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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

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FORM 10-Q

|/x/ | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended March 31, 2001
|--- | -------------------------------------------------------------------------------------------------------------------------------------

|/ / | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from  to
|--- | ---------------------------------------------------------------------------------------------------------------------------

Commission File Number0-20124

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

Delaware

77-0177255(State or other jurisdiction of

(I.R.S. Employerincorporation or organization)

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 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 / /

As
of April 30, 2001, 17,613,237 shares of the registrant's Common Stock and 220,000 shares of Series B Convertible Preferred Stock, were outstanding.

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NETWORK COMPUTING DEVICES, INC.

INDEX

|Description                   |                                                                                               | Page Number                                                                                              
|----------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------
|Cover Page                    |                                                                                               | 1                                                                                                        
|Index                         |                                                                                               | 2                                                                                                        
|Part I: Financial Information |                                                                                               |                                                                                                          
|                              | Item 1: Financial Statements                                                                  |                                                                                                          
|                              |                                                                                               | Condensed Consolidated Balance Sheets as of March 31, 2001 and December 31, 2000                         
|                              |                                                                                               | Condensed Consolidated Statements of Operations for the Three-Month Periods Ended March 31, 2001 and 2000
|                              |                                                                                               | Condensed Consolidated Statements of Cash Flows for the Three-Month Periods Ended March 31, 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 6: Exhibits and Reports on Form 8-K                                                      |                                                                                                          
|Signature                     |                                                                                               | 18                                                                                                       

2

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NETWORK COMPUTING DEVICES, INC.

Part I: Financial Information

Item 1. Financial Statements

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

(unaudited)

|                                           |                             | March 31,
2001                                                                                                       |        | December 31,
2000 |        
|------------------------------------------ | --------------------------- | -------------------------------------------------------------------------------------------------------------------- | ------ | ----------------- | -------
|Assets:                                    |                             |                                                                                                                      |        |                   |        
|                                           | Current assets:             |                                                                                                                      |        |                   |        
|                                           |                             | Cash and cash equivalents                                                                                            |        | $                 | 820    
|                                           |                             | Short-term investments                                                                                               |        |                   |       
|                                           |                             | Accounts receivable, net of allowances of $4,901 and $5,629 as of March 31, 2001 and December 31, 2000, respectively |        |                   | 9,271  
|                                           |                             | Inventories                                                                                                          |        |                   | 6,348  
|                                           |                             | Prepaid assets                                                                                                       |        |                   | 1,573  
|                                           |                             | Other current assets                                                                                                 |        |                   |       
|                                           |                             |                                                                                                                      |        |                   |        
|                                           | Total current assets        |                                                                                                                      |        | 18,012            |        
|                                           | Property and equipment, net |                                                                                                                      |        | 1,207             |        
|                                           | Other assets                |                                                                                                                      |        | 2,278             |        
|                                           |                             |                                                                                                                      |        |                   |        
|Total assets                               |                             | $                                                                                                                    | 21,497 |                   | $      
|                                           |                             |                                                                                                                      |        |                   |        
|Liabilities and Shareholders' Equity:      |                             |                                                                                                                      |        |                   |        
|                                           | Current liabilities:        |                                                                                                                      |        |                   |        
|                                           |                             | Accounts payable                                                                                                     |        | $                 | 4,501  
|                                           |                             | Accrued expenses                                                                                                     |        |                   | 3,447  
|                                           |                             | Deferred revenue                                                                                                     |        |                   | 586    
|                                           |                             | Notes payable                                                                                                        |        |                   | 6,801  
|                                           |                             | Income taxes payable                                                                                                 |        |                   | 217    
|                                           |                             |                                                                                                                      |        |                   |        
|                                           | Total current liabilities   |                                                                                                                      |        | 15,552            |        
|                                           | Shareholders' equity:       |                                                                                                                      |        |                   |        
|                                           |                             | Convertible preferred stock                                                                                          |        |                   | 1,500  
|                                           |                             | Common stock                                                                                                         |        |                   | 18     
|                                           |                             | Capital in excess of par value                                                                                       |        |                   | 91,027 
|                                           |                             | Treasury stock                                                                                                       |        |                   | (28,647
|                                           |                             | Accumulated deficit                                                                                                  |        |                   | (57,953
|                                           |                             |                                                                                                                      |        |                   |        
|                                           | Total shareholders' equity  |                                                                                                                      |        | 5,945             |        
|                                           |                             |                                                                                                                      |        |                   |        
|Total liabilities and shareholders' equity |                             | $                                                                                                                    | 21,497 |                   | $      
|                                           |                             |                                                                                                                      |        |                   |        

See
accompanying notes.

3

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NETWORK COMPUTING DEVICES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)

|                                      |                                                        | Three Months Ended March 31, |       
|------------------------------------- | ------------------------------------------------------ | ---------------------------- | ------
|
|Net revenues:                         |                                                        |                              |       
|                                      | Hardware products and services                         |                              | $     
|                                      | Software licenses and services                         |                              |       
|                                      |                                                        |                              |       
|Total net revenues                    |                                                        |                              | 10,479
|Cost of revenues:                     |                                                        |                              |       
|                                      | Hardware products and services                         |                              |       
|                                      | Software licenses and services                         |                              |       
|                                      |                                                        |                              |       
|Total cost of revenues                |                                                        |                              | 7,135 
|                                      |                                                        |                              |       
|Gross profit                          |                                                        |                              | 3,344 
|Operating expenses:                   |                                                        |                              |       
|                                      | Research and development                               |                              |       
|                                      | Marketing and selling                                  |                              |       
|                                      | General and administrative                             |                              |       
|                                      | Business restructuring                                 |                              |       
|                                      | Acquired in-process research and development           |                              |       
|                                      |                                                        |                              |       
|Total operating expenses              |                                                        |                              | 5,020 
|                                      |                                                        |                              |       
|Operating loss                        |                                                        |                              | (1,676
|Interest income (expense), net        |                                                        |                              | (145  
|Loss before income taxes              |                                                        |                              | (1,821
|                                      | Provision for income taxes                             |                              |       
|                                      |                                                        |                              |       
|Net loss                              |                                                        | $                            | (1,828
|                                      |                                                        |                              |       
|Basic and diluted earnings per share: |                                                        |                              |       
|                                      | Net loss per share                                     |                              | $     
|                                      |                                                        |                              |       
|                                      | Weighted average shares used in per share computations |                              |       
|                                      |                                                        |                              |       

See
accompanying notes.

4

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NETWORK COMPUTING DEVICES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

|                                       |                                                                      | Three Months Ended March 31,                 |                                                
|-------------------------------------- | -------------------------------------------------------------------- | -------------------------------------------- | -----------------------------------------------
|
|Cash flows from operating actitivites: |                                                                      |                                              |                                                
|                                       | Net loss                                                             |                                              | $                                              
|                                       | Reconciliation of net loss to net cash used in operating activities: |                                              |                                                
|                                       |                                                                      | Depreciation and amortization                |                                                
|                                       |                                                                      | Acquired in-process research and development |                                                
|                                       |                                                                      | Changes in:                                  |                                                
|                                       |                                                                      |                                              | Accounts receivable, net                       
|                                       |                                                                      |                                              | Inventories                                    
|                                       |                                                                      |                                              | Prepaid expenses                               
|                                       |                                                                      |                                              | Other current assets                           
|                                       |                                                                      |                                              | Accounts payable                               
|                                       |                                                                      |                                              | Accrued expenses                               
|                                       |                                                                      |                                              | Deferred revenue                               
|                                       |                                                                      |                                              | Income taxes payable                           
|                                       |                                                                      |                                              |                                                
|                                       |                                                                      | Net cash used in operating activites         |                                                
|                                       |                                                                      |                                              |                                                
|Cash flows from investing activities:  |                                                                      |                                              |                                                
|                                       |                                                                      |                                              | Sales and maturities of short-term investments 
|                                       |                                                                      |                                              | Changes in other assets                        
|                                       |                                                                      |                                              | Acquisition of business                        
|                                       |                                                                      |                                              | Property and equipment purchases               
|                                       |                                                                      |                                              |                                                
|                                       |                                                                      | Net cash provided by investing activities    |                                                
|                                       |                                                                      |                                              |                                                
|Cash flows from financing activities:  |                                                                      |                                              |                                                
|                                       |                                                                      |                                              | Principal payments on capital lease obligations
|                                       |                                                                      |                                              | Proceeds from line of credit                   
|                                       |                                                                      |                                              | Payments on line of credit                     
|                                       |                                                                      |                                              | Proceeds from issuance of stock, net           
|                                       |                                                                      |                                              |                                                
|                                       |                                                                      | Net cash provided by financing activities    |                                                
|                                       |                                                                      |                                              |                                                
|                                       |                                                                      | Decrease in cash and cash equivalents        |                                                
|                                       |                                                                      | Cash and cash equivalents:                   |                                                
|                                       |                                                                      |                                              | Beginning of period                            
|                                       |                                                                      |                                              |                                                
|                                       |                                                                      |                                              | End of period                                  
|                                       |                                                                      |                                              |                                                

See
accompanying notes.

5

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NETWORK COMPUTING DEVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Basis of Presentation

The unaudited condensed consolidated financial information of Network Computing Devices, Inc. and its wholly-owned subsidiaries (the "Company")
furnished herein reflects all adjustments, consisting only of normal recurring entries, which in the opinion of management are necessary to fairly state our consolidated financial position, results of
operations and cash flows for the periods presented. The functional currency for the Company is the U.S. dollar. All significant inter company balances and transactions have been eliminated in
consolidation. This Quarterly Report on Form 10-Q should be read in conjunction with the consolidated financial statements and notes thereto included in our 2000 Annual Report on
Form 10-K. The consolidated results of operations for the three-months period ended March 31, 2001 are not necessarily indicative of the results to be expected for any
subsequent quarter or for the entire year ending December 31, 2001.

Going Concern Uncertainty

The Company has incurred losses from continuing operations for the year ended December 31, 2000 of approximately $32.7 million and for the three
months ended March 31, 2001 of approximately $1.8 million. If the Company fails to maintain profitable operations, the Company will need to obtain additional financing. However, there is
no assurance that the Company will be able to obtain the necessary funds, which could result in an adverse effect on the Company's financial condition. The financial statements do not include any
adjustments relating to the recoverability and classification of
reported asset amounts or the amount and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. The Company's continuation as a going
concern is dependent upon its ability to obtain additional financing or refinancing as may be required and ultimately to attain profitability. The Company is actively marketing its existing and new
products, which it believes will ultimately lead to profitable operations. However, no assurance can be given that these available funds will meet the Company's cash requirements in the future.

Net Loss Per Share

Basic net loss per share is computed using the weighted-average number of common shares outstanding during the period. Diluted net loss per share is computed
using the weighted-average number of common shares and potential common shares from stock options and warrants outstanding, when dilutive, using the treasury stock method. At March 31, 2001 and
2000 there were 4,630,381 and 4,552,983 options and warrants outstanding, respectively. There were also 220,000 shares of convertible preferred stock (convertible into 2,200,000 shares of common
stock) outstanding at March 31, 2001. Such options, warrants and convertible preferred shares could potentially dilute earnings per share ("EPS") in the future, but they were not included in
the computation of diluted EPS because to do so would have been antidilutive for those periods.

6

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Inventories

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

March 31,
2001

December 31,
2000Purchased components and sub-assemblies

$
2,604

$
3,739Work in process


664


657Finished goods


3,080


3,239$
6,348

$
7,635


Interest and tax payments

Interest payments, primarily interest on notes payable, were $118,900 and $8,050 for the three months ended March 31, 2001 and 2000, respectively.
Income tax payments, primarily foreign, were $36,400 and $67,600 for the three months ended March 31, 2001 and 2000, respectively.

Operating Segments and Major Customers

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

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

Three Months Ended March 312001

2000Adtcom (Europe)

30
%
15
%Tech Data (U.S. & Europe)

24
%
20
%


Business Acquisition

On January 7, 2000, we acquired the net assets of Multiplicity LLC ("Multiplicity") in a purchase business combination with a total purchase price of
$2.2 million. The purchase price was allocated as follows:

In-process research and development

$
1,800Other intangible assets


200Goodwill


161Tangible assets


40


Restructuring Charges

On March 31, 2000 we announced a restructuring plan involving a general reduction in workforce affecting all classes of employees and exiting certain
leased facilities. In connection with the plan, we recorded a restructuring charge of $2.6 million consisting of $2.4 million for employee separation costs and $0.2 million for
facility exit costs.

7

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During the third quarter of 2000 we undertook additional restructuring actions involving a general reduction in workforce affecting all classes of employees, exiting certain leased
facilities and discontinuing development activities related to several product lines. In connection with these actions, we recorded restructuring charges of $1.6 million consisting of cash
charges of $1.0 million for employee separation costs and $0.2 million for facility exit costs, and non cash charges of $0.4 million related to the discontinued product lines,
including the recognition of an impairment loss of $0.3 million on the intangibles attributable to our purchase of Multiplicity. Approximately $0.3 million remains unpaid and is included
in accrued liabilities as of March 31, 2001. The restructuing plan is expected to be completed by the fourth quarter of 2001.

Notes Payable

In August 2000, we concluded an agreement with SCI Technology, Inc. ("SCI"), a subsidiary of SCI Systems, Inc., to convert
$3.3 million of our accounts payable to them into a thirteen-month note. The note was issued in September 2000. This note bears interest at 6.5% per annum and the outstanding principal
can be converted into shares of our Common Stock at the option of SCI anytime during the note period. The conversion price is $1.00 per share.

On
March 30, 2000, we secured a working capital line of credit with Wells Fargo Bank's Foothill Capital subsidiary ("Foothill Capital"). Our line of credit is secured by
substantially all of our assets. Under the terms of the agreement borrowings bear interest at a rate of prime plus 0.75% (8.75% at March 31, 2001). The amount that can be borrowed at any given
time is determined by the balance of our
accounts receivable as well as our compliance with specified financial covenants. Accordingly, this line of credit may not be sufficient to enable us to continue as a going concern. As of
March 31, 2001, the total amount outstanding to Foothill Capital was approximately $3.5 million. We were in compliance with established covenants at March 31, 2001.

8

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

Overview

This discussion includes forward-looking statements, including but not limited to statements with respect to our future financial
performance, operating results, plans and objectives. Actual results may differ materially from those currently anticipated depending upon a variety of factors, including those described below under
the sub-heading, "Future Performance and Risk Factors."

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

Network Computing Devices, Inc. provides thin client hardware and software that delivers simultaneous, high-performance,
easy-to-manage and cost effective access to all of the information on enterprise intranets and the Internet from thin client, UNIX and PC desktops. Our product line includes the NCD ThinSTARline of
Windows-based terminals, theNCD Exploranetwork terminals and NCD NC200andNCD NC400network computers. On
the software side, our products are the NCD ThinPATHfamily of client and server software, developed to enhance the connectivity, management and features of the NCD thin clients as well as PCs
in accessing information and applications on Windows servers. Some of the software products were part of theNCD ThinSTARsoftware family in 1998; they
have been re-named and were announced in March 1999 as part of theNCD ThinPATHsoftware family. These products are sold through
OEMs, system integrators and distributor/VAR channels worldwide.

Recent Developments

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

In
December 2000, we raised $1,500,000 in capital through a private placement of 220,000 shares of Series B Convertible Preferred Stock with an investor who was elected
a member of the Company's board of directors on January 11, 2001. The Preferred shares are entitled to dividends of $.41 per annum, which accrue semi-annually if not paid. Each
share of Preferred Stock is convertible into ten shares of Common Stock at the election of the holder. In connection with this private placement, the purchaser 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, we entered into a mutual settlement of all claims with Tektronix. The claims represented unpaid commitments for both parties. As part of the settlement, we
issued 750,000 shares of Common Stock to Tektronix (as a vendor). A gain on the settlement of $821,000 was recorded in December 2000.

At
March 31, 2001, we had cash and short-term investments of approximately $820,000. During the year ended December 31, 2000 and the quarter ended
March 31, 2001, we incurred losses of $32.7 million and $1.8 million, respectively, and during those periods our cash and cash equivalents decreased by approximately
$6.6 million and $0.9 million, respectively. Based on these factors, among others, there is substantial doubt about our ability to continue as a going concern. Our ability to continue as
a going concern is dependent on our ability to raise additional capital or obtain financing and ultimately to achieve profitability and positive cash flow.

9

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On March 31, 2000 we announced a restructuring plan involving a general reduction in workforce affecting all classes of employees and exiting certain leased facilities. In
connection with the plan, we recorded a restructuring charge of $2.6 million consisting of $2.4 million for employee separation costs and $0.2 million for facility exit costs.

During
the third quarter of 2000 we undertook additional restructuring actions involving a general reduction in workforce affecting all classes of employees, exiting certain leased
facilities and discontinuing development activities related to several product lines. In connection with these actions, we recorded restructuring charges of $1.6 million consisting of cash
charges of $1.0 million for employee separation costs and $0.2 million for facility exit costs, and non cash charges of $0.4 million related to the discontinued product lines,
including the recognition of an impairment loss of $0.3 million on the intangibles attributable to our purchase of Multiplicity LLC ("Multiplicity"). Approximately $0.3 million remains
unpaid and is included in accrued liabilities as of March 31, 2001. The restructuring plan is expected to be completed by the fourth quarter of 2001.

Results of Operations

Total Net Revenues

Total net revenues for the first three months of 2001 were $10.5 million, a decrease of 23% from 2000 first quarter net revenues of
$13.7 million. Sales to Adtcom and Tech Data accounted for 30% and 24%, respectively, of net revenues in the first quarter of 2001 and 15% and 20%, respectively, of net revenues in the first
quarter of 2000.

Hardware Revenues

Hardware revenues consist primarily of revenues from the sale of thin client products, related hardware, and to a lesser extent, fees for related hardware
service activities. Hardware revenues were $9.6 million for the first three months of 2001, a decrease of 25% from $12.8 million for the first three months of 2000. The decrease in
hardware revenues is due to the loss of sales to IBM, fewer monitor sales and a slight decline in sales of network computer products.

Software Revenues

Software revenues consist primarily of revenues from the licensing of software products and related support services. Software products that are included in
revenue for the periods presented are (i)NCD ThinPATH, (ii)NCD Wincenter, our
multi-user Windows NT application server software, (iii)NCD PC-Xware, our thin client software for PCs, and
(iv)NCDware, our proprietary thin client software. Revenues from software and related services were $0.9 million for the first three
months of 2001 and the first three months of 2000.

Gross Margin on Hardware Revenues

Our gross margins on hardware revenues were $2.7 million and $0.3 million for the first three months of 2001 and 2000, respectively. Our gross
margin percentages on hardware revenues were 28% and 3% for the first three months of 2001 and 2000, respectively. The increase in gross margins was attributable to a significant write off of certain
inventory during the first quarter of 2000.

Gross Margin on Software Revenues

Our gross margin on software revenues were $0.6 million and $0.8 million for the first three months of 2001 and 2000, respectively. This decrease
was across all product lines. Our gross margin percentages on software revenues were 70% and 90% for the first three months of 2001 and 2000,

10

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respectively. The reduction on gross margin percentages resulted from higher discounts to customers during the first quarter of 2001.

Research and Development Expenses

Research and development ("R&D") expenses were $0.6 million and $3.2 million for the first three months of 2001 and 2000, respectively. The
decrease in R&D spending was the result of reduced salary and employee benefit expenses associated with the reduction in our R&D personnel as part of our restructuring.

Marketing and Selling Expenses

Marketing and selling expenses were $3.3 million and $8.0 million for the first three months of 2001 and 2000, respectively. The decrease in
2001, resulted from the implementation of our cost reduction plans, including the closure of a number of our U.S. and foreign sales offices and a significant reduction in our marketing programs.

General and Administrative Expenses

General and administrative expenses were $1.1 million and $2.5 million for the first three months of 2001 and 2000, respectively. The decrease of
56% between the first quarter of 2001 and the first quarter of 2000, is due primarily to a significant increase in the bad debt reserve and other write offs incurred in the first quarter of 2000 and
the impact of our cost reduction programs.

Charge For Acquired In-Process Research and Development

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

Interest Income (Expense), Net

Interest income (expense), net, was $(145,000) and $9,000 for the first three months of 2001 and 2000, respectively. The change reflects a $24,000 decrease in
interest income, due primarily to decreased average balances in interest-earning accounts, and a $130,000 increase in interest expense due to the line of credit we secured on March 30, 2000 and
our issuance of a $3.3 million convertible note payable in September 2000.

Income Taxes

The provision for income taxes for the first three months of 2001 is for foreign income taxes. We continue to generate tax net operating loss carryforwards for
the United States federal and state jurisdictions. However, no deferred tax assets have been recognized in respect of these carryforwards because continued losses create uncertainty about our ability
to generate sufficient taxable income to realize the related benefits.

Financial Condition

At March 31, 2001, we had total assets of $21.5 million, representing a decrease from $26.9 million at December 31, 2000. The
change in total assets reflects decreases in cash and equivalents of $0.6 million, short-term investments of $0.3 million, inventory of $1.3 million, prepaid assets of
$1.1 million, and accounts receivable and property and equipment of $0.3 million. In the first quarter of 2001, accounts receivable increased by $0.1 million while accounts
payable, accrued expenses and deferred revenue decreased by $1.0 million, $0.6 million and $0.7 million, respectively.

11

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Capital Requirements

Capital spending requirements for the remainder of 2001 are estimated at approximately $0.3 million.

Liquidity

As of March 31, 2001, we had combined cash and equivalents and short-term investments totaling $0.8 million, and $6.8 million
in notes payable, consisting of $3.5 million in bank indebtedness and $3.3 million in other debt. Cash used in operations was $1.5 million in the first three months of 2001
compared to cash used in operations of $5.6 million for the three months ended March 31, 2000. In the first three months of 2001, a net loss of $1.8 million was offset by a
decrease in inventories of $1.3 million, prepaid expenses of $1.1 million, accounts payable of $1.0 million, accrued expenses of $0.6 million and deferred revenue of
$0.7 million. In the first three months of 2000, a net loss of $17.2 million was only partially offset by a decrease in accounts receivable and inventories of $5.0 million and
$1.2 million, respectively, and increases in accounts payable and accrued expenses of $0.6 million and $2.1 million, respectively.

Cash
provided by investing activities of $0.5 million in the first three months of 2001 resulted from the maturity of short-term investments of $0.3 million
and a reduction in other assets of $0.2 million. Cash provided by investing activities of $1.1 million in the first three months of 2000 is the result of sales and maturities of
short-term investments of $3.3 million offset by the cash used to acquire Multiplicity of $2.2 million.

Cash
used by financing activities of $.4 million in the first three months of 2001 resulted from the net reduction of the outstanding balance under our line of credit of
$1.1 million offset by the receipt of $1.5 million for the sale of convertible preferred stock. Cash provided by financing activities of $3.2 million in the first three months of
2000 reflects the proceeds of $2.6 million from borrowings under the line of credit and proceeds of $0.6 million from the issuance of common stock.

On
March 30, 2000 we secured a working capital line of credit with Foothill Capital. Our line of credit is secured by substantially all of our assets. Under the terms of the
agreement borrowings bear interest at a rate of prime plus 0.75% (8.75% at March 31, 2001). The amount that can be borrowed at any given time is determined by the balance of our aging, location
and other factors of accounts receivable. The outstanding loan was approximately $3.5 million at March 31, 2001. We are currently finalizing an amendment to our draw down terms with the
lender to provide us with additional available funds.

Our
capital requirements will depend on many factors, including but not limited to the market acceptance of our product, the response of our competitors to our product and our ability
to continue to grow software revenue. In addition to the financing we received in March 2000 (line of credit) and December 2000 (convertible preferred stock), we may be required to seek
additional financing before
we achieve positive cash flow. In that event, no assurance can be given that additional financing will be available, or that if available, it will be available on terms acceptable to us, or our
shareholders. If adequate funds are not available to satisfy our short-term or long-term capital requirements we may be required to limit our operations significantly. Based on
the factors discussed above, among other things, there is substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is dependent on our ability to
raise additional capital or enhanced or additional financing, and ultimately achieve profitability and/or positive cash flow.

Recent Accounting Pronouncements

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement as amended by SFAS
No. 137, "Deferral of the Effective Date of FASB

12

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Statement No. 133," established accounting and reporting standards for derivative instruments and requires recognition of all derivatives as assets or liabilities in the statement of financial
position and measurement of those instruments at fair value. The statement is effective for fiscal years beginning after June 15, 2000. We adopted the standard in the first quarter of fiscal
year 2001 but have determined that the standard has no impact on our financial statements.

In
December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial Statements," as amended by
SAB 101A and SAB 101B, which provides guidance on the recognition, presentation, and disclosure of revenue in financial statements filed with the SEC. SAB 101 outlines the basic criteria that must be
met to recognize revenue and provides guidance for disclosure related to revenue recognition policies. In June 2000, the SEC issued SAB 101B that delayed the implementation date of SAB 101. We
adopted SAB 101 in the fourth quarter of 2000. We have determined that SAB 101 had no impact on our financial statements.

In
March 2000, the FASB issued Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation" (FIN 44). The provisions of FIN 44 are effective
July 1, 2000. The adoption of this standard did not impact the accounting for any stock-based awards granted to date.

Future Performance and Risk Factors

Our future business, operating results and financial condition are subject to various risks and uncertainties, including those described below.

Evolving Thin Client Computing Market

We derive substantially all of our revenues from the sale of thin client network computing products and related software. Until several years ago, our thin
client product offerings primarily focused on the UNIX marketplace using our X protocol. Our introduction ofWinCentermulti-user Windows NT
application server software and new, lower-priced thin client network computing devices allowed us to offer thin client network computing systems that provide users with access to Windows
applications. Our expansion of our thin client computing model into the Windows-based environment was limited because of our inability to offer an endorsed Microsoft solution within the Windows market
prior to the introduction of the Windows-based terminal in June 1998 and intense competition from alternative desktop systems, particularly personal computers, whose selling prices are at
historic lows for relatively high performance configurations. Our future success will depend substantially upon increased acceptance of the thin client computing model and the successful marketing of
our new thin client computing hardware and software products. There can be no assurance that our new thin client computing products will compete successfully with alternative desktop solutions or that
the thin client computing model will be widely adopted in the rapidly evolving desktop computer market. The failure of new markets to develop for our thin client computing products would have a
material, adverse effect on our business, operating results and financial condition.

Competition

The market for thin client products and similar products that facilitate access to data over networks are characterized by rapidly changing technology and
evolving industry standards. We experience significant competition from other network computer manufacturers, suppliers of personal computers and workstations and software developers. Competition
within the thin client computing market has intensified over the past several quarters, resulting in price reductions and reduced profit margins. We expect this intense competition and pricing
pressure to continue, and there can be no assurance that we will be able to continue to compete successfully against current and future competitors as the desktop computer market evolves and
competition increases. There is the possibility

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that competition in the future could come from companies not currently in the market or with greater resources than ours which would adversely affect our operating results.

Fluctuations in Operating Results

Our operating results have varied significantly, particularly on a quarterly basis, as a result of a number of factors, including general economic conditions
affecting industry demand for computer products, the timing and market acceptance of new product introductions by us and our competitors, the timing of significant orders from and shipments to large
customers, periodic changes in product pricing and discounting due to competitive factors, and the availability and pricing of key components, such as DRAMs, video monitors, integrated circuits and
electronic sub-assemblies, some of which require substantial order lead times. Our operating results may fluctuate in the future as a result of these and other factors, including our
success in developing and introducing new products, our product and customer mix, licensing costs, the level of competition which we experience and our ability to develop and maintain strategic
business alliances.

We
operate with a relatively small backlog. Revenues and operating results therefore generally depend on the volume and timing of orders received, which are difficult to forecast and
which may occur disproportionately during any given quarter or year. Our expense levels are based in part on our forecast of future revenues. If revenues are below expectations, our operating results
may be adversely affected. We have experienced a disproportionate amount of shipments occurring in the last month of our fiscal quarters. This trend increases the risk of material
quarter-to-quarter fluctuations in our revenues and operating results.

New Product Development and Timely Introduction of New and Enhanced Products

The markets for our products are characterized by rapidly changing technologies, evolving industry standards, frequent new product introductions and short
product life cycles. Our future results will depend to a considerable extent on our ability to continuously develop, introduce and deliver in quantity new hardware and software products that offer our
customers enhanced performance at competitive prices. The development and introduction of new products is a complex and uncertain process requiring substantial financial resources and high levels of
innovation, accurate anticipation of technological and market trends and the successful and timely completion of product development. Once a hardware product is developed, we must rapidly bring it
into volume production, a process that requires accurate forecasting of customer requirements in order to achieve acceptable manufacturing costs. The introduction of new or enhanced products also
requires us to manage the transition from older, displaced products in order to minimize disruption to customer ordering patterns, avoid excessive levels of older product inventories and ensure that
adequate supplies of new products can be delivered to meet customer demand. As we are continuously engaged in this product development and transition process, our operating results may be subject to
considerable fluctuation, particularly when measured on a quarterly basis. The inability to finance important research and development projects, delays in the introduction of new and enhanced
products, the failure of such products to gain market acceptance, or problems associated with new product transitions could adversely affect our operating results.

Reliance on Independent Distributors and Resellers

We rely significantly on independent distributors and resellers for the distribution of our products. However, there can be no assurance that our distributors
and resellers will continue their current relationships with us or that they will not give higher priority to the sale of other products, which could include products of our competitors. A reduction
in sales effort or discontinuance of sales of our products by our distributors and resellers could lead to reduced sales and could adversely affect our operating results. In addition, there can be no
assurance as to the continued viability or the financial

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stability of our distributors and resellers, our ability to retain our existing distributors and resellers or our ability to add distributors and resellers in the future.

Reliance on Independent Contractors

We rely on independent contractors for virtually all of the manufacture of our thin client computing products and accessories. Our reliance on these
independent contractors limits our control over delivery schedules, quality assurance and product costs. In addition, a number of our independent suppliers are located abroad. Our reliance on these
foreign suppliers subjects us to risks such as the imposition of unfavorable governmental controls or other trade restrictions, changes in tariffs and political instability. We currently obtain all of
our thin client computing products from a single supplier located in Thailand. Any significant interruption in the supply of products from this contractor would have a material, adverse effect on our
business and operating results. Disruptions in the provision of components by our other suppliers, or other events that would require us to seek alternate sources of supply, could also lead to supply
constraints or delays in delivery of our products and adversely affect our operating results. However, the manufacturing process could be relocated to one of their other factories if necessary within
a few weeks.

A
number of components and parts used in our products, including certain semiconductor components, also are currently available from single or limited sources of supply. We have no
long-term purchase agreements or other guaranteed supply arrangements with suppliers of these single or limited source components. We have generally been able to obtain adequate supplies
of parts and components in a timely manner from existing sources under purchase orders and endeavor to maintain inventory levels adequate to guard against interruptions in supplies. However, our
inability to obtain sufficient supplies of these parts and components from existing suppliers or to develop alternate supply sources would adversely affect our operating results.

International Sales

International sales and operations may be subject to risks such as the imposition of governmental controls, export license requirements, restrictions on the
export of technology, political instability, trade restrictions, changes in tariffs and difficulties in staffing and managing international operations and managing accounts receivable. In addition,
the laws of certain countries do not protect our products and intellectual property rights to the same extent as the laws of the United States. There can be no assurance that these factors will not
have an adverse effect on our future international sales and, consequently, on our operating results.

Dependence on Key Personnel

Our success depends to a significant degree upon the continuing contributions of our senior management and other key employees. We believe that our future
success will depend in large part on our ability to attract and retain highly-skilled engineering, managerial, sales and marketing personnel. Competition for such personnel is intense, and there can
be no assurance that we will be successful in attracting, integrating and retaining such personnel. Failure to attract and retain key personnel could have a material, adverse effect on our business,
operating results or financial condition.

Volatility of Stock Price

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

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The market price of our common stock has fluctuated significantly over the past several years and is subject to material fluctuations in the future in response to announcements
concerning us or our competitors or customers, quarterly variations in operating results, announcements of technological innovations, the introduction of new products or changes in product pricing
policies by us or our competitors, general conditions in the computer industry, developments in the financial markets and other factors. In particular, shortfalls in our quarterly operating results
from historical levels or from levels forecast by securities analysts could have an adverse effect on the trading price of the common stock. We may not be able to quantify such a quarterly shortfall
until the end of the quarter, which could result in an immediate and adverse effect on the common stock price. In addition, the stock market has, from time to time, experienced extreme price and
volume fluctuations that have particularly affected the market prices for technology companies and which have been unrelated to the
operating performance of the affected companies. Broad market fluctuations of this type may adversely affect the future market price of our common stock.

Liquidity

As of March 31, 2001, we had combined cash and equivalents and short-term investments totaling $0.8 million, and $6.8 million
in notes payable, consisting of $3.5 million in bank indebtedness and $3.3 million in other debt.

On
March 30, 2000, we secured a working capital line of credit with Foothill Capital. Our line of credit is secured by substantially all of our assets. Under the terms of the
agreement borrowings bear interest at a rate of prime plus 0.75% (8.75% at March 31, 2001). The amount that can be borrowed at any given time is determined by the balance of our aging, location
and other factors of accounts receivable. The outstanding loan was approximately $3.5 million at March 31, 2001. We are currently finalizing an amendment to our draw down terms with the
lender to provide us with additional available funds.

Our
capital requirements will depend on many factors, including but not limited to the market acceptance of our product, the response of our competitors to our product and our ability
to continue to grow software revenue. In addition to the financing we received in March 2000 (line of credit) and January 2001 (convertible preferred stock), we may be required to seek
additional financing before we achieve positive cash flow. In that event, no assurance can be given that additional financing will be available, or that if available, it will be available on terms
acceptable to us, or our shareholders. If adequate funds are not available to satisfy our short-term or long-term capital requirements we may be required to limit our
operations significantly. Based on the factors discussed above, among other things, there is substantial doubt about our ability to continue as a going concern. Our ability to continue as a going
concern is dependent on our ability to raise additional capital or enhanced or additional financing, and ultimately achieve profitability and/or positive cash flow.

Item 3. Quantitative and Qualitative Disclosure About Market Risk

Our market risk sensitive instruments as of March 31, 2001 are primarily exposed to interest rate risks. Because of the short-term
maturities of these instruments, a 100 basis point change in related interest rates would not have a material effect on their fair value.

Effective
January 2001 all of our international sales are denominated in U.S. dollars. We have Euro denominated accounts receivable as of March 31, 2001 which are
subject to exchange rate fluctuations when the customer pays in Euros. This will affect our operating results negatively or positively, depending on the value of the U.S. dollar against the Euro.

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NETWORK COMPUTING DEVICES, INC.

PART IIOTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K.





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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 the undersigned,
thereunto duly authorized.

|Date: May 15, 2001 |  | Network Computing Devices, Inc.
(Registrant)
|------------------ |  | --------------------------------------------
|                   |  | By:                                         

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