Financial Instruments
Financial instruments, primarily cash and cash equivalents, marketable securities, accounts receivable, and long term debt, are carried at amounts which approximate their fair value.

Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their tax bases. Deferred tax assets and liabilities are measured using enacted statutory tax rates in effect in the year in which the differences are expected to reverse. A deferred tax asset is established for the expected future benefit of net operating loss and credit carry-forwards. A valuation reserve against net deferred tax assets is required, if, based upon available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

Basic and Diluted Net Income (Loss) Per Common Share
Basic net income (loss) per common share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per common share is computed by dividing the net income (loss) by the sum of the weighted-average number of common shares outstanding plus all additional common shares that would have been outstanding if potentially dilutive common stock equivalents had been issued.

2—DEPENDENCE ON OUTSIDE SUPPLIERS AND CONTRACT ASSEMBLY MANUFACTURERS

The Company relies on various suppliers of components for its products. Many of these components are standard and generally available from multiple sources. However, certain integrated circuits and other devices which are components of one or more of the Company’s products are purchased from single source suppliers of the Company. Although the Company believes it could develop other sources for each of these custom devices, the process could take several months, and the inability or refusal of any of the Company’s suppliers to continue to supply devices could have a material adverse effect on the Company pending the development of an alternative source. The Company also currently relies on a single contract manufacturer to assemble certain printed circuit boards for each of its North American and European operations. Although a number of such contract manufacturers exist, the interruption or termination of the Company’s current manufacturing relationships could have a short-term adverse effect on the Company’s business.

3—MERGERS AND ACQUISITIONS

In June 1996, the Company acquired the outstanding shares of Teknique, Inc. and an affiliate. The final purchase price totaled $8.3 million, including contingent payments discussed below and transaction costs of $284,000. The transaction was accounted for as a purchase and accordingly, the purchase price was allocated to assets purchased and liabilities assumed based on their fair values at the date of acquisition. During the years ended December 31, 1997 and 1998, $1.9 million and $625,000 of contingent consideration was earned and added to goodwill, which is being amortized on a straight-line basis over the remaining life of the goodwill of seven years. There are no possible further contingent payments.

In October 1997 the Company acquired ViaDSP, Inc. for aggregate consideration of 144,562 shares of the Company’s common stock. ViaDSP was formed in 1996 as a spin-off of DSP Software Engineering on January 26, 1996. ViaDSP was created to define, develop and deliver standard products for the telecommunications markets using advanced digital signal processing technology. The value of the transaction was $7.1 million, including approximately $236,000 of expenses related to the acquisition. The transaction was accounted for as a purchase.

At the time of acquisition, the purchase price was allocated to the tangible and intangible assets of ViaDSP based on the fair market value of those assets using a risk-adjusted discounted cash flow approach. Specifically, the purchased technology, consisting of completed technology and two separate development projects, was evaluated through interviews. The development projects were further subjected to analysis of data concerning the state of the technology and needed developments. This evaluation of underlying technology acquired considered the inherent difficulties and uncertainties in completing the two development projects, and thereby achieving technological feasibility, and the risks related to the viability of and potential changes in future target markets. At the time of the acquisition, the fair value of $5.6 million of the acquired technology that had not reached technological feasibility was expensed as purchased in-process research and development. The underlying technology had no alternative future use to the Company in other research and development projects or otherwise. The completed technology was valued at $1.5 million based upon a risk adjusted discounted cash flows basis and is being amortized to cost of revenues over a five year life. The goodwill life used is seven years.