SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    Form 10-K

(Mark One)

|X|              ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
            OF THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)

For the Fiscal Year Ended .................................... December 31, 1996

                                       OR

 |_|           TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
            OF THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)

For the Transition Period from ____________________ to ____________________

Commission File Number   0-26124

                            PARADIGM TECHNOLOGY, INC.
             (Exact name of registrant as specified in its charter)


                Delaware                                        770140882-5
    ---------------------------------                       -------------------
      (State or other jurisdiction                           (I.R.S. Employer
    of incorporation or organization)                       Identification No.)

     694 Tasman Drive, Milpitas, CA                                95035
----------------------------------------                         ----------
(Address of principal executive offices)                         (Zip Code)

             (408) 954-0500
     -------------------------------
     (Registrant's telephone number,
          including area code)


           Securities registered under Section 12(b) of the Act: None
    Securities registered pursuant to Section 12(g) of the Act: Common Stock,
                                 $.01 Par Value

         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed 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 at least the past 90 days. YES |X| NO |_|

         Indicate by check mark if disclosure of delinquent  filers  pursuant to
Item 405 of Regulation S-K is not contained  herein,  and will not be contained,
to the best of  registrant's  knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part  III of this  Form  10-K or any
amendment to this Form 10-K. |_|

         Indicate by check  whether the  registrant  has filed all documents and
reports  required  to be  filed by  Section  12,  13 or 15(d) of the  Securities
Exchange Act of 1934 subsequent to the  distribution of securities  under a plan
confirmed by a court. |X|

         The aggregate market value of the voting stock held by nonaffiliates of
the  registrant was  approximately  $7,582,869 on February 20, 1997 based on the
last sale price as reported by the NASDAQ/National Market System.

         The aggregate  number of outstanding  shares of Common Stock,  $.01 par
value, of the registrant was 7,241,086 shares as of February 20, 1997.

<PAGE>

         When used in this Form 10-K, the words "estimate," "project," "intend,"
"expect"  and similar  expressions  are  intended  to  identify  forward-looking
statements.  Such statements are subject to risks and  uncertainties  that could
cause actual results to differ  materially,  including  factors  relating to the
impact of competitive  products and pricing,  the timely  development and market
acceptance of new products and upgrades to existing  products,  availability and
cost of products  from  Paradigm's  suppliers  and market  conditions  in the PC
industry.  For discussion of certain such risk factors,  see  "Business--Factors
That May Affect  Future  Results."  Readers  are  cautioned  not to place  undue
reliance on these  forward-looking  statements,  which speak only as of the date
hereof.  The Company  undertakes no obligation  to publicly  release  updates or
revisions to these statements.






<PAGE>



                                TABLE OF CONTENTS

                                                                            Page
Item                                                                        ----
----

PART I   ....................................................................  1

         ITEM 1.  BUSINESS...................................................  1
         ITEM 2.  PROPERTIES................................................. 16
         ITEM 3.  LEGAL PROCEEDINGS.......................................... 17
         ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY
                  HOLDERS.................................................... 18

PART II  .................................................................... 18
         ITEM 5.  MARKET FOR REGISTRANT'S COMMON STOCK AND
                  RELATED STOCKHOLDER MATTERS ............................... 18
         ITEM 6.  SELECTED FINANCIAL DATA ................................... 18
         ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATION .............. 20
         ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................ 36
         ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
                  ACCOUNTING AND FINANCIAL DISCLOSURE........................ 59

PART III .................................................................... 60
         ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
                  REGISTRANT ................................................ 60
         ITEM 11. EXECUTIVE COMPENSATION .................................... 62
         ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
                  OWNERS AND MANAGEMENT ..................................... 65
         ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............. 67

PART IV  .................................................................... 69
         ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
                  REPORTS ON FORM 8-K ....................................... 69

SIGNATURES................................................................... 76



                                       -i-

<PAGE>

                                     PART I

ITEM 1.           BUSINESS.

         Paradigm  Technology,  Inc.  ("Paradigm" or the "Company")  designs and
markets  high  speed,   high  density  static  random  access  memory   ("SRAM")
semiconductor devices to meet the needs of advanced  telecommunications devices,
networks,  workstations,  high  performance  PCs,  advanced  modems and  complex
military/aerospace  applications.  The Company focuses on high  performance,  10
nanosecond  ("ns") and faster SRAMs.  For the year ended December 31, 1996, 10ns
and  faster  SRAMs  accounted  for  approximately  36% of the  Company's  sales.
Paradigm believes its proprietary CMOS process and design technologies enable it
to offer  SRAMs with high  speeds and small die sizes.  Using a  combination  of
innovative process architecture and design know-how,  the Company was one of the
first  companies  to  introduce  high  speed  CMOS  SRAMs for  three  successive
generations of product densities:  256 kilobit ("K"), one megabit ("M"), and 4M.
Paradigm's customers include Hughes Network Systems, Motorola and US Robotics.

Recent Developments

         Sale of Manufacturing  Operations.  On November 15, 1996, Paradigm sold
its wafer  fabrication  facility  (the "Fab") to Orbit  Semiconductor,  Inc.,  a
wholly owned  subsidiary  of DII Group,  Inc.  ("Orbit").  The Company  received
aggregate  consideration of $20 million consisting of $6.7 million in cash, $7.5
million in debt  assumption,  and  promissory  notes in the aggregate  principal
amount of $5.8 million.  The sale of the Fab resulted in a loss of $4.6 million,
which was recorded in the fourth quarter of 1996.

         As a result of the sale of the Fab,  Paradigm's future needs for wafers
will  need to be  supplied  by third  parties.  Orbit has  agreed to supply  the
Company a specified quantity of wafers in exchange for specified credits against
the promissory  notes delivered in connection with the sale. The Company is also
in the process of seeking wafer supply from offshore foundries who would provide
8-inch wafers using 0.35 micron process technology. See "Factors That May Affect
Future Results-Dependence on Foundries and Other Third Parties."

         Sale of Preferred Stock. On January 23, 1997,  Paradigm sold a total of
200 shares of 5% Series A Convertible Redeemable Preferred Stock (the "Preferred
Stock") in a private placement to Vintage  Products,  Inc. at a price of $10,000
per  share,   for  total   proceeds  (net  of  payments  to  third  parties)  of
approximately  $1,880,000.  The Preferred  Stock is convertible at the option of
the  holder  into the number of fully  paid and  nonassessable  shares of Common
Stock as is  determined  by  dividing  (A) the sum of (1)  $10,000  plus (2) the
amount of all  accrued  but  unpaid or  accumulated  dividends  on the shares of
Preferred  Stock being  converted by (B) the  Conversion  Price in effect at the
time of  conversion.  The  "Conversion  Price" will be equal to the lower of (i)
$2.25 or (ii)  eighty-two  percent  (82%) of the average  closing bid price of a
share of Common Stock as quoted on the Nasdaq  National Market over the five (5)
consecutive trading days immediately  preceding the date of notice of conversion
of the Preferred  Stock.  The Preferred Stock is redeemable by the Company under
certain limited


                                       -1-

<PAGE>

circumstances. The Company shall not be required to issue shares of Common Stock
equal to or greater than twenty percent (20%) of the Common Stock outstanding on
the  date of the  initial  issuance  of the  Preferred  Stock.  The  Company  is
registering  the  maximum  number  of  shares  of  Common  Stock  issuable  upon
conversion of the Preferred Stock.

         Shutdown of NewLogic Corporation Operations.  In June 1996, the Company
acquired  NewLogic  Corp.  ("NewLogic")  with the strategy to expand  Paradigm's
product line beyond SRAMs.  In early 1997,  the Company  believed that it was in
Paradigm's  best  interest  to shut  down the  NewLogic  operation  and focus on
Paradigm's core SRAM products and markets.

Industry Background

         Virtually   all  digital   electronic   systems,   including   cellular
telephones,  workstations, PCs and modems, contain memory devices. Over the past
decade, the drive to reduce the size and increase the speed and functionality of
electronic systems has required concurrent increases in the density and speed of
memory  devices used in these  systems.  The most widely used memory devices are
dynamic  random  access  memories  ("DRAMs") and SRAMs.  DRAMs are  commercially
available with higher densities than SRAMs, while SRAMs generally are capable of
significantly higher speeds than DRAMs of comparable density. SRAMs achieve this
speed advantage  principally by  incorporating  more  transistors in each memory
cell,  rendering  SRAMs larger and more costly to  manufacture.  Until recently,
DRAMs have produced  acceptable  performance  levels at a lower cost and reduced
size  compared to SRAMs.  However,  the  increased  computing  speeds of digital
signal  processors  contained  in  advanced  telecommunications   equipment  and
recently introduced  processors,  such as Intel's Pentium and the PowerPC,  have
exceeded the ability of DRAMs to provide timely access to data. For example,  to
take advantage of the significantly increased performance  capabilities of these
new  processors in high  performance  PCs,  SRAMs are often used as cache memory
between the processor and the DRAM main memory. The cache memory stores the most
frequently  or most  recently  used  data from the DRAM  main  memory,  enabling
quicker access by the processor. When SRAMs are used to provide access to a high
percentage of the information the processor requests,  data access speeds can be
greatly enhanced.

         The  vast  majority  of SRAMs  currently  sold  are  industry  standard
asynchronous  SRAMs that have only  relatively  simple  interface  logic and are
required to operate only at normal commercial  temperatures.  Synchronous SRAMs,
which  operate at the same clock speed as the  processor,  are more  complex and
difficult to produce than  asynchronous  SRAMs  because they combine SRAM memory
with additional logic. Synchronous burst mode SRAMs permit high- end processors,
such as the Pentium and PowerPC,  to access data more  quickly by allowing  data
bits to be transferred in blocks rather than one bit at a time. Both synchronous
and asynchronous SRAMs vary in performance features,  such as speed, density and
temperature   tolerance,   which  enable  them  to  support   various   high-end
applications.   In  addition,  the  demand  for  reduced  power  consumption  in
electronic  products has resulted in an  increasing  demand for low voltage SRAM
devices.



                                       -2-

<PAGE>

         Dataquest  Incorporated,   an  information  technology  research  firm,
estimates  that the  worldwide  market  for SRAM  products  will  grow from $6.7
billion in 1996 to $8.9  billion in 1999,  with the  market for  sub-20ns  SRAMs
growing from $2.0  billion to $2.5 billion over the same period.  In addition to
high performance PCs, SRAMs are used in a variety of other electronics products.
In commercial communications,  SRAMs are used in both cellular base stations and
digital  cellular  telephones.  SRAMs are also  increasingly  used in high speed
communication  networks,  such as Ethernet and FDDI-based networks.  In military
and  aerospace  systems,  SRAMs can also  provide  the high  performance  memory
required by fast military processors. For example, high speed military computers
utilize high performance SRAMs in pattern recognition and command,  control, and
communication  applications  embedded in today's  advanced  electronic  weapons,
planes, and satellites.

The Company's Products

         Paradigm designs, manufactures and sells a broad range of SRAM products
with various  density,  speed,  configuration,  temperature  range and packaging
options for a wide range of commercial,  industrial,  and military applications.
The Company's  products range in density from 256K to 4M. The Company's  fastest
products currently achieve 7ns access times, and for the year ended December 31,
1996,  10ns and faster  SRAMs  accounted  for 36% of the  Company's  sales.  The
majority  of   Paradigm's   products  are  available  in  two  levels  of  power
consumption,  standard  and  low,  and  three  temperature  ranges,  commercial,
industrial, and military. Paradigm also offers its products in a wide variety of
packaging   options  to   accommodate   various   product   features   and  cost
considerations.  Paradigm  designs  its SRAM  packages  and  pinouts to meet the
standards prescribed by the Joint Electron Device Engineering Council.

         Asynchronous SRAMs.  Paradigm's asynchronous SRAM products include high
speed  256K,  1M  and  4M  CMOS  SRAMs.  They  are  available  in a  variety  of
configurations and commercial and industrial temperature range versions, as well
as  military  versions  manufactured  to comply  with the most  recent  military
specifications.  Cellular  phones  represent a key  application  for  Paradigm's
asynchronous SRAMs, due largely to the wide temperature  tolerances and speed of
the Company's products.

         Synchronous  SRAMs.  Paradigm  has  introduced  a family of high speed,
synchronous  burst mode CMOS SRAM devices,  and has completed  development  of a
family of pipelined  burst mode  devices.  Key  applications  for the  Company's
synchronous  SRAMs include  workstations,  high performance PCs and file servers
with significant cache memory requirements.

         SRAM Modules.  Paradigm offers SRAM modules in which multiple SRAMs are
connected  and  grouped on a printed  circuit  board and sold as a single  unit.
Paradigm  module  offerings are designed to support the specific needs of the PC
cache market and the requirements for JEDEC standard SRAM modules. The Company's
PC cache module  offerings  include  Intel COAST  compliant  modules and modules
which support  PowerPC CHRP based  designs.  The JEDEC  standard  module product
offerings include modules ranging in size from


                                       -3-

<PAGE>

750Kb to 8Mb.  These  modules  are used in a variety of  applications  including
networking,  communications, digital signal processing ("DSP") boards and memory
testers.

         Products Under Development.  Timely development and introduction of new
products are  essential to  maintaining  Paradigm's  competitive  position.  The
Company  currently  develops  all of its  products  internally.  Paradigm  works
closely  with  leading  electronics  manufacturers  in order to  anticipate  and
develop  future   generations  of  high  performance  SRAMs  required  by  these
customers.   The  Company's  current  design   development   objectives  include
synchronous  SRAM devices for Pentium cache memory.  The Company also intends to
develop  products  to  provide  cache  memory  for the  next  generation  of x86
processors,  while  continuing to design and produce very fast SRAM products for
the telecommunications,  networking and military/aerospace industries.  Products
currently  under   development   include:   asynchronous,   low  voltage  SRAMs;
synchronous  burst pipelined  SRAMs;  modules for 90Mhz and faster Pentium cache
memory;   and  special   configuration   SRAMs  for  cellular  phone  and  modem
applications.  In  addition,  by working  closely  with  customers,  Paradigm is
developing a line of module  offerings.  The Company believes that these modules
will provide high quality,  high value SRAM-based industry standard products, as
well as custom solutions. In addition to new product development, the Company is
focused on redesigning existing products to reduce manufacturing costs, increase
yields, and increase the speeds of its products.

         The  SRAM  business  is  highly   cyclical  and  has  been  subject  to
significant   downturns  at  various  times  that  have  been  characterized  by
diminished product demand,  production overcapacity,  and accelerated erosion of
average selling prices.  During the latter part of 1995 and throughout 1996, the
market for certain SRAM devices  experienced an excess supply relative to demand
which resulted in a significant  downward trend in prices.  The Company  expects
such downward price trend to continue.

         The selling prices that the Company is able to command for its products
are highly dependent on industry-wide  production  capacity and demand.  In this
regard,  the Company did experience rapid erosion in product pricing during 1996
which was not within the control of the Company.  The Company could  continue to
experience  a  downward  trend in  pricing  which  could  adversely  effect  the
Company's operating results.

         The Company's  future  success will depend,  in part, on its ability to
offset  expected  price  erosion  through  manufacturing  cost  savings,   yield
improvements  and developing and  introducing on a timely basis new products and
enhanced versions of existing  products which incorporate  advanced features and
command higher prices.

Customers and Applications

         Recent   market    trends,    such   as   the   rapid    expansion   of
telecommunications,  graphics,  multimedia and networking  applications  and the
proliferation  of high-end  workstations  and PCs, have resulted in  significant
demand for high performance SRAMs. Paradigm has targeted this higher performance
segment of the SRAM market, where it believes critical performance criteria such
as speed and temperature tolerance are more highly valued.


                                       -4-

<PAGE>

         For the year ended December 31, 1995,  Paradigm's  sales of products to
Motorola  accounted  for 28% of sales.  Sales to  Motorola  during  this  period
represented sales to several separate  divisions of Motorola,  which the Company
believes make independent purchasing decisions.  For the year ended December 31,
1996, Motorola,  All American  Semiconductor and Micron Technology accounted for
25%, 13% and 13%, respectively, of the Company's sales.

Sales and Marketing

         Paradigm sells its products in North America through a combination of a
direct sales force,  independent sales representatives and distributors.  Direct
sales personnel are responsible for calling on key accounts in North America and
coordinating the activities of the Company's sales representatives.  The Company
has a sales manager in each of its regional  sales  offices in Boston,  Chicago,
Los  Angeles,  and San Jose.  The Company  sells its products in Asia and Europe
through  a  network  of  distributors  and  independent  sales  representatives.
Paradigm  intends to expand the size of its direct sales force and the number of
outside sales representatives to provide additional customer service and broaden
its customer base.

         The Company's sales representatives and distributors are not subject to
minimum  purchase  requirements  and can  discontinue  marketing  the  Company's
products at any time. The Company's  distributors are permitted to return to the
Company  any or all of the  products  purchased  by them and are  offered  price
protection.  As is  standard in the  semiconductor  industry,  distributors  are
granted a credit for the difference,  at the time of a price reduction,  between
the price they were  originally  charged for the products in  inventory  and the
reduced price which the Company subsequently charges distributors.  From time to
time,   distributors  are  also  granted  credit  on  an  individual  basis  for
Company-approved  price  reductions  on specific  transactions,  usually to meet
competitive  prices.  The  Company  believes  that its  relations  with it sales
representatives and distributors are good.

         In September 1994, Paradigm entered into a strategic  relationship with
National  Semiconductor  under  which  National  Semiconductor  made  an  equity
investment in the Company and was granted  exclusive  marketing and sales rights
to Paradigm's products in the military/aerospace  market. Paradigm believes that
National   Semiconductor's   significant  expertise  and  longstanding  customer
relationships  in the  military/aerospace  industries  benefit  the  Company  by
facilitating access to these higher-margin markets.

         The Company  believes that customer  service and technical  support are
important  competitive factors in selling to key customers.  Paradigm emphasizes
on-time  delivery and quick  responses to the demand  changes of its  customers.
Paradigm has trained employees of its sales  representatives and distributors to
provide technical support,  with Paradigm technical support engineers  available
to provide assistance with more difficult questions.

Backlog

         The  Company's  backlog  includes  all  purchase  orders that have been
received,  accepted,  and  scheduled  for  delivery.  The Company  counts in its
backlog only those orders which it


                                       -5-

<PAGE>

believes will be shipped within the next six months.  Most orders in backlog are
subject to delivery rescheduling, price renegotiations,  and cancellation at the
option of the purchaser,  usually without penalty. As a result, although backlog
may be useful for  scheduling  production,  it may not be a reliable  measure of
sales for future  periods.  As of December 31, 1996,  the Company's  backlog was
approximately $2.6 million.

Manufacturing

         On November 15, 1996, the Company sold its Fab to Orbit.  Following the
sale of the Fab,  the  Company  and  Orbit  entered  into a Wafer  Manufacturing
Agreement  whereby  Orbit will supply a quantity of wafers to the Company over a
specified  period of time.  The Company is also in the process of seeking  wafer
supply from other  offshore  foundries,  and  anticipates  that it will  conduct
business with other foundries by delivering  written purchase orders  specifying
the particular  product  ordered,  quantity,  price,  delivery date and shipping
terms and, therefore, such foundries will not be obligated to supply products to
the  Company  for  any  specific  period,  in any  specific  quantity  or at any
specified  price,  except as may be provided  in a  particular  purchase  order.
Reliance on outside foundries involves several risks,  including  constraints or
delays in timely  delivery  of the  Company's  products,  reduced  control  over
delivery  schedules,  quality assurance,  potential costs and loss of production
due to seismic activity,  weather conditions and other factors.  To the extent a
foundry  terminates its relationship  with the Company,  or should the Company's
supply from a foundry be  interrupted  or terminated  for any other reason,  the
Company  may not have a  sufficient  amount  of time to  replace  the  supply of
products  manufactured by the foundry.  Should the Company be unable to obtain a
sufficient  supply of products to enable it to meet demand, it could be required
to allocate  available  supply of its products among its  customers.  Until late
1995, there had been a worldwide shortage of advanced process technology foundry
capacity and there can be no assurance  that the Company will obtain  sufficient
foundry  capacity to meet customer  demand in the future,  particularly  if that
demand should  increase.  The Company is continuously  evaluating  potential new
sources of supply. However, the qualification process and the production ramp-up
for additional foundries could take longer than anticipated, and there can be no
assurance  that such  sources  will be able or willing to satisfy the  Company's
requirements on a timely basis or at acceptable quality or per unit prices.

         Constraints or delays in the supply of the Company's products,  whether
because of capacity constraints, unexpected disruptions at the current or future
foundries or assembly houses,  delays in obtaining additional  production at the
existing foundry or in obtaining production from new foundries, shortages of raw
materials,  or other  reasons,  could result in the loss of customers  and other
material adverse effects on the Company's  operating results,  including effects
that may result  should the Company be forced to purchase  products  from higher
cost foundries or pay expediting charges to obtain additional supply.

Strategic Relationships

         Atmel  Corporation.  On April  28,  1995  Paradigm  signed a five  year
License  and  Manufacturing  Agreement  (the  "License  Agreement")  with Atmel,
pursuant to which the

                                      -6-

<PAGE>

Company and Atmel installed the Company's 0.6 micron CMOS manufacturing  process
at Atmel's advanced wafer fabrication facility in Colorado Springs,  Colorado in
1996. Pursuant to the License Agreement, each company will have a license to use
this process technology as installed at Atmel's facility. The Atmel facility has
agreed to  manufacture  six-inch  wafers for the  Company's  current  and future
products  using the  Company's  CMOS  process.  Atmel has  agreed to sell to the
Company, at predetermined prices, a committed quantity of sub-micron wafers each
year during the five-year term of the License Agreement. Paradigm and Atmel also
agreed to work together to migrate the CMOS process technology to 0.5 micron and
0.4 micron feature sizes. Pursuant to the License Agreement, Atmel also obtained
a license to certain of the Company's  existing SRAM  products,  and the Company
obtained a license to a future Atmel SRAM product,  in each case with  specified
royalties.

         NKK  Corporation.  Under  several  technology  license and  development
agreements,  the first two of which were executed in December 1990, Paradigm and
NKK  entered  into  various  product   development   and  technology   licensing
relationships,  resulting in  Paradigm's  successful  transfer of its 0.6 micron
process  technology  to  NKK's  wafer  fabrication   facility  in  Japan.  These
relationships were modified in April 1995 by an agreement (the "1995 Agreement")
which  significantly   simplified  the  relationship  between  the  parties  and
substantially ended each party's obligation to disclose or deliver technological
improvements to the other.  Under the 1995  Agreement,  NKK has agreed to supply
Paradigm with a significant quantity of 1M SRAMs of Paradigm's design each month
for a three year period in exchange for additional  and expanded  license rights
with respect to certain proprietary  technology.  However,  Paradigm is under no
obligation  to purchase the 1M SRAMs under the 1995  Agreement.  In effect,  the
1995 Agreement  provides  Paradigm with an important,  discretionary  ability to
increase  capacity on an  as-needed  basis.  The Company  began  shipping  SRAMs
produced  by NKK during the fourth  quarter  of 1995.  The 1995  Agreement  also
rescinded  NKK's right to restrict  Paradigm  from  entering  into other foundry
relationships or granting additional licenses for the Company's products.

         National Semiconductor Corporation. In September 1994, Paradigm entered
into a strategic  relationship with National  Semiconductor under which National
Semiconductor markets Paradigm's products to customers in the military/aerospace
industries. National Semiconductor also made an equity investment in the Company
in connection with this strategic relationship.

Competition

         The   semiconductor   industry   is   intensely   competitive   and  is
characterized  by  rapidly  changing  technology,  short  product  life  cycles,
cyclical  oversupply  and rapid price erosion.  The Company  competes with large
domestic  and  international   semiconductor  companies,   most  of  which  have
substantially greater financial, technical,  marketing,  distribution, and other
resources  than the Company.  The Company's  principal  competitors  in the high
performance   SRAM  market  include  Motorola  and  Micron   Technology.   Other
competitors  in  the  SRAM  market  include  Alliance   Semiconductor,   Cypress
Semiconductor,   Integrated  Device  Technology,  Integrated  Silicon  Solution,
Samsung  and  numerous  other large and  emerging  semiconductor  companies.  In
addition, other manufacturers can be expected to enter the high speed, high


                                       -7-

<PAGE>

density  SRAM  market.  The  Company  has also  licensed  the design and process
technology for substantially  all of its current products,  including certain of
its 256K, 1M and 4M products,  to NKK Corporation  ("NKK") and in the future may
compete  with NKK with  respect to all of such  products in certain  Pacific Rim
countries,  North  America  and  Europe  and,  as to  certain of its 256K and 1M
products,  in the  rest of the  world.  In 1995,  NKK  commenced  production  of
products using the Company's design and process technologies,  and therefore may
become a more significant competitor of the Company.  Paradigm has also licensed
to  Atmel  Corporation  ("Atmel")  the  right  to  produce  certain  of its SRAM
products,  and as a result is likely to compete  with Atmel with respect to such
products.  Because Atmel has greater  resources than the Company and has foundry
capacity, any such competition could adversely affect the Company. To the extent
that the Company enters into similar  arrangements with other companies,  it may
compete with such companies as well.

         The ability of the Company to compete  successfully depends on elements
outside its  control,  including  the rate at which  customers  incorporate  the
Company's products into their systems,  the success of such customers in selling
those  systems,  the Company's  protection  of its  intellectual  property,  the
number,  nature, and success of its competitors and their product introductions,
and general market and economic conditions.  In addition,  the Company's success
will depend in large part on its ability to develop,  introduce, and manufacture
in a timely  manner  products that compete  effectively  on the basis of product
features  (including  speed,  density,  die size, and packaging),  availability,
quality,  reliability,  and price,  together  with other  factors  including the
availability of sufficient manufacturing capacity and the adequacy of production
yields.  There  is no  assurance  that  the  Company  will be  able  to  compete
successfully in the future.

Patents and Licensed Technology

         The  Company  seeks to protect  its  proprietary  technology  by filing
patent applications to obtain patents in the United States and foreign countries
and by registering its circuit designs pursuant to the U.S.  Semiconductor  Chip
Protection   Act  of  1984.  The  Company  also  relies  on  trade  secrets  and
confidential  technological  know-how  in the  conduct  of its  business.  As of
December 31, 1996, the Company held 15 U.S. patents and one Canadian patent, and
had four U.S. and 15 foreign patent applications  pending.  The Company believes
that its patent portfolio  strengthens its negotiating  position with respect to
technology disputes that may occur in the future.

         The Company  intends to continue to pursue  patent,  trade secret,  and
mask work protection for its semiconductor  process technologies and designs. To
that end,  the Company has  obtained  certain  patents and patent  licenses  and
intends to continue  to seek  patents on its  inventions,  as  appropriate.  The
process of seeking patent protection can be long and expensive,  and there is no
assurance  that  patents  will  be  issued  from  currently  pending  or  future
applications or that, if patents are issued, they will be of sufficient scope or
strength to provide  meaningful  protection or any  commercial  advantage to the
Company.  In particular,  there can be no assurance that any patents held by the
Company will not be challenged, invalidated, or circumvented, or that the rights
granted thereunder will provide competitive advantage to the


                                       -8-

<PAGE>

Company.  The Company also relies on trade secret protection for its technology,
in part through confidentiality  agreements with its employees,  consultants and
third  parties.  There can be no  assurance  that these  agreements  will not be
breached,  that the Company will have adequate  remedies for any breach, or that
the Company's trade secrets will not otherwise  become known to or independently
developed by others. In addition,  the laws of certain  territories in which the
Company's  products  are or may be  developed,  manufactured,  or  sold  may not
protect the  Company's  products and  intellectual  property  rights to the same
extent as the laws of the United States.

         There  has been  substantial  litigation  regarding  patent  and  other
intellectual  property  rights in the  semiconductor  industry.  In the  future,
litigation may be necessary to enforce patents issued to the Company, to protect
trade secrets or know-how owned by the Company, or to defend the Company against
claimed  infringement  of the  rights of others and to  determine  the scope and
validity of the proprietary  rights of others. The Company has from time to time
received,  and  may in the  future  receive,  communications  alleging  possible
infringement of patents or other  intellectual  property  rights of others.  Any
such litigation  could result in substantial  cost to and diversion of effort by
the Company, which could have a material adverse effect on the Company. Further,
adverse  determinations in such litigation could result in the Company's loss of
proprietary  rights,  subject the Company to  significant  liabilities  to third
parties, require the Company to seek licenses from third parties, or prevent the
Company from  manufacturing  or selling its products,  any of which could have a
material adverse effect on the Company.

         In  December  1990,  as part of an  agreement  terminating  a strategic
relationship  with  AT&T,  the  Company  entered  into  a  nonexclusive  license
agreement  with  AT&T  giving  the  Company  a  license  to use all  AT&T-owned,
semiconductor-related patents over a period of eight years. Under the agreement,
the Company  agreed to pay AT&T a royalty of 0.75% of revenue  for each  product
produced by the Company. Under the same agreement,  the Company licensed to AT&T
its poly-iso structure for a similar royalty.

         The Company has also entered into certain  technology  agreements  with
Atmel and NKK.

Environmental Matters

         The Company  believes that  compliance with federal,  state,  and local
provisions  regulating  the  discharge  of  materials  into the  environment  or
otherwise relating to the protection of the environment will not have a material
effect upon its capital expenditures, operations, or competitive position.

Employees

         As of December 31, 1996, the Company had 85 employees,  of whom 18 were
engaged in research and development and engineering, 10 in marketing, sales, and
customer support, 44 in manufacturing, 8 in finance and 5 in administration. The
Company's employees are not


                                       -9-

<PAGE>

represented by a collective  bargaining  organization  and the Company has never
experienced a work stoppage.  The Company  believes that its employee  relations
are good.

Factors That May Affect Future Results

         The  operations  and  business  prospects of the Company are subject to
certain  qualifications  based on potential business risks faced by the Company.
This Form 10-K should be reviewed  in light of the  potential  effects of events
that may occur as outlined in the following risk factors. Readers of this report
should  consider  carefully the following  risk factors in addition to the other
information presented in this Form 10-K.

         Uncertainty of Future Profitability; Need for Additional Funds. For the
year ended  December 31, 1996 the Company  reported a net loss of $36.4 million.
The sale of the Company's wafer fabrication  facility in November 1996, resulted
in a loss of $4.6 million, which was recorded in the fourth quarter of 1996.

         The Company's recent  operations have consumed  substantial  amounts of
cash. The Company believes that cash flow from operations and other existing and
potential  sources of liquidity will be sufficient to meet its projected working
capital  and other cash  requirements  through at least the  remainder  of 1997.
However,  there can be no assurance  that the Company  will not need  additional
capital  and if so that  such  capital  can be  successfully  obtained  on terms
acceptable to the Company or at all. The sale or issuance of  additional  equity
or  convertible  debt  securities  could  result in  additional  dilution to the
Company's stockholders.  There can be no assurance that additional financing, if
required,  will be  available  when  needed or, if  available,  will be on terms
acceptable to the Company.

         Fluctuations  in  Quarterly   Results.   The  Company  has  experienced
significant  quarterly  fluctuations in operating  results and anticipates  that
these  fluctuations  will  continue.  These  fluctuations  have been caused by a
number of  factors,  including  changes in  manufacturing  yields by  contracted
manufacturers,  changes in the mix of products  sold,  the timing of new product
introductions  by the  Company  or its  competitors,  cancellation  or delays of
purchases of the Company's products,  the gain or loss of significant customers,
the  cyclical   nature  of  the   semiconductor   industry  and  the  consequent
fluctuations in customer demand for the Company's  devices and the products into
which they are incorporated,  and competitive  pressures on prices. A decline in
demand in the markets  served by the Company,  lack of success in developing new
markets or new products, or increased research and development expenses relating
to new  product  introductions  could  have a  material  adverse  effect  on the
Company.  Moreover,  because the Company sets spending levels in advance of each
quarter based, in part, on  expectations of product orders and shipments  during
that quarter,  a shortfall in revenue in any  particular  quarter as compared to
the  Company's  plan  could  have a  material  adverse  effect  on the  Company.
Beginning  in late 1995 and  continuing  into 1996,  the market for certain SRAM
devices  experienced  a  significant  excess  supply  relative to demand,  which
resulted in a significant downward trend in prices. The market for the Company's
products  could  continue to experience a downward  trend in pricing which could
adversely  affect the Company's  operating  results.  The  Company's  ability to
maintain or increase revenues in light of the current


                                      -10-

<PAGE>

downward  trend in product  prices will be highly  dependent upon its ability to
increase unit sales  volumes of existing  products and to introduce and sell new
products in quantities  sufficient to compensate for the anticipated declines in
average selling prices of existing  products.  Declining  average selling prices
will also  adversely  affect the Company's  gross margins  unless the Company is
able to  reduce  its costs per unit to  offset  such  declines.  There can be no
assurance  that  the  Company  will be  able to  increase  unit  sales  volumes,
introduce and sell new products, or reduce its costs per unit.

         Dependence  on New  Products  and  Technologies.  The  market  for  the
Company's  products  is  characterized  by rapidly  changing  technology,  short
product  life  cycles,  cyclical  oversupply  and rapid price  erosion.  Average
selling prices for many of the Company's products have generally  decreased over
the  products'  life  cycles in the past and are  expected  to  decrease  in the
future.  Accordingly,  the Company's future success will depend, in part, on its
ability to develop and  introduce  on a timely  basis new  products and enhanced
versions of its  existing  products  which  incorporate  advanced  features  and
command higher prices. The success of new product introductions and enhancements
to existing products depends on several factors, including the Company's ability
to  develop  and  implement  new  product  designs,  achievement  of  acceptable
production  yields,  and market  acceptance of customers'  end products.  In the
past, the Company has  experienced  delays in the development of certain new and
enhanced  products.  Based  upon  the  increasing  complexity  of both  modified
versions of existing products and planned new products,  such delays could occur
again in the future.  Further, the cost of development can be significant and is
difficult to forecast.  In addition,  there can be no assurance  that any new or
enhanced products will achieve or maintain market acceptance.  If the Company is
unable to design,  develop and introduce  competitive products or to develop new
or modified designs on a timely basis, the Company's  operating  results will be
materially adversely affected.

         Dependence on Foundries and Other Third Parties.  On November 15, 1996,
the Company  sold its Fab to Orbit.  Following  the sale of the Fab, the Company
and Orbit entered into a Wafer Manufacturing Agreement whereby Orbit will supply
a quantity of wafers to the Company over a specified period of time. The Company
is also in the process of seeking  wafer supply from other  offshore  foundries,
and anticipates that it will conduct business with other foundries by delivering
written purchase orders  specifying the particular  product  ordered,  quantity,
price, delivery date and shipping terms and, therefore,  such foundries will not
be obligated to supply products to the Company for any specific  period,  in any
specific  quantity  or at any  specified  price,  except as may be provided in a
particular purchase order. Reliance on outside foundries involves several risks,
including  constraints or delays in timely  delivery of the Company's  products,
reduced control over delivery schedules, quality assurance,  potential costs and
loss of  production  due to  seismic  activity,  weather  conditions  and  other
factors.  To the extent a foundry  terminates its relationship with the Company,
or should the Company's  supply from a foundry be  interrupted or terminated for
any  other  reason,  the  Company  may not have a  sufficient  amount of time to
replace the supply of products  manufactured by the foundry.  Should the Company
be unable to obtain a sufficient supply of products to enable it to meet demand,
it could be required  to allocate  available  supply of its  products  among its
customers.  Until  recently,  there has been a  worldwide  shortage  of advanced
process technology foundry


                                      -11-

<PAGE>

capacity and there can be no assurance  that the Company will obtain  sufficient
foundry  capacity to meet customer  demand in the future,  particularly  if that
demand should  increase.  The Company is continuously  evaluating  potential new
sources of supply. However, the qualification process and the production ramp-up
for additional foundries could take longer than anticipated, and there can be no
assurance  that such  sources  will be able or willing to satisfy the  Company's
requirements on a timely basis or at acceptable quality or per unit prices.

         Constraints or delays in the supply of the Company's products,  whether
because of capacity constraints, unexpected disruptions at the current or future
foundries or assembly houses,  delays in obtaining additional  production at the
existing foundry or in obtaining production from new foundries, shortages of raw
materials,  or other  reasons,  could result in the loss of customers  and other
material adverse effects on the Company's  operating results,  including effects
that may result  should the Company be forced to purchase  products  from higher
cost foundries or pay expediting charges to obtain additional supply.

         Semiconductor  Industry;  SRAM Market.  The  semiconductor  industry is
highly  cyclical  and has been  subject to  significant  economic  downturns  at
various  times,   characterized   by  diminished   product  demand,   production
overcapacity and accelerated erosion of average selling prices. During 1996, the
market for certain SRAM devices  experienced an excess supply relative to demand
which  resulted in a  significant  downward  trend in prices.  The Company could
continue to experience a downward trend in pricing which could adversely  affect
the Company's operating margins.  The selling prices that the Company is able to
command  for its  products  are highly  dependent  on  industry-wide  production
capacity and demand,  and as a consequence  the Company could  experience  rapid
erosion in product  pricing  which is not within the  control of the Company and
which  could  adversely  effect the  Company's  operating  results.  The Company
expects  that  additional  SRAM  production  capacity  will become  increasingly
available in the foreseeable  future, and such additional capacity may adversely
affect the Company's margins and competitive position. In addition,  the Company
may experience  period-to-period  fluctuations  in operating  results because of
general semiconductor industry conditions, overall economic conditions, or other
factors. The Company's business is also subject to the risks associated with the
imposition of legislation  and  regulations  relating to the import or export of
semiconductor products.

         Litigation.  On August 12, 1996, a securities  class action lawsuit was
filed in Santa  Clara  Superior  Court  against  the  Company and certain of its
officers  and  directors  (the  "Paradigm  Defendants").  The class  alleged  by
plaintiffs  consists of purchasers  of the Company's  common stock from November
20,  1995  to  March  22,  1996,  inclusive.  The  complaint  alleges  negligent
misrepresentation, fraud and deceit, breach of fiduciary duty, and violations of
certain  provisions of the California  Corporate  Securities Law and Civil Code.
The plaintiffs seek an unspecified  amount of compensatory and punitive damages.
Plaintiffs allege,  among other things, that the Paradigm Defendants  wrongfully
represented  that the  Company  would have  protection  against  adverse  market
conditions  in the  semiconductor  market based on the  Company's  focus on high
speed, high performance  semiconductor  products. The Paradigm Defendants intend
to vigorously defend the action. On September 30, 1996, the Paradigm  Defendants
filed a demurrer seeking to have plaintiffs' entire complaint dismissed with


                                      -12-

<PAGE>

prejudice.  On December 12, 1996, the Court  sustained the demurrer as to all of
the  causes  of  action  except  for  violation  of  certain  provisions  of the
California Corporate Securities Law and Civil Code. The Court, however,  granted
plaintiffs  leave to amend the  complaint  to attempt to cure the defects  which
caused the Court to sustain the demurrer.  Plaintiffs failed to amend within the
allotted  time. On January 8, 1997, the Paradigm  Defendants  filed an answer to
the  complaint  denying any  liability  for the acts and damages  alleged by the
plaintiffs.  Plaintiffs have served the Paradigm  Defendants with a first set of
requests to produce  documents,  to which the Paradigm  Defendants are currently
responding. Plaintiffs have also filed a motion for class certification which is
set for hearing on April 15,  1997.  No other  motions  have been filed with the
court by plaintiffs  or  defendants,  and no discovery  has yet been  conducted.
There can be no assurance  that the Company will be  successful in such defense.
Even if Paradigm is successful in such defense,  it may incur  substantial legal
fees and other expenses related to this claim. If unsuccessful in the defense of
any such claim, the Company's  business,  operating results and cash flows could
be materially adversely affected.

         On February 21, 1997, an additional purported class action, with causes
of action and factual allegations  essentially  identical to those of the August
12, 1996 class action lawsuit,  was filed.  This second class action is asserted
against the same Paradigm Defendants,  PaineWebber,  Inc. and Smith Barney. None
of the  Paradigm  Defendants  have been served in this new action.  The Paradigm
Defendants believe because the new action appears redundant it is subject to the
demurrer which the Court sustained in the first class action as to all causes of
action  asserted  against Michael Gulett and all but one of the causes of action
asserted against the remaining Paradigm Defendants.

         Product and Customer  Concentration;  Dependence on  Telecommunications
and Computer Industries. Currently, substantially all of the Company's sales are
derived from the sale of SRAM products.  Additionally,  a substantial portion of
the Company's sales is derived from a relatively small number of customers.  For
the year ended  December 31, 1995,  Motorola  accounted for 28% of the Company's
sales,  and for the  year  ended  December  31,  1996,  Motorola,  All  American
Semiconductor   and  Micron   Technology   accounted   for  25%,  13%  and  13%,
respectively,  of the  Company's  sales.  Substantially  all  of  the  Company's
products are incorporated into telecommunications and computer-related products.
The  telecommunications and computer industries have recently experienced strong
unit sales growth, which has increased demand for integrated circuits, including
the memory products offered by the Company.  However, these industries have from
time to time experienced cyclical,  depressed business conditions. Such industry
downturns  have  historically  resulted in reduced  product demand and declining
average selling prices.  The Company's  business and operating  results could be
materially  and adversely  affected by a downturn in the  telecommunications  or
computer industries in the future.

         Competition. The semiconductor industry is intensely competitive and is
characterized  by  rapidly  changing  technology,  short  product  life  cycles,
cyclical  oversupply  and rapid price erosion.  The Company  competes with large
domestic  and  international   semiconductor  companies,   most  of  which  have
substantially greater financial, technical,  marketing,  distribution, and other
resources than the Company. The Company's principal competitors in the high


                                      -13-

<PAGE>

performance   SRAM  market  include  Motorola  and  Micron   Technology.   Other
competitors  in  the  SRAM  market  include  Alliance   Semiconductor,   Cypress
Semiconductor,   Integrated  Device  Technology,  Integrated  Silicon  Solution,
Samsung  and  numerous  other large and  emerging  semiconductor  companies.  In
addition,  other  manufacturers  can be expected  to enter the high speed,  high
density  SRAM  market.  The  Company  has also  licensed  the design and process
technology for substantially  all of its current products,  including certain of
its 256K, 1M and 4M products,  to NKK Corporation  ("NKK") and in the future may
compete  with NKK with  respect to all of such  products in certain  Pacific Rim
countries,  North  America  and  Europe  and,  as to  certain of its 256K and 1M
products,  in the  rest of the  world.  In 1995,  NKK  commenced  production  of
products using the Company's design and process technologies,  and therefore may
become a more significant competitor of the Company.  Paradigm has also licensed
to  Atmel  Corporation  ("Atmel")  the  right  to  produce  certain  of its SRAM
products,  and as a result is likely to compete  with Atmel with respect to such
products.  Because Atmel has greater  resources than the Company and has foundry
capacity, any such competition could adversely affect the Company. To the extent
that the Company enters into similar  arrangements with other companies,  it may
compete with such companies as well.

         The ability of the Company to compete  successfully depends on elements
outside its  control,  including  the rate at which  customers  incorporate  the
Company's products into their systems,  the success of such customers in selling
those  systems,  the Company's  protection  of its  intellectual  property,  the
number,  nature, and success of its competitors and their product introductions,
and general market and economic conditions.  In addition,  the Company's success
will depend in large part on its ability to develop,  introduce, and manufacture
in a timely  manner  products that compete  effectively  on the basis of product
features  (including  speed,  density,  die size, and packaging),  availability,
quality,  reliability,  and price,  together  with other  factors  including the
availability of sufficient manufacturing capacity and the adequacy of production
yields.  There  is no  assurance  that  the  Company  will be  able  to  compete
successfully in the future.

         Dependence on Patents,  Licenses and Intellectual  Property;  Potential
Litigation.  The Company intends to continue to pursue patent, trade secret, and
mask work protection for its semiconductor  process technologies and designs. To
that end,  the Company has  obtained  certain  patents and patent  licenses  and
intends  to  continue  to  seek  patents  on its  inventions  and  manufacturing
processes, as appropriate.  The process of seeking patent protection can be long
and  expensive,  and there is no  assurance  that  patents  will be issued  from
currently  pending or future  applications or that, if patents are issued,  they
will be of sufficient scope or strength to provide meaningful  protection or any
commercial  advantage to the Company.  In particular,  there can be no assurance
that any patents held by the Company  will not be  challenged,  invalidated,  or
circumvented,  or that the rights granted  thereunder  will provide  competitive
advantage to the Company. The Company also relies on trade secret protection for
its technology,  in part through confidentiality  agreements with its employees,
consultants and third parties.  There can be no assurance that these  agreements
will not be  breached,  that the Company  will have  adequate  remedies  for any
breach,  or that the Company's trade secrets will not otherwise  become known to
or  independently  developed  by  others.  In  addition,  the  laws  of  certain
territories   in  which  the  Company's   products  are  or  may  be  developed,
manufactured,


                                      -14-

<PAGE>

or sold may not protect the Company's products and intellectual  property rights
to the same extent as the laws of the United States.

         There  has been  substantial  litigation  regarding  patent  and  other
intellectual  property  rights in the  semiconductor  industry.  In the  future,
litigation may be necessary to enforce patents issued to the Company, to protect
trade secrets or know-how owned by the Company, or to defend the Company against
claimed  infringement  of the  rights of others and to  determine  the scope and
validity of the proprietary  rights of others. The Company has from time to time
received,  and  may in the  future  receive,  communications  alleging  possible
infringement of patents or other  intellectual  property  rights of others.  Any
such litigation  could result in substantial  cost to and diversion of effort by
the Company, which could have a material adverse effect on the Company. Further,
adverse  determinations in such litigation could result in the Company's loss of
proprietary  rights,  subject the Company to  significant  liabilities  to third
parties, require the Company to seek licenses from third parties, or prevent the
Company from  manufacturing  or selling its products,  any of which could have a
material adverse effect on the Company.

         International  Operations.  Approximately  28% and 25% of the Company's
sales in the  years  ended  December  31,  1995  and  1996,  respectively,  were
attributable  to sales outside the United States,  primarily in Asia and Europe,
and the Company  expects that  international  sales will continue to represent a
significant  portion of its sales.  In  addition,  the  Company  expects  that a
significant  portion of its products will be manufactured  by independent  third
parties in Asia.  Therefore,  the Company is subject to the risks of  conducting
business  internationally,  and both  manufacturing  and sales of the  Company's
products may be adversely affected by political and economic  conditions abroad.
Protectionist   trade  legislation  in  either  the  United  States  or  foreign
countries, such as a change in the current tariff structures,  export compliance
laws, or other trade policies,  could adversely affect the Company's  ability to
have  products  manufactured  or sell products in foreign  markets.  The Company
cannot predict whether quotas,  duties,  taxes, or other charges or restrictions
will be  imposed by the  United  States,  Hong  Kong,  Japan,  Taiwan,  or other
countries upon the  importation or exportation of the Company's  products in the
future,  or what effect any such actions would have on its relationship with NKK
or other manufacturing sources, or its general business, financial condition and
results of operations.  In addition,  there can be no assurance that the Company
will not be  adversely  affected by  currency  fluctuations  in the future.  The
prices for the Company's products are denominated in dollars.  Accordingly,  any
increase in the value of the dollar as compared to  currencies  in the Company's
principal overseas markets would increase the foreign currency-denominated sales
prices of the  Company's  products,  which may  negatively  affect the Company's
sales in those markets.  Currency  fluctuations  in the future may also increase
the manufacturing costs of the Company's products.  Although the Company has not
to date experienced any material adverse effect on its operations as a result of
such  international  risks, there can be no assurance that such factors will not
adversely impact the Company's general business, financial condition and results
of operations.

         Employees;  Management of Growth.  The Company's future success will be
heavily  dependent upon its ability to attract and retain  qualified  technical,
managerial, marketing and


                                      -15-

<PAGE>

financial  personnel.  The Company has  experienced a high degree of turnover in
personnel, including at the senior and middle management levels. The competition
for such personnel is intense and includes companies with substantially  greater
financial and other resources to offer such personnel. There can be no assurance
that the Company will be able to attract and retain the necessary personnel,  or
successfully  manage  its  expansion,  and any  failure  to do so  could  have a
material adverse effect on the Company.

         Potential Volatility of Stock Price. The trading price of the Company's
Common  Stock is subject to wide  fluctuations  in  response  to  variations  in
operating results of the Company and other  semiconductor  companies,  actual or
anticipated  announcements  of  technical  innovations  or new  products  by the
Company or its competitors, general conditions in the semiconductor industry and
the worldwide economy,  and other events or factors.  The Company's stock traded
from a high of $37.25  in August  1995 to a low of $1.38 in  February  1997.  In
addition,  the stock market has in the past experienced extreme price and volume
fluctuations,  particularly affecting the market prices for many high technology
companies,  and these  fluctuations  have often been  unrelated to the operating
performance of the specific  companies.  These market fluctuations may adversely
affect the market price of the Company's Common Stock.

         Antitakeover Effect of Certain Charter  Provisions.  Certain provisions
of the Company's  Certificate  of  Incorporation  and Bylaws and of Delaware law
could discourage  potential  acquisition  proposals and could delay or prevent a
change  in  control  of  the  Company.   Such  provisions   could  diminish  the
opportunities  for a stockholder  to  participate  in tender  offers,  including
tender  offers at a price  above the then  current  market  value of the  Common
Stock. Such provisions may also inhibit  fluctuations in the market price of the
Common Stock that could result from takeover attempts. In addition, the Board of
Directors,  without further stockholder approval, may issue Preferred Stock that
could  have the  effect of  delaying  or  preventing  a change in control of the
Company.  The issuance of Preferred Stock could also adversely affect the voting
power of the holders of Common Stock,  including  the loss of voting  control to
others.

ITEM 2.           PROPERTIES.

         The  Company  leases its  20,000  square  foot  principal  facility  in
Milpitas,  California  pursuant  to a lease that  expires in January  2002.  The
Company also has domestic sales offices in the Boston,  Chicago, Los Angeles and
San Jose metropolitan  areas. The Company believes that the size of its existing
facility is adequate to meet its current needs.



                                      -16-

<PAGE>

ITEM 3.           LEGAL PROCEEDINGS.

         On August 12,  1996, a  securities  class  action  lawsuit was filed in
Santa Clara  Superior  Court against the Company and certain of its officers and
directors (the "Paradigm Defendants").  The class alleged by plaintiffs consists
of purchasers of the Company's  common stock from November 20, 1995 to March 22,
1996, inclusive.  The complaint alleges negligent  misrepresentation,  fraud and
deceit,  breach of fiduciary  duty, and violations of certain  provisions of the
California  Corporate  Securities  Law and Civil Code.  The  plaintiffs  seek an
unspecified  amount of compensatory  and punitive  damages.  Plaintiffs  allege,
among other things, that the Paradigm Defendants wrongfully represented that the
Company  would  have  protection   against  adverse  market  conditions  in  the
semiconductor   market  based  on  the  Company's  focus  on  high  speed,  high
performance semiconductor products. The Paradigm Defendants intend to vigorously
defend the action.  On September  30,  1996,  the  Paradigm  Defendants  filed a
demurrer seeking to have plaintiffs' entire complaint  dismissed with prejudice.
On December 12, 1996,  the Court  sustained the demurrer as to all of the action
except  for  violation  of  certain  provisions  of  the  California   Corporate
Securities Law and Civil Code. The Court,  however,  granted plaintiffs leave to
amend the  complaint  to attempt to cure the defects  which  caused the Court to
sustain the demurrer.  Plaintiffs  failed to amend within the allotted  time. On
January  8,  1997,  the  Paradigm  Defendants  filed an answer to the  complaint
denying any liability for the acts and damages alleged by plaintiffs. Plaintiffs
have  served the  Paradigm  Defendants  with a first set of  requests to produce
documents, to which the Paradigm Defendants are currently responding. Plaintiffs
have also filed a motion  for class  certification  which is set for  hearing on
April 15, 1997. No other motions have been filed with the court by plaintiffs or
defendants,  and no discovery has yet been  conducted.  The Paradigm  Defendants
will vigorously defend the action and, subject to the inherent  uncertainties of
litigation and based upon facts presently  known,  management  believes that the
resolution  of this  matter  will  not have a  material  adverse  impact  on the
Company's  financial  position  or results of  operations.  However,  should the
outcome of this  action be  unfavorable,  the  Company  may be  required  to pay
damages and other  expenses,  which could have a material  adverse effect on the
Company's financial position or results of operations.

         On February 21, 1997, an additional purported class action, with causes
of action and factual allegations  essentially  identical to those of the August
12, 1996 class action lawsuit,  was filed.  This second class action is asserted
against the same Paradigm Defendants,  PaineWebber,  Inc. and Smith Barney. None
of the  Paradigm  Defendants  have been served in this new action.  The Paradigm
Defendants believe because the new action appears redundant it is subject to the
demurrer which the Court sustained in the first class action as to all causes of
action  asserted  against Michael Gulett and all but one of the causes of action
asserted against the remaining Paradigm Defendants.

         Other than as set forth  above,  there are no  material  pending  legal
proceedings  against  the  Company  or as to which  any of its  property  is the
subject.



                                      -17-

<PAGE>

ITEM 4.           SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

         None.

                                     PART II

ITEM 5.           MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
                  STOCKHOLDER MATTERS.

         (a) Common  Stock Price Range.  The Common  Stock of the Company  began
trading publicly on the Nasdaq National Market on June 28, 1995 under the symbol
PRDM.  Prior to that date,  there was no public market for the Common Stock. The
Company has not paid cash dividends and has no present plans to do so. It is the
present  policy of the  Company to  reinvest  earnings of the Company to finance
expansion of the  Company's  operations,  and the Company does not expect to pay
dividends in the  foreseeable  future.  The  following  table sets forth for the
periods indicated the high and low sale prices of the Common Stock on the Nasdaq
National Market.

                                                               High         Low
                                                               ----         ---

Fiscal Year ended December 31, 1995
         Second Quarter (from June 28, 1995)                 $23.25      $17.25
         Third Quarter                                        37.25       22.25
         Fourth Quarter                                       30.25       12.00
Fiscal Year ended December 31, 1996
         First Quarter                                        19.00        8.25
         Second Quarter                                       12.00        6.25
         Third Quarter                                         7.38        3.88
         Fourth Quarter                                        5.50        2.06


         (b) As of December 31, 1996, there were  approximately 259 stockholders
of record.  The Company has never paid a dividend and has no current plans to do
so.

ITEM 6.           SELECTED FINANCIAL DATA.

         The following  selected  financial  data should be read in  conjunction
with  the  Company's   financial   statements  and  related  notes  thereto  and
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations" included elsewhere in this Annual Report on Form 10-K.



                                      -18-

<PAGE>

<TABLE>
<CAPTION>
                                                       Selected Financial Data
                                              (in thousands, except per share amounts)

                                                   Pre-Reorganization(1)                               Post-Reorganization(1)
                                       ------------------------------------------------------    --------------------------------
                                                                                     April 1     June 21
                                                                                        to          to           Year Ended
                                             Year Ended March 31,                    June 20,    Dec. 31,         Dec. 31,
                                       -------------------------------------------   --------    --------    --------------------
                                          1991        1992        1993       1994     1994(2)     1994(2)       1995        1996
                                       --------    --------    --------   --------   --------    --------    --------    --------
<S>                                    <C>         <C>         <C>        <C>        <C>         <C>         <C>         <C>     
Statement of Operations Data:
Sales, net .........................   $  3,253    $ 12,602    $ 24,827   $ 31,844   $  6,033    $ 19,690    $ 51,923    $ 23,202
License income .....................      4,000       2,000        --         --         --          --          --          --
Cost of goods sold .................      7,635      15,123      28,465     26,283      5,895      12,881      31,033      36,364
                                       --------    --------    --------   --------   --------    --------    --------    --------

Gross profit (loss) ................       (382)       (521)     (3,638)     5,561        138       6,809      20,890     (13,162)
                                       --------    --------    --------   --------   --------    --------    --------    --------

Operating expenses:
Research and development(3) ........      2,251       1,291       1,980      1,148      1,192       1,920       4,621       6,243
Selling, general and administration       3,475       4,681       6,007      5,555      1,191       3,004       8,107       9,497
Loss on sale of wafer fabrication
    facility .......................       --          --          --         --         --          --          --         4,632(7)
Write-off of in-process technology
    acquired .......................       --          --          --         --         --          --          --         3,841(7)
Contract termination ...............      2,250        --          --         --         --          --          --          --
                                       --------    --------    --------   --------   --------    --------    --------    --------
Total operating expenses ...........      7,976       5,972       7,987      6,703      2,383       4,924      12,728      24,213
                                       --------    --------    --------   --------   --------    --------    --------    --------
Operating income (loss) ............     (8,358)     (6,493)    (11,625)    (1,142)    (2,245)      1,885       8,162     (37,375)
Interest expense ...................        958       2,609       3,824      3,286        518         721       1,369       1,121
Other (income) expense, net(4) .....        682         381       2,417       (218)       (17)        (44)       (615)       (946)
                                       --------    --------    --------   --------   --------    --------    --------    --------
Income (loss) before extraordinary
    gain and provision (benefit)
    for income taxes ...............    (9,998)     (9,483)    (17,866)    (4,210)    (2,746)      1,208       7,408     (37,550)
Extraordinary gain(5) ..............       --          --          --         --       12,990        --          --          --
Provision (benefit) for income taxes       --          --          --         --         --          --         2,145      (1,125)
                                       --------    --------    --------   --------   --------    --------    --------    --------
Net income (loss) ..................   $ (9,998)   $ (9,483)   $(17,866)  $ (4,210)  $ 10,244    $  1,208    $  5,263    $(36,425)
                                       ========    ========    ========   ========   ========    --------    ========    ========
Net income (loss) per share(6) .....                                                             $   0.23    $   0.83    $  (5.16)
                                                                                                 --------    --------    --------
Weighted average shares(6) .........                                                                5,355       6,314       7,060

</TABLE>

<TABLE>
<CAPTION>
                                                   Pre-Reorganization(1)                              Post-Reorganization(1)
                                       ------------------------------------------------------    ------------------------------
                                                         March 31,                                          December 31,
                                       ------------------------------------------------------    ------------------------------
                                            1991        1992        1993        1994                1994        1995      1996
                                         --------    --------    --------    --------            --------    --------   -------
<S>                                      <C>         <C>         <C>         <C>                 <C>         <C>        <C>
Balance Sheet Data: 
Cash, cash equivalents and short-term 
    investments ......................   $  2,501    $   --      $    311    $     52            $    135    $ 21,213   $    587
Working capital (deficit) ............       (774)    (14,964)    (28,226)    (26,324)             (2,243)     26,624       (392)
Total assets .........................     21,134      31,013      24,238      18,591              19,421      56,732     17,742(8)
Total debt and obligations under
    capital leases ...................     11,097      20,440      26,471      25,847              12,620       7,636        374
Retained earnings (accumulated deficit    (22,244)    (32,788)    (50,654)    (54,864)              1,208       6,471    (29,954)
Total stockholders' equity (deficit) .      6,485     (31,743)    (45,292)    (49,488)              2,345      39,349      6,344
Mandatorily redeemable preferred stock     27,835      27,835      32,821      33,753                --          --         --

<FN>
---------- 

(1)  On June 21, 1994,  the Company  consummated  a plan of  reorganization  (the  "Reorganization")  which  established  a new
     accounting basis. See "Management's  Discussion and Analysis of Financial  Condition and Results of Operations" and Note 4
     of Notes to  Financial  Statements  for a  discussion  of the lack of  comparability  of  periods  before  and  after  the
     Reorganization.
(2)  The period ended December 31, 1994 had ten more days than the normal six month period.
(3)  Net of co-development  funding from a stockholder of $1,423, $5,957, $5,177 and $4,283 for the years ended March 31, 1991,
     1992, 1993 and 1994, respectively.
(4)  The year ended March 31, 1993 includes a penalty payment of $2,000 related to a lease consolidation agreement.

                                                             -19-

<PAGE>

(5)  The period ended June 20, 1994 includes a $12,990 extraordinary gain resulting from the cancellation of liabilities in the
     Reorganization.  See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 3 of
     Notes to Financial Statements.
(6)  See Note 2 of Notes to Financial  Statements  for an explanation  of the  computation of net income (loss) per share.  Per
     share data for the periods preceding the consummation of the  Reorganization is not presented because it is not comparable
     to the similar information for the periods after the Reorganization.
(7)  The year ended December 31, 1996 includes  charges of $4,632  resulting from the sale of the Company's  wafer  fabrication
     facility and $3,841 related to the Company's  acquisition of NewLogic.  See Note 13 and Note 8, respectively,  of Notes to
     Financial Statements.
(8)  The Company sold its wafer fabrication facility in 1996. See Note 13 of Notes to Financial Statements.
</FN>
</TABLE>

ITEM 7.           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                  CONDITION AND RESULTS OF OPERATION.

         This Annual  Report on Form 10-K  contains  forward-looking  statements
that involve risks and  uncertainties.  The Company's  actual results may differ
materially  from  the  results  discussed  in such  forward-looking  statements.
Factors that may cause such a difference include,  but are not limited to, those
discussed in "Factors That May Affect Future Results."

Overview

         Paradigm   was  founded  in  January   1987  and  focused  its  initial
development  efforts  primarily on high speed 256K and 1M SRAMs,  producing  its
first  prototype  product in 1988. In July 1989 the Company began  operating its
wafer fabrication facility in San Jose, California and in April 1990 shipped its
first commercial products, high speed 256K SRAMs. In July 1990 and October 1993,
respectively,  Paradigm  began  shipping 1M SRAMs and limited  quantities  of 4M
SRAMs.  On November  15, 1996,  the Company sold its Fab to Orbit.  See "Sale of
Wafer Fabrication Facility."

         From its inception through its Reorganization in June 1994, the Company
incurred  substantial  operating  losses  as it  developed  its  technology  and
manufacturing  processes.  During this period, the Company incurred  significant
indebtedness to fund its operations,  including capital expenditures  associated
with its wafer fabrication facility.  This increasing indebtedness resulted in a
significant  increase in interest expense,  which negatively impacted cash flow.
In  addition,  the  Company  incurred  operating  losses  due  to  manufacturing
inefficiencies and a less than optimal sales mix that was comprised primarily of
customers in lower margin markets.  Specifically,  prior to the  Reorganization,
many of the  Company's  suppliers  temporarily  suspended  shipments or demanded
payment in cash prior to delivery of products. In addition, due to the Company's
urgent cash needs,  it sold the majority of its high  performance  SRAM products
into lower  margin  commodity  markets,  resulting  in  reduced  sales and lower
margins than would otherwise have been  achievable.  In January 1994 the Company
concluded  that it could not meet its debt  obligations  and began to  develop a
plan  for  restructuring  its  debt  and  capital  structure.  See  "Chapter  11
Reorganization."

         Prior to the  Reorganization,  Paradigm's new management team adopted a
strategy of focusing on emerging markets for higher performance asynchronous and
synchronous SRAMs


                                      -20-

<PAGE>

and specialty  products.  This emphasis on the higher end of the SRAM market was
facilitated  by  the  Reorganization,  which  gave  the  Company  the  financial
flexibility  and time to  target  high-  end  markets  for its high  performance
products.  As a result of Paradigm's change in marketing  strategy,  the Company
made  a  transition   from  a  customer  base   composed   largely  of  contract
manufacturers  to  one  increasingly   represented  by  market  leading  product
developers,  resulting in increased sales to the Company's  targeted  markets in
the  telecommunications,   networking,  workstation,  high  performance  PC  and
military/aerospace industries.

         Beginning  in late  1995  and  continuing  into  1996 the  Company  has
experienced   significant  decreases  in  average  selling  prices  for  certain
products.  Such  price  decreases  have had an adverse  effect on the  Company's
operating  results.  Accordingly,  the Company's ability to maintain or increase
revenues  will be highly  dependent  upon its  ability  to  increase  unit sales
volumes  of  existing  products  and to  introduce  and  sell  new  products  in
quantities  sufficient to  compensate  for the  anticipated  declines in average
selling prices of existing products.  Declining average selling prices will also
adversely  affect the  Company's  gross  margins  unless the  Company is able to
reduce its costs per unit to offset such declines.

Chapter 11 Reorganization

         On February 23, 1994, the Company  entered into a letter of intent with
ACMA  Limited  ("ACMA")  and a letter  of  intent  with  National  Semiconductor
Corporation  ("National  Semiconductor")  to  restructure  its  obligations  and
provide additional capital to the Company. On March 30, 1994 and pursuant to the
ACMA letter of intent,  the Company filed in the United States  Bankruptcy Court
for the Northern  District of California (the "Court") a voluntary  petition for
reorganization  under Chapter 11 of the U.S.  Bankruptcy Code. On April 7, 1994,
the Company filed its initial Plan of Reorganization  with the Court. On May 24,
1994, after further  negotiations between the Company and the Official Committee
of Unsecured Creditors in its bankruptcy proceeding, the Company filed its Third
Amended Joint Plan of  Reorganization  (the "Plan").  On June 7, 1994, the Court
confirmed the Plan, which became effective on June 21, 1994.

         The Plan provided for the  elimination of a significant  portion of the
Company's  indebtedness and a significant  reduction in its interest expense. At
the time of  filing  of the  Company's  Chapter  11  proceeding,  the  Company's
indebtedness, consisting of bank and other borrowings, capital lease obligations
and  trade  payables,  amounted  to  $33.9  million,  and  the  Company  had  an
accumulated  deficit  of $52.7  million.  The Plan  provided  for a  substantial
restructuring of this  indebtedness  through reduction or elimination of certain
amounts  owed,  based on the order of priority of claims in the  Reorganization.
Accordingly, bank borrowings and secured borrowings were repaid in full, capital
lease  obligations  were  restructured,  and holders of trade payables and other
unsecured  borrowings  received  cash in the  amount  of 5% of  allowed  claims,
promissory  notes in the amount of 25% of allowed  claims,  and shares of Common
Stock of the  Company  equal to 8.5% of the  capital  stock of the  Company on a
fully diluted  basis.  Under the Plan, the rights and interests of the Company's
equity holders at that time were terminated. In addition, pursuant to letters of
intent with the Company, ACMA and


                                      -21-

<PAGE>

National Semiconductor purchased shares of preferred stock of the Company for an
aggregate  purchase  price of $6.0  million.  See  Note 3 of Notes to  Financial
Statements.

         In  connection  with  the   Reorganization,   the  Company's  basis  of
accounting for financial reporting purposes changed, effective June 21, 1994, as
follows: (i) the Company's assets and liabilities reflect a reorganization value
generally  approximating  the fair value of the Company as a going concern on an
unleveraged basis, (ii) the Company's  accumulated  deficit was eliminated,  and
(iii) the Company's  capital  structure was adjusted to reflect  consummation of
the Plan.  Accordingly,  the Company's results of operations after June 20, 1994
are not  comparable  to the results of  operations  prior to that date,  and the
results of  operations  for the periods  from April 1, 1994 to June 20, 1994 and
from June 21, 1994 to December 31, 1994 have not been aggregated.  Further,  the
financial position of the Company on or after June 21, 1994 is not comparable to
its  financial  position  at any  date  prior  thereto.  See  Note 4 of Notes to
Financial Statements.

Sale of Wafer Fabrication Facility

         In fiscal  1996 the Company  adopted a strategy of having its  products
manufactured at outside foundries to provide greater flexibility and lower fixed
costs. In that respect, on November 15, 1996, the Company sold its Fab to Orbit.
Following  the sale of the Fab,  the  Company  and  Orbit  entered  into a Wafer
Manufacturing  Agreement  whereby  Orbit will supply a quantity of wafers to the
Company over a specified  period of time.  The Company is also in the process of
seeking wafer supply from other offshore foundries, and anticipates that it will
conduct  business with other  foundries by delivering  written  purchase  orders
specifying the particular product ordered,  quantity,  price,  delivery date and
shipping  terms and,  therefore,  such foundries will not be obligated to supply
products to the Company for any specific period,  in any specific quantity or at
any specified price,  except as may be provided in a particular  purchase order.
Reliance on outside foundries involves several risks,  including  constraints or
delays in timely  delivery  of the  Company's  products,  reduced  control  over
delivery  schedules,  quality assurance,  potential costs and loss of production
due to seismic activity,  weather conditions and other factors.  To the extent a
foundry  terminates its relationship  with the Company,  or should the Company's
supply from a foundry be  interrupted  or terminated  for any other reason,  the
Company  may not have a  sufficient  amount  of time to  replace  the  supply of
products  manufactured by the foundry.  Should the Company be unable to obtain a
sufficient  supply of products to enable it to meet demand, it could be required
to allocate supply of its products among its customers.  Until  recently,  there
has been a worldwide  shortage of advanced process  technology  foundry capacity
and there can be no assurance  that the Company will obtain  sufficient  foundry
capacity  to meet  customer  demand in the future,  particularly  if that demand
should increase. The Company is continuously evaluating potential new sources of
supply.   However,  the  qualification  process  and  the  product  ramp-up  for
additional  foundries  could take longer than  anticipated,  and there can be no
assurance  that such  sources  will be able or willing to satisfy the  Company's
requirements on a timely basis or at acceptable quality or per unit prices.



                                      -22-

<PAGE>

         Constraints or delays in the supply of the Company's products,  whether
because of capacity constraints, unexpected disruptions at the current or future
foundries or assembly houses,  delays in obtaining additional  production at the
existing foundry or in obtaining production from new foundries, shortages of raw
materials,  or other  reasons,  could result in the loss of customers  and other
material adverse effects on the Company's  operating results,  including effects
that may result  should the Company be forced to purchase  products  from higher
cost foundries or pay expediting charges to obtain additional supply.

         The  Company  recorded  a loss of $4.6  million  in the  quarter  ended
December  31,  1996 as a result of the sale of its wafer  fabrication  facility.
This charge included the excess of the net book value of leasehold improvements,
wafer  fabrication  equipment,  fabrication work in process  inventory and other
assets  sold to Orbit over the  proceeds  received  from  Orbit,  an accrual for
professional fees incurred to complete the transaction, a reserve for an adverse
purchase  commitment related to the wafer  manufacturing  agreement and accruals
for other  estimated  costs to be  incurred.  See Note 13 of Notes to  Financial
Statements.

         Orbit  paid  to the  Company  aggregate  consideration  of  $20,000,000
consisting of $6.7 million in cash,  assumption of $7.5 million of  indebtedness
associated  with and secured by the Fab, and  promissory  notes in the aggregate
principal  amounts of $5.8  million.  The  Company  also  executed a  short-term
sublease  with  Orbit  pursuant  to which  it will  occupy  office  space at its
principal offices not associated with the Fab.

         The following table sets forth the total costs of $4.6 million recorded
in 1996 related to the sale of the wafer fabrication facility (in thousands):

                                                  Benefit (Charge)
                                                  Recorded in 1996
                                                  ----------------

     Sale proceeds..............................    $  20,000
     Less:  Cost of inventory, fixed
     assets and other assets sold...............      (21,480)
                                                    ---------
                                                       (1,480)
     Adverse purchase commitment................       (1,920)
     Professional fees..........................         (360)
     Lease buyout...............................         (225)
     Other costs................................         (647)
                                                    ---------

     Loss on sale...............................    $  (4,632)
                                                    =========


         In connection  with the sale of the Fab,  substantially  all of the 109
employees associated with the Fab were terminated and became employees of Orbit.
No severance payments were made to employees transferred to Orbit.

         The  Company  also  implemented  a  reduction  in  the  work  force  of
approximately  35 employees and took a charge of  approximately  $150,000 in the
fourth quarter associated with severance payments and other related costs.


                                      -23-

<PAGE>


<TABLE>

         The  following  tables  set  forth  certain   unaudited   statement  of
operations data for each of the eleven quarters in the period ended December 31,
1996,  and such data  expressed as a percentage of the Company's  total revenues
for the periods indicated.  This data has been derived from unaudited  financial
statements  that,  in  the  opinion  of  management,   include  all  adjustments
(consisting  only  of  normal  recurring   adjustments)  necessary  for  a  fair
presentation of such information and have been prepared on the same basis as the
audited financial  statements.  Such statement of operations data should be read
in  conjunction  with the  Company's  audited  financial  statements  and  notes
thereto.  The  results  of  operations  for  any  quarter  are  not  necessarily
indicative  of the results to be expected  for any future  period.  See "Factors
That May Affect Future Results--Fluctuations in Quarterly Results."


<CAPTION>
                                            Quarterly Financial Data
                                                 (in thousands)

(Unaudited)                                                            Post-Reorganization
                                                 ---------------------------------------------------------
                                                             Three-Month Period Ended               Year
                                                 --------------------------------------------       Ended
                                                 March 31,    June 30,   Sept. 30,   Dec. 31,     Dec. 31,
                                                    1996        1996        1996        1996         1996
                                                 --------    --------    --------    --------    --------
<S>                                              <C>         <C>         <C>         <C>         <C>     
Sales, net ...................................   $ [    $  4,002    $  5,191    $  3,082    $ 23,202
Cost of goods sold ...........................      7,275      13,994       8,501       6,594      36,364
                                                 --------    --------    --------    --------    --------
  Gross profit (loss) ........................      3,652      (9,992)     (3,310)     (3,512)    (13,162)
                                                 --------    --------    --------    --------    --------

Operating expenses:
  Research and development ...................      1,316       1,623       1,657       1,647       6,243
  Selling, general and administrative ........      1,940       2,318       2,523       2,716       9,497
Loss on sale of wafer fabrication facility ...       --          --          --         4,632       4,632
Write-off of in-process technology acquired ..       --         3,841        --          --         3,841
                                                 --------    --------    --------    --------    --------
      Total operating expenses ...............      3,256       7,782       4,180       8,995      24,213
                                                 --------    --------    --------    --------    --------
Operating income (loss) ......................        396     (17,774)     (7,490)    (12,507)    (37,375)
Interest expense .............................        241         364         305         211       1,121
Other income, net ............................       (204)       (199)       (515)        (28)       (946)
                                                 --------    --------    --------    --------    --------
Income (loss) before provision (benefit) for
  income taxes ...............................        359     (17,939)     (7,280)    (12,690)    (37,550)
Provision (benefit) for income taxes .........        122      (1,247)       --          --        (1,125)
                                                 --------    --------    --------    --------    --------
Net income (loss) ............................   $    237    $(16,692)   $ (7,280)   $(12,690)   $(36,425)
                                                 ========    ========    ========    ========    ========

</TABLE>


<TABLE>
<CAPTION>

                                                                     Post-Reorganization
                                               ---------------------------------------------------------
                                                           Three-Month Period Ended               Year
                                               --------------------------------------------       Ended
                                               March 31,    June 30,   Sept. 30,   Dec. 31,     Dec. 31,
                                                  1996        1996        1996        1996         1996
                                               --------    --------    --------    --------    --------
<S>                                              <C>         <C>         <C>         <C>         <C>     

Sales, net....................................   100%        100%         100%        100%        100%
Cost of goods sold ...........................    67         350          164         214         157
                                                ----        ----         ----        ----        ----
  Gross profit (loss) ........................   33        (250)         (64)       (114)        (57)
                                                ----        ----         ----        ----        ----

Operating expenses:
  Research and development....................    12          40           32          54          27
  Selling, general and administrative.........    18          58           48          88          41
Loss on sale of wafer fabrication facility ...    --          --           --         150          20
Write-off of in-process technology acquired ..    --          96           --          --          16
                                                ----        ----         ----        ----        ----
      Total operating expenses................    30         194           80         292         104
                                                ----        ----         ----        ----        ----
Operating income (loss) ......................     3        (444)        (144)       (406)       (161)
Interest expense .............................     2           9            6           7           5
Other income, net ............................    (2)         (5)         (10)         (1)         (4)
                                                ----        ----         ----        ----        ----
Income (loss) before provision (benefit) for
  income taxes................................     3        (448)        (140)       (412)       (162)
Provision (benefit) for income taxes .........     1         (31)          --          --          (5)
                                                ----        ----         ----        ----        ----
Net income (loss) ............................     2%       (417)%       (140)%      (412)%      (157)%
                                                ====        ====         ====        ====        ====

</TABLE>


                                      -24-

<PAGE>

<TABLE>
<CAPTION>
                               Quarterly Financial Data
                                    (in thousands)

(Unaudited)                                            Post-Reorganization
                                 ---------------------------------------------------------
                                             Three-Month Period Ended               Year
                                 --------------------------------------------       Ended
                                 March 31,    June 30,   Sept. 30,   Dec. 31,     Dec. 31,
                                    1995        1995        1995        1995         1995
                                 --------    --------    --------    --------    --------
<S>                              <C>         <C>         <C>         <C>         <C>     
Sales, net ...................   $ 10,837    $ 12,077    $ 14,003    $ 15,006    $ 51,923
Cost of goods sold ...........      6,584       7,244       8,328       8,877      31,033
                                 --------    --------    --------    --------    --------
  Gross profit ...............      4,253       4,833       5,675       6,129      20,890
                                 --------    --------    --------    --------    --------
Operating expenses:
  Research and development ...        891       1,213       1,263       1,254       4,621
  Selling, general and
      administrative .........      1,914       1,971       2,049       2,173       8,107
                                 --------    --------    --------    --------    --------
      Total operating expenses      2,805       3,184       3,312       3,427      12,728
                                 --------    --------    --------    --------    --------
Operating income .............      1,448       1,649       2,363       2,702       8,162
Interest expense .............        382         398         326         263       1,369
Other income, net ............        (32)         (3)       (295)       (285)       (615)
                                 --------    --------    --------    --------    --------
Income before provision for
  income taxes ...............      1,098       1,254       2,332       2,724       7,408
Provision for income taxes ...       --           427         792         926       2,145
                                 --------    --------    --------    --------    --------
Net income ...................   $  1,098    $    827    $  1,540    $  1,798    $  5,263
                                 ========    ========    ========    ========    ========
</TABLE>


<TABLE>
<CAPTION>
                                                              Post-Reorganization
                                        ---------------------------------------------------------
                                                    Three-Month Period Ended               Year
                                        --------------------------------------------       Ended
                                        March 31,    June 30,   Sept. 30,   Dec. 31,     Dec. 31,
                                           1995        1995        1995        1995         1995
                                        --------    --------    --------    --------    --------
<S>                                       <C>         <C>         <C>         <C>         <C>     

Sales, net..............................  100%        100%         100%        100%        100%
Cost of goods sold .....................   61          60           59          59          60
                                          ---         ---          ---         ---         ---
  Gross profit..........................   39          40           41          41          40
                                          ---         ---          ---         ---         ---
Operating expenses:
  Research and development..............    8          10            9           8           9
  Selling, general and
      administrative....................   18          16           15          15          15
                                          ---         ---          ---         ---         ---
      Total operating expenses..........   26          26           24          23          24
                                          ---         ---          ---         ---         ---
Operating income........................   13          14           17          18          16
Interest expense.......................    3           3            2           2           3
Other income, net.......................   --          --           (2)         (2)         (1)
                                          ---         ---          ---         ---         ---
Income before provision for
  income taxes..........................   10          11           17          18          14
Provision for income taxes..............   --           4            6           6           4
                                          ---         ---          ---         ---         ---
Net income..............................   10%          7%          11%         12%         10%
                                          ===         ===          ===         ===         ===
</TABLE>


                                      -25-

<PAGE>

                            Quarterly Financial Data
                                 (in thousands)

(Unaudited)                             Pre-Reorganization   Post-Reorganization
                                        ------------------   -------------------
                                                  Three Month Period Ended
                                        ----------------------------------------
                                          June 20,          Sept. 30,   Dec. 31,
                                           1994(1)           1994(1)       1994
                                          --------         --------    ---------
                                                         
Sales, net ............................   $  6,033         $  9,684    $ 10,006
Cost of goods sold ....................      5,895            6,574       6,307
                                          --------         --------    --------
  Gross profit ........................        138            3,110       3,699
                                          --------         --------    --------
Operating expenses:                                      
  Research and development ............      1,192            1,028         892
  Selling, general and administrative .      1,191            1,433       1,571
                                          --------         --------    --------
     Total operating expenses .........      2,383            2,461       2,463
                                          --------         --------    --------
Operating income (loss) ...............     (2,245)             649       1,236
Interest expense ......................        518              383         338
Other income, net .....................        (17)              (2)        (42)
                                          --------         --------    --------
Income (loss) before extraordinary gain                  
  and provision for income taxes ......     (2,746)             268         940
Extraordinary gain ....................     12,990             --          --
Provision for income taxes ............       --               --          --
                                          --------         --------    --------
Net income ............................   $ 10,244         $    268    $    940
                                          ========         ========    ========
                                                       


                                        Pre-Reorganization   Post-Reorganization
                                        ------------------   -------------------
                                                  Three Month Period Ended
                                        ----------------------------------------
                                          June 20,          Sept. 30,   Dec. 31,
                                           1994(1)           1994(1)       1994
                                          --------         --------    ---------
Sales, net.............................     100%              100%         100%
Cost of goods sold.....................      98                68           63
                                            ---                --           --
  Gross profit.........................       2                32           37
                                            ---                --           --
Operating expenses:
  Research and development.............      20                10            9
  Selling, general and administrative..      19                15           16
                                            ---                --           --
     Total operating expenses..........      39                25           25
                                            ---                --           --
Operating income (loss)................     (37)                7           12
Interest expense.......................       9                 4            3
Other income, net......................      --                --           --
                                            ---                --           --
Income (loss) before extraordinary gain
  and provision for income taxes.......     (46)                3            9
Extraordinary gain.....................     215                --           --
Provision for income taxes.............      --                --           --
                                            ---                --           --
Net income.............................     169%                3%           9%
                                            ===               ===           ==

----------
(1)  The period  ended June 20,  1994 had ten fewer days than the normal  second
     quarter  period and the period ended  September  30, 1994 had ten more days
     than the normal third quarter period.



                                      -26-

<PAGE>

Comparison of Results of Operations  for the Year Ended December 31, 1996 to the
Year Ended December 31, 1995

Sales

         Sales  decreased by 55% to $23.2 million in the year ended December 31,
1996 from  $51.9  million in the year  ended  December  31,  1995.  The  Company
experienced a significant  downward trend in pricing during 1996 that was caused
by an excess  supply  relative to demand for certain SRAM  devices.  The Company
expects this downward price trend to continue. In addition,  the Company shipped
lower volumes of units in 1996  compared to 1995.  Unit  shipments  declined 48%
from 1995 to 1996.

         The  SRAM  business  is  highly   cyclical  and  has  been  subject  to
significant   downturns  at  various  times  that  have  been  characterized  by
diminished product demand,  production overcapacity,  and accelerated erosion of
average selling prices.

Gross Profit

         Gross profit  decreased  from $20.9 million in the year ended  December
31, 1995 to a loss of $(13.2)  million in the year ended  December 31, 1996 and,
as a percentage of sales, from 40% to (57)%, respectively. The decrease in gross
profit resulted principally from industry-wide  pricing pressures experienced by
the  Company in 1996  caused by an  oversupply  in the SRAM  marketplace.  These
pricing  pressures  directly  impacted profits as average selling prices for the
Company's  products  declined  during  the year  ended  December  31,  1996 when
compared to 1995. In addition, during 1996 the Company provided lower of cost or
market  provisions of $2,475,000 and  write-offs of $3,325,000  related to older
generation SRAM products to reflect reduced product demand and current  industry
pricing trends.

         Gross profit for future periods may be affected by an agreement between
the  Company  and  Atmel,  pursuant  to which  Atmel  has  agreed to sell to the
Company, at predetermined  prices, a committed quantity of sub-micron wafers for
five years,  beginning in 1996, and by an agreement  between the Company and NKK
pursuant  to which NKK has  agreed  to supply  the  Company  with a  significant
quantity of 1M SRAMs of  Paradigm's  design each month for a three year  period.
The Company is not obligated to make any  purchases  under the  agreements  with
Atmel and NKK. To the extent that market  prices for 1M SRAM  sub-micron  wafers
are higher than the prices payable to Atmel or NKK under these  agreements,  the
Company's  gross  profit  would tend to be higher  than if the  Company  were to
purchase  sub-micron  wafers  or  1M  SRAMs  at  market  prices.  The  Company's
conversion of its internal fabrication facility from five-inch to six-inch wafer
manufacturing was completed in 1996 and caused temporary  declines in output and
reductions  in yield.  This  facility  was sold in November  1996 to provide the
Company increased flexibility and lower fixed costs.



                                      -27-

<PAGE>

Research and Development

         Research and development  expenses  increased by 35% to $6.2 million in
the year ended  December 31, 1996,  from $4.6 million in the year ended December
31, 1995.  As a percentage  of sales,  research and  development  expenses  have
increased from 9% in 1995 to 27% in 1996.  Increased  expenses result  primarily
from  increased  headcount  required  to support  the  Company's  co-development
activities with Atmel, new product development and other development activities.
In addition,  research and development expenses increased in 1996 as a result of
the Company's  acquisition  of NewLogic in June 1996.  Research and  development
expenses,  as a percentage  of revenue,  have also  increased as a result of the
decline in revenue in 1996 compared to 1995.

         In June 1996, the Company acquired NewLogic with the strategy to expand
Paradigm's  product line beyond SRAMs. In early 1997, the Company  believed that
it was in Paradigm's best interest to shut down the NewLogic operation and focus
on Paradigm's core SRAM products and markets.

Selling, General and Administrative

         Selling,  general and administrative  expenses increased by 17% to $9.5
million in the year ended  December 31, 1996 from $8.1 million in the year ended
December  31,  1995.  Selling,   general  and  administrative  expenses  include
approximately  $1.4 million in bad debt expense in 1996  compared to $.1 million
in 1995 due to financial problems at several of the Company's customers.

Other Operating Expenses

         The  Company  recorded  a loss of $4.6  million  in the  quarter  ended
December  31,  1996 as a result of the sale of its wafer  fabrication  facility.
This charge included the excess of the net book value of leasehold improvements,
wafer  fabrication  equipment,  fabrication work in process  inventory and other
assets  sold to Orbit over the  proceeds  received  from  Orbit,  an accrual for
professional fees incurred to complete the transaction, a reserve for an adverse
purchase  commitment related to the wafer  manufacturing  agreement and accruals
for other estimated costs to be incurred.

         In June 1996, the Company acquired, through a stock purchase and merger
transaction,  NewLogic,  a company which develops and manufactures logic designs
with large memory arrays.  In exchange for its purchase of the NewLogic  capital
stock, the Company issued 314,394 shares of the Company's  common stock,  with a
market value of approximately $2,656,000, and approximately $825,000 in cash. In
addition, the Company incurred transaction costs of approximately  $237,000. The
fair value of NewLogic's  tangible net assets at the date of  acquisition  was a
deficit of $373,000. Approximately $3,841,000 of the purchase price in excess of
the fair market value of the net  tangible  assets was  allocated to  in-process
technology  which the  Company  wrote off in the  quarter  ended June 30,  1996.
Approximately $250,000


                                      -28-

<PAGE>

was  allocated  to other  intangibles.  The  unamortized  balance of these other
intangibles  was written off in  connection of the shutdown of NewLogic in early
1997.

Interest Expense

         Interest  expense  decreased to $1.1 million in the year ended December
31, 1996,  from $1.4 million in the year ended December 31, 1995.  This decrease
in  interest  expense  reflects  repayment  of certain  outstanding  debt by the
Company from the proceeds of its initial public offering, which was subsequently
replaced  in 1996 with new debt at lower  interest  rates.  See  "Liquidity  and
Capital Resources".

Other Income, Net

         For the years ended  December 31, 1996 and  December  31,  1995,  other
income,  net,  reflects  interest  income  earned on the  investment  of the net
proceeds to the Company from its initial  public  offering.  In addition,  other
income in 1996 includes a gain on the sale of fixed assets of $.5 million.

Taxes

         The  Company  has a tax year  that  ends in March.  The  Company's  tax
provision  for the  resultant  nine month tax period  ended  December  31,  1995
reflected  the statutory  rate reduced by net operating  loss benefits and other
credits. The amount of net operating loss the Company may utilize in any year is
limited  due to the  change  of  ownership  which  occurred  as a result  of the
Reorganization. The Company incurred a net loss for its tax year ended March 31,
1995 and thus no provision has been reflected in the quarters in the period from
the reorganization  through March 31, 1995. In 1996 the Company's  effective tax
rate was (3%) which  reflects the benefit of the statutory rate of the operating
loss reduced by tax losses not  recognized  due to the  uncertainty of realizing
the benefit of these losses.

Comparison of Results of Operations for the Six
Post-Reorganization Quarters Ended December 31, 1995

Sales

         Sales  increased  by 55% to $15.0  million in the quarter  December 31,
1995, from $9.7 million in the quarter ended September 30, 1994. The increase in
sales over these  post-  Reorganization  quarters  was  principally  a result of
strong market demand, as well as increased product  availability,  and increased
average selling prices for the Company's high  performance  asynchronous and new
synchronous SRAM products.

         The  SRAM  business  is  highly   cyclical  and  has  been  subject  to
significant   downturns  at  various  times  that  have  been  characterized  by
diminished product demand,  production overcapacity,  and accelerated erosion of
average selling prices. During the latter part of 1995,


                                      -29-

<PAGE>

the market for certain SRAM devices  experienced  an excess  supply  relative to
demand which resulted in a significant downward trend in prices.

Gross Profit

         Gross profit increased from $3.1 million in the quarter ended September
30, 1994 to $6.1 million in the quarter  ended  December  31,  1995,  and , as a
percentage of sales, from 32% to 41%,  respectively.  The improvement  reflected
increased  productivity  as  a  result  of  improved  capacity  utilization  and
associated  manufacturing  efficiencies,  higher yields,  and increased  average
selling prices on many of the Company's SRAM products.

Research and Development

         Research and Development  expenses  increased by 22% to $1.3 million in
the quarter  ended  December  31, 1995,  from $1.0 million in the quarter  ended
September 30, 1994. As a percentage of sales,  research and development expenses
have been  relatively  constant over the same period.  Research and  development
expenses  during the six  post-Reorganization  quarters  ended December 31, 1995
have totaled approximately $6.5 million.

Selling, General and Administrative

         Selling,  general and administrative  expenses increased by 52% to $2.2
million in the quarter ended  December 31, 1995 from $1.4 million in the quarter
ended  September 30, 1994. As a percentage  of sales,  these  expenses have been
relatively   constant   except  for  the  March  1995  quarter  which  reflected
nonrecurring   costs  associated  with  establishing  the  Company's   strategic
relationship with Atmel and negotiating its agreements with NKK.

Interest Expense

         Interest  expense  decreased  to  $0.3  million  in the  quarter  ended
December 31, 1995,  from $0.4 million in the quarter  ended  September 30, 1994.
This  decrease in interest  expense  reflects  repayment  of certain debt by the
Company from the proceeds of its initial public offering.

Other Income, Net

         For the quarters ended September 30, 1995 and December 31, 1995,  other
income,  net,  reflects  interest  income  earned on the  investment  of the net
process to the Company from its initial public offering.

Taxes

         The  Company  has a tax year  that  ends in March.  The  Company's  tax
provision  for the  resultant  nine month tax period  ended  December  31,  1995
reflected  the statutory  rate reduced by net operating  loss benefits and other
credits. The amount of net operating loss the Company may utilize in any year is
limited due to the change of ownership which occurred as a result


                                      -30-

<PAGE>

of the  Reorganization.  The Company  incurred a net loss for its tax year ended
March 31, 1995 and thus no provision  has been  reflected in the quarters in the
period from the reorganization through March 31, 1995.

Results of Operations for the Pre-Reorganization
Quarter Ended June 20, 1994

Operating Results

         Sales of $6.0 million in the quarter ended June 20, 1994,  reflects the
Company's  low  productivity  and sales  volumes  as a result of  inefficiencies
related to cash unavailability in the quarters leading up to the Reorganization.
Gross  margin  during  the  Pre-Reorganization  quarter  reflects  sales  of the
Company's  high  performance  256K  SRAMS to  commodity  markets  and  increased
supplier costs and manufacturing inefficiencies. Sales of the Company's products
into these  commodity  markets were  attributable  to the Company's  urgent cash
needs and resulted in reduced sales and lower margins than would  otherwise have
been achievable.  Interest expense is attributable to the Company's  substantial
indebtedness.

Extraordinary Gain

         The $13.0 million of  extraordinary  gain for the June 20, 1994 quarter
reflects  cancellation of indebtedness  associated with the Reorganization.  See
Notes 3 and 4 of Notes to Financial Statements.

Taxes

         The  Company  has  not   reflected  an  income  tax  benefit  for  this
pre-reorganization  quarter since realization of the net operating loss benefits
was not assured.

Liquidity and Capital Resources

         During the year ended  December  31,  1996,  the  Company's  operating,
investing  and  financing  activities  used $3.4  million of cash,  compared  to
generating  cash of $3.9 million  during the year ended  December 31, 1995.  The
Company's operating,  investing and financing activities,  including commitments
relating  to the  Reorganization,  used $5.8  million of cash in the period from
June 21, 1994 to December 31, 1994. Prior to the  Reorganization,  the Company's
operating,  investing and financing  activities  generated  $5.9 million of cash
during  the  period  from  April 1,  1994 to June 20,  1994,  which  was  mainly
attributable  to the sale of preferred stock to ACMA ($5.0 million) and National
Semiconductor ($1.0 million).

         During the year ended December 31, 1996, $15.6 million of cash was used
in  operations  compared  to  $8.1  million  of cash  that  was  generated  from
operations in 1995,  and compared to a use of $1.8 million of cash in operations
during the period from June 21, 1994 to December 31, 1994 (in each case,  before
Reorganization  items).  The $15.6 million of cash used by operations during the
year ended December 31, 1996, was mainly attributable to the


                                      -31-

<PAGE>

net loss for the year of $36.4 million and a reduction in other  liabilities  of
$3.7 million  offset by non-cash  charges of $5.7 million for  depreciation  and
amortization, the write-off of inprocess technology associated with the NewLogic
acquisition of $3.8 million, a loss of $4.6 million on the sale of the Company's
wafer  fabrication  facility  and  a  reduction  of  $6.1  million  in  accounts
receivable  that reflects the lower sales volume in 1996  compared to 1995.  The
$8.1 million of cash  generated from  operations  during the year ended December
31, 1995 was mainly  attributable to the net profit for the year of $5.3 million
and an increase in accounts payable ($3.5 million) as the Company re-established
its  relationships  with suppliers  subsequent to the  Reorganization  and other
liabilities  ($3.0 million,  primarily  income taxes payable).  In addition,  an
increase of $5.7 million in accounts  receivable was offset by non-cash  charges
of $5.1 million for depreciation and  amortization.  Upon the  Reorganization on
June 21, 1994,  the Company had $6.0 million in cash,  which was used during the
period  immediately  following  the  Reorganization  principally  to  pay  off a
substantial portion of the pre-petition liabilities ($3.0 million) and build the
Company's inventory ($1.2 million).  In addition,  accounts receivable increased
by  $1.1  million  as  the  Company's   level  of  sales   increased  after  the
Reorganization.  Negative cash flow from operations  during the period from June
21, 1994 to December 31, 1994 was partially offset by net income of $1.2 million
and non-cash charges of $2.8 million for depreciation and amortization.

         Investing  activities  generated $9.7 million in 1996 compared to a use
of $30.8 million in 1995.  The sale of $19.9  million of short-term  investments
funded the Company's  conversion of its wafer fabrication  facility to 6" wafers
($14.0 million). In 1995, $18.7 million of short-term investments were purchased
from the net proceeds of the Company's  initial public offering in June of 1995.
In addition, $13.7 million was used to convert the wafer fabrication facility to
6" wafers and expand the Company's test floor.

         After the  Reorganization  and prior to the  Company's  initial  public
offering, the Company financed its operations and capital requirements primarily
with cash contributed by ACMA and National  Semiconductor in the Reorganization.
Cash used by financing  activities  amounted to $2.3  million  during the period
from June 21, 1994 to December 31, 1994,  principally due to payments on capital
leases ($2.0  million)  and on notes  payable ($.5  million).  Cash  provided by
financing  activities  during the year ended December 31, 1995 amounted to $26.8
million and is mainly  attributable to the Company's  initial public offering on
June 28, 1995, which provided net proceeds to the Company of approximately $28.3
million,  and issuance of notes  payable  ($9.3  million),  partially  offset by
payments on capital leases ($7.7 million) and the decrease in the line of credit
($4.6 million).  In addition,  in April 1995 the Company sold a total of 425,000
shares of Common Stock to Atmel for an equity investment of $3.4 million.

         Cash generated from  Financing  activities  amounted to $2.5 million in
1996 and  results  primarily  from an increase  of $2.0 in  borrowings  from the
Company's  line of credit and the issuance of $11.3 of notes  payable  offset by
$11.6 million of payments made on notes payable.

         At December 31, 1995,  the Company had  outstanding  borrowings of $7.6
million  related to three  term  notes  under a credit  facility  with  Greyrock
Business  Credit  with a credit  limit of $16.75  million.  Under the  agreement
borrowings were limited to 80% of eligible accounts


                                      -32-

<PAGE>

receivable (not to exceed $8.0 million),  plus the aggregate amount  outstanding
under certain term loans,  plus $2.5 million until May 15, 1995 and $1.5 million
thereafter.

         In February 1996 the Company  replaced the existing line of credit with
Greyrock  Business  Credit  with a line of  credit  from Bank of the West with a
borrowing  limit of $10.0  million.  Borrowings  were limited to 80% of eligible
receivables  and  interest  was at prime.  The line of  credit  was  secured  by
accounts  receivable.  On February 27, 1996 the Company borrowed $5.6 million to
pay off the outstanding balance of the Greyrock term notes.

         In  addition  to the  Bank of the  West  line of  credit,  the  Company
obtained  a line of credit  for  equipment  purchases  from the CIT  Group.  The
aggregate  principal  amount of all loans under this commitment could not exceed
$15,000,000 and the commitment  expired on December 30, 1996.  Borrowings  under
this  line of  credit  bore  interest  at the  U.S.  Treasury  rate for two year
maturities plus 2.96% and were limited to 80% of the cost of eligible equipment.
All borrowings under this commitment were secured by the equipment purchased.

         In November  1996,  the Company  replaced  the Bank of the West line of
credit with a new line of credit from Greyrock  Business Credit with a borrowing
limit of  $6,000,000  of which  $513,000  was  available  at December  31, 1996.
Borrowings  under  this  line of credit  are  limited  to up to 80% of  eligible
receivables  and  interest  is at the  greater  of LIBOR  plus  5.25% or 9%.  At
December  31, 1996 the  outstanding  balance  under this line of credit was $2.0
million.

         In November 1996 the Company sold its wafer  fabrication  operations to
Orbit.  Orbit assumed $7.5 million of outstanding  borrowings with the CIT Group
that were secured by wafer fabrication equipment that was purchased. The Company
used  approximately $2.2 million of the cash proceeds from the sale of the wafer
fabrication facility to pay off the remaining CIT Group borrowings.

         The Company's recent  operations have consumed  substantial  amounts of
cash. In January 1997, the Company  completed the private  placement of Series A
Convertible  Preferred Stock for net proceeds of  approximately  $1,880,000 (See
Note 15 of Notes to Financial  Statements).  The Company believes that this cash
infusion  together  with  existing cash balances and other sources of liquidity,
such as asset  sales and  equipment  financing  will be  sufficient  to meet the
Company's projected working capital and other cash requirements through at least
the end of 1997. If the cash generated from  operations is  insufficient to meet
the  Company's  cash  requirements,  the  sale of  additional  equity  or  other
securities  could result in additional  dilution to the Company's  stockholders.
There can be no assurance that such additional  financing,  if required,  can be
obtained on acceptable terms, if at all.



                                      -33-

<PAGE>

Litigation

         On August 12,  1996, a  securities  class  action  lawsuit was filed in
Santa Clara  Superior  Court against the Company and certain of its officers and
directors (the "Paradigm Defendants").  The class alleged by plaintiffs consists
of purchasers of the Company's  common stock from November 20, 1995 to March 22,
1996, inclusive.  The complaint alleges negligent  misrepresentation,  fraud and
deceit,  breach of fiduciary  duty, and violations of certain  provisions of the
California  Corporate  Securities  Law and Civil Code.  The  plaintiffs  seek an
unspecified  amount of compensatory  and punitive  damages.  Plaintiffs  allege,
among other things, that the Paradigm Defendants wrongfully represented that the
Company  would  have  protection   against  adverse  market  conditions  in  the
semiconductor   market  based  on  the  Company's  focus  on  high  speed,  high
performance semiconductor products. The Paradigm Defendants intend to vigorously
defend the action.  On September  30,  1996,  the  Paradigm  Defendants  filed a
demurrer seeking to have plaintiffs' entire complaint  dismissed with prejudice.
On December 12, 1996,  the Court  sustained the demurrer as to all of the causes
of action except for violation of certain provisions of the California Corporate
Securities Law and Civil Code. The Court,  however,  granted plaintiffs leave to
amend the  complaint  to attempt to cure the defects  which  caused the Court to
sustain the  demurrer.  Plaintiffs  failed to amend within the allotted time and
independently  expressed an intent to prosecute only the fourth cause of action.
On January 8, 1997,  the Paradigm  Defendants  filed an answer to the  complaint
denying  any  liability  for the acts and  damages  alleged  by the  plaintiffs.
Plaintiffs  have served the Paradigm  Defendants with a first set of requests to
produce documents,  to which the Paradigm  Defendants are currently  responding.
Plaintiffs  have also  filed a motion for class  certification  which is set for
hearing on April 15,  1997.  No other  motions have been filed with the court by
plaintiffs or defendants,  and no discovery has yet been conducted. There can be
no  assurance  that the Company  will be  successful  in such  defense.  Even if
Paradigm is successful in such defense,  it may incur substantial legal fees and
other expenses related to this claim. If unsuccessful in the defense of any such
claim,  the  Company's  business,  operating  results  and cash  flows  could be
materially adversely affected.

         On February 21, 1997, an additional purported class action, with causes
of action and factual allegations  essentially  identical to those of the August
12, 1996 class action lawsuit,  was filed.  This second class action is asserted
against the same Paradigm Defendants,  PaineWebber,  Inc. and Smith Barney. None
of the  Paradigm  Defendants  have been served in this new action.  The Paradigm
Defendants believe because the new action appears redundant it is subject to the
demurrer which the Court sustained in the first class action as to all causes of
action  asserted  against Michael Gulett and all but one of the causes of action
asserted against the remaining Paradigm Defendants.

         The Company is  involved  in various  other  litigation  and  potential
claims which management believes,  based on facts presently known, will not have
a material  adverse  effect on the results of  operations,  existing  sources of
liquidity or the financial position of the Company.



                                      -34-

<PAGE>

Factors Affecting Future Results

         The Company's  operating  results have been,  and in the future may be,
subject to fluctuations  due to a wide variety of factors,  including the timing
of new product and process  technology,  announcements  and introductions by the
Company or its  competitors,  competitive  pricing  pressures,  fluctuations  in
manufacturing  yields,  changes in the mix of products  sold,  availability  and
costs of raw  materials,  industry-wide  shifts in the  supply of and demand for
SRAMs, intellectual property disputes and litigation, and other risks, including
risks  disclosed in this Annual  Report on Form 10-K and other  filings with the
Securities and Exchange  Commission.  There can be no assurance that the Company
will be able to effectively  compete in the future against existing or potential
competitors or that the Company's  operating results or financial condition will
not be adversely affected by increased price competition.

         The  semiconductor  industry is highly cyclical and has been subject to
significant  downturns  at  various  times  and by  diminished  product  demand,
production  overcapacity  and  accelerated  erosion of average  selling  prices.
During  1996,  the  Company  experienced,   and  expects  it  will  continue  to
experience,  significant decreases in selling prices for its SRAM products. Such
price decreases could have a material adverse effect on the Company's  operating
results.


                                      -35-

<PAGE>

ITEM 8.           FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

                        Report of Independent Accountants


To the Board of Directors and Stockholders
of Paradigm Technology, Inc.

         In our  opinion,  the  accompanying  balance  sheets  and  the  related
statements of operations,  of  stockholders'  equity (deficit) and of cash flows
present fairly, in all material respects, the pre-reorganization  results of its
operations and its cash flows for the period from April 1, 1994 to June 20, 1994
and the post-reorganization  financial position of Paradigm Technology,  Inc. at
December 31, 1995 and 1996 and the post-reorganization results of its operations
and its cash flows for the period from June 21,  1994 to  December  31, 1994 and
for each of the two years in the period ended  December 31, 1996,  in conformity
with generally accepted accounting  principles.  These financial  statements are
the responsibility of the Company's management; our responsibility is to express
an opinion on these financial  statements based on our audits.  We conducted our
audits of these  statements  in  accordance  with  generally  accepted  auditing
standards which require that we plan and perform the audit to obtain  reasonable
assurance   about  whether  the  financial   statements  are  free  of  material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the  amounts  and  disclosures  in  the  financial  statements,   assessing  the
accounting  principles  used and significant  estimates made by management,  and
evaluating the overall  financial  statement  presentation.  We believe that our
audits provide a reasonable basis for the opinion expressed above.

         As discussed in Note 3 to the financial  statements,  on June 21, 1994,
the Company's Third Amended Joint Plan of Reorganization was consummated.  As of
that date,  the  Company  adopted  "fresh-start"  reporting  to account  for the
reorganization, as set forth in Note 4 to the financial statements. Accordingly,
the financial  statements for periods subsequent to the reorganization have been
prepared  using  a  different  basis  of  accounting  and  are,  therefore,  not
comparable to the pre-reorganization financial statements.




Price Waterhouse LLP

San Jose, California
January 23, 1997,  except as to the second  paragraph of Note 14, which is as of
February 21, 1997.



                                      -36-

<PAGE>

                                 Balance Sheets
                     (in thousands except per share amounts)

                                                                December 31,
                                                                ------------
                                                             1995         1996
                                                           --------    ---------
ASSETS:
Current assets:
  Cash and cash equivalents ...........................    $  4,015    $    587
  Short-term investments ..............................      17,198        --
  Accounts receivable, net of allowances of $675
      and $1,569 ......................................      10,085       2,800
  Accounts receivable, related party ..................         339         137
  Inventory ...........................................       5,702       2,472
  Prepaid expenses and other ..........................       1,883       4,918
                                                           --------    --------
      Total current assets ............................      39,222      10,914
  Property and equipment, net .........................      17,331       6,638
  Other assets ........................................         179         190
                                                           --------    --------
                                                           $ 56,732    $ 17,742
                                                           ========    ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
  Line of credit ......................................    $    --      $  2,015
  Pre-petition liabilities ............................          34        --
  Accounts payable ....................................       2,855       6,103
  Accounts payable, related party .....................       1,319         140
  Accrued expenses and other liabilities ..............       5,103       2,766
  Current portion of debt obligations .................       3,287         282
                                                           --------    --------
      Total current liabilities .......................      12,598      11,306
                                                           
  Debt obligations, net of current portion ............       4,349          92
  Deferred rent .......................................         436        --
                                                           --------    --------
      Total liabilities ...............................      17,383      11,398
                                                           --------    --------
  Commitments and contingencies (Notes 7, 12 and 13)
Stockholders' equity:
  Preferred stock, $.01 par value; 5,000 shares
      authorized, no shares issued and outstanding ....        --          --
  Common stock, $0.01 par value; 25,000 shares
      authorized; 6,599 and 7,225 shares issued and
      outstanding .....................................          66          72
  Additional paid-in capital ..........................      32,812      36,226
  Retained earnings (accumulated deficit) .............       6,471     (29,954)
                                                           --------    --------
      Total stockholders' equity ......................      39,349       6,344
                                                           --------    --------
                                                           $ 56,732    $ 17,742
                                                           ========    ========



              The accompanying notes are an integral part of these
                             financial statements.


                                      -37-

<PAGE>

<TABLE>
                                     Statements of Operations
                             (in thousands except per share amounts)

<CAPTION>

                             Pre-Reorganization                  Post-Reorganization
                             ------------------       ------------------------------------------
                                 Period from          Period from
                                  April 1 to           June 21 to     Year Ended     Year Ended
                                   June 20,           December 31,   December 31,   December 31,
                                     1994                 1994           1995           1996
                             ------------------       ------------   ------------   ------------
                                                                                  
<S>                                 <C>                 <C>            <C>            <C>     
Sales, net ...................      $  6,033            $ 19,690       $ 51,923       $ 23,202
Cost of goods sold ...........         5,895              12,881         31,033         36,364
                                    --------            --------       --------       --------
Gross profit (loss) ..........           138               6,809         20,890        (13,162)
                                    --------            --------       --------       --------
Operating expenses:                                   
  Research and development ...         1,192               1,920          4,621          6,243
  Selling, general and                                
    administrative ...........         1,191               3,004          8,107          9,497
  Loss on sale of wafer                               
    fabrication facility                              
    (Note 13) ................          --                  --             --            4,632
  Write-off of in-process                             
    technology acquired                               
    (Note 8) .................          --                  --             --            3,841
                                    --------            --------       --------       --------
    Total operating expenses .         2,383               4,924         12,728         24,213
                                    --------            --------       --------       --------
Operating income (loss) ......        (2,245)              1,885          8,162        (37,375)
                                                      
Interest expense .............           518                 721          1,369          1,121
Other income, net ............           (17)                (44)          (615)          (946)
                                    --------            --------       --------       --------
Income (loss) before extra-                           
  ordinary gain and provision                         
  (benefit)for income taxes ..        (2,746)              1,208          7,408        (37,550)
Extraordinary gain ...........        12,990                --             --             --
Provision (benefit) for income                        
  taxes ......................          --                  --            2,145         (1,125)
                                    --------            --------       --------       --------
Net income (loss) ............      $ 10,244            $  1,208       $  5,263       $(36,425)
                                    ========            ========       ========       ========
                                                      
Net income (loss) per share                           
  (Note 2)....................                          $   0.23       $   0.83       $  (5.16)
                                                        --------       --------       --------
                                                      
Weighted average common                               
  and common equivalent                                 
  shares outstanding (Note 2).                             5,355          6,314          7,060
                                                        --------       --------       --------
                                                 


<FN>
              The accompanying notes are an integral part of these
                             financial statements.
</FN>
</TABLE>



                                      -38-

<PAGE>

<TABLE>
                                            Statements of Stockholders' Equity (Deficit)
                                                           (in thousands)

<CAPTION>
                                                                                                           Retained   
                                      Preferred Stock               Common Stock            Additional      Earnings   
                                 ------------------------     ------------------------       Paid In     (Accumulated       
                                   Shares        Amount          Shares        Amount        Capital        Deficit)        Total
                                 --------       --------       --------       --------       --------      --------       --------
<S>                              <C>            <C>             <C>           <C>            <C>           <C>            <C>     
Balance, March 31, 1994 ........     --         $   --           10,393       $  5,376           --        $(54,864)      $(49,488)
Net loss .......................     --             --             --             --             --          (2,746)        (2,746)
                                 --------       --------       --------       --------       --------      --------       --------
Balance, June 20, 1994 pre-
  reorganization ...............     --             --           10,393          5,376           --         (57,610)       (52,234)
Adjustments for reorganization:
  Extraordinary gain on debt ...     --             --             --             --             --          12,990         12,990
  Fresh start reporting
    adjustments ................     --             --          (10,393)        (5,376)          --          44,620         39,244
  Issuance of new stock ........    6,400            960            550            165           --            --            1,125
                                 --------       --------       --------       --------       --------      --------       --------
Balance, June 21, 1994 post-
  reorganization ...............    6,400            960            550            165           --            --            1,125
Stock options exercised ........     --             --               39             12           --            --               12
Net income .....................     --             --             --             --             --           1,208          1,208
                                 --------       --------       --------       --------       --------      --------       --------
Balance, December 31, 1994 .....    6,400            960            589            177           --           1,208          2,345
Reincorporation in Delaware
  (Note 1) .....................     --             --             --             (171)           171          --             --
Initial public offering of common
  stock, net of costs ..........     --             --            2,300             23         28,281          --           28,304
Conversion of preferred stock to
  common stock .................   (6,400)          (960)         3,200             32            928          --             --
Issuance of stock pursuant to 
  Atmel agreement (Note 6) .....     --             --              425              4          3,396          --            3,400
Stock options exercised ........     --             --               85              1             36          --               37
Net income .....................     --             --             --             --             --           5,263          5,263
                                 --------       --------       --------       --------       --------      --------       --------
Balance, December 31, 1995 .....     --             --            6,599             66         32,812         6,471         39,349
Issuance of common stock to
  acquire NewLogic (Note 8) ....     --             --              314              3          2,653          --            2,656
Issuance of common stock under
  employee stock plans .........     --             --              312              3            761          --              764
Net loss .......................     --             --             --             --             --         (36,425)       (36,425)
                                 --------       --------       --------       --------       --------      --------       --------
Balance, December 31, 1996 .....     --         $   --            7,225       $     72       $ 36,226      $(29,954)      $  6,344
                                 ========       ========       ========       ========       ========      ========       ========



<FN>
                             The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>



                                                                -39-

<PAGE>

<TABLE>
                                                      Statements of Cash Flows
                                                           (in thousands)

<CAPTION>
                                                                   Pre-Reorganization                 Post-Reorganization
                                                                   -------------------  --------------------------------------------
                                                                      Period from       Period from
                                                                      April 1 to        June 21 to        Year Ended     Year Ended
                                                                       June 20,         December 31,      December 31,  December 31,
                                                                      ----------        ------------      -----------   ------------
                                                                         1994               1994             1995          1996
                                                                       --------           --------         --------      --------
<S>                                                                     <C>               <C>              <C>            <C>      
Cash flows from operating activities:                                                  
 Net income (loss) .............................................        $ 10,244          $  1,208         $  5,263       $(36,425)
 Adjustments to reconcile net income (loss) to net cash                                
    from operating activities:                                                         
    Depreciation and amortization ..............................           1,503             2,777            5,141          5,716
    Provision for doubtful accounts ............................             115              --                 90          1,372
    Extraordinary gain .........................................         (12,990)             --               --             --
    Loss on sale of wafer fabrication facility .................            --                --               --            4,632
    Write off in-process technology ............................            --                --               --            3,841
    Gain on sale of fixed assets ...............................            --                --               --             (532)
 Changes in operating assets and liabilities:                                          
    Accounts receivable ........................................             (59)           (1,077)          (5,680)         6,115
    Inventory ..................................................            (520)           (1,190)            (814)         1,430
    Other assets ...............................................             284              (356)          (1,361)           (48)
    Accounts payable ...........................................             (63)              (47)           3,475          2,023
    Pre-petition liabilities paid ..............................            --              (2,981)          (1,007)           (34)
    Other liabilities ..........................................             868              (168)           3,012         (3,723)
                                                                        --------          --------         --------       --------
 Net cash provided by (used in) operating activities                                  
    before reorganization items paid ...........................            (618)           (1,834)           8,119        (15,633)
    Reorganization items paid ..................................            (175)             (889)            (189)          --
                                                                        --------          --------         --------       --------
       Net cash provided by (used in) operating activities .....            (793)           (2,723)           7,930        (15,633)
                                                                        --------          --------         --------       --------
Cash flows used in investing activities:                                               
 Purchases of property and equipment ...........................            (263)             (827)         (13,609)       (13,985)
 Purchase of short-term investments ............................            --                --            (18,689)        (2,672)
 Sale of short-term investments ................................            --                --              1,491         19,870
 Sale of fixed assets ..........................................            --                --               --              549
 Proceeds from sale of wafer fabrication facility...............            --                --               --            6,665
 Acquisition of NewLogic, net of cash acquired .................            --                --               --             (723)
                                                                        --------          --------         --------       --------
    Net cash provided by (used) by investing activities ........            (263)             (827)         (30,807)         9,704
                                                                        --------          --------         --------       --------
Cash flows from financing activities:                                                  
 Line of credit increase (decrease) ............................             973               171           (4,623)         2,015
 Payments on capital leases ....................................            --              (2,012)          (7,747)          --
 Issuance of notes payable .....................................            --                --              9,300         11,339
 Principal payments on notes payable ...........................            --                (455)          (1,914)       (11,601)
 Issuance of common stock ......................................            --                  12           31,741            748
 Issuance of preferred stock ...................................           6,000              --               --             --
                                                                        --------          --------         --------       --------
    Net cash provided by (used by) financing activities ........           6,973            (2,284)          26,757          2,501
                                                                        --------          --------         --------       --------
    Net increase (decrease) in cash and cash                                           
      equivalents ..............................................           5,917            (5,834)           3,880         (3,428)
Cash and cash equivalents:                                                             
 Beginning of period ...........................................              52             5,969              135          4,015
                                                                        --------          --------         --------       --------
 End of period .................................................        $  5,969          $    135         $  4,015       $    587
                                                                        ========          ========         ========       ========
Supplemental information:                                                              
 Interest paid .................................................        $    266          $  1,060         $  1,335       $  1,291
                                                                        --------          --------         --------       --------
 Income taxes paid .............................................        $   --            $   --           $    348       $  1,067
                                                                        --------          --------         --------       --------


<FN>
                             The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>


                                                                -40-

<PAGE>

                          Notes To Financial Statements

Note 1 -- The Company and its Business:

         Paradigm Technology,  Inc. ("Paradigm" or the "Company") was originally
incorporated in California in January 1987.  Pursuant to the May 24, 1994, Third
Amended Joint Plan of Reorganization (the "Plan") under Chapter 11 of the United
States  Bankruptcy Code (Note 3), amended Articles of Incorporation  were filed.
On June 7, 1994, the Court  confirmed the Plan,  which became  effective on June
21, 1994. The Company  reincorporated in Delaware effective June 22, 1995, which
involved the exchange of the Company's  post-Reorganization common and preferred
stock  into   shares  of  the   Delaware   Company   stock.   Pursuant   to  the
reincorporation, the Company has authorized 25,000,000 shares of $0.01 par value
common stock and 5,000,000 shares of $0.01 par value preferred stock.

         The Company  markets high speed,  high  density  Static  Random  Access
Memory ("SRAM") products for uses in telecommunication devices, workstations and
high performance PCs to OEMs and  distributors in the United States,  Europe and
the Far East.

         The  SRAM  business  is  highly   cyclical  and  has  been  subject  to
significant   downturns  at  various  times  that  have  been  characterized  by
diminished product demand,  production overcapacity,  and accelerated erosion of
average  selling  prices.  During the latter  part of 1995 and all of 1996,  the
market for certain SRAM devices  experienced an excess supply relative to demand
which resulted in a significant downward trend in prices.

         The selling price that the Company is able to command for it's products
is highly dependent on  industry-wide  production  capacity and demand.  In this
regard,  the Company did experience rapid erosion in product pricing during 1996
which was not within the control of the Company.  The Company could  continue to
experience a downward trend in product pricing which could adversely  effect the
Company's operating results.

         The Company's recent  operations have consumed  substantial  amounts of
cash. In January 1997, the Company  completed the private  placement of Series A
Convertible  Preferred Stock for net proceeds of approximately  $1,880,000 (Note
15). The Company  believes that this cash  infusion  together with existing cash
balances  and other  sources of  liquidity,  such as asset  sales and  equipment
financing will be sufficient to meet the Company's projected working capital and
other cash requirements through at least the end of 1997.

Note 2 -- Summary of Significant Accounting Policies:

Fiscal Year

         Prior to consummation of the Reorganization,  the Company's fiscal year
ended on the Sunday closest to March 31. Upon completion of the  Reorganization,
the Company  changed its fiscal year end to December  31. The periods from April
1, 1994 to June 20, 1994 and from June 21, 1994 to December  31, 1994  contained
12 and 27 weeks, respectively.


                                      -41-

<PAGE>

Reverse Stock Split

         Share  information for all periods has been  retroactively  adjusted to
reflect a 1-for-2 reverse stock split of common stock effected on June 22, 1995.

Basis of Presentation

         The  preparation  of these  financial  statements  in  conformity  with
generally accepted  accounting  principles requires management to make estimates
and  assumptions  that affect the reported  amounts of assets and liabilities at
the date of the financial  statements  and the reported  amounts of revenues and
expenses  during the  reporting  period.  Actual  results  could vary from those
estimates.

Cash Equivalents and Short-Term Investments

         The Company considers all highly liquid  investments  purchased with an
initial  maturity of 90 days or less to be cash equivalents and investments with
original  maturities of greater than 90 days to be short-term  investments.  The
Company accounts for its short-term  investments in accordance with Statement of
Financial  Accounting  Standards No. 115, "Accounting for Certain Investments in
Debt and Equity  Securities"  ("SFAS 115"). As of December 31, 1995, the Company
had short-term investments comprising primarily of fixed- maturity securities of
$17.2 million,  all of which had been classified as available for sale and which
all have  contractual  maturities of less than two years.  These  securities are
stated at fair market  value.  Unrealized  gains and losses were  immaterial  at
December 31, 1995.

Concentration of Credit Risk

         Export sales, primarily to Europe and the Far East, represent 15%, 26%,
28%,  and 25% of total sales for the period from April 1, 1994 to June 20, 1994,
for the period from June 21, 1994 to December 31, 1994,  and for the years ended
December 31, 1995 and December 31, 1996, respectively.  The Company's sales have
been denominated in U.S. dollars.

         The Company  performs  ongoing credit  evaluations of its customers and
generally  does not require  collateral.  The  following  table  summarizes  the
percentage of net sales to significant customers:



                                      -42-

<PAGE>

             Pre-Reorganization               Post-Reorganization
             ------------------  -----------------------------------------------
                Period from       Period from
                April 1 to         June 21 to       Year Ended     Year Ended
                 June 20,         December 31,     December 31,   December 31,
                   1994               1994             1995           1996
               -------------      -------------    ------------   ------------


Customer A         20%                 11%              --             --
Customer B         11%                 23%              28%            25%
Customer C         --                  13%              --             --
Customer D         --                  --               --             13%
Customer E         --                  --               --             13%


         As of December  31,  1995,  accounts  receivable  from three  customers
accounted for approximately 11%, 11% and 15% of total gross accounts receivable,
respectively.  As of December 31, 1996, accounts receivable from three customers
accounted  for  approximately   16%,  17%,  and  18%  of  total  gross  accounts
receivable,  respectively. The Company maintains allowances for potential credit
losses based upon expected collectibility of all accounts receivable.

Inventory

         Inventory  is stated at the lower of cost  (determined  on a  first-in,
first-out  method)  or  market.  Included  in cost of sales  for the year  ended
December  31,  1996 are lower of cost or market  provisions  of  $2,475,000  and
write-offs of $3,325,000 related to older generation SRAM products.

Property and Equipment

         Property and  equipment  are stated at cost.  Depreciation  is computed
using the  straight-line  method over  estimated  useful  lives of three to five
years.  Leasehold  improvements are amortized over the shorter of the lease term
or the estimated  useful life.  During the quarter  ended  December 31, 1996 the
Company sold fixed assets with a net book value of $19.3 million  related to its
wafer fabrication facility (Note 13).

Revenue Recognition

         Revenue from product sales is generally  recognized upon shipment and a
reserve is provided for estimated  returns.  The Company's sales to distributors
are made under agreements allowing certain rights of return and price protection
on  products  unsold  by  the  distributors.  Accordingly,  the  Company  defers
recognition  of  revenue  on such  sales  until  the  products  are  sold by the
distributors.



                                      -43-

<PAGE>

Research and Development

         Research  and  development  expenses  are charged to the  statement  of
operations as incurred.

Income Taxes

         Deferred tax assets and liabilities are recognized for the expected tax
consequences  of  temporary  differences  between  the tax bases of  assets  and
liabilities  and their  reported  amounts  under  the  provisions  of  Financial
Accounting  Standards  No. 109 (SFAS 109),  "Accounting  for Income Taxes" (Note
11).

Stock Based Compensation

         Statement of Financial  Accounting  Standards No. 123,  "Accounting for
Stock-Based  Compensation"  ("SFAS  123"),  encourages,  but  does  not  require
companies to record  compensation  cost for  stock-based  employee  compensation
plans  based on the fair value of options  granted.  The  Company  has chosen to
continue to account  for  stock-based  compensation  using the  intrinsic  value
method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for
Stock  Issued to  Employees."  Accordingly,  compensation  for stock  options is
measured as the  excess,  if any, of the quoted  market  price of the  Company's
stock at the date of the grant over the amount an  employee  must pay to acquire
the stock.

Net Income (Loss) Per Share

         Net loss per share is computed  using the  weighted  average  number of
Common shares outstanding. Common stock equivalents are excluded as their effect
is  anti-dilutive.  Net income per share is computed using the weighted  average
number of common stock and common stock  equivalents  outstanding.  Common stock
equivalent  shares  consist  of stock  options  and  warrants.  Pursuant  to the
requirements of the Securities and Exchange Commission,  common stock equivalent
shares  relating to stock  options and warrants  issued during the twelve months
prior to the  initial  public  offering  are  included in the  computations  for
periods  presented  through  the  initial  public  offering,  whether  they  are
anti-dilutive or not. Net income per share for pre-reorganization periods is not
presented since such information is not comparable with  post-reorganization net
income per share.  The Company  completed its initial public  offering of common
shares on July 5, 1995 and shares  issued are included in the  weighted  average
computation only from the date of issuance.  Accordingly,  these shares resulted
in a greater amount of average shares in 1996 compared to 1995.

Note 3 -- The Reorganization:

         From  its  inception   through  fiscal  1994,   the  Company   incurred
substantial  losses and consumed all of the equity  contributed by stockholders.
In addition,  during this period, the Company continued to incur indebtedness to
fund its cash flow needs  including  capital  expenditures  associated  with its
wafer fabrication facility. As a result of the significant interest


                                      -44-

<PAGE>

expense  caused by this leverage and  continued  operating  losses,  the Company
concluded that it could not meet its debt  obligations  and developed a plan for
restructuring its debt and capital structure.

         On February 23, 1994, the Company  entered into a letter of intent with
ACMA  Limited  ("ACMA")  and a letter  of  intent  with  National  Semiconductor
Corporation  ("National  Semiconductor")  to  restructure  its  obligations  and
provide additional capital to the Company. On March 30, 1994 and pursuant to the
ACMA letter of intent,  the Company filed in the United States  Bankruptcy Court
for the Northern  District of California (the "Court") a voluntary  petition for
reorganization  under Chapter 11 of the U.S.  Bankruptcy Code. On April 7, 1994,
the Company filed its initial Plan of Reorganization  with the Court. On May 24,
1994, after further  negotiations between the Company and the Official Committee
of Unsecured Creditors in its bankruptcy proceeding, the Company filed its Plan.
On June 7, 1994, the Court  confirmed the Plan,  which became  effective on June
21, 1994.

         The Plan provided for the  elimination of a significant  portion of the
Company's  indebtedness  and a  significant  reduction in its interest  expense.
Pursuant to the Plan:

         o        ACMA paid $5.0  million in exchange  for  2,295,000  shares of
                  Series A-1 voting preferred stock,  2,405,000 shares of Series
                  A-2 nonvoting preferred stock and warrants to purchase 250,000
                  shares of the  post-reorganization  new common stock (the "new
                  common stock") (Note 9) at an exercise price of $250,000,  and
                  paid $1.0 million for a convertible note,
         o        ACMA  guaranteed  $1.5 million of the Company's line of credit
                  with CoastFed Business Credit Corporation ("CoastFed"),
         o        National Semiconductor paid $1.0 million for 500,000 shares of
                  Series A-1 voting  preferred stock, the proceeds of which were
                  used to repay ACMA's convertible note,
         o        Mitsubishi International Corporation ("Mitsubishi") received a
                  cash  payment of $300,000  and 465,116  shares of new Series B
                  preferred  stock  in  exchange  for the  cancellation  of $5.0
                  million of indebtedness,
         o        Equipment  lessors received  payments in full under a modified
                  payments  schedule and new common stock equal to approximately
                  3.2% of the  Company's  capital stock on a fully diluted basis
                  (300,000 shares, pre-split),
         o        NUF  Corporation,  an  affiliate of NKK  Corporation,  and NKK
                  Corporation  received $345,000 in cash,  734,884 shares of new
                  Series B preferred stock and a license to sell Paradigm's 256K
                  product in North America in exchange for  cancellation of $5.8
                  million of indebtedness,
         o        Claim  holders of The  Creditor  Workout  Agreement,  who were
                  considered unsecured creditors, received 30% of their proof of
                  claim and new common stock equal to approximately  8.5% of the
                  Company's  capital  stock,  on a fully diluted basis  (800,000
                  shares, pre-split),
         o        A  $526,000  term  note  was  repaid  in full to an  equipment
                  supplier, and
         o        The rights and  interests  of the  Company's  previous  equity
                  holders were terminated.


                                      -45-

<PAGE>

         As of the  effective  date of the Plan, a claim by one of the Company's
equipment  suppliers  was in dispute.  A provision of $250,000 was accrued as of
December  31,  1994  for the  disputed  claim.  A total of  $66,000  was paid on
pre-petition  interest accrued prior to March 30, 1994 and pre-petition interest
accrued during the Chapter 11 proceedings. The Company recorded an extraordinary
gain of $13.0  million in the period  ended  June 20,  1994,  as a result of the
Plan.

Note 4 -- Fresh Start Reporting:

         In  connection  with the  Reorganization  under  Chapter 11 of the U.S.
Bankruptcy  Code  described in Note 3, the  Company's  basis of  accounting  for
financial reporting purposes changed starting June 21, 1994 as follows:  (i) the
Company's assets and liabilities were adjusted to reflect a reorganization value
(the  "Reorganization  Value"),  generally  approximating  the fair value of the
Company as a going concern on an unleveraged basis, (ii) the accumulated deficit
was  eliminated,  and (iii) the  Company's  capital  structure  was  adjusted to
reflect consummation of the Plan.  Accordingly,  the results of operations after
June 20, 1994 are not comparable to results of operations prior to such date.

         The  Reorganization  Value  of $1.1  million  was  determined  based on
several  factors  including  projected  discounted  cash flows and  management's
estimate  of the  fair  value  of its  common  stock  upon  reorganization  from
bankruptcy.  The cash flow analysis  gave effect to the corporate  restructuring
and resultant  debt  obligations  as well as other  operating  program  changes,
limitations on the use of available net operating loss  carryforwards  and other
tax  attributes,  market share and position,  competition  and general  economic
considerations,  projected sales growth and  profitability,  and working capital
requirements.

         Current assets and liabilities were recorded at their book value, which
approximated  fair value.  Property and  equipment  was recorded  based upon the
Reorganization Value, which was less than its fair value in continued use, based
on an independent  appraisal.  Other noncurrent assets were recorded at net book
value,  which approximates fair value and long-term debt was recorded at present
value of the obligation determined under the Plan as of June 21, 1994.



                                      -46-

<PAGE>

<TABLE>
         The effect of the Plan and the adoption of fresh start reporting on the
Company's balance sheet as of June 21, 1994 was as follows (in thousands):

<CAPTION>
                                                                                        Adjustment to Record the
                                                                                         Plan of Reorganization
                                                                                      ----------------------------
                                                                 Prior to               Debt                          Subsequent to
                                                              Reorganization          Exchange         Fresh Start    Reorganization
                                                              --------------          --------         -----------    --------------
<S>                                                                <C>                <C>                <C>           <C>     
ASSETS:
Cash and cash equivalents ...............................          $    (31)          $   --             $  6,000      $  5,969
Accounts receivable, net ................................             3,757               --                 --           3,757
Inventories .............................................             3,698               --                 --           3,698
Prepaid expenses and other ..............................               340               --                 (195)          145
                                                                   --------           --------           --------      --------
 Total current assets ...................................             7,764               --                5,805        13,569
                                                                   --------           --------           --------      --------
Property and equipment, net .............................             9,485               --                1,328        10,813
Other assets ............................................               199               --                 --             199
                                                                   --------           --------           --------      --------
 Total assets ...........................................          $ 17,448           $   --             $  7,133      $ 24,581
                                                                   ========           ========           ========      ========

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT):
Line of credit ..........................................          $  4,452           $   --             $   --        $  4,452
Accounts payable ........................................             5,808             (3,295)              --           2,513
Accrued payroll and related expenses ....................             1,048                 16                (30)        1,034
Accrued expenses and other liabilities ..................             2,614               (265)             1,129         3,478
Accrued interest ........................................               700               (614)              --              86
Capital leases, current portion .........................             9,172             (5,132)              --           4,040
Notes payable ...........................................            11,527             (9,978)              (127)        1,422
                                                                   --------           --------           --------      --------
 Total current liabilities ..............................            35,321            (19,268)               972        17,025
                                                                   --------           --------           --------      --------
Capital leases, net of current portion ..................              --                5,933               --           5,933
Deferred rent ...........................................               608               --                 (110)          498
                                                                   --------           --------           --------      --------
 Total liabilities ......................................            35,929            (13,335)               862        23,456
                                                                   --------           --------           --------      --------
Common/preferred stock ..................................              --                  345                780         1,125
Predecessor common/preferred stock ......................            39,129               --              (39,129)         --
Retained earnings (deficit) .............................           (57,610)            12,990             44,620          --
                                                                   --------           --------           --------      --------
 Total stockholders' equity (deficit) ...................           (18,481)            13,335              6,271         1,125
                                                                   --------           --------           --------      --------
 Total liabilities and stockholders'
    equity ..............................................          $ 17,448           $   --             $  7,133      $ 24,581
                                                                   ========           ========           ========      ========

</TABLE>


         Pre-petition  liabilities paid in the years ended December 31, 1995 and
1996 consist of (in thousands):

                                                     Post-Reorganization
                                                   ----------------------
                                                    1995            1996
                                                   ------          ------

Accounts payable ...............................   $  715          $ --
Accrued payroll and related expenses ...........      146            --
Accrued expenses ...............................      146              34
                                                   ------          ------
 Total .........................................   $1,007          $   34
                                                   ======          ======


                                      -47-

<PAGE>

Note 5 -- Balance Sheet Detail:
(in thousands)

                                                 Post-Reorganization
                                                     December 31,
                                             ----------------------------
                                               1995               1996
                                             --------           --------

Inventory:
 Raw materials ...........................   $    633           $     16
 Work in process .........................      4,307              1,778
 Finished goods ..........................        762                678
                                             --------           --------
                                             $  5,702           $  2,472
                                             ========           ========

Property and equipment:
 Machinery and equipment .................   $ 21,315           $  9,488
 Leasehold improvements ..................      3,622               --
 Furniture and fixtures ..................        264                 19
                                             --------           --------
                                               25,201              9,507
 Less accumulated depreciation ...........     (7,870)            (2,869)
                                             --------           --------
                                             $ 17,331           $  6,638
                                             ========           ========

Accrued Liabilities:
 Accrued payroll and commissions .........   $  1,583           $    804
 Income taxes ............................      1,797               --
 Other ...................................      1,723              1,962
                                             --------           --------
                                             $  5,103           $  2,766
                                             ========           ========



Note 6 -- Related Party Transactions:

         As a result of the  Reorganization,  certain of the Company's creditors
became  stockholders  (Note 3).  Transactions with  stockholders  consist of the
following:

         Gross sales to NKK were  $359,000  for the period from June 21, 1994 to
December 31, 1994. Gross sales to NKK were insignificant  during the years ended
December 31, 1995 and December 31, 1996. The value of product purchased from NKK
in the year ended  December  31,  1995 was  $3,237,000  of which  $1,319,000  is
included in the accounts  payable,  related  party balance at December 31, 1995.
During the year ended  December 31, 1996, the Company  purchased  product with a
value of $6,111,000 from NKK. There was no amount due NKK at December 31, 1996.

         Gross sales to National Semiconductor for the period from June 21, 1994
to December  31, 1994 and during the years ended  December 31, 1995 and December
31, 1996 amounted to  $1,700,000,  $2,500,000,  and $500,000,  respectively,  of
which $339,000 and


                                      -48-

<PAGE>

$137,000,  respectively,  is included in the accounts receivable,  related party
balance at December 31, 1995 and December 31, 1996.

         In April 1995, NKK and the Company  modified their previous  technology
license and development agreements.  This 1995 agreement provides for payment of
royalties  to the  Company by NKK on certain  quantities  of 1M SRAM's sold and,
with certain  exceptions,  cancels further  obligations of each party to deliver
technology improvements or design updates to the other.

         On April 28, 1995,  pursuant to certain  agreements with certain of the
Company's  stockholders,  Atmel acquired 425,000 shares of common stock from the
Company, 300,000 shares of common stock from certain stockholders of the Company
who had been unsecured  creditors of the Company as of the  reorganization,  and
128,050 shares of common stock from the Company's equipment lessors all of which
shares were purchased at a price of $8.00 per share (the "Atmel  Stock").  Atmel
also acquired from ACMA certain  warrants to purchase  175,000  shares of common
stock at an exercise price of $1.00 per share, for a purchase price of $7.00 per
share  subject to the  warrants.  In  connection  with these  transactions,  the
Company  entered into an Agreement with Atmel (the "Stock  Purchase  Agreement")
pursuant to which Atmel agreed to certain transfer  restrictions for a period of
three years.  Atmel also agreed to certain standstill  provisions,  including an
agreement  not to increase its  beneficial  ownership  above 19.9% of the voting
power of the  Company on a fully  diluted  basis for a period of five years from
the date of the Stock Purchase Agreement.  The foregoing  restrictions terminate
on the date on which a person or  entity  acquires  more than 50% of the  voting
power of the Company. In addition,  Atmel agreed that, for a period of ten years
from the date of the Stock Purchase  Agreement,  it will vote the Atmel Stock in
proportion to the votes cast by the other  stockholders  of the Company,  except
with respect to certain material events. The voting and standstill  restrictions
terminate  at such time as Atmel  beneficially  owns less than 5% of the  common
stock of the Company. On April 28, 1995, Atmel also entered into a Licensing and
Manufacturing  Agreement  (the  "Agreement")  with the Company.  This  Agreement
provides Atmel with a nonexclusive,  royalty bearing license to manufacture, use
and sell  certain  of the  Company's  products.  The  royalty  fee is based on a
percentage of the average selling price of the products sold. In addition, under
the  Agreement,  a certain wafer  manufacturing  capacity per week has been made
available  to the Company by Atmel.  The  Agreement  does not include a purchase
commitment by the Company.  However,  to the extent the Company  provides  Atmel
with  its  three-month  demand  forecast,   it  is  committed  to  purchase  the
three-month forecasted  quantities.  No obligation to purchase wafers existed as
of December 31, 1996. The price of the wafers has been fixed at the current fair
market value.  The Agreement  expires on April 28, 2000. There was no amount due
Atmel at December 31,  1995.  The value of product  purchased  from Atmel in the
year ended  December 31, 1996 was $429,000 of which  $140,000 is included in the
accounts payable, related party balance at December 31, 1996.



                                      -49-

<PAGE>

Note 7 -- Debt Obligations:

         Notes  payable and debt,  excluding  the line of credit  consist of the
following (in thousands):

                                              Post-Reorganization
                                                  December 31,
                                          --------------------------
                                           1995                1996
                                          ------              ------

Promissory notes .......................  $ --                $  374
Term loans .............................   7,636                --
                                          ------              ------
                                           7,636                 374
Less current portion ...................   3,287                 282
                                          ------              ------
                                          $4,349              $   92
                                          ======              ======



         Outstanding  promissory  notes at December  31,  1996 bear  interest at
rates  ranging  from 8.0% to 19.8% and are  repayable at various  dates  through
1998. These notes are secured by the equipment purchased.

         At December 31, 1995,  the Company had  outstanding  borrowings of $7.5
million  related to three  term  notes  under a credit  facility  with  Greyrock
Business  Credit with a credit  limit of $16.75  million.  Under the  agreement,
borrowings  were limited to 80% of eligible  accounts  receivable (not to exceed
$8.0 million),  plus the aggregate amount  outstanding under certain term loans,
plus $2.5  million  until May 15, 1995 and $1.5 million  thereafter.  The credit
facility  was  secured by all  inventory,  equipment,  receivables  and  general
intangibles of the Company.  ACMA issued a $2.5 million standby letter of credit
to guarantee the line of credit, and in connection  therewith received a warrant
to  purchase  25,000  shares of common  stock (Note 9). In  connection  with the
repayment of the line of credit in August 1995, the standby letter of credit was
terminated.

         In February 1996 the Company  replaced the existing line of credit with
Greyrock  Business  Credit  with a line of  credit  from Bank of the West with a
borrowing  limit of $10.0  million.  Borrowings  were limited to 80% of eligible
receivables  and  interest  was at prime.  The line of  credit  was  secured  by
accounts  receivable.  On February 27, 1996 the Company borrowed $5.6 million to
pay off the outstanding balance of the Greyrock term notes.

         In  addition  to the  Bank of the  West  line of  credit,  the  Company
obtained  a line of credit  for  equipment  purchases  from the CIT  Group.  The
aggregate  principal  amount of all loans under this commitment could not exceed
$15,000,000 and the commitment  expired on December 30, 1996.  Borrowings  under
this  line of  credit  bore  interest  at the  U.S.  Treasury  rate for two year
maturities plus 2.96% and were limited to 80% of the cost of eligible equipment.
All borrowings under this commitment were secured by the equipment purchased.



                                      -50-

<PAGE>

         In November  1996,  the Company  replaced  the Bank of the West line of
credit with a new line of credit from Greyrock  Business Credit with a borrowing
limit of  $6,000,000  of which  $513,000  was  available  at December  31, 1996.
Borrowings under this line of credit are limited to 80% of eligible  receivables
and  interest is at the greater of LIBOR plus 5.25% or 9%. At December  31, 1996
the outstanding balance under this line of credit was $2,015,000.

         In November  1996 the  Company  sold its wafer  fabrication  operations
(Note 13). The purchasing company assumed  $7,500,000 of outstanding  borrowings
with the CIT Group that were  secured by wafer  fabrication  equipment  that was
purchased.  The Company used approximately  $2,200,000 of the cash proceeds from
the sale of the wafer  fabrication  facility to pay off the  remaining CIT Group
borrowings.

Note 8 -- NewLogic Acquisition

         In June 1996, the Company acquired, through a stock purchase and merger
transaction,  NewLogic,  a company which develops and manufactures logic designs
with large memory arrays.  In exchange for its purchase of the NewLogic  capital
stock, the Company issued 314,394 shares of the Company's  common stock,  with a
market value of approximately $2,656,000, and approximately $825,000 in cash. In
addition, the Company incurred transaction costs of approximately  $237,000. The
fair value of NewLogic's  tangible net assets at the date of  acquisition  was a
deficit of $373,000. Approximately $3,841,000 of the purchase price in excess of
the fair market value of the net  tangible  assets was  allocated to  in-process
technology  which the  Company  wrote off in the  quarter  ended June 30,  1996.
Approximately  $250,000 was  allocated  to other  intangibles.  The  unamortized
balance of these other intangibles was written off in connection of the shutdown
of NewLogic in early 1997.

         The Company accounted for this acquisition using the purchase method of
accounting  and  accordingly,  the results of  operations  and cash flows of the
acquisition have been included only from the date of acquisition.  Excluding the
$3,841,000 write-off of purchased in-process technology, the pro forma impact on
the Company's  results of operations  had the  acquisition  been  consummated on
January 1, 1995 is not materially  different  from the results  presented in the
accompanying statement of operations.

Note 9 -- Preferred Stock, New Common Stock and New Common Stock Warrants:

         As a result of the Plan, the Company issued  2,295,000 voting shares of
Series A-1 preferred  stock  ("Series  A-1") and 2,405,000  nonvoting  shares of
Series  A-2  preferred  stock  to  ACMA  for  cash  of  $5.0  million.  National
Semiconductor  was issued  500,000 voting shares of Series A-1 for $1.0 million.
In addition,  1,200,000 shares of Series B voting preferred stock were issued to
NKK and Mitsubishi. These shares form part of the settlement against $10,750,000
of short-term  notes owed by the Company  prior to June 21, 1994.  All preferred
stock was converted at a 2-for-1  ratio of preferred  stock to common stock upon
the completion of the Company's initial public offering.



                                      -51-

<PAGE>

         A total of  550,000  shares  of the new  common  stock  was  issued  to
creditors  and lessors as part of the Plan.  The 1994 Stock Option Plan was also
created (Note 10).

         In exchange for its  guarantee on the CoastFed  line of credit in April
1994, ACMA was issued warrants to purchase 250,000 shares of new common stock at
an  exercise  price of $1.00 per  share.  There is a five year  expiration  date
placed on these  warrants.  On  December  9,  1994,  ACMA  assigned a warrant to
purchase 50,000 shares of common stock to Chiang Lam (President of ACMA USA). In
January  1995,  in exchange for a $1.0 million  increase in its guarantee of the
line of credit, ACMA received an additional warrant to purchase 25,000 shares of
new common  stock at an  exercise  price of $4.00 per share.  No  warrants  were
exercised at December 31, 1995 and December 31, 1996.  The value of the warrants
is  considered  nominal  at the date of  grant.  On April  28,  1995 ACMA sold a
warrant to  purchase  175,000  shares of new common  stock to Atmel  Corporation
("Atmel") (Note 6).

Note 10 -- Stock Compensation Plans:

         Pursuant  to the Plan,  the 1994 Stock  Option Plan was created on June
21, 1994.

         Under the 1994 Stock  Option  Plan (the  "Option  Plan"),  the  maximum
aggregate  number  of  shares  which  may  be  optioned  is  1,498,000   shares.
Nonstatutory  stock options may be granted to employees,  outside  directors and
consultants,  whereas  incentive stock options can only be granted to employees.
Options are generally granted at fair market value subject to the following:

(a)      With respect to options  granted to an employee who, at the time of the
         grant owns stock  representing more than 10% of the voting power of all
         classes of stock of the  Company or any parent or  subsidiary,  the per
         share  exercise  price  shall be no less than  110% of the fair  market
         value on the date of the grant for  incentive  and  nonstatutory  stock
         options.

(b)      With respect to options granted to any employee other than described in
         the preceding paragraph,  the exercise price shall be no less than 100%
         for incentive stock options and 85% for  nonstatutory  stock options of
         the fair market value on the date of the grant.

         During 1994,  the  Company's  directors and  stockholders  approved the
Directors' Stock Option Plan ("Directors'  Plan") and reserved 150,000 shares of
common stock for issuance  thereunder.  Terms of the Directors' Plan provide for
the grant of options to the Company's independent directors in annual increments
commencing  in 1995.  The exercise  price of options  granted is the fair market
value at the date of grant.



                                      -52-

<PAGE>

         Nonstatutory stock option activity under the Option Plan and Director's
Plan was as follows (in thousands):

                                                1994         1995         1996
                                               ------       ------       ------

Outstanding at beginning of period ......        --            730          896
 Granted ................................         857          414        1,175
 Canceled ...............................         (88)        (163)        (700)
 Exercised ..............................         (39)         (85)        (235)
                                               ------       ------       ------
Outstanding at December 31 ..............         730          896        1,136
Exercisable at December 31 ..............         256          384          298
                                               ------       ------       ------
Available for Grant at December 31 ......         103          307          149
                                               ------       ------       ------



         Weighted average option exercise price  information for the years 1994,
1995 and 1996 follows:

                                               1994         1995         1996
                                              ------       ------       ------
                                           
Outstanding at beginning of period ......    $ 0.00        $ 0.32       $ 4.30
Granted during the year .................      0.31         10.26         6.20
Canceled during the year ................      0.30          3.35         8.24
Exercised during the year ...............      0.30          0.43         0.58
Outstanding at December 31 ..............      0.32          4.30         4.54
Exercisable at December 31 ..............      0.31          1.36         2.77
                                                                    
                                                   

         Significant option groups outstanding at December 31, 1996, and related
weighted average price and life information follows (options in thousands):

                        Outstanding          Exercisable 
   Range of          -----------------     -----------------       Remaining   
Exercise Prices      Shares      Price     Shares      Price      Life (years)  
---------------      ------      -----     ------      -----      ------------
$0.30-0.50            242       $ 0.32       202       $ 0.31         7.5
$2.50                 234         2.50       --          0.0          9.9
$3.25-5.00            379         4.49        28         4.50         9.2
$5.13-9.00            224         8.41        59         8.09         8.8
$13.50-25.00           57        16.02         9        17.49         9.0


         Options  granted  vest  over a period of four  years.  The terms of the
option shall be no longer than 10 years. All options were granted at an exercise
price equal to the fair market value of the  Company's  common stock at the date
of grant.  The weighted  average fair value at date of grant for options granted
during 1995 and 1996 was $5.34 and $2.74 per option,


                                      -53-

<PAGE>

respectively. The fair value of options at date of grant was estimated using the
Black-Scholes model with the following assumptions:

                                                     1995              1996
                                                     ----              ----

         Expected life (years) ..................      5                5
         Risk free interest rate ................    6.9%             6.6%
         Volatility .............................     48%              50%
         Dividend yield .........................     --               --


         In April  1995,  the board of  directors  of the  Company  adopted  the
Paradigm  Technology,  Inc. Employee Stock Purchase Plan (the "ESPP") to provide
employees of the Company with an  opportunity  to purchase  common stock through
payroll deductions.  The ESPP became effective upon the closing of the Company's
initial public offering in July 1995.  Under the ESPP,  250,000 shares of common
stock have been reserved for issuance to full-time  employees  employed with the
Company for at least three consecutive months.

         Under the ESPP, the purchase price of the common stock will be equal to
85% of the lower of (i) the market price of common stock immediately  before the
beginning  of the  applicable  participation  period or (ii) the market price of
common stock at the time of purchase.  In general,  each participation period is
24 months long,  with a new  participation  period  beginning  every six months.
During 1996,  76,783  shares were issued  under the plan.  The fair value of the
employee's  purchase rights was estimated using the Black-Scholes model with the
following assumptions for 1995 and 1996,  respectively;  dividend yield of 0% in
both years;  an expected  life of two years for each purchase  period;  expected
volatility  of 48% and 50%; and risk free interest  rates of 6.0% and 6.3%.  The
weighted-average  fair value of these  purchase  rights granted in 1995 and 1996
was $5.37 and $4.78, respectively.

         Had  compensation  expense for the Company's  stock-based  compensation
plans been  determined  based on the methods  prescribed  by SFAS No.  123,  the
Company's  net income  (loss) and net income (loss) per share would have been as
follows (in thousands, except per share amounts):



                                      -54-

<PAGE>

                                                Year Ended         Year Ended
                                                December 31,      December 31,
                                                   1995              1996
                                                ------------      ------------

       Net income (loss):
             As reported ...............          $5,263          $(36,425)
             Pro forma .................           5,024           (37,272)

       Net income (loss) per share:
             As reported ...............          $ 0.83          $  (5.16)
             Pro forma .................            0.79             (5.28)



Note 11 -- Income Taxes:

         No provision has been recorded for any of the periods prior to December
31, 1994, since the Company incurred a net operating loss for tax purposes.

         The provision  (benefit) for income taxes consists of the following (in
thousands):

                                              Year Ended     Year Ended
                                             December 31,   December 31,
                                                 1995           1996
                                             ------------  -------------

        Federal:
              Current ......................    $ 1,673       $(1,125)
        State:
              Current ......................        472          --
                                                -------       -------
                                                $ 2,145       $(1,125)
                                                =======       =======



         The  components  of the net  deferred  tax asset  were as  follows  (in
thousands):

                                                       Post-Reorganization
                                                            December 31,
                                                  ------------------------------
                                                    1995                  1996
                                                  -------              ---------
Inventory and other reserves..................    $   589              $  3,052
Depreciation and capital leases...............      2,425                   972
Other.........................................        473                   551
Net operating losses..........................      1,822                13,885
                                                  -------              --------
                                                    5,309                18,460
Less valuation allowance......................     (5,309)              (18,460)
                                                  -------              --------
                                                  $    --              $     --
                                                  =======              ========




                                      -55-

<PAGE>

         The  Company's  effective  tax rate for 1995 and 1996 was 29% and (3)%,
respectively.  This rate differs from the federal statutory rate due principally
to the following:

                                                    Year Ended       Year Ended
                                                    December 31,    December 31,
                                                       1995             1996
                                                    ------------    ------------
                                                                    
Tax at statutory rate ............................       34%           (34)%
State taxes, net of federal benefit ..............        6             (6)
Tax losses not recognized ........................      --              37
Net operating losses and tax credits                                
  utilized .......................................      (11)           --
                                                        ---            ---
                                                         29%            (3)%
                                                        ===            ===
                                                                    

         The Company has established a valuation allowance equal to its deferred
tax  assets  on the  basis  that  realization  of such  assets  is not  assured.
Management's assessment is based on the Company's current net operating losses.

         The Tax Reform Act of 1986 limits the use of net operating loss and tax
credit  carryforwards  in certain  situations  where  changes occur in the stock
ownership of a company.  The Company  experienced  such an ownership change as a
result of the Reorganization  (Note 3), and the utilization of the carryforwards
was limited.

         At December 31, 1996, the Company had net operating loss  carryforwards
(reflecting  limitation  resulting  from change in ownership)  of  approximately
$35.5 million available to offset future regular and alternative minimum taxable
income. The Company's net operating loss  carryforwards  expire through 2011, if
not utilized.

Note 12  -- Capital Lease Obligations and Commitments:

         Until May 1, 1995 the Company leased its  fab/manufacturing and lab and
test  equipment  from  eleven  equipment  lessors.  A  modified  payment  stream
sufficient  to cure  all  defaults  under  the  original  lease  agreements  was
confirmed by the Bankruptcy  Court in June 1994. The Company was responsible for
all  insurance,  property  tax and  maintenance.  On May 1,  1995,  the  Company
purchased this leased equipment effective March 31, 1995 with proceeds of a term
note from Greyrock Business Credit (Note 7).

         The Company's principal  manufacturing and administrative  facility was
leased under an operating  lease expiring in 2004. This lease was assumed by the
purchaser of the  Company's  wafer  fabrication  facility.  Rent expense for the
period  from April 1, 1994 to June 20,  1994,  the period  from June 21, 1994 to
December  31, 1994 and the years ended  December  31, 1995 and December 31, 1996
was $164,000, $368,000, $715,000 and $680,000, respectively.



                                      -56-

<PAGE>

         In December 1996 the Company entered into an agreement to lease its new
principal  administrative  facility  under an operating  lease expiring in 2002.
Future minimum  payments under  noncancelable  operating  leases at December 31,
1996 are as follows (in thousands):

            Year Ending
            December 31,           Operating Leases
           --------------          ----------------

               1997                   $   382,000
               1998                       439,000
               1999                       452,000
               2000                       464,000
               2001                       476,000
            Thereafter                     40,000
                                      -----------
                                      $ 2,253,000
                                      ===========



Note 13 -- Sale of Wafer Fabrication Facility

         The  Company  recorded  a loss of $4.6  million  in the  quarter  ended
December  31,  1996 as a result of the sale of its wafer  fabrication  facility.
This charge included the excess of the net book value of leasehold improvements,
wafer  fabrication  equipment,  fabrication work in process  inventory and other
assets  sold to Orbit over the  proceeds  received  from  Orbit,  an accrual for
professional fees incurred to complete the transaction, a reserve for an adverse
purchase  commitment related to the wafer  manufacturing  agreement and accruals
for other estimated costs to be incurred.

         Orbit  paid  to the  Company  aggregate  consideration  of $20  million
consisting of $6.7 million in cash,  assumption of $7.5 million of  indebtedness
associated  with and secured by the Fab, and  promissory  notes in the principal
amounts of $4.8 million and $1.0 million. The Company also executed a short-term
sublease  with  Orbit  pursuant  to which  it will  occupy  office  space at its
principal offices not associated with the Fab.

         The $4.8 million  promissory note was issued in connection with a wafer
supply agreement that requires Orbit to supply Paradigm with approximately 9,750
of certain  fabricated  wafers  through May 1997 at $500 per wafer  purchased by
Paradigm.  Per terms of the  agreement,  if the Company  does not  purchase  the
wafers by the end of May 1997,  the Company  will forfeit any  remaining  amount
owed under the promissory note. At December 31, 1996, the Company is required to
purchase  6,684 wafers under this  agreement  which the Company fully expects to
receive  by the end of May 1997.  The $1.0  million  promissory  note is held in
escrow to satisfy  certain  representation  and warranties  made by the Company.
Orbit is required to make two  payments of $500,000  plus  interest of 4% in May
and November 1997. As of December 31, 1996 the  outstanding  balance under these
promissory  notes was $4,342,000  which was  classified as prepaid  expenses and
other assets.



                                      -57-

<PAGE>

         The following  table sets forth the components of the $4.6 million loss
recorded  in 1996  related  to the sale of the wafer  fabrication  facility  (in
thousands):

                                                           Benefit (Charge)
                                                           Recorded in 1996
                                                           ----------------

     Sale proceeds ........................................... $ 20,000
     Less:  Cost of inventory, fixed
     assets and other assets sold ............................  (21,480)
                                                               --------
                                                                 (1,480)
     Adverse purchase commitment .............................   (1,920)
     Professional fees .......................................     (360)
     Lease buyout ............................................     (225)
     Other costs .............................................     (647)
                                                               --------
     
     Loss on sale ............................................ $ (4,632)
                                                               ========



         At December  31, 1996 the  remaining  adverse  purchase  commitment  of
$1,337,000  is recorded in prepaid  expenses  and other as an offset to the note
receivable from Orbit.

         In connection  with the sale of the Fab,  substantially  all of the 109
employees associated with the Fab were terminated and became employees of Orbit.
No severance payments were made to employees transferred to Orbit.

Note 14  -- Litigation:

         On August 12,  1996, a  securities  class  action  lawsuit was filed in
Santa Clara  Superior  Court against the Company and certain of its officers and
directors (the "Paradigm Defendants").  The class alleged by plaintiffs consists
of purchasers of the Company's  common stock from November 20, 1995 to March 22,
1996, inclusive.  The complaint alleges negligent  misrepresentation,  fraud and
deceit,  breach of fiduciary  duty, and violations of certain  provisions of the
California  Corporate  Securities  Law and Civil Code.  The  plaintiffs  seek an
unspecified  amount of compensatory  and punitive  damages.  Plaintiffs  allege,
among other things, that the Paradigm Defendants wrongfully represented that the
Company  would  have  protection   against  adverse  market  conditions  in  the
semiconductor   market  based  on  the  Company's  focus  on  high  speed,  high
performance semiconductor products. The Paradigm Defendants intend to vigorously
defend the action.  On September  30,  1996,  the  Paradigm  Defendants  filed a
demurrer seeking to have plaintiffs' entire complaint  dismissed with prejudice.
On December 12, 1996,  the Court  sustained the demurrer as to all of the action
except  for  violation  of  certain  provisions  of  the  California   Corporate
Securities Law and Civil Code. The Court,  however,  granted plaintiffs leave to
amend the  complaint  to attempt to cure the defects  which  caused the Court to
sustain the demurrer.  Plaintiffs  failed to amend within the allotted  time. On
January  8,  1997,  the  Paradigm  Defendants  filed an answer to the  complaint
denying any liability for the acts and damages alleged by plaintiffs. Plaintiffs
have served the Paradigm


                                      -58-

<PAGE>

Defendants  with a first set of  requests  to  produce  documents,  to which the
Paradigm  Defendants  are  currently  responding.  Plaintiffs  have also filed a
motion for class  certification  which is set for hearing on April 15, 1997.  No
other motions have been filed with the court by plaintiffs or defendants, and no
discovery has yet been conducted. The Paradigm defendants will vigorously defend
the action and,  subject to the inherent  uncertainties  of litigation and based
upon facts  presently  known,  management  believes that the  resolution of this
matter  will not have a  material  adverse  impact  on the  Company's  financial
position or results of operations.

         On February 21, 1997, an additional purported class action, with causes
of action and factual allegations  essentially  identical to those of the August
12, 1996 class action lawsuit,  was filed.  This second class action is asserted
against the same Paradigm Defendants,  PaineWebber,  Inc. and Smith Barney. None
of the  Paradigm  Defendants  have been served in this new action.  The Paradigm
Defendants believe because the new action appears redundant it is subject to the
demurrer which the Court sustained in the first class action.

         The Company is  involved  in various  other  litigation  and  potential
claims which management believes,  based on facts presently known, will not have
a material adverse effect on the results of operations or the financial position
of the Company.

Note 15  -- Subsequent Event:

         On January 23, 1997, Paradigm sold a total of 200 shares of 5% Series A
Convertible  Redeemable  Preferred  Stock (the  "Preferred  Stock") in a private
placement to Vintage  Products,  Inc. at a price of $10,000 per share, for total
proceeds (net of payments to third  parties) of  approximately  $1,880,000.  The
Preferred  Stock is  convertible  at the option of the holder into the number of
fully paid and nonassessable shares of Common Stock as is determined by dividing
(A) the sum of (1)  $10,000  plus (2) the  amount of all  accrued  but unpaid or
accumulated  dividends on the shares of Preferred  Stock being  converted by (B)
the Conversion Price in effect at the time of conversion. The "Conversion Price"
will be equal to the lower of (i) $2.25 or (ii) eighty-two  percent (82%) of the
average  closing  bid price of a share of Common  Stock as quoted on the  Nasdaq
National Market over the five (5) consecutive trading days immediately preceding
the date of notice of conversion of the Preferred  Stock. The Preferred Stock is
redeemable by the Company under certain  limited  circumstances.  The Company is
required to register the maximum  number of shares of Common stock issuable upon
conversion of the Preferred Stock.

ITEM 9.           CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
                  ACCOUNTING AND FINANCIAL DISCLOSURE.

         None.


                                      -59-

<PAGE>

                                    PART III

ITEM 10.          DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

         (a)      Directors of the Registrant.

         Michael  Gulett,  44,  the  Company's  President  and  Chief  Executive
Officer,  joined  Paradigm in March 1992. Mr. Gulett,  was elected  President in
February  1993,  was  appointed  Chief  Executive  Officer  in July 1993 and was
appointed to the board in March 1994. Prior to joining Paradigm,  Mr. Gulett was
a consultant  from May 1989 until March 1992. From July 1987 until May 1989, Mr.
Gulett  was  the  Director  of  ASIC  Operations  at VLSI  Technology,  Inc.,  a
semiconductor  manufacturer.  He  has  also  worked  for  NCR  Microelectronics,
California  Devices,  Intel  Corporation and Burroughs  Corporation.  Mr. Gulett
received his B.S. in electrical engineering from the University of Dayton.

         George J.  Collins,  54, has served as a Director of the Company  since
October  1995.  Mr.  Collins has been a professor of electrical  engineering  at
Colorado State  University since 1973. Mr. Collins is a Fellow with the American
Physical  Society and the Institute of Electrical  Engineers.  Mr.  Collins is a
Director of Quantum Research Corporation. Mr. Collins received his B.S.E.E. from
Manhattan University and his M.S. and Ph.D. in engineering from Yale University.

         James L. Kochman,  47, has served as Director of the Company since June
1994 and has been a partner with the investment  banking firm of Bentley,  Hall,
Von Gehr  International  since April 1992.  He was formerly  President and Chief
Executive Officer of TEKNA/S-TRON, a consumer products company. Prior to joining
TEKNA,  he spent six years with FMC  Corporation in a variety of corporate staff
and operating  assignments,  including Director of Manufacturing and Director of
Technology and Business  Development with FMC's Ordinance  Division in San Jose.
Previously Mr. Kochman worked for International  Harvester Company.  Mr. Kochman
received his B.S. in mechanical  engineering from the University of Illinois and
an M.B.A. from the University of Chicago.

         (b)      Executive Officers of the Registrant.

         Michael Gulett,  the Company's  President and Chief Executive  Officer,
joined  Paradigm in March 1992.  Mr.  Gulett was elected  President  in February
1993, and was appointed Chief Executive  Officer in July 1993.  Prior to joining
Paradigm,  Mr. Gulett was a consultant from May 1989 until March 1992. From July
1987 until May 1989,  Mr.  Gulett was the  Director of ASIC  Operations  at VLSI
Technology,  Inc.,  a  semiconductor  manufacturer.  He has also  worked for NCR
Microelectronics,   California   Devices,   Intel   Corporation   and  Burroughs
Corporation.  Mr. Gulett  received his B.S. in electrical  engineering  from the
University of Dayton.

         Robert C.  McClelland  served as Paradigm's  Vice President of Finance,
Chief  Financial  Officer from June 1993 to February 1997, and as Secretary from
April 1994 to February 1997. Prior to joining Paradigm, Mr. McClelland served as
Vice President of Finance at Beaver


                                      -60-

<PAGE>

Computer Corporation,  a manufacturer of notebook computers,  from February 1991
through January 1993. From January 1982 through January 1991, Mr. McClelland was
a Vice President and Controller of Precision  Monolithics,  Inc., a manufacturer
of bipolar semiconductors.  Mr. McClelland received his B.S. in finance from the
University of Vermont.

         Douglas  Schirle has served as Paradigm's Vice President of Finance and
Chief  Financial  Officer since February  1997.  Mr. Schirle joined  Paradigm in
December  1993 as the  Corporate  Controller.  Prior to  joining  Paradigm,  Mr.
Schirle was a product line controller and general  accounting manager at Cypress
Semiconductor  from January 1987 to September  1993.  From June 1979 to December
1986, Mr.  Schirle worked in the audit division of Arthur  Andersen & Co. in San
Jose, California.  Mr. Schirle received his B.S. in business administration from
San Jose State University and is a CPA in the State of California.

         Dennis  McDonald  has  served  as  Paradigm's  Vice  President,   Human
Resources since May 1995. Mr. McDonald was Vice President of Human Resources for
Meta-Software  from  September  1994 to May 1995,  and a Principal  at Pragmatic
Human  Resources  Solutions from May 1990 to August 1994. Mr.  McDonald has also
worked for VLSI Technology and Fairchild Semiconductor.  Mr. McDonald received a
B.B.A. from St. John's University.

         Philip Siu has served as Paradigm's Vice President,  Engineering  since
April  1995.  Prior to joining  Paradigm,  Mr. Siu was the  President  of Saning
Electronic, a start-up analog and memory design company, since 1993. Mr. Siu was
Vice President of Engineering at ESS Technology,  a semiconductor  company, from
1991 to 1993 and was President of Micro  Integration,  a semiconductor  company,
from 1987 to 1991. He has previously  worked for VLSI  Technology,  Synertek and
American Microsystems.  Mr. Siu received his B.S. in electrical engineering from
the University of Manitoba,  Canada and an M.S. in electrical  engineering  from
San Jose State University.

         James H. Boswell who has served as Paradigm's Vice President, Sales and
Marketing  since December 1996,  joined the Company in November 1995 as Director
of Marketing.  Prior to joining  Paradigm,  Mr. Boswell was the Sales Manager of
Sharp from 1994 to 1995. Mr.  Boswell was in the marketing and sales  department
of Hitachi from 1989 to 1994. Mr. Boswell  received his B.S. from  University of
New Mexico and his M.B.A. from the University of Arizona.

         Richard  Morley has served as  Paradigm's  Vice  President,  Operations
since  February  1997.  Prior to joining  Paradigm Mr. Morley worked in other IC
based  Operations-notably  Kopin  Corporation  as  General  Manager  of  Display
Manufacturing from 1994 to 1996 and was Director of Operations for Zilog's Nampa
Mod II and Mod III CMOS  wafer  fabrication  facilities  from 1988 to 1994.  Mr.
Morley has also  worked  for other IC  manufacturing  companies  such as General
Instrument,  NCR, Sprague Solid State,  California  Devices and VLSI Technology.
Mr. Morley received his B.S. in chemistry from Manhattan College.


                                      -61-

<PAGE>

ITEM 11.          EXECUTIVE COMPENSATION.

<TABLE>

SUMMARY COMPENSATION TABLE

         The following  table provides  certain summary  information  concerning
compensation  paid to the Company's  Chief  Executive  Officer,  and each of the
other four most  highly  compensated  executive  officers,  who were  serving as
executive  officers on December 31, 1996 (the "Named  Executive  Officers")  and
whose aggregate salary and bonus exceeded  $100,000,  for the fiscal years ended
December 31, 1994, 1995 and 1996.

                                                     Summary Compensation Table

<CAPTION>
                                                                                                                     Long-Term
                                                                                                                   Compensation
                                                                        Annual Compensation(1)                       Payouts
                                                        -----------------------------------------------------      -------------
                                                                                                                    Securities
                                                                                            Other Annual            Underlying
  Name and Principal Position            Year           Salary($)         Bonus($)(2)      Compensation($)           Options(#)
  ---------------------------            ----           ---------         -----------      ---------------           ----------

<S>                                      <C>            <C>                <C>                <C>                    <C>   
Michael Gulett                           1996           $249,185           $ 85,174               --                  25,000
 President and Chief                     1995           $219,692           $150,310               --                  15,000
 Executive Officer                       1994           $171,923           $ 55,000               --                 180,000

                                         1996           $128,076           $ 17,155               --                  13,000
Robert C. McClelland                     1995           $121,792           $ 30,484               --                  10,000
 Chief Financial Officer                 1994           $112,599           $ 10,000               --                  33,750

Dennis McDonald (3)
 Vice President, Human                   1996           $134,302           $ 19,174               --                  17,000
 Resources                               1995           $ 70,400           $    175               --                  25,000

Philip Siu (3)
 Vice President,                         1996           $139,195           $ 25,174               --                  22,000
 Engineering                             1995           $ 92,308           $ 25,155               --                  62,500

James Boswell (3)
 Vice President, Sales and               1996           $119,638           $  9,174           $  1,385(3)             26,250
 Marketing                               1995           $  6,250               --                 --                  15,000

<FN>
--------------

(1)    The Company  changed its fiscal  year-end from March 31 to December 31 in
       June 1994.  For  purposes of the  Summary  Compensation  Table,  the 1994
       fiscal year figures  presented  reflect annual  compensation for the four
       quarters ended December 31, 1994.
(2)    Represents cash bonuses,  profit sharing and commissions  paid during the
       year. 
(3)    Mr. Siu, Mr. McDonald and Mr. Boswell were hired by the Company in April,
       May and November 1995, respectively.
</FN>
</TABLE>



                                      -62-

<PAGE>

<TABLE>
         The following table sets forth certain  information  regarding  options
granted  during the fiscal year ended  December 31, 1996 to the Company's  Named
Executive Officers.

<CAPTION>
                                                                 Option Grants in Last Fiscal Year

                                                                                                         Potential Realizable    
                                                     Percent                                               Value at Assumed      
                                                    of Total                                                Annual Rates of      
                                 Number of           Options                                                  Stock Price        
                                 Securities        Granted to        Exercise                              Appreciation for      
                                 Underlying         Employees         or Base                               Option Term (3)      
                                  Options           in Fiscal          Price         Expiration         ---------------------
                                 Granted(1)          Year(2)         ($/Share)          Date               5%           10%   
                                 ---------          ---------        ---------       ----------         -------      --------

<S>                               <C>                 <C>              <C>            <C>               <C>          <C>     
Michael Gulett                    25,000              2.15%            $ 4.50         07/24/06          $70,751      $179,296
Robert C. McClelland               5,000              0.43%            $13.50         01/01/06          $42,494      $107,715
                                   8,000              0.69%            $ 4.50         07/24/06          $22,640      $ 57,375
Philip Siu(4)                     10,000              0.86%            $13.50         01/01/06          $84,989      $215,430
                                  12,000              1.03%            $ 4.50         07/24/06          $33,960      $ 86,062
Dennis McDonald                    5,000              0.43%            $13.50         01/01/06          $42,494      $107,715
                                  12,000              1.03%            $ 4.50         07/24/06          $33,960      $ 86,062
James Boswell                     15,000              1.29%            $ 4.50         12/29/05          $39,450      $ 98,365
                                  11,250              0.97%            $ 2.50         11/21/06          $17,688      $ 44,824
<FN>
----------                                                                                          

(1)  These options vest on the anniversary date of the grant at 25% per year.
(2)  Based on options to purchase an  aggregate  of  1,161,812  shares of Common
     Stock granted during fiscal 1996.
(3)  Amounts  represent  hypothetical  gains  that  could  be  achieved  for the
     respective  options if exercised at the end of the option term. These gains
     are based on assumed rates of stock  appreciation  of 5% and 10% compounded
     annually  from  the date  the  respective  options  were  granted  to their
     expiration  date  and  are  not  presented  to  forecast   possible  future
     appreciation, if any, in the price of the Common Stock. The gains shown are
     net of the option exercise price,  but do not include  deductions for taxes
     or other expenses  associated  with the exercise of the options or the sale
     of the  underlying  shares.  The actual gains,  if any, on the stock option
     exercises will depend on the future  performance  of the Common Stock,  the
     optionee's  continued employment through applicable resting periods and the
     date on which the options are exercised.
</FN>
</TABLE>




                                      -63-

<PAGE>

<TABLE>
         The  following  table  shows  stock  options  exercised  by  the  Named
Executive Officers as of December 31, 1996. In addition, this table includes the
number of shares of Common Stock  represented by outstanding  stock options held
by each of the Named  Executive  Officers as of December 31,  1996.  The closing
price of the Company's Common Stock at fiscal year-end was $2.38.

                                           Aggregated Option Exercises in Last Fiscal Year
                                                      and FY-End Option Values

<CAPTION>
                                                                 Number of Securities               Value of Unexercised
                              Shares                           Underlying Unexercised               In-the-Money Options
                             Acquired                           Options at FY-End(#)                  at FY-End ($)(1)
                                on           Value           ------------------------------    ------------------------------
           Name              Exercise      Realized          Exercisable      Unexercisable     Exercisable     Unexercisable
           ----              --------      --------          -----------      -------------     -----------     -------------

<S>                          <C>           <C>                  <C>               <C>            <C>              <C>    
Michael Gulett               15,000        $146,313             166,837           381,163        $334,515         $ 7,860
Robert C. McClelland         20,058        $230,690              10,366            26,326        $ 17,619         $14,863
Philip Siu                       --        $      0              27,292            57,208        $      0         $     0
Dennis McDonald                  --        $      0               9,896            32,104        $      0         $     0
James Boswell                    --        $      0               3,750            22,500        $      0         $     0

<FN>
--------------                                                                                
(1)      Value is calculated  by (i)  subtracting  the exercise  price per share
         from  the  year-end   closing  price  of  $2.38  per  share;  and  (ii)
         multiplying the number of shares subject to the option.
</FN>
</TABLE>


Compensation of Directors

         The Company's  non-employee  directors ("Outside  Directors") receive a
fee of $3,000  per  quarter.  All  Outside  Directors  are also  reimbursed  for
expenses incurred in connection with attending Board and committee meetings. The
Company's 1994 Stock Option Plan (the "Option  Plan")  provides for the grant of
options to Outside  Directors  pursuant to a  nondiscretionary,  automatic grant
mechanism,  whereby  each  Outside  Director is granted an option at fair market
value to  purchase  3,125  shares  of  Common  Stock on the date of each  Annual
Meeting of  Stockholders,  provided such director is  re-elected.  These options
vest over four years at the rate of 25% per year so long as the optionee remains
an Outside  Director of the  Company.  Each new Outside  Director  who joins the
Board is automatically granted an option at fair market value to purchase 12,500
shares of Common  Stock  upon the date on which  such  person  first  becomes an
Outside  Director.  These  options  vest over four  years at the rate of 25% per
year.

Employment Agreements

         The Company entered into an employment agreement with Michael Gulett on
August 26, 1996 (the "Agreement"),  which provides for a base salary of $255,000
and the right to participate in the Company's  executive  compensation  program.
The Company may  terminate Mr.  Gulett's  employment at any time with or without
cause upon 90 days' advance written  notice;  provided,  however,  that if he is
terminated  without  cause  (other than as a result of  disability  or change of
control of the Company),  he will receive salary continuation for six months. In
the event Mr. Gulett's employment is terminated during the term of the Agreement


                                      -64-

<PAGE>

and  within  the first  six-month  period  after the  occurrence  of a change of
control of the Company, as defined in the Agreement, Mr. Gulett will be entitled
to receive  one and a half times his annual  rate of base salary as in effect on
the  date of the  employment  termination,  plus one and a half  times  the last
annual bonus awarded by the Company.


ITEM 12.          SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                  MANAGEMENT.

         The following table sets forth certain information regarding beneficial
ownership  of the  Company's  Common  Stock as of February 20, 1997 by: (i) each
person  known to the Company to  beneficially  own more than five percent of the
Company's Common Stock, (ii) each of the Company's directors,  (iii) each of the
named executive  officers,  and (iv) all directors and executive officers of the
Company as a group.  Except as  indicated in the  footnotes  to this table,  the
persons named in the table have sole voting and investment power with respect to
all shares of Common Stock shown as beneficially owned by such person subject to
community property laws where applicable.


                                      -65-

<PAGE>

                                                       Shares
                                                     Beneficially
       Name of Beneficial Owner                         Owned         Percent
       ------------------------                         -----         -------
Vintage Products, Inc.(1)                                           
Arlozorv Street                                                     
Telaviv, Israel ....................................   1,600,000         18.1%
                                                                    
ACMA Limited(2)                                                     
17 Jurong Port Road                                                 
Singapore 2261 .....................................   1,500,000         20.2%
                                                                    
Atmel Corporation(3)                                                
2125 O'Nel Drive                                                    
San Jose, CA 95131 .................................   1,028,050         13.9%
                                                                    
Michael Gulett(4) ..................................     183,125          2.5%
                                                                    
Philip Siu(5) ......................................      33,750           *
                                                                    
James L. Kochman(6) ................................      21,875           *
                                                                    
Robert C. McClelland(7) ............................      14,572           *
                                                                    
Dennis McDonald(8) .................................      12,708           *
                                                                    
Richard Morley .....................................      11,000           *
                                                                    
James Boswell(9) ...................................       3,750           *
                                                                    
George J. Collins(10) ..............................       3,125           *
                                                                    
S. Atiq Raza(11) ...................................       3,125           *
                                                                    
All directors and executive officers as a group                     
(10 persons)(12) ...................................     291,331          3.9%
                                                                
----------

*        Less than one percent (1%).

(1)      Represents shares issuable upon conversion of the Company's 5% Series A
         Convertible   Redeemable   Preferred   Stock.   See   "Business--Recent
         Developments--Sale of Preferred Stock."
(2)      Includes 175,000 shares issuable upon exercise of outstanding warrants.
(3)      Includes 200,000 shares issuable upon exercise of outstanding warrants.
(4)      Includes  171,875 shares subject to stock options that are  exercisable
         or will become exercisable within 60 days of February 20, 1997.
(5)      Represents shares subject to stock options that are exercisable or will
         become exercisable within 60 days of February 20, 1997.
(6)      Represents shares subject to stock options that are exercisable or will
         become exercisable within 60 days of February 20, 1997.
(7)      Represents shares subject to stock options that are exercisable or will
         become exercisable within 60 days of February 20, 1997.
(8)      Represents shares subject to stock options that are exercisable or will
         become exercisable within 60 days of February 20, 1997.
(9)      Represents shares subject to stock options that are exercisable or will
         become exercisable within 60 days of February 20, 1997.
(10)     Represents shares subject to stock options that are exercisable or will
         become exercisable within 60 days of February 20, 1997.


                                      -66-

<PAGE>

(11)     Represents shares subject to stock options that are exercisable or will
         become exercisable within 60 days of February 20, 1997.
(12)     Includes  270,081 shares subject to stock options that are  exercisable
         or will become exercisable within 60 days of February 20, 1997.


Section 16(a)     Beneficial Ownership Reporting Compliance.

         Section  16(a) of the  Securities  Exchange Act of 1934 (the  "Exchange
Act") and the rules of the Securities and Exchange Commission (the "Commission")
thereunder  require  the  Company's  directors  and  executive  officers to file
reports of their  ownership  and changes in  ownership  of Common Stock with the
Commission.  Personnel of the Company  generally  prepare  these  reports on the
basis of  information  obtained  from each  director and officer.  Based on such
information,  the Company believes that all reports required by Section 16(a) of
the Exchange Act to be filed by its directors and executive  officers during the
last fiscal year were filed on time,  except that a Form 4 for Richard  Velhouse
was inadvertently filed late for his November 1996 transactions.

ITEM 13.          CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

Atmel Relationship

         On April 28, 1995,  pursuant to certain  agreements with certain of the
Company's  stockholders,  Atmel Corporation ("Atmel") acquired 425,000 shares of
Common  Stock from the  Company,  300,000  shares of Common  Stock from  certain
stockholders  of the  Company,  and  128,050  shares  of Common  Stock  from the
Company's  equipment  lessors,  all of which shares were purchased at a price of
$8.00 per share. Atmel also acquired from ACMA Limited ("ACMA") certain warrants
to purchase  175,000  shares of Common Stock of the Company at an exercise price
of $1.00 per  share,  for a  purchase  price of $7.00 per share  subject  to the
warrants.  In connection  with these  transactions,  the Company entered into an
agreement with Atmel (the "Stock  Purchase  Agreement")  pursuant to which Atmel
agreed to certain transfer  restrictions for a period of three years. Atmel also
agreed to certain standstill provisions,  including an agreement not to increase
its  beneficial  ownership  above 19.9% of the voting  power of the Company on a
fully  diluted  basis  for a period  of five  years  from the date of the  Stock
Purchase Agreement.  The foregoing restrictions terminate on the date on which a
person or entity  acquires more than 50% of the voting power of the Company.  In
addition,  Atmel  agreed  that,  for a period of ten years  from the date of the
Stock Purchase Agreement, it will vote its shares of Common Stock of the Company
in proportion to the votes cast by the other stockholders of the Company, except
with respect to certain material events. The voting and standstill  restrictions
terminate  at such time as Atmel  beneficially  owns less than 5% of the  Common
Stock of the Company. In connection with its acquisition of capital stock of the
Company,  Atmel  became  a party  to the  Registration  Rights  Agreement  which
provides Atmel with certain rights to register its shares of Common Stock of the
Company.   On  April  28,  1995,   Atmel  also  entered  into  a  Licensing  and
Manufacturing Agreement with the Company.



                                      -67-

<PAGE>

Bentley, Hall, Von Gehr International

         James  Kochman,  a director  of the  Company,  is a partner of Bentley,
Hall,  Von Gehr  International  ("Von Gehr"),  an investment  banking firm which
performed investment banking services for the Company during the 12 months ended
December 31, 1996. Such services  related to, among other things,  the Company's
acquisition of NewLogic and the sale of the Company's wafer fabrication facility
to Orbit Semiconductor.  Compensation to Von Gehr during 1996 exceeded 5% of the
Von Gehr's consolidated gross revenues for its most recent fiscal year. Von Gehr
may also perform  investment  banking services for the Company from time to time
in the future.


                                      -68-

<PAGE>

                                    PART IV

ITEM 14.          EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
                  FORM 8-K.

         (a)      Financial Statements.

                  The  financial  statements  listed  below  appear  on the page
indicated:

                                                                     Page Number
                                                                     -----------

Report of Independent Accountants....................................... 36

Balance Sheets, December 31, 1996 and December 31, 1995................. 37

Statements of  Operations  for the years ended  December 31, 1996
         and December 31, 1995,  the Period from June 21, 1994 to
         December 31, 1994,  and the Period from April 1, 1994 to
         June 20, 1994.................................................. 38

Statements of Stockholders'  Equity (Deficit) for the years ended
         December 31, 1996 and December 31, 1995, the Period from
         June 21, 1994 to December 31, 1994,  and the Period from
         April 1, 1994 to June 20, 1994 ................................ 39

Statements of Cash Flows for the years  ended  December  31, 1996
         and December 31, 1995,  the Period from June 21, 1994 to
         December 31, 1994,  and the Period from April 1, 1994 to
         June 20, 1994 ................................................. 40

Notes to Financial Statements........................................... 41


         (b)      Reports on Form 8-K.

                  A Current Report on Form 8-K was filed with the Securities and
                  Exchange  Commission on December 2, 1996. The report announced
                  the sale of the Registrant's  semiconductor  wafer fabrication
                  manufacturing  operation,  including  equipment  and  work  in
                  process,  and the  assignment of the  Registrant's  rights and
                  obligations under the lease of its wafer fabrication facility.

                  A Current Report on Form 8-K was filed with the Securities and
                  Exchange  Commission on February 6, 1997. The report announced
                  the  private  placement  of a  total  of  200  shares  of  the
                  Registrant's  5%  Series A  Convertible  Redeemable  Preferred
                  Stock to Vintage  Products,  Inc.  at a price of  $10,000  per
                  share, for a total proceeds (net of payments to third parties)
                  of approximately $1,880,000.


                                      -69-

<PAGE>

         (c)      Exhibits

                  The exhibits listed in the accompanying  index to exhibits are
                  filed or  incorporated  by  reference  as part of this  annual
                  report.

         (d)      Financial Statement Schedules

                  Financial statement schedules are omitted because they are not
                  required or are not applicable, or the required information is
                  shown in the financial statements or notes thereto included as
                  part of the Company's 1996 Annual Report on Form 10-K.




                                      -70-

<PAGE>

                        INDEX TO EXHIBITS


    Exhibit
    Number                                      Exhibit
    ------                                      

      1.3          Agreement  and Plan of  Merger  between  the  Registrant  and
                   Paradigm   Technology   Delaware   Corporation,   a  Delaware
                   corporation.(1)

      1.4          Agreement and Plan of Merger dated as of June 5, 1996 between
                   the Registrant and NewLogic Corp.

      2.1          Third Amended Joint Plan of Reorganization effective June 21,
                   1994.(1)

      2.2          Stock  Purchase  Agreement,  dated as of January 21, 1997, by
                   and between Paradigm  Technology,  Inc. and Vintage Products,
                   Inc.(7)

      2.3          Securities  Purchase  Agreement  dated as of April  22,  1996
                   between   the   Registrant,   NewLogic   Corp.   and  certain
                   securityholders of NewLogic Corp.

      2.4          First Amendment to Securities  Purchase Agreement dated as of
                   April 22, 1996 between the  Registrant,  NewLogic  Corp.  and
                   certain securityholders of NewLogic Corp.

      2.5          Investor  Securities  Purchase  Agreement dated as of May 29,
                   1996 between the Registrant and certain  Investors  listed on
                   Schedule A attached thereto.

      3.1          Amended and Restated Certificate of Incorporation.(1)

      3.2          Bylaws of the Registrant, as amended.(1)

      4.1          Certificate  of  Designation  of the 5% Series A  Convertible
                   Redeemable  Preferred  Stock as filed with the  Secretary  of
                   State of the State of Delaware.(7)

      9.1          Voting Trust  Agreement dated as of May 24, 1996 between Hans
                   Olsen and the persons listed on Schedule A attached thereto.

     10.1          Amended and Restated 1994 Stock Option Plan of the Registrant
                   (the "Plan").(5)

     10.2          Form of Incentive Stock Option Agreement under the Plan.(1)

     10.3          Form  of  Nonstatutory   Stock  Option  Agreement  under  the
                   Plan.(1)

     10.4          1995 Employee Stock Purchase Plan of the Registrant.(1)



                                      -71-

<PAGE>

    Exhibit
    Number                                      Exhibit
    ------                                      

     10.5          Office Building Lease between Sobrato  Development  Companies
                   #871, a California  limited  partnership  and the  Registrant
                   dated December 7, 1988.(1)

     10.6          Second  Amendment to Office  Building  Lease between  Sobrato
                   Development  Companies #871, a California limited partnership
                   and the Registrant dated June 18, 1990.(1)

     10.7          First  Amendment to Office  Building  Lease  between  Sobrato
                   Development  Companies #871, a California limited partnership
                   and the Registrant dated May 4, 1989.(1)

     10.8          Technology   Development   Agreement  for  SRAM/ASM   Process
                   Technology  and  Design  between  NKK   Corporation  and  the
                   Registrant dated January 17, 1992.(1)(2)

     10.9          Side Letter to Technology  Development Agreement for SRAM/ASM
                   Process Technology and Design between NKK Corporation and the
                   Registrant dated January 17, 1992.(1)

     10.10         Amendment  No.  1 to  Technology  Development  Agreement  for
                   SRAM/ASM   Process   Technology   and  Design   between   NKK
                   Corporation and the Registrant dated October 23, 1992.(1)(2)

     10.11         Amendment  No.  2 to  Technology  Development  Agreement  for
                   SRAM/ASM   Process   Technology   and  Design   between   NKK
                   Corporation and the Registrant dated October 30, 1992.(1)

     10.12         Amendment  No.  3 to  Technology  Development  Agreement  for
                   SRAM/ASM   Process   Technology   and  Design   between   NKK
                   Corporation and the Registrant dated February 16, 1995.(1)(2)

     10.13         Restated  Technology   Development  Agreement  for  4Mb  SRAM
                   Process and Design between NKK Corporation and the Registrant
                   dated May 26, 1992.(1)(2)

     10.14         Amendment No. 1 to Restated Technology  Development Agreement
                   for 4Mb SRAM Process and Design between NKK  Corporation  and
                   the Registrant dated October 23, 1992.(1)(2)

     10.15         Amendment No. 2 to Restated Technology  Development Agreement
                   for 4Mb SRAM Process and Design between NKK  Corporation  and
                   the Registrant dated October 30, 1992.(1)



                                      -72-

<PAGE>

    Exhibit
    Number                                      Exhibit
    ------                                      
     10.16         Restated  Technology  Transfer and License Agreement 256K/1Mb
                   SRAM  Process  and Design  between  NKK  Corporation  and the
                   Registrant dated May 26, 1992.(1)(2)

     10.17         Amendment No. 1 to Restated  Technology  Transfer and License
                   Agreement  256K/1Mb  SRAM  Process  and  Design  between  NKK
                   Corporation and the Registrant dated October 23, 1992.(1)(2)

     10.18         Amendment No. 2 to Restated  Technology  Transfer and License
                   Agreement  256K/1Mb  SRAM  Process  and  Design  between  NKK
                   Corporation and the Registrant dated October 30, 1992.(1)

     10.19         Amendment No. 3 to Restated  Technology  Transfer and License
                   Agreement  256K/1Mb  SRAM  Process  and  Design  between  NKK
                   Corporation and the Registrant dated August 16, 1994.(1)(2)

     10.20         Agreement   on  1M  SRAM  Sales  Right  and  OEM  Supply  and
                   Modification of Existing  Agreements  between NKK Corporation
                   and the Registrant dated April 18, 1995.(1)(2)

     10.21         Marketing and Resale  Agreement  between the  Registrant  and
                   National   Semiconductor   Corporation   dated   October  13,
                   1994.(1)(2)

     10.22         License and  Manufacturing  Agreement  between the Registrant
                   and Atmel Corporation dated April 28, 1995.(1)(2)

     10.23         Patent License  Agreement between the Registrant and American
                   Telephone and Telegraph Company dated December 13, 1990.(1)

     10.24         Amended and Restated  Registration  Rights Agreement  between
                   the  Registrant  and certain  stockholders  of the Registrant
                   dated April 28, 1995.(1)

     10.25         Amended  Warrant  for  50,000  shares of Common  Stock of the
                   Registrant issued to ACMA Limited on June 23, 1994.(1)

     10.26         Warrant for 100,000  shares of Common  Stock  transferred  by
                   ACMA Limited to Chiang Lam on December 9, 1994.(1)

     10.27         Warrant  for  50,000  shares  of Common  Stock  issued by the
                   Registrant  to ACMA  Limited on January 25, 1995  between the
                   Registrant and Atmel Corporation.(1)

     10.28         Warrant for 350,000  shares of Common Stock of the Registrant
                   transferred  by ACMA Limited to Atmel  Corporation  on May 1,
                   1995.(1)



                                      -73-

<PAGE>

    Exhibit
    Number                                      Exhibit
    ------                                      

     10.29         Loan  and  Security  Agreement  between  the  Registrant  and
                   Greyrock Business Credit dated February 28, 1995.(1)

     10.30         Amendment  to  Loan  Documents  between  the  Registrant  and
                   Greyrock Business Credit dated April 7, 1995.(1)

     10.31         Amendment  to  Loan  Documents  between  the  Registrant  and
                   Greyrock Business Credit dated May 1, 1995.(1)

     10.32         Form of Indemnification Agreement.(1)

     10.33         General  Release and  Covenant  Not to Sue dated May 24, 1995
                   between Anthony C. Langley and the Registrant.(1)

     10.34         Stock Purchase  Agreement  dated as of April 28, 1995 between
                   the Registrant and Atmel Corporation.(1)

     10.35         Letter of Credit  dated March 2, 1995 issued by Royal Bank of
                   Canada  Singapore  on  behalf  of ACMA  Limited  in  favor of
                   Greyrock Business Credit.(1)

     10.36         Observation Rights Agreement dated June 16, 1995 between ACMA
                   Limited and the Registrant.(1)

     10.37         Third  Amendment to Office  Building  Lease  between  Sobrato
                   Development  Companies #871, a California limited partnership
                   and the Registrant dated December 21, 1995.(3)

     10.38         Loan and Security  Agreement  dated  February 9, 1996 between
                   Bank of the West and the Registrant.(3)

     10.39         Loan and Security  Agreement  dated February 14, 1996 between
                   the Registrant and the CIT Group/Equipment Financing, Inc.(4)

     10.40         Agreement of Purchase and Sale of Assets dated as of November
                   7, 1996 between the Registrant and Orbit Semiconductor,  Inc.
                   Exhibits to this  Agreement  omitted from this report will be
                   furnished  to the  Securities  and Exchange  Commission  upon
                   request.(6)

     10.41         Wafer  Manufacturing  Agreement  dated as of November 7, 1996
                   between the Registrant and Orbit Semiconductor, Inc.(6)

     10.42         Promissory  Note dated  November  15,  1996 in the  aggregate
                   principal amount of $4,800,000 issued by Orbit Semiconductor,
                   Inc. to the Registrant.(6)



                                      -74-

<PAGE>

    Exhibit
    Number                                      Exhibit
    ------                                      

     10.43         Promissory  Note dated  November  15,  1996 in the  aggregate
                   principal amount of $1,000,000 issued by Orbit Semiconductor,
                   Inc. to the Registrant.(6)

     10.44         Office  Building  Lease  Agreement  dated  December  26, 1996
                   between the Registrant,  John Arrillaga,  Trustee,  UTA dated
                   7/20/77 and Richard T. Perry, Trustee, UTA dated 7/20/77.

     10.45         Loan and Security  Agreement  dated  October 25, 1996 between
                   the Registrant and Greyrock Business Credit.

     10.46         Employee  letter  agreement  dated May 23,  1996  between the
                   Registrant and Hans Olsen.

     10.47         Employee  letter  agreement  dated May 24,  1996  between the
                   Registrant and Bruce Campbel.

     10.48         Employee  letter  agreement  dated May 23,  1996  between the
                   Registrant and Gregory Roberts.

     10.49         Executive   Compensation  Agreement  dated  August  26,  1996
                   between the Registrant and Michael Gulett.

     11.1          Computation of Net Income (Loss) Per Share.

     23.1          Consent of Price Waterhouse LLP, Independent Accountants.

     27.1          Financial Data Schedule

--------------------

(1)      Incorporated by reference to  Registration  Statement on Form S-1 (Reg.
         No. 33-92390).
(2)      Confidential treatment granted as to certain portions.
(3)      Incorporated  by reference to the Company's  Annual Report on Form 10-K
         for the year ended December 31, 1995.
(4)      Incorporated  by reference to the  Company's  Quarterly  Report on Form
         10-Q for the quarter ended March 31, 1996.
(5)      Incorporated  by reference to the  Company's  Quarterly  Report on Form
         10-Q for the quarter ended September 30, 1996.
(6)      Incorporated  by reference to the Company's  Current Report on Form 8-K
         filed with the Securities and Exchange Commission on December 2, 1996.
(7)      Incorporated  by reference to the Company's  Current Report on Form 8-K
         filed with the Securities and Exchange Commission on February 6, 1997.


                                      -75-

<PAGE>

                                   SIGNATURES

         Pursuant to the  requirements  of Section 13 or 15(d) 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.

Dated:  March 11, 1997               PARADIGM TECHNOLOGY, INC.



                                     By             /s/ Michael Gulett
                                        ----------------------------------------
                                                      Michael Gulett
                                           President and Chief Executive Officer



         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
this  report has been  signed  below by the  following  persons on behalf of the
Registrant and in the capacities and on the dates indicated.

                  Signature and Title                                Date
                  -------------------                                ----



By                /s/ Michael Gulett                            March 11, 1997
  --------------------------------------------------
                    Michael Gulett
    President, Chief Executive Officer and Director
             (Principal Executive Officer)



By                /s/ Douglas Schirle                           March 11, 1997
  --------------------------------------------------
                    Douglas Schirle
             Vice President of Finance and
                Chief Financial Officer
             (Principal Financial Officer)



By                /s/ George Collins                            March 11, 1997
  --------------------------------------------------
                    George Collins
                       Director



By                 /s/ James Kochman                            March 11, 1997
  --------------------------------------------------
                     James Kochman
                       Director







                                      -76-

<PAGE>

                                INDEX TO EXHIBITS



    Exhibit
    Number                            Exhibit
    ------                            -------

     1.3           Agreement  and  Plan  of  Merger  between  the           
                   Registrant  and Paradigm  Technology  Delaware
                   Corporation, a Delaware corporation.(1)

     1.4           Agreement  and Plan of Merger dated as of June           
                   5, 1996  between the  Registrant  and NewLogic
                   Corp.

     2.1           Third  Amended  Joint  Plan of  Reorganization           
                   effective June 21, 1994.(1)

     2.2           Stock Purchase Agreement,  dated as of January           
                   21, 1997, by and between Paradigm  Technology,
                   Inc. and Vintage Products, Inc.(7)

     2.3           Securities  Purchase  Agreement  dated  as  of           
                   April  22,  1996   between   the   Registrant,
                   NewLogic Corp. and certain  securityholders of
                   NewLogic Corp.

     2.4           First   Amendment   to   Securities   Purchase           
                   Agreement  dated as of April 22, 1996  between
                   the  Registrant,  NewLogic  Corp.  and certain
                   securityholders of NewLogic Corp.

     2.5           Investor  Securities  Purchase Agreement dated           
                   as of May 29, 1996 between the  Registrant and
                   certain   Investors   listed  on   Schedule  A
                   attached thereto.

     3.1           Amended   and    Restated    Certificate    of           
                   Incorporation.(1) 

     3.2           Bylaws of the Registrant, as amended.(1)                 

     4.1           Certificate  of Designation of the 5% Series A           
                   Convertible   Redeemable  Preferred  Stock  as
                   filed with the Secretary of State of the State
                   of Delaware.(7)

     9.1           Voting  Trust  Agreement  dated  as of May 24,           
                   1996 between Hans Olsen and the persons listed
                   on Schedule A attached thereto.

    10.1           Amended and Restated 1994 Stock Option Plan of           
                   the Registrant (the "Plan").(5)

    10.2           Form of Incentive Stock Option Agreement under           
                   the Plan.(1)

    10.3           Form of  Nonstatutory  Stock Option  Agreement           
                   under the Plan.(1) 

    10.4           1995  Employee  Stock  Purchase  Plan  of  the           
                   Registrant.(1) 

    10.5           Office    Building   Lease   between   Sobrato           
                   Development   Companies   #871,  a  California
                   limited  partnership and the Registrant  dated
                   December 7, 1988.(1)



<PAGE>

    Exhibit
    Number                            Exhibit
    ------                            -------

    10.6           Second  Amendment  to  Office  Building  Lease             
                   between Sobrato Development  Companies #871, a
                   California   limited   partnership   and   the
                   Registrant dated June 18, 1990.(1)

    10.7           First   Amendment  to  Office  Building  Lease             
                   between Sobrato Development  Companies #871, a
                   California   limited   partnership   and   the
                   Registrant dated May 4, 1989.(1)

    10.8           Technology  Development Agreement for SRAM/ASM             
                   Process  Technology  and  Design  between  NKK
                   Corporation  and the Registrant  dated January
                   17, 1992.(1)(2)

    10.9           Side   Letter   to   Technology    Development             
                   Agreement for SRAM/ASM Process  Technology and
                   Design   between  NKK   Corporation   and  the
                   Registrant dated January 17, 1992.(1)

    10.10          Amendment  No.  1  to  Technology  Development             
                   Agreement for SRAM/ASM Process  Technology and
                   Design   between  NKK   Corporation   and  the
                   Registrant dated October 23, 1992.(1)(2)

    10.11          Amendment  No.  2  to  Technology  Development             
                   Agreement for SRAM/ASM Process  Technology and
                   Design   between  NKK   Corporation   and  the
                   Registrant dated October 30, 1992.(1)

    10.12          Amendment  No.  3  to  Technology  Development             
                   Agreement for SRAM/ASM Process  Technology and
                   Design   between  NKK   Corporation   and  the
                   Registrant dated February 16, 1995.(1)(2)

    10.13          Restated Technology  Development Agreement for             
                   4Mb  SRAM  Process  and  Design   between  NKK
                   Corporation  and the Registrant  dated May 26,
                   1992.(1)(2)

    10.14          Amendment   No.  1  to   Restated   Technology             
                   Development Agreement for 4Mb SRAM Process and
                   Design   between  NKK   Corporation   and  the
                   Registrant dated October 23, 1992.(1)(2)

    10.15          Amendment   No.  2  to   Restated   Technology             
                   Development Agreement for 4Mb SRAM Process and
                   Design   between  NKK   Corporation   and  the
                   Registrant dated October 30, 1992.(1)

    10.16          Restated   Technology   Transfer  and  License             
                   Agreement  256K/1Mb  SRAM  Process  and Design
                   between  NKK  Corporation  and the  Registrant
                   dated May 26, 1992.(1)(2)

    10.17          Amendment   No.  1  to   Restated   Technology             
                   Transfer and License  Agreement  256K/1Mb SRAM
                   Process and Design between NKK Corporation and
                   the Registrant dated October 23, 1992.(1)(2)



<PAGE>

    Exhibit
    Number                            Exhibit
    ------                            -------

    10.18          Amendment   No.  2  to   Restated   Technology              
                   Transfer and License  Agreement  256K/1Mb SRAM
                   Process and Design between NKK Corporation and
                   the Registrant dated October 30, 1992.(1)

    10.19          Amendment   No.  3  to   Restated   Technology              
                   Transfer and License  Agreement  256K/1Mb SRAM
                   Process and Design between NKK Corporation and
                   the Registrant dated August 16, 1994.(1)(2)

    10.20          Agreement  on 1M  SRAM  Sales  Right  and  OEM              
                   Supply and Modification of Existing Agreements
                   between  NKK  Corporation  and the  Registrant
                   dated April 18, 1995.(1)(2)

    10.21          Marketing  and Resale  Agreement  between  the              
                   Registrant    and    National    Semiconductor
                   Corporation dated October 13, 1994.(1)(2)

    10.22          License and  Manufacturing  Agreement  between              
                   the  Registrant  and Atmel  Corporation  dated
                   April 28, 1995.(1)(2)

    10.23          Patent   License    Agreement    between   the              
                   Registrant   and   American    Telephone   and
                   Telegraph Company dated December 13, 1990.(1)

    10.24          Amended  and  Restated   Registration   Rights              
                   Agreement  between the  Registrant and certain
                   stockholders of the Registrant dated April 28,
                   1995.(1)

    10.25          Amended  Warrant  for 50,000  shares of Common              
                   Stock of the Registrant issued to ACMA Limited
                   on June 23, 1994.(1)

    10.26          Warrant  for  100,000  shares of Common  Stock              
                   transferred  by ACMA  Limited to Chiang Lam on
                   December 9, 1994.(1)

    10.27          Warrant  for  50,000  shares of  Common  Stock              
                   issued by the  Registrant  to ACMA  Limited on
                   January 25, 1995  between the  Registrant  and
                   Atmel Corporation.(1)

    10.28          Warrant for 350,000  shares of Common Stock of              
                   the Registrant  transferred by ACMA Limited to
                   Atmel Corporation on May 1, 1995.(1)

    10.29          Loan  and  Security   Agreement   between  the              
                   Registrant and Greyrock  Business Credit dated
                   February 28, 1995.(1)

    10.30          Amendment  to  Loan   Documents   between  the              
                   Registrant and Greyrock  Business Credit dated
                   April 7, 1995.(1)

    10.31          Amendment  to  Loan   Documents   between  the              
                   Registrant and Greyrock  Business Credit dated
                   May 1, 1995.(1)

    10.32          Form of Indemnification Agreement.(1)                       



<PAGE>

    Exhibit
    Number                            Exhibit
    ------                            -------

    10.33          General  Release and Covenant Not to Sue dated            
                   May 24, 1995  between  Anthony C.  Langley and
                   the Registrant.(1)

    10.34          Stock Purchase Agreement dated as of April 28,            
                   1995   between   the   Registrant   and  Atmel
                   Corporation.(1)

    10.35          Letter of Credit dated March 2, 1995 issued by            
                   Royal  Bank of Canada  Singapore  on behalf of
                   ACMA  Limited  in favor of  Greyrock  Business
                   Credit.(1)

    10.36          Observation  Rights  Agreement  dated June 16,            
                   1995    between    ACMA    Limited   and   the
                   Registrant.(1)

    10.37          Third   Amendment  to  Office  Building  Lease            
                   between Sobrato Development  Companies #871, a
                   California   limited   partnership   and   the
                   Registrant dated December 21, 1995.(3)

    10.38          Loan and Security  Agreement dated February 9,            
                   1996   between   Bank  of  the  West  and  the
                   Registrant.(3)

    10.39          Loan and Security Agreement dated February 14,            
                   1996  between  the   Registrant  and  the  CIT
                   Group/Equipment Financing, Inc.(4)

    10.40          Agreement of Purchase and Sale of Assets dated            
                   as of November 7, 1996 between the  Registrant
                   and Orbit Semiconductor, Inc. Exhibits to this
                   Agreement  omitted  from this  report  will be
                   furnished  to  the   Securities  and  Exchange
                   Commission upon request.(6)

    10.41          Wafer  Manufacturing  Agreement  dated  as  of            
                   November 7, 1996  between the  Registrant  and
                   Orbit Semiconductor, Inc.(6)

    10.42          Promissory Note dated November 15, 1996 in the            
                   aggregate   principal   amount  of  $4,800,000
                   issued  by Orbit  Semiconductor,  Inc.  to the
                   Registrant.(6)

    10.43          Promissory Note dated November 15, 1996 in the            
                   aggregate   principal   amount  of  $1,000,000
                   issued  by Orbit  Semiconductor,  Inc.  to the
                   Registrant.(6)

    10.44          Office Building Lease Agreement dated December            
                   26,   1996   between  the   Registrant,   John
                   Arrillaga,  Trustee,  UTA  dated  7/20/77  and
                   Richard T. Perry, Trustee, UTA dated 7/20/77.

    10.45          Loan and Security  Agreement dated October 25,            
                   1996  between  the   Registrant  and  Greyrock
                   Business Credit.

    10.46          Employee  letter  agreement dated May 23, 1996            
                   between the Registrant and Hans Olsen.



<PAGE>

    Exhibit
    Number                            Exhibit
    ------                            -------

    10.47          Employee  letter  agreement dated May 24, 1996          
                   between the Registrant and Bruce Campbell.

    10.48          Employee  letter  agreement dated May 23, 1996          

                   between the Registrant and Gregory Roberts.

    10.49          Executive  Compensation Agreement dated August          
                   26, 1996  between the  Registrant  and Michael
                   Gulett.

    11.1           Computation of Net Income (Loss) Per Share.             

    23.1           Consent of Price  Waterhouse LLP,  Independent          
                   Accountants.

    27.1           Financial Data Schedule                                 

--------------------

(1)      Incorporated by reference to  Registration  Statement on Form S-1 (Reg.
         No. 33-92390).
(2)      Confidential treatment granted as to certain portions.
(3)      Incorporated  by reference to the Company's  Annual Report on Form 10-K
         for the year ended December 31, 1995.
(4)      Incorporated  by reference to the  Company's  Quarterly  Report on Form
         10-Q for the quarter ended March 31, 1996.
(5)      Incorporated  by reference to the  Company's  Quarterly  Report on Form
         10-Q for the quarter ended September 30, 1996.
(6)      Incorporated  by reference to the Company's  Current Report on Form 8-K
         filed with the Securities and Exchange Commission on December 2, 1996.
(7)      Incorporated  by reference to the Company's  Current Report on Form 8-K
         filed with the Securities and Exchange Commission on February 6, 1997.
*        Previously filed.