UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 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 September 30, 2000 or [ ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________________ to ___________________ Commission File Number: 000-2409 Com21, Inc. (Exact name of registrant as specified in its charter) Delaware 94-3201698 ________________________________ ________________________________ (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 750 Tasman Drive Milpitas, California 95035 (408) 953-9100 (Address, including zip code, and telephone number, including area code, of the registrant's principal executive offices) Indicate by check mark whether the registrant (1) has filed all reports required 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. [X]	Yes	[ ]	No The number of outstanding shares of the registrant's Common Stock, $0.001 par value, was 24,626,437 as of September 30, 2000. COM21, INC. INDEX PART I: FINANCIAL INFORMATION Page _____________________________ ____ Item 1 Financial Statements (Unaudited) Condensed Consolidated Balance Sheets - September 30, 2000 and December 31, 1999 3 Condensed Consolidated Statements of Operations and Comprehensive Loss - Three and Nine Months ended September 30, 2000 and 1999 4 Condensed Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2000 and 1999 5 Notes to Condensed Consolidated Financial Statements 6 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 3 Quantitative and Qualitative Disclosures About Market Risk 25 PART II: OTHER INFORMATION __________________________ Item 1 Legal Proceedings 25 Item 2 Changes in Securities and Use of Proceeds 25 Item 3 Defaults Upon Senior Securities 25 Item 4 Submission of Matters to a Vote of Security Holders 26 Item 5 Other Information 26 Item 6 Exhibits and Reports on Form 8-K 26 Signature 26 In addition to historical information, this Form 10-Q contains forward-looking statements including statements regarding our strategy, financial performance and revenue sources that involve a number of risks and uncertainties, including those discussed below at "Risk Factors". While this outlook represents our current judgement on the future direction of the business, such risks and uncertainties could cause actual results to differ materially from any future performance suggested below. Readers are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date of this Form 10-Q. Com21 undertakes no obligation to publicly release any revisions to forward-looking statements to reflect events or circumstances arising after the date of this document. See "Risk Factors" below as well as "Risk Factors" in Com21's Annual Report on Form 10-K dated March 24, 2000 as filed with the SEC. PART I: FINANCIAL INFORMATION Item 1 Financial Statements COM21, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share and par value amounts) (Unaudited) September 30, December 31, ASSETS 2000 1999 __________ __________ Current assets: Cash and cash equivalents $ 18,621 $ 16,499 Short-term investments 34,952 89,524 Accounts receivable 46,982 19,207 Inventories 18,831 4,518 Prepaid expenses and other 10,342 2,924 __________ __________ Total current assets 129,728 132,672 Investments 15,041 - Property and equipment, net 14,838 8,198 Acquired intangibles, net 17,663 - Goodwill, net 46,149 - Other assets 2,574 296 __________ __________ Total Assets $ 225,993 $ 141,166 __________ __________ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 42,188 $ 12,870 Accrued compensation and related benefits 5,906 3,732 Deferred revenue 438 317 Other current liabilities 7,837 2,982 Current portion of capital lease and debt obligations 1,033 538 __________ __________ Total current liabilities 57,402 	20,439 Deferred rent 292 304 Capital lease and debt obligations 42 345 __________ __________ Total Liabilities 57,736 21,088 __________ __________ Stockholders' equity: Common stock, $0.001 par value, 40,000,000 shares authorized; 24,626,437 and 21,619,172 issued and outstanding at September 30, 2000 and December 31, 1999 25 22 Additional paid-in capital 262,676 179,138 Deferred stock compensation (6,614) (230) Accumulated deficit (89,992) (59,016) Accumulated other comprehensive income (loss) 2,162 164 __________ __________ Total Stockholders' Equity 168,257 120,078 __________ __________ Total Liabilities and Stockholders' Equity $ 225,993 $ 141,166 __________ __________ See notes to condensed consolidated financial statements. COM21, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (In thousands, except per share amounts) (Unaudited) Three Months Ended Nine Months Ended September 30, September 30, ______________________ ______________________ 2000 1999 2000 1999 __________ __________ __________ __________ Revenues $ 60,636 $ 25,269 $ 153,550 $ 66,025 Cost of revenues 50,940 16,316 117,254 40,177 __________ __________ __________ __________ Gross profit 9,696 8,953 36,296 25,848 __________ __________ __________ __________ Operating expenses: Research and development 13,858 7,728 32,740 21,657 Sales and marketing 7,416 4,126 20,089 11,319 General and administrative 5,242 1,060 9,224 2,856 In-process research and development 8,823 - 8,823 - __________ __________ __________ __________ Total operating expenses 35,339 12,914 70,876 35,832 __________ __________ __________ __________ Loss from operations (25,643) (3,961) (34,580) (9,984) Total other income, net 831 1,420 3,626 3,724 __________ __________ __________ __________ Loss before income taxes (24,812) (2,541) (30,954) (6,260) Provision for income taxes - - 22 55 __________ __________ __________ __________ Net loss (24,812) (2,541) (30,976) (6,315) Other comprehensive loss, net of tax- Unrealized gain (loss) on available-for-sale investments 2,594 (310) 1,998 709 __________ __________ __________ __________ Comprehensive loss $ (22,218) $ (2,851) $ (28,978) $	(5,606) __________ __________ __________ __________ Net loss per share, basic and diluted $ (1.02) $ (0.12) $ (1.37) $ (0.30) __________ __________ __________ __________ Shares used in computation, basic and diluted 24,242 21,426 22,645 20,732 __________ __________ __________ __________ See notes to condensed consolidated financial statements COM21, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) Nine Months Ended September 30, ______________________ 2000 1999 __________ __________ Cash used in operating activities: Net loss $ (30,976) $ (6,315) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 8,551 2,897 In-process research and development 8,823 - Deferred rent (12) 19 Gain on sales and maturities of investments (423) (1,038) Changes in operating assets and liabilities: Accounts receivable (27,103) (9,696) Inventories (9,470) 2,219 Prepaid expenses and other (6,785) 	(1,388) Other assets (2,049) (1) Accounts payable 27,457 3,173 Accrued compensation and related benefits 1,742 1,744 Deferred revenue 121 131 Other current liabilities (954) 733 __________ __________ Net cash used in operating activities (31,078) (7,522) __________ __________ Cash flows from investing activities: Proceeds from sale of investments 99,398 109,697 Purchases of investments (56,004) (125,220) Purchases of property and equipment (8,549) (3,772) Acquisition of companies net of cash acquired (783) - __________ __________ Net cash provided by (used in) investing activities 34,062 (19,295) __________ __________ Cash flows from financing activities: Proceeds from issuance of stock, net - 54,330 Proceeds from exercise of stock options, net 3,651 1,524 Repayments under capital lease obligations (457) (739) Repayments on debt obligations (4,056) (198) __________ __________ Net cash provided by financing activities (862) 54,917 __________ __________ Net increase in cash and cash equivalents 2,122	28,100 Cash and cash equivalents at beginning of period 16,499 7,135 __________ __________ Cash and cash equivalents at end of period $ 18,621 $ 35,235 __________ __________ Noncash investing and financing activities: Deferred stock compensation $ 1,088 $ - __________ __________ Unrealized (gain) loss on available-for-sale investments, net $ (1,998) $ (709) __________ __________ See notes to condensed consolidated financial statements COM21, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 2000 (Unaudited) 1. Unaudited Interim Financial Statements The accompanying unaudited condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, these unaudited condensed consolidated financial statements include all adjustments necessary (consisting of normal, recurring adjustments) for a fair presentation of Com21's financial position as of September 30, 2000, the results of operations for the three and nine months ended September 30, 2000 and 1999 and cash flows for the nine months ended September 30, 2000 and 1999. The results of operations for the three and nine months ended September 30, 2000 are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2000. These financial statements should be read in conjunction with the consolidated financial statements and the accompanying notes included in the Company's Form 10-K dated March 24, 2000 as filed with the SEC. In December 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements," which provides the SEC staff's views on selected revenue recognition issues. The guidance in SAB 101 must be adopted during the fourth quarter of fiscal 2000 and the effects, if any, are required to be recorded through a retroactive, cumulative-effect adjustment as of the beginning of the fiscal year, with a restatement of all prior interim quarters in the year. Our management has not completed its evaluation of the effects, if any, that SAB 101 will have on the Company's income statement presentation, operating results or financial position. In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". This statement requires companies to record derivatives on the balance sheet as assets or liabilities, measured at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. SFAS No. 133 will be effective for the Company beginning in the first quarter of fiscal year 2001. Based on management's preliminary review of contracts, agreements and investments we believe that this statement will not have a significant impact on the Company's consolidated financial position, results of operations or cash flows. 2. Inventories Inventories consist of (in thousands): September 30, December 31, 2000 1999 __________ __________ Raw materials and sub-assemblies $ 8,282 $ 917 Work-in-process 6,132 326 Finished goods 4,417 3,275 __________ __________ $ 18,831 $ 4,518 __________ __________ 3. Stockholders' Equity Net Loss Per Share - The following is a reconciliation of the numerators and denominators of the basic and diluted net loss per share computations (in thousands, except per share amounts): Three Months Ended September 30, 2000 1999 __________ __________ 	Net Loss (Numerator): Net loss, basic and diluted $ (24,812) $ (2,541) __________ __________ 	Shares (Denominator): Weighted average common shares outstanding 24,479 21,477 Weighted average common shares outstanding subject to repurchase (237) (51) __________ __________ Shares used in computation, basic and diluted 24,242 21,426 __________ __________ Net Loss Per Share, Basic and Diluted $ (1.02) $ (0.12) __________ __________ Nine Months Ended September 30, 2000 1999 __________ __________ 	Net Loss (Numerator): Net loss, basic and diluted $ (30,976) $ (6,315) __________ __________ 	Shares (Denominator): Weighted average common shares outstanding 22,740 20,814 Weighted average common shares outstanding subject to repurchase (95) (82) __________ __________ Shares used in computation, basic and diluted 22,645 20,732 __________ __________ Net Loss Per Share, Basic and Diluted $ (1.37) $ (0.30) __________ __________ During the three months and nine months ended September 30, 2000 and 1999, the Company had securities outstanding which could potentially dilute basic EPS in the future, but were excluded in the computation of diluted EPS in such periods, as their effect would have been antidilutive due to the net loss reported in such periods. Such outstanding securities consist of the following at September 30, 2000: warrants to purchase 75,000 shares of common stock; 5,665 outstanding shares of common stock subject to repurchase; 245,000 shares of common stock subject to forfeiture; and options to purchase 5,571,266 shares of common stock. 4. Acquisitions GADline Ltd., On July 3, 2000, pursuant to a Share Purchase Agreement dated April 18, 2000 by Com21, Inc. and GADline, Ltd. (GADline), an Israeli company, GADline was merged with and into Com21. GADline develops, manufactures and markets innovative, fully managed networking solutions that deliver high-speed data and telephony services over a hybrid fiber coaxial infrastructure. Pursuant to the GADline Agreement, the shareholders of GADline received an aggregate of 2,281,750 shares of Com21 common stock, all outstanding GADline options converted into options to purchase approximately 232,000 shares of Com21 common stock. An additional 350,000 shares of Com21 common stock may be issued to GADline shareholders upon completion of predefined milestones through December 31, 2000. The fair value of the contingent shares will be measured upon achievement of the predefined milestones and will be accounted for as additional purchase price. Com21 also assumed certain operating assets and liabilities of GADline. The acquisition was treated as a purchase for accounting purposes. The purchase price was allocated to the assets acquired and liabilities assumed based on their respective fair values. The approximate purchase price was determined to be $73,607,000. The consolidation of the assets and liabilities affected the Company's balance sheet at September 30, 2000, as depicted in the following tables (in thousands): Total purchase price: Common Stock $ 67,340 Options assumed 3,207 Acquisition expenses 3,060 __________ $ 73,607 __________ Purchase price allocation: Fair market value of net tangible assets acquired of GADline at June 30, 2000 $ 3,240 Intangible assets acquired: Customer base 239 Workforce-in-place 1,564 Tradename 1,111 Core technology 9,114 Current technology 6,038 In-process research & development 8,823 Goodwill 43,478 __________ $ 73,607 __________ Purchased technology, other intangibles and goodwill are amortized over their estimated useful lives, generally three to five years. Com21 recorded a one-time charge of $8.8 million in the third quarter of 2000 for purchased in-process technology related to a development project that had not reached technological feasibility, had no alternative future use, and for which successful development was uncertain. Management believes that the in-process research and development has no alternative future use. The in-process development project is an integrated network solution for data and voice over Internet protocol. At the time of acquisition, estimated costs to complete the development were approximately $9.0 million. Management expects that product being developed will become available for sale in fiscal 2001; however, no assurances can be given. Cost incurred on the project to date is approximately $9.3 million. Failure to reach successful completion of this project could result in impairment of the associated capitalized intangible assets and could require the Company to accelerate the time period over which the intangibles are being amortized, which could have a material adverse effect on the Company's business, financial condition or results of operations. Significant assumptions used to determine the value of in-process technology included several factors, including the following. First, an income approach that focuses on the income producing capability of the acquired technology, and best represents the present value of the future economic benefits expected to derive from them. Second, a forecast of net cash flows that were expected to result from the development effort, using projections prepared by Com21's management. Third, a discount rate of approximately 25% was computed after analysis of the risk of an investment in GADline and considered the implied rate of the transaction and the weighted average cost of capital. BitCom, Inc., On July 6, 2000, pursuant to a Share Purchase Agreement dated June 22, 2000 by Com21, Inc., a Delaware corporation, and BitCom, Inc. (BitCom), a Delaware company, with facilities in Maryland was merged with and into Com21. BitCom is an engineering consulting and development team specializing in the fields of wired and wireless telecommunications, satellite, and networking engineering. Com21 acquired all of the outstanding shares of BitCom for an aggregate purchase price of $4,000,000 in cash. Additionally, Com21 assumed 100,000 options to purchase BitCom stock that will become options to purchase 100,000 shares of Com21 common stock. Com21 also issued 245,000 shares of common stock to former BitCom employees who have executed Employment Agreements with Com21 that will be restricted with regard to transfer and may be forfeited if such employees do not reach certain milestones. An additional 50,000 shares of Com21's common stock may be issued to former BitCom employees upon completion of predefined milestones through December 31, 2000. The fair value of the contingent milestones will be measured upon achievement of the predefined milestones and will be accounted for as stock compensation. Com21 also assumed certain operating assets and liabilities of BitCom. The acquisition was treated as a purchase for accounting purposes. The purchase price was allocated to the assets acquired and liabilities assumed based on their respective fair values. The approximate purchase price was determined to be $5,678,000. The consolidation of the assets and liabilities affected the Company's balance sheet at September 30, 2000, as depicted in the following tables (amounts in thousands): Total purchase price: Cash $ 4,000 Options assumed 1,478 Acquisition expenses 200 __________ $ 5,678 __________ Purchase price allocation: Fair market value of net tangible assets acquired of BitCom at June 30, 2000 $ 256 Intangible assets acquired: Workforce-in-place 536 Goodwill 4,886 __________ $ 5,678 __________ Com21 recorded the related amortization for the workforce-in-place and goodwill during the quarter ended September 30, 2000. Workforce-in-place and goodwill are amortized over their estimated useful lives, generally five years. Pro Forma Financial Results The following selected unaudited pro forma combined results of operations for the nine months ended September 30, 2000 and 1999 of Com21, GADline and BitCom have been prepared assuming that the acquisitions occurred at the beginning of the periods presented. The following pro forma financial information is not necessarily indicative of the results that would have occurred had the acquisitions been completed at the beginning of the period indicated nor is it indicative of future operating results (in thousands, except per share data): Nine Months Ended September 30, 2000 1999 __________ __________ Revenue $ 63,457 $ 28,199 Net loss (30,714) (4,736) Net loss per share (1.25) (0.20) Shares used in calculation of net loss per share 24,513 23,953 The pro forma results of operations give effect to certain adjustments, including amortization of purchased intangibles, goodwill and deferred stock compensation associated with the acquisition. The $8.8 million charge for purchased in-process research and development has been excluded from the pro forma results, as it is a material non-recurring charge. PART I: FINANCIAL INFORMATION ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion in conjunction with Com21's unaudited condensed consolidated financial statements and notes thereto. The results described below are not necessarily indicative of the results to be expected in any future period. Certain statements in this discussion and analysis, including statements regarding our strategy, financial performance and revenue sources, are forward-looking statements based on current expectations and entail various risks and uncertainties that could cause actual results to differ materially from those expressed in the forward- looking statements. Readers are referred to the "Risk Factors" section contained in Com21's Annual Report on Form 10-K dated March 24, 2000, and to the "Risk Factors" section contained herein which identify important risk factors that could cause actual results to differ from those contained in the forward looking statements. Overview We are a leading global supplier of system solutions for the broadband access market. Our products enable domestic and international cable operators to provide high-speed, cost-effective Internet access, reduce operating costs, and maximize revenue opportunities in a variety of subscriber markets - including corporate telecommuters, small businesses, and private homes. We develop headend equipment, subscriber cable modems, network management software, and noise containment technologies, all designed to support the ATM, DOCSIS, Euro-DOCSIS and Digital Video Broadcasting (DVB) industry standards. In the North American market, we sell directly to cable operators and systems integrators. Internationally, we sell primarily to systems integrators, who in turn sell to cable operators. Com21 was incorporated in Delaware in June 1992. Our principal executive offices are located at 750 Tasman Drive, Milpitas, California 95035 and our telephone number at that address is (408) 953-9100. We can also be reached at our Web site http://www.Com21.com. Acquisitions GADline On July 3, 2000 we completed an acquisition to acquire GADline, Ltd. (GADline), an Israeli company. GADline develops, manufactures and markets innovative, fully managed networking solutions that deliver high-speed data and telephony services over a hybrid fiber coaxial infrastructure. In exchange for all outstanding shares of GADline's capital stock we issued 2,281,750 shares of Com21 common stock and assumed all outstanding GADline options by issuing options to purchase approximately 232,000 shares of Com21 common stock. The transaction was accounted for as a purchase. Of the approximate $74.0 million in purchase price, $8.8 million was allocated to in- process research and development, and expensed during the quarter ended September 30, 2000 and the remaining $65.2 million was allocated to goodwill and other intangibles and will be amortized over the respective useful lives of 3 to 5 years. In addition, 350,000 shares of Com21 common stock may be issued to GADline shareholders upon completion of predefined milestones if such milestones are reached during the next two quarters. The fair value of the contingent shares will be measured upon achievement of the predefined milestones and will be accounted for as additional purchase price. See Note 4 to the Financial Statements. BitCom On July 6, 2000 we completed an acquisition to acquire BitCom, Inc. (BitCom), a Delaware company. BitCom is an engineering consulting and development team specializing in the fields of wired and wireless telecommunications, satellite, and networking engineering. In exchange for all outstanding shares of BitCom's capital stock, we paid $4 million in cash and assumed all outstanding BitCom options by issuing options to purchase approximately 100,000 shares of Com21 common stock. This transaction was accounted for as a purchase. The purchase price of approximately $5.7 million was allocated to goodwill and workforce-in-place and will be amortized over the useful lives of 5 years. In addition, we issued 245,000 shares of common stock to former BitCom employees that may be forfeited if such employees do not reach certain milestones, and may issue an additional 50,000 shares of Com21's common stock to BitCom employees upon completion of predefined milestones through December 31, 2000. The fair value of the contingent milestone shares will be measured upon achievement of the predefined milestones and will be accounted for as stock compensation. See Note 4 to the Financial Statements. Results of Operations Total Revenues - Total revenues increased 140% from $25.3 million in the third quarter of 1999 to $60.6 million in the third quarter of 2000, and increased 133% from $66.0 million for the first nine months of 1999 to $153.6 million for the first nine months of 2000. We experienced revenue growth in both cable modems and headend products over the comparable quarter and nine month period in the prior year. Unit sales of all our cable modem products increased 223% from the third quarter of 1999, as we experienced strong demand for our DOCSIS and ATM cable modems. We anticipate continued growth in demand associated with our cable modems, but revenue may be constrained due to industry wide component shortages. We anticipate these component shortages to ease somewhat during the remainder of 2000. Revenues associated with our headend products increased from $4.3 million in the third quarter of 1999 to $5.2 million in the third quarter of 2000 due to strong demand in the European markets. Cable modem sales accounted for 89% of total revenue in the third quarter of 2000 as compared to 82% of total revenue in the third quarter of 1999. Cable modem sales accounted for 84% of total revenue for the first nine months of 2000 as compared to 75% for the first nine months of 1999. The average sales price of all cable modems declined from the third quarter of 1999 to the third quarter of 2000 due to planned price reductions to meet competitive pricing pressures and product mix as we are selling more of our lower priced DOCSIS modems. We anticipate that the average sales price of cable modems will continue to decline moderately during the remainder of 2000. The average sales price of headend equipment also declined from the third quarter of 1999 to the third quarter of 2000 due to planned price reductions. We anticipate continued pricing pressure on our headend equipment and declines in our average sales price of headend products. During the quarter ended September 30, 2000, international sales accounted for 56% of total revenues, increasing from the 48% experienced in the third quarter of 1999. During the nine months ended September 30, 2000, international sales accounted for 62% of total revenues, increasing from the 46% experienced in the first nine months of 1999. The increase is due to strong demand in Europe and Asia for both of our proprietary and DOCSIS cable modems. Gross Margins - Gross margins decreased from 35% in the third quarter of 1999 to 16% in the third quarter of 2000, and decreased from 39% during the first nine months of 1999 to 24% during the first nine months of 2000. The decrease in margins is primarily due to the mix of product sold and the inclusion in cost of sales of $3.5 million of amortization of intangibles and increased inventory reserves associated with the acquisitions during the quarter. Excluding the $3.5 million of amortization and reserves gross margin would have been 22% in the third quarter of 2000. As noted above cable modem sales accounted for 84% of total revenue during the first nine months of 2000 as compared to 75% of total revenue during the first nine months of 1999. Additionally, revenue from our DOCSIS cable modems has become a more significant portion of our total cable modem revenue. Cable modems have lower margins than our headend products and our DOCSIS cable modems currently have lower margins than our proprietary cable modems. During the third quarter of 2000 we commenced shipments for revenue of our CableLabs certified 1.0 DOCSIS modem which has been significantly cost reduced. As this product becomes a greater percent of total revenue we anticipate improvement in our gross margins over time. During the fourth quarter of 2000 we anticipate margin pressure to continue from increasing sales of our DOCSIS cable modems. Research and Development - Research and development expenses increased 79% from $7.7 million in the third quarter of 1999 to $13.9 million in the third quarter of 2000, and increased 51% from $21.7 million during the first nine months of 1999 to $32.7 million during the first nine months of 2000. The increase was attributable to higher costs related primarily to increased personnel and project related costs as well as the inclusion of approximately $678,000 of amortization of intangibles associated with the acquisitions during the quarter. The increase in personnel costs were a result of expansion in our employee base through the expansion of our Ireland research center, our acquisitions of GADLine and BitCom and the increases in our Milpitas facility. The Ireland research center was opened during the fourth quarter of 1999 and expanded significantly during 2000 resulting in $1.3 million of research and development expenses during the third quarter of 2000 and $4.0 million of research and development expenses for the nine months ended September 30, 2000. The acquisitions of GADLine and BitCom resulted in $1.2 million of third quarter research and development expenses. The increases in our personnel and project costs in Milpitas resulted in a $3.0 million increase from the third quarter of 1999 to the third quarter of 2000 and a $5.1 million increase from the first nine months of 1999 to the first nine months of 2000. We expect these expenses to modestly increase in absolute dollars in the future as we continue to invest in research and development in our basic products and expand our product lines. Sales and Marketing - Sales and marketing expenses increased 80% from $4.1 million in the third quarter of 1999 to $7.4 million in the third quarter of 2000, and increased 78% from $11.3 million during the first nine months of 1999 to $20.1 million during the first nine months of 2000. The increase was primarily due to higher costs associated with increased personnel in sales and marketing organizations necessary to support the expansion of our sales force in both domestic and international areas. We increased personnel through the acquisition of GADLine which resulted in an increase of $0.8 million for third quarter. We also increased headcount in Milpitas and experienced increased expenses due to higher commissions and additional marketing programs resulting in a total increase of $2.5 million from the third quarter of 1999 to the third quarter of 2000 and a total increase of $8.0 million increase from the first nine months of 1999 to the first nine months of 2000. We expect sales and marketing expenses to increase in absolute dollars in the future as we develop additional marketing programs and product channels for our DOCSIS and DVB products. General and Administrative - General and administrative expenses increased 395% from $1.1 million in the third quarter of 1999 to $5.2 million in the third quarter of 2000, and increased 223% from $2.9 million during the first nine months of 1999 to $9.2 million during the first nine months of 2000. The increase in both the three and nine month periods is primarily due to the inclusion of $2.5 million of amortization of intangibles associated with the acquisitions during the quarter. Excluding the $2.5 million of amortization general and administrative expenses would have increased 157% from the third quarter of 1999 to the third quarter of 2000 and 135% from the nine months ended September 30, 1999 to the nine months ended September 30, 2000. The remaining increase is due to increased headcount primarily related to the acquisitions as well as increases at our headquarters to accommodate our growth. We expect general and administrative expenses to show a moderate increase in absolute dollars as we continue to add personnel and incur additional costs related to the growth of our business and to build out our infrastructure. Total Other Income, Net - Total other income decreased 42% from $1.4 million in the third quarter of 1999 to $0.8 million in the third quarter of 2000, and decreased from $3.7 million during the first nine months of 1999 to $3.6 million during the first nine months of 2000. The decrease in the three month period was attributable to earnings on lower cash balances available during the third quarter of 2000. The decrease in the nine month period was attributable to earnings on lower cash balances available partially offset by higher interest rates during the period. Liquidity and Capital Resources At September 30, 2000, our cash and cash equivalents and total investments were $68.6 million, compared to $106.0 million at December 31, 1999, a decrease of $37.4 million. The decrease is primarily a result of cash used in operations of $31.1 million, cash used for purchases of property and equipment of $8.5 million and net cash used in the acquisition of GADline and BitCom of $0.8 million. Cash outflows from operations is due primarily to an increase in accounts receivable, inventory, prepaid expenses and other assets of $45.4 million and the net loss of $14.0 million after non-cash items offset by an increase to accounts payable and accrued compensation of $29.2 million. The net increase in inventory of $14.3 million from December 31, 1999 to September 30, 2000 is due to inventory acquired from GADline of $5.5 million as well as increased investment in inventory for our cost reduced modem. The cash outflow from financing activities of $0.9 million is primarily a result of repayments of debt and lease obligations of $4.5 million offset by proceeds from the exercise of stock options of $3.7 million. The cash outflow from operating activities, purchases of property, and financing activities was offset by the gross appreciation of investments of $3.4 million. Our capital requirements primarily relate to the working capital requirements and investments in property and equipment. We have funded operations primarily through public offerings of common stock and private sales of common and preferred stock. Other than capital lease commitments and current debt obligations of approximately $1,075,000, we have no material commitments for capital expenditures. However, we anticipate an increase in capital expenditures and lease commitments consistent with anticipated growth in operations associated with the acquisitions of GADline, Inc. and BitCom, Inc., infrastructure and personnel. We intend to establish sales offices and lease additional space, which will require us to commit to additional lease obligations, purchase or lease equipment and install leasehold improvements. We are continuing to upgrade and invest in information technology which will increase capital and software expenditures and consulting costs. Going forward, we may make cash investments or exchange Com21 stock for investments in various companies to secure development resources and/or access to various product lines. We may also more aggressively pursue market opportunities that leverage our technology platform. These activities, if pursued, will result in a significant use of cash resources. We believe our current cash and cash equivalents and investments are sufficient to meet anticipated cash requirements for the next twelve months. However, any projections of future cash flows are subject to substantial uncertainty. To provide additional working capital liquidity, we have entered into discussions with various banks to establish a working capital line of credit secured by receivables. If current cash, marketable securities and cash that may be generated from operations are insufficient to satisfy our liquidity requirements, we may seek to sell additional equity or debt securities. The sale of additional equity or convertible debt securities could result in additional dilution to our stockholders and additional interest expense. Risk Factors You should carefully consider the risks described below before making a decision to invest in Com21. You may lose all or part of your investment. The risks and uncertainties described below are not the only ones facing our Company. Readers are referred to additional risks identified in the "Risk Factors" section contained in Com21's Annual Report on Form 10-K dated on March 24, 2000 as filed with the SEC. Our operating results in one or more future periods are likely to fluctuate significantly and may fail to meet or exceed the expectations of securities analysts or investors. Our operating results are likely to fluctuate significantly in the future on a quarterly and an annual basis due to a number of factors, many of which are outside of our control. Supply of components, delays in getting new products, particularly our new DOCSIS cost reduced modem, into high volume manufacturing, manufacturing or testing constraints could result in delays in the delivery of products and impact margins and revenues. Factors that could cause our revenues to fluctuate include the following: - - competitive pricing pressures - - variations in the timing of orders and shipments of our products; - - key component shortages or failures from our suppliers in providing necessary materials and modems; - - variations in the size of orders by our customers; - - new product introductions by us or by our competitors; - - delays in introducing standards based products that are certified as meeting the specifications of various approval organizations; - - general economic conditions and economic conditions specific to the cable and electronic data transmission industries. - - variations in capital spending budgets of cable operators; - - delays in obtaining regulatory approval for commercial deployment of cable modem systems; and - - the timing of upgrades of cable plants; The amount and timing of our operating expenses generally will vary from quarter to quarter depending on the level of actual and anticipated business activities. Research and development expenses will vary based on decisions to develop new products or the deployment of resources on completed projects. Total revenues for any future quarter are difficult to predict. Delays in the product deployment schedule of one or more of our cable operator customers would likely materially adversely affect our operating results for a particular period. A variety of factors affect our gross margin, including the following: - - our ability to ramp up manufacturing for our cost reduced DOCSIS modem - - the sales mix within a product group, especially between proprietary and DOCSIS modems; - - the sales mix between our headend equipment and cable modems; - - component prices we secure from our vendors; - - the average selling prices of our products; - - our continuing cost reduction efforts; and - - the volume of products manufactured. Because of these factors, our operating results in one or more future periods may not meet or exceed the expectations of securities analysts or investors. In that event, the trading price of our common stock would likely decline. We may not be able to produce sufficient quantities of our products because we depend on third-party manufacturers, their suppliers and OEM suppliers and have limited manufacturing experience. We contract for the manufacture of cable modems and integrated circuit boards on a turnkey basis. Our future success will depend, in significant part, on our ability to have others manufacture our products cost-effectively, in sufficient volumes and to meet production and delivery schedules. A number of risks are associated with our dependence on third-party manufacturers including: - - failure to meet our delivery schedules; - - quality assurance; - - manufacturing yields and costs; - - the potential lack of adequate capacity during periods of excess demand; - - difficulty in planning mix of units to be produced by manufacturer; - - increases in prices and the potential misappropriation of our intellectual property. Any manufacturing disruption could impair our ability to fulfill orders. We have no long-term contracts or arrangements with any of our vendors that guarantee product availability, the continuation of particular payment terms or the extension of credit limits. We may experience manufacturing or supply problems in the future. We are dependent on our manufacturers to secure components at favorable prices, but we may not be able to obtain additional volume purchase or manufacturing arrangements on terms that we consider acceptable, if at all. Any such difficulties could harm our relationships with customers. Our future success will depend in part upon our ability to enhance our existing products and to develop and introduce, on a timely basis, new products and features that meet changing customer requirements and emerging industry standards. The market for cable modem systems and products is characterized by rapidly changing technologies and short product life cycles. Our future success will depend in large part upon our ability to: - - identify and respond to emerging technological trends in the market; - - develop and maintain competitive products; - - enhance our products by adding innovative features that differentiate our products from those of our competitors; - - bring products to market on a timely basis at competitive prices; and - - respond effectively to new technological changes or new product announcements by others. If our product development and enhancements take longer than planned, the availability of products would be delayed. Our future success will depend in part upon our ability to enhance our existing products and to develop and introduce, on a timely basis, new products and features that meet changing customer requirements and evolving and emerging industry standards. The technical innovations required for us to remain competitive are inherently complex, require long development cycles, are dependent in some cases on sole source suppliers and require us, in some cases, to license technology from others. We must continue to invest in research and development to attempt to maintain and enhance our existing technologies and products, but we may not have the funds available to do so. Even if we have sufficient funds, these investments may not serve the needs of customers or be compatible with changing technological requirements or standards. Most expenses must be incurred before the technological feasibility or commercial viability can be ascertained. Revenues from future products or product enhancements may not be sufficient to recover the development costs associated with the products or enhancements. Competition for qualified personnel in the cable networking equipment and telecommunications industries is intense, and we may not be successful in attracting and retaining these personnel. Our future success will depend, to a significant extent, on the ability of our management to operate effectively, both individually and as a group. We are dependent on our ability to retain and motivate high caliber personnel, in addition to attracting new personnel. Competition for qualified personnel in the cable networking equipment and telecommunications industries is extremely intense, especially in the San Francisco Bay Area, and we may not be successful in attracting and retaining such personnel. We expect to add additional personnel in the near future. There may be only a limited number of people with the requisite skills to serve in those positions and it may become increasingly difficult to hire these people. We are actively searching for research and development engineers, who are in short supply. Our business will suffer if we encounter delays in hiring additional engineers. In response to the intense competition for qualified personnel in the San Francisco Bay Area, we have opened up development facilities in Ireland and New York, and a customer service center in The Netherlands as well completing the acquisitions of GADline in Israel and BitCom in Maryland and are exploring setting up additional centers in other locations. Competitors and others have in the past and may in the future attempt to recruit our employees. We do not have employment contracts with any of our key personnel. We are experiencing higher turnover than in 1999 due to increased competition for qualified personnel. We do not maintain key person life insurance on our key personnel. The loss of the services of any of our key personnel, the inability to attract or retain qualified personnel in the future or delays in hiring required personnel, particularly engineers, could negatively affect our business. We may be subject to risks associated with acquisitions. On July 3 and July 7, 2000, we acquired GADline and BitCom. The process of integrating any acquired business into our business and operations is risky and may create unforeseen operating difficulties and expenditures. The areas in which we may face difficulties include: - - assimilating the acquired operations and personnel; - - limits on our ability to retain the acquired customers; - - risks of entering markets in which we have no or limited direct prior experience and where competitors in such markets have stronger market positions; - - disruption of our ongoing business; - - limits on our ability to successfully incorporate acquired technology and rights into our service offerings and sell the acquired products; and - - implementation of controls, procedures and policies appropriate for a larger public group of companies that prior to acquisition had been smaller, private companies. We have very limited experience in managing the integration process. Moreover, we may not be able to successfully overcome potential problems encountered with these acquisitions or other potential acquisitions. In addition, future acquisitions could materially adversely affect our operating results by diluting our stockholders' equity, causing us to incur additional debt, incurring significant immediate expenses related to write-offs, or incurring amortization of acquisition expenses and acquired assets. In the past, we have experienced delays in shipments from our OEM modem supplier and shortages of certain components. Previously we have experienced delays in shipments from our OEM modem supplier, a problem which appears to have been abated. However, if we are unable to purchase OEM modems or key components from our vendors at a high enough volume to meet demand, or qualify and secure additional sources of supply, we will be unable to meet our production and delivery schedules and revenue will be adversely affected. We do not have long term supply contracts to ensure sources of supply for all components. Our suppliers may enter into exclusive arrangements with our competitors, stop selling their products or components to us at commercially reasonable prices or refuse to sell their products or components to us at any price. If we are unable to obtain sufficient quantities of modems or components, or to develop alternative sources for products and/or components our revenue would be materially adversely affected. If any manufacturer or other sole source suppliers delay or halt production of any of their components, our business, operating results and financial condition could be materially adversely affected. We must reduce the cost of our cable modems to remain competitive. Certain of our competitors' cable modems are priced lower than our cable modems. As headend equipment becomes more widely deployed, the price of cable modems and related equipment will continue to decline. In particular, industry standards, including the DOCSIS standard in North America, has caused increased price competition for cable modems. We may not be able to continue to reduce the costs of our cable modems sufficiently to enable us to lower our modem prices and compete effectively with other cable modem suppliers. In addition we may not be able to continue to get our DOCSIS modems certified in a timely manner by various standards bodies including CableLabs. If we are unable to continue to reduce the manufacturing costs of our cable modems, our gross margin and operating results would be harmed. We have a short operating history, have incurred net losses since our inception and expect future losses. We did not commence product shipments until April 1997. As a result, we have only a limited operating history upon which you may evaluate our prospects or us. We have incurred net losses since inception and expect to continue to operate at a loss through at least the first half of fiscal year 2001. To achieve and subsequently maintain profitable operations, we must successfully design, develop, test, manufacture, introduce, market and distribute our products on a broad commercial basis and secure higher revenues, gross profits and contain our operating expenses. Our ability to generate future revenues will depend on a number of factors, many of which are beyond our control. These factors include the following: - - cable operators' success and timeliness in the installation of subscriber site equipment; - - our ability to meet competitive pricing pressures; - - the rate at which cable operators upgrade their cable plants; - - our ability and the ability of cable operators to coordinate timely and effective marketing campaigns with the availability of upgrades; - - cable operators' success in marketing data-over-cable services and our modems to subscribers; and - - cable operators' success in setting prices for data transmission installation service. Due to these factors, we cannot forecast with any degree of accuracy what our revenues will be or how quickly cable operators will adopt our systems and buy our cable modems. Therefore, we may not achieve, or be able to sustain, profitability. Both our proprietary products and our standards based products are subject to evolving industry standards. If our products do not comply with any standard that achieves market acceptance, customers may refuse to purchase our products. The DOCSIS standard has achieved substantial market acceptance in North America. Conformance with the DOCSIS standard is being determined through certification tests performed by CableLabs. As we continue to enhance current DOCSIS products and develop new products and as the evolution of the DOCSIS standard continues we may incur additional costs associated with making our cable modems compliant with various versions of the DOCSIS standard. Additionally, we cannot assure you that future enhancements or new DOCSIS product offerings will be CableLabs certified according to our anticipated schedule, or that if certified, will meet with market acceptance. The emergence or evolution of industry standards, either through adoption by official standards committees or widespread use by cable operators or telephone companies could require us to redesign current products. There is movement by some cable operators in Europe towards either a DVB or EuroDOCSIS standard. We currently have introduced a DVB products, but we cannot assure you that our DVB products will meet the evolving DVB specifications. Additionally, we cannot assure you that if a EuroDOCSIS standard obtains widespread acceptance we will be able to produce our EuroDOCSIS modem to meet the EuroDOCSIS specifications. The widespread adoption of DOCSIS, DVB, EuroDOCSIS or other standards outside North America could cause aggressive competition in the cable modem market and result in lower sales of our proprietary headend products and lower revenues from licensing of our network management software. Any of these events would adversely affect our gross margin and our operating results. The development of new competing technologies and standards increases the risk that current or new competitors could develop products that would reduce the competitiveness of our products. If any of these new technologies or standards achieve widespread market acceptance, any failure by us to develop new products or enhancements, or to address these new technologies or standards, would harm our business. We rely on indirect distribution channels for our products and need to develop additional distribution channels. Today, cable operators and systems integrators purchase cable modems from vendors through direct and indirect sales channels. Due to the DOCSIS standard achieving widespread market acceptance, we anticipate that the North American cable modem market may at some point shift to a consumer purchase model. If this occurs, we will sell more of our cable modems directly through consumer sales channels. Our success will then be dependent on our ability to market effectively to end users, to establish brand awareness, to set up the required channels of distribution and to have cable operator's reference sell our products. We have started to establish new distribution channels for our cable modems. We may not have the capital required or the necessary personnel, or expertise to develop these distribution channels, which could materially adversely affect our business, operating results and financial condition. To the extent that large consumer electronics companies enter the cable modem market, their well-established retail distribution capabilities would provide them with a significant competitive advantage. The market in which we sell our products is characterized by many competing technologies, and the technology on which our product is based may not compete effectively against other technologies. The market for high-speed data transmission services has several competing technologies which offer alternative solutions. Technologies which compete with our solution include the following: - - telephone company-related wireline technologies such as: 	dial-up (analog modems); 	digital subscriber line, known as DSL , ADSL, among others; and integrated services digital network, known as ISDN. - - wireless technologies such as: 	local multipoint distribution service, known as LMDS; multi-channel multipoint distribution service, commonly known as MMDS; 	direct satellite. - - fiber optic technologies such as: 	fiber to a residence; and 	fiber to a multi-dwelling unit. Because of the widespread reach of telephone networks and the financial resources of telephone companies, competition from telephone company-related solutions is expected to be intense. Cable modem technology may not be able to compete effectively against wireline or wireless technologies. In addition, one of our competitors has developed a commercially available alternative modulation technology. Significant market acceptance of alternative solutions for high-speed data transmission could decrease the demand for our products if these alternatives are viewed as providing faster access, greater reliability, increased cost-effectiveness or other advantages. Our market is highly competitive and has many more established competitors. The market for our products is intensely competitive, rapidly evolving and subject to rapid technological change. Many of our current and potential competitors have been operating longer, have better name recognition, more established business relationships and significantly greater financial, technical, marketing and distribution resources than we do. These competitors may undertake more extensive marketing campaigns, adopt more aggressive pricing policies and devote substantially more resources to developing new or enhanced products than we do. Our failure to adequately protect our proprietary rights may adversely affect us. We rely on a combination of patent, copyright and trademark laws, and on trade secrets and confidentiality provisions and other contractual provisions to protect our proprietary rights. These measures afford only limited protection. Our means of protecting our proprietary rights in the U.S. or abroad may not be adequate and competitors may independently develop similar technologies. Our future success will depend in part on our ability to protect our proprietary rights and the technologies used in our principal products. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or to obtain and use trade secrets or other information that we regard as proprietary. In addition, the laws of some foreign countries do not protect our proprietary rights as fully as do the laws of the U.S. Issued patents may not preserve our proprietary position. Even if they do, competitors or others may develop technologies similar to or superior to our own. If we do not enforce and protect our intellectual property, our business will be harmed. From time to time, third parties, including our competitors, have asserted patent, copyright and other intellectual property rights to technologies that are important to us. We expect that we will increasingly be subject to infringement claims as the number of products and competitors in the cable modem market grows and the functionality of products overlaps. The results of any litigation matter are inherently uncertain. In the event of an adverse result in any litigation with third parties that could arise in the future, we could be required to pay substantial damages, including treble damages if we are held to have willfully infringed, to halt the manufacture, use and sale of infringing products, to expend significant resources to develop non- infringing technology, or to obtain licenses to the infringing technology. Licenses may not be available from any third party that asserts intellectual property claims against us, on commercially reasonable terms, or at all. In addition, litigation frequently involves substantial expenditures and can require significant management attention, even if we ultimately prevail. There can be no assurance that we would be able to successfully resolve legal disputes in the future. Our failure to manage growth could adversely affect us. We have rapidly and significantly expanded our operations and anticipate that further significant expansion will be required to address potential growth in our customer base and market opportunities. To manage the anticipated growth of our operations, we will be required to: - - improve existing and implement new operational, financial and management information controls, reporting systems and procedures; - - hire, train and manage additional qualified personnel; - - expand and upgrade our core technologies; and - - effectively manage multiple relationships with our customers, suppliers and other third parties. We compete for skilled personnel in a labor market where there is a shortage of qualified personnel and salary demands are above the norm. We must be able to continue to recruit and retain personnel, and failure to do so would result in us not meeting our anticipated growth goals. In addition, our management team may not be able to achieve the rapid execution necessary to fully exploit the market for our products and services. We may not be able to install enhanced management information and control systems in an efficient and timely manner, and our current or planned personnel, systems, procedures and controls may not be adequate to support our future operations. In the future, we may experience difficulties meeting the demand for our products and services. We cannot assure you that our systems, procedures or controls will be adequate to support the anticipated growth in our operations. Any failure to manage growth effectively could materially adversely affect our business, operating results and financial condition. We depend on strategic relationships. Our business strategy relies to a significant extent on our strategic relationships with other companies. These relationships include: - - software license arrangements for our network management system; - - technology licensing agreements for certain products; - - development and OEM arrangements with certain suppliers for advanced products; - - marketing arrangements with system integrators, and others; and - - collaboration agreements with suppliers of routers and headend equipment to ensure the interoperability of our cable modems with these suppliers. These relationships may not be successful because we may not be able to continue to maintain, develop or replace them in the event any of these relationships are terminated. In addition, any failure to renew or extend any licenses between any third party and us may adversely affect our business. Our customer base is concentrated and the loss of one or more of our customers could cause our business to suffer. A relatively small number of customers (which include system integrators) have accounted for a large part of our revenues to date, and we expect that this trend will continue. We expect that our largest customers in the future could be different from our largest customers today due to a variety of factors, including customers' deployment schedules and budget considerations. In addition, certain of our system integrators could develop and manufacture products that compete with us and therefore could no longer distribute our products. Because a limited number of cable operators account for a majority of our prospective customers, our future success will depend upon our ability to establish and maintain relationships with these companies. We may not be able to retain our current accounts or to obtain additional accounts. Both in the U.S. and internationally, a substantial majority of households passed are controlled by a relatively small number of cable operators. The loss of one or more of our customers or our inability to successfully develop relationships with other significant cable operators could cause our business to suffer. We are subject to risks associated with operating in international markets. We expect that a significant portion of our sales will continue to be in international markets for the foreseeable future. We have expanded operations in our existing international markets and intend to enter new international markets, which will demand management attention and financial commitment. In addition, a successful expansion of our international operations and sales in certain markets will require us to develop relationships with international systems integrators and distributors. We may not be able to identify, attract or retain suitable international systems integrators or distributors. We may not be able to successfully expand our international operations. Furthermore, to increase revenues in international markets, we will need to continue to establish foreign operations, to hire additional personnel to run these operations and to maintain good relations with our foreign systems integrators and distributors. To the extent that we are unable to successfully do so, our growth in international sales will be limited and our operating results could be adversely affected. Our international sales to date have been denominated in U.S. dollars. We do not currently engage in any foreign currency hedging transactions. A decrease in the value of foreign currencies relative to the U.S. dollar could make our products more expensive in international markets. In addition to currency fluctuation risks, international operations involve a number of risks not typically present in domestic operations. These risks include the following: - - changes in regulatory requirements; - - costs and risks of deploying systems in foreign countries; - - licenses, tariffs and other trade barriers; - - political and economic instability; - - difficulties in staffing and managing foreign operations; - - potentially adverse tax consequences; - - difficulties in obtaining governmental approvals for products; - - the burden of complying with a wide variety of complex foreign laws and treaties; and - - the possibility of difficult accounts receivable collections. We are also subject to the risks associated with the imposition of legislation and regulations relating to the import or export of high technology products. We cannot predict whether charges or restrictions upon the importation or exportation of our products will be implemented by the U.S. or other countries. Future international activity may result in sales denominated in foreign currencies. Gains and losses on the conversion to U.S. dollars of accounts receivable, accounts payable and other monetary assets and liabilities arising from international operations may contribute to fluctuations in our operating results. Any of these factors could materially and adversely affect our business, operating results and financial condition. The industry in which we compete is subject to consolidation. There has been a trend toward industry consolidation for several years, which has continued through the third quarter of 2000. We expect this trend toward industry consolidation to continue as companies attempt to strengthen or hold their market positions in an evolving industry. We believe that industry consolidation may provide increasingly stronger competitors that are better able to compete as sole-source vendors for customers. This could lead to more variability in operating results as we compete to be a single vendor solution and could have a material adverse effect on our business, operating results and financial condition. Additionally we believe that industry consolidation may lead to fewer larger possible customers. If we are unable to maintain our current customers or secure additional customers our business could be adversely affected. We may be subject to product returns and product liability claims due to defects in our products. Our products are complex and may contain undetected defects, errors or failures. These errors have occurred in our products in the past and additional errors may be expected to occur in our products in the future. The occurrence of any defects, errors, or failures could result in delays in installation, product returns and other losses to us or to our cable operators or end-users. Any of these occurrences could also result in the loss of or delay in market acceptance of our products, which could have a material adverse effect on our business, operating results and financial condition. We would have limited experience with the problems that could arise with any new products that we introduce. Although we have not experienced any product liability claims to date, the sale and support of our products entail the risk of these claims. A successful product liability claim brought against us could have a material adverse effect on our business, operating results and financial condition. The location of our facilities subjects us to the risk of earthquakes and or other natural disasters. Our corporate headquarters, including most of our research and development operations and our in-house manufacturing facilities, are located in the Silicon Valley area of Northern California, a region known for seismic activity. A significant natural disaster in the Silicon Valley, such as an earthquake, could have a material adverse impact on our business, financial condition and operating results. Our stock price is highly volatile and broad market fluctuations may adversely affect the market price of our common stock. The trading price of our common stock has fluctuated significantly since our initial public offering in May 1998. In addition, the trading price of our common stock could be subject to wide fluctuations in response to quarterly variations in operating results, announcements of technological innovations or new products by us or our competitors, announcements by certification and standards bodies, developments with respect to patents or proprietary rights, changes in financial estimates by securities analysts and other events or factors. In addition, the stock market has experienced volatility that has particularly affected the market prices of equity securities of many high technology companies and that often has been unrelated or disproportionate to the operating performance of these companies. These broad market fluctuations may adversely affect the market price of our common stock. Additionally, we may choose to structure acquisitions or other transactions by issuing additional Com21 common stock or warrants or options to purchase Com21 stock that would have a dilutive affect on the common stock currently outstanding. Although we anticipate these types of transactions will increase the overall value of Com21, Inc., they may have an adverse affect on the market price of our common stock. Readers are cautioned not to place undue reliance on these forward- looking statements, which reflect our management's view only as of the date of this Form 10-Q. We undertake no obligation to update these statements or publicly release the result of any revisions to the forward-looking statements that we may make to reflect events or circumstances after the date of this Form 10-Q or to reflect the occurrence of unanticipated events. ITEM 3 Quantitative and Qualitative Disclosures About Market Risk Interest Rate Sensitivity. Com21 maintains an investment portfolio consisting mainly of government and corporate debt obligations purchased with an average maturity of less than one year. These available-for-sale securities are subject to interest rate risk and will fall in value if market interest rates increase. If market interest rates were to increase immediately and uniformly by 10% from levels at September 30, 2000, the fair value of the portfolio would decline by an immaterial amount. We generally have the ability to hold our fixed income investments until maturity and therefore we would not expect our operating results or cash flows to be affected to any significant degree by the effect of a sudden change in market interest rates on our securities portfolio. Com21 is also exposed to market price risk on investments in a marketable equity securities held as available-for-sale investments. These investments are in the volatile high-technology industry sector. A 50% adverse change in the equity price would result in an approximate $2.8 million decrease in the fair value of the investments in the marketable equity securities as of September 30, 2000. Com21 has fixed rate debt of approximately $1.1 million as of September 30, 2000, that have no interest rate risk. The fixed rate on such obligations was approximately 11% during the third quarter of 2000. PART II: OTHER INFORMATION Item 1	Legal Proceedings 	None Item 2	Changes in Securities and Use of Proceeds 	None Item 3	Defaults upon Senior Securities 	None Item 4	Submission of Matters to a Vote of Security Holders 	None Item 5	Other Information 	None Item 6	Exhibits and Reports on Form 8-K. 	a)	Exhibits 		 Exhibit 		 Number		Description 		 27.1		Financial Data Schedule 	b)	Reports on Form 8-K The Company filed a report with the SEC on Form 8-K/A on September 18, 2000 to provide the details of the acquisition of GADline. Ltd. 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. Com21, Inc. Date: November 2, 2000 By: /s/ David L. Robertson ________________________________ David L. Robertson Chief Financial Officer Vice President, Finance