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We have developed a pseudospectral time-domain (PSTD) algorithm to simulate electromagnetic waves in inhomogeneous, conductive media. It requires only two grids per wavelength because the Fourier transform (through an FFT algorithm) is used to represent spatial derivatives. The wrap-around effect caused by the use of FFT is eliminated by using Berenger's perfectly matched layers (PML). Numerical experiments show that for the same accuracy in the PSTD method with two grids per wavelength, Yee's FDTD algorithm requires 8-16 grids per wavelength. Hence, the PSTD method is 4/sup D/-8/sup D/ times more efficient than FDTD methods (D is the dimensionality of the problem). The PSTD method is ideal for parallel computation of large-scale problems since both the FFT and the PML are well-suited for parallelization.