The move comes just one week after Level One took a minority stake in T.sqware Inc., and only two months after Level One's purchase of LAN switching specialist Acclaim Communications Inc.

Level One is issuing approximately $80 million in new shares of public stock for all of the outstanding shares of Jato, which is privately held. Michael Dell, founder of Dell Computer Corp., holds a minority investment of undisclosed size in the company. Rather than being dilutive, Level One expects the acquisition will increase its 1999 earnings slightly, with a few pennies of dilutive effects in the first quarter, tipping over to an accretive effect on earnings by mid-year.

Jato, founded by executives from Thomas-Conrad and Newbridge Networks, is one of the few Gigabit Ethernet LAN chip companies to focus on media-access controllers (MACs) for network interface cards, rather than for LAN switches. While other LAN semiconductor companies have developed architectures to link 100-Mbit Fast Ethernet channels with Gigabit Ethernet uplinks, Jato has tried to optimize bus performance for MAC devices. Jato's NetCelerator digital processor began sampling in a second revision to key OEMs in September, and is generating a lot of excitement for its Propulsion technology, which accelerates bursting of packets over the PCI bus.

Level One already gained experience in Layer 2 (bridging) and Layer 3 (routing) LAN switching at the chip level when it acquired Acclaim last summer. But Acclaim was an OEM, and its ASICs must still be converted to standard products. Through its recent investment in T.sqware, Level One has garnered access to an architecture in which multiple embedded Sparclets are used to provide general-purpose edge acceleration in WAN products ranging from remote routers to Sonet add-drop multiplexers.

By marrying the digital-chip troika to Level One's internal talents in DSP and high-speed interfaces, the company is moving to becoming a powerhouse in both LAN and WAN. Mike Wodopian, vice president of business development at Level One (Sacratmento, Calif.), said his company and Jato began discussions almost a year ago. The talks originally focused on the concept of launching joint marketing efforts, but Level One realized that "Jato's goals were extremely complementary to what we were trying to do in the physical-layer area," Wodopian said.

In addition to its expertise in PCI and Gigabit Ethernet MAC design, Jato has a broad array of Internet Protocol processing cores and sophisticated drivers for Windows NT 4.0 and 5.0, Wodopian said.

In comparing the Acclaim and Jato acquisitions, Wodopian said that Acclaim became the core of Level One's internetworking business unit. With an R&D center in the Bay Area, it is looking at all aspects of high-layer switching and routing. Jato will become an element of Level One's existing network products group under vice president David McKinnon. Jato president Walt Thirion will become Level One's vice president of strategic technical development, and will report directly to Robert Pepper, chief executive of Level One. Level One plans to keep much of the Jato staff in Austin.

In a recent interview, Jato vice president of marketing Peter Rauch and product manager Blaine Kohl waxed enthusiastic about the ability to cost-reduce the original NetCelerator design to a highly-optimized core called Ozark, which would allow the integration of physical-layer functions into the digital processor. Kohl predicted that, with copper-interface costs for Gigabit Ethernet dropping to $200 by late 1999, next-generation designs could be appropriate for PCI-based client computers, as well as servers.

Programs like the one for Ozark could be accelerated considerably after the acquisition, Wodopian said. Although the heart of the PCI market will be servers for the next few quarters, Wodopian said that "there are pressure points in the network beyond the server that we think can be addressed sooner rather than later by Gigabit Ethernet."