Liquidity and Capital Resources

             As of March 31, 2001, we had working capital of $68.0 million including $39.4 million of cash and cash equivalents. As of December 31, 2000, we had working capital of $64.3 million including $33.7 million of cash and cash equivalents.  In addition, we had unused availability of $27.5 million at March 31, 2001 and December 31, 2000 under our line of credit with Comerica Bank.  The outstanding principal balance under our line of credit was zero at March 31, 2001 and December 31, 2000.  There is no unused line fee under our line of credit agreement with Comerica Bank.  As a result of our initial public offering on September 29, 2000, Comerica Bank has the option to reduce our available line of credit to a range between $15.0 million to $20.0 million as determined in their sole and absolute discretion.

             Net cash provided by operating activities was $6.8 million in the first quarter of 2001. Net cash provided by operating activities in the first quarter of 2001 resulted primarily from net income of $4.0 million, a decrease in accounts receivable of $6.1 million, a decrease in inventory of $9.5 million and an increase in accrued and other liabilities of $1.7 million, offset by a decrease in accounts payable of $15.7 million.  Accounts receivable, inventory and accounts payable levels decreased due to declining sequential revenues.

             Net cash used in investing activities was $1.6 million in the first quarter of 2001, attributable primarily to purchases of furniture, fixtures and equipment.  We expect to spend approximately $8.0-10.0 million during the next 24 months, primarily for the purchase of manufacturing, testing and engineering equipment.

             Net cash provided by financing activities totaled $401,000 in the first quarter of 2001.  Net cash provided by financing activities in the first quarter of 2001 resulted from the receipt of $802,000 in proceeds from the exercise of stock options, offset by $432,000 in payments related to equipment loans and capital lease obligations.

             We have several capital leases and loans to finance manufacturing and testing equipment, including leases and loans with companies affiliated with our executive officers and directors as described under "Certain Relationships and Related Transactions-MDC Land Corporation and MDC Land LLC" in our Annual Report on Form 10-K filed with the SEC on April 2, 2001. Our obligations under capital leases were $1.1 million on March 31, 2001 and $1.4 million on December 31, 2000, with interest rates ranging from 8.1% to 9.6% per annum. Our equipment financing loan balances were $1.7 million on March 31, 2001 and $1.8 million on December 31, 2000, with interest rates ranging from 8.4% to 9.1% per annum.  One of the equipment note payable agreements contains various nonfinancial covenants that, among other things, limit distributions and dividends to our shareholders without the prior written consent of the lender, and requires the equipment to remain unencumbered by other liens. As of March 31, 2001, we were in compliance with all covenants under the equipment note payable agreements.

             We believe that our existing cash, cash equivalents, investments on hand, existing assets, anticipated debt and expected cash flow from operations will be sufficient to fund our operations for the next 12 months. Thereafter, we may require additional sources of funds to continue to support our business. Such funds, if needed, may not be available or may not be available on terms acceptable to us.

Risk Factors

             You should carefully consider the following risks before you decide to buy shares of our common stock.  The risks and uncertainties described below are not the only ones facing us.  Additional risks and uncertainties, including those risks set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” above, may also adversely impact and impair our business.  If any of the following risks actually occur, our business, results of operations or financial condition would likely suffer.  In such case, the trading price of our common stock could decline, and you may lose all or part of the money you paid to buy our stock.

This Report contains forward-looking statements based on the current expectations, assumptions, estimates and projections about us and our industry.  These forward-looking statements involve risks and uncertainties.  Our actual results could differ materially from those discussed in these forward-looking statements as a result of certain factors, as more fully described in this section and elsewhere in this Report.  We do not undertake to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.

Declines in our average sales prices may result in declines in our revenues and gross margins.

             In the fourth quarter of 2000, overcapacity in the memory product market negatively impacted our average selling prices.  We expect this overcapacity to negatively impact our revenues and profitability at a minimum until mid-2001.  Declines in semiconductor prices could affect the valuation of our inventory which could harm our business. Our ability to maintain or increase revenues will depend upon our ability to increase unit sales volumes of existing products and to introduce and sell new products in quantities sufficient to offset declines in sales prices. Our efforts to reduce costs and develop new products to offset the impact of further declines in average sales prices may not be successful. Declines in average sales prices also would result in more memory being built into products by Industrial customers, which would favor our largest competitors and reduce the demand for our commercial memory products.

Because we depend on a small number of suppliers for IC devices, any disruption in our supply relationships could harm our ability to fulfill orders.

             We have no long-term supply contracts and are dependent on a small number of suppliers to supply integrated circuit, or IC, devices which represent approximately 95% of our component costs. Our dependence on a small number of suppliers and our lack of long-term supply contracts expose us to several risks, including the inability to obtain an adequate supply of components, price increases, late deliveries and poor component quality. Hitachi Semiconductor supplies substantially all of the IC devices used in our Flash memory products. In addition, Hitachi Semiconductor, Hyundai Electronics, NEC Electronics, Samsung Semiconductor and Toshiba currently supply a majority of the dynamic random access memory, or DRAM, IC devices used in our DRAM memory products. A disruption in or termination of our supply relationship with any of these significant suppliers by natural disaster or otherwise, or our inability to develop relationships with new suppliers, if required, would cause delays, disruptions or reductions in product shipments or require product redesigns which could damage relationships with our customers, and would increase our costs and/or prices. In particular, if our supply relationship with Hitachi Semiconductor is disrupted or terminated, our ability to manufacture and sell our Flash products would be limited and our Flash business would be adversely affected.

We are subject to the cyclical nature of the semiconductor industry and changes from the current point in the cycle could adversely affect our business.

             The semiconductor industry, including the memory markets in which we compete, is highly cyclical and is characterized by constant and rapid technological change, rapid product obsolescence and price erosion, evolving standards, short product life cycles and wide fluctuations in product supply and demand. The industry has experienced significant downturns, often connected with, or in anticipation of, maturing product cycles of both semiconductor companies' and their customers' products and declines in general economic conditions. These downturns have been characterized by diminished product demand, production overcapacity, high inventory levels and accelerated erosion of average selling prices. Any future downturns could have a material adverse effect on our business and operating results. Furthermore, any upturn in the semiconductor industry could result in increased demand for, and possible shortages of, components we use to manufacture and assemble our ICs. Such shortages could have a material adverse effect on our business and operating results.

We may be unable to maintain a steady supply of components.

The electronics industry has experienced in the past, and may experience in the future, shortages in IC devices, including DRAM, static random access memory, or SRAM, and Flash memory. We have experienced and may continue to experience delays in component deliveries and quality problems which have caused and could in the future cause delays in product shipments and have required and could in the future require the redesign of some of our products. In addition, industry capacity has, from time to time, become constrained such that some vendors which supply components for our products have placed their customers, ourselves included, on allocation. This means that while we may have customer orders, we may not be able to obtain the materials that we need to fill those orders in a timely manner.