsuits filed against
them.  If a suit were to be filed  against us,  regardless  of the merits or the
outcome,   it  could  result  in  substantial  costs  and  a  diversion  of  our
management's attention and resources.  This could have a material adverse effect
on our business, results of operations, financial condition and the price of our
common stock.

WE DO NOT ANTICIPATE PAYING DIVIDENDS FOR THE FORESEEABLE FUTURE.

      We currently anticipate that all of our earnings, if any, will be retained
for development and expansion of our business.  We do not anticipate  paying any
cash dividends on our common stock in the foreseeable future.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

      The  primary  objectives  of our  investment  activities  are to  preserve
principal  and maximize  the  after-tax  income we receive from our  investments
without significantly increasing risk. Some of the securities in which we invest
may be subject to market risk.  This means that a change in prevailing  interest
rates  may cause  the  principal  amount of the  investment  to  fluctuate.  For
example,  if we hold a security  that was issued with an interest  rate fixed at
the then-prevailing  rate and interest rates later rise, the principal amount of
our  investment  will  probably  decline.  We have the ability to hold our fixed
income  investments  until  maturity,  and  therefore  we would  not  expect  to
recognize  any  adverse  impact in  income or cash  flows in the event of rising
interest rates previously mentioned. Cash equivalents short-term investments and
long-term  investments  consist  principally of investments in commercial paper,
investment   quality   corporate  and  municipal  bonds,   money  market  funds,
collateralized  mortgage  obligations,  and U.S. government agency securities in
which we believe there is no material market risk exposure.

ITEM 4. CONTROLS AND PROCEDURES

      As of the end of the period covered by this quarterly  report,  we carried
out an evaluation, under the supervision and with the participation of our Chief
Executive  Officer  (principal  executive  officer) and Chief Financial  Officer
(principal financial officer),  of the effectiveness of the design and operation
of our disclosure controls and procedures.  Based on this evaluation,  our Chief
Executive  Officer and Chief  Financial  Officer  concluded  that our disclosure
controls  and  procedures  are  effective  in timely  alerting  them to material
information  required to be included in our periodic  SEC filings.  It should be
noted that the design of any system of  controls  is based in part upon  certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving  its stated goals under all  potential
future conditions, regardless of how remote.

      There have been no  significant  changes in our  internal  controls  or in
other factors that could  significantly  affect internal controls  subsequent to
our most recent evaluation of our internal controls.


                                       26
<PAGE>

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

      We are not currently party to any material legal proceedings.  However, we
are  periodically  subject to legal  proceedings  and  claims  that arise in the
ordinary course of business.  While management  currently believes the amount of
ultimate  liability,  if any, with respect to these actions will not  materially
affect our financial position, results of operations, or liquidity, the ultimate
outcome of any litigation is uncertain. Were an unfavorable outcome to occur, or
if  protracted  litigation  were to ensue,  the impact  could be material to the
Company.

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

      Our 2004 annual meeting of  stockholders  was held on May 20, 2004. At the
meeting,  our stockholders  approved the following  proposals  presented to them
pursuant to the vote totals indicated next to each item:

<TABLE>
<CAPTION>
                                                                                   Vote (No. of Shares)
                                                                                   --------------------

                          Proposal                                    For          Against/Withheld    Abstain      Broker Non-Votes
                          --------                                    ---          ----------------    -------      ----------------
<S>                                                                 <C>           <C>                 <C>           <C>
Election of Philip Pollok as a Class I Director                     18,250,902           67,123             --               --
Ratification  of  PricewaterhouseCoopers  LLP as  independent       18,250,957           62,200          4,868               --
      public  accountants  for fiscal year ended
      December 31, 2004
</TABLE>

      As of May 20,  2004,  Roger W.  Johnson,  Andrei  Manoliu,  Ph.D.,  Peretz
Tzarnotzky and Dan Wilnai were members of the Board of Directors  whose terms of
office continued after the annual meeting of stockholders. On July 20, 2004, the
Board of  Directors  resolved to increase  the size of the Board of Directors by
two  additional  seats and  thereafter  appointed  John T. Rossi and  Carmine J.
Napolitano to fill the vacancies on the Board of Directors.


                                       27
<PAGE>


ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

a.    Exhibits.


                                  EXHIBIT INDEX


   EXHIBIT NO.                            DOCUMENT NAME
   -----------                            -------------

         3.1*     Amended  and  Restated  Certificate  of  Incorporation  of the
                  Registrant.

         3.2*     Bylaws of the Registrant.

         4.1*     Specimen Certificate of the Registrant's common stock.

         10.1*    Form of  Indemnification  Agreement  entered  into between the
                  Registrant and its directors and executive officers.+

         10.2*    1994 Stock Option Plan, as amended.+

         10.3*    2000 Stock Option/Stock Issuance Plan.+

         10.4*    2000 Stock Incentive Plan.+

         10.5*    2000 Employee Stock Purchase Plan.+

         10.6*    Employment  Agreement  dated December 5, 1997,  between Albert
                  Lee and the Registrant.+

         10.7*    Employment  Agreement  dated  April 16,  2002,  between  Kevin
                  Fitzgerald and the Registrant.+

         10.8*    Employment  Agreement  dated July 22,  2002,  between  Carmine
                  Napolitano and the Registrant.+

         31.1     Section 302 Certification of Principal Executive Officer.

         31.2     Section 302 Certification of Principal Financial Officer.

         32.1     Section 906 Certification of Principal Executive Officer.

         32.2     Section 906 Certification of Principal Financial Officer.

*     Previously filed as an exhibit,  with the corresponding exhibit number, to
      the  Registrant's  Registration  Statement on Form S-1  (Registration  No.
      333-43866)  as filed  with the SEC on August  16,  2000,  as  subsequently
      amended, and incorporated in this quarterly report by reference.

+     Denotes management contract or compensation plan, contract or arrangement.

      b.    Reports on Form 8-K

            On July 22, 2004,  we filed a Form 8-K  disclosing  our earnings for
            the three months ended June 30, 2004.

            On July 22, 2004, we filed a Form 8-K disclosing the  resignation of
            our Chief Executive Officer, Dan Wilnai, and new appointments to the
            executive management team and Board of Directors.


                                       28
<PAGE>

                                   SIGNATURES

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


Date: August 13, 2004              COMPUTER ACCESS TECHNOLOGY CORPORATION

                                   By: /s/ JASON B. LEBECK
                                       ----------------------------------------
                                       Jason B. LeBeck
                                       Vice President, Chief Financial Officer
                                       and Secretary (Principal Financial
                                       Officer and Principal Accounting Officer)



                                       29