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 March 31, 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)


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


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


                                 (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 April 30, 2004, there were 19,517,787  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)



                                                        MARCH 31,   DECEMBER 31,
                                                          2004         2003
                                                        --------    -----------
                             ASSETS

Current assets:
    Cash and cash equivalents ......................    $ 23,161      $ 34,116
    Short-term investments .........................         630         1,055
    Trade accounts receivable, net .................       2,884         3,180
    Inventories ....................................       1,059           907
    Other current assets ...........................         582           675
                                                        --------      --------
        Total current assets .......................      28,316        39,933
Long-term investments ..............................      21,760         9,367
Property and equipment, net ........................         793           768
Purchased intangibles ..............................         133           167
Other assets .......................................         128           114
                                                        --------      --------
                                                        $ 51,130      $ 50,349
                                                        ========      ========

             LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
    Accounts payable ...............................    $    326      $    393
    Accrued expenses ...............................       2,977         2,921
    Accrued restructuring ..........................          23            29
    Deferred revenue ...............................         607           535
        Total current liabilities ..................       3,933         3,878
                                                        --------      --------
Stockholders' equity:
    Common stock ...................................          20            19
    Additional paid-in capital .....................      52,901        52,595
    Deferred stock-based compensation ..............          --           (32)
    Unrealized gain on investments .................          26            --
    Accumulated deficit ............................      (5,750)       (6,111)
                                                        --------      --------
        Total stockholders' equity .................      47,197        46,471
                                                        --------      --------
                                                        $ 51,130      $ 50,349
                                                        ========      ========

                             See accompanying notes.


                                       2
<PAGE>

                     COMPUTER ACCESS TECHNOLOGY CORPORATION

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

<TABLE>
<CAPTION>
                                                                                     QUARTERS ENDED
                                                                                       MARCH 31,
                                                                                  -------------------
                                                                                     2004       2003
                                                                                  --------   --------
<S>                                                                               <C>        <C>
Revenue .......................................................................   $  4,645   $  3,262
Cost of revenue ...............................................................        824        673
                                                                                  --------   --------
Gross profit ..................................................................      3,821      2,589
                                                                                  --------   --------
Operating expenses:
    Research and development (exclusive of amortization of deferred stock-based
       compensation of $19 and $32 for the quarters ended March 31, 2004 and
       2003, respectively .....................................................      1,603      1,308
    Sales and marketing (exclusive of amortization of deferred  stock-based
       compensation of $2 and $19 for the quarters ended March 31, 2004 and
       2003, respectively .....................................................      1,281      1,144
    General and administrative (exclusive of amortization of deferred
       stock-based  compensation  of $5 and $8 for the  quarters  ended March
       31, 2004 and 2003, respectively ........................................        682        676
    Amortization of purchased intangibles .....................................         26         26
    Amortization of deferred stock-based compensation .........................         26         59
                                                                                  --------   --------
        Total operating expenses ..............................................      3,618      3,213
                                                                                  --------   --------
Income (loss) from operations .................................................        203       (624)
Other income, net .............................................................        158        161
                                                                                  --------   --------
Income (loss) before income taxes .............................................        361       (463)
Income taxes ..................................................................         --         --
                                                                                  --------   --------
Net income (loss) .............................................................   $    361   $   (463)
                                                                                  ========   ========
Net income (loss) per share:
    Basic and diluted .........................................................   $   0.02   $  (0.02)
                                                                                  ========   ========
Weighted average shares outstanding:
    Basic .....................................................................     19,479     19,443
                                                                                  ========   ========
    Diluted ...................................................................     20,643     19,443
                                                                                  ========   ========
</TABLE>


                             See accompanying notes.


                                       3
<PAGE>

                     COMPUTER ACCESS TECHNOLOGY CORPORATION

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

<TABLE>
<CAPTION>
                                                                                QUARTERS ENDED
                                                                                   MARCH 31,
                                                                             --------------------
                                                                               2004         2003
                                                                             --------    --------
<S>                                                                          <C>         <C>
Cash flows from operating activities:
   Net income (loss) .....................................................   $    361    $   (463)
   Adjustments to reconcile net income (loss) to net cash provided by
      (used in) operating activities:
      Depreciation and amortization ......................................        161         195
      Provision for doubtful accounts ....................................         --           9
      Amortization of acquired developed technology ......................          8          --
      Amortization of purchased intangibles ..............................         26          26
      Amortization of deferred stock-based compensation ..................         32          62
      Amortization of premium on investments .............................         78          --
      Changes in assets and liabilities:
         Trade accounts receivable .......................................        296        (317)
         Inventories .....................................................       (152)         97
         Other assets ....................................................         93          77
         Accounts payable ................................................        (67)       (633)
         Accrued expenses ................................................         50        (276)
         Accrued restructuring ...........................................         (6)       (113)
         Deferred revenue ................................................         72         (63)
         Deferred rent ...................................................          6          --
                                                                             --------    --------
                Net cash provided by (used in) operating activities ......        958      (1,399)
                                                                             --------    --------
Cash flows from investing activities:
   Acquisition of property and equipment .................................       (186)       (124)
   Other long-term assets ................................................        (14)         --
   Purchase of short-term investments ....................................       (633)     (4,274)
   Sale of short-term investments ........................................      1,053       1,000
   Purchase of long-term investments .....................................    (12,440)         --
                                                                             --------    --------
                Net cash used in investing activities ....................    (12,220)     (3,398)
                                                                             --------    --------
Cash flows from financing activities:
    Proceeds from exercise of stock options ..............................        180           7
    Proceeds from employee stock purchase plan ...........................        127          70
    Repurchases of common stock ..........................................         --         (40)
                                                                             --------    --------
                Net cash provided by financing activities ................        307          37
                                                                             --------    --------
Net decrease in cash and cash equivalents ................................    (10,955)     (4,760)
Cash and cash equivalents at beginning of period .........................     34,116      30,486
                                                                             --------    --------
Cash and cash equivalents at end of period ...............................   $ 23,161    $ 26,086
                                                                             ========    ========
</TABLE>


                             See accompanying notes.


                                       4
<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, device, system and software companies at
each phase of their products' lifecycles from development through production and
market deployment.

     We have expertise in the  Bluetooth,  Ethernet,  Fibre Channel,  IEEE 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  design.  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 and all amendments to those reports, and the Proxy Statement
for our annual meeting of stockholders  are made available,  free of charge,  on
our website,  www.catc.com,  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 March 31, 2004, and for the quarters  ended March 31, 2004 and 2003,  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  March  31,  2004,  the  condensed
consolidated  operating  results for the quarters ended March 31, 2004 and 2003,
and the condensed  consolidated cash flows for the quarters ended March 31, 2004
and 2003. 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:


                                       5
<PAGE>

                                                       QUARTERS ENDED
                                                          MARCH 31,
                                                  -------------------------
                                                    2004          2003
                                                  ---------    ------------
Revenue:
   Company A...............................          22%           21%
   Company B...............................          15%           19%

                                                  MARCH 31,    DECEMBER 31,
                                                    2004           2003
                                                  ---------    ------------
Accounts receivable:
   Company A...............................          24%           15%
   Company B...............................          13%           13%
   Company C...............................            *           10%

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


NOTE 2 - COMPREHENSIVE LOSS

         Comprehensive  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.  There is no difference
between  net loss and  comprehensive  loss for the Company in any of the periods
presented.

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.  Amortization  of deferred  stock-based  compensation  was
$32,000 in the quarter ended March 31, 2004 of which $6,000 was included in cost
of revenue  in the  quarter  ended  March 31,  2004.  Amortization  of  deferred
stock-based  compensation  was  $62,000 in the  quarter  ended March 31, 2003 of
which  $3,000 was  included  in cost of revenue in the  quarter  ended March 31,
2003.

    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.

         The weighted-average fair values of options granted during the quarters
ended  March  31,  2004  and  2003,  were  $2.17  and  $1.31,  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:

                                                        QUARTERS ENDED
                                                           MARCH 31,
                                               ---------------------------------
                                                    2004              2003
                                               --------------   ----------------

         Expected life (in years) ...........         5                5
         Risk-free interest rate ............       3.01%         2.29%-6.88%
         Volatility .........................        42%              53%
         Dividend yield......................         0%               0%



                                       6
<PAGE>

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

                                                              QUARTERS ENDED
                                                                 MARCH 31,
                                                            ------------------
                                                              2004       2003
                                                            -------    -------

     Net income (loss), as reported .....................   $   361    $  (463)
         Add:  Amortization of deferred stock-based
         compensation included in reported net income
         (loss) .........................................        32         62
         Deduct:  Stock-based employee compensation
         expense determined under fair value based method
         for all grants .................................      (499)      (684)
                                                            -------    -------
         Net loss, pro forma ............................   $  (106)   $(1,085)
                                                            =======    =======
     Net income (loss) per share, as reported
         Basic and diluted ..............................   $  0.02    $ (0.02)
                                                            =======    =======
     Net income (loss) per share, pro forma
         Basic and diluted ..............................   $ (0.01)   $ (0.06)
                                                            =======    =======

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.

         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):

                                                               QUARTERS ENDED
                                                                  MARCH 31,
                                                            --------------------
                                                              2004        2003
                                                            --------   --------
Numerator:
   Net income (loss) ....................................   $    361   $   (463)
                                                            ========   ========
Denominator:
   Weighted average shares outstanding ..................     19,479     19,443
                                                            --------   --------
   Denominator for basic calculation ....................     19,479     19,443
   Dilutive effect of stock options .....................      1,164         --
                                                                       --------
   Denominator for diluted calculation ..................     20,643     19,443
                                                            ========   ========

Net income (loss) per share:
   Basic ................................................   $   0.02   $  (0.02)
                                                            ========   ========
   Diluted ..............................................   $   0.02   $  (0.02)
                                                            ========   ========
Total common stock equivalents, related to options
   outstanding, excluded from the computation of earnings
   per share as their effect is anti-dilutive ...........      2,397      3,378
                                                            ========   ========


                                       7
<PAGE>

NOTE 5 - INVENTORIES

         Inventories consist of the following (in thousands):

                                                      MARCH 31,  DECEMBER 31,
                                                        2004        2003
                                                      ---------  ------------

Raw materials ......................................   $  380      $  334
Work in progress ...................................      321         250
Finished goods......................................      358         323
                                                       ------      ------
                                                       $1,059      $  907
                                                       ======      ======

NOTE 6 - INCOME TAXES

         The Company's  effective  rate was 0.0% in the quarters ended March 31,
2003 and 2004 as the Company provided a full valuation allowance against its net
deferred tax assets  through March 31, 2004.  As of March 31, 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.

Segment information (in thousands):

                                                            UNALLOCATED
                                                            STOCK-BASED
                                   DEVELOPMENT  PRODUCTION  COMPENSATION
                                    PRODUCTS     PRODUCTS     EXPENSE      TOTAL
                                   -----------  ----------  ------------  ------
Quarter Ended March 31, 2004
     Segment revenue ............    $4,416      $  229       $   --      $4,645
     Segment gross profit .......    $3,683      $  144       $   (6)     $3,821

Quarter Ended March 31, 2003
     Segment revenue ............    $2,799      $  463       $   --      $3,262
     Segment gross profit .......    $2,330      $  262       $   (3)     $2,589


Geographic information (in thousands):

                                                    REVENUE    LONG-LIVED ASSETS
                                                    -------    -----------------
Quarter Ended March 31, 2004
   North America ..............................     $ 2,120        $22,814
   Europe .....................................         564             --
   Asia .......................................       1,961             --
   Rest of world ..............................          --             --
                                                    -------        -------
      Total ...................................     $ 4,645        $22,814
                                                    =======        =======

Quarter Ended March 31, 2003
    North America .............................     $ 1,260        $ 1,283
    Europe ....................................         440             --
    Asia ......................................       1,556             --
    Rest of world .............................           6             --
                                                    -------        -------
      Total ...................................     $ 3,262        $ 1,283
                                                    =======        =======


                                       8
<PAGE>

Revenues are  attributed  to  countries  based on delivery  locations.  Sales to
international  customers  accounted  for 54.4% and 61.4% of  revenue  during the
quarters ended March 31, 2004 and 2003, respectively.


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 quarter ended March 31, 2004 (in thousands):


         Balance as of December 31, 2003 .........................        $ 125
         Accrual for warranty reserve for sales made during
           the quarter ended March 31, 2004 ......................          174
         Warranty costs for the quarter ended March 31, 2004 .....           --
         Warranty expirations during the quarter ended
           March 31, 2004 ........................................         (174)
                                                                          -----
         Total ...................................................        $ 125
                                                                          =====


NOTE 9 - RECENT ACCOUNTING PRONOUNCEMENTS

During December 2003, the SEC released Staff  Accounting  Bulleting  ("SAB") No.
104, "Revenue  Recognition",  which supercedes SAB No. 101, "Revenue Recognition
in  Financial  Statements".  SAB No. 104 updates  portions  of the  interpretive
guidance included in Topic 13 of staff accounting bulletin "Revenue Recognition"
in  order  to  make  this   interpretive   guidance   consistent   with  current
authoritative  accounting  guidance.  The  principle  revisions  relate  to  the
deletion of interpretive material that is no longer necessary because of private
sector development in U.S. generally accepted accounting principles. The revenue
recognition principles of SAB No. 101, however,  remain largely unchanged by the
issuance of SAB No. 104, which was effective upon issuance. The Company does not
believe  that SAB No.  104 will have a  material  effect on it on its  financial
position or results of operations.




                                       9
<PAGE>

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

         This Report on Form 10-Q 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  Report  on Form  10-Q  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 and that in order to generate growth in revenue our new product
          offerings in other  communications  standards  will have to offset any
          shortfalls in revenues from the USB standard;

     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 at least the next 12 months;

     o    Our  expectation  that a  significant  percentage  of our revenue will
          continue to be derived from  Universal  Serial Bus (USB) product sales
          for the foreseeable  future,  notwithstanding our expectation that USB
          product sales will decline due to the maturity of the product line;

     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  incorporate  features  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 we may be required 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 that might
          otherwise offer growth opportunities;

     o    Our intent to continue  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;


                                       10
<PAGE>

     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 operation;

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

     o    Our belief that 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 shipment delays of products to our customers; and

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


         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 Form 10-Q are based on information  available to us on the date
of this  Report  on Form  10-Q,  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 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.

         CASH EQUIVALENTS, SHORT-TERM INVESTMENTS AND LONG-TERM INVESTMENTS. Our
cash  equivalents,  and  short-term  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


                                       11
<PAGE>

liquid investments  purchased with an original maturity of 90 days or less to be
cash  equivalents.  Those with a maturity 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  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 quarter  ended  December 31,
2002, we provided a full valuation allowance for our net deferred tax assets. As
of March 31, 2004, we continue to maintain a full  valuation  allowance  against
our net deferred tax assets.

         INTANGIBLE ASSETS. Our purchased intangible assets total $133,000 as of
March 31, 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, IEEE
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 quarter ended March 31,
2004,  revenue from our  development  products was $4.4 million and revenue from
our production products was $229,000. 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,  in order to  generate  growth in revenue our new product
offerings in other  communications  standards will have to offset any shortfalls
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 manufacturer's  representatives.  Historically, a substantial portion of our
revenue has been derived from customers outside of North America. In the quarter
ended  March 31,  2004,  54.4% of our revenue  was  derived  from  international
customers, of which 22.3% was derived from customers in Japan, 19.9% was derived
from  customers in other parts of Asia,  and 12.1% was derived 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.

         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


                                       12
<PAGE>

have invested  significantly  in the research,  development and marketing of our
products for emerging  communications  standards,  often before these  standards
have  gained  widespread  industry  acceptance  and  in  advance  of  generating
substantial  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  risk,  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 and 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:

                                                       QUARTERS ENDED MARCH 31,
                                                          2004        2003
                                                        --------   ---------
Consolidated Statement of Operations Data:
Revenue ..............................................    100.0%     100.0%
Cost of Revenue ......................................     17.8       20.6
                                                          -----      -----
      Gross profit ...................................     82.2       79.4
                                                          -----      -----
Operating expenses:
  Research and development ...........................     34.5       40.1
  Sales and marketing ................................     27.6       35.1
  General and administrative .........................     14.7       20.7
  Amortization of purchased intangibles ..............      0.6        0.8
  Amortization of deferred stock-based compensation ..      0.6        1.8
                                                          -----      -----
      Total operating expenses .......................     78.0       98.5
                                                          -----      -----
Income (loss) from operations ........................      4.2      (19.1)
Other income, net ....................................      3.4        4.9
Income (loss) before income taxes ....................      7.6      (14.2)
Income taxes .........................................       --         --
                                                          -----      -----
Net income (loss) ....................................     7.6%      (42.2)%
                                                          =====      =====

RESULTS OF OPERATIONS IN THE QUARTERS ENDED MARCH 31, 2004 AND 2003

         Revenue.  Our revenue was $4.6  million in the quarter  ended March 31,
2004,  compared to $3.3 million in the quarter ended March 31, 2003, an increase
of 42.4%. New product revenue increases of $1.5 million were partially offset by
decreases in sales of certain  existing  products of  $185,000.  The decrease in
sales of existing  products was primarily  the result of reduced  demand for USB
production products due to the maturity and stability of the protocol components
incorporated  into  end-user  products.  Going  forward,  we  expect  continuing
declines in certain USB  development  and production  product revenue as the USB
communication standard continues to mature. Revenue from international customers
represented  54.4% of revenue in the  quarter  ended March 31, 2004 and 61.4% of
revenue in the quarter ended March 31, 2003.

         Cost of Revenue and Gross Profit.  Our gross profit was $3.8 million in
the quarter  ended March 31, 2004  compared to $2.6 million in the quarter ended
March 31, 2003, an increase of 47.6%.  Our gross margin  percentage was 82.2% in
the quarter  ended March 31, 2004 and 79.4% in the quarter ended March 31, 2003.
The increase in gross margin  percentage was primarily the result of an increase
in development product sales as a percentage of total revenue. Our higher margin
business segment,  development products, increased as a percentage of revenue by
9.3%.

         Research and  Development.  Our research and development  expenses were
$1.6 million in the quarter ended March 31, 2004 compared to $1.3 million in the
quarter  ended March 31, 2003,  an increase of 22.6%.  Research and  development
expenses  represented  34.5% of revenue in the quarter  ended March 31, 2004 and
40.1% of revenue in the quarter  ended March 31, 2003.  The increase in expenses
was  primarily due to increased  personnel  and related  costs of  approximately


                                       13
<PAGE>

$194,000 and approximately $110,000 for certain customer service costs that were
included  in sales and  marketing  expenses  prior to the first  quarter of 2004
resulting  from a  reorganization  of our  technical  services  department.  The
percentage  of  revenue  decrease  for the  quarter  ended  March  31,  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 quarter ended
March 31, 2003.

         Sales and Marketing. Our sales and marketing expenses were $1.3 million
in the  quarter  ended March 31,  2004  compared to $1.1  million in the quarter
ended  March 31,  2003,  an  increase  of 12.0%.  Sales and  marketing  expenses
represented  27.6% of revenue in the  quarter  ended March 31, 2004 and 35.1% of
revenue in the  quarter  ended March 31,  2003.  The  increase  in expenses  was
primarily  due  to  increased  personnel  and  related  costs  of  approximately
$156,000,   an  increase  in  the  commissions   earned  by  our  manufacturer's
representatives  of $102,000,  partially  offset by a reduction of approximately
$110,000  for certain  customer  service  costs that were  included in sales and
marketing  expenses  prior to the first  quarter of 2004 and are now included in
research  and  development  expenses  and  decreases  in  marketing  programs of
approximately  $76,000. The percentage of revenue decrease for the quarter ended
March 31, 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
quarter ended March 31, 2003.

         General and  Administrative.  Our general and  administrative  expenses
were  $682,000 in the quarter  ended March 31, 2004  compared to $676,000 in the
quarter  ended March 31, 2003, an increase of 0.9%.  General and  administrative
expenses  represented  14.7% of revenue in the quarter  ended March 31, 2004 and
20.7% in the quarter ended March 31, 2003.  The  percentage of revenue  decrease
for the  quarter  ended  March  31,  2004 was  primarily  due to the  impact  of
increased revenues when compared to the quarter ended March 31, 2003.

         Amortization  of Deferred  Stock-based  Compensation.  Amortization  of
deferred  stock-based  compensation  was $32,000 in the quarter  ended March 31,
2004 of which $6,000 was included in cost of revenue.  Amortization  of deferred
stock-based  compensation  was $62,000 in the quarter  ended March 31, 2003,  of
which  $3,000  was  included  in  cost  of  revenue.  Amortization  of  deferred
stock-based  compensation  represented  0.6% and 1.8% of revenue in the quarters
ended March 31, 2004 and March 31, 2003, respectively.

         Other Income.  Other income was $158,000 in the quarter ended March 31,
2004  compared to $161,000 in the quarter  ended March 31,  2003,  a decrease of
1.9%. This decrease resulted  primarily from declining interest income earned on
the investment of excess cash balances associated with lower interest rates.

         Income  Taxes.  We have  incurred no provision for income taxes for the
quarters  ended  March 31, 2004 and March 31,  2003.  As of March 31,  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  quarter  ended  March 31,  2004,  cash  provided  by  operating
activities  of  $958,000  was  primarily  the result of net income of  $361,000,
non-cash expenses associated with depreciation of $161,000, decreases in related
assets and liabilities for working capital purposes of $292,000, amortization of
premium  on  investments  of  $78,000,  amortization  of  deferred  stock  based
compensation  of $32,000,  amortization  of acquired  intangibles of $26,000 and
amortization  of other  acquired  developed  technology of $8,000.  Cash used in
investing  activities was $12.2 million,  primarily  relating to the purchase of
long-term  investments of $12.4 million, the purchase of short-term  investments
of $633,000 and capital  expenditures of $186,000,  partially offset by the sale
of short-term investments of $1.1 million. Cash provided by financing activities
was  $307,000,  consisting of the proceeds from the exercise of stock options of
$180,000 and the sale of stock  pursuant to our employee  stock purchase plan of
$127,000.

         In the quarter ended March 31, 2003, cash used in operating  activities
of $1.4  million  was  primarily  the  result of a net loss of  $463,000  and an
increase in related assets and liabilities for working capital  purposes of $1.2
million,  offset by non-cash expenses  associated with depreciation  expenses of
$195,000,   amortization  of  deferred  stock-based   compensation  of  $62,000,


                                       14
<PAGE>

amortization of other purchased  intangibles of $26,000 and the  amortization of
other acquired developed technology of $9,000. Cash used in investing activities
was $3.4  million,  related to the purchase of  short-term  investments  of $4.3
million,  capital expenditures of $124,000,  offset by proceeds from the sale of
short-term  investments of $1.0 million.  Cash provided by financing  activities
was $37,000,  consisting  of the sale of stock  pursuant to our  employee  stock
purchase plan of $70,000, proceeds from the exercise of stock options of $7,000,
offset by repurchases of common stock of $40,000.

         As of March 31, 2004, we had cash, cash  equivalents and investments of
$45.6 million,  working capital of $24.4 million and no debt. We have no capital
lease obligations,  and we had future minimum lease payments under our operating
leases of approximately $1.6 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 at least the
next 12 months.  In the more distant future,  we may find it necessary to obtain
additional  equity or debt  financing.  If we are  required 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 WOULD 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 product 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 would  likely  decline,
possibly significantly.

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,  notwithstanding  that we expect a decline in USB product
sales due to the maturity of the product  line and we expect that will  continue


                                       15
<PAGE>

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.  The
competition  for product  sales in these  markets is typically  substantial  and
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.

DELAYS IN THE  DEVELOPMENT OF NEW OR ENHANCED  PRODUCTS 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 or
customers  defer or cancel  orders  expecting  the  release of a new or enhanced
product,  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.  As a
result,  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


                                       16
<PAGE>

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.

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 multiple 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  develop  and  introduce  on  a  timely  basis  new  products  that
incorporate features 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  continue  to  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.

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  April  30,  2004,  our  executive  officers,   directors,   Philips
Semiconductors and certain entities  affiliated with or beneficially  controlled
by them owned  approximately  7,157,734  shares or  approximately  36.67% 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


                                       17
<PAGE>

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 November  17,  2003,  we  announced  that our Chief  Financial  Officer,
Carmine Napolitano,  was promoted to President and assumed day-to-day management
of the  Company  from one of our  co-founders,  Dan Wilnai,  while  concurrently
maintaining his position as Chief Financial Officer. Mr. Wilnai continues to act
as our  Chief  Executive  Officer  and  Chairman  of the  Board  and  our  other
co-founder,  Peretz  Tzarnotzky,  currently  holds the title of  Executive  Vice
President Engineering and is a director of the Company. Given Messrs. Wilnai and
Tzarnotzky's tenure with the Company they may decide to retire in the future.

     The  departure  of one or more of  these  key  management  employees  or an
inability to recruit and retain qualified personnel to replace them, could cause
substantial disruptions to our business and operations.

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 companies that are  Nasdaq-listed.  We expect these
developments to increase our legal compliance and financial  reporting costs. We
also expect these  developments to make it more difficult and more expensive for
us to obtain director and officer liability insurance, and we may be required to
accept reduced coverage or incur substantially higher costs to obtain coverage.

     These  developments  could make it more  difficult  for us to  attract  and
retain  qualified  members of 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 we may incur as a
result.   To  the  extent   these  costs  are   significant,   our  general  and
administrative  expenses are likely to increase as a  percentage  of revenue and
our results of operations will be negatively impacted.

THE  LOSS OF KEY  MANAGEMENT  PERSONNEL,  ON  WHOSE  KNOWLEDGE,  LEADERSHIP  AND
TECHNICAL  EXPERTISE  WE  RELY,  WOULD  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 maintain
no 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 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.


                                       18
<PAGE>

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.

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

     Historically, we have relied on manufacturer's  representatives to sell our
products  domestically  and have relied on our distributors to sell our products
internationally.  A  substantial  number of our  products  are sold  through our
distributors   and   manufacturer's   representatives.   Our   distributors  and
manufacturer's   representatives   generally   offer   products   from  multiple
manufacturers.   Accordingly,   there  is  a  risk  that  our  distributors  and
manufacturer's representatives may give higher priority to selling products from
other suppliers and reduce their efforts to sell our products.  Our distributors
and manufacturer's  representatives  may not market our products  effectively or
continue to devote the  resources  necessary  to  effectively  sell,  market and
provide  technical  support for 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  manufacturer's
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.

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, the
channels through which we sell our products, or the introduction of new products
and product 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  except  for 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.  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,  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  would cause a delay in our ability to
timely fulfill orders.

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  that  might  otherwise  offer  growth
opportunities.  If we make any  acquisitions,  we could  issue  stock that would


                                       19
<PAGE>

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  quarter  ended  September  30,  2002,  we recorded a goodwill
impairment of $1.4 million,  and a partial impairment  write-down of $194,000 of
purchased intangible assets, arising 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 shipment delays of products to our customers. If
we overestimate  our component  requirements,  we may develop excess  inventory,
which would increase costs. If we underestimate our component  requirements,  we
may not be able 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  were 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
our products would 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  in 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 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
not be able 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.

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.


                                       20
<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  54.4% of our
revenue from sales to  international  customers  in the quarter  ended March 31,
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    ongoing  health  epidemics  (e.g.  Severe Acute  Respiratory  Syndrome
          (SARS));

     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    differing protection of intellectual property; 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   existing   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  grow  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


                                       21
<PAGE>

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 do 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  with  third
parties that could arise in the future,  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.

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 do not
have any registered patents.  Although we have six patent applications  pending,
patents  may not issue as a result of these or other  patent  applications.  Any
patents that ultimately issue 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  unauthorized  use of  our  products  is  difficult  and  may be
expensive,  and we cannot be certain  that the steps we have taken 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 be required to spend significant  resources 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 not be able 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. Furthermore, we may become involved in legal proceedings against other
parties, which may also cause other parties to assert claims against us.

CHANGES  IN  CURRENT  LAWS  OR  REGULATIONS  OR THE  ENACTMENT  OF NEW  LAWS  OR
REGULATIONS COULD IMPEDE THE SALE OF OUR PRODUCTS.

     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
authorizations from the FCC directly or from a third-party authorized by the FCC
to issue such authorizations.  We are also required to maintain in good standing
any equipment authorization 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 regulations established
by regulatory  authorities  or to obtain timely  domestic or foreign  regulatory
approvals or certificates could significantly harm our business.


                                       22
<PAGE>

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.

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 that have had 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 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, 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


                                       23
<PAGE>

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.

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 our business.  While management currently believes the amount
of ultimate liability, if any, with respect to these actions will not materially
affect the  financial  position,  results of  operations,  or  liquidity  of the
Company,  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 2.  CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
         SECURITIES

         The following table presents  information  concerning the repurchase by
us of shares of our common stock during the period ending March 31, 2004:

                        ISSUER PURCHASES OF EQUITY SECURITIES

<TABLE>
<CAPTION>
                                           (a)           (b)            (c)            (d)
                                      -------------   ----------    ------------   ------------
                                                                                     MAXIMUM
                                                                                    NUMBER (OR
                                                                    TOTAL NUMBER   APPROXIMATE
                                                                     OF SHARES    DOLLAR VALUE)
                                                                     (OR UNITS)     OF SHARES
                                                                     PURCHASED      (OR UNITS)
                                                                     AS PART OF    THAT MAY YET
                                       TOTAL NUMBER    AVERAGE        PUBLICLY     BE PURCHASED
                                      OF SHARES (OR   PRICE PAID     ANNOUNCED      UNDER THE
                                          UNITS)      PER SHARE       PLANS OR       PLANS OR
            PERIOD                      PURCHASED     (OR UNIT)       PROGRAMS       PROGRAMS
            ------                    -------------   ----------    ------------   ------------
<S>                                      <C>           <C>            <C>             <C>
Month #1 (January 1 to January 31)            0        $    --        $    --         $  --
Month #2 (February 1 to February 29)          0        $    --        $    --         $  --
Month #3 (March 1 to March 31)           12,953        $  5.00        $    --         $  --
                                         ------        -------        -------         -----
     Total                               12,953        $  5.00        $    --         $  --
</TABLE>

     (1) In  satisfaction  of  certain  indemnification  obligations  under  the
Agreement and Plan of Merger between the Verisys  shareholders  and the Company,
the Verisys shareholders  released to the Company 12,953 shares of the Company's
common  stock held in escrow  since the close of the  Company's  acquisition  of
Verisys in June 2002.



                                       24
<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,  by and  between
               Albert Lee and the Registrant.+

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

      10.8*    Employment  Agreement dated July 22, 2002, by and 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 annual report be reference.

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

          b.   Reports on Form 8-K

               On January 29, 2004, we filed a Form 8-K  disclosing our earnings
               for the quarter ended December 31, 2003.

               On March 17, 2004, we filed a Form 8-K  disclosing the pricing of
               a  secondary   offering  of  common  stock  by  certain   selling
               stockholders of the Company.

               On April 22, 2004,  we filed a Form 8-K  disclosing  our earnings
               for the quarter ended March 31, 2004.


                                       25
<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 May 13, 2004                     COMPUTER ACCESS TECHNOLOGY CORPORATION

                                      By: /s/ CARMINE J. NAPOLITANO
                                          --------------------------------------
                                          Carmine J. Napolitano
                                          President, Chief Financial Officer and
                                          Secretary (Principal Financial Officer
                                          and Principal Accounting Officer)



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