<PAGE>

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

          [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
                 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000

                                       OR

         [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                         COMMISSION FILE NUMBER 0-26274

                     INTEGRATED MEASUREMENT SYSTEMS, INC.
            (Exact name of registrant as specified in its charter)

               OREGON                               93-0840631
   (State or other jurisdiction of                 (IRS Employer
   incorporation or organization)               Identification No.)

9525 SW GEMINI DRIVE, BEAVERTON, OREGON                97008
(Address of principal executive offices)            (Zip Code)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:   (503) 626-7117

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

                                 TITLE OF CLASS
                     Common Stock, $.01 par value per share
                              Share Purchase Rights

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 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.
           --------------

The aggregate market value of the voting stock held by non-affiliates of the
Registrant was $58,459,489 on March 16, 2001, based upon the last sales price of
the Common Stock on that date reported in the NASDAQ National Market System. On
March 16, 2001, there were 7,859,597, shares of the Registrant's Common Stock
outstanding, including 2,663,198 held by affiliates.

                       DOCUMENTS INCORPORATED BY REFERENCE

<TABLE>
<CAPTION>
        DOCUMENT                    PART OF FORM 10-K INTO WHICH INCORPORATED
        --------                    -----------------------------------------
<S>                                       <C>
Portions of Proxy Statement to               Part III
be used in connection with the
Company's 2001 annual meeting of
shareholders to be held on or
about May 22.
</TABLE>


                                       1
<PAGE>

                      INTEGRATED MEASUREMENT SYSTEMS, INC.
                          2000 FORM 10-K ANNUAL REPORT
                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                      PAGE
                                                                      ----
<S>                                                                 <C>
                                     PART I

Item 1.  Business                                                       3

Item 2.  Properties                                                    18

Item 3.  Legal Proceedings                                             19

Item 4.  Submission of Matters to a Vote of Security Holders           19


                                     PART II

Item 5.  Market for Registrants Common Equity and Related              19
         Stockholder Matters

Item 6.  Selected Financial Data                                       20

Item 7.  Management's Discussion and Analysis of Results of            21
         Operations and Financial Condition

Item 7A. Quantitative and Qualitative Disclosures About                31
         Market Risk

Item 8.  Financial Statements and Supplementary Data                   31

Item 9.  Changes in and Disagreements with Accountants on              31
         Accounting and Financial Disclosure


                                    PART III

Item 10. Directors and Executive Officers of Registrant                32

Item 11. Executive Compensation                                        32

Item 12. Security Ownership of Certain Beneficial Owners and           32
         Management

Item 13. Certain Relationships and Related Transactions                32


                                     PART IV

Item 14. Exhibits, Financial Statements Schedules, and Reports         32
         on Form 8-K
</TABLE>


                                       2
<PAGE>


                                     PART I

ITEM 1. BUSINESS

                                    OVERVIEW

We design, manufacture, market and service versatile, high performance
integrated circuit validation systems. Customers use our validation systems to
test, at the prototype stage, complex digital, mixed-signal and memory devices
such as microprocessors; application specific integrated circuits, or ASICs;
multi-chip modules, or MCMs; static random access memory, or SRAM; and dynamic
random access memory, or DRAM devices. In addition, we develop, market and
support a line of virtual test software that enables design and test engineers
to develop and debug production test software prior to fabricating the prototype
of the actual device. Our validation systems and software enable our customers
to refine their integrated circuit designs, provide reliable and prompt feedback
to both design and test engineers, reduce cost of testing and shorten
time-to-market.

We market and support our products worldwide through a network of direct sales
force personnel, independent distributors and dedicated sales personnel employed
by affiliated companies. We have sold over 1,000 validation systems to customers
in the semiconductor, aerospace, automotive, computer, consumer electronics,
data communications, medical electronics, telecommunications and other
industries.

                               INDUSTRY BACKGROUND

INCREASING COMPLEXITY OF INTEGRATED CIRCUITS
--------------------------------------------
Continuous improvements in integrated circuit process and design technologies
have led to the design and production of more complex, reliable and
cost-effective devices. These improvements have expanded the use of integrated
circuits beyond their original primary applications in computer systems to
applications such as telecommunication systems, automotive products, consumer
goods and industrial automation and control systems. As system users and
designers increasingly demand higher performance, greater reliability, shorter
design cycle times and lower costs from their systems, the functionality
provided by integrated circuits used in these systems is expanding.

INTEGRATED CIRCUIT PROCESS FLOW FROM DESIGN TO PRODUCTION TEST
--------------------------------------------------------------
The process of designing and manufacturing integrated circuits is complex and
capital-intensive, involving stages of design, prototype manufacture,
engineering test of the prototypes, device manufacture and production test. Each
stage in this process has come under pressure as integrated circuits have
increased in complexity and speed. Complexity means more functions on a single
integrated circuit, and is made possible by higher density, or more transistors
per chip, and by increasing the number of channels through which data may be
entered or extracted from a chip, also known as pin count. Since the early
1970s, the density of microprocessors has increased from tens of thousands to
tens of millions of transistors. Over the same period, feature sizes in
integrated circuits have decreased from 5 microns to 0.13 microns in today's
advanced designs. Pin count has increased from single digits thirty years ago to
more than one thousand pins in chips being developed today. The speed with which
integrated circuits can process data has also increased, and for advanced
designs is now measured in gigabits, or billions of bits, of data per second.

Increases in integrated circuit complexity, speed and functionality, as well as
shorter development cycles, have been made possible by technological advances at
the following critical stages of the integrated circuit design-to-production
process:

      o     DESIGN. At the design stage, advances in electronic design
            automation, or EDA, software have allowed design engineers to
            work with integrated circuit designs at increasingly higher
            levels of abstraction. Engineers today do not have to describe
            each transistor; they can instead use computer workstations to
            describe the behavior they want from the whole circuit. Working
            at these higher levels of abstraction permits engineers to design
            significantly more complex integrated circuits in less time.

      o     PROTOTYPE MANUFACTURE. After the integrated circuit has been
            designed, prototypes are manufactured, allowing the design and test
            engineers to evaluate the performance of the integrated circuit
            before

                                       3
<PAGE>

            committing to volume production. Prototype manufacture uses the
            same technology and equipment as production manufacture.

      o     ENGINEERING TEST. At the engineering test stage, also called the
            validation stage, prototype integrated circuits are verified and
            characterized. Verification establishes that a circuit functions
            logically as it was designed. Characterization establishes under
            what conditions the circuit can perform as designed; for example,
            within what temperature or voltage ranges, under what vibration
            conditions, or at what signal speeds. Engineering test activities
            also include failure analysis: if a circuit fails during the
            validation stage, or in production test, the causes of such
            failure must be determined.

      o     DEVICE MANUFACTURE. Once a device is production ready, it is
            manufactured in volume. Advances in semiconductor manufacturing
            process technology have made possible the fabrication of devices
            that have roughly doubled in complexity and speed approximately
            every two years for the past twenty years.

      o     PRODUCTION TEST. The demand for automated, high volume equipment
            that can test devices once they have been manufactured has led to
            the development of successive generations of automated test
            equipment, also called ATE machines. ATE machines have
            contributed to the decrease of device production time by allowing
            manufacturers to test many units of the same integrated circuit
            in a short time. ATE machines are enabled by production test
            software which is custom designed for each integrated circuit
            design. This software understands how the device should perform
            and determines whether a device is defective.

CHALLENGES OF ENGINEERING TEST AND PRODUCTION TEST
--------------------------------------------------
As integrated circuits have become more complex and as device manufacturers have
increasingly sought ways to introduce products to market more rapidly, critical
limitations have become apparent in the integrated circuit design-to-production
process. The equipment used in the engineering test stage has often been unable
to effectively verify and characterize increasingly complex integrated circuits.
Additionally, the process and technology used to develop and debug production
test software has often been inefficient and inadequate.

Originally, semiconductor design and test engineers had no choice but to use
instrument clusters--combinations of oscilloscopes, probes, meters, signal
generators, analyzers and other standard electrical engineering tools--to
perform verification and characterization tests on prototype integrated
circuits. Some tests could not be performed using such tool sets. To perform
specialized tests on prototypes, engineers turned to ATE machines to verify and
characterize prototypes. However, ATE machines are designed for volume
production testing and usually only provide pass/fail information. They lack the
flexibility or versatility to efficiently test whether and within what limits a
given part works, or efficiently analyze why it fails to work. ATE machines are
also very expensive; therefore, companies often use the same ATE machines for
both engineering test and production test. This strategy requires that
production be interrupted, or that engineering test be delayed until gaps in the
production schedule permit use of the production ATE machines. Furthermore,
engineers at companies that design and sell integrated circuits, but have them
built by third party foundries, may not even have the option of getting time on
a production ATE machine. Some companies have tried to avoid these constraints
by developing their own specialized test equipment in-house, but that process is
costly and time-consuming.

Typically, engineers must complete one stage in the integrated circuit process
flow before they can advance to the next step. That serial progression produces
a problem: if engineers find a defect at a later stage, they generally must
repeat an earlier stage, or even start the design process over again. A design
has to be complete before prototypes can be built; prototypes have to be built
before they can be tested; and prototypes have to be production-ready before
production test software can be debugged and refined. Production test software
can take significant time to debug and refine, so the need to wait until a
physical part has been produced to perform that process delays an integrated
circuit's introduction to the market. Even then, test failures can raise the
question of whether the integrated circuit itself is flawed, or the test has an
error. In addition, integrated circuits can be designed in a way that some or
all of their functionality cannot effectively be tested. Designs that are
discovered to be untestable when produced require another iteration of the
integrated circuit process flow.

                                      4
<PAGE>

These limitations create a significant market need for specialized engineering
test products, and for solutions that enable engineers to develop and debug
production test software and ATE interface equipment, or fixtures, in parallel
with the design and validation of integrated circuit prototypes.

                                  OUR SOLUTION

We provide high performance integrated circuit validation systems and virtual
test software that address the engineering and production test requirements of
increasingly complex devices. Our validation systems test logic devices,
mixed-signal devices that combine both analog and digital functionality and
memory devices. Our validation systems can also be used to test selected
functions of highly integrated, or system-on-chip, devices. By keeping pace with
the industry's advances in speed and pin count requirements, our solutions
enable customers to reduce the time required for verification, characterization
and failure analysis. This results in lower cost of design, reduced
time-to-market and increased competitiveness for the companies designing today's
increasingly complex integrated circuits.

Our validation systems give engineers a flexible and cost-effective way to
verify and characterize prototype integrated circuits and to perform failure
analysis. Each validation system integrates the functions of a variety of
individual test instruments into a single system consisting of both hardware and
software that offers increased verification and characterization performance at
a significant cost savings over ATE machines. Our validation systems send
defined signals to the integrated circuit under test, and then measure the
signals the device sends back and compare them with the expected response. Our
validation systems can send and receive data from an integrated circuit at the
same speeds the circuit will experience in actual use. As a result, design and
test engineers can better identify failures, assess areas of concern, run rapid
diagnostic sequences to pinpoint the causes of failure and identify changes
needed to correct design errors or weaknesses.

Our validation systems are designed to work with desktop computers or
workstations to receive and execute test commands and report the results of test
procedures. Our validation systems can also be linked to the industry's most
commonly used integrated circuit design software, including software tools
offered by Cadence, Mentor Graphics, Synopsys and others.

Our virtual test software enables test engineers to refine and debug production
test software early in the integrated circuit design and production process,
even before a prototype of the integrated circuit is produced. The key to our
software is that it simulates the production testing process. The software
creates a computer model of the ATE machine that will ultimately be used to test
the integrated circuit, and then tests a computer model of the integrated
circuit on the ATE machine model. Our software eliminates the need to have an
actual integrated circuit and an ATE machine to determine if test software is
working properly and to debug that software. Because the computer model of the
integrated circuit is logically the same as the desired physical device, our
software can perform some initial tests of the device model to identify certain
design flaws and to determine whether the design itself can be adequately
tested. Our software does not eliminate the need for engineering test of the
physical prototype. By allowing production test software to be developed and
debugged while the integrated circuit is being designed and validated, our
software can significantly reduce the time required to introduce integrated
circuits to market.

                                  OUR STRATEGY

Our objective is to be the leading provider of integrated circuit validation
systems that enable design and test engineers to effectively and rapidly
evaluate and test new, complex integrated circuits. The key elements of our
strategy are set forth below.

PROVIDE INNOVATIVE SOLUTIONS TO TEST INCREASINGLY COMPLEX DEVICES
-----------------------------------------------------------------
We intend to keep pace with rapid advances in integrated circuit design and test
by introducing new validation systems and related software designed to test
higher speed and higher pin count devices. We also continually enhance our
existing systems to add valuable features and functions that meet our customers'
evolving needs. We strive to make all of our validation systems highly
interactive, easy-to-use and cost-effective and to make them capable of passing
data between EDA software and ATE machines. We intend to continue to enhance our
virtual test software to streamline the process of developing and debugging
production test software. We believe these efforts enable us to remain ahead of
our

                                       5
<PAGE>

competition and, therefore, are currently devoting significant research and
development resources to enhancing and expanding our product offerings.

EXPAND MARKETS AND MARKET SHARE
-------------------------------
We intend to leverage our position as a leading supplier of products in the
prototype verification market to increase our penetration of the prototype
characterization market. We have built upon our historical strength in testing
microprocessors and other logic circuits to extend our offerings in the areas of
mixed-signal test and memory test, including high-speed memory devices. We
intend to enhance our product offerings in these markets. Using our knowledge of
the technologies underlying both design and test, we intend to continue to
develop innovative solutions to expand the market for virtual test software.

LEVERAGE RELATIONSHIPS WITH INDUSTRY LEADERS TO ENHANCE MARKET POSITION
-----------------------------------------------------------------------
We intend to continue to build close working relationship with integrated
circuit manufacturers, EDA software vendors and ATE machine vendors to enhance
our market position. By working closely with integrated circuit manufacturers,
we are often able to anticipate their needs and incorporate specific value-added
functionality into our products. Our relationships with leading EDA software
vendors allow us to design and offer products that can access the device models
created with EDA software and effectively use this data to perform validation
tests and debug and refine production test software. In addition, our
relationship with Cadence provides us with access to technological advances in
integrated circuit design software. Our relationships with several leading ATE
vendors, including Advantest, Agilent, Credence, Schlumberger and Teradyne,
strengthen our ability to develop ATE machine simulations, and have led to
increased customer acceptance of our virtual test software.

MAINTAIN HIGH LEVEL OF CUSTOMER SERVICE
---------------------------------------
We believe a high level of customer service and support is critical to the
adoption and successful use of engineering test technology. We work closely with
our customers to solve their increasingly complex engineering test problems. By
doing so, we also expect to gain insight that will help us develop subsequent
generations of validation systems and virtual test software products to address
the needs of test engineers in the rapidly changing integrated circuit market.

EXPAND WORLDWIDE PRODUCT DISTRIBUTION
-------------------------------------
We will continue to expand our worldwide product distribution through ongoing
investments in direct sales and applications engineering. We also intend to
develop distributor relationships in markets where partnering adds market
leverage and where investment in direct sales has not been warranted.

                                    PRODUCTS

VALIDATION SYSTEMS
------------------
Our integrated circuit validation systems play a variety of roles in bridging
the gap between EDA software and ATE machines. At the beginning of the
engineering test process, our software converts design engineering data,
including EDA simulation data, into data compatible with our validation systems,
thus bridging the gap between design software and verification. We comply with
industry standard conventions which facilitate compatibility with ATE machines.
Compatible output between our validation systems and ATE machines enables rapid
progression of integrated circuits from engineering test to production test.

Our validation systems are designed and configured to match varying customer
requirements. Generally, our systems vary with respect to:

      o     the speed at which they send and receive data from the integrated
            circuit under test, ranging from 1 Hertz (Hz) to 1000
            Megabits/second (Mbs) (or 1 Gigabit/second);

      o     the number of channels through which data may be entered into or
            extracted out of the integrated circuit to be tested, also known as
            the pin count, ranging from 16 pins to 576 pins;

      o     the integrated  circuit type,  including  logic,  mixed-signal  or
            memory;



                                       6

<PAGE>

      o     flexibility in the number and variety of  applications,  including
            verification, characterization and failure analysis; and

      o     price, which typically ranges from $0.2 million to $1.8 million
            (although high speed, high pin count systems can sell for over $2.0
            million).

We currently offer three families of validation systems. The logic family, which
accounted for 65% of our net revenues in 2000, is the oldest and largest of the
three families. Customers typically use our logic validation systems to verify
the designs of complex microprocessors, ASICs and MCMs. Included in this family
is the Vanguard, our flagship product since 1999, which can send and receive
data from integrated circuits under test at up to 1000 Mbs. The Vanguard systems
sell for between $0.7 million and $2.3 million, depending on the configuration,
and accounted for the majority of logic family sales in 2000. The logic
validation system family also includes the ATS and XTS products, our leading
logic validation system products prior to 1999, which can send and receive data
from integrated circuits under test at up to 200 MHz. These systems sell for
between $0.2 million and $1.8 million, depending on the configuration.

Our mixed-signal family of validation systems are used by customers to verify
the designs of complex integrated circuits containing both digital and analog
functionality. These mixed-signal integrated circuits are used in applications
such as cable modems and to implement Sonet and ATM technologies in high-speed
networks. Our mixed-signal validation systems are also used to test selected
functions of highly-integrated, or system-on-chip, designs. Depending on the
configuration, the mixed-signal validation systems can send and receive data
from integrated circuits under test at up to 200 MHz. Our mixed-signal family
includes the Electra, which can test mixed-signal integrated circuits with up to
224 pins, and the Electra MX, which can test mixed-signal integrated circuits
with up to 576 pins. Our mixed-signal systems sell for between $0.3 million and
$2.1 million and accounted for 13% of net revenues in 2000.

With our acquisition of Perform IC in September 1998, we added the Orion memory
validation systems. The Orion is used by our customers to verify the designs of
the most common types of memory integrated circuits, including complex SRAMs and
DRAMs. The Orion will send and receive data from integrated circuits under test
at speeds up to 200 MHz/400 Mbs. Depending on the configuration, these memory
validation systems sell for between $0.4 million and $0.6 million. We began
shipping Orion memory validation systems to customers during the second quarter
of 1999 and they accounted for 5% of net revenues in 2000.

All of our validation systems provide design verification, characterization and
failure analysis, and contribute to enhancing device yields. The following table
summarizes our current validation system product offerings:

<TABLE>
<CAPTION>
PRODUCT LINE            TYPE OF DEVICE TESTED   SPEED (MHz/Mbs)    PIN COUNT   PRICE RANGE (MILLIONS)
------------            ---------------------   ---------------    ---------   ----------------------
<S>                    <C>                     <C>                 <C>          <C>
Vanguard                High-speed logic        Up to 500/1000     16 to 512    $0.7 - $2.3

ATS and XTS             Logic                   Up to 200/200      16 to 576    $0.2 - $1.8

Electra (MX)            Logic and               Up to 200/200      16 to 576    $0.3 - $2.1
                        mixed-signal

Orion DX, EX and LX     Memory                  Up to 200/400      48 to 80     $0.4 - $0.6
</TABLE>

INTEGRATED CIRCUIT VALIDATION SYSTEMS SOFTWARE
----------------------------------------------
We have developed integrated circuit validation systems software that is either
embedded in our validation systems or sold as separate add-on software products.
These software packages provide optimal operation in various applications,
including interactive device verification, automated device characterization,
and a way to link EDA software and ATE machines.

Our validation systems can be interfaced to the customer's network, allowing our
systems to access other resources on the network, and allowing multiple
workstations on the network to have access to our systems. Using software tools
available from us or from third-party vendors, users can import and export test
data to and from the electronic design

                                       7

<PAGE>
automation software tools. In addition, test information can be exported from
our systems for use on traditional ATE machines.

The following table summarizes our current validation systems software product
offerings:

<TABLE>
<CAPTION>
SYSTEMS SOFTWARE       PRODUCT LINE              APPLICATION SERVED
----------------       ------------              ------------------
<S>                    <C>                       <C>
IMS Tools              Vanguard                  Interactive debug and analysis
                                                 Automated characterization

Vanguard Emulator      Vanguard                  Off-line test setup
                                                 Pattern import
                                                 Result viewing

TestENV                ATS and XTS               Interactive debug and analysis
                       Electra (MX)

IMS-Link/APT           ATS and XTS               Test software translation
                       Electra (MX)

TestVIEW               ATS and XTS               Automated test programming
                       Electra (MX)

Test Exec              ATS and XTS               Automated characterization
                       Electra (MX)

IMS Waves              Vanguard                  Graphical signal analysis
                       ATS and XTS
                       Electra (MX)

ATE-Link               ATS and XTS               Translation to ATE test software

AnalogVIEW             Electra (MX)              Interactive debug and analysis
</TABLE>


IMS Tools, TestENV and AnalogVIEW are included in the price of our validation
systems. The other software packages can be sold on a stand alone basis or
bundled with our validation systems.

VIRTUAL TEST SOFTWARE
---------------------
While EDA software has helped improve designer productivity, little has been
done to provide test development engineers with software productivity tools.
Test development times have increased while design times have been reduced. To
address the need for shorter test development times, we provide software for
test engineers, called virtual test software, that accelerates the development
and debug of a test program, creates a model of the test environment, develops
and tests fixtures and documents the entire test process. Our software runs on a
UNIX or Windows NT workstation rather than on an expensive ATE system. Our
software simulates the ATE environment which eliminates the need to use the
actual ATE machines for debugging test programs, and enables test engineers to
develop and debug test programs in parallel with the design, prototype
manufacture and engineering test processes.

With virtual test software, test engineers begin test development work before
device design is completed. Through the use of tester modeling and simulation,
both the test itself and the testability of the design can be verified on a
workstation before first prototypes devices are delivered.


                                       8
<PAGE>


The following table sets forth our virtual test software product offerings:

<TABLE>
<CAPTION>
VIRTUAL TEST SOFTWARE     APPLICATION SERVED                          ATE VENDORS SUPPORTED
---------------------     ------------------                          ---------------------
<S>                      <C>                                         <C>
 TestDirect and           Generation of production test software      Advantest, Agilent,
  TurboBridge                                                         Schlumberger and Teradyne

 Digital                  Creation of ATE machine models to           Advantest,
  VirtualTester           simulate the test environment and debug     Agilent, Credence,
                          production test software                    Schlumberger and Teradyne
</TABLE>


                          CUSTOMER SERVICE AND SUPPORT

To be competitive, we must provide a high level of service and support. We
maintain and support products sold directly in the United States, Europe and
Japan with IMS service and support personnel. Our international distributors and
dedicated international sales agents generally provide maintenance and support
to their customers. We offer a toll-free technical support hotline to customers
and distributors. Support engineers answer the technical support calls and
generally provide same-day responses to questions that cannot be resolved during
the initial call. When necessary, however, support engineers are dispatched to
the customer's facility.

We maintain a rapid response program, which is designed to quickly respond to
customer support issues. Many of our customers currently have support
agreements with us. Customers have ranked us first among test equipment
suppliers in VLSI Research, Inc.'s annual "10 BEST Customer Satisfaction
Survey of Test and Material Handling Suppliers" in each of the last six
published surveys. We generally warrant our validation systems for 12 months.
During the warranty period, we will repair or replace failed components,
investigate all reported software problems and endeavor to provide a solution.

                                    CUSTOMERS

We seek a broad base of customers in a variety of industries to reduce the
effect of the cyclical nature of any one industry. Sales to Intel represented
approximately 52% of our net revenues for 2000, 50% for 1999, and 25% for 1998.
No other customer accounted for more than 10% of our net revenues for 2000,
1999, or 1998. Our five largest customers based on 2000 net revenues are Intel,
National Semiconductor, Micron Technology, Navarro and STMicroelectronics. Sales
to our top five customers represented approximately 65% of our net revenues for
2000, 66% for 1999 and 47% for 1998.

                                   TECHNOLOGY

We have used a variety of proprietary hardware and software technologies to
design our integrated circuit validation systems. Our proprietary hardware
technology includes, among other technologies, full-custom gallium arsenide
integrated circuits, semi-custom complementary metal oxide semiconductor, or
CMOS, integrated circuits, mixed-signal hybrid assemblies and high-speed printed
circuit boards, all of which are manufactured to our specifications by third
parties.

Our proprietary software technology converts computer models of devices
generated by commonly used EDA software to integrated circuit validation system
formats and enables rapid interactive debug capability for our customers. Our
products can exchange data with certain EDA software sold by Cadence, Mentor
Graphics and Synopsys, and with certain ATE machines sold by Advantest, Agilent,
Schlumberger and Teradyne. Our proprietary virtual test software products
provide an innovative solution to production test software development and
debug, fixture development and test simulation prior to production of the
prototype.


                                       9
<PAGE>


                            MANUFACTURING OPERATIONS

Our validation systems are complex and are used by our customers in critical
projects that demand a high level of quality and reliability. We invest
significant resources to assure the high quality and reliability of our test
systems and are committed to providing a high level of service to our customers
in the event of malfunction to minimize downtime. Our manufacturing operations
primarily consist of order administration, materials planning, procurement,
quality control of materials, components and subassemblies, final assembly,
final systems integration and extensive calibration and testing. We use
manufacturing control software to monitor orders, purchasing, inventory,
production and manufacturing costs.

The components used in our products consist of standard parts available from
numerous vendors, along with a number of proprietary items available only from
sole or single source suppliers. We currently use several independent
third-party vendors to manufacture our subassemblies and semiconductor
components, including circuit boards, integrated circuits and integrated circuit
packaging, cable assembly and mechanical parts. External manufacturing is
performed to our specifications with technical support from us.

We manufacture our logic and mixed-signal validation systems at our headquarters
facility in Beaverton, Oregon. Our Orion memory validation systems are
manufactured at our facility in Sargans, Switzerland.

                           MARKETING AND DISTRIBUTION

We market our products in the United States through a direct sales force which
has primary responsibility for developing orders, coordinating distribution,
providing demonstrations and providing applications support. We employ skilled
applications and service engineers and technically proficient sales people
capable of serving the sophisticated needs of prospective customers' engineering
staffs as part of the customer support process. The United States sales force is
managed from our headquarters in Beaverton, Oregon and our regional offices in
Irvine and Santa Clara, California; Boston, Massachusetts; Phoenix, Arizona; and
Columbia, Maryland.

We market our products in the European region through a direct sales force in
France and the United Kingdom, and independent distributors in Germany, the
Benelux countries, Scandinavia, Italy, Turkey and Israel. In Asia we sell
through a direct sales force in Japan and through distributors in Taiwan, the
People's Republic of China, Hong Kong, Malaysia, Singapore, Philippines and
Korea.

We use advertising in trade journals, technical articles, exhibits at trade
shows, direct mail and telephone solicitations to build interest in our
products. We provide extensive training for our sales representatives and
distributors and support our representatives and distributors with marketing
tools, including sales brochures, demonstration test equipment and promotional
product literature.

                            RESEARCH AND DEVELOPMENT

We have historically devoted the great majority of our research and development
efforts to the design and development of validation systems and related hardware
and software technologies. We purchased certain of our virtual test software
technologies. We are currently developing additional software products for our
virtual test product line and expect to continue considerable internal research
and development efforts for this product line in the future.

From time to time we evaluate opportunities to acquire additional technology and
assets. In 1998, we acquired PerformIC, a developer of technologies aimed at
addressing the engineering test needs of memory designers. As a result, we
established our new European Design Center in PerformIC's facilities in Dresden,
Germany to principally concentrate on developing integrated circuit validation
system technologies to address the memory market.

As of December 31, 2000, R&D efforts were performed by 79 employees in
Beaverton, Oregon and our European Design Center in Dresden, Germany.




                                    10
<PAGE>

                                   COMPETITION

The design and test equipment market is highly competitive. We believe the
principal competitive factors in the validation systems markets are ease of use,
product performance and reliability, price, marketing and distribution
capability, service and support and reputation and financial stability. We
believe we compete favorably with respect to all principal competitive factors
and that we are particularly strong in the areas of ease of use, product
performance and reliability, price, service and support.

For verification opportunities, our validation systems compete against customer
developed solutions, generally consisting of instrument clusters, and excess
capacity on ATE machines, manufactured by companies such as Advantest, Agilent,
Credence, Schlumberger and Teradyne. In addition, our memory validation systems
compete directly against Mosaid. For characterization opportunities, our systems
compete directly against the ATE machines. Our virtual test software competes
against tools developed by our customers, tools developed by the ATE vendors,
and a small number of third party vendors, most notably Fluence, a wholly-owned
subsidiary of Credence. We are not aware of any product that competes with our
virtual test simulation and debug product. Most of these companies have
significantly greater financial, marketing, manufacturing and technological
resources than we do.

We believe our long-term success will depend largely on our ability to identify
design and test needs ahead of our competitors and develop products which
respond to those needs in a timely manner. We also believe that to remain
competitive, we will require significant financial resources in order to invest
in new product development and to maintain a worldwide customer service and
support network.

                               PROPRIETARY RIGHTS

We have relied principally on trade secret, trademark and copyright law to
protect our intellectual property. In addition, we have one issued patent and
one patent application involving technologies relating to our virtual test
software. We believe that, because of the rapid pace of technological change in
the data communications and telecommunications industries, the legal
intellectual property protection for our products is a less significant factor
in our success than the knowledge, abilities and experience of our employees,
the frequency of our product enhancements, the effectiveness of our marketing
activities and the timeliness and quality of our support services. Our policy
has been to enter into nondisclosure/confidentiality agreements with all
employees and consultants, and we generally enter into agreements with vendors
and others that likewise limit access to and distribution of our proprietary
information. These steps may not provide adequate protection of our technology
and competitors may develop similar or functionally equivalent technology.

                                    EMPLOYEES

At December 31, 2000, we had 286 employees, including 77 in sales and marketing,
95 in manufacturing and service, 79 in research, development and engineering and
35 in administration and finance. We also have 4 dedicated employees on the
payroll of affiliated companies, which are international subsidiaries of
Cadence. We reimburse the full cost of these employees' expense to Cadence under
the terms of a corporate services agreement between us and Cadence. These
employees work full time on our business and report to and are directly managed
by us. We believe that our future success will depend on our continued ability
to attract and retain highly qualified technical, management and marketing
personnel. Our employees are not represented by a collective bargaining unit,
and we believe that our employee relations are very good.

                                  RISK FACTORS

THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE NOT THE ONLY RISKS AND
UNCERTAINTIES WE FACE. ADDITIONAL RISKS AND UNCERTAINTIES WE DO NOT KNOW ABOUT
NOW, OR THAT WE NOW THINK ARE NOT MATERIAL, MAY ALSO HURT OUR BUSINESS. IF ANY
OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS, FINANCIAL CONDITION AND
RESULTS OF OPERATIONS WOULD SUFFER. IN THAT EVENT, THE TRADING PRICE OF OUR
COMMON STOCK COULD DECLINE, AND YOU MAY LOSE ALL OR PART OF YOUR INVESTMENT IN
OUR COMMON STOCK. THE RISKS DISCUSSED BELOW ALSO INCLUDE FORWARD-LOOKING
STATEMENTS AND OUR ACTUAL RESULTS MAY DIFFER SUBSTANTIALLY FROM THOSE DISCUSSED
IN THESE FORWARD-LOOKING STATEMENTS


                                       11
<PAGE>

                          RISKS RELATED TO OUR BUSINESS

OUR OPERATING RESULTS FLUCTUATE FROM PERIOD TO PERIOD.

Our quarterly operating results have fluctuated widely in the past. We expect
this to continue. Our operating results fluctuate both because our net revenues
can fluctuate, and because we cannot always adjust our expenses accordingly.
These are the principal factors that cause our net revenues to fluctuate:

o     The timing of orders from customers, and the timing of shipments to, and
      acceptance by, customers, for our integrated circuit validation systems.
      These systems typically range in price from $0.2 million to $1.8 million
      for a single unit, so even one shipment can have a very large impact on
      quarterly results, and a significant impact on annual results.

o     Our historical pattern of concentrated shipments in the last month and the
      last weeks of the quarter.

o     The volume and mix of products sold to customers. If customers buy fewer,
      or lower priced or lower margin systems, we earn less.

o     How successful we are in developing, introducing and shipping new
      products. If we expect a new product to be ready for customers by a
      particular date, and we experience delays, we might lose sales or be able
      to realize them only in later quarters.

o     The length of our sales cycles. It usually takes months, and much internal
      review, for a customer to decide to spend up to $2.3 million on one of our
      systems. It is hard to predict how long the customers' decision process
      will take.

o     The cyclical nature of the industries in which our customers do business.
      In times when our customers cannot sell their integrated circuits as fast
      as they would like, they are less likely to spend money on capital
      equipment like our products.

o     The configurations of our products our customers choose. If customers want
      more complex product configurations, it takes longer to build them, and we
      might not be able to ship them and obtain customer acceptance to recognize
      revenue until a later quarter.

o     Seasonal fluctuations in our customers' buying habits. Our customers,
      particularly in the U.S. and Europe, vacation in the summer. Our customers
      generally approve yearly capital budgets in the first quarter, and then to
      use up those budgets before the end of the year. These influences produce
      a seasonal fluctuation that results in relative declines in product sales
      for the first and third quarters and relative increases for the second and
      fourth quarters.

Consequently, our quarterly net revenues and operating results have in the past
and will in the future depend upon our obtaining orders for validation systems
to be shipped and accepted in the same quarter that the order is received.

These are the principal factors that cause our expenses to fluctuate:

o     The timing of expenditures in anticipation of future sales. We may spend
      money to put resources in place to support sales in periods earlier than
      when the sales happen. We might also misjudge when, whether or how much
      the sales will grow, and put resources in place too early. Either way our
      expenses increase without concurrent increases in net revenues. This
      decreases our profits for that period.

o     A significant portion of our operating expenses is relatively fixed. We
      may not be able to reduce expenses in a particular period if our revenue
      goals for that period are not met. If we cannot reduce expenses quickly
      enough, it can magnify the adverse impact of a net revenues shortfall on
      our results of operations.



                                       12
<PAGE>

For all of the above reasons, our quarterly operating results have in the past
been and may in the future be different from the expectations of public market
analysts and investors. Because our quarterly operating results fluctuate, we
believe that quarter-to-quarter comparisons of our operating results are not
necessarily meaningful and should not be relied upon as indicators of future
performance.

OUR OPERATING RESULTS FLUCTUATE BECAUSE OUR CUSTOMERS OFTEN PLACE, ADJUST,
CANCEL OR DELAY ORDERS FOR COMPLEX CUSTOM SYSTEMS LATE IN THE QUARTER.

We usually configure our integrated circuit validation systems to meet specific
customer requirements. Over time, our customers increasingly require larger,
more complex configurations of our systems. Complex configuration requirements
mean it takes longer to build the particular system for that customer. Longer
manufacturing times for those customers combined with sales late in the quarter
can cause shipments to slip into the next quarter. The percentage of each
quarter's shipments that occurred in the last month of each quarter during 2000
ranged from 46% to 66%. Further, as customers consider their own quarterly
results, they may delay or cancel orders already placed, late in the quarter.
During 1998 particularly, our quarterly net revenues were hurt by customer
decisions to delay placing orders or cancel plans to place orders for our
products in the last few days of the quarter. All of these factors can greatly
affect and have greatly affected our net revenues and results of operations in a
particular quarter.

MUCH OF OUR NET REVENUES ARE CONCENTRATED IN ONE CUSTOMER. IF THAT CUSTOMER
ORDERS LESS OR STOPS ORDERING, OUR TOTAL NET REVENUES WILL DECLINE
SIGNIFICANTLY. BROADENING OUR CUSTOMER BASE REQUIRES ADDITIONAL INVESTMENTS IN
DEVELOPMENT RESOURCES.

We have been and expect to continue to be dependent on one large customer for a
significant part of our net revenues. Sales to Intel Corporation accounted for
approximately 52% in 2000, 50% in 1999 and 25% in 1998. We expect relatively
high concentrations of net revenues from Intel to continue. No other customer
now accounts, or in the past three years has accounted, for as much as 10% of
our annual net revenues. As a result, if or when Intel delays, reduces, or
cancels orders, or decides to buy products from a competitor instead, our net
revenues would decline significantly. For example, our 1998 net revenues dropped
significantly due to lower than expected sales to Intel. At that time, Intel was
shifting its own strategy and, in the process of managing that shift internally,
substantially slowed capital purchases. Our net revenues and earnings suffered
substantially from this event.

Reducing customer concentration without losing a specific customer requires
attracting new customers. Attracting new customers may require adding new
features or capabilities to our products that are important to those customers.
Our existing customers may also require new features and capabilities that are
not necessarily the same features that new customers would need. To address both
sets of needs, we can either address the needs of potential new customers as a
lower priority, or we can add development resources. A lower priority means
delayed or lost revenues; adding resources means higher expenses. Either result
hurts our operating performance.

INTERRUPTIONS OR PROBLEMS IN SUPPLY FROM SINGLE AND SOLE SOURCE SUPPLIERS CAN
HARM OUR OPERATING RESULTS.

We rely on a number of sole source and single source suppliers for some key
components and customized assemblies for our products. A sole source component
is something that only one vendor makes, so we cannot buy it elsewhere. A single
source component is something that we can get from more than one source, but is
a component that we have chosen to purchase from a single source to gain
efficiencies in operations or cost. Any of these single and sole source
suppliers could experience financial, operational, production or quality
assurance difficulties, or a catastrophic event, or something else that would
result in a reduction, interruption or discontinuance in supply to us. Single
and sole source suppliers present these risks:

o     If a sole source supplier cannot deliver, and we do not have enough
      inventory to meet our needs, we must wait until that supplier can deliver
      or we must redesign our systems to use a different component. The
      resulting delay could substantially harm our operating results.

o     If a single source supplier cannot deliver and we do not have enough
      inventory to meet our needs, we must wait until that supplier can deliver
      or until we can find and qualify another source. In times when the
      semiconductor


                                       13
<PAGE>


      industry as a whole is doing extremely well, finding supply
      at another source can be difficult. The resulting delay could
      substantially harm our operating results.

o     If supplies are reduced,  interrupted,  or  discontinued,  it can take a
      long time, up to  twenty-four  months,  before we would begin  receiving
      supplies  from  alternative  suppliers.  In  cases  where  supplies  are
      discontinued  and when  designing  that  component out of the product is
      not  feasible,  we will  place a last time buy order for the  component.
      For  example,  our  ATS,  XTS  and  Electra  product  lines  incorporate
      components  that  have  been   discontinued.   We  have  therefore  made
      substantial  last-time  purchases  of these  components.  We  cannot  be
      certain that such quantities  will be adequate to meet our  requirements
      over the  remainder of the  product's  life or that such  last-time  buy
      quantities  are not in excess  of our  requirements  over the  product's
      remaining life.

o     Making  some of our  single or sole  source  components  and  customized
      assemblies  is a very  complex  process.  That  complexity  can  lead to
      production  difficulties and quality variations,  which can increase our
      cost,  hinder our ability to deliver our products on time, or compromise
      the performance of our own products in the field. For example,  in 1998,
      we experienced late delivery of integrated  circuits used in some of our
      integrated  circuit  validation  systems,   and  discovered  that  these
      integrated  circuits  did  not  provide  the  performance  we  expected,
      requiring us to change our product  specifications.  As a result, we may
      have lost a previously identified sales opportunity.

OUR RESULTS FROM OUR VIRTUAL TEST SOFTWARE BUSINESS WILL SUFFER IF WE CANNOT
MAINTAIN RELATIONSHIPS WITH VENDORS OF ATE MACHINES AND EDA SOFTWARE.

Our virtual test software creates a simulation of third party automated test
equipment, or ATE machines. We have to know how that equipment works before we
can create a software model of the ATE machine. Our ability to gain that
knowledge will be hindered if our relationships with the vendors of that
equipment, including Agilent Technologies, Inc., Credence Systems Corporation,
Teradyne, Inc. and others, do not remain strong. Our virtual test software also
relies upon software simulation programs and other integrated circuit software
design tools written by third parties, including Cadence Design Systems, Inc.
and others. Our ability to take timely advantage of advances in those tools will
be hindered if we do not maintain close working relationships with those
vendors. Consequently, maintaining close working relationships both with vendors
of ATE machines and electronic design automation, or EDA, software is of
strategic importance to us. If we cannot maintain those relationships, our
ability to achieve success in the market for our virtual test software could be
substantially compromised.

OUR RESULTS OF OPERATIONS WILL SUFFER IF WE DO NOT SUCCEED IN NEW MARKETS.

We have derived a majority of our net revenues to date from sales of our logic
validation systems. In 1995, we established our virtual test software division
and began developing the virtual test software market. In 1998, we established
our memory validation systems division and began selling our Orion memory
validation systems. Also in 1998, we established our mixed-signal validation
systems division and began marketing our Electra mixed-signal validation
systems. To date, these new divisions have contributed a relatively small
portion of our sales. The risks associated with these new markets and products
include the following:

o     The markets for these products may not develop as we anticipate or our
      products may not achieve market acceptance. In particular, the market for
      our virtual test software has developed more slowly than we have
      anticipated and our software may never achieve wide market acceptance.

o     We may fail to appropriately allocate scarce development resources among
      our various divisions to develop and deliver products in a timely manner
      that meet our customers' needs.

o     Our product families employ different technologies and are targeted at
      different applications. This requires us to train our sales personnel to
      sell each of these different products. We may fail to adequately train our
      sales force to understand and sell these various product families which
      would negatively impact our ability to grow.


                                       14
<PAGE>


o     We may fail to adequately allocate our manufacturing, inventory, field
      applications support and customer support resources among our various
      divisions. If we do not allocate these resources appropriately, we may
      lose customers and delay or lose orders.

o     Gross profits and inventory levels will be adversely affected if we
      experience delays in new product introductions or start-up costs
      associated with simultaneous development and introduction of new products.

OUR BUSINESS WILL SUFFER IF OUR PRODUCTS CONTAIN DEFECTS.

We make complex software and hardware products. No matter how much we test them,
we know we will not be able to test them completely. If our customers find
errors in our existing or new software or hardware products, we could face any
or all of these problems:

o   Legal actions against us, leading to costs and diversion of management
    time even if the actions are unsuccessful.

o   Diversion of development resources to try to fix the problems.

o   Loss of reputation and customers.

o   Increased support and service costs.

o   Loss of revenue and market share.

SALES OF OUR PRODUCTS ARE HIGHLY DEPENDENT ON THE STRATEGIC DECISIONS OF OTHER
COMPANIES, AND HAVE A LENGTHY SALES CYCLE.

Sales of our products depend in significant part upon the decisions of companies
in technology industries to develop and manufacture new electronic devices. We
have little or no influence on those decisions. Further, because our products
are expensive, our customers must typically gain capital budget approval to buy
them. That process can take a long time. For new customers, our validation
systems and virtual test software also represent a change in the way they have
done design and development in the past, so customers that have not yet adopted
the methods our systems and software represent may need to make basic changes in
their own integrated circuit development approach to take advantage of what we
offer. For these and other reasons, sales of our products have lengthy sales
cycles during which we may expend substantial funds and management effort to
secure a sale. This subjects us to fluctuations in operating results over which
we have little control.

WE DEPEND ON KEY TECHNICAL AND SENIOR MANAGEMENT PERSONNEL.

Our future success depends on the efforts and continued services of our key
executives and technical personnel and our ability to attract and retain
qualified management, technical and sales and support personnel. In our
industry, significant competition exists for those people. We cannot be certain
that we will retain our existing personnel, find qualified replacements or add
enough people to serve our future needs. The market for technically qualified
people is particularly competitive. We also cannot be sure that employees will
not leave and then compete against us. If we cannot attract and retain key
personnel, it could seriously harm our operating results.

WE MAY BE UNABLE TO ADEQUATELY PROTECT OUR PROPRIETARY TECHNOLOGY.

Generally, we have not sought patent protection for our validation systems,
services or processes. We have been issued one patent and have one patent
application pending, which each involve technologies relating to our virtual
test software. In addition to these patents, we principally rely on a
combination of trade secret, copyright and trademark laws, confidentiality
agreements and contractual provisions to protect our proprietary rights. Such
protection is legally less absolute than patent protection would be. The steps
we have taken, such as entering into proprietary rights agreements with our
employees, may prove to be inadequate to prevent third parties from using,
infringing, or misappropriating our intellectual property. Moreover effective
trademark, patent, copyright and trade secret protection may not be available in



                                       15
<PAGE>

other countries in which we now operate, or will eventually operate, to the same
extent such protection is available in the United States. We cannot be certain
that we will obtain additional patents, trademarks or copyrights, or that our
trade secrets will remain secret to us. We also cannot be sure that our
trademarks, patents, copyrights, or trade secrets will be sufficiently broad to
protect our proprietary rights or will not be challenged or circumvented by
competitors. If we must enforce our rights, we may find that the cost of the
proceeding itself, both financially and in the time of key personnel, would be
substantial and would hurt our operating results, even if we ultimately prevail.

Although we enter into proprietary rights agreements with our employees and
consultants and control access to and distribution of our proprietary
information, unauthorized parties, including departing employees, business
partners and others, may attempt to copy or otherwise obtain and use our
intellectual property rights. Monitoring unauthorized use of our intellectual
property rights is very difficult, and we may be unable to prevent
misappropriation of these rights.

WE MAY CONFRONT, OR BE UNABLE TO PROTECT OURSELVES FROM, CLAIMS BY OTHERS WITH
RESPECT TO PROPRIETARY TECHNOLOGY.

We have in the past received notices of potential claims that our products
infringe another party's intellectual property rights. Several of our customers
informed us that they received letters from Jerome H. Lemelson alleging that
equipment used in the manufacture of electronic devices infringes patents issued
to Mr. Lemelson relating to electronic manufacturing technologies. Those
customers may seek indemnification or contribution from us for any damages and
expenses resulting from this matter. If any of our equipment or software is
found to infringe a patent, a court may grant an injunction to prevent making,
selling or using the equipment or software in the United States or other markets
covered by equivalent patents or award damages against us. We may also be
required to obtain licenses to the infringing technology or expend significant
resources to develop non-infringing technology. We cannot predict the outcome of
this or any similar claims we may receive, or the effect of such claims upon us.
Patent or other intellectual property litigation or claims could seriously harm
our business, financial condition or results of operations. Irrespective of the
validity or success of such claims, we could incur significant costs, both
financially and in the time of key personnel, in defending them.

WE COULD FACE INFRINGEMENT OR OTHER CLAIMS RESULTING FROM OUR EMPLOYMENT OF
COMPETITORS' FORMER EMPLOYEES.

We hire employees who have previously been employed by our competitors and hire
contractors who have previously performed work for our competitors. Some of
these competitors include companies with whom we have in the past held detailed
business discussions, including in-depth due diligence. Consequently former
employers could assert claims against us, and we cannot be sure that our
practices and policies dealing with respecting obligations to those former
employers will be enough to prevent those claims from being successful.

WE FACE RISKS FROM INTERNATIONAL OPERATIONS.

We market and sell our products worldwide. In 2000, international sales
represented 19% of our net revenues and we anticipate that international sales
will continue to account for a significant portion of our revenues. In addition,
we develop and manufacture our Orion memory validation systems in Europe. Our
international operations are subject to a number of risks, including:

o     The imposition of governmental controls on technology in our overseas
      markets. Import restrictions have in the past and may in the future result
      in high tariffs or bans on imports of advanced technologies to protect a
      domestic industry.

o     Export restrictions or license requirements the United States may elect to
      impose or tighten, or that may affect future generations of our products.
      These restrictions have particularly affected advanced technologies.

o     Fluctuations  in the  value  of  foreign  currencies  against  the  U.S.
      dollar.

o     Difficulties in staffing and managing international operations.

o     Political and economic instability in our overseas markets.


                                       16
<PAGE>

o     Difficulties in collecting accounts receivable.

o     Changes in tariffs and taxes.

The occurrence of the above factors could harm our future international sales
and operations and, consequently, our business, financial condition and results
of operations.

OUR LIMITED EXPERIENCE IN MANAGING INTERNATIONAL DEVELOPMENT AND MANUFACTURING
OPERATIONS, AND THE LIMITED EXPERIENCE OF OUR NEW DEVELOPMENT AND MANUFACTURING
TEAMS IN EUROPE, COULD DAMAGE OUR OPERATING RESULTS.

In September 1998, we acquired a memory test company in Dresden, Germany, and we
now develop memory integrated circuit validation systems in Dresden. We have
also opened manufacturing operations for those systems in Sargans, Switzerland,
and shipped our first system to a customer in the second quarter of 1999. Before
those initiatives, our development and manufacturing had always been at the same
facility, and always in the United States. Initiating development and
manufacturing of one of our product lines outside the United States therefore
represents a new experience for us as a company, and if our limited experience
leads us to fail to anticipate problems that could arise, or fail to manage the
operations successfully for other reasons, our results could suffer. Our new
risks include all of the usual risks of international operations, such as
currency fluctuations, cultural and language differences, time zone differences
and legal differences. In addition, the teams of people in both Dresden and
Sargans are relatively new to us, and relatively untested. Until those teams
gain experience and familiarity with the markets we serve, the risks are higher
both for employee turnover and for product design and manufacturing introduction
delays or cost overruns in those facilities than in our primary facility in the
United States. Those risks could adversely affect performance in our memory test
division, and therefore our operating results.

THE INABILITY TO MEET OUR FUTURE CAPITAL REQUIREMENTS WOULD LIMIT OUR ABILITY TO
GROW.

Developing new and enhanced integrated circuit validation systems or virtual
test software is expensive. We may not have the resources for ongoing
development or may find that obtaining the necessary funds when needed might not
be possible on terms favorable to our shareholders or at all. For example, if we
issue additional equity securities our shareholders may experience additional
dilution and the new equity securities may have rights, preferences or
privileges senior to those of our common stock. If we cannot raise funds on
acceptable terms, we may not be able to develop or enhance our products, take
advantage of future opportunities or respond to competitive pressures or
unanticipated requirements.

                          RISKS RELATED TO OUR INDUSTRY

OUR INDUSTRY IS SUBJECT TO RAPID TECHNOLOGICAL CHANGE AND WE MUST INTRODUCE NEW
AND ENHANCED PRODUCTS IN A TIMELY MANNER TO EFFECTIVELY COMPETE.

The market for integrated circuit validation systems is characterized by rapid
technological change because integrated circuits themselves are evolving so
quickly. That rapid change requires us to spend significant resources developing
and introducing new products, and enhancing existing products. To remain
competitive, our products must keep pace with technological developments, with
evolving industry standards and methodologies, and with the increasingly
sophisticated needs of our customers. In fact, the introduction of integrated
circuits embodying new technologies or changes in industry standards or customer
requirements could render our existing products obsolete and unmarketable.
Furthermore, commitments to develop new products generally must be made well in
advance of sales. That means we must anticipate both future demand and the
availability of technology to satisfy that future demand. Our success in
developing new and enhanced products to keep pace with changing technology and
demand depends upon a variety of factors, including:

o     Our ability to adequately fund new product development, and to raise the
      capital necessary to do so. We cannot assure you that we will have the
      budget necessary to keep pace with technological change.


                                       17
<PAGE>

o     Our ability to design new products and product enhancements efficiently
      and on time. This factor is not just a management risk, it is also an
      engineering and invention risk. We will need to solve technical problems
      caused by the increasing speed, density, complexity, and sophistication of
      the integrated circuits we test. We cannot assure you that we can solve
      those problems, or that solutions even exist.

o     Our ability to manufacture and assemble systems on time and effectively,
      including our ability to find qualified and reliable sources for
      specialized components we may need for future products. We cannot assure
      you that we can find those suppliers, or that their products will be of
      sufficient quantity, quality and reliability to support our business.

o     Our ability to create products that our customers like and accept. This
      factor depends significantly on our ability to accurately forecast what
      the market will need when our new designs are in production -- which may
      be many months or even years after our product design is begun. We cannot
      assure you that we will be able to judge those needs successfully.

As a result of any of these factors, we could lose orders and our business,
financial condition and results of operations could be seriously damaged.
Combinations of these factors have in the past led to significant delays between
our introduction of a new integrated circuit validation system or a new version
of our software and large scale customer deliveries of those products, and have
interfered with our ability to deliver enhancements as quickly as we would have
wanted to deliver them.

COMPETITION IN THE ELECTRONIC DESIGN AND TEST INDUSTRIES IS INTENSE.

We currently compete with customer-developed solutions and excess capacity on
ATE machines. ATE machines manufactured by companies including Advantest
Corporation, Agilent Technologies, Inc., Credence Systems Corporation, LTX
Corporation, Schlumberger Limited and Teradyne, Inc., can be used for logic and
mixed-signal validation. The primary competitor for our Orion memory integrated
circuit validation systems is Mosaid Technologies. Most of these companies have
significantly greater financial, marketing, manufacturing and technological
resources than we do. We believe that our long-term success will depend largely
on our ability to identify design and test needs ahead of our competitors and to
develop products that respond to those needs in a timely manner, and we cannot
be certain of our ability to do this better than our competition. New product
introductions or product announcements by our competitors could cause a decline
in sales or loss of market acceptance of our existing or future products.
Increased competitive pressure could also lead to intensified price-based
competition, eroding our margins and hurting our results. Additionally,
electronic design automation companies such as Avant! Corporation, Cadence,
Mentor Graphics Corporation or Synopsis, Inc. could elect to enter into the
virtual test software business and directly compete with us. Any of them, and
perhaps others, are financially and technologically well positioned to do so. If
one of the electronic design automation software companies did introduce a
virtual test product, it could substantially harm our sales of virtual test
software.

OUR BUSINESS IS PARTICULARLY SENSITIVE TO GENERAL ECONOMIC AND MARKET CONDITIONS
AND CYCLICALITY.

The industries in which we compete and the markets that we serve are highly
cyclical. During recent years, segments of these industries, including the
aerospace, automotive, computer, consumer electronics, data communications,
medical electronics, semiconductor and telecommunications industries, have
experienced significant economic downturns from time to time. The semiconductor
industry is particularly volatile due to rapid technological change, short
product life cycles, fluctuations in manufacturing capacity and pricing and
gross margin pressures. Our operations have in the past and may in the future
fluctuate substantially from period to period as a consequence of industry
patterns like these, or of general economic conditions affecting the timing of
significant orders from customers and other factors affecting capital spending.

ITEM 2. PROPERTIES

Our executive offices, as well as our principal manufacturing, engineering and
marketing operations, are located in a leased building of approximately 90,000
square feet in Beaverton, Oregon. The lease expires on February 29, 2004. We


                                       18
<PAGE>

believe the space will be adequate through that period and, if required,
suitable additional space is available nearby. We also lease a total of
approximately 26,000 square feet of space for our regional sales offices,
European manufacturing facilities and European design center.

ITEM 3. LEGAL PROCEEDINGS

The Company is not a party to any material legal proceedings.

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

No matters were submitted to a vote of the security holders of the Company
during the fourth quarter of the fiscal year ended December 31, 2000.


                                     PART II

ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company's common stock is traded publicly on the Nasdaq National Market
under the symbol "IMSC." The following table sets forth, for the periods
indicated, the high and low prices for the Company's common stock as reported by
the Nasdaq National Market.

<TABLE>
<CAPTION>
                                                                HIGH     LOW
                                                                ----     ---
<S>                                                           <C>      <C>
FISCAL 1999
  First Quarter                                                     11        7
  Second Quarter                                                14 3/8    6 3/4
  Third Quarter                                                15 1/16    9 3/4
  Fourth Quarter                                                14 1/2  10 7/16
FISCAL 2000
  First Quarter                                                24 5/16   13 1/4
  Second Quarter                                                20 1/4   12 5/8
  Third Quarter                                                 20 7/8   11 1/2
  Fourth Quarter                                                17 3/4   7 7/16
</TABLE>

As of February 28, 2001, there were approximately 1,770 shareholders that held
beneficial interests in shares of common stock. The Company has not paid any
cash dividends on its common stock, and it does not anticipate paying any cash
dividends in the foreseeable future.

During the quarter ended December 31, 2000, the Company made no sales of
securities that were not registered under the Securities Act of 1933.


                                       19
<PAGE>


ITEM 6. SELECTED FINANCIAL DATA

                   (In thousands, except per share amounts)

<TABLE>
<CAPTION>
                                               YEAR ENDED DECEMBER 31,
                                  -------------------------------------------------
                                   2000      1999       1998      1997      1996
                                  --------  --------  ---------  --------  --------
<S>                               <C>       <C>       <C>        <C>      <C>
Consolidated Statements of
  Operations Data:
  Net revenues                    $ 75,213  $ 56,070  $ 36,697   $ 46,850  $ 50,837
  Gross margin %                      61.7%     62.2%     59.6%      65.5%     64.3%
  Operating income (loss)         $ 13,976  $  7,374  $ (4,587)  $  7,073  $  9,495
  Operating income (loss) %           18.6%     13.2%    (12.5)%     15.1%     18.7%
  Income (loss) before
  cumulative effect of
  accounting change (a)           $ 10,317  $  5,581  $ (3,331)  $  5,205  $  6,166
  Cumulative effect of
  accounting change (b)           $  7,317  $     --  $     --   $     --  $     --
  Net income (loss) (a)           $  3,000  $  5,581  $ (3,331)  $  5,205  $  6,166
  Basic earnings (loss) per
  share (a):
     Income (loss) before
       cumulative effect of
       accounting change (a)      $  1.31   $   0.74  $  (0.44)  $   0.70  $   0.92
     Cumulative effect of
       accounting change (b)      $ (0.93)  $     --  $     --   $     --  $     --
     Net income (loss)            $  0.38   $   0.74  $  (0.44)  $   0.70  $   0.92
  Diluted earnings (loss)
  per share (a):
     Income (loss) before
       cumulative effect of
       accounting change (a)      $   1.20  $   0.70  $  (0.44)  $   0.67  $   0.88
    Cumulative effect of
       accounting change (b)      $  (0.85) $     --  $     --   $     --  $     --
    Net income (loss)             $   0.35  $   0.70  $  (0.44)  $   0.67  $   0.88
  Pro forma amounts assuming
  SAB101 revenue recognition
  applied retroactively:
    Net income (loss)             $    --   $  3,033  $ (3,850)  $  5,044  $  5,389
       Earnings (loss) per
         share-Basic              $    --   $   0.40  $  (0.51)  $   0.68  $   0.80
       Earnings (loss) per
         share-Diluted            $    --   $   0.38  $  (0.51)  $   0.65  $   0.77



<CAPTION>
                                                   DECEMBER 31,
                                  ------------------------------------------------
                                   2000      1999       1998     1997      1996
                                  --------  --------  --------- --------  --------
<S>                               <C>       <C>       <C>       <C>       <C>
Consolidated Balance Sheet Data:
  Cash and cash equivalents       $18,312   $ 7,507   $ 3,379   $17,464   $ 9,545
  Short-term investments          $23,215   $15,117   $ 7,630   $ 8,371        --
  Total assets                    $93,600   $74,424   $63,414   $65,523   $44,314
  Long-term obligations, net of
    current portion               $   --    $   213   $   363   $   152   $   278
  Shareholders' equity            $68,521   $61,820   $53,542   $57,433   $34,859
</TABLE>


(a)     Net income, basic earnings per share and diluted earnings per share for
        1998, before nonrecurring acquisition and restructuring charges, were
        $0.1 million, $0.02 per share, and $0.02 per share, respectively.

(b)     Effective January 1, 2000, the Company changed its method of accounting
        for systems revenues based on guidance provided in SEC Staff Accounting
        Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
        Statements."


                                       20
<PAGE>


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


(Unless otherwise indicated, all numerical references are in thousands, except
percentages and share data.)

THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH
SELECTED FINANCIAL DATA AND THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS AND
THE NOTES THERETO INCLUDED ELSEWHERE IN THIS ANNUAL REPORT. THIS ANNUAL REPORT,
INCLUDING THE FOLLOWING DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, AND PARTICULARLY THE SECTION CAPTIONED, "BUSINESS
OUTLOOK," CONTAINS CERTAIN STATEMENTS, TREND ANALYSIS AND OTHER INFORMATION THAT
CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995, AS AMENDED, WHICH MAY INVOLVE RISKS
AND UNCERTAINTIES. SUCH FORWARD LOOKING STATEMENTS INCLUDE, BUT ARE NOT LIMITED
TO, STATEMENTS INCLUDING THE WORDS "ANTICIPATE," "BELIEVE," "PLAN," "ESTIMATE,"
"EXPECT," "INTEND" AND OTHER SIMILAR EXPRESSIONS. THE COMPANY'S ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HEREIN DUE TO NUMEROUS FACTORS
INCLUDING, BUT NOT LIMITED TO, THOSE DISCUSSED IN THE FOLLOWING DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, AS WELL AS THOSE
DISCUSSED ELSEWHERE HEREIN, INCLUDING THE SECTION CAPTIONED, "BUSINESS - RISK
FACTORS."

COMPANY BACKGROUND

We were founded in 1983 to design and develop integrated circuit validation
systems to test and measure complex electronic devices at the prototype stage.
We were acquired by Valid Logic Systems, Incorporated (Valid Logic) in 1989 and
then by Cadence Design Systems (Cadence) in 1991 as a result of the merger of
Valid Logic into Cadence. We were operated as a separate subsidiary of Cadence.
In July 1995, we completed our initial public offering of common stock and in
February 1997, completed a secondary public offering of our common stock.
Cadence sold shares in each of those offerings, and as of December 31, 2000,
continues to own approximately 32% of our common stock.

Our net revenue is comprised of validation systems revenue, software revenue,
including validation systems software and our virtual test software, and service
revenue, which consists primarily of revenue derived from maintenance contracts.
Beginning in 2000, revenue from validation systems where a portion of the
purchase price is tied to final customer acceptance is recognized upon
acceptance. In those rare instances where we are delivering multiple systems to
a single customer for similar applications with identical acceptance criteria,
revenues for systems after initial deliveries are recognized upon shipment. For
all other validation systems sales, revenue is generally recognized as the
product ships and when no significant obligations remain. Historically, revenue
from validation systems sales has been recognized as the product ships and when
no significant obligations remain. Contract service and support revenues billed
in advance are recorded as deferred revenue and recognized ratably over the
contractual period as the services and support are performed. Revenue from other
services, such as consulting and training, is recognized as the related services
are performed or when specified milestones are achieved.

In December 1999, the Securities and Exchange Commission (SEC) released Staff
Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements." SAB 101 provides guidance for public companies on the recognition,
presentation and disclosure of revenue in their financial statements. In the
fourth quarter of 2000, we implemented SAB 101, effective January 1, 2000, by
changing the timing of revenue recognition for system sales from the historical
industry practice of when product is shipped (title passes) to when a customer
has accepted a shipped product. This change in our revenue recognition policy
has been accounted for as a change in accounting principle effective January 1,
2000. We have recorded an after-tax non-operating charge against net income in
the amount of $7.3 million reflecting the deferral of revenue net of related
expenses for shipments of our products previously reported as revenue prior to
January 1, 2000 that had not been accepted by customers as of December 31, 1999.
We have also restated the previously reported quarters during the year 2000 to
conform revenue recognition and related expense recognition to the requirements
of SAB 101.



                                       21
<PAGE>

We derive a substantial portion of our net revenue from the sale of validation
systems which typically range in price from $0.2 million to $1.8 million per
unit and may be priced as high as $2.3 million for a single unit. As a result,
the receipt of a single order, and the timing of the receipt, shipment, and
customer acceptance of a single order can have a significant impact on our net
revenue and results of operations for a particular period. In addition, a
substantial portion of our net revenue can be realized during the last few weeks
of each quarter. A significant portion of our operating expenses are relatively
fixed in nature, and planned expenditures are based in part on anticipated
orders. As a result, we may be unable to reduce such expenses in a particular
period if our revenue goals for that period are not met. The inability to reduce
spending quickly enough to compensate for any revenue shortfall would magnify
the adverse impact of such revenue shortfall on our results of operations.

The industries in which we compete and the markets that we serve are highly
cyclical. During recent years, segments of these industries, including the
aerospace, automotive, computer, consumer electronics, data communications,
medical electronics, semiconductor and telecommunications industries, have
experienced significant economic downturns from time to time. The semiconductor
industry is particularly volatile due to rapid technological change, short
product life cycles, fluctuations in manufacturing capacity and pricing and
gross margin pressures. Our operations have in the past and may in the future
fluctuate substantially from period to period as a consequence of industry
patterns like these, or of general economic conditions affecting the timing of
significant orders from customers and other factors affecting capital spending.

RESULTS OF OPERATIONS

NET REVENUES
------------

Net revenues is comprised of engineering IC validation systems sales, software
sales (including IC validation systems software and Virtual Test Software) and
service sales, which consists primarily of revenue derived from maintenance and
consulting contracts.

The implementation of SAB 101 effective January 1, 2000, as discussed above,
resulted in a cumulative effect adjustment recorded in 2000. Part of the
cumulative effect adjustment included recording deferred revenue in the amount
of $17.2 million for systems shipped in 1999 for which customer acceptance had
not yet been received by December 31, 1999. During 2000, as we considered the
implications of SAB 101, we focused our efforts toward gaining customer
acceptance of previously shipped systems and in documenting acceptance criteria
for current systems sales. The results of this effort allowed us to recognize
nearly all the 1999 deferred revenue, resulting from the implementation of SAB
101, during 2000. At December 31, 2000, deferred revenue for shipped systems was
$10.6 million.

As provided for in SAB 101, 1999 and 1998 revenues were not restated. Therefore,
a comparison of revenues for the year ended December 31, 2000, with the
implementation of SAB 101, to the prior years is not meaningful. The table below
compares revenues for the year ended December 31, 2000 with SAB 101, and without
SAB 101 to the two prior years ended December 31, 1999 and 1998.


<TABLE>
<CAPTION>
                  2000        2000
                  WITH      WITHOUT     INCREASE               INCREASE
                SAB 101     SAB 101    (DECREASE)     1999     (DECREASE)       1998
               ---------   ---------   ----------   --------   ----------   --------
<S>           <C>          <C>         <C>          <C>        <C>          <C>
Systems
  Vanguard       $33,375   $  28,721           51%  $ 19,032          444%   $ 3,500
  Other           12,357      11,805          (19)    14,553           (8)    15,766
  Logic
  Mixed            9,233       6,757           27      5,329           75      3,052
  Signal
  Memory           3,422       5,089          130      2,211          n/a          0
                --------   ---------   ----------   --------   ----------    -------
 Total Systems   $58,387   $  52,372           27%  $ 41,125           84%   $22,318
                ========   =========   ==========   ========   ==========    =======
</TABLE>


                                       22
<PAGE>


<TABLE>
<CAPTION>
                   2000       2000
                   WITH      WITHOUT    INCREASE              INCREASE
                 SAB 101     SAB 101   (DECREASE)    1999    (DECREASE)   1998
                 ---------  ---------  ----------  --------  ---------  --------
<S>             <C>        <C>          <C>        <C>       <C>        <C>
Software
  Systems        $ 3,723     $ 3,265        10%     $ 2,958       43%    $ 2,066
  Virtual Test     3,074       3,074         7        2,882       12       2,566
                 ---------  ---------  ----------  --------  ---------  --------
  Total
  Software       $ 6,797     $ 6,339         9%     $ 5,840       26%    $ 4,632
                 =========  =========  ==========  ========  =========  ========
</TABLE>


Net revenues rose sharply in both 2000 and 1999 after two consecutive years of
revenue declines. In general, two factors contributed to the increase:

1)    The product line is broader than it was several years ago. Towards the end
      of 1998, the Company released the 500MHz Vanguard logic IC validation
      system, Electra and Electra MX mixed-signal IC validation systems, all of
      which contributed to the increase in net revenues. Additionally, in
      mid-1999, the Company began customer shipments of the Orion Memory IC
      validation system.

2)    Capital spending within the Semiconductor Industry increased in 1999 for
      the first time in several years, and increased again in 2000. Although our
      revenues do not necessarily correlate directly with industry capital
      spending, the increase in expenditures indicates a healthier selling
      environment for our products. Semiconductor capital spending over the past
      three years is as follows:

<TABLE>
<CAPTION>
                                          YEAR ENDED DECEMBER 31,
                            ----------------------------------------------------
                              2000      INCREASE    1999     INCREASE    1998
                            ----------  --------  ---------- ---------  --------
<S>                        <C>            <C>     <C>          <C>     <C>
Semiconductor Capital
  Spending
(Per VLSI Research, March   $47,636        80%     $26,385      16%     $22,824
  2001)
</TABLE>


SYSTEMS REVENUES

Systems revenues in 2000, after implementation of SAB 101, of $58.4 million
were $6.0 million higher than 2000 systems revenues before implementation of
SAB 101. As a result of the advent of SAB 101, we implemented new processes
designed to obtain acceptances more rapidly of previously shipped systems and
to clarify acceptance criteria for new orders. As a result, during 2000 we
substantially reduced the number of systems awaiting acceptances over the
course of the year, and particularly during the second and third quarters. As
a result, systems revenues after implementation of SAB 101 were anomalously
high for the second and third quarters and for the year.

Systems revenues in 2000, before implementation of SAB 101, of $52.4 million
increased 27% over the $41.1 million for 1999. Our newer validation systems,
the 500 MHz Vanguard logic system, the Electra mixed-signal system, and the
Orion memory system all posted sharp increases over 1999 while the older
generation logic system sales declined as a percentage of revenues. Sales of
Vanguard, which is our flagship product and eventually will be the platform
for our next generation mixed-signal and system-on-chip solutions, increased
51% over 1999 and accounted for 55% of net systems revenues. Although the
older generation logic systems revenues declined 19% for 1999, they still
accounted for 23% of net systems revenues. Electra mixed-signal system
revenues grew 27% from 1999 and the Orion memory system revenues grew 130%
over 1999.

Systems revenues in 1999 increased $18.8 million or 84% over 1998, after
decreasing $9.7 million or 30% in 1998 from 1997. Revenues of the Vanguard
logic validation system, which were attributable almost entirely to the
Company's largest customer, accounted for 46% of net systems revenues in
1999, up from 16% in 1998. Revenues of other logic systems declined by $1.2
million or 8% from 1998 as a result of the Vanguard ramp, but still accounted
for 35% of net systems revenues. Mixed-signal systems revenues increased $2.3
million or 75% over 1998, with most of the volume occurring in the latter
part of 1999. Nearly all mixed-signal revenues in 1999 were for the Electra
family, while all mixed-signal revenues in 1998 were for older generation
products. The Company began shipping Orion memory IC validation systems in
the second quarter of 1999. There were no revenues from memory systems in
1998.

                                       23
<PAGE>

SOFTWARE REVENUES
System software revenues in 2000, after implementation of SAB 101, of $3.7
million was $0.5 million higher than system software revenues before
implementation of SAB 101. The greater revenue is primarily attributable to
the higher number of systems included in the net systems revenue after
implementation of SAB 101, especially Vanguard systems.

System software revenues before implementation of SAB 101 increased $0.3 million
or 10% in 2000 from 1999, and $0.9 million or 43% in 1999 from 1998. These
increases are directly attributable to the increase in system revenues, and
particularly Vanguard system revenues. Virtual Test software revenues increased
by $0.2 million or 7% in 2000 from 1999, and by $0.3 million or 12% in 1999 from
1998, as increased revenues of standardized Virtual Test software licenses more
than offset reduced revenues of custom software. The Company no longer pursues
non-standard custom software revenues, and now focuses on developing standard
products that can be sold multiple times to multiple customers.

SERVICE REVENUES
Service revenues increased $0.9 million or 10% in 2000 from 1999 and declined in
1999 by $0.6 million or 7% from 1998. In 2000, service revenues grew as a result
of a higher installed base created by significant systems growth in the last
several years. The principle reason for the decline in 1999 was the Company's
decision to exit the consulting business for Virtual Test and focus on revenues
of standard Virtual Test software products.

International revenues amounted to 19% of net revenues for the year ended
December 31, 2000 compared to 25% and 26% of net revenues for 1999 and 1998,
respectively. Sales to one customer, Intel, amounted to 52%, 50% and 25% of net
revenues in 2000, 1999, and 1998, respectively. No other customer accounted for
more than 10% of the net revenues in 2000, 1999 or 1998.

GROSS MARGIN
------------
For the year ended December 31, 2000 gross margin was $46.4 million or 62% of
net revenue as compared to $34.9 million or 62% of net revenue for the year
ended December 31, 1999. (As a percentage of revenue, gross margin for the year
ended December 31, 2000 was the same with SAB 101 as without SAB 101.) In 1998,
gross margin was $21.9 million or 60% of net revenues, including non-recurring
charges. During 1998, the anomalous gross margin dip to 60% was a direct result
of lower net revenues and a non-recurring $2.0 million inventory adjustment
recorded in cost of systems revenues. Excluding the non-recurring inventory
adjustment, gross margin for the year ended December 31, 1998, would have been
65% of net revenues.

In September 1998, the Company acquired all of the assets of PerformIC for a
cash price of $1.3 million. PerformIC, located in Dresden, Germany, is a
developer of technologies aimed at addressing the engineering test needs of
memory manufacturers. With this acquisition, the Company opened its new
European Design Center in Dresden. In connection with this acquisition,
management decided to discontinue the use of certain technology used in the
manufacture of the Company's IC validation systems, in favor of technology
which is more compatible with that to be utilized in the product developed
from the technology acquired from PerformIC. This decision caused certain raw
material inventories held by the Company prior to the PerformIC acquisition
to be rendered obsolete. The resulting inventory write-down of $2.0 million
was recorded in Systems Cost of Revenues, and the obsolete material was
disposed of as scrap prior to December 31, 1998.

The gross margin from revenues of IC validation systems was 60% for 2000, 61%
for 1999, and 55% for 1998, including non-recurring charges. Excluding
non-recurring charges, gross margin from revenue of IC validation systems would
have been 64% for 1998. Software gross margin of 81% for 2000 declined from 86%
for 1999, which was slightly higher than the 1998 gross margin of 85%. Software
gross margin in 2000 declined from 1999 and 1998 primarily because amortization
of capitalized software development costs increased. Sales of services yielded
gross margin of 58% for 2000, 50% for 1999, and 58% for 1998. Service gross
margin increased in 2000


                                       24
<PAGE>

from 1999 primarily because of a 10% increase in revenues. Service gross margin
declined from 1998 to 1999 due primarily to a decrease in higher-margin Virtual
Test consulting contracts during these periods.

OPERATING EXPENSES
------------------
Research, development and engineering (R&D) expenses consist of employee costs,
costs of materials consumed, depreciation of equipment and engineering related
costs net of capitalized software development costs. For the year ended December
31, 2000, net R&D expenses increased by $1.4 million or 17% to $9.8 million from
$8.4 million for the same period in 1999. Net R&D expenses were $6.8 million in
1998. The increase in 2000 and 1999 was due primarily to our investment in the
development of the Orion memory IC validation system products, combined with
lower capitalization of software development costs. As a percentage of net
revenues, R&D expenses were 13% for the year ended December 31, 2000 and 15% and
18% for 1999 and 1998, respectively. The decrease in R&D expenses as a
percentage of net revenues in 2000 and 1999 was attributable to the increase in
net revenue discussed above. Capitalized software development costs and
amortization (included in Cost of Revenue) were $1.5 million and $1.9 million,
respectively, for the year ended December 31, 2000, compared with $1.9 million
and $1.4 million, respectively, in 1999, and $2.4 million and $0.7 million,
respectively, in 1998.

For the year ended December 31, 2000, selling, general and administrative (SG&A)
expenses increased by $3.6 million or 19% to $22.7 million from $19.1 million in
1999. In 1999, SG&A expenses increased 8% or $1.4 million from $17.8 million in
1998. The increase in SG&A expenses in 2000 and 1999 primarily reflects payment
of sales commissions on higher sales volumes, and payment of employee
performance bonuses attributable to Company achievement of specified operating
income targets. As a percentage of net revenues, SG&A expenses were 30%, 34% and
48% for the years ended December 31, 2000, 1999, and 1998, respectively. The
decreases in 2000 and 1999 SG&A expenses in 2000 and 1999 as a percentage of net
revenues resulted directly from the increase in net revenues discussed above.

During the second half of 1998, the Company implemented a restructuring plan,
including a reduction in the Company's worldwide employee headcount by
approximately 14%, the termination of certain international distributor
agreements, and the establishment of direct sales operations in Europe and Asia.
The primary objectives of the restructuring plan were to strengthen the
Company's international distribution channel, and to maintain acceptable
operating expense levels as the Company moved forward. The restructuring plan
was unrelated to the Company's acquisition of PerformIC.

The total non-recurring restructuring charges recorded in 1998 operating
expenses amounted to $1.0 million. These charges included $0.6 million
associated with the termination of certain international distributors, and $0.4
million for severance costs. The restructuring was completed in early 1999. As
expected, the cost reductions associated with the restructuring plan were offset
by increased costs to maintain the newly established international sales
offices. The direct sales strategy pursued under the restructuring plan was
intended to allow us to achieve a better market penetration in the international
marketplace. During 1999, the shift to a direct sales strategy was marked by an
increase in revenues of 97% in the Asian-Pacific marketplace and an increase of
13% in the European marketplace.

In connection with the acquisition of PerformIC, we recorded a charge of $0.9
million for in-process research and development. The value assigned to
in-process research and development represented research and development efforts
in process at the acquisition date for which technological feasibility had not
yet been established and which had no alternative future uses. The significant
project in process at the acquisition date was the development of a memory
engineering test station. The value was determined by estimating the costs to
further develop the acquired in-process technology into a commercially viable
product, estimating the resulting net cash flows from the product, and
discounting the net cash flows back to their present value. The discount rate
used took into account the uncertainty surrounding the successful development of
the acquired in-process technology. At the time of the acquisition, the
in-process technology under development was expected to be commercially viable
in late 1999. The efforts to complete the project included the completion of all
designing, prototyping, verification, and testing activities necessary to
establish that the product, when complete, would meet design specifications
including functional, technical, and economic performance requirements.
Expenditures to complete the acquired project were initially expected to total
approximately $2.5 million. During 1998 and 1999, the Company invested
approximately

                                       25
<PAGE>

$0.3 million and $1.6 million, respectively, in related research and development
efforts necessary to complete the initial commercially feasible version of the
memory engineering test station product. Additionally, we are incurring, and
will continue to incur, expenditures for continuing research and development
related to the memory engineering test station developed from the acquired
technology.

OTHER INCOME, NET
-----------------
Other income, net was $1.7 million for 2000, $0.8 million for 1999 and $0.8
million for 1998. The increase in other income, net was primarily due to higher
average cash and investments balances.

INCOME TAXES
------------
The effective tax rate was 34% for the year ended December 31, 2000 and 32% for
the year ended December 31, 1999. The benefit from income taxes for 1998
reflects recognition of a portion of the benefit from net operating loss
carryforwards. At December 31, 1998, we had recorded deferred tax assets from
net operating loss carryforwards of $3.5 million, against which we recorded a
valuation allowance of $2.4 million. During 1999, as profitability returned, the
valuation allowance was reduced by approximately $2.1 million. Of the reduction
in the valuation allowance, approximately $1.4 million was credited directly to
Shareholders' Equity in recognition of the tax benefits from deduction of
employee gains on stock option exercises for tax return purposes.

Our income tax position includes the effects of available tax benefits in
certain countries where we do business, benefits for available net operating
loss carryforwards, and tax expense for subsidiaries with pre-tax income. While
management anticipates the effective tax rate to remain at levels similar to
2000, this rate is very sensitive to the geographic and product mix of net
revenues, and therefore could be higher or lower in the future depending upon
actual net revenues realized.

NET INCOME
----------
As a result of the various factors discussed above, net income for the year
ended December 31, 2000 decreased to $3.0 million or $0.35 per diluted share
compared to net income of $5.6 million or $0.70 per diluted share for the
corresponding period in 1999. The decrease was attributable to the cumulative
effect of accounting change recorded effective January 1, 2000 as a result of
the implementation of SAB 101, discussed above. Income before the cumulative
effect of accounting change was $10.3 million or $1.20 per diluted share for the
year ended December 31, 2000, an increase of $4.7 million from $5.6 million or
$0.70 per diluted share for the year ended December 31, 1999. Net loss for the
year ended December 31, 1998 was $3.3 million or $0.44 per diluted share.

YEAR 2000
---------
During 1999 and 1998, we developed and executed our Year 2000 Readiness Plan
which included steps to monitor, test and implement corrective measures for our
critical vendors and suppliers, products and information systems. We estimate
the costs incurred during 1999 and 1998, including payments to third parties and
estimates of internal costs, for developing and implementing our Year 2000
readiness plan were less than $0.3 million and $0.2 million, respectively. To
date, we have not been impacted by any material Year 2000 issues.

LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 2000, our principal sources of liquidity consisted of cash,
cash equivalents and short-term investments of approximately $41.5 million, and
funds available under an existing bank line of credit of $10.0 million. Since
1988, we have relied on cash generated from operations and cash raised through
public stock offerings as our principal source of liquidity.



                                       26
<PAGE>

OPERATING ACTIVITIES
--------------------
Net cash flows from operating activities include cash received from customers,
payments to suppliers, payments to employees and interest received and paid.
During 2000 and 1999, net cash provided by operating activities amounted to
$22.3 million and $16.0 million, respectively. The increase in cash from
operating activities of $6.3 million in 2000 from 1999 is primarily attributable
to improved operating results and asset management programs aimed at increasing
turnover of accounts receivable and inventories. During 1998, net cash used in
operating activities amounted to $3.3 million.

For 2000 and 1999, we realized a significant improvement in cash flow from
operating activities, driven by the increase in net revenues discussed above,
combined with improvement in the days sales outstanding in trade receivables,
and reductions in inventory levels. In addition, we realized reductions in
current income tax liabilities of $1.4 million and $1.7 million for 2000 and
1999, respectively, resulting from the benefit of tax deductions of employee
gains upon exercise of both Cadence and IMS stock options. During 1998, a
significant decline in revenues during a year where we continued to invest
heavily in both our research and development efforts and our distribution
capabilities, led to a decline in cash flow from operating activities. Other
factors, which negatively impacted cash flow from operating activities during
1998, were increases in trade receivables and inventories. Trade receivables,
inventories and accounts payable have fluctuated from period to period as a
result of the timing of shipments, cash collections and inventory receipts near
period end. The size and timing of a single customer shipment or collection can
have a significant impact on trade receivables and inventories.

Trade receivables amounted to $11.5 million and $14.0 million at December 31,
2000 and December 31, 1999, respectively. Because a greater portion of quarterly
net revenue was realized earlier in each quarter during 2000 than had been
experienced in 1999, days sales outstanding decreased to 59 days at December 31,
2000 from 75 days at December 31, 1999. Inventories on-hand decreased to $11.0
million at December 31, 2000 from $13.2 million at December 31, 1999. This
change was primarily due to the combination of focused inventory reduction
programs and the manufacturing of demonstration equipment. Inventory at customer
sites of $2.9 million represents the inventory value of shipments of systems for
which revenue will not be recognized until acceptance from the customer is
received.

INVESTING ACTIVITIES
--------------------
Capital equipment expenditures of $4.0 million, $3.1 million, and $7.1 million
in 2000, 1999, and 1998, respectively, were primarily for computers, software,
demonstration equipment, engineering equipment and service spare parts used in
daily operations. The higher level of capital spending during 1998 was largely
driven by investments in production equipment and tooling necessary to begin
shipments of the Vanguard IC validation systems late in 1998. Following these
significant investments, there was less need for additional capital expenditures
during 2000 and 1999.

In addition, certain costs associated with software development were capitalized
at $1.5 million, $1.9 million, and $2.4 million for 2000, 1999 and 1998,
respectively. The higher amount in 1998 reflects the investment in software
technology associated with the new Vanguard IC validation system, which was
introduced in late 1998.

FINANCING ACTIVITIES
--------------------
In 2000 and 1999, net cash provided by financing activities was $2.2 million
and $0.6 million, respectively. In 1998, net cash used in financing
activities was $0.8 million.

In May 1998, we initiated a plan to repurchase up to 500,000 shares of the
currently outstanding common stock over twelve months in open market and
negotiated transactions, and in September 2000 we renewed this program. This
repurchase program authorized the repurchase of shares in increments in
accordance with SEC regulations and Board of Directors' guidance. During 2000
and 1998, the program resulted in the repurchase of 39,000 and 150,500 shares


                                       27

<PAGE>

at a cost of $0.6 million and $1.2 million, respectively. The Company did not
repurchase any of its common stock during 1999.

Cash used for payments of certain capital leases obtained for computers and
equipment used in operations was $0.1 million, $0.4 million and $0.2 million
during 2000, 1999 and 1998, respectively. The Company received $2.9 million,
$1.0 million, and $0.6 million in 2000, 1999 and 1998, respectively, from the
issuance of stock under employee stock option and stock purchase plans.

The compensation for tax purposes associated with stock option exercises and
with disqualifying dispositions are typically not treated as expenses for
financial reporting purposes, and the exercise of Cadence stock options does not
increase the number of shares of our common stock outstanding. The tax benefits
available from the stock option deduction may decrease in the future, if our
stock price declines, and as employee holdings of Cadence stock options decline
due to option exercises and cancellations. The timing and magnitude of such
decreases in tax benefits, if realized, is uncertain as the number of employee
stock options, which are exercised, and the amount of gains realized upon
exercise, will be determined by, among other factors, fluctuations in the market
values of our common stock and of Cadence common stock.

We have a committed $10.0 million revolving line of credit with U.S. National
Bank of Oregon, which is available for general corporate purposes as needed.
Under the agreement, we can borrow with interest at the bank's prime lending
rate, or if lower, at certain margins above banker's acceptance or interbank
offering rates. There have been no borrowings against the line of credit to
date. The term of the current credit line agreement ends April 30, 2001.
Management intends to renew the agreement at that time.

We believe that existing funds, funds expected to be generated by operating
activities, and the available line of credit will satisfy our anticipated
working capital needs and other general corporate purposes through at least the
next twelve months. Currently there are no significant capital commitments other
than commitments under facility operating leases and vendor contracts for
development services, consulting services and parts. From time to time, the
acquisition of complementary businesses, products or technologies may be
considered. Presently there are no significant understandings, commitments or
agreements with respect to any such acquisitions. Any such transactions, if
consummated, may require additional financing. No assurance can be given that
additional financing will be available or that, if available, such financing
will be obtainable on favorable terms.

BUSINESS OUTLOOK

THE FOLLOWING STATEMENTS ARE BASED ON CURRENT EXPECTATIONS. THESE STATEMENTS ARE
FORWARD-LOOKING, AND ACTUAL RESULTS MAY DIFFER MATERIALLY.

The following guidance is based upon the new revenue recognition rules imposed
by SAB 101.

REVENUES
--------

Consistent with guidance given on January 2nd, we expect 2001 revenues to be:

     Q1 - between $17.7 million and $18.2 million
     Q2 - between $16.2 million and $16.7 million
     Q3 - between $17.9 million and $18.4 million
     Q4 - between $22.2 million and $22.7 million

The timing of customer acceptances, which are not entirely within our control,
can have a significant impact on revenues. Other factors which impact the
predictability of revenues include: a disproportionate amount of orders and



                                       28

<PAGE>

shipments occur towards the end of a quarter, a single customer often accounts
for a significant amount of revenue in a quarter, and one order can account for
a significant portion of the quarter's revenue.

GROSS MARGIN PERCENTAGE
-----------------------
We expect gross margin percentages for 2001 to be:

     Q1 - between 61% and 62%
     Q2 - between 63% and 64%
     Q3 - between 64% and 65%
     Q4 - between 65% and 66%

Variances in volume, product mix and product pricing may impact the gross margin
percentage in any quarter.

OPERATING PROFIT PERCENTAGE
---------------------------
We expect operating profit percentages for 2001 to be:

      Q1 - between 13% and 14%
      Q2 - between 7% and 8%
      Q3 - between 10% and 11%
      Q4 - between 16% and 17%

In addition to the factors mentioned above for gross margin percentage, spending
levels could impact the operating margin percentage in any quarter.

OTHER INCOME
------------
We expect other income, which consists primarily of interest on cash and
investments and foreign exchange gains and losses, to be approximately $0.5
million per quarter. Sudden changes in cash and investment balances, interest
rates and foreign exchange rates could impact other income in any quarter.

EFFECTIVE TAX RATE
------------------
We expect the effective tax rate for 2001 to be 34%. Failure to meet planned
operating results in Europe and in Japan could have a negative impact on the
effective tax rate.

WEIGHTED AVERAGE SHARES OUTSTANDING
-----------------------------------
We expect weighted average shares outstanding for 2001 to be approximately:

              Q1 - 8.5 million
              Q2 - 8.5 million
              Q3 - 8.5 million
              Q4 - 8.7 million

DEPRECIATION AND AMORTIZATION
-----------------------------
We expect depreciation and amortization for 2001 to be approximately $1.9
million per quarter.

CAPITAL EXPENDITURES
--------------------
We expect capital expenditures for 2001 to be approximately $5.0 million, 60%
of which will occur in the first half of the year.

                                       29

<PAGE>

The statements contained in the foregoing Business Outlook section are
forward-looking statements within the meaning of the Securities Litigation
Reform Act of 1995 which are based on current expectations, estimates and
projections about the Company's business, management's beliefs, and assumptions
made by management. These statements are not guarantees of future performance
and involve risks and uncertainties that are difficult to predict. Therefore,
actual outcomes and results may differ materially from what is expressed or
forecasted in such forward-looking statements due to numerous factors, including
those described above and the following: the cyclical nature of the
semiconductor industry, changes in demand for the Company's products, product
mix, the timing of customer orders and deliveries, the timing of customer
acceptances, high concentration of revenue from a single customer, a
disproportionate amount of orders booked toward the end of any quarter, the
impact of competitive products and pricing, constraints on supplies of critical
components, excess or shortage of production capacity, actual purchases under
agreements, difficulties encountered in the integration of acquired businesses
and other risks discussed in this annual report under the caption "Business -
Risk Factors." In addition, such statements could be affected by general
industry and market conditions and growth rates, and general domestic and
international economic conditions. Such forward-looking statements speak only as
of the date of this annual report and the Company does not undertake any
obligation to update any forward-looking statement to reflect events or
circumstances after the date of this release.


                                       30
<PAGE>


ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

INTEREST RATE RISK
------------------
Our exposure to market risk for changes in interest rates relate primarily to
our investment portfolio. We mitigate our risk by diversifying investments among
high credit quality securities in accordance with our investment policy. As of
December 31, 2000, our investment portfolio includes marketable debt securities
of $29.9 million. These securities are subject to interest rate risk, and will
decline in value if the interest rates increase. Due to the short duration of
our investment portfolio, an immediate 10 percent increase in interest rates
would not have a material effect on our financial condition or the results of
operations.

FOREIGN CURRENCY EXCHANGE RATE RISK
-----------------------------------
The Euro is the functional currency of our subsidiaries in France, Germany and
Switzerland. The Yen is the functional currency of our subsidiary in Japan. We
maintain cash balances denominated in currencies other than the U.S. Dollar in
order to meet minimum operating requirements of our foreign subsidiaries.

We have limited involvement with derivative financial instruments and do not use
them for trading purposes. Derivatives are used to manage well-defined foreign
currency risks. We enter into forward exchange contracts to hedge the value of
recorded short-term receivables and payables denominated in a foreign currency.
Accordingly, the impact of exchange rates on the forward contracts will be
substantially offset by the impact of such changes on the underlying
transactions. The effect of an immediate 10 percent change in exchange rates on
the forward exchange contracts and the underlying hedged positions denominated
in foreign currencies would not be material to our financial position or the
results of operations.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements and schedule listed in Item 14(a)(1) and (2) are
included in this Report beginning on Page F-2.

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

None.



                                       31

<PAGE>


                                    PART III

ITEM 10.      DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT

The information required by Item 401 of Regulation S-K is included under the
captions "Election of Directors" and "Management" in the Company's Proxy
Statement to be used in connection with the Company's 2001 annual meeting of
shareholders to be held on or about May 22, and is incorporated herein by
reference. The information required by Item 405 of Regulation S-K is included
under the captions "Section 16(a) Beneficial Ownership Reporting Compliance" in
the Company's Proxy Statement to be used in connection with the Company's
2001annual meeting of shareholders to be held on or about May 22, and is
incorporated herein by reference.

ITEM 11.      EXECUTIVE COMPENSATION

The information required by this item is included under the caption "Executive
Compensation" in the Company's Proxy Statement to be used in connection with the
Company's 2001 annual meeting of shareholders to be held on or about May 22, and
is incorporated herein by reference.

ITEM 12.      SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this item is included under the caption "Stock Owned
by Management and Principal Shareholders" in the Company's Proxy Statement to be
used in connection with the Company's 2001 annual meeting of shareholders to be
held on or about May 22, and is incorporated herein by reference.

ITEM 13.      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is included under the caption "Certain
Transactions and Relationships" in the Company's Proxy Statement to be used in
connection with the Company's 2001 annual meeting of shareholders to be held on
or about May 22, and is incorporated herein by reference.

                                     PART IV

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

(a)  Documents filed as part of this report:

   (1)      Financial Statements and Supplementary Data

      The documents and schedule listed below are filed as part of this report
      on the pages indicated:

                                                             PAGE
        Report of Independent Public Accountants             F-1
        Consolidated Statements of Operations                F-2
        Consolidated Balance Sheets                          F-3
        Consolidated Statements of Shareholders' Equity      F-4
        Consolidated Statements of Cash Flows                F-5
        Notes to Consolidated Financial Statements           F-6
        Selected Quarterly Financial Data                    F-20-F-21


                                       32

<PAGE>

   (2)      Financial Statement Schedules

      The documents and schedule listed below are filed as part of this report
      on the pages indicated:

                                                                PAGE
        Schedule II -- Valuation and Qualifying Accounts        F-22
        Report of Independent Public Accountants on Financial
        Statements Schedule                                     F-23

      All other financial statement schedules have been omitted since they are
      not required, not applicable or the information is included in the
      consolidated financial statements or notes.

   (3)      Exhibits

                                                                 SEQUENTIAL
                                                                 PAGE NUMBER

     3.1.   Restated   Articles  of   Incorporation   of  Integrated
            Measurement Systems,  Inc.  Incorporated by reference to
            Exhibit 3.1 of the Company's  Registration  Statement on
            Form S-1 (Registration No. 33-92408)

     3.2.   Second   Restated   Bylaws  of  Integrated   Measurement
            Systems,  Inc.  Incorporated  by  reference  to  Exhibit
            3(ii) of the  Company's  Report on Form 8-K filed  March
            26, 1998.

    10.1.   Form   of   Indemnity   Agreement   between   Integrated
            Measurement  Systems,  Inc.  and  each of its  executive
            officers  and  directors.  Incorporated  by reference to
            Exhibit 10.1 of the Company's  Registration Statement on
            Form S-1 (Registration No. 33-92408)
    10.2.   1995 Stock  Incentive  Plan.  Incorporated  by reference
            to Exhibit 10.2 of the Company's  Registration Statement
            on Form S-1 (Registration No. 33-92408)
    10.3.   1995  Stock  Option  Plan  for  Nonemployee   Directors.
            Incorporated   by  reference  to  Exhibit  10.3  of  the
            Company's    Registration    Statement   on   Form   S-1
            (Registration No. 33-92408)
    10.4.   Form  of   Employment   Agreement   between   Integrated
            Measurement  Systems,  Inc.  and  each of its  executive
            officers.  Incorporated  by reference to Exhibit 10.4 of
            the  Company's   Registration   Statement  on  Form  S-1
            (Registration No. 33-92408)
    10.5.   Asset Transfer Agreement between Integrated  Measurement
            Systems,   Inc.  and  Cadence   Design   Systems,   Inc.
            Incorporated   by  reference  to  Exhibit  10.7  of  the
            Company's    Registration    Statement   on   Form   S-1
            (Registration No. 33-92408)
    10.6.   Tax Sharing  Agreement  between  Integrated  Measurement
            Systems,   Inc.  and  Cadence   Design   Systems,   Inc.
            Incorporated   by  reference  to  Exhibit  10.9  of  the
            Company's    Registration    Statement   on   Form   S-1
            (Registration No. 33-92408)
    10.7.   Line of Credit agreement with US Bank. Incorporated by
            reference to Exhibit 10.11 of the Company's Annual Report
            on Form 10-K for the year ended December 31, 1995.
    10.8.   Integrated   Measurement  Systems,  Inc.  1995  Employee
            Stock  Purchase  Plan.   Incorporated  by  reference  to
            Exhibit  10.12 of the  Company's  Annual  Report on Form
            10-K for the year ended December 31, 1995.
    10.9.   Employment   Agreement  dated  March  16,  1996  between
            Integrated   Measurement  Systems,  Inc.  and  Keith  L.
            Barnes.  Incorporated  by  reference  to Exhibit 10.a of
            the  Company's  Quarterly  Report  on Form  10-Q for the
            quarter ended March 31, 1996.
   10.10.   Amended   Stockholder   Agreement   between   Integrated
            Measurement  Systems,  Inc. and Cadence Design  Systems,
            Inc.  Incorporated  by reference to Exhibit 10.15 of the
            Company's    Registration    Statement   on   Form   S-1
            (Registration No. 333-20495)


                                       33

<PAGE>


   10.11.   Amended Corporate  Services Agreement between Integrated
            Measurement  Systems,  Inc. and Cadence Design  Systems,
            Inc.  Incorporated  by reference to Exhibit 10.16 of the
            Company's    Registration    Statement   on   Form   S-1
            (Registration No. 333-20495)
   10.12.   Second   Amendment  to  Joint  Sales  Agency   Agreement
            between  Integrated   Measurement   Systems,   Inc.  and
            Cadence Design Systems,  Inc.  Incorporated by reference
            to   Exhibit   10.17  of  the   Company's   Registration
            Statement on Form S-1 (Registration No. 333-20495)
   10.13.   Integrated  Measurement Systems, Inc. Executive Deferred
            Compensation Plan.  Incorporated by reference to Exhibit
            10 of the  Company's  Quarterly  Report on Form 10-Q for
            the quarter ended September 30, 1996.
   10.14.   Lease  Agreement,  dated  September  22,  1997,  between
            Integrated   Measurement   Systems,   Inc.  and  Spieker
            Partners,  LP, a limited  partnership.  Incorporated  by
            reference  to  Exhibit  10.21  of the  Company's  Annual
            Report  on Form  10-K for the year  ended  December  31,
            1997.
   10.15.   Rights  Agreement,  dated as of March 25, 1998,  between
            Integrated  Measurement  Systems,  Inc. and  ChaseMellon
            Shareholder Services,  L.L.C.  including the Articles of
            Amendment creating the Series A Participating  Preferred
            Stock of Integrated  Measurement Systems, Inc., the form
            of  Rights   Certificate   and  the  Summary  of  Rights
            attached  thereto as Exhibits A, B and C,  respectively.
            Incorporated   by   reference  to  Exhibit  4.1  of  the
            Company's Report on Form 8-K filed March 26, 1998.
   10.16.   Amended and Restated Shareholder Agreement,  dated as of
            March 25, 1998, between Integrated  Measurement Systems,
            Inc. and  Cadence  Design  Systems, Inc. Incorporated  by
            reference  to  Exhibit  4.2 of the  Company's  Report on
            Form 8-K filed March 26, 1998.
   10.17.   Renewal of Line of Credit  Agreement with US Bank, dated
            April 30, 2000.*
   21.      List of Subsidiaries of the Company*
   23.1.    Consent of Arthur Andersen LLP*

---------------------
   * File Herewith

(b)   Reports on Form 8-K

   No report on Form 8-K was filed during the quarter ended December 31, 2000.



                                       34
<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, on the 30th day of March,
2001.

INTEGRATED MEASUREMENT SYSTEMS, INC.


By    /s/  FRED HALL
     -------------------------------

Fred Hall
Chief Financial 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 indicated, on the 30th day of March, 2000.


      Signature                     Title

/s/  KEITH L. BARNES          Chief Executive Officer and Chairman of the Board
-----------------------       (Principal Executive Officer)
Keith L. Barnes

/s/  FRED HALL                Chief Financial Officer (Principal Financial
-----------------------       and Accounting Officer)
Fred Hall

/s/  MIKE BOSWORTH            Director
-----------------------
Mike Bosworth

/s/  THOMAS R. FRANZ          Director
-----------------------
Thomas R. Franz

/s/  PAUL GARY                Director
-----------------------
Paul Gary

/s/  C. SCOTT GIBSON          Director
-----------------------
C. Scott Gibson

/s/  MILTON R. SMITH          Director
-----------------------
Milton R. Smith

/s/  JAMES E. SOLOMON         Director
-----------------------
James E. Solomon



                                       35

<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF INTEGRATED  MEASUREMENT SYSTEMS,
INC.:

   We have audited the accompanying consolidated balance sheets of Integrated
Measurement Systems, Inc. (an Oregon corporation) and subsidiaries as of
December 31, 2000 and 1999, and the related consolidated statements of
operations, shareholders' equity, and cash flows for each of the three years in
the period ended December 31, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based upon our audits.

   We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards 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. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

   In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Integrated
Measurement Systems, Inc. and subsidiaries as of December 31, 2000 and 1999, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2000 in conformity with accounting principles
generally accepted in the United States. As explained in Note 2 to the
consolidated financial statements, effective January 1, 2000, the Company
changed its method of accounting for systems revenues based on guidance provided
in the SEC Staff Accounting Bulletin No. 101 "Revenue Recognition in Financial
Statements."

                                       ARTHUR ANDERSEN LLP

Portland, Oregon
January 23, 2001


                                      F-1

<PAGE>

                    INTEGRATED MEASUREMENT SYSTEMS, INC.
                   CONSOLIDATED STATEMENTS OF OPERATIONS
                  (In thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                       Year Ended December 31,
                                                    -----------------------------
                                                       2000      1999      1998
                                                    ---------  --------  --------
<S>                                                 <C>        <C>       <C>
REVENUES
   Systems                                          $  58,387  $ 41,125  $ 22,318
   Software                                             6,797     5,840     4,632
   Service                                             10,029     9,105     9,747
                                                    ---------  --------  --------
    Net revenues                                       75,213    56,070    36,697
                                                    ---------  --------  --------
COST OF REVENUES
   Systems                                             23,235    15,863     9,993
   Software                                             1,297       823       707
   Service                                              4,249     4,510     4,132
                                                    ---------  --------  --------
    Total cost of revenues                             28,781    21,196    14,832
                                                    ---------  --------  --------
    GROSS MARGIN                                       46,432    34,874    21,865

OPERATING EXPENSES
   Research, development and engineering                9,767     8,362     6,763
   Selling, general and administrative                 22,689    19,138    17,781
   Acquisition and restructuring                            -         -     1,908
                                                    ---------  --------  --------
    Total operating expenses                           32,456    27,500    26,452
                                                    ---------  --------  --------
    OPERATING INCOME (LOSS)                            13,976     7,374    (4,587)

Interest income                                         1,708       766       824
Other income (expense), net                               (52)       68       (64)
                                                    ---------  --------  --------
Income (loss) before provision for (benefit from)
  income taxes and cumulative effect of
  accounting change                                    15,632     8,208    (3,827)

Provision for (benefit from) income taxes               5,315     2,627      (496)
                                                    ---------  --------  --------
Income (loss) before cumulative effect of
 accounting change                                     10,317     5,581    (3,331)
Cumulative effect of accounting change                 (7,317)        -         -
                                                    ---------  --------  --------
    NET INCOME (LOSS)                               $   3,000  $  5,581  $ (3,331)
                                                    =========  ========  ========

BASIC EARNINGS (LOSS) PER SHARE:

   Income (loss) before cumulative effect of
    accounting change                               $    1.31  $   0.74  $  (0.44)
   Cumulative effect of accounting change               (0.93)        -         -
                                                    ---------  --------  --------
   Net income (loss)                                $    0.38  $   0.74  $  (0.44)
                                                    =========  ========  ========

DILUTED EARNINGS (LOSS) PER SHARE:
   Income (loss) before cumulative effect of
    accounting change                               $    1.20  $   0.70  $  (0.44)
   Cumulative effect of accounting change               (0.85)        -         -
                                                    ---------  --------  --------
   Net income (loss)                                $    0.35  $   0.70  $  (0.44)
                                                    =========  ========  ========
Shares used for basic earnings per share                7,846     7,492     7,496
                                                    =========  ========  ========
Shares used for diluted earnings per share              8,573     7,980     7,496
                                                    =========  ========  ========

PRO FORMA AMOUNTS ASSUMING SAB101 IS APPLIED
 RETROACTIVELY:
   Net income (loss)                                        -   $ 3,033   $(3,850)
    Basic earnings (loss) per share                         -   $  0.40   $ (0.51)
    Diluted earnings (loss) per share                       -   $  0.38   $ (0.51)
</TABLE>

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

                                      F-2


<PAGE>


                      INTEGRATED MEASUREMENT SYSTEMS, INC.
                           CONSOLIDATED BALANCE SHEETS
                    (Dollars in thousands, except share data)


<TABLE>
<CAPTION>
                                                                December 31,
                                                         ------------------------
                                                            2000           1999
                                                         ----------     ----------
<S>                                                      <C>            <C>
ASSETS
Current Assets:
   Cash and cash equivalents                              $  18,312     $   7,507
   Short-term investments                                    23,215        15,117
   Trade receivables, less allowance for doubtful
    accounts of $376 and $257                                11,480        13,956
   Inventories, net                                          10,984        13,176
   Inventories at customer sites                              2,937             -
   Deferred income taxes                                      3,808         2,662
   Income taxes receivable                                    1,247             -
   Prepaid expenses and other current assets                  4,425         3,453
                                                          ---------     ---------
    Total current assets                                     76,408        55,871

Property, plant and equipment, net                           10,121        10,737
Service spare parts, net                                      3,125         2,986
Software development costs, net                               3,519         3,915
Other assets, net                                               427           915
                                                          ---------     ---------
    Total assets                                          $  93,600     $  74,424
                                                          =========     =========

LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
   Accounts payable                                       $   2,280     $   1,512
   Payable to Cadence, net                                       92            27
   Accrued compensation                                       2,076         2,608
   Accrued warranty                                           1,290         1,182
   Deferred systems revenue                                  10,603             -
   Other deferred revenue                                     3,103         2,193
   Other current liabilities                                  2,293           947
   Income taxes payable                                           -           818
   Capital lease obligations - current                          213           149
                                                          ---------     ---------
    Total current liabilities                                21,950         9,436

Deferred income taxes                                         1,357         1,390
Capital lease obligations, net of current portion                 -           213
Deferred compensation                                         1,772         1,565

Shareholders' Equity:
   Preferred stock, $0.01 par value, 10,000,000
    shares authorized; none issued and outstanding                -             -
   Common stock, $0.01 par value, 15,000,000 shares
    authorized; 7,935,320 and 7,588,600 shares
    issued and outstanding                                       79            76
   Additional paid-in capital                                45,871        42,173
   Retained earnings                                         22,571        19,571
                                                          ---------     ---------
    Total shareholders' equity                               68,521        61,820
                                                          ---------     ---------
    Total liabilities and shareholders' equity            $  93,600    $   74,424
                                                        ============  ============
</TABLE>

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

                                      F-3

<PAGE>


                      INTEGRATED MEASUREMENT SYSTEMS, INC.
                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                                 (In thousands)


<TABLE>
<CAPTION>
                                                          Additional               Total
                                          Common Stock     Paid-in    Retained  Shareholders'
                                         Shares   Amount   Capital    Earnings    Equity
                                        --------  -------  ---------  ---------  ------------
<S>                                    <C>       <C>      <C>        <C>        <C>
BALANCE, DECEMBER 31, 1997                7,521   $   75   $40,037    $17,321    $57,433
   Repurchases of common stock             (151)      (2)   (1,153)         -     (1,155)
   Stock issued under employee stock
    plans                                    56        1       594          -        595
   Net loss                                   -        -         -     (3,331)    (3,331)
                                        --------  -------  --------   ---------  ------------
BALANCE, DECEMBER 31, 1998                7,426       74    39,478     13,990     53,542
   Stock issued under employee stock
    plans                                   163        2     1,015          -      1,017
   Tax benefit from Cadence and IMS
    stock options                             -        -     1,680          -      1,680
   Net income                                 -        -         -      5,581      5,581
                                        --------  -------  --------   ---------  ------------
BALANCE, DECEMBER 31, 1999                7,589       76    42,173     19,571     61,820
   Repurchases of common stock              (39)      (1)     (554)         -       (555)
   Stock issued under employee stock
    plans                                   385        4     2,898          -      2,902
   Tax benefit from Cadence and IMS
    stock options                             -        -     1,354          -      1,354
   Net income                                 -        -         -      3,000      3,000
                                        --------  -------  --------   ---------  ------------
BALANCE, DECEMBER 31, 2000                7,935   $   79   $45,871    $22,571    $68,521
                                        ========  =======  ========   =========  ============
</TABLE>

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

                                      F-4
<PAGE>


                      INTEGRATED MEASUREMENT SYSTEMS, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)


<TABLE>
<CAPTION>
                                                     Year Ended December 31,
                                                 ----------------------------------
                                                  2000         1999         1998
                                                --------     --------    ----------
<S>                                             <C>          <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income (loss)                            $  3,000     $  5,581    $ (3,331)
   Adjustments to reconcile net income
    (loss) to cash provided by (used in)
    operating activities:
     Cumulative effect of accounting change        7,317            -           -
     Depreciation and amortization                 6,916        5,881       4,247
     Acquired in-process research &
       development                                     -            -         861
     Deferred compensation                           207          411         324
     Provision for (benefit from) deferred
       income taxes                                2,658          400        (518)
     Income tax benefit from IMS and Cadence
       stock options                               1,354        1,680           -
   (Increase) decrease in assets:
     Trade receivables, net                        2,476           21      (3,395)
     Receivable from/payable to Cadence, net          65         (479)        725
     Inventories, net                              4,595        1,767      (3,505)
     Prepaid expenses and other current assets      (241)      (1,072)         47
   Increase (decrease) in liabilities:
     Accounts payable and accrued liabilities      1,690          999         679
     Deferred revenue                             (5,712)         185          10
     Income taxes payable/receivable              (2,065)         621         533
                                                --------     --------    --------
     Net cash provided by (used in) operating
       activities                                 22,260       15,995      (3,323)
                                                --------     --------    --------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Acquisition of PerformIC                            -            -      (1,194)
   Sale of short-term investments                 11,300        2,122       6,581
   Purchases of short-term investments           (19,398)      (9,609)     (5,840)
   Purchases of equipment and service spare
     parts                                        (4,022)      (3,129)     (7,110)
   Software development costs capitalized         (1,533)      (1,873)     (2,442)
                                                --------     --------    --------
     Net cash used in investing activities       (13,653)     (12,489)    (10,005)
                                                --------     --------    --------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Principal payments under capital leases          (149)        (395)       (197)
   Repurchase of common stock                       (555)           -      (1,155)
   Proceeds from employee stock plans              2,902        1,017         595
                                                --------     --------    --------
     Net cash provided by (used in) financing
       activities                                  2,198          622        (757)
                                                --------     --------    --------

Net increase (decrease) in cash and cash
  equivalenents                                   10,805        4,128     (14,085)
Beginning cash and cash equivalents balance        7,507        3,379      17,464
                                                --------     --------    --------
Ending cash and cash equivalents balance        $ 18,312     $  7,507    $  3,379
                                                =========   ==========  ==========


SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING
  ACTIVITIES:
   Purchases of assets through capital leases   $      -     $      -    $    621
                                                =========   ==========  ==========
   Acquisition of PerformIC                     $      -     $      -    $    125
                                                =========   ==========  ==========


OTHER SUPPLEMENTAL CASH FLOW DISCLOSURES:
   Income taxes refunded                        $  3,273     $    100    $    512
                                                =========   ==========  ==========
   Interest paid                                $    (24)    $    (45)   $    (35)
                                                =========   ==========  ==========

</TABLE>

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

                                      F-5

<PAGE>


                      INTEGRATED MEASUREMENT SYSTEMS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   (All numerical references are in thousands, except percentages, share data
                               and per share data)


1. COMPANY BACKGROUND:

Integrated   Measurement   Systems,   Inc.  (the  Company  or  IMS)  commenced
operations  in August  1983.  The Company was  independent  until  acquired by
Valid  Logic  in  1989.  In 1991,  Valid  Logic  merged  with  Cadence  Design
Systems,  Inc.  (Cadence) in a transaction  accounted  for as a pooling.  From
that time until July 21, 1995,  the Company was a wholly owned  subsidiary  of
Cadence.

In July 1995, the Company successfully completed an initial public offering of
its common stock. A total of 2,990,000 shares were sold, consisting of 375,000
shares issued by the Company and 2,615,000 shares sold by Cadence. In February
1997, the Company issued 700,000 additional shares of common stock, and Cadence
sold 950,000 shares of the Company's common stock in a registered public stock
offering. Net proceeds to the Company amounted to $13,400. At December 31, 2000,
Cadence owned 32% of the outstanding common stock of the Company, with the
remaining 67% publicly owned.

The Company is engaged in designing, developing, manufacturing, marketing and
servicing high-performance engineering integrated circuits (IC) validation
systems and software to test and measure the performance of complex electronic
devices. In addition, the Company develops, markets and supports a line of
Virtual Test Software that permits design and test engineers to automate test
program development and to conduct simulated tests of electronic device designs
prior to the fabrication of a prototype of the actual device.

The Company markets and supports its products worldwide through a network of
direct sales force personnel and independent distributors.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the financial statements of
Integrated Measurement Systems, Inc. and its wholly owned subsidiaries. All
significant intercompany accounts and transactions are eliminated in
consolidation.

FOREIGN CURRENCY TRANSLATION
Assets and liabilities of foreign subsidiaries, where the functional currency is
the local currency, are translated using exchange rates in effect at the end of
the period and revenues and costs are translated using average exchange rates
for the period. Gains and losses on translation into U.S. dollars of amounts
denominated in foreign currencies for those operations where the functional
currency is the local currency are not material. Transaction gains and losses
are included in net income (loss) in the accompanying Consolidated Statements of
Operations.

USE OF ESTIMATES
The preparation of financial statements in conformance with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent 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 differ from those estimates.

RECLASSIFICATIONS
Certain reclassifications have been made in the accompanying financial
statements for 1998 to conform with the 1999 and 2000 presentation.

REVENUE RECOGNITION


                                      F-6

<PAGE>

Revenues are derived from sales of systems, licenses of stand alone software,
and sales of maintenance and other services.

Effective January 1, 2000, the Company changed its method of accounting for
systems revenues based on guidance provided in SEC Staff Accounting Bulletin No.
101 (SAB 101), "Revenue Recognition in Financial Statements." Where our
customers require final acceptance tests to be performed at their site, and
withhold a portion of the purchase price until the final acceptance tests have
been passed, systems revenues are generally recognized upon final customer
acceptance. In those instances where we are delivering multiple systems to a
single customer for similar applications with identical acceptance criteria,
revenues for systems after initial deliveries are recognized upon shipment. For
all other systems sales, revenues are recognized as the product ships and title
passes, and when no significant obligations remain. Billings in advance of
revenue recognition are recorded as deferred revenues and the related costs are
recorded as inventory at customer sites and as deferred commissions. Warranty
and any remaining installation costs are accrued upon recognition of the systems
revenue. Prior to 2000, systems revenues were generally recognized as product
shipped (title passed) and no significant obligations remained.

Revenue from licenses of stand-alone software is recognized when a
non-cancelable license agreement has been signed, the software product has been
delivered, there are no uncertainties surrounding product acceptance, the fees
are fixed and determinable, and collection is considered probable. When the
license arrangement includes more than one product, including maintenance
services, revenue for the transaction is allocated based on the fair values of
the products included. Amounts allocated to maintenance services are recorded as
deferred revenue and recognized ratably over the maintenance period.

Contract service and support revenues billed in advance are recorded as deferred
revenue and recognized ratably over the contractual period as the services and
support are performed. Revenue from other services, such as consulting and
training, is recognized as the related services are performed or when certain
milestones are achieved.

CASH AND CASH EQUIVALENTS
The Company classifies all highly liquid investments with a maturity of three
months or less at purchase as cash equivalents. The carrying amount approximates
fair value because of the short maturity of these instruments. The Company's
investments are placed with high credit-quality financial institutions and bear
minimal credit risk.

INVESTMENTS
The Company accounts for its investments in accordance with the Financial
Accounting Standards Board Statement No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" (SFAS 115). Under the provisions of
SFAS 115, the Company is required to classify and account for its security
investments as trading securities, securities available for sale or securities
held to maturity depending on the Company's intent to hold or trade the
securities at the time of purchase. The Company's short-term investments are
placed with high credit-quality financial institutions or in short-duration,
high quality debt securities. The Company limits the amount of credit exposure
in any one institution or type of investment instrument. As of December 31,
2000, the Company's short-term investments consisted of debt securities issued
by the Federal government and agencies of the United States, and high-quality
corporate and financial institution obligations. All debt securities are
available for sale and are carried on the balance sheet at fair market value,
with the change in unrealized gain or loss included in Shareholders' Equity. The
unrealized gain on the Company's investments in debt securities at December 31,
2000 and 1999, was not material.

INVENTORIES
Inventories, consisting principally of computer hardware, electronic
sub-assemblies and test equipment, are valued at the lower of cost (first-in,
first-out) or market. Costs used for inventory valuation purposes include
material, labor and manufacturing overhead.

<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                              ----------------
                                                                2000     1999
                                                              -------- -------
<S>                                                           <C>      <C>
Raw materials                                                 $6,183   $7,443
Work-in-progress                                               2,576    2,184
</TABLE>

                                      F-7
<PAGE>
<TABLE>
<S>                                                          <C>       <C>
Finished goods                                                 2,225     3,549
Inventories at customer sites                                  2,937        --
                                                             --------  -------
Total inventories                                            $13,921   $13,176
                                                             ========  =======
</TABLE>

PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost and consists principally of
equipment, furniture and leasehold improvements. Depreciation of equipment and
furniture is computed principally on a straight-line basis over the estimated
useful lives of the assets, generally three to five years. Leasehold
improvements are amortized on a straight-line basis over the lesser of the term
of the lease, or the estimated useful lives of the improvements.

<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                              ------------------
                                                                2000      1999
                                                              -------   --------
<S>                                                          <C>       <C>
Leasehold improvements                                         $  398    $  395
Computer equipment and software                                 6,745     6,185
Manufacturing and test equipment                                5,704     4,918
Demonstration equipment                                        13,882    12,697
Office furniture and equipment                                  1,221     1,167
                                                              -------   --------
                                                               27,950    25,362

Less accumulated depreciation                                 (17,829)  (14,625)
                                                              -------   --------

Net property, plant and equipment                             $10,121   $10,737
                                                              =======   ========
</TABLE>

SERVICE SPARE PARTS
Service spare parts consist of electronic components used to service IC
validation systems for which the Company has entered into equipment maintenance
agreements with customers. The Company classifies its service spare parts as
non-current assets to reflect the long-term use of such parts in the Company's
service business. These assets are not held for sale, diminish in value in a
reasonably predictable manner, and therefore are subject to depreciation.
Depreciation of the Company's service spare parts is computed on a straight-line
basis over the estimated useful lives of the assets, generally eight years, and
charged to Cost of Service Revenues in the accompanying Consolidated Statements
of Operations. Cost and accumulated depreciation of service spare parts are as
follows:

<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                                             -----------------
                                                              2000      1999
                                                             -------  -------
<S>                                                         <C>      <C>
Service spare parts, at cost                                 $5,078   $5,736
Less accumulated depreciation                                (1,953)  (2,750)
                                                             -------  -------

Net service spare parts                                      $3,125   $2,986
                                                             =======  =======
</TABLE>

RESEARCH, DEVELOPMENT AND ENGINEERING COSTS
Research, development and engineering costs are expensed as incurred.

SOFTWARE DEVELOPMENT COSTS
The Company capitalizes certain software development costs incurred once
technological and economic feasibility of the product has been demonstrated.
These capitalized costs are amortized over the estimated economic life of the
related product, generally three years, computed principally on a
straight-line basis. Amortization is included in Cost of Software Revenues in
the accompanying Consolidated Statements of Operations. The Company
capitalized software development costs amounting to $1,533, $1,873 and $2,442
in 2000, 1999 and 1998, respectively. Related amortization expense of $1,918,
$1,415 and $748 was recorded in 2000, 1999 and 1998, respectively.

                                      F-8
<PAGE>

<TABLE>
<CAPTION>
                                                               DECEMBER 31,
                                                            -----------------
                                                              2000     1999
                                                            --------  -------
<S>                                                        <C>       <C>
Software development costs                                  $8,329    $10,616
Less accumulated amortization                               (4,810)    (6,701)
                                                            --------  -------
Net software development costs                              $3,519    $ 3,915
                                                            ========  =======
</TABLE>

INCOME TAXES
The Company accounts for income taxes under the asset and liability method as
defined by the provisions of Statement of Financial Accounting Standards (SFAS)
No. 109, "Accounting for Income Taxes" (SFAS 109). Under this method, deferred
income taxes are recognized for the future tax consequences attributable to
temporary differences between the financial statement and tax balances of
existing assets and liabilities. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. Under SFAS 109, the effect on deferred taxes of a change in tax rates
is recognized in income in the period that includes the enactment date.

STOCK-BASED COMPENSATION PLANS
The Company accounts for its stock-based plans under Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25). The Company
has adopted the disclosure provisions of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123).

EARNINGS PER SHARE
The Company calculates earnings per share (EPS) in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings per Share" (SFAS 128). Basic
earnings per share is calculated using the weighted average number of common
shares outstanding during the period. Diluted earnings per share is calculated
using the weighted average number of common shares and dilutive common stock
equivalent shares outstanding during the period, calculated using the treasury
stock method as defined in SFAS 128. The Company's common stock equivalents
consist of dilutive shares issuable upon the exercise of outstanding common
stock options. There are no differences in net income (loss) used for basic and
diluted earnings (loss) per share. Following is a reconciliation of basic EPS
and diluted EPS:

<TABLE>
<CAPTION>
(In thousands, except
 per share amounts)                         YEAR ENDED DECEMBER 31,
                    ------------------------------------------------------------------------
                           2000                        1999                   1998
                    ----------------------- ------------------------ -----------------------
                                      PER                      PER                       PER
                                     SHARE                    SHARE     INCOME          SHARE
                    INCOME   SHARES  AMOUNT   INCOME  SHARES  AMOUNT    (LOSS)  SHARES  AMOUNT
                    ------------------------ ------------------------ -----------------------
<S>                 <C>      <C>      <C>     <C>     <C>      <C>     <C>       <C>    <C>
BASIC EPS
Income (loss)       $3,000   7,846    $0.38   $5,581  7,492    $0.74   $(3,331)  7,496  $(0.44)
                                     ======                    ======                   =======
Effect of
  dilutive stock
  options               --     727                --    488                 --      --
                     --------------            -------------             -------------
DILUTED EPS
Income (loss)       $3,000   8,573    $0.35   $5,581  7,980    $0.70   $(3,331)  7,496  $(0.44)
                                      ======                  ======                    =======
</TABLE>
The number of options to purchase shares of common stock that were excluded from
the table above as the effect would have been anti-dilutive were as follows:

<TABLE>
<CAPTION>

                                                 YEAR ENDED DECEMBER 31,
                                        ------------------------------------------
                                           2000           1999            1998
                                        -----------    ------------    -----------
<S>                                     <C>             <C>           <C>
Number of shares of anti-dilutive        115,596         82,920        1,706,617
options

</TABLE>
                                      F-9

<PAGE>

COMPREHENSIVE INCOME
In July 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income." The statement was effective for the
Company's fiscal year ending December 31, 1998. SFAS 130 sets standards for
reporting and display of comprehensive income and its components in a full
set of general purpose financial statements. Comprehensive income is the
total of net income and all other non-owner changes in equity. The only
non-owner changes in equity recorded by the Company have been unrealized
holding gains/losses on short-term investment securities classified as
available-for-sale under SFAS 115, "Accounting for Certain Investments in
Debt and Equity Securities," and foreign currency translation adjustment
resulting from translation of subsidiary financial statements into U.S.
dollars from the functional currencies in which the subsidiary financial
statements are maintained. These non-owner changes in equity were not
material, and therefore are not reported separately in the accompanying
consolidated financial statements. The accumulated unrealized gains/losses on
short-term investments and foreign currency translation adjustment are
included in Additional Paid-in Capital in the accompanying Consolidated
Balance Sheets.

CHANGE IN ACCOUNTING PRINCIPLE
The Company implemented SAB 101, in the fourth quarter of 2000, with an
effective date of January 1, 2000. The cumulative effect of this accounting
change prior to January 1, 2000 was $7,317 on an after-tax basis and was
recorded as an adjustment to net income in 2000. The cumulative effect on basic
and diluted earnings per share was a reduction of per share earnings of $0.93
and $0.85, respectively, for the year ended December 31, 2000.

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133),
which was subsequently amended by SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 137) in June 1999. SFAS 133 and SFAS
137 require the Company to recognize all derivatives on the balance sheet at
fair value. Derivatives that are not hedges must be adjusted to fair value
through income. If the derivative is a hedge, depending on the nature of the
hedge, changes in the fair value of the derivatives will either be offset
against the change in fair value of the hedged assets, liabilities, or firm
commitments through earnings, or recognized in other comprehensive income until
the hedged item is recognized in earnings. The change in the derivative's fair
value related to the ineffective portion of a hedge, if any, will be immediately
recognized in earnings. SFAS 133 is effective for fiscal years beginning after
June 15, 2000, and must be applied to (a) derivative instruments and (b) certain
derivative instruments embedded in hybrid contracts that were issued, acquired
or substantively modified after December 31, 1998 (effective dates noted are as
amended by SFAS 137). In June 2000, the FASB issued SFAS No. 138, which amended
certain guidance within SFAS 133. The Company will adopt these standards for
fiscal 2001. The effect of adopting these standards is not expected to have a
material effect on the Company's financial position or its results of
operations.

The Company enters into foreign currency forward contracts (forward contracts)
to manage exposure related to certain foreign currency transactions. All
outstanding forward contracts at the end of the period are marked-to-market,
with unrealized gains and losses included in net income as a component of other
income, net. The Company may, from time to time, adjust its foreign currency
hedging positions by taking out additional contracts or by terminating or
offsetting existing forward contracts. These adjustments typically result from
changes in the underlying foreign currency exposures. Realized gains and losses
on terminated forward contracts, or on contracts that are offset, are recognized
in income in the period of contract termination or offset. The Company had
outstanding forward contracts with notional amounts totaling approximately $850
and $1,478 at December 31, 2000 and December 31, 1999, respectively. These
contracts, which mature within 45 days of year-end, are hedges of certain
foreign currency transaction exposures in the British pound sterling, Euro, and
Japanese yen. The estimated fair value of the contracts at December 31, 2000 and
1999 was negligible.

3.    ACQUISITION AND RESTRUCTURING:

On September 3, 1998, the Company acquired all of the assets of PerformIC for a
cash price of $1,319. In addition, royalties are payable on future revenues
derived from the acquired technology for up to three years from the date of


                                      F-10

<PAGE>

acquisition. PerformIC, located in Dresden, Germany, is a developer of
technologies aimed at addressing the engineering test needs of memory
manufacturers. The transaction was accounted for as a purchase.

In connection with the purchase, the Company allocated the purchase price to
inventory, purchased technology assets, and acquired in-process research and
development. The value assigned to in-process research and development
represented research and development efforts in process at the acquisition date
for which technological feasibility had not yet been established and which had
no alternative future uses. The significant project in process at the
acquisition date was the development of a memory engineering test station. The
value was determined by estimating the costs to further develop the acquired
in-process technology into a commercially viable product, estimating the
resulting net cash flows from the product, and discounting the net cash flows
back to their present value. The discount rate used took into account the
uncertainty surrounding the successful development of the acquired in-process
technology. The net cash flows resulting from the acquired project used to value
the purchased research and development were based on management's estimates of
revenue, cost of revenue, research and development costs, selling, general and
administrative costs, and income taxes from such projects. The revenue
projections were based on the potential market size that the project addresses,
the Company's ability to gain market acceptance in these segments, and the life
cycle of this in-process technology.

The successful development of the acquired in-process technology is subject to a
high degree of business risk including the risk of failure to achieve
technological feasibility, risk associated with procurement of sufficient human
resources necessary to complete the development of the acquired technology,
market acceptance risk, risk of competition from other third-party products, and
risks associated with the useful life and profitability level of the product
developed from the acquired in-process technology.

At the time of the acquisition, the in-process technology under development was
expected to be commercially viable in late 1999. Expenditures to complete the
acquired project were initially expected to total approximately $2.5 million.
The nature of efforts required to develop the purchased in-process technology
into a commercially viable product principally related to the completion of all
planning, designing, prototyping, verification and testing activities that were
necessary to establish that the product can be produced to meet design
specifications, including functions, features, technical performance
requirements and cost. During 1998 and 1999, the Company invested approximately
$300 and $1.6 million, respectively, in related research and development efforts
necessary to complete the initial commercially feasible version of the memory
engineering test station product. Additionally, the Company is incurring, and
will continue to incur, expenditures for continuing research and development
related to the memory engineering test station developed from the acquired
technology.

In accordance with accounting principles generally accepted in the United
States, a charge for acquired in-process research and development of $861
relating to the acquired project has been reflected in the accompanying
Consolidated Statements of Operations.

Pro forma combined statement of operations data for the years ended December 31,
1998 was not materially different from results presented in the accompanying
Consolidated Statements of Operations.

During the second half of 1998, the Company implemented a restructuring plan,
including a reduction in the Company's worldwide employee headcount by
approximately 14%, the termination of certain international distributor
agreements, and the establishment of direct sales operations in Europe and Asia.
The restructuring charge of $3,088 consisted of payments in connection with the
termination of distributors, costs to set up direct international operations as
a result of the expiration of a support agreement with Cadence, employee
severance, write downs of inventory made obsolete and disposed of as a result of
a strategic decision to discontinue the use of certain technology used in the
manufacture of the Company's IC validation systems in favor of technology which
is more compatible with that to be utilized in the product developed from the
technology acquired from PerformIC, and associated legal and consulting costs.
Employee severance was accrued for the termination of 24 sales, engineering, and
administrative employees located in the U.S. with the exception of one employee
located in Europe. Charges affecting inventories of $2,041 have been classified
as systems cost of revenue in the accompanying Consolidated Statements of
Operations. The remainder of the restructuring charge of $1,047 was recorded as
operating expense.

The following is an analysis of the restructuring charge recorded for the year
ended December 31, 1998:



                                      F-11

<PAGE>

<TABLE>
<S>                                                <C>
  Inventory write-downs                             $2,041
  Employee severance                                   424
  Distributor termination costs & other                623
                                                 ----------

  Total                                             $3,088
                                                 ==========
</TABLE>

As indicated in the following analysis of the accrued liability arising from the
accrual of restructuring charges in 1998, all of the restructuring costs were
paid in 1998 and early 1999:

<TABLE>
<CAPTION>
                                           Adjustments
                                            to Costs
                               Beginning      and                    Ending
                                Balance     Expenses    Deductions   Balance
                               ---------------------------------------------
<S>                            <C>        <C>         <C>         <C>
YEAR ENDED DECEMBER 31, 1998:
Inventory write-downs          $       -- $     2,041 $   (2,041) $     --
Employee severance                     --         424       (128)      296
Distributor termination costs
& other                                --         623       (380)      243

YEAR ENDED DECEMBER 31, 1999:

Inventory write-downs          $       -- $        -- $        -- $     --
Employee severance                    296          --       (296)       --
Distributor termination costs
& other                               243          --       (243)       --
</TABLE>

4. CAPITAL LEASE OBLIGATIONS:


The Company leases certain equipment under capital lease agreements, which are
secured by the related assets. A schedule of future minimum lease payments under
capital lease agreements as of December 31, 2000 is as follows:

<TABLE>
<S>                                                     <C>
Total minimum payments (all due in 2001)                   $  222
Amount representing interest                                   (9)
                                                           -------
Present value of future minimum lease payments (all
  current)                                                 $  213
                                                           =======
</TABLE>


5. COMMITMENTS:

The Company leases its facilities and certain equipment under operating leases
that expire from 2001 to 2005. The approximate future minimum lease payments
under these operating leases at December 31, 2000 are as follows:

<TABLE>
<S>                                                    <C>
2001                                                    $1,587
2002                                                     1,426
2003                                                     1,355
2004                                                       257
2005                                                        21
</TABLE>

Rent expense was approximately $1,564, $1,201 and $1,385 for the years ended
December 31, 2000, 1999 and 1998, respectively.



                                      F-12

<PAGE>

6. LINE OF CREDIT:

The Company has a committed revolving line of credit with a bank allowing
maximum borrowings of $10,000. The Company can borrow, with interest at the
bank's prime lending rate, or if lower, at certain margins above bankers'
acceptance on inter-bank offering rates. There have been no borrowings against
the line of credit to date. Certain financial covenants are included in this
agreement, which the Company was in compliance with at December 31, 2000. The
line of credit is renewable April 30, 2001.

7. EMPLOYEE SAVINGS PLANS:

The Company has a profit sharing plan and trust that qualifies as a deferred
salary arrangement under Section 401(k) of the Internal Revenue Code. Under the
terms of the plan, the employees of the Company may make voluntary contributions
to the plan as a percentage of compensation, but not in excess of the maximum
allowed under the Code. Employees become eligible to participate in the plan on
the first day of the calendar quarter following date of hire. The Company has
not matched employee contributions. Effective in 2000, the Company began
contributing to the plan in an amount up to 3% of each eligible employee's base
compensation, subject to the Company's achievement of targeted operating income
levels.

On July 1, 1996, the Company implemented an Executive Deferred Compensation Plan
(the Plan) for the purpose of providing eligible employees with a program for
deferring compensation earned during employment. The Plan is intended to
constitute an unfunded deferred compensation arrangement for the benefit of
certain highly compensated employees of the Company. Under the terms of the
Plan, eligible employees of the Company may make voluntary contributions to the
Plan as a percentage of compensation, but not in excess of limitations stated in
the Plan. The Company has invested these voluntary contributions in a variety of
investment funds for the intended use of paying plan benefits when participating
employees become eligible to receive such benefits under the terms of the Plan.
These investments have been included in Prepaid expenses and other current
assets in the accompanying Consolidated Balance Sheets. The Company currently
does not match employee contributions and does not intend to do so in the near
future.

8. EMPLOYEE AND DIRECTOR STOCK PLANS:

In May 1995, the Company adopted the 1995 Stock Incentive Plan (the 1995 Plan)
pursuant to which 2,587,000 shares of the Company's common stock have been
reserved for issuance. Options under the 1995 Plan generally vest ratably over a
four-year period from the date of grant, expire ten years from the date of
grant, and are exercisable at prices generally not less than the fair market
value at the grant date. During 1998, the Company cancelled and reissued, with
modified vesting provisions, certain incentive stock options granted to
employees. The reissued options were granted at fair market value on the date of
reissuance and have been reflected in the table below as cancellations and new
grants. These options generally vest ratably over four years from the date of
the reissuance. No option grants were cancelled and reissued during 1999 or
2000.

In May 1995, the Board of Directors approved the adoption of the 1995 Stock
Option Plan for Nonemployee Directors (the Nonemployee Director Plan) pursuant
to which 250,000 shares of the Company's common stock have been reserved for
issuance. The Nonemployee Director Plan covers directors who are not employees
of the Company. The Nonemployee Director Plan allows for the automatic grant of
10,000 options upon becoming a director and 3,000 options annually thereafter.
To-date, grants have been made at fair market value on the date of grant. These
options vest ratably over three years from the date of grant and expire ten
years from the date of grant. Since consummation of the Company's initial public
offering, 75,000 stock options have been awarded under the Nonemployee Director
Plan. No stock options have been awarded under the Nonemployee Director Plan
during 1998, 1999, or 2000.

In December 2000, the Board of Directors approved the adoption of the 2000
Nonqualified Stock Option Plan (the 2000 Plan) pursuant to which 750,000 shares
of the Company's common stock have been reserved for issuance.


                                      F-13

<PAGE>

Options under the 2000 Plan generally vest ratably over a four-year period from
the date of grant, expire ten years from the date of grant, and are exercisable
at prices generally not less than the fair market value at the grant date.
During 2000, the Company granted 157,500 stock options under the 2000 Plan.

In May 1996, the shareholders approved the adoption of the 1995 Employee Stock
Purchase Plan (the "ESPP") pursuant to which 450,000 shares of the Company's
common stock have been reserved for issuance to participating employees, of
which 208,227 shares have been issued as of December 31, 2000. Eligible
employees may elect to contribute up to 10 percent of their cash compensation
during each pay period. The ESPP formerly provided for two semiannual offering
periods, beginning February 1 and August 1 of each year. Effective February 1,
2000, the Company amended the ESPP to extend the offering period from six months
to twenty-four months. During the offering periods, participants accumulate
funds in an account via payroll deduction. At the end of each offering period,
the purchase price is determined and the accumulated funds are used to
automatically purchase shares of the Company's common stock. The purchase price
per share is equal to 85 percent of the lower of the fair market value of the
common stock (a) on the Enrollment Date of the offering period or (b) on the
date of the purchase.

During 1995, the Financial Accounting Standards Board issued SFAS 123 which
defines a fair value based method of accounting for an employee stock option or
similar equity instrument and encourages all entities to adopt that method of
accounting for all of their employee stock compensation plans. However, it also
allows an entity to continue to measure compensation cost for those plans using
the method of accounting prescribed in APB 25. Entities electing to remain with
the accounting in APB 25 must make pro forma disclosures of net income and,
earnings per share, as if the fair value based method of accounting defined in
SFAS 123 had been applied.

The Company has elected to account for its stock-based compensation plans under
APB 25. However, the Company has computed, for pro forma disclosure purposes,
the value of all options granted and shares issued pursuant to the ESPP during
2000, 1999, and 1998 using the Black-Scholes option-pricing model as prescribed
by SFAS 123, using the following weighted average assumptions:


<TABLE>
<CAPTION>
                                                    YEAR ENDED DECEMBER 31,
                                                    -------------------------
                                                     2000     1999      1998
                                                    -------- -------- -------
<S>                                                 <C>      <C>      <C>
  Risk-free interest rate                            5.75%    5.50%    5.00%
  Expected dividend yield                             0%       0%        0%
  Expected life                                     5 years  4 years  4 years
  Expected volatility                                 94%      77%      77%


Using the Black-Scholes methodology, the total value of options granted during
2000, 1999 and 1998 would be amortized on a pro forma basis over the vesting
period of the options. Options generally vest equally over four years. If the
Company had accounted for these plans in accordance with SFAS 123, the Company's
net income (loss) and net income (loss) per share would have changed as
reflected in the following pro forma amounts:

<CAPTION>
                                                     YEAR ENDED DECEMBER 31,
                                                    -------------------------
                                                      2000     1999     1998
                                                    -------- -------  -------
<S>                                                 <C>      <C>      <C>
 Net income (loss):
   As reported                                      $ 3,000   $5,581  $(3,331)
   Pro forma                                        $   724   $3,411  $(5,588)
 Basic earnings (loss) per share:
   As reported                                      $  0.38  $  0.74  $ (0.44)
   Pro forma                                        $  0.09  $  0.46  $ (0.75)
 Diluted earnings (loss) per share:
   As reported                                      $  0.35  $  0.70  $ (0.44)
   Pro forma                                        $  0.08  $  0.43  $ (0.75)
</TABLE>

                                      F-14

<PAGE>

Options are generally issued with an exercise price equal to the price of the
closing trade on the Nasdaq National Market on the date of issuance.

A summary of the activity under the Company's stock option plans and changes is
presented in the following table:

<TABLE>
<CAPTION>
                                          YEAR ENDED DECEMBER 31,
                         --------------------------------------------------------------
                                2000                1999                  1998
                         ------------------  -------------------  ---------------------
                                     WTD.                  WTD.                  WTD.
                                     AVG.                  AVG.                  AVG.
                                     EX.                   EX.                   EX.
                           SHARES    PRICE      SHARES     PRICE      SHARES     PRICE
                         ---------  --------  ----------  --------  ----------  --------
<S>                      <C>        <C>        <C>         <C>     <C>          <C>
Options outstanding at
  beginning of year      1,868,923  $   7.77   1,706,617   $7.35    1,308,118    $11.43
Granted                    936,375     12.92     440,212    9.46    2,655,742      8.01
Exercised                 (354,217)     7.30     (97,124)   8.00       (3,293)     9.40
Cancelled                  (80,133)     8.96    (180,782)   7.61   (2,253,950)    10.54
                         ---------  --------  ----------  --------  ----------  --------
Options outstanding at
  end of year            2,370,948  $   9.84   1,868,923   $7.77     1,706,61    $ 7.35
                         =========  ========  ==========  ========  ==========  ========
Exercisable at end of
  year                     928,558  $   8.55     821,621   $7.73      209,284    $ 9.55
                         =========  ========  ==========  ========  ==========  ========
Shares issued under the
  ESPP                      31,503  $   9.78      65,525   $7.90       51,765    $ 8.49
                         =========  ========  ==========  ========  ==========  ========
Weighted average fair
  value of options
  granted                     --    $   9.48      --       $6.08          --     $ 4.81

Weighted average fair
  value of shares
  issued under the ESPP       --    $   4.27      --       $3.52          --     $ 3.40
</TABLE>

The following table sets forth the exercise price range, number of shares
outstanding at December 31, 2000, weighted average remaining contractual life,
weighted average exercise price, number of exercisable shares and weighted
average exercise price of exercisable options by groups of similar price and
grant date:

<TABLE>
<CAPTION>
                             OPTIONS OUTSTANDING               OPTIONS EXERCISABLE
 ----------------   --------------------------------------  -------------------------
                                   WEIGHTED
                                    AVERAGE
                    OUTSTANDING    REMAINING    WEIGHTED                   WEIGHTED
    EXERCISE           SHARES     CONTRACTUAL   AVERAGE                    AVERAGE
      PRICE             AT           LIFE       EXERCISE    EXERCISABLE    EXERCISE
      RANGE           12/31/00      (YEARS)      PRICE        OPTIONS        PRICE
 ----------------   -----------   ------------ -----------  -----------  ------------
<S>                  <C>            <C>        <C>          <C>          <C>
 $ 5.75-$ 6.25         237,595        7.7        $  6.21      124,915      $  6.23
 $ 7.00-$ 7.00         673,334        7.5        $  7.00      389,014      $  7.00
 $ 7.25-$ 9.00         625,264        8.6        $  8.24      224,982      $  8.64
 $ 9.25-$14.50         488,314        8.0        $ 12.62      145,138      $ 11.97
 $ 14.56-$23.00        346,441        9.1        $ 16.79       44,509      $ 17.10
                    -----------                             ----------
 Totals              2,370,948                                928,558
                    ===========                             ==========
</TABLE>


As of December 31, 2000, employees of the Company also held approximately 49,507
Cadence stock options, under the original terms of their issuance. These options
were granted to IMS employees by Cadence prior to 1995 (see Note 1). Upon
exercise of Cadence options, proceeds equal to the option exercise price pass to
Cadence, and there is no impact on the number of shares of Company stock
outstanding.
                                      F-15
<PAGE>

9. SHAREHOLDER RIGHTS PLAN:

In March 1998, the Company adopted a Shareholder Rights Plan (the "Rights
Plan"). Under the Rights Plan, a dividend of one Share Purchase Right (a
"Right") was declared for each share of Company Common Stock outstanding at the
close of business on April 17, 1998. In the event that a person or group
acquires 20% or more of the Company's Common Stock (other than stockholders
currently owning 20% or more of Company Common Stock) without advance approval
by the Board of Directors, each Right will entitle the holder, other than the
acquirer, to buy Common Stock with a market value of twice the Right's then
current exercise price (initially $70.00, subject to adjustment). In addition,
if the new Rights are triggered by such a non-approved acquisition and the
Company is thereafter acquired in a merger or other transaction in which the
shareholders of the Company are not treated equally, shareholders with
unexercised Rights will be entitled to purchase common stock of the acquirer
with a value of twice the exercise price of the Rights.

10. INCOME TAXES:

The provision for (benefit from) income taxes consisted of the following
components:
<TABLE>
<CAPTION>
                                          YEAR ENDED DECEMBER 31,
                                       -------------------------------
                                         2000       1999       1998
                                       ---------  ---------  ---------
<S>                                    <C>        <C>        <C>
       Current:
         Federal                       $  2,168   $  2,161     $  --
         State                              471         15         10
         Foreign                             18         51         12
                                       ---------  ---------  ---------
                                          2,657      2,227         22

       Deferred                           2,658        400       (518)
                                       ---------  ---------  ---------
         Total                         $  5,315   $  2,627    $  (496)
                                       =========  =========  =========
</TABLE>

The effective tax rate differs from the Federal Statutory Tax Rate as follows:
<TABLE>
<CAPTION>
                                          YEAR ENDED DECEMBER 31,
                                       -------------------------------
                                         2000       1999       1998
                                       ---------  ---------  ---------
<S>                                     <C>        <C>       <C>
       Federal statutory tax rate        35.0%      34.0%      34.0%
       State taxes, net of Federal
         tax effect                       2.7        1.1       (1.7)
       Foreign tax rates                 (0.1)       0.2       (2.2)
       Research and development tax
         credits                         (0.3)      (2.2)       7.8
       Valuation allowance for
         deferred tax assets             (2.0)      (4.6)     (24.1)
       Other, net                        (1.3)       3.5       (0.8)
                                       ---------  ---------  ---------
         Total                           34.0%      32.0%      13.0%
                                       =========  =========  =========
</TABLE>

Net deferred tax assets consist of the following tax effects relating to
temporary differences:

<TABLE>
<CAPTION>
                                                     DECEMBER 31,
                                                  --------------------
                                                    2000       1999
                                                  ---------  ---------
<S>                                              <C>        <C>
       Deferred tax assets:
         Inventory valuation                      $  806     $  912
         Accrued vacation and other compensation     642        524
         Book in excess of tax depreciation           89        148


                                      F-16

<PAGE>

         Allowance for doubtful accounts             136        148
         Accrued warranty                            505        396
         Deferred revenue                          1,958         --
         Tax credit carryforwards                     --        640
         Net operating loss carryforwards            185        823
                                                  ---------  ---------
         Gross deferred tax assets                 4,321      3,591
         Less valuation allowance                     --       (322)
                                                  ---------  ---------
                                                   4,321      3,269
                                                  ---------  ---------
       Deferred tax liabilities:
         Service spare parts valuation              (679)      (640)
         Software development costs               (1,191)    (1,357)
                                                  ---------  ---------
                                                  (1,870)    (1,997)
                                                  ---------  ---------
         Net deferred tax assets                  $2,451     $1,272
                                                  =========  =========
</TABLE>


As of December 31, 2000, the Company had net operating loss carryforwards for
income tax purposes of approximately $354. Such carryforwards will expire from
2003 to 2004 if not used by the Company to reduce income taxes payable in future
periods.

For the years ended December 31, 2000 and 1999, income taxes payable have been
reduced by $1,354 and $1,680, respectively, for the tax benefit from tax
deduction of employee gains upon exercise of IMS and Cadence stock options. The
tax benefit of the stock option deduction for 2000 and 1999 is reflected as an
increase in Additional Paid-in Capital in the accompanying Consolidated
Statements of Shareholders' Equity. The employee gains are generally not
expenses of the Company for financial reporting purposes, and the exercise of
Cadence stock options does not increase the number of shares of Company common
stock outstanding.

11.  TRANSACTIONS WITH CADENCE:

In certain foreign markets, Cadence employees act as sales agents for the
Company. The Company reimburses Cadence for related costs incurred on the
Company's behalf, plus an administrative fee. Cadence provides facilities for
certain domestic Company sales personnel. Charges for utilization of these
facilities have been reflected in the accompanying Consolidated Statements of
Operations as Selling, General and Administrative expense. For the years ended
December 31, 2000, 1999 and 1998, the costs of the above services provided by
Cadence totaled $535, $657 and $1,746, respectively. In 1998, the Company sold
Virtual Test Software to Cadence for resale to Cadence customers in the amount
of $1,176. No such sales were made to Cadence in 1999 or 2000.

12.  SEGMENT DISCLOSURES:

The Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information", during the fourth quarter of 1997. SFAS No. 131
established standards for reporting information about operating segments in
annual financial statements and requires selected information about operating
segments in interim financial reports issued to stockholders. It also
established standards for related disclosures about products and services, and
geographic areas. Operating segments are defined as components of an enterprise
about which separate financial information is available that is evaluated
regularly by the chief operating decision maker, or decision making group, in
deciding how to allocate resources and in assessing performance. The Company's
chief operating decision making group is the Executive Committee, which is
comprised of the Chief Executive Officer, President and Chief Operating Officer,
Chief Financial Officer and the Chief Technology Officer. The reported operating
segments are managed separately because each operating segment represents a
strategic business unit that offers different products and serves different
markets. Certain internal operating groups have been aggregated in the Systems
segment below, due to significant similarities in their products & services,
production processes, markets & customers, and common distribution channels.



                                      F-17


<PAGE>

The Company's reportable operating segments include Systems and Virtual Test.
The Systems segment designs, develops, manufactures, markets and services
high-performance engineering IC validation systems and software to test and
measure the performance of complex electronic devices. Virtual Test designs,
develops, manufactures, markets and provides service and support for software
tools to help test engineers to accelerate the generation of test programs,
simulate the test environment, develop the test fixture and document the entire
test process for complex electronic devices.

The accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies except that the
separate financial results for the Company's operating segments have been
prepared using a management approach, which is consistent with the basis and
manner in which Company management internally reports financial information for
the purposes of assisting in making internal operating decisions. The Company
evaluates performance based on standalone operating income for each operating
segment. Revenues are attributed to geographic areas based on the location of
the customer taking delivery of the related products or services.

<TABLE>
<CAPTION>
OPERATING SEGMENTS
------------------
                                   SYSTEMS   VIRTUAL TEST   OTHER    CONSOLIDATED
                                  ---------- ------------ ---------  ------------
<S>                               <C>        <C>          <C>         <C>
1998
----
Segment net revenues               $32,788    $ 3,909     $   --     $36,697
Segment operating (loss) (a)       $(3,620)   $  (967)    $   --     $(4,587)
Identifiable segment assets (b)    $45,404    $ 3,225     $14,785    $63,414
Segment depreciation &
  amortization expense             $ 3,919    $   328     $   --     $ 4,247
Expenditure to acquire
  long-lived property              $ 8,036    $ 1,516     $   --     $ 9,552

1999
----
Segment net revenues               $52,788    $ 3,282     $   --     $56,070
Segment operating income (loss)    $ 8,788    $(1,414)    $   --     $ 7,374
Identifiable segment assets (b)    $41,944    $ 3,741     $28,739    $74,424
Segment depreciation &
  amortization expense             $ 5,101    $   780     $   --     $ 5,881
Expenditure to acquire
  long-lived property              $ 4,355    $   647     $   --     $ 5,002

2000
----
Segment net revenues               $71,597    $ 3,616     $   --     $75,213
Segment operating income (loss)    $15,956    $(1,980)    $   --     $13,976
Identifiable segment assets (b)    $39,340    $ 3,253     $51,007    $93,600
Segment depreciation &
  amortization expense             $ 5,537    $ 1,379     $   --     $ 6,916
Expenditure to acquire
  long-lived property              $ 4,254    $ 1,301     $   --     $ 5,555
</TABLE>

(a) Systems operating loss includes the effect of the adjustment to write-off
    certain inventories made obsolete as a result of the acquisition of
    PerformIC.

(b) Other consists of cash & cash equivalents, short-term investments, income
    tax accounts, and prepaid expenses and other current assets.

Export sales are made to the Company's customers throughout Asia-Pacific and
Europe. Revenue by customer geographic region were:
<TABLE>
<CAPTION>
                                                    YEAR ENDED DECEMBER 31,
                                                   --------------------------
                                                    2000     1999     1998
                                                   -------  -------  --------
<S>                                               <C>      <C>      <C>
United States and Canada                           $60,853  $42,012  $27,216
Asia-Pacific                                         5,794    7,671    3,899
Europe                                               8,566    6,387    5,582
                                                   -------  -------  --------

                                      F-18

<PAGE>

  Total                                            $75,213  $56,070  $36,697
                                                   =======  =======  ========
</TABLE>

Long-lived assets by geographic region were:
<TABLE>
<CAPTION>
                                                              DECEMBER 31,
                                                           -----------------
                                                             2000     1999
                                                           -------- --------
<S>                                                       <C>      <C>
United States                                             $14,713  $17,197
Asia-Pacific                                                  745      561
Europe                                                      1,734      795
                                                           -------- --------

  Total                                                   $17,192  $18,553
                                                           ======== ========
</TABLE>



13.  CONCENTRATIONS OF CREDIT RISK AND GEOGRAPHIC INFORMATION:

The Company sells to customers located throughout the United States,
Asia-Pacific and Europe. Credit evaluations of its customers' financial
conditions are performed periodically, and the Company generally does not
require collateral from its customers. The Company maintains reserves for
potential credit losses and such losses have been both immaterial and within
management's expectations.

For the years ended December 31, 2000, 1999, and 1998, one customer accounted
for 52 percent, 50 percent and 25 percent of net revenues, respectively. The
Company is subject to credit risk through trade receivables, which is minimized
due to the size and financial stability of the Company's customers. At December
31, 2000, trade receivables by geographic region were:

<TABLE>
<S>                                                             <C>
United States                                                     $   9,032
Asia-Pacific                                                          1,151
Europe                                                                1,673
                                                                  ----------
                                                                     11,856

Less allowance for doubtful accounts                                   (376)
                                                                  ----------
Trade receivables, net                                            $  11,480
                                                                  ==========
</TABLE>



                                      F-19

<PAGE>



14.  SELECTED QUARTERLY FINANCIAL DATA (Unaudited)

<TABLE>
<CAPTION>
                                                                      QUARTER ENDED
                                                     ------------------------------------------------
                                                     MARCH 31    JUNE 30   SEPTEMBER 30   DECEMBER 31
                                                     --------    -------   ------------   -----------

2000-AS PREVIOUSLY REPORTED
(FOR FIRST THREE QUARTERS):
----------------------------
<S>                                                   <C>        <C>         <C>          <C>
Net revenues                                          $15,722    $17,356     $17,948      $17,714
Gross margin                                          $ 9,476    $10,480     $11,270      $10,811
Income (loss) before provision for income taxes
  and cumulative effect of accounting change          $ 2,481    $ 2,882     $ 3,181      $ 2,759
Income (loss) before cumulative effect of
  accounting change                                   $ 1,687    $ 1,960     $ 2,163      $ 1,875
Cumulative effect of accounting change                $   -      $  -        $  -         $  -
Net income (loss)                                     $ 1,687    $ 1,960     $ 2,163      $ 1,875
    Basic earnings per share:
     Income (loss) before cumulative effect of
      accounting change                               $  0.22    $  0.25     $  0.27      $  0.24
     Net income (loss)                                $  0.22    $  0.25     $  0.27      $  0.24
    Diluted earnings per share:
     Income (loss) before cumulative effect of
      accounting change                               $  0.20    $  0.23     $  0.25      $  0.22
     Net income (loss)                                $  0.20    $  0.23     $  0.25      $  0.22

2000-ADJUSTMENTS:
------------------------------------
Net revenues                                          $    21    $ 3,505     $ 2,665      $   282
Gross margin                                          $   192    $ 2,610     $ 1,585      $     8
Income (loss) before provision for income taxes
  and cumulative effect of accounting change          $   528    $ 2,513     $ 1,738      $  (450)
Income (loss) before cumulative effect of
  accounting change                                   $   299    $ 1,601     $ 1,083      $  (351)
Cumulative effect of accounting change                $(7,317)   $  -        $  -         $   -
Net income (loss)                                     $(7,018)   $ 1,601     $ 1,083      $  (351)
    Basic earnings per share:
     Income (loss) before cumulative effect of
      accounting change                               $  0.04    $  0.20     $  0.14      $ (0.05)
     Net income (loss)                                $ (0.91)   $  0.20     $  0.14      $ (0.05)
    Diluted earnings per share:
     Income (loss) before cumulative effect of
      accounting change                               $  0.03    $  0.19     $  0.13      $ (0.04)
     Net income (loss)                                $ (0.82)   $  0.19     $  0.13      $ (0.04)
</TABLE>


                                                    F-20
<PAGE>


14.   SELECTED QUARTERLY FINANCIAL DATA (Unaudited)


<TABLE>
<CAPTION>
                                                                      QUARTER ENDED
                                                      ---------------------------------------------
                                                      MARCH 31   JUNE 30  SEPTEMBER 30  DECEMBER 31
                                                      --------   -------  ------------  -----------
<S>                                                  <C>        <C>        <C>         <C>
2000-FINAL ADJUSTED
(TO REFLECT SAB 101):
----------------------
Net revenues                                          $ 15,743   $ 20,861   $ 20,613    $ 17,996
Gross margin                                          $  9,668   $ 13,090   $ 12,855    $ 10,819
Income (loss) before provision for income taxes
  and cumulative effect of accounting change          $  3,009   $  5,395   $  4,919    $  2,309
Income (loss) before cumulative effect of
  accounting change                                   $  1,986   $  3,561   $  3,246    $  1,524
Cumulative effect of accounting change                $ (7,317)  $   -      $   -       $   -
Net income (loss)                                     $ (5,331)  $  3,561   $  3,246    $  1,524
    Basic earnings per share:
     Income (loss) before cumulative effect of
      accounting change                               $   0.26   $   0.45   $   0.41    $   0.19
     Net income (loss)                                $  (0.69)  $   0.45   $   0.41    $   0.19
    Diluted earnings per share:
     Income (loss) before cumulative effect of
      accounting change                               $   0.23   $   0.42   $   0.38    $   0.18
     Net income (loss)                                $  (0.62)  $   0.42   $   0.38    $   0.18

1999
--------------
Net revenues                                          $ 11,222   $ 13,162   $ 14,895    $ 16,791
Gross margin                                          $  6,791   $  8,270   $  9,219    $ 10,594
Income (loss) before provision for income taxes       $    658   $  1,491   $  2,367    $  3,692
Net income (loss)                                     $    434   $  1,027   $  1,610    $  2,510
    Basic earnings per share:
     Net income (loss)                                $   0.06   $   0.14   $   0.21    $   0.33
    Diluted earnings per share:
     Net income (loss)                                $   0.06   $   0.13   $   0.20    $   0.31
</TABLE>


                                      F-21

<PAGE>


                      INTEGRATED MEASUREMENT SYSTEMS, INC.

                      VALUATION AND QUALIFYING ACCOUNTS
                 Years Ended December 31, 1998, 1999 and 2000
                                 (In Thousands)


<TABLE>
<CAPTION>
                                                          ADJUSTMENTS
                                                            RECORDED
                                              BEGINNING    TO COST &                  ENDING
DESCRIPTION                                    BALANCE      EXPENSES    DEDUCTIONS   BALANCE
-----------                                    -------      --------    ----------   -------
<S>                                           <C>          <C>           <C>          <C>
Year Ended December 31, 1998
    Allowance fordoubtful accounts             $   577      $   --        $   (164)    $  413

Year Ended December 31, 1999
    Allowance for doubtful accounts            $   413      $   (50)      $   (106)    $  257

Year Ended December 31, 2000
    Allowance for doubtful accounts            $   257      $   166       $    (47)    $  376

</TABLE>




                                      F-22
<PAGE>


REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE

To the Board of Directors and Shareholders of
Integrated Measurement Systems, Inc.:

   We have audited, in accordance with auditing standards generally accepted in
the United States, the consolidated financial statements of Integrated
Measurement Systems, Inc. included in the 2000 Form 10-K annual report and have
issued our report thereon dated January 23, 2001. Our audits were made for the
purpose of forming an opinion on those statements taken as a whole. The
Valuation and Qualifying accounts schedule is the responsibility of the
Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
consolidated financial statements. This schedule has been subjected to the
auditing procedures applied in the audits of the basic consolidated financial
statements and, in our opinion, fairly state in all material respects the
financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.

                                       ARTHUR ANDERSEN LLP

Portland, Oregon
January 23, 2001



                                      F-23