** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

# 

# **FORM 10-Q**

 

| **ý** |   | **Quarterly Report Pursuant to Section 13 or 15(d) of the Securities  Exchange** |
|------------|--------|----------------------------------------------------------------------------------|
|       |   | **Act of 1934 for the quarterly period ended  September 30, 2001**          |
|       |   |                                                                             |
| **o**      |   | **Transition Report Pursuant to Section 13 or  15(d) of the Securities**         |
|       |   | **Exchange Act of 1934 for the transition period  from __________ to _________** |

 

Commission FileNumber **0-20124**

 

 

**NETWORK COMPUTING DEVICES, INC.**(Exact name of registrant as specified in its charter)

 

| **Delaware**                                                    | **77-0177255**                       |
|-----------------------------------------------------------------|--------------------------------------|
| (State or other jurisdiction of  incorporation or organization) | (I.R.S. Employer Identification No.) |
|                                                            |                                 |
| **301  Ravendale Drive, Mountain View, California**             | **94043**                            |
| (Address of principal executive offices)                        | (Zip Code)                           |

 

**(650) 694-0650**(Registrant's telephone number, including area code)

 

**Common Stock, $0.001 par value**(Title of class)

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports) and (2) has been subject to suchfiling requirements for the past 90 days.

 

Yes ýNo o

 

As of September 30, 2001, 17,613,237 shares of the registrant’s CommonStock were outstanding.

 

**NETWORK COMPUTING DEVICES, INC.**

 

**INDEX**

 

 
| *Description* |                                                                                                                      |
|---------------|---------------------------------------------------------------------------------------------------------------------------|
| Cover Page    |                                                                                                                      |   |
|          |                                                                                                                      |   |
| Index         |                                                                                                                      |   |
|          |                                                                                                                      |   |
| Part I:       | Financial Information                                                                                                     |   |
|          |                                                                                                                      |   |
|          | Item 1: Financial  Statements                                                                                             |   |
|          |                                                                                                                      |   |
|          | Condensed  Consolidated Balance Sheets as of September 30, 2001 and December 31, 2000                                     |   |
|          |                                                                                                                      |   |
|          | Condensed  Consolidated Statements of Operations for the Three and Nine- Month Periods  Ended September 30, 2001 and 2000 |   |
|          |                                                                                                                      |   |
|          | Condensed  Consolidated Statements of Cash Flows for the Nine- Month Periods Ended  September 30, 2001 and 2000           |   |
|          |                                                                                                                      |   |
|          | Notes  to Condensed Consolidated Financial Statements                                                                     |   |
|          |                                                                                                                      |   |
|          | Item  2: Management's Discussion and Analysis of Financial Condition And Results of  Operations                           |   |
|          |                                                                                                                      |   |
|          | Item  3: Quantitative and Qualitative Disclosure About Market Risk                                                        |   |
|          |                                                                                                                      |   |
|          | Part II: Other Information                                                                                                |   |
|          |                                                                                                                      |   |
|          | Item 3:  Defaults Upon Senior Securities                                                                                  |   |
|          |                                                                                                                      |   |
|          | Item 6:  Exhibits and Reports on Form 8-K                                                                                 |   |
|          |                                                                                                                      |   |
| Signature     |                                                                                                                      |   |
|          |                                                                                                                      |   |
|          |                                                                                                                      |   |
|               |                                                                                                                           |  |  |  |  |

 

**NETWORK COMPUTING DEVICES, INC.**

**PartI:  Financial Information**

**Item1.  Financial Statements**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

*(in thousands)*

 
| **ASSETS**                                                                                                                       |
|----------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                             |   | **(unaudited)  September 30,  2001** |   | **December  31,  2000** |   |
| Current assets:                                                                                                                  |   |   |   |   |   |
| Cash and cash  equivalents                                                                                                       |   | $ | 517 |   | $ | 1,419 |   |
| Short-term  investments                                                                                                          |   | - |   | 339 |   |
| Accounts  receivable, net of allowances of $1,436 and $5,629 as of  September 30, 2001 and December 31, 2000,  respectively |   | 8,145 |   | 9,160 |   |
| Inventories                                                                                                                      |   | 5,720 |   | 7,635 |   |
| Prepaid assets                                                                                                                   |   | 848 |   | 2,667 |   |
| Other current  assets                                                                                                            |   | - |   | 1,500 |   |
| Total current  assets                                                                                                            |   | 15,230 |   | 22,720 |   |
|                                                                                                                             |   |   |   |   |   |
|                                                                                                                             |   |   |   |   |   |
| Property and  equipment, net                                                                                                     |   | 789 |   | 1,530 |   |
| Goodwill and  other assets                                                                                                       |   | 2,128 |   | 2,602 |   |
| Total assets                                                                                                                     |   | $ | 18,147 |   | $ | 26,852 |   |
|                                                                                                                             |   |   |   |   |   |
|                                                                                                                             |   |   |   |   |   |
| **LIABILITIES AND SHAREHOLDERS'  EQUITY**                                                                                        |
| Current  liabilities:                                                                                                            |   |   |   |   |   |
| Accounts payable                                                                                                                 |   | $ | 7,883 |   | $ | 5,545 |   |
| Accrued expenses                                                                                                                 |   | 3,275 |   | 4,047 |   |
| Deferred revenue                                                                                                                 |   | 327 |   | 1,297 |   |
| Notes payable                                                                                                                    |   | 5,317 |   | 7,947 |   |
| Other current  liabilities                                                                                                       |   | 120 |   | 243 |   |
| Total current  liabilities                                                                                                       |   | 16,922 |   | 19,079 |   |
|                                                                                                                             |   |   |   |   |   |
|                                                                                                                             |   |   |   |   |   |
| Shareholders'  equity:                                                                                                           |   |   |   |   |   |
| Preferred stock                                                                                                                  |   | 1,500 |   | 1,500 |   |
| Common stock                                                                                                                     |   | 18 |   | 18 |   |
| Capital in  excess of par                                                                                                        |   | 62,380 |   | 62,380 |   |
| Accumulated  deficit                                                                                                             |   | (62,673 | ) | (56,125 | ) |
| Total  shareholders' equity                                                                                                      |   | 1,225 |   | 7,773 |   |
| Total liabilities  and shareholders' equity                                                                                      |   | $ | 18,147 |   | $ | 26,852 |   |

 

See accompanying notes.

**NETWORK COMPUTING DEVICES, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

*(in thousands, except per share amounts)*

*(unaudited)*

 
|                                          |   | **Three  Months Ended September 30,** |   | **Nine  Months Ended September 30,** |   |
|-----------------------------------------------|--------|---------------------------------------|--------|-------------------------------------------|--------|
|                                          |   | **2001**                              |   | **2000**                                  |   | **2001** |   | **2000** |   |
| Net revenues:                                 |   |                                  |   |                                      |   |   |   |   |   |
|                                          |   |                                  |   |                                      |   |   |   |   |   |
| Hardware  products                            |   | $                                     | 7,174  |                                      | $      | 8,972 |   | $ | 26,078 |   | $ | 31,783 |   |
| Software  products                            |   | 933                                   |   | 1,468                                     |   | 2,629 |   | 3,511 |   |
| Services                                      |   | 280                                   |   | 638                                       |   | 1,405 |   | 2,684 |   |
| Total net  revenues                           |   | 8,387                                 |   | 11,078                                    |   | 30,112 |   | 37,978 |   |
| Cost of  revenues:                            |   |                                  |   |                                      |   |   |   |   |   |
| Hardware  products                            |   | 6,352                                 |   | 7,380                                     |   | 20,165 |   | 28,387 |   |
| Software  products                            |   | 300                                   |   | 204                                       |   | 845 |   | 757 |   |
| Services                                      |   | 75                                    |   | 326                                       |   | 177 |   | 1,206 |   |
| Total cost of  revenues                       |   | 6,727                                 |   | 7,910                                     |   | 21,187 |   | 30,350 |   |
|                                          |   |                                  |   |                                      |   |   |   |   |   |
| Gross Margin                                  |   | 1,660                                 |   | 3,168                                     |   | 8,925 |   | 7,628 |   |
|                                          |   |                                  |   |                                      |   |   |   |   |   |
| Operating  expenses:                          |   |                                  |   |                                      |   |   |   |   |   |
| Research and  development                     |   | 645                                   |   | 1,399                                     |   | 2,020 |   | 7,514 |   |
| Marketing and  selling                        |   | 2,584                                 |   | 3,831                                     |   | 9,175 |   | 17,700 |   |
| General and  administrative                   |   | 1,089                                 |   | 1,877                                     |   | 3,330 |   | 6,331 |   |
| Business  restructuring                       |   | -                                     |   | 1,645                                     |   | - |   | 4,206 |   |
| Acquired  in-process research and development |   | -                                     |   | -                                         |   | - |   | 1,800 |   |
| Total operating  expenses                     |   | 4,318                                 |   | 8,752                                     |   | 14,525 |   | 37,551 |   |
|                                          |   |                                  |   |                                      |   |   |   |   |   |
| Operating loss                                |   | (2,658                                | )      | (5,584                                    | )      | (5,600 | ) | (29,923 | ) |
| Interest  expense, net                        |   | (548                                  | )      | (191                                      | )      | (873 | ) | (314 | ) |
|                                          |   |                                  |   |                                      |   |   |   |   |   |
| Loss before  income taxes                     |   | (3,206                                | )      | (5,775                                    | )      | (6,473 | ) | (30,237 | ) |
| Provision for  income taxes                   |   | 21                                    |   | 97                                        |   | 75 |   | 448 |   |
|                                          |   |                                  |   |                                      |   |   |   |   |   |
| Net loss                                      |   | $                                     | (3,227 | )                                         | $      | (5,872 | ) | $ | (6,548 | ) | $ | (30,685 | ) |
|                                          |   |                                  |   |                                      |   |   |   |   |   |
| Net loss per  share                           |   |                                  |   |                                      |   |   |   |   |   |
| Basic and  diluted                            |   | $                                     | (0.18  | )                                         | $      | (0.35 | ) | $ | (0.37 | ) | $ | (1.85 | ) |
|                                          |   |                                  |   |                                      |   |   |   |   |   |
| Shares used in  per share computations        |   |                                  |   |                                      |   |   |   |   |   |
| Basic and  diluted                            |   | 17,613                                |   | 16,710                                    |   | 17,613 |   | 16,628 |   |

 

 

See accompanying notes.

**NETWORK COMPUTING DEVICES, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

*(in thousands)*

*(unaudited)*

 
|                                                   |   | **Nine  Months Ended September 30,** |   |
|--------------------------------------------------------|--------|--------------------------------------|--------|
|                                                   |   | **2001**                             |   | **2000** |   |
| Cash flow from  operations:                            |   |                                 |   |   |   |
| Net loss                                               |   |                                 |   |   |   |
| Reconciliation  of net loss to cash used in operations |   | $                                    | (6,548 | ) | $ | (30,685 | ) |
| In process  research and development charge            |   | -                                    |   | 1,800 |   |
| Depreciation                                           |   | 806                                  |   | 1,780 |   |
| Amortization of  goodwill                              |   | 302                                  |   | 380 |   |
| Non cash  restructuring charge                         |   | -                                    |   | 336 |   |
| Changes in:                                            |   |                                 |   |   |   |
| Accounts  receivable, net                              |   | 1,015                                |   | 11,040 |   |
| Inventories                                            |   | 1,915                                |   | 5,739 |   |
| Prepaid expenses  and other current assets             |   | 1,819                                |   | 446 |   |
| Accounts payable                                       |   | 2,338                                |   | (656 | ) |
| Accrued expenses                                       |   | (772                                 | )      | 738 |   |
| Deferred revenue                                       |   | (970                                 | )      | (700 | ) |
| Other current  liabilities                             |   | (123                                 | )      | 162 |   |
| Cash used in  operations                               |   | (218                                 | )      | (9,620 | ) |
| Cash flows from  investing activities:                 |   |                                 |   |   |   |
| Acquisition of  business                               |   | -                                    |   | (2,224 | ) |
| Purchases of  short-term investments                   |   | -                                    |   | (998 | ) |
| Sales and  maturities of short-term investments        |   | 339                                  |   | 4,223 |   |
| Changes in other  assets                               |   | 172                                  |   | 417 |   |
| Property and  equipment purchases                      |   | (65                                  | )      | (469 | ) |
| Cash provided by  (used in) investing activities       |   | 446                                  |   | 949 |   |
| Cash flows from  financing activities:                 |   |                                 |   |   |   |
| Principal  payments on capital lease obligations       |   | -                                    |   | (69 | ) |
| Proceeds from  short-term debt                         |   | 28,676                               |   | 25,248 |   |
| Principal  payments on short-term debt                 |   | (31,306                              | )      | (21,383 | ) |
| Proceeds from  issuance of preferred stock, net        |   | 1,500                                |   | 798 |   |
| Cash provided by  (used in) financing activities       |   | (1,130                               | )      | 4,594 |   |
| Decrease in cash  and equivalents                      |   | (902                                 | )      | (4,077 | ) |
| Cash and  equivalents:                                 |   |                                 |   |   |   |
| Beginning of  period                                   |   | 1,419                                |   | 4,781 |   |
| End of period                                          |   | $                                    | 517    |   | $ | 704 |   |

 

 

See accompanying notes.

 

**NETWORK COMPUTING DEVICES, INC.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

*Basis of Presentation*

The unaudited condensedconsolidated financial information of Network Computing Devices, Inc. and itswholly-owned subsidiaries (the "Company") furnished herein reflectsall adjustments, consisting only of normal recurring entries, which in theopinion of management are necessary to fairly state our consolidated financialposition, results of operations and cash flows for the periods presented. Thefunctional currency for the Company is the U.S. dollar.  All significant inter-company balances andtransactions have been eliminated in consolidation. This Quarterly Report onForm 10-Q should be read in conjunction with the consolidated financialstatements and notes thereto included in our 2000 Annual Report on Form10-K.  The consolidated results ofoperations for the three- and nine-month periods ended September 30, 2001 arenot necessarily indicative of the results to be expected for any subsequentquarter or for the entire year ending December 31, 2001. Certainreclassifications have been made to prior period amounts to conform to currentpresentation.  No reclassificationsimpacted net loss or shareholders' equity.

*Going Concern Uncertainty*

The Company has incurredlosses from continuing operations for the year ended December 31, 2000 ofapproximately $32.7 million and for the three- and nine-month periods endedSeptember 30, 2001 of approximately $3.2 million and $6.5 million,respectively.  The Company has a workingcapital deficit of $1.3 million at September 30, 2001.  The Company’s continuation as a goingconcern is dependent upon its ability to obtain additional financing orrefinancing as may be required and ultimately to attain profitability.  The Company is actively marketing itsexisting and new products, which it believes will ultimately lead to profitableoperations.  However, no assurance canbe given that these available funds will meet the Company’s cash requirementsin the future. The financial statements do not include any adjustments relatingto the recoverability and classification of reported asset amounts or theamount and classification of liabilities that might be necessary should theCompany be unable to continue as a going concern.

*Revenue Recognition*

Hardware Revenues

Hardware revenues consistprimarily of revenues from the sale of thin client products and relatedhardware. Hardware revenues are recognized when the products are shippedfollowing receipt of a valid purchase order. According to contracts with certain international distributors, revenueis recognized when the shipment is made available at a third party logisticscenter and the buyer is notified of the availability.  We warrant our hardware products for defects in materials for aperiod of three years. During this warranty period, the customer may returndefective product to us and at our option we will either repair or replace thedefective product.  In the event we areunable to accomplish the repair or replacement of the defective product, we mayrefund customer the corresponding purchase price. We reduce revenues and costof sales by an amount representing estimated returns, which we estimate, basedupon historical experience factors. Warranty costs are accrued based upon actual units sold based uponestimates derived from historical experience.

Software Revenues

Software revenues consistof revenues from the sale of software products. Software revenues arerecognized when the software license is sold and the software isdelivered.  We do not offer freesoftware upgrades and because we provide 30-day complimentary telephone supportfor software, there is no undelivered element related to software sales.  Software products that are included inrevenue for the periods presented are (i) *NCD**ThinPATH*, (ii) *NCD Wincenter*, ourmulti-user Windows NT application server software, (iii) *NCD**PC-Xware*, our thin clientsoftware for PCs, and (iv) *NCDware*, our proprietary thin clientsoftware.

Service Revenues

Services revenues aregenerated from the sale of hardware service contracts.  Our *Extended Warranty Program* extends thethree- year standard warranty, and our *Express Exchange Program* provides for theshipment of a replacement unit within 24 - 48 hours, upon customerrequest.  Service revenues arerecognized ratably over the term of the hardware service contract.  Our deferred revenue includes all unrecognizedservice revenue.

*Net Loss Per Share*

Basic net loss per shareis computed using the weighted-average number of common shares outstandingduring the period. Diluted net loss per share is computed using theweighted-average number of common shares and potential common shares from stockoptions and warrants outstanding, when dilutive, using the treasury stockmethod. At September 30, 2001 and 2000 there were 5,558,562 and 4,538,936options and warrants outstanding, respectively. There were also 220,000 sharesof convertible preferred stock (convertible into 2,200,000 shares of commonstock) outstanding at September 30, 2001. Such options, warrants andconvertible preferred shares could potentially dilute earnings per share("EPS") in the future, but they were not included in the computationof diluted EPS because to do so would have been antidilutive for those periods.

*Inventories*

Inventories stated at thelower of standard costs, which approximates actual cost on a first-in,first-out basis, or market, consisted of (in thousands):

|                                     |   | ** September 30,   2001** |   | **December  31,   2000** |   |
|------------------------------------------|--------|--------------------------------|--------|--------------------------|--------|
|                                     |   |                           |   |                     |   |
| Purchased  components and sub-assemblies |   | $                              | 6,287  |                     | $      | 10,367 |   |
| Work in process                          |   | 400                            |   | 776                      |   |
| Finished goods                           |   | 4,534                          |   | 4,363                    |   |
| Total  inventories                       |   | 11,221                         |   | 15,506                   |   |
| Less reserves                            |   | (5,501                         | )      | (7,871                   | )      |
| Net inventories                          |   | $                              | 5,720  |                     | $      | 7,635 |   |

 

*Interestand tax payments*

Interest payments,primarily interest on notes payable, were $248,000 and $191,000 for the threemonths ended September 30, 2001 and 2000, respectively and $487,000 and$314,000 for the first nine months of 2001 and 2000, respectively. Income taxpayments, primarily foreign, were $20,000 and $28,000 for the three monthsended September 30, 2001 and 2000, respectively, and $38,000 and $147,000 forthe first nine months of 2001 and 2000, respectively.

*Operating Segments and Major Customers*

The company hasone operating segment, sales of thin client hardware and software.

The percentages oftotal net revenues represented by sales to major customers are as follows:

|                           |   | **Three  Months Ended September 30** |   | **Nine  Months Ended September 30** |   |
|--------------------------------|--------|--------------------------------------|--------|-------------------------------------|--------|
|                           |   | **2001**                             |   | **2000**                            |   | **2001** |   | **2000** |   |
| GTS Gral  (Europe)*            |   | 16                                   | %      | -                                   |   | 10 | % | - |   |
| Adtcom (Europe)                |   | -                                    |   | 25                                  | %      | 9 | % | 22 | % |
| Ingram Micro                   |   | 9                                    | %      | 17                                  | %      | 7 | % | 7 | % |
| Tech Data (U.S.  & Europe) |   | 5                                    | %      | 1                                   | %      | 9 | % | 14 | % |

 

----

        * GTS Gral is a European distributorsubstantially owned by a director of the Company.

 

*BusinessAcquisition*

On January 7, 2000, we acquired the net assets ofMultiplicity LLC ("Multiplicity") in a purchase business combinationwith a total purchase price of $2.2 million. Subsequent to this acquisition, a substantial portion of the acquiredassets and goodwill were written off in a restructuring.  The purchase price was allocated as follows:

 
| In-process  research and development |   | $   | 1,800  |   |
|--------------------------------------|--------|-----|--------|--------|
| Other intangible  assets             |   | 200 |   |
| Goodwill                             |   | 160 |   |
| Tangible assets                      |   | 40  |   |

 

*RestructuringCharges*

On March 31, 2000 we announced a restructuring planinvolving a general reduction in workforce affecting all classes of employeesand exiting certain leased facilities. Approximately 60 employees were terminated under this plan.  In connection with the plan, we recorded arestructuring charge of $2.6 million consisting of $2.4 million for employeeseparation costs and $0.2 million for facility exit costs.

During the third quarter of 2000 we undertook a newrestructuring plan which involved a general reduction in workforce affectingall classes of employees, exiting certain leased facilities and discontinuingdevelopment activities related to several product lines. This plan was necessitatedby the termination of our contract with IBM as well as the change in marketconditions.  Approximately 40 employeeswere terminated under this plan.  Inconnection with these actions, we recorded a restructuring charge of $1.6million consisting of cash charges of $1.0 million for employee separationcosts and $0.2 million for facility exit costs, and non-cash charges of $0.4million related to the discontinued product lines, including the recognition ofan impairment loss of $0.3 million on the intangibles attributable to ourpurchase of Multiplicity.

Approximately $0.2 million remains unpaid and isincluded in accrued liabilities as of September 30, 2001.  The restructuing plan is expected to becompleted during the fourth quarter of 2001.

*NotesPayable*

On October 30, 2001, we secured a $5.0 million line of credit withSilicon Valley Bank ("SVB"). The line is secured by substantially all of our assets and bearsinterest at a rate of prime plus 2%. In connection with this line of credit weissued warrants to SVB to purchase 650,000 shares of Common Stock at a price of$.50 per share. The warrants expire on October 31, 2006.

Concurrent with the SVBfinancing, we paid off our working capital line of credit obtained on March 30,2000 from Foothill Capital.  Such lineof credit was secured by substantially all of our assets. As of June 30, 2001,we were in default of the minimum EBITDA (Earnings Before Income Taxes,Depreciation and Amortization) covenant of $38,000 for the three month periodended June 30, 2001. Under the terms of the agreement, borrowings during thethird quarter of 2001 bore interest at a rate of prime plus 6.75%, whichincludes a covenant default rate of 4% (for a total of 12.75% at September 30,2001). As of the date of termination of our agreement with Foothill Capital,the total amount outstanding under the line of credit was approximately $0.8million.  For the three- and nine-monthperiods ended September 30, 2001, fees amounting to $260,000 and $299,000respectively, were included in interest expense.  During the same three-and nine-month periods total interestexpense on the line of credit amounted to $451,000 and $575,000, respectivelyand the corresponding effective annual interest rate was 54% and 19%,respectively.  For the three- andnine-month periods ended September 30, 2000, total interest expense on the lineof credit amounted to $138,000 and $268,000, respectively.

In August 2000, we concluded an agreement with SCI Technology, Inc.("SCI"), a subsidiary of SCI Systems, Inc., to convert $3.3 millionof our accounts payable to them into a thirteen-month note (the"Convertible Note").  TheConvertible Note, issued in September 2000 had an interest rate of six andone-half percent (6.5%) per annum and an option to convert each dollar of theoutstanding principal into one share of our Common Stock at anytime during theConvertible Note period at a conversion price of $1.00 per share.  In August 2001, the Convertible Note wasextended for an additional year with an increase in the interest rate from 6.5%per annum to eight percent (8%) per annum computed on the unpaid balancebeginning October 1, 2001 and the conversion price was reduced to $.62 pershare.

On October 17, 2001, weconcluded an agreement with SCI to convert $1.0 million of our accounts payableto them into a note, which matures on September 29, 2002 and bears interest ata rate of eight percent (8%). This note is not convertible.

**Item 2.  Management's Discussion and Analysis of Financial Condition andResults of Operations**

**Overview**

***This discussion includes forward-looking statements,including but not limited to statements with respect to our future financialperformance, operating results, plans and objectives. Actual results may differmaterially from those currently anticipated depending upon a variety offactors, including those described below under the sub-heading, "FuturePerformance and Risk Factors."***

***The following discussion should be read in conjunction withthe unaudited condensed consolidated interim financial statements and notesthereto included in Part I -- Item 1 of this Quarterly Report on Form 10-Q, andthe audited consolidated financial statements and notes thereto andManagement's Discussion and Analysis of Financial Condition and Results ofOperations for the year ended December 31, 2000, contained in our 2000 AnnualReport on Form 10-K.***

Network ComputingDevices, Inc. provides thin client hardware and software that deliverssimultaneous, high-performance, easy-to-manage and cost effective access to allof the information on enterprise intranets and the Internet from thin client,UNIX and PC desktops. Our product line includes *the NCD ThinSTAR* line ofWindows-based terminals, the *NCD Explora* network terminals and *NCD NC900*network computers. On the software side, our products are the *NCD ThinPATH*family of client and server software, developed to enhance the connectivity,management and features of the NCD thin clients as well as PCs in accessinginformation and applications on Windows servers. These products are soldthrough OEMs, system integrators and distributor/VAR channels worldwide.

**Recent Developments**

At September 30, 2001, wehad cash of approximately $517,000. During the year ended December 31, 2000 and the quarter ended September30, 2001, we incurred losses of  $32.7million and $3.2 million, respectively, and during those periods our cash andcash equivalents decreased by approximately $3.4 million and $0.9 million,respectively.  Based on these factors,among others, there is doubt about our ability to continue as a goingconcern.  Our ability to continue as agoing concern is dependent on our ability to raise additional capital or obtainfinancing and ultimately to achieve profitability and positive cash flow.

On October 17, 2001, weconcluded an agreement with SCI to convert $1.0 million of our accounts payableto them into a note, which matures on September 29, 2002 and bears interest ata rate of eight percent (8%).

On October 30, 2001, wereceived $2,000,000 in capital through a private placement of 530,000 shares ofSeries C Convertible Preferred Stock ("Series C Preferred") pursuantto an August 29, 2001 purchase agreement between the Company and the purchaser.The Series C Preferred shares were issued on November 13, 2001. As of September30, 2001, the Series C Preferred Shares were recorded as equity with anoffsetting subscription receivable also being classified as equity. The SeriesC Preferred shares are entitled to dividends of $.23 per annum, which accruesemi-annually if not paid.  Each shareof the Series C Preferred is convertible into ten shares of Common Stock at theelection of the holder, subject to the Company obtaining prior approval fromits shareholders to amend the Company's Certificate of Incorporation toincrease the number of authorized shares of Common Stock by not less than5,300,000 shares.  In connection withthis private placement, the purchaser also received warrants to purchase1,200,000 shares of Common Stock at $.62 per share.  The warrants expire on August 29, 2006.

On October 30, 2001, wesecured a $5.0 million line of credit with Silicon Valley Bank("SVB").  The line is securedby substantially all of our assets and bears interest at a rate of prime plus2%. In connection with this line of credit we issued warrants to SVB topurchase 650,000 shares of Common Stock at a price of $.50 per share. Thewarrants expire on October 31, 2006.

Concurrent with the SVBfinancing, we paid off our working capital line of credit obtained on March 30,2000 from Foothill Capital.  Such lineof credit was secured by substantially all of our assets.  As of June 30, 2001, we were in default ofthe minimum EBITDA (Earnings Before Income Taxes, Depreciation andAmortization) covenant of $38,000 for the three-month period ended June 30,2001. Under the terms of the agreement, borrowings during the third quarter of2001 bore interest at a rate of prime plus 6.75%, which includes a covenantdefault rate of 4% (for a total of 12.75% at September 30, 2001).  As of the date of termination of ouragreement with Foothill Capital, the total amount outstanding was approximately$0.8 million.  For the three- andnine-month periods ended September 30, 2001, fees amounting to $260,000 and$299,000, respectively, were included in interest expense.  During the same three-and nine-month periodstotal interest expense on the line of credit amounted to $451,000 and $575,000,respectively and the corresponding effective annual interest rate was 54% and19%, respectively.  For the three- andnine-month periods ended September 30, 2000, total interest expense on the lineof credit amounted to $138,000 and $268,000, respectively.

On March 20, 2001, ourCommon Stock was delisted from the Nasdaq National Market due to the failure tomaintain a minimum bid price of $1.00 per share.  Our Common Stock is now trading on the OTC Bulletin Board, whichis considered to be less liquid and more volatile than the Nasdaq NationalMarket.

In December 2000, weraised $1,500,000 in capital through a private placement of 220,000 shares ofSeries B Convertible Preferred Stock ("Series B Preferred") with aninvestor who was appointed as a member of the Company's board of directors onJanuary 11, 2001.  At the Company'sAnnual Meeting held on May 29, 2001, the investor did not stand for election,but he was subsequently reappointed as a member of the Company's board ofdirectors on November 6, 2001. The Series B Preferred shares are entitled todividends of $.41 per annum, which accrue semi-annually if not paid. Each shareof Series B Preferred is convertible into ten shares of Common Stock at theelection of the holder. In connection with this private placement, thepurchaser also received warrants to purchase 600,000 shares of Common Stock at$.75 per share. The warrants expire on December 28, 2005.

In December 2000, weentered into a mutual settlement of all claims with Tektronix. The claimsrepresented unpaid commitments by both parties. As part of the settlement, weissued 750,000 shares of Common Stock to Tektronix (as a vendor). The value ofthe stock was determined by the closing price of our Common Stock on the NasdaqNational Market on the date of the settlement and a gain on the settlement of$821,000 was recorded in December 2000.

On March 31, 2000 weannounced a restructuring plan involving a general reduction in workforceaffecting all classes of employees and exiting certain leased facilities.  Approximately 60 employees were terminatedunder this plan.  In connection with theplan, we recorded a restructuring charge of $2.6 million consisting of $2.4million for employee separation costs and $0.2 million for facility exit costs.

During the third quarter of 2000 we undertook a new restructuring planwhich involved a general reduction in workforce affecting all classes ofemployees, exiting certain leased facilities and discontinuing developmentactivities related to several product lines. This plan was necessitated by the termination of our contract with IBMas well as a change in market conditions. Approximately 40 employees were terminated under this plan.  In connection with these actions, werecorded a restructuring charge of  $1.6million consisting of cash charges of $1.0 million for employee separationcosts and $0.2 million for facility exit costs, and non cash charges of $0.4million related to the discontinued product lines, including the recognition ofan impairment loss of $0.3 million on the intangibles attributable to ourpurchase of Multiplicity LLC ("Multiplicity").  Approximately $0.2 million remains unpaidand is included in accrued liabilities as of September 30, 2001.  The restructuring plan is expected to becompleted by the fourth quarter of 2001.

**Resultsof Operations**

***TotalNet Revenues***

Total net revenues forthe third quarters of 2001 and 2000 were $8.4 million and $11.1 million,respectively, representing a decrease of 24%, and $30.1 million and $38.0million for first nine months of 2001 and 2000, respectively, representing adecrease of 21%.  A discussion of thedecrease in total net revenues follows under "Hardware Revenues","Software Revenues" and "Service Revenues".

***HardwareRevenues***

Hardware revenues were $7.2 million and $9.0 million for the thirdquarters of 2001 and 2000, respectively, representing a decrease of 20%, and$26.1 million and $31.8 million for the first nine months of 2001 and 2000,respectively, representing a decrease of 18%. The decrease in hardware revenuesis due to fewer thin client unit sales and the loss of sales to IBM, whoseagreement with us terminated on December 31, 2000.

***SoftwareRevenues***

Revenues from softwareproducts were $0.9 million and $1.5 million for the third quarters of 2001 and2000, respectively, representing a decrease of 40% and $2.6 million and $3.5million for the first nine months of 2001 and 2000, respectively, representinga decrease of 26%.  The decrease insoftware revenues reflected the corresponding decrease in related hardwarerevenues resulting from reduced thin client unit sales.

***ServiceRevenues***

Service revenues were $0.3 million and $0.6 million for the thirdquarters of 2001 and 2000, respectively, representing a decrease of 50%, and$1.4 million and $2.7 million for the first nine months of 2001 and 2000,respectively, representing a decrease of 48%. Service revenues have declined as a result of the decline in thepurchase and/or renewal of hardware service contracts.  This is due in part to the customers'preferences to purchase spare units with their initial orders rather thanpurchase hardware service contracts.

***GrossMargin on Hardware Revenues***

Gross margin on hardwarerevenues represents revenues less cost of revenues related to hardwareproducts. Our gross margins on hardware revenues were $0.8 million and $1.6million for the third quarters of 2001 and 2000, respectively, and $5.9 millionand $3.4 million for the first nine months of 2001 and 2000, respectively. Ourgross margin percentages on hardware revenues were 12% and 18% for the thirdquarters of 2001 and 2000, respectively, and 23% and 11% for the first ninemonths of 2001 and 2000, respectively. The increase in gross margins during the nine-month periods wasattributable primarily to a significant write off of certain inventory duringthe first six months of 2000.

***GrossMargin on Software Revenues***

Gross margin on softwarerevenues represents revenues less cost of revenues related to softwareproducts. Our gross margins on software revenues were $0.6 million and $1.3million for the third quarters of 2001 and 2000, respectively, and $1.8 millionand $2.8 million for the first nine months of 2001 and 2000, respectively.  This decrease was across all productlines.  Our gross margin percentages onsoftware revenues were 68% and 86% for the third quarters of 2001 and 2000,respectively, and 68% and 78% for the first nine months of 2001 and 2000,respectively. The reduction on gross margin percentages resulted from higherdiscounts to customers during 2001.

***Gross Margin on Service Revenues***

Gross margin on servicerevenues represents revenues less cost of revenues related to services.  Our gross margins on service revenues were$0.2 million and $0.3 million for the third quarters of 2001 and 2000,respectively, and $1.2 million and $1.5 million for the first nine months of2001 and 2000, respectively.  Thedecreases resulted both from the expiration of existing hardware servicecontracts and a declining number of new hardware service contracts.  Our gross margin percentages were 73% and49% for the third quarters of 2001 and 2000, respectively, and 87% and 55% forthe first nine months of 2001 and 2000, respectively.  The improvement in gross margin percentages resulted from reducedcosts associated with the *Extended Warranty* and *Express Warranty*programs.

***Researchand Development Expenses***

Research and development("R&D") expenses were $0.6 million and $1.4 million for the thirdquarters of 2001 and 2000, respectively, and $2.0 million and  $7.5 million for the first nine months of2001 and 2000, respectively. The decrease in R&D spending was the result ofreduced salary and employee benefit expenses associated with the reduction inour R&D personnel as part of our restructuring and cost containmentprograms.

***Marketingand Selling Expenses***

Marketing and sellingexpenses were $2.6 million and $3.8 million for the third quarters of 2001 and2000, respectively, and $9.2 million and $17.7 million for the first ninemonths of 2001 and 2000, respectively. The decrease in 2001 resulted from theimplementation of our cost reduction plans and a significant reduction in ourmarketing programs.

### ***General and Administrative Expenses***

General andadministrative expenses were $1.1 million and $1.9 million for the thirdquarters of 2001 and 2000, respectively, and $3.3 million and $6.3 million forthe first nine months of 2001 and 2000, respectively. The decrease of $0.8million between the third quarter of 2001 and the third quarter of 2000 as wellas the decrease of $3.0 million between the first nine months of 2001 and thefirst nine months of 2000, is due primarily to a reduction in our workforce, costreduction programs and a reduction in foreign currency translation lossesresulting from our transition to solely a U.S. dollar denominated invoicingpolicy, which became effective January 1, 2001.

***Charge For Acquired In-Process Research andDevelopment***

During the first quarterof 2000, we incurred a charge of $1.8 million of in-process research anddevelopment associated with the acquisition of Multiplicity in January 2000.The amount allocated to in-process research and development was determined by athird party assessment using established techniques for the high-technologyindustry.

***InterestExpense, Net***

Interest expense, net,was $548,000 and $191,000 for the third quarters of 2001 and 2000,respectively, and $873,000 and $314,000 for the first nine months of 2001 and2000, respectively. The increases from period to period reflects a $313,000increase in interest expense due to the line of credit with Foothill Capital,our issuance of a $3.3 million convertible note in September 2000, dividendsaccrued on our Series B Convertible Preferred Stock and a $12,000 decrease ininterest income, due primarily to decreased average balances ininterest-earning accounts Loan amendment fees incurred in connection with therefinancing of the line of credit totaled $299,000 of which $260,000 wasrecorded as interest expense in the third quarter of 2001 and $299,000 wasrecorded in the nine months ended September 30, 2001. Our effective annualinterest rate on our line of credit was 54% and 19% for the three- and nine-monthperiods ended September 30, 2001 and total interest expense on the line ofcredit was approximately $451,000 and $138,000 for the third quarters of 2001and 2000, respectively, and approximately $575,000 and $268,000 for the firstnine months of 2001 and 2000, respectively.

***Income Taxes***

**The provision for income taxes for the first nine months of2001 is for foreign income taxes.  Wecontinue to generate tax net operating loss carryforwards for the United Statesfederal and state jurisdictions.  However,no deferred tax assets have been recognized in respect of these carryforwardsbecause continued losses create uncertainty about our ability to generatesufficient taxable income to realize the related benefits.**

***CapitalRequirements***

Capital spending requirementsfor the remainder of 2001 are estimated at approximately $40,000.

***Liquidity***

As of September 30, 2001,we had combined cash and equivalents and short-term investments totaling $0.5million, and $5.3 million in notes payable, consisting of $2.0 million in bankindebtedness and $3.3 million outstanding on SCI's convertible note. Cash usedin operations was $0.2 million in the first nine months of 2001 compared tocash used in operations of $9.6 million for the first nine months of 2000. Inthe first nine months of 2001, a net loss of $6.5 million was offset bymanagement's emphasis to continue to reduce certain asset accounts evidenced bya decrease in inventories of $1.9 million, prepaid expenses of $1.8 million,accounts receivable of $1.0 million, accrued expenses of $0.8 million anddeferred revenue of $1.0 million.  Inthe first nine months of 2000, a net loss of $30.7 million and a decrease inaccounts payable of $0.7 million were only partially offset by a decrease inaccounts receivable and inventories of $11.0 million and $5.7 million,respectively, and an increase in accrued expenses of $0.7 million.

Cash provided byinvesting activities of $0.4 million in the first nine months of 2001 resultedfrom the maturity of short-term investments of $0.3 million and a reduction inother assets of $0.1 million.  Cashprovided by investing activities of $0.9 million in the first nine months of2000 is the result of sales and maturities of short-term investments of $4.2million offset by the cash used to acquire Multiplicity of $2.2 million andpurchases of short-term investments of $1.0 million.

Cash used in financingactivities of $1.1 million in the first nine months of 2001 resulted from thereceipt of $1.5 million for the sale of convertible preferred stock offset bythe net reduction of the outstanding balance under our line of credit of $2.6million.  Cash provided by financingactivities of $4.6 million in the first nine months of 2000 reflects theproceeds of $3.9 million from borrowings under the line of credit and proceedsof $0.8 million from the issuance of common stock.  Principal payments on capital lease obligations were $0.1 millionduring the first nine months of 2000.

On October 30, 2001, wesecured a $5.0 million line of credit with SVB.  The line is secured by substantially all of our assets and bearsinterest at a rate of prime plus 2%. In connection with this line of credit weissued warrants to SVB to purchase 650,000 shares of Common Stock at a price of$.50 per share. The warrants expire on October 31, 2006.

Concurrent with the SVBfinancing, we paid off our line of credit obtained on March 30, 2000 fromFoothill Capital.  Such line of creditwas secured by substantially all of our assets. As of June 30, 2001, we were indefault of the minimum EBITDA covenant of $38,000 for the three month periodended June 30, 2001.Under the terms of the agreement, borrowings during thethird quarter of 2001 bore interest at a rate of prime plus 6.75% (for a totalof 12.75% at September 30, 2001). As of the date of termination of ouragreement with Foothill Capital, the total amount outstanding under the line ofcredit was approximately $0.8 million. For the three- and nine-month periods ended September 30, 2001, feesamounting to $260,000 and $299,000, respectively, were included in interestexpense.  During the same three-andnine-month periods total interest expense on the line of credit amounted to$451,000 and $575,000, respectively and the corresponding effective annualinterest rate was 54% and 19%, respectively. For the three- and nine-month periods ended September 30, 2000, totalinterest expense on the line of credit amounted to $138,000 and $268,000,respectively.

**InAugust 2001, our thirteen-month Convertible Note issued to SCI in September2000 in the amount of $3.3 million was extended for an additional year with anincrease in the interest rate from 6.5% per annum to eight percent (8%) perannum computed on the unpaid balance beginning October 1, 2001 and theconversion price was reduced to $.62 per share.**

***RecentAccounting Pronouncements***

In June 2001, theFinancial Accounting Standards Board finalized Statement of FinancialAccounting Standards  No. 141, “BusinessCombinations” (“SFAS 141”), and No. 142, “Goodwill and Other Intangible Assets”(“SFAS 142”).  SFAS 141 requires the useof the purchase method of accounting and prohibits the use of thepooling-of-interests method of accounting for business combinations initiatedafter June 30, 2001.  SFAS 141 alsorequires that the Company recognize acquired intangible assets apart fromgoodwill if the acquired intangible assets meet certain criteria.  SFAS 141 applies to all businesscombinations initiated after June 30, 2001 and for purchase business combinationscompleted on or after July 1, 2001.  Italso requires, upon adoption of SFAS 142, that the Company reclassify thecarrying amounts of intangible assets and goodwill based on the criteria inSFAS 141.

SFAS 142 requires, amongother things, that companies no longer amortize goodwill, but instead testgoodwill for impairment at least annually. In addition, SFAS 142 requires that the Company identify reporting unitsfor the purposes of assessing potential future impairments of goodwill,reassess the useful lives of other existing recognized intangible assets, andcease amortization of intangible assets with an indefinite useful life.  An intangible asset with an indefiniteuseful life should be tested for impairment in accordance with the guidance inSFAS 142.  SFAS 142 is required to be appliedin fiscal years beginning after December 15, 2001 to all goodwill and otherintangible assets recognized at that date, regardless of when those assets wereinitially recognized.  SFAS 142 requiresthe Company to complete a transitional goodwill impairment test six months fromthe date of adoption.  The Company isalso required to reassess the useful lives of other intangible assets withinthe first interim quarter after adoption of SFAS 142.

As of September 30, 2001,the net carrying amount of goodwill remaining after the purchase of the NetworkDisplays Business unit of Tektronix in December 1998 is $1.7 million and thereare no intangible assets relating to the purchase of Multiplicity in January2000.  Amortization expense during thethree and nine-month periods ended September 30, 2001 was $101,000 and$302,000, respectively.  At present, theCompany is currently assessing, but has not yet determined the impact theadoption of SFAS 141 and SFAS 142 will have on its financial position andresults of operations.

**FuturePerformance and Risk Factors**

***Our future business, operating results and financialcondition are subject to various risks and uncertainties, including thosedescribed below.***

***EvolvingThin Client Computing Market***

We derive substantially allof our revenues from the sale of thin client network computing products andrelated software. Initially, our thin client product offerings primarilyfocused on the UNIX marketplace using the X.11 display protocol in X-terminalthin client devices and X server software for personal computers. Following ourMarch 1996 OEM agreement with Citrix Systems, Inc. ("Citrix") we wereable to offer *WinCenter* multi-user Windows NT application server software,which provided Windows applications to our own as well as other devices thatrelied on the X.11 display protocol.  Wealso moved to offer the Citrix ICA protocol on our X-terminal thin clients.Sales of network computers to traditional X.11 customers remains an importantpart of our business.  In June 1998 we enteredinto a licensing agreement with Microsoft which enabled us to offer new,lower-priced thin client network computing devices known as Windows-basedterminals.  Recently, we have seenintense competition from alternative desktop systems, particularly personalcomputers, whose selling prices are at historic lows for relatively highperformance configurations, and which can be configured to work in the samemanner as Windows-based terminals. Despite the lower total cost of ownership ofthin client devices, our future success will depend substantially uponincreased acceptance of the thin client computing model and the successfulmarketing of our new thin client computing hardware and software products intothe server and web-based computing markets. There can be no assurance that ournew thin client computing products will compete successfully with alternativedesktop solutions or that the thin client computing model will be widelyadopted in the rapidly evolving desktop computer market. The failure of newmarkets to develop for our thin client computing products would have amaterial, adverse effect on our business, operating results and financialcondition.

***Competition***

The market for thinclient products and similar products that facilitate access to data overnetworks are characterized by rapidly changing technology and evolving industrystandards. We experience significant competition from other network computermanufacturers, suppliers of personal computers and workstations and softwaredevelopers. Competition within the thin client computing market has intensifiedover the past several quarters, resulting in price reductions and reducedprofit margins. We expect this intense competition and pricing pressure tocontinue, and there can be no assurance that we will be able to continue tocompete successfully against current and future competitors as the desktopcomputer market evolves and competition increases. There is the possibilitythat competition in the future could come from companies not currently in themarket or with greater resources than ours which would adversely affect ouroperating results.

***Fluctuationsin Operating Results***

Our operating resultshave varied significantly, particularly on a quarterly basis, as a result of anumber of factors, including general economic conditions affecting industrydemand for computer products, the timing and market acceptance of new productintroductions by us and our competitors, the timing of significant orders fromand shipments to large customers, periodic changes in product pricing anddiscounting due to competitive factors. Our operating results may fluctuate inthe future as a result of these and other factors, including our success indeveloping and introducing new products, our product and customer mix,licensing costs, the level of competition which we experience and our abilityto develop and maintain strategic business alliances.

We operate with arelatively small backlog. Revenues and operating results therefore generallydepend on the volume and timing of orders received, which are difficult toforecast and which may occur disproportionately during any given quarter oryear. Our expense levels are based in part on our forecast of future revenues.If revenues are below expectations, our operating results may be adverselyaffected. Like others in our industry, we experience a disproportionate amountof shipments occurring in the last month of our fiscal quarters. This increasesthe risk of material quarter-to-quarter fluctuations in our revenues and operatingresults.*NewProduct Development and Timely Introduction of New and Enhanced Products*

The markets for ourproducts are characterized by rapidly changing technologies, evolving industrystandards, frequent new product introductions and short product life cycles.Our future results will depend to a considerable extent on our ability tocontinuously develop, introduce and deliver in quantity new hardware andsoftware products that offer our customers enhanced performance at competitiveprices. The development and introduction of new products is a complex anduncertain process requiring substantial financial resources and high levels ofinnovation, accurate anticipation of technological and market trends and thesuccessful and timely completion of product development. Once a hardwareproduct is developed, we must rapidly bring it into volume production, aprocess that requires accurate forecasting of customer requirements in order toachieve acceptable manufacturing costs. The introduction of new or enhancedproducts also requires us to manage the transition from older, displacedproducts in order to minimize disruption to customer ordering patterns, avoidexcessive levels of older product inventories and ensure that adequate suppliesof new products can be delivered to meet customer demand. As we arecontinuously engaged in this product development and transition process, ouroperating results may be subject to considerable fluctuation, particularly whenmeasured on a quarterly basis. The inability to finance important research anddevelopment projects, delays in the introduction of new and enhanced products,the failure of such products to gain market acceptance, or problems associatedwith new product transitions could adversely affect our operating results.

***Relianceon Independent Distributors and Resellers***

We rely significantly onindependent distributors and resellers for the distribution of our products.However, there can be no assurance that our distributors and resellers willcontinue their current relationships with us or that they will not give higherpriority to the sale of other products, which could include products of ourcompetitors. A reduction in sales effort or discontinuance of sales of ourproducts by our distributors and resellers could lead to reduced sales andcould adversely affect our operating results. In addition, there can be noassurance as to the continued viability or the financial stability of ourdistributors and resellers, our ability to retain our existing distributors andresellers or our ability to add distributors and resellers in the future.

***Relianceon Independent Contractors***

We rely on independentcontractors for virtually all of the manufacture of our thin client computingproducts and accessories. Our reliance on these independent contractors limitsour control over delivery schedules, quality assurance and product costs. Inaddition, a number of our independent suppliers are located abroad. Ourreliance on these foreign suppliers subjects us to risks such as the impositionof unfavorable governmental controls or other trade restrictions, changes intariffs and political instability. We currently obtain all of our thin clientcomputing products from SCI, which has locations in Thailand as well as variousother countries throughout the world. Although we believe that the manufactureof our products could be relocated to one of SCI's other facilities ifnecessary within a few weeks, any significant interruption in the supply ofproducts from this contractor would have a material, adverse effect on ourbusiness and operating results. On July 16, 2001, SCI and Sanmina announcedtheir intention to merge the two companies. As a result of this pending merger, any potential change in strategicdirection by the new entity, could have a significant impact on our operations.

A number of componentsand parts used in our products, including certain semiconductor components,also are currently available from single or limited sources of supply. We haveno long-term purchase agreements or other guaranteed supply arrangements withsuppliers of these single or limited source components.  We have generally been able to obtainadequate supplies of parts and components in a timely manner from existing sourcesunder purchase orders and endeavor to maintain inventory levels adequate toguard against interruptions in supplies. However, our inability to obtainsufficient supplies of these parts and components from existing suppliers or todevelop alternate supply sources would adversely affect our operating results.

***InternationalSales***

International sales andoperations may be subject to risks such as the imposition of governmentalcontrols, export license requirements, restrictions on the export oftechnology, political instability, trade restrictions, changes in tariffs anddifficulties in staffing and managing international operations and managingaccounts receivable. In addition, the laws of certain countries do not protectour products and intellectual property rights to the same extent as the laws ofthe United States. There can be no assurance that these factors will not havean adverse effect on our future international sales and, consequently, on ouroperating results.

***Dependenceon Key Personnel***

Our success depends to asignificant degree upon the continuing contributions of our senior managementand other key employees. We believe that our future success will depend inlarge part on our ability to attract and retain highly-skilled engineering,managerial, sales and marketing personnel. Competition for such personnel isintense, and there can be no assurance that we will be successful inattracting, integrating and retaining such personnel. Failure to attract andretain key personnel could have a material, adverse effect on our business, operatingresults or financial condition.

***Volatilityof Stock Price***

On March 20, 2001, ourCommon Stock was delisted from the Nasdaq National Market due to the failure tomaintain a minimum bid price of $1.00 per share. Our Common Stock is nowtrading on the OTC Bulletin Board, which is considered to be less liquid andmore volatile than the Nasdaq National Market.

The market price of ourcommon stock has fluctuated significantly over the past several years and issubject to material fluctuations in the future in response to announcementsconcerning us or our competitors or customers, quarterly variations inoperating results, announcements of technological innovations, the introductionof new products or changes in product pricing policies by us or our competitors,general conditions in the computer industry, developments in the financialmarkets and other factors. In particular, shortfalls in our quarterly operatingresults from historical levels or from levels forecast by securities analystscould have an adverse effect on the trading price of the common stock. We maynot be able to quantify such a quarterly shortfall until the end of thequarter, which could result in an immediate and adverse effect on the commonstock price. In addition, the stock market has, from time to time, experiencedextreme price and volume fluctuations that have particularly affected themarket prices for technology companies and which have been unrelated to theoperating performance of the affected companies. Broad market fluctuations ofthis type may adversely affect the future market price of our common stock.

***Liquidity***

Our capital requirementswill depend on many factors, including but not limited to the market acceptanceof our product, the response of our competitors to our product and our abilityto continue to grow software revenue. In addition to the financing we received in March 2000 (line of credit),January 2001 (convertible preferred stock) and October, 2001 (line of creditand convertible preferred stock), we may be required to seek additionalfinancing before we achieve positive cash flow.  In that event, no assurance can be given that additionalfinancing will be available, or that if available, it will be available onterms acceptable to us, or our shareholders. If adequate funds are not available to satisfy our short-term orlong-term capital requirements we may be required to limit our operationssignificantly.  Based on the factorsdiscussed above, among other things, there is doubt about our ability tocontinue as a going concern.  Ourability to continue as a going concern is dependent on our ability to raiseadditional capital or additional financing, and ultimately achieveprofitability and/or positive cash flow.

**As of September 30, 2001, we had combined cash and equivalentstotaling $0.5 million, and $5.3 million in notes payable, consisting of $2.0million in bank indebtedness and $3.3 million in other debt.**

On October 30, 2001, wesecured a $5.0 million line of credit with SVB.  The line is secured by substantially all of our assets and bearsinterest at a rate of prime plus 2%. In connection with this line of credit weissued warrants to SVB to purchase 650,000 shares of Common Stock at a price of$.50 per share. The warrants expire on October 31, 2006.

** In August 2001, our thirteen-month Noteissued to SCI in September 2000 in the amount of $3.3 million was extended foran additional year with an interest rate of 6.5% per annum computed on the unpaid balance from August 31, 2000 toSeptember 30, 2001 and eight percent (8%) per annum computed on the unpaidbalance beginning October 1, 2001 and an option to convert each dollar of theoutstanding principal into one share of our Common Stock at anytime during thenew Note period at a conversion price of $.62 per share.**

***Going Concern Uncertainty***

The Company hasincurred losses from continuing operations for the year ended December 31, 2000of approximately $32.7 million and for the three- and nine-month periods endedSeptember 30, 2001 of approximately $3.2 million and $6.5 million,respectively.  The Company’scontinuation as a going concern is dependent upon its ability to obtainadditional financing or refinancing as may be required and ultimately to attainprofitability.  The Company is activelymarketing its existing and new products, which it believes will ultimately leadto profitable operations.  However, noassurance can be given that these available funds will meet the Company’s cashrequirements in the future. The financial statements do not include any adjustmentsrelating to the recoverability and classification of reported asset amounts orthe amount and classification of liabilities that might be necessary should theCompany be unable to continue as a going concern.

**Item 3.  Quantitativeand Qualitative Disclosure About Market Risk**

All of our internationalsales are now denominated in U.S. dollars. We still have a few small accountsreceivable and minimal amounts of property and equipment denominated in Eurosas of September 30, 2001, which are subject to exchange rate fluctuations. Thiswill potentially affect our operating results negatively or positively,depending on the value of the U.S. dollar against the Euro, although the effecton our results of operation is not expected to be material.  The Company's line of credit bears interestat a variable rate, which fluctuates with market conditions.

** **

 

**NETWORK COMPUTING DEVICES, INC.**

#### **PART II - OTHERINFORMATION**

**Item 3.  Defaults Upon Senior Securities**

**As ofJune 30, 2001, we were in default under a covenant under our line of creditwith Foothill Capital requiring us to achieve minimum EBITDA  of $38,000 for the three- month period endedJune 30, 2001. In July 2001, the line of credit was amended to eliminate thiscovenant and reduce the maximum amount of the credit line from $15.0 million to$3.5 million. In August 2001, the maximum credit line was reduced to $3.25million from $3.5 million and the maturity date of the line of credit wasextended to September 15, 2001. Finally, in September 2001, the line of creditwas amended to reduce the maximum amount of the credit line from $3.25 millionto $3.0 million and extend the maturity date to October 15, 2001 in order toprovide additional time for another lender to extend a new revolving creditfacility to us. On October 30, 2001, we secured this new credit facility andterminated our line of credit with Foothill Capital.**

**Item 6. Exhibitsand Reports on Form 8-K.**
| (a)    | The  following exhibits are filed herewith:                                                        |
|--------|----------------------------------------------------------------------------------------------------|
|   |                                                                                               |
|   | Exhibit  4.1                                                                                       |   | Amended  and Restated Convertible Promissory Note, dated August 31, 2001, by and  between Network Computing Devices, Inc. and SCI Technology, Inc. |
|   |                                                                                               |   |   |
|   | Exhibit  4.2                                                                                       |   | Amended  and Restated Registration Rights Agreement, dated August 29, 2001, by and  among Network Computing Devices, Inc., SCI Technology, Inc., Guenther Pfaff  and Hofmann & Co. |
|   |                                                                                               |   |   |
|   | Exhibit  4.3                                                                                       |   | Warrant,  dated August 29, 2001, issued to Hofmann & Co. |
|   |                                                                                               |   |   |
|   | Exhibit  10.60                                                                                     |   | Amended  and Restated Registration Rights Agreement, dated August 29, 2001, by and  among Network Computing Devices, Inc., SCI Technology, Inc., Guenther Pfaff  and Hofmann & Co. (Reference is made to Exhibit 4.2) |
|   |                                                                                               |   |   |
|   | Exhibit  10.67                                                                                     |   | Securities  Purchase Agreement, dated August 29, 2001, by and between Network Computing  Devices, Inc. and Hofmann & Co. |
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|   | Exhibit  10.68                                                                                     |   | Warrant,  dated August 29, 2001, issued to Hofmann & Co. (Reference is made to  Exhibit 4.3) |
|   |                                                                                               |   |   |
|   | Exhibit  10.69                                                                                     |   | Amended  and Restated Convertible Promissory Note, dated August 31, 2001, by and  between Network Computing Devices, Inc. and SCI Technology, Inc.  (Reference is made to Exhibit 4.1) |
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|   | Exhibit  10.70                                                                                     |   | Amendment  No. 6 to the Loan and Security Agreement, dated September 14, 2001, by and  between Network Computing Devices, Inc. and Foothill Capital Corporation. |
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| (b)    | The  Company filed no reports on Form 8-K during the three-month period ended  September 30, 2001. |

 

**NETWORK COMPUTING DEVICES, INC.**

**SIGNATURE**

 

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 theundersigned, thereunto duly authorized.

 
|                     |   | Network  Computing Devices, Inc. |
|--------------------------|--------|----------------------------------|
|                     |   | (Registrant)                     |
| Date:  November 14, 2001 |   |                             |   |
|                     |   | By:                              | /s/  Michael A. Garner |
|                     |   |                             | Michael  A. Garner |
|                     |   |                             | Chief  Financial Officer and Secretar*y* |
|                     |   |                             | (Duly Authorized  and Principal Financial and Accounting Officer) |