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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
 
                     -------------------------------------
 
                                   FORM 10-K
(Mark One)
[X]  Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
     Act of 1934
     For the fiscal year ended: DECEMBER 29, 1995
 
                                         or
 
[ ]  Transition Report Pursuant to Section 13 or 15(d) of the Securities
     Exchange Act of 1934
     For the transition period from                to
 
                           Commission file number: 0-11879
 
                     ------------------------------------------
 
                                VLSI TECHNOLOGY, INC.
               (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
<TABLE>
<S>                                                <C>
                     DELAWARE                                          94-2597282
          (STATE OR OTHER JURISDICTION OF                           (I.R.S. EMPLOYER
          INCORPORATION OR ORGANIZATION)                           IDENTIFICATION NO.)
                                           1109 MCKAY DRIVE
                                      SAN JOSE, CALIFORNIA 95131
                     (Address of principal executive offices, including zip code)
</TABLE>
 
       Registrant's telephone number, including area code: (408) 434-3100
 
                     -------------------------------------
 
        Securities registered pursuant to Section 12(b) of the Act: None
 
          Securities registered pursuant to Section 12(g) of the Act:
 
                     Common Stock, par value $.01 per share
                                (Title of class)
 
                        Preferred Share Purchase Rights
                                (Title of class)
 
                     -------------------------------------
 
     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.  [X].
 
   
     The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of March 15, 1996 was approximately $538,010,411 based upon
the last sale price reported for such date on the Nasdaq National Market. For
purposes of this disclosure, Common Shares held by persons who hold more than 5%
of the outstanding voting shares and Common Shares held by executive officers
and directors of the Registrant have been excluded in that such persons may be
deemed to be "affiliates" as that term is defined under the rules and
regulations promulgated under the Securities Act of 1933. This determination is
not necessarily conclusive.
    
 
     As of March 15, 1996, the number of shares of the Registrant's Common Stock
outstanding was 45,780,107.
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
     Parts of the following document are incorporated by reference in this
Annual Report on Form 10-K: the Proxy Statement for the Registrant's Annual
Meeting of Stockholders to be held May 31, 1996 (the "Proxy Statement"), (Parts
I & III).
 
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<PAGE>   2
 
                                     PART I
 
ITEM 1.  BUSINESS
 
     VLSI Technology, Inc., a Delaware corporation ("VLSI" or the "Company"),
was incorporated in May 1987 as a successor to the business of VLSI Technology,
Inc., a California corporation ("VLSI-California"). The merger of
VLSI-California with and into the Company was consummated on December 31, 1987.
All references herein to "VLSI" or the "Company" include its predecessor
VLSI-California unless specified or unless the context otherwise requires.
 
     This Form 10-K contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Actual results could differ materially from those
projected in the forward-looking statements as a result of the risk factors set
forth below and elsewhere in this Form 10-K.
 
                                    OVERVIEW
 
     VLSI designs, manufactures and sells complex application-specific
integrated circuits ("ASICs"), which are custom designed chips for an individual
customer, and application-specific standard products ("ASSPs"), which are
semi-custom chips designed for a particular market application that may be used
by several different customers. Through its majority-owned subsidiary, COMPASS
Design Automation, Inc. ("COMPASS"), VLSI offers an integrated suite of
electronic design automation ("EDA") software tools, foundry-flexible libraries
and support services for use by systems and circuit designers at other
semiconductor and systems design companies in addition to VLSI (see "COMPASS
DESIGN AUTOMATION" below).
 
     VLSI applies its value-added technology to deliver products targeted at
specific segments of the electronics marketplace. These products address a range
of applications in the computing, communications and consumer digital
entertainment markets. VLSI targets a limited number of key Original Equipment
Manufacturer ("OEM") customers who are leaders in their respective industries.
See "MARKETING AND CUSTOMERS" below.
 
     The Company has developed significant design expertise in its targeted
markets by establishing a library of proprietary cells and highly integrated
building blocks and uses that expertise to assist customers in rapidly designing
products and bringing them to market.
 
     The Company's objective is to design and manufacture highly-integrated,
complex semiconductor devices that allow its customers to develop and bring to
market higher value-added systems and products. Key elements in its strategy to
achieve this objective include:
 
     Target selected growth markets. VLSI has targeted a limited number of
growth markets in which it has built significant expertise. In these markets,
the Company can utilize its library of proprietary cells and high-level building
blocks to assist customers in designing and bringing the customers' products to
market rapidly. VLSI believes that this allows the Company to offer more value
to the customer at potentially higher gross margins for the Company. VLSI's
target markets include computing (high-end computing and desktop and portable
personal computers) applications, wireless and networking communications
applications and consumer digital entertainment systems.
 
     Develop differentiated products. VLSI seeks to develop differentiated
products that allow a customer both to distinguish the customer's products from
those offered by its competitors and to reduce the customer's product cost. The
Company creates highly complex products that reduce the number of integrated
circuit devices required for a given application and contain advantageous
combinations of features and functionality. VLSI emphasizes high performance
applications where its products are critical elements of complex electronic
systems.
 
     Focus on large, industry-leading OEM customers. VLSI focuses its
manufacturing and research and development resources on products for a limited
number of OEM customers who are leaders in their respective industries. The
Company believes that such large OEM customers provide the Company with
 
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significant potential. During the year ended December 29, 1995, approximately
two-thirds of the Company's net revenues were derived from sales to its top 20
customers.
 
     Use FSB(TM) libraries to reduce customers' time to market. VLSI's
Functional System Block(TM) ("FSB") libraries, an expanding collection of
pre-designed cells and high-level building blocks, provides easy design-in of
frequently used integrated circuit functions. The FSB library elements allow
VLSI and its customers to more rapidly design and integrate products, thereby
reducing VLSI's customers' time to market. VLSI's library of FSBs includes
Graphics Controllers (LCD and CRT), a DES Encryption FSB, a PCI FSB, Floppy Disk
Controllers, SCSI Controllers, T1 Controllers and a suite of analog functions
for communications FSBs. VLSI continues to expand its FSB libraries through
internal development and through the acquisition or licensing of technology from
other companies. Technology acquired and/or licensed from other companies
include an ARM RISC-based microprocessor (low power, high performance embedded
control applications), DSP, Ethernet, Fibre Channel, MPEGII and SSA.
 
     Focus on customer support. The Company seeks to differentiate itself from
its competitors not only through the quality of its products, but also through
the level of its technological support and service. VLSI operates a network of
geographically dispersed Technology Centers where experienced engineers with a
specific technical focus work directly with customers to develop designs for new
products and to provide continuing after-sale customer support.
 
                      SILICON OPERATIONS -- VLSI PRODUCTS
 
PRODUCTS AND SERVICES
 
     VLSI has organized its business around targeted market segments,
establishing groups to address specific silicon markets. Each of the Company's
silicon groups maintains independent marketing and applications research and
development capabilities.
 
     The Company's market-focused structure permits VLSI to dedicate certain of
its engineers to develop systems expertise in, and experience with issues
peculiar to, applications in a particular market. VLSI believes that this
increased systems expertise allows it to offer more value to the customer
through the development of FSBs to address those specific issues. VLSI's
customers in silicon market segments have a choice of using proprietary
solutions, standard solutions that are shared among multiple customers, or a
combination of both.
 
     The Computing Products group designs, manufactures and markets devices for
the computer market, including personal computer ("PC") applications and
high-end computing applications such as graphics workstations and high-end
storage. The Communications Products group designs, manufactures and markets
devices for networking and wireless communications. The Consumer Digital
Entertainment Products group designs, manufactures and markets devices for
secure communications and home entertainment applications (such as interactive
television and video game systems).
 
     The key to the success of these business units is providing customers with
timely silicon solutions optimized for their applications. This approach enables
rapid market introduction of customer products coupled with the ability to
customize for specific customer requirements.
 
     FSB library elements consist of system-level blocks that provide a higher
level of integration than in a traditional design library. These blocks are
designed to be combined with other FSB blocks, random logic and compiled
elements to provide the optimum silicon circuit with minimum customer design
time. FSB cells are intended to speed the development of integrated circuits
("ICs"), resulting in faster time to market for customers.
 
     Competition comes from a wide variety of large, established IC providers,
including, but not limited to, AT&T, Intel, IBM, LSI Logic, Motorola, NEC, Texas
Instruments ("TI") and Toshiba.
 
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COMPUTING PRODUCTS
 
     This group produces PC devices for Apple, its subcontractors and licensees
as well as Apple-compatible peripheral suppliers worldwide and system-logic chip
sets and peripheral components for personal computers based on X86 and competing
personal computing architectures. The group also serves workstations (from
entry-level through high-end graphic), servers, parallel processors, mass
storage devices and peripherals. Apple and its licensees are provided with
high-performance gate array and cell-based products, which are used in
second-generation Power Macintosh(TM) systems, Apple's Powerbook(TM) computer
line based on the Macintosh(R) platform and in a host of printer products. While
the Company did not have significant silicon content in Apple's first generation
Power Macintosh(TM) machines in 1994, VLSI has returned to historic levels of
silicon content in second-generation Power Mac systems in 1995. See "MARKETING
AND CUSTOMERS" below. See also "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Factors Affecting Future
Results" in Item 7 of Part II herein.
 
     The PC chip set product line consists of highly-integrated core logic and
peripheral input/output devices for X86 systems. The group primarily targets a
selected set of high-volume market leaders worldwide. VLSI's chip sets currently
support Intel, Advanced Micro Devices and other competing microprocessors.
 
     During 1995, the dynamics of the X86 core logic chip set market changed
dramatically with Intel, the dominant microprocessor supplier, gaining
significant market share in core logic chip sets that work with its
microprocessors, as well as motherboards that use the microprocessor and core
logic chip sets. By the second half of 1995, Intel dominated the core logic chip
set business and VLSI's design wins in this area dropped significantly. This
drop is expected to result in a sharp decline in the Company's core logic chip
set business in 1996. The Computing Products group is therefore shifting its
focus away from standard core logic chip sets and redirecting its expertise to
develop and produce custom products for X86 applications.
 
     See "COMPETITION" herein and "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Factors Affecting Future
Results" in Item 7 of Part II hereof for recent 1996 developments that will
likely reduce VLSI's current market share of the PC chip set market.
 
     Significant high-end computing customers include AT&T, DEC, Silicon
Graphics and Storage Technology.
 
COMMUNICATIONS PRODUCTS
 
     This group serves wireless and network customers. Wireless solutions are
provided for communications voice and data through the use of baseband signal
processing technology developed to support various voice and data standards, the
majority of which in 1995 were GSM solutions, and in 1996 are expected to
include GSM, PHS, DECT and CDPD solutions. Standard products include GTI2000 (a
GSM reference solution), Geode (a CDPD reference solution), RubyII (a
communication processor) and Vocoder and Kernal (GSM basebands). The group
supports major wireless telephone manufacturers, including Ericsson, Acer and
Motorola. Additionally, solutions have been developed for other markets and
standards. Wireless revenues are primarily generated in non-U.S. markets; sales
to a single OEM, Ericsson, accounted for over 50% of 1995 and 1994 worldwide
wireless revenues.
 
     Network solutions are provided for customers such as Alcatel, Cisco
Systems, DSC Communications, NEC and Tellabs in several applications, including
digital cross-connect, transmission, networking/internetworking, switching and
multiplexing. Certain communications-specific FSB cells have been employed as
high-level building blocks and designed to consolidate voice, data, image and
video onto single networks and comply with the relevant industry standards that
include high complexity analog, digital and memory functions. Specific solutions
for major customers include FSB cells for various networking standards,
including ATM, T1, E1 and Sonet/SDH.
 
CONSUMER DIGITAL ENTERTAINMENT PRODUCTS
 
     This group primarily targets high-volume entertainment-related markets
including satellite and cable set-top box, digital video disk, cable modem, and
electronic games as well as other miscellaneous industrial
 
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applications including manufacturing and robotics. The customer base for the
group includes the Allen Bradley Division of Rockwell International, General
Instruments, Pioneer, Sagem SAT, Sony and Thomson Consumer Electronic.
 
     As these products become more sophisticated and interactive, security
becomes a critical element of the product. In response to this critical need,
VLSI has teamed its secure information technology with these consumer products.
Secure information technologies in the form of data encryption strategies are
another key area of focus for this group. VLSI also provides commercial
applications of technologies developed for military applications, including
Geo-Positioning Satellite systems and entertainment applications of graphics
technology.
 
MARKETING AND CUSTOMERS
 
     The Company primarily uses a direct sales force and commissioned
representatives to sell its silicon products and services. VLSI's silicon
operations have 27 sales offices (19 in the United States, four in Europe, two
in Japan and two in the Asia-Pacific region) as well as 19 Technology Centers
(12 in the United States, four in Europe, two in Japan and one in the
Asia-Pacific region). The direct sales force is assisted by VLSI engineers
located in its Technology Centers.
 
     The Company's Technology Centers support VLSI's customers by offering a
range of design services. These services include system definition, complete
logic and circuit design and test program generation. The Technology Centers are
staffed by system and integrated circuit designers.
 
     During each of the years 1995, 1994 and 1993, VLSI's top 20 customers
represented approximately two-thirds of the Company's net revenues. Shipments to
a single customer in the personal computer business, Apple, accounted for 11% of
net revenues in 1995 and 19% in 1993, as compared to less than 10% in 1994.
Shipments to Compaq accounted for 22% of net revenues in 1994, as compared to
less than 10% in both 1995 and 1993. Due to the expected decline in the
Company's X86 chip set business, the Company anticipates a shift in its top 20
customers in 1996 away from the high concentration of personal computer industry
companies that was seen in 1995 and in prior years. See also Item 7 of Part II
herein, "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Factors Affecting Future Results."
 
RESEARCH AND DEVELOPMENT
 
     The Company's research and development ("R&D") is focused on continued
development and improvement of its systems applications expertise, process and
packaging technologies, design libraries and its expertise with cell-based and
gate array ICs. The Company's R&D expenditures for the years 1995, 1994 and 1993
have shown sequential increases with total expenses of $89.7 million, $78.9
million and $66.4 million, respectively.
 
     The Company's future success depends on its ability to develop and
introduce new products that compete effectively on the basis of price and
performance and that satisfy customer requirements. New product development
often requires long-term forecasting of market trends, development and
implementation of new processes and technologies and substantial capital
commitments. For example, the Company invested significant resources in 1993 and
1994 toward developing products for the handheld computer market, which failed
to develop as estimated, thereby postponing, if not permanently deferring, the
Company's recovery of the cost of these development expenditures. If the Company
is unable to design, develop, manufacture and market new products successfully
and in a timely manner, its operating results could be adversely affected. No
assurance can be given that the Company's product and process development
efforts will be successful.
 
     The Company regards purchased technology as a key component of product
development. A few examples include ARM, DSP, Ethernet, Fibre Channel, MPEGII,
SSA, power management, communications (including standards such as DECT, CT2,
GSM and PHS), signal converters, forward error correction and digital signal
processing, which represent key licensed technology. Research and development
efforts are
 
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ongoing to create products from those technologies and establish them as FSB's
for use in ASIC products or for incorporation in ASSPs.
 
     The Company's process technology development activities in 1995
concentrated on the successful development of a 0.35-micron CMOS process and on
the development of software for the EDA market. R&D activities in the packaging
area continue to focus on high performance, high pincount advanced packaging
solutions and assembly techniques.
 
     Research and development activities are sometimes augmented through
alliances with other companies. Wafer process technology development efforts in
1995 in conjunction with the Company's strategic agreement with Hitachi include
integration of 0.35-micron CMOS process and manufacturing methodologies.
 
     See also "EMPLOYEES" below and "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Factors Affecting Future
Results" in Item 7 of Part II herein.
 
MANUFACTURING
 
     The fabrication of ICs is an extremely complex and precise process
consisting of hundreds of separate steps and requiring production in a highly
controlled, clean environment. Minute impurities, errors in any step of the
fabrication process, defects in the masks used to print circuits on a wafer or a
number of other factors can cause a substantial percentage of wafers to be
rejected or numerous die on each wafer to be nonfunctional.
 
     Semiconductor manufacturing is also highly capital intensive, and capital
costs have tended to significantly increase as geometries have decreased in
size. The marketplace has placed an ongoing emphasis on ever-smaller geometries,
evidenced by increasing demand for deep sub-micron devices (those geometries
under 0.6-micron), requiring the Company to increase its capital investment
needs.
 
     The Company's success is partially dependent upon its ability to develop
and implement new manufacturing process technologies. Semiconductor design and
process methodologies are subject to rapid technological change, requiring large
expenditures for research and development. The Company believes that the
transition to smaller geometry process technologies will be important to
remaining competitive. There can be no assurance that the Company will be able
to profitably manufacture devices in geometries smaller than 0.6-micron.
 
     In addition to large R&D expenditures required to develop processes for
deep sub-micron devices, capital expenditure requirements to manufacture at such
small geometries increase rapidly. Decreases in geometries call for
sophisticated design efforts, advanced manufacturing equipment and cleaner
fabrication environments. The Company made significant investments during 1995
into sub-micron manufacturing and expects to continue a high level of investment
in this area in the future.
 
     The majority of the Company's 1995 wafer production utilized a 0.8-micron
CMOS process; however, the production of wafers utilizing a 0.6-micron CMOS
process increased to approximately 30% of total monthly wafer production by the
end of the year.
 
     The Company has three manufacturing locations. Its San Jose, California
plant performs wafer fabrication, probe and final test activities. The Tempe,
Arizona site contains design, probe and final test facilities. The San Antonio
facility is primarily dedicated to wafer fabrication and includes four modules.
Modules A, B and C have been fully facilitized, while VLSI currently anticipates
facilitizing Module D during 1996. During 1995, the Company began the process of
converting its San Antonio wafer fabrication facility from a predominantly
0.8-micron process to predominantly 0.6-micron and smaller processes. The
conversion is expected to be completed in the first half of 1996. This will
enable the Company to significantly increase its production capacity at the San
Antonio facility in the fourth quarter of 1996 over the fourth quarter of 1995.
These conversions, if successfully completed, will increase device volume
production and lead to lower overall device costs.
 
     The building housing the Company's San Jose wafer fabrication facility,
which in 1995 accounted for approximately 45% of its total internal wafer
production, was purchased by the Company during the first quarter of 1994. In
late 1995, the conversion of the Class 10 San Jose facility from a 5-inch wafer
process to a
 
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6-inch process was completed. This conversion is expected to increase device
production capacity at this facility. The San Jose wafer fabrication facility is
located near major earthquake faults and in an area that has in the recent past
experienced an extended drought. Additionally, as a 12-year-old fabrication
facility, it faces certain technological limitations. Due to the age of the
Class 10 San Jose facility and other factors, including ground motion, it is
uncertain whether geometries smaller than the 0.8-micron level can ever be
profitably manufactured there. To the extent customers and markets served by the
Company require advanced process technologies, there are no assurances that the
Company will have sufficient demand to fully utilize the San Jose fabrication
facility or have ultimate use for its capacity.
 
     In addition to manufacturing in its own facilities, VLSI has wafer
manufacturing arrangements with several foreign companies specializing in
subcontract wafer foundry services. These wafer subcontractors are themselves
subject to all of the manufacturing risks that are applicable to VLSI's own
wafer manufacturing operations. In addition, the Company's foreign subcontract
manufacturing arrangements are subject to risks such as changes in government
policies, transportation delays, increased tariffs, fluctuations in foreign
exchange rates, and export and tax controls. Lengthy or recurring disruptions of
operations at either the Company's production facilities or those of its
subcontractors for any reason, such as fire or earthquake, could cause
significant delays in shipments until the Company could shift the products from
an affected facility or subcontractor to another facility.
 
     The Company subcontracts substantially all of its integrated circuit
packaging and approximately 50% of its final testing to third parties. The final
tested circuits are then shipped to VLSI's customers or returned to the Company
for shipment to customers. Subcontractors include Anam Semiconductor Technology
Co. Ltd. in Korea and the Philippines (see Item 13 in Part III hereof). Although
the Company has no long-term contractual commitments from these suppliers, the
Company believes that these sources of packaging and testing services are
relatively reliable given their level of interdependence with the Company and
the overall level of availability of worldwide subcontract packaging and testing
capacity. Any problems experienced in obtaining acceptable subcontract
manufacturing services could delay shipments of the Company's products and
affect the Company's results of operations.
 
     The principal raw materials used by the Company in the manufacture of its
products are silicon wafers, processing chemicals and gases and certain precious
metals. Subcontractors use ceramic and plastic packages to enclose the devices
produced for the Company. Certain raw materials used for the manufacture of ICs
are available from a limited number of worldwide suppliers. The Company does not
generally depend on long-term fixed-price supply contracts. Shortages could
occur in various essential materials due to interruption of supply or increased
demand in the industry. If VLSI was unable to procure certain of such materials
from any source, it would be required to reduce its manufacturing operations. To
date, the Company has experienced no significant difficulty in obtaining the
necessary raw materials. The Company's operations also depend upon a continuing
adequate supply of electricity, natural and specialty gases and water.
 
     See also "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Factors Affecting Future Results" in Item 7 of Part II
herein.
 
COMPETITION
 
     The semiconductor industry in general and the markets in which the Company
competes in particular are intensely competitive, exhibiting both rapid
technological change and ongoing price erosion as technologies mature.
Competition in the X86 core logic chip set market, the Company's largest
individual market segment, is especially intense and is subject to significant
shifts in demand and severe pricing pressures. During the latter portion of 1995
and continuing into 1996, VLSI has experienced significant changes in customer
behavior as Intel has become the predominant supplier of PC chip sets. As a
result of this competition, VLSI expects significantly reduced market share and,
to the extent VLSI elects to continue to compete in the X86 core logic market,
expects to do so at reduced sales prices and gross margins.
 
     The Company competes with large domestic and foreign companies that have
substantially greater financial, technical, marketing and management resources
than the Company, such as AT&T, Intel, IBM,
 
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LSI Logic, Motorola, NEC, TI and Toshiba. There is no assurance that the Company
will be able to compete successfully in the future.
 
     Competition is primarily based on design capabilities (including both the
design tool features and the skills of the design team), quality, delivery time
and price. The Company believes that its overall competitive strengths include:
a growing expertise in systems applications in specific market segments, its
high quality wafer processing technology and fabrication facilities, its
experienced engineering staff, test capabilities, cost effectiveness, technical
design services offered through its network of Technology Centers and design
tools and services, including its proprietary FSB libraries.
 
     See also "EMPLOYEES" below and "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Factors Affecting Future
Results" in Item 7 of Part II herein.
 
                        COMPASS DESIGN AUTOMATION, INC.
 
     The Company's COMPASS subsidiary designs, develops, markets and services
software-based products used by systems or circuit designers to design complex
integrated circuits using either schematic capture, high level design languages,
data path descriptions or state diagrams. These design tools integrate many
steps of the design process, from design specification (beginning with synthesis
and test) through physical layout and verification.
 
     COMPASS product offerings are organized into four main product lines: logic
design and analysis tools, physical design and verification tools, library
development tools and physical libraries. These products are intended to reduce
overall time to market and decrease engineering and production costs for
advanced integrated circuit design.
 
     COMPASS produces a complete set of tools for all levels of design from VHDL
and Verilog down to basic silicon structures. In the top-down design market
segment, COMPASS focuses on VHDL and Verilog-based synthesis and test-generation
tools, along with services to import custom libraries from various semiconductor
vendors to work on the COMPASS toolset. In the physical design software area,
COMPASS develops tools for floorplanning, automatic place-and-route, a range of
symbolic and polygon-based custom layout tools, and a complete set of physical
layout verification tools. In library technology, COMPASS develops a wide range
of libraries, memory and datapath compilers. It also develops high-productivity
tools to automate the process of library generation.
 
     COMPASS' R&D efforts are focused on making its array of software technology
capable of supporting a wider variety of semiconductor vendor design tools and
semiconductor foundry formats. Product development efforts are focused on the
design environment requirements imposed by deep sub-micron designs. COMPASS uses
a number of different vendors' software tools to develop its own software tools
and physical libraries. Vendor changes in those underlying tools in terms of
features and functionality, interoperability, licensing and support can
influence the focus of certain R&D projects and COMPASS' development strategies.
The focus of COMPASS product development is on deep sub-micron physical
libraries, the associated physical design software tools, and related EDA tools
required by large, complex design projects.
 
     COMPASS competes with other software vendors in the EDA market for
integrated circuit design automation. Competition in the EDA market has come
primarily from a few established vendors, such as Cadence Design Systems, Mentor
Graphics, Viewlogic Systems and Synopsys. COMPASS pursues cooperative
relationships with certain of these EDA companies to provide complementary
solutions to the vendors' offerings. Competition is based on such factors as
design capabilities (including both the design tool features and the skills of
the design team), quality, delivery time and price. The Company believes that a
principal competitive strength of COMPASS is its expertise and products for deep
sub-micron libraries and physical design. The Company's ability to compete in
the EDA market will depend upon the expansion of vendor libraries available for
the logic design system and the foundries that can fabricate designs using
COMPASS libraries. Such vendor libraries are available from COMPASS as well as
other semiconductor vendors, which include Fujitsu, General Electric Corporation
Ltd.'s Plessey Division, LG Semicon, Hitachi, Mitsubishi, NEC and Toshiba.
Additionally, COMPASS libraries are supported by VLSI, Taiwan Semiconductor
Manufactur-
 
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ing Company Ltd., Chartered Semiconductor Manufacturing Pte Ltd., European
Silicon Structures BV, and other foundries.
 
     COMPASS uses direct sales, commissioned representatives and distributors to
sell its software products. COMPASS' 20 sales offices (14 in the United States,
four in Europe, one in Japan and one in the Asia-Pacific region) include its
three worldwide development centers. Direct sales represent COMPASS' primary
domestic and European distribution channels.
 
     COMPASS generally licenses its design tools under nontransferable,
non-exclusive license agreements and provides postcontract customer and software
revision support. In addition, COMPASS offers training and consulting services
to its customers. COMPASS retains ownership rights to all software that it
develops. COMPASS uses various security schemes to protect its software products
from unauthorized use or copying.
 
                                    BACKLOG
 
     The Company's sales are made primarily pursuant to standard purchase orders
for delivery of products, with such purchase orders officially acknowledged by
VLSI according to its own terms and conditions. Due to industry practice with
respect to cancellation of orders, VLSI believes that backlog is a potentially
misleading indicator of future revenue levels.
 
                                   EMPLOYEES
 
     As of December 29, 1995, the Company and its subsidiaries had approximately
3,000 employees worldwide. Management believes that the future success of VLSI
will depend in part on its ability to attract and retain qualified employees,
including technical and design personnel. In particular, the Company currently
has numerous open positions, specifically in the engineering arena. Any lengthy
delays in filling these positions will lead to delays in the introduction of
various products currently being developed, as well as the research and
development associated with potential new products.
 
                              PATENTS AND LICENSES
 
     The Company has filed a number of patent applications and currently holds
various patents expiring from 2003 to 2012 covering inventions in areas
including computer-aided engineering, semiconductor manufacturing and electronic
circuitry. The Company expects to file additional patent applications from time
to time, as appropriate. VLSI does not consider the success of its business to
be materially dependent on any single patent or group of patents.
 
     The semiconductor industry is characterized by vigorous protection and
pursuit of intellectual property rights and positions, which have on occasion
resulted in protracted and expensive litigation. The Company is currently one of
three remaining defendants in a major patent infringement suit brought by TI and
currently under appeal by TI (see "Legal Proceedings" in Item 3 of Part I
herein).
 
     Periodically, the Company is made aware that technology used by the Company
in the manufacture of some or all of its products may infringe on product or
process technology rights held by others. Resolution of whether the Company's
manufacture of products has infringed on valid rights held by others may have a
material adverse effect on the Company's financial position or results of
operations, and may require material changes in production processes and
products. IBM, Motorola and others have individually contacted the Company
concerning its alleged use of intellectual property belonging to them. In
addition, VLSI has also entered into licensing agreements and technology
exchange agreements with various strategic partners and other third parties in
order to allow VLSI limited access to third party technology, or to allow third
parties limited access to VLSI's technology. Certain of these agreements will
require renewal in calendar 1996. The Company is unable to predict whether
license agreements can be obtained or renewed on terms acceptable to the
Company. Failure to obtain or renew such licenses could result in litigation and
the attendant cost and diversion of resources associated therewith. An adverse
decision on any such litigation or such material changes could have a material
effect on the Company's financial position or results of operations.
 
                                        8
<PAGE>   10
 
                                WORKING CAPITAL
 
     Information regarding the Company's working capital practices is
incorporated herein by reference from Item 7 of Part II hereof under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources".
 
                   FINANCIAL INFORMATION BY BUSINESS SEGMENT
                              AND GEOGRAPHIC DATA
 
     This information is included in Note 9 of Notes to Consolidated Financial
Statements, which information is incorporated herein by reference to Item 8 of
Part II hereof.
 
                              ENVIRONMENTAL ISSUES
 
     The Company is subject to a variety of federal, state and local
governmental regulations related to the storage, use, discharge and disposal of
toxic, volatile or otherwise hazardous chemicals used in its manufacturing
process. Increasing public attention has been focused on the environmental
impact of semiconductor manufacturing operations. The Company's San Jose and San
Antonio facilities are located near residential areas, which could increase the
incidence of environmental complaints or investigations. There can be no
assurance that changes in environmental regulations will not impose the need for
additional capital equipment or other requirements. Any failure by the Company
to control the use of, or adequately to restrict the discharge of, hazardous
substances under present or future regulations could subject VLSI to substantial
liability or could cause its manufacturing operations to be suspended, which
could have a material adverse effect on the Company's operating results.
 
ITEM 2.  PROPERTIES
 
     The Company owns the buildings housing its three manufacturing facilities
located in San Jose, California, Tempe, Arizona and San Antonio, Texas and
recently acquired ownership of its previously leased headquarters buildings in
San Jose. In addition, VLSI (including its subsidiary, COMPASS) has 47 sales
offices (33 in the U. S., eight in Europe, three in Japan and three in the
Asia-Pacific region) and 19 Technology Centers (12 in the U. S., four in Europe,
two in Japan and one in the Asia-Pacific region). The Company's other
properties, including some comprising its San Jose campus, are occupied under
operating leases that expire on various dates through October 2023 with options
to renew in most instances. The Tempe facility is located on land held under a
long-term ground lease, which expires in December 2037, while the Company owns
the land beneath those San Jose and San Antonio facilities that it owns.
 
     The Company's San Jose facility, which includes manufacturing, COMPASS,
corporate support services such as its computer center, technology development,
primary shipping location and major design center, is located near major
earthquake faults. Should an earthquake cause an interruption in operations,
operating results would be materially adversely affected.
 
     The San Antonio facility began qualified production in 1989 and is
primarily dedicated to wafer fabrication. Module A of four planned modules of
class 1 clean room was completed in 1990. Module B was partially facilitized,
equipped and used to augment capacity beginning in 1991 with the balance of
facilitization completed in 1993. During 1995, Module B was fully equipped and
Module C was fully facilitized and minimally equipped, while Module D was
partially facilitized.
 
     The Tempe site contains the research and development resources supporting
the PC chip set products for the Computing Products group, test facilities,
marketing, sales and Technology Center functions.
 
     VLSI expanded into new leased facilities adjacent to its San Jose
headquarters in each of the last three years ending in 1995. The Company
anticipates that the lease of the additional space, along with an option
obtained for additional space adjacent to its leased facilities in San Jose,
will satisfy the Company's growth needs in the near term.
 
                                        9
<PAGE>   11
 
ITEM 3.  LEGAL PROCEEDINGS
 
Texas Instruments Litigation
 
     The Company along with LSI Logic and Cypress Semiconductor (the Company and
such other defendants are collectively referred to as the "TI Defendants") are
named defendants in a lawsuit filed by TI in 1990 that claims alleged patent
infringement.
 
     TI filed this patent infringement action against the TI Defendants in the
United States District Court for the Northern District of Texas seeking damages
for alleged past infringement of now expired U.S. Patent Nos. 4,043,027 and
3,716,764. A trial in April 1995 resulted in a May 1995 jury verdict against the
Company in the amount of $19.4 million. While in the process of contesting the
jury verdict, the Company recorded a charge to earnings of $19.4 million in the
second quarter of 1995. In August 1995, the trial judge issued an order
overturning and setting aside the jury verdict and conditionally granting a new
trial on the matter in the event that his order is reversed on appeal. TI is
pursuing an appeal of the trial judge's order in the United States Court of
Appeals for the Federal Circuit and seeks a reversal of that order as well as
enhanced damages, pre-judgment interest and attorneys' fees. The Company has not
made any adjustments to the $19.4 million charge taken during the second quarter
of 1995, pending resolution of this and related intellectual property matters.
In the event that TI's appeal is successful and enhanced damages (which by
statute may be as high as treble damages), pre-judgment interest and/or
attorney's fees are awarded, such a judgment could result in a material
reduction in liquidity, as well as an additional adverse impact on the Company's
reported results of operations.
 
Other Patent Matters
 
     Periodically, the Company is made aware that technology used by the Company
in the manufacture of some or all of its products may infringe on product and
process technology rights held by others. An adverse decision on infringement of
patents may have a material adverse effect on the Company's financial position
or results of operations and may require material changes in production
processes or products. Where deemed advisable, the Company may seek or extend
licenses or negotiate settlements. See "Patents and Licenses" in Item I of Part
I herein.
 
Other Litigation
 
     The Company is currently a party to various other legal actions arising out
of the normal course of business, none of which are expected to have a material
effect on the Company's financial position or results of operations.
 
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 fiscal 1995, which ended December 29, 1995.
 
                       EXECUTIVE OFFICERS OF THE COMPANY
 
     Information concerning executive officers of the Company who are not also
directors is set forth below:
 
     Mr. John C. Batty, age 41, was elected Vice President and Treasurer in
December 1992. Mr. Batty joined the Company in June 1986 as Financial Manager.
From April 1989 to April 1991, Mr. Batty was the Tempe, Arizona Site Controller.
From April 1991 to December 1992, Mr. Batty was Director, Corporate Financial
Planning.
 
   
     Mr. Bernd U. Braune, age 40, was named Senior Vice President of Worldwide
Sales and Marketing in November 1995. Mr. Braune joined the Company in June 1993
as General Manager and Vice President of European Operations. Prior to joining
the Company, Mr. Braune was Managing Director for European operations of NCR
Microelectronics, a computing company, from 1987 until 1991 and then Director
    
 
                                       10
<PAGE>   12
 
   
of Marketing for NCR Central Europe as part of the Global Information Systems
Group of AT&T, a computing company, until joining VLSI.
    
 
     Mr. Donald L. Ciffone, Jr., age 40, was named Senior Vice President of VLSI
Products in November 1995. Mr. Ciffone was elected Vice President and General
Manager of the VLSI Product Divisions in August 1992. Mr. Ciffone joined the
Company in November 1991 as Vice President, Primary and Emerging Markets
Division. From March 1991 until joining the Company, Mr. Ciffone was Director of
Marketing for Oasic Technology, an ASIC company. Mr. Ciffone was employed by
National Semiconductor Corporation, a semiconductor manufacturer, in various
capacities from 1978 until 1991, including as Director of Marketing, ASIC
Division immediately prior to his departure.
 
     Mr. Larry Grant, age 50, joined the Company in January 1996 as Vice
President, General Counsel and Secretary. From 1985 until joining VLSI, Mr.
Grant was Vice President and General Counsel to Micron Technology, Inc., a
semiconductor manufacturer.
 
     Mr. Gregory K. Hinckley, age 49, was named Senior Vice President in
November 1995. Mr. Hinckley was elected Vice President, Finance and Chief
Financial Officer of the Company in August 1992 upon joining the Company. From
December 1991 until August 1992, he was an independent consultant. From January
1989 until December 1991, Mr. Hinckley was Senior Vice President and Chief
Financial Officer of Crowley Maritime Corporation, a U.S. shipping company. Mr.
Hinckley is a director of Advanced Molecular Systems and OEC Medical Systems,
Inc.
 
     Mr. Balakrishnan S. Iyer, age 39, joined the Company in April 1993 as Vice
President and Controller. From July 1992 until joining VLSI, Mr. Iyer was
Corporate Controller for Cypress Semiconductor Corporation, a semiconductor
manufacturer. From August 1988 until July 1992, Mr. Iyer was Group Controller at
Advanced Micro Devices, Inc., a semiconductor manufacturer.
 
     Mr. L. Don Maulsby, age 44, was named Group Vice President of the Computing
Products Division in November 1995. Prior to that time, he was Vice President
and General Manager of the Personal Computer Division from June 1994, and Vice
President, Worldwide Sales and Technology Center Operations, from November 1992
until June 1994. Mr. Maulsby joined the Company in 1988 as a Regional Sales
Manager. Mr. Maulsby was Area Sales Manager from January 1989 to September 1990.
From September 1990 to August 1991, Mr. Maulsby was Vice President, Central U.S.
Business Unit; and from August 1991 to November 1992, Vice President, North
American Sales and Technology Center Operations.
 
     Mr. Dieter J. Mezger, age 52, has been President of the Company's
subsidiary, COMPASS Design Automation, Inc., since its formation in February
1991. Since July 1990, Mr. Mezger has also been Senior Vice President of the
Company. He joined the Company in 1984 as Director and General Manager of the
Company's European operations. From December 1988 until March 1991, he was
President of VLSI Technology Europe.
 
     There are no family relationships among the Company's executive officers
and directors.
 
                                       11
<PAGE>   13
 
                                    PART II
 
ITEM 5.  MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
         MATTERS
 
                  FINANCIAL INFORMATION BY QUARTER (UNAUDITED)
                     (THOUSANDS, EXCEPT PER SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                      1995                        DEC. 29      SEPT. 29     JUNE 30      MAR. 31
------------------------------------------------  --------     --------     --------     --------
<S>                                               <C>          <C>          <C>          <C>
Net revenues....................................  $184,311     $188,184     $184,389     $163,035
Gross profit....................................  $ 74,805     $ 75,115     $ 74,583     $ 64,074
Net income......................................  $ 18,266     $ 16,157     $  1,295     $ 10,250
Net income per share............................  $    .38     $    .35     $    .03     $    .26
Market price:(1) High...........................  $ 32 1/4     $ 37 5/8     $ 30 1/8     $18 3/16
                  Low...........................  $ 16 1/4     $26 11/16    $ 16 3/4     $11 11/16
</TABLE>
 
<TABLE>
<CAPTION>
                      1994                        DEC. 30      SEPT. 30      JULY 1      APRIL 1
------------------------------------------------  --------     --------     --------     --------
<S>                                               <C>          <C>          <C>          <C>
Net revenues....................................  $149,311     $151,609     $148,048     $138,123
Gross profit....................................  $ 61,107     $ 57,766     $ 60,177     $ 51,183
Net income......................................  $  9,459     $  7,540     $  9,337     $  5,361
Net income per share............................  $    .25     $    .20     $    .25     $    .15
Market price:(1) High...........................  $ 13 1/8     $15 15/16    $ 15 3/8     $     16
                  Low...........................  $ 10 1/2     $     11     $ 12 1/8     $  9 5/8
</TABLE>
 
---------------
 
(1) The Company's Common Stock is traded on the Nasdaq National Market under the
    symbol VLSI. The prices per common share represent the highest and lowest
    closing prices for VLSI's Common Stock in the Nasdaq National Market during
    each quarter. On February 23, 1996, there were approximately 2,020
    stockholders of record. The Company has not paid cash dividends and is
    currently prohibited from doing so. See Note 2 of Notes to Consolidated
    Financial Statements.
 
   
ITEM 6.  SELECTED FINANCIAL DATA(1)
    
 
<TABLE>
<CAPTION>
                                        1995         1994         1993       1992(2)        1991
                                      --------     --------     --------     --------     --------
                                                         (DOLLARS IN THOUSANDS)
<S>                                   <C>          <C>          <C>          <C>          <C>
Net revenues........................  $719,919     $587,091     $515,946     $428,498     $413,376
Operating income (loss).............  $ 75,382     $ 46,749     $ 27,082     $(19,282)    $ 23,173
Net income (loss)...................  $ 45,968     $ 31,697     $ 15,883     $(32,217)    $  9,873
Net income (loss) per share.........  $   1.05     $    .85     $    .45     $  (1.12)    $    .37
Research and development as a
  percentage of net revenues........      12.5%        13.4%        12.9%        11.8%         9.5%
Capital expenditures................  $203,472     $ 94,446     $ 71,615     $ 40,123     $ 55,432
Cash, cash equivalents and liquid
  investments.......................  $365,581     $103,111     $ 72,636     $ 69,674     $ 48,018
Working capital.....................  $400,097     $138,704     $114,423     $102,149     $ 76,127
Long-term debt and non-current
  capital lease obligations.........  $218,847     $ 96,804     $ 85,855     $ 83,178     $ 92,633
Stockholders' equity................  $530,629     $255,430     $212,508     $185,008     $161,628
Total assets........................  $959,887     $490,216     $412,223     $368,208     $364,018
Employees...........................     2,986        2,728        2,659        2,379        2,315
</TABLE>
 
---------------
 
(1) Certain prior year amounts previously reported have been reclassified to
    conform to the 1995 presentation.
 
(2) Included in operations for the fourth quarter of 1992 is a special charge of
    $22.5 million related to the deemphasis of older technologies, costs of
    streamlining sales distribution channels, costs of relocating certain
    offices, writedowns of non-performing assets and costs associated with
    intellectual property matters.
 
                                       12
<PAGE>   14
 
     The Company has never paid any cash dividends and is currently prohibited
from doing so under the terms of its committed Credit Agreement. See Note 2 of
Notes to Consolidated Financial Statements, which information is incorporated
herein by reference to Item 8 of Part II hereof.
 
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS
 
     This Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MDA") should be read in conjunction with the 1995
Consolidated Financial Statements and Notes thereto in Item 8 of Part II herein.
 
     This Form 10-K contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Actual results could differ materially from those
projected in the forward-looking statements as a result of the risk factors set
forth below and elsewhere in this Form 10-K.
 
OVERVIEW
 
     VLSI ("the Company") improved its liquidity and financial position during
1995 through the sale of Common Stock, conversion of previously outstanding
convertible debt into Common Stock and the issuance of new convertible debt, as
well as increased net income on increased net revenues.
 
     VLSI recorded net income of $46.0 million on net revenues of $719.9 million
in 1995, compared to net income of $31.7 million on net revenues of $587.1
million in 1994 and net income of $15.9 million on net revenues of $515.9
million in 1993. Sequentially improved operating results in 1995, 1994 and 1993
reflect gross profit margin improvements on increased shipment volumes.
 
     VLSI recorded a $19.4 million litigation charge in the second quarter of
1995 upon a jury rendering a verdict in favor of Texas Instruments ("TI") in an
intellectual property litigation matter. Subsequently, the trial judge
overturned the verdict and TI has appealed. See Note 4 of Notes to Consolidated
Financial Statements.
 
RESULTS OF OPERATIONS
 
     The Company derives its net revenues from sales of Application-Specific
Integrated Circuits ("ASICs") and Application-Specific Standard Products
("ASSPs") through the Company's silicon groups, in the Computing, Communications
and Consumer Digital Entertainment Products markets serving Original Equipment
Manufacturers ("OEMs"). The Company's subsidiary, COMPASS Design Automation,
Inc. ("COMPASS"), sells software and design libraries in the Electronic Design
Automation ("EDA") market, which are intended to allow systems and chip
designers to automate and standardize the integrated circuit design process.
 
<TABLE>
<CAPTION>
                                                           1995         1994         1993
                                                         --------     --------     --------
                                                                    (THOUSANDS)
    <S>                                                  <C>          <C>          <C>
    Net Revenues.......................................  $719,919     $587,091     $515,946
    Percentage increase over preceding year............        23%          14%          20%
</TABLE>
 
     A key factor to the Company's 1995 net revenue growth was increased demand
for products designed for communications devices as the units shipped in that
market segment during 1995 doubled from 1994. A major portion of the Company's
1994 net revenue growth was due to an increase in the number of units shipped
for communications devices in 1994 over 1993 by approximately two-thirds.
 
     Net revenues from the personal computer ("PC") market in 1995 were
characterized by a substantial increase in units shipped for incorporation into
Apple products, partially offset by decreased unit sales of X86 chip sets. The
Company realized higher average sales prices on devices for personal computers
in 1994 over 1993 through the introduction of portable products and
Pentium-compatible chip sets.
 
                                       13
<PAGE>   15
 
     Consumer Digital Entertainment Products revenue increased in 1995 from
1994; however, that increase was not as dramatic as was the increase of 1994
revenues over 1993, which increase was primarily due to significantly greater
unit shipments. The focus of this group in the latter portion of 1995 was on
research and development and in achieving design wins for products to begin
shipment in 1996, which is expected to result in increased revenues in 1996 over
1995 for this group.
 
     COMPASS net revenues in the EDA market increased in 1995 from 1994 levels,
which were above 1993 net revenue results.
 
     International net revenues (including export sales) increased at a rate
consistent with the overall growth in net revenues for the Company in 1995 as
well as in 1994, flattening out from the higher-than-overall rate of net revenue
growth noted during 1993. International net revenues were approximately 50% of
the 1995, 1994 and 1993 total net revenues. Export sales in terms of dollars,
primarily to the Asia-Pacific region, decreased slightly in 1995 from 1994
levels, while 1994 was up 28% over 1993 levels, reflecting VLSI's customers'
continuing emphasis of manufacturing efforts in the Asia-Pacific region.
European net revenues increased 42% in 1995 over 1994, and increased slightly in
1994 over 1993. The growth in European net revenues reflects the location of the
major customers for VLSI's communications devices. The slower net growth for
1994 European revenues primarily reflects lower net revenues from the PC
marketplace.
 
<TABLE>
<CAPTION>
                                                           1995         1994         1993
                                                         --------     --------     --------
                                                                    (THOUSANDS)
    <S>                                                  <C>          <C>          <C>
    Gross Profits......................................  $288,577     $230,233     $188,172
    Percentage of net revenues.........................        40%          39%          36%
</TABLE>
 
     Gross profits as a percentage of net revenues improved to 40% in 1995,
compared to 39% in 1994 and 36% in 1993. Gross profit margin improvement over
the three-year period of 1993 through 1995 reflects the implementation of new
process technologies that have resulted in shrinking device geometries,
efficient use of internal capacity, lower assembly costs, improved yields and
improved product mix. The 1995 gross profit margin was affected by certain
manufacturing inefficiencies associated with the conversion of the San Jose,
California facility to a 6-inch CMOS wafer process and of the San Antonio, Texas
facility to 100% sub-0.8-micron CMOS processes. For further discussion of the
manufacturing issues, see "Factors Affecting Future Results".
 
<TABLE>
<CAPTION>
                                                           1995         1994         1993
                                                         --------     --------     --------
                                                                    (THOUSANDS)
    <S>                                                  <C>          <C>          <C>
    Operating Expenses.................................  $213,195     $183,484     $161,090
    Percentage of net revenues.........................        30%          31%          31%
</TABLE>
 
     Operating expenses were approximately 30% of net revenues in 1995, and
approximately 31% of net revenues in the years 1994 and 1993. The decrease in
operating expenses as a percentage of net revenues in 1995 reflects continued
decreases in marketing, general and administrative expenses as a percentage of
net revenues offset by sequential dollar increases in R&D expenses from 1993 to
1995.
 
   
     Increased R&D expenses in 1995 reflect the continuing investment in new
products and package and process technologies. These expenditures focus on
design environment and process development and development of products for the
communications and consumer digital entertainment markets. R&D expenses in 1994
focused on the development of new process technologies in smaller geometries and
new devices for the communications and consumer digital entertainment markets
and the development of software for the EDA market. R&D expenses in 1993
centered on the development of new products for the handheld, desktop and
portable segments of the computing market. Handheld development efforts ceased
in 1994 with the termination of the Technology and Manufacturing Agreement with
Intel Corporation ("Intel").
    
 
     Marketing, general and administrative expenses have increased in amount
from 1993 to 1995, while decreasing as a percentage of net revenues. The
increase in expenses reflects the Company's ongoing infrastructure investment to
support higher manufacturing and revenue levels. The Company's objective is to
grow marketing, general and administrative costs at a slower percentage rate
than that of net revenues.
 
                                       14
<PAGE>   16
 
     The Company approved the closure of two offices in the Asia-Pacific region
during 1994, closed its Tempe, Arizona assembly operations and downsized its R&D
efforts in the PC marketplace, primarily related to handheld computing,
resulting in charges of $1.4 million in the second half of 1994.
 
IMPACT OF CHANGES IN VALUES OF FOREIGN CURRENCIES/IMPACT OF INFLATION
 
     International net revenues comprise approximately 50% of 1995 net revenues.
During 1995, the Company changed the functional currency of the majority of its
larger European foreign subsidiaries from the local subsidiary currency to U.S.
dollar-based currency reflecting the significance of predominantly U.S. dollar-
based revenues and cost of sales. Prior to 1995, the Company had designated the
local subsidiary currency as the functional currency of each of its foreign
subsidiaries. There was no material effect on the consolidated financial
statements from this change. See Note 1 of Notes to Consolidated Financial
Statements. Substantially all expenditures of foreign subsidiaries, other than
cost of sales (which are primarily purchased from the parent company in U.S.
dollars), are based in local currency. As a result, fluctuations in currency
rates predominantly affect operating expenses. Although the U.S. dollar weakened
against the Japanese Yen and major European currencies in 1995 and 1994, thereby
negatively impacting operating expenses, the Company had offsetting favorable
currency-related results on revenues, resulting in an immaterial net effect on
the operations of the Company.
 
     The Company believes that its financial statements accurately reflect the
impact that inflation has, if any, on the results of operations of the Company
and considers such impact to be immaterial for all periods presented.
 
LITIGATION CHARGE
 
     The litigation charge in 1995 of $19.4 million reflects the current year
accrual for the jury award to TI. Litigation expenditures incurred in 1995 for
the TI litigation were netted against the litigation reserve taken during 1995
(see Note 4 of Notes to Consolidated Financial Statements). Since VLSI accrued
costs associated with the TI litigation in 1995, the Company does not anticipate
that the adjudication of the TI litigation will materially increase expenses in
1996, although there can be no assurance of the outcome of any litigation (see
"Factors Affecting Future Results").
 
INTEREST EXPENSE AND OTHER, NET
 
     Interest expense net of interest income and other expenses, net shows
income in 1995, as compared to expense in 1994 and 1993, reflecting reduced
interest expense and higher interest income. Interest expense is lower
reflecting the capitalization of interest expense associated with increased
capital expenditures. Higher interest income reflects higher investment yields
on significantly higher cash balances. The higher cash balances are due
primarily to the Company's June 1995 public offering of Common Stock and
September 1995 offering of Convertible Subordinated Notes. The Company considers
incurred foreign exchange gains and losses immaterial in 1995, 1994 and 1993.
 
PROVISION FOR TAXES ON INCOME
 
     The 1995 tax provision at 26% of pre-tax income reflects the impact of
foreign income taxes in excess of U.S. rates offset by state tax benefits and
changes in the tax valuation reserve. The 1994 and 1993 tax provisions at 24%
and 23% of pre-tax income, respectively, reflect benefits from prior year credit
carryforwards and changes in the tax valuation reserve. The Company eliminated
the valuation reserve for U.S. deferred taxes in 1995; however, it continues to
reserve foreign deferred tax assets. The Company still has credit and loss
carryovers that it has been unable to fully utilize. The Company estimates that
its overall effective tax rate will increase in 1996 as the Company, if
profitable in 1996, could exhaust its available tax carryforward benefits. The
level of future tax rates will be dependent on the overall operating results of
the Company, the level of income in certain high-tax rate jurisdictions and the
Company's ability to use the tax carryforward benefits.
 
                                       15
<PAGE>   17
 
ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
 
     The Company must adopt Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" ("FAS 121") with the commencement of fiscal 1996. Initial
adoption of FAS 121 will not have a material effect on the Company's
consolidated financial statements.
 
FACTORS AFFECTING FUTURE RESULTS
 
     As described by the following factors, past financial performance should
not be considered to be a reliable indicator of future performance, and
investors should not use historical trends to anticipate results or trends in
future periods.
 
     Approximately 46% of the Company's net revenues were derived from the
personal computer market in 1995, as compared to 47% in 1994 and 58% in 1993
(with approximately 33%, 37% and 33% of total revenues in the years 1995, 1994
and 1993, respectively, coming from the X86 market). With seven of the Company's
top ten 1995 customers operating in the personal computer industry, a
deterioration of, or changes in, business conditions in the personal computer
industry would have a material adverse effect on VLSI's operations. Revenues for
the Company's X86 chip sets as a percentage of total Company revenues in 1995
were below Company expectations. The Company anticipates a sharp reduction in
the amount of net revenues derived from the PC market in 1996 reflecting that
during the latter part of 1995, the Company did not win new designs at certain
major customers, including AST Research, Compaq, Hewlett-Packard and IBM, as a
result of pricing that was not considered attractive for the Company to pursue.
In addition, VLSI has experienced a dramatic loss of market share as a result of
Intel's expansion in scope of its business from microprocessors to motherboards
and core logic chip sets. The Company's results in the personal computer market
are also dependent in part on the Company's ability to gain early access to new
microprocessor architectures being developed by Intel, the dominant
microprocessor supplier, and adopted by major OEMs. Intel's withholding of key
information of upcoming architectures from core logic chip set suppliers has
adversely impacted the Company's ability to respond quickly to new architecture
changes. The Company's need to anticipate customer product transitions could
lead to potential inventory exposure, which could adversely affect the Company's
financial results.
 
     During each of the years 1995, 1994 and 1993, VLSI's top 20 customers
represented approximately two-thirds of the Company's net revenues. Shipments to
a single customer in the personal computer business, Apple, accounted for 11% of
net revenues in 1995 and 19% in 1993, as compared to less than 10% in 1994.
Shipments to Compaq accounted for 22% of net revenues in 1994, as compared to
less than 10% in both 1995 and 1993. Due to the expected decline in the
Company's X86 chip set business, the Company anticipates a shift in its top 20
customers in 1996 away from the high concentration of personal computer industry
companies that was seen in 1995.
 
     The Company is a sole source of products to many of its customers, which
may cause some customers to potentially over-order VLSI products. This could
lead to cancellations of certain of those orders by customers when customers
perceive that demand and supply are better aligned. As a result of the
concentration of the Company's customer base, loss or cancellation of business
from any of these customers, significant changes in scheduled deliveries to any
of these customers or decreases in the prices of products sold to any of these
customers could materially adversely affect the Company's results of operations.
In late 1995, Apple announced delays to certain of its products in development,
excessive amounts of inventories as well as a downturn in operations. This
downturn in Apple's operations resulted in lower than expected VLSI revenues
from Apple in the fourth quarter of 1995, which VLSI anticipates will continue
into 1996.
 
     The Company sells its ASSPs under terms and conditions customarily found in
the semiconductor industry. Sales of these products are subject to customer
cancellation with limited advance notice prior to shipment. Due to the Company's
relatively narrow customer base for certain ASSPs and the short product life
cycles of such products, the Company could be left with significant inventory
exposure, which could have a material adverse effect on the Company's operating
results.
 
                                       16
<PAGE>   18
 
     Software net revenues are subject to various factors, including pricing
pressure, customers' capital budget approval cycles and limited backlog, which
create a high degree of variability from quarter to quarter. Due to the high
gross profit margin content of software revenues and the size of certain
transactions, such variability can lead to unpredictability of financial and
operating results of the Company for any given period. For example, software
revenues in the fourth quarter of 1995 were lower than revenues in the third
quarter of 1995 and were lower than expected, adversely affecting VLSI's results
of operations.
 
     The semiconductor industry has a history of cyclicality and is
characterized by short product life cycles, continuous evolution of process
technology, high fixed costs, additions of manufacturing capacity in large
increments and wide fluctuations in product supply and demand. These product
supply and demand fluctuations have historically been characterized by periods
of manufacturing capacity shortages immediately followed by periods of
overcapacity, which are caused by the previously mentioned additions of
manufacturing capacity in large increments. Due to the high fixed costs of the
industry, profitability can drop sharply as utilization drops during periods of
overcapacity. In addition, competition in the semiconductor industry is intense,
particularly in core logic X86 chip sets where Intel has become a major supplier
of personal computer chip sets and motherboards. The reduced level of revenues
for the X86 chip sets in relation to overall Company revenues could result in
unused wafer fabrication capacity, potentially adversely affecting manufacturing
performance and increasing the cost of each unit manufactured. To the extent
customers and markets served by the Company require advanced process
technologies, there are no assurances that the Company will have sufficient
demand to fully utilize the San Jose fabrication facility or have ultimate use
for its capacity. In March 1996, the Company reduced its work force by four
percent as a result of reduced X86 business.
 
     The Company's products are susceptible to severe pricing pressures and the
Company continually attempts to pursue cost reductions, including process
enhancements, in order to maintain favorable gross profit margins. Future gross
margins will also vary with the general condition of the economy, customer
acceptance of new technologies and products, product functionality and
capabilities, shifts in product mix, manufacturing yields and the effect of
ongoing manufacturing cost reduction activities. The Company's COMPASS
subsidiary, like other companies in the electronic design automation business,
is particularly subject to significant fluctuations in revenues due to limited
backlog and its reliance on large orders placed late in quarters.
 
     During 1995, the semiconductor industry faced capacity constraints in wafer
manufacturing, assembly operations and test operations. While the Company
operates and maintains its own wafer manufacturing facilities, the Company also
relies on three suppliers for a portion of its wafers and on three suppliers for
the bulk of its assembly and test operations. With respect to these suppliers,
the Company has only one contract for guaranteed capacity. Wafer, assembly and
test allocations depend on VLSI's needs, supply availability during periods of
changes in capacity shortages and excesses and pricing. Any reduction in
allocation from these suppliers could adversely affect the Company's operations.
 
     Due to the industry-wide manufacturing capacity shortage experienced during
1995, the Company accelerated the expansion and upgrading of its manufacturing
capacity. These activities require substantial investments in capital equipment
and facilities. Significant lead time is required to acquire and install
additional wafer fabrication equipment. Any significant expansion or upgrade of
semiconductor manufacturing capacity has attendant risks. Specifically, the
Company has recently completed a program to expand and upgrade its manufacturing
facility in San Jose to convert production to a 6-inch CMOS wafer process.
Additionally, the Company's San Antonio facility, which is currently using both
0.6-micron and 0.8-micron processes, is being converted to 100% 0.6-micron CMOS
process and steps to facilitize and equip the third and fourth modules have
begun. In 1995, inefficiencies caused by the work associated with the
conversions of the manufacturing facilities had a negative effect on the
Company's overall gross profit of approximately $10 million, or 2 percentage
points of gross margin. The work effort associated with the changes to these
facilities has resulted in lower wafer yields and could cause further disruption
to manufacturing output, negatively impacting the Company's revenues and gross
profit in 1996. As the Company continues to shift an even greater percentage of
its manufacturing to its own facilities (in 1995, VLSI produced approximately
80% of its wafer requirements internally and projects to produce more than 90%
of its 1996 wafer requirements
 
                                       17
<PAGE>   19
 
internally), any delays, problems or lack of successful completion of the
Company's facilities conversion efforts could have a material adverse impact on
future operating results.
 
     The Company's future success depends on its ability to continue to develop
and introduce new products that compete effectively on the basis of price and
performance and that satisfy customer requirements. The Company expects to
continue to invest in the research and development of new products for all of
its market segments in 1996. New product development often requires long-term
forecasting of markets, market trends, development and implementation of new
processes and technologies and substantial capital commitments. No assurance can
be given that the Company's product and process development efforts will be
successful, that new product introductions will achieve market acceptance or
that the markets in question will develop.
 
     The Company is subject to a variety of federal, state and local
governmental regulations related to the storage, use, discharge and disposal of
toxic, volatile or otherwise hazardous chemicals used in its manufacturing
process. Increasing public attention has been focused on the environmental
impact of semiconductor manufacturing operations. The Company's San Jose and San
Antonio facilities are located near residential areas, which could increase the
incidence of environmental complaints or investigations. There can be no
assurance that changes in environmental regulations will not impose the need for
additional capital equipment or other requirements. Any failure by the Company
to control the use of, or adequately to restrict the discharge of, hazardous
substances under present or future regulations could subject it to substantial
liability or could cause its manufacturing operations to be suspended, which
could have a material adverse effect on the Company's operating results.
 
     The Company's San Jose facility, which includes manufacturing, COMPASS,
corporate support services such as its computer center, technology development,
a primary shipping location and a major design center, is located near
earthquake faults. Should an earthquake cause an interruption in operations,
operating results could be materially adversely affected.
 
     The status of the Company's pending material legal proceeding is set forth
in Note 4 of Notes to Consolidated Financial Statements. The Company cannot
accurately predict the final outcome of this matter with TI. As part of its
appeal, TI has requested that it be awarded enhanced damages, pre-judgment
interest and attorneys' fees. An unfavorable outcome could have an adverse
effect on VLSI's future operations and/or liquidity and could be material to any
particular quarter's results of operations. Additionally, the ongoing effort of
defending the Company against lawsuits utilizes cash and management resources.
 
LIQUIDITY AND CAPITAL RESOURCES
 
     VLSI generates cash from operations, debt and equipment financings and
sales of its equity and debt securities. Principal uses of cash include
purchases of capital equipment needed for semiconductor manufacturing and
engineering and payments of debt and lease obligations.
 
<TABLE>
<CAPTION>
                                                           1995         1994         1993
                                                         --------     --------     --------
                                                                    (THOUSANDS)
    <S>                                                  <C>          <C>          <C>
    Cash, cash equivalents and liquid investments......  $365,581     $103,111     $ 72,636
    Working capital....................................  $400,097     $138,704     $114,423
    Stockholders' equity...............................  $530,629     $255,430     $212,508
</TABLE>
 
     At December 29, 1995, total cash, cash equivalents and liquid investments
increased $262.4 million from the 1994 year-end balance due primarily to the
receipt of proceeds from an equity offering late in the second quarter of 1995,
proceeds from a convertible debt offering in September 1995, proceeds from the
exercise by Intel in August 1995 of its warrant to purchase VLSI Common Stock,
and net income, offset by purchases of property, plant and equipment and
payments of debt and capital leases during 1995. The balance of liquid
investments has increased at December 29, 1995 from December 30, 1994 levels in
order to take advantage of higher interest rates for liquid investments. Working
capital increased to $400.1 million at December 29, 1995, compared to $138.7
million at December 30, 1994.
 
     During the year ended December 29, 1995, the Company generated $123.5
million of cash from operations, a 19% increase over the $103.5 million of cash
generated from operations for the year ended
 
                                       18
<PAGE>   20
 
December 30, 1994 and a 92% increase over the $64.4 million generated for the
year ended December 25, 1993. Accounts receivable were $39.1 million higher at
December 29, 1995 than at December 30, 1994, reflecting proportionally higher
sales volumes in the latter part of the fourth quarter of 1995. Accounts
receivable increased $9.8 million in 1994 compared to 1993, reflecting higher
sales volume. Inventory levels have increased $1.2 million from December 30,
1994 levels, reflecting a build-up of products targeted to ASIC products, much
in communications, and decreased $1.3 million from inventories at December 25,
1993, which were high due to anticipated demand for standard products in early
1994. Accounts payable and accrued liabilities contributed approximately $60.1
million to cash from operations in 1995 reflecting increased spending levels
associated with increases in production volumes and the stock tax benefit
associated with the exercise of stock options by employees and the exercise by
Intel of its warrant. Accounts payable and accrued liabilities increased in 1994
by $20.3 million over 1993 year-end levels reflecting increases in production
volumes and the timing of payments for higher levels of spending for fixed
assets, as well as increases in accrued compensation and benefits and other
liabilities.
 
     Cash used for investing activities was $326.7 million for the year ended
December 29, 1995, as compared to $43.9 million for the year ended December 30,
1994 and $84.1 million for the year ended December 25, 1993. VLSI invested
$203.5 million in property, plant and equipment during 1995 compared to $94.4
million in 1994 and $71.6 million in 1993. Capital additions during 1995, 1994
and 1993 were financed by cash, equipment loans and capital leases. The 1995,
1994 and 1993 investments in property, plant and equipment included acquisition
of equipment for sub-micron wafer fabrication, upgrades to manufacturing and
office facilities and computers and software to support research and development
activity, while the 1995 expenditures also included facilitization and equipment
for modules C and D of the San Antonio facility. The expansion into these
available modules was initiated during 1995 in response to considerable capacity
constraints affecting the semiconductor industry and VLSI. As part of the 1995
capital purchases, VLSI acquired land and buildings at its San Jose headquarters
for approximately $9.6 million. As part of 1994 capital purchases, VLSI acquired
the land and buildings associated with the wafer fabrication and test areas at
its San Jose headquarters for approximately $6.0 million. In each of the years
1993 through 1995, the Company has expanded office facilities for its growing
engineering and support space requirements. The Company expects current
facilities will be adequate through 1996. The Company expects to continue to
utilize debt and/or lease financing for portions of its future capital
expenditures. In January 1996, the Board of Directors of the Company ("Board")
authorized the Company to repurchase shares of the Company's Common Stock on the
open market or in privately negotiated transactions. The Board authorized the
Company to re-issue those shares at a later date through certain of its employee
stock plans and/or to fund stock or asset acquisitions authorized by the Board.
By the end of January 1996, the Company had repurchased 1.8 million shares at an
average per share price of $15.10, and had not yet re-issued any of these
shares.
 
     Cash provided from financing activities was $293.1 million in 1995,
compared to cash used for financing activities of $7.9 million in 1994 and $8.5
million in 1993. The change in 1995 from 1994 reflects higher proceeds from the
issuance of Common Shares in 1995, the majority of which were proceeds from the
Company's June 1995 equity offering (3.4 million shares for net proceeds to the
Company of approximately $94 million), the August 1995 exercise by Intel of a
warrant for 2.7 million shares (approximately $31 million) and a September 1995
debt offering of $172.5 million of 8.25% Convertible Subordinated Notes due 2005
(for net proceeds of approximately $168 million). Additionally, the Company
completed the conversion of its $57.5 million Convertible Subordinated
Debentures into Common Shares in August 1995. See Note 2 of Notes to
Consolidated Financial Statements. Unused committed credit facilities
approximated $52.5 million at February 23, 1996.
 
<TABLE>
<CAPTION>
                                                             1995        1994        1993
                                                           --------     -------     -------
                                                                     (THOUSANDS)
    <S>                                                    <C>          <C>         <C>
    Capital expenditures.................................  $203,472     $94,446     $71,615
</TABLE>
 
     VLSI currently estimates that total budgeted capital expenditures for 1996
will approximate $300 million and will include expenditures to facilitize and
equip modules C and D of the San Antonio facility and for further increases in
0.6-micron wafer fabrication capability. As VLSI pursues these large projects in
ever
 
                                       19
<PAGE>   21
 
increasingly complex technologies, more time is needed to bring manufacturing
capabilities on-line. Accordingly, VLSI will continue to capitalize interest on
the increasing costs of capital projects. Of such planned 1996 capital
expenditures, the level of which could change as necessary during the year, VLSI
had outstanding commitments for purchases of equipment of approximately $157.2
million at December 29, 1995.
 
     VLSI believes that its existing cash balances and estimated cash flows from
operations will be sufficient to meet its liquidity and capital expenditure
needs through 1996. The Company also has a $52.5 million credit facility which
is available until it expires in June 1996, or is renewed. The Company does not
anticipate difficulties associated with renewing the credit facility on terms no
less favorable than its current facility. While the Company believes that its
current capital resources are sufficient to meet its near-term needs, in order
to meet its longer-term needs, VLSI continues to investigate the possibility of
generating financial resources through technology or manufacturing partnerships,
additional equipment financings and offerings of debt or equity securities.
 
                                       20
<PAGE>   22
 
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
     The chart entitled "Financial Information by Quarter (Unaudited)" contained
in Item 5 of Part II hereof is hereby incorporated by reference into this Item 8
of Part II of this Form 10-K.
 
                             VLSI TECHNOLOGY, INC.
 
                           ANNUAL REPORT ON FORM 10-K
 
                          YEAR ENDED DECEMBER 29, 1995
 
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
                        AND FINANCIAL STATEMENT SCHEDULE
 
     Consolidated Financial Statements Included in Item 8:
 
   
<TABLE>
<CAPTION>
                                                                                        PAGE
                                                                                        -----
<S>                                                                                     <C>
Report of Ernst & Young LLP, Independent Auditors.....................................     22
Consolidated Statements of Income for each of the three years in the period ended
  December 29, 1995...................................................................     23
Consolidated Statements of Stockholders' Equity for each of the three years in the
  period ended December 29, 1995......................................................     24
Consolidated Balance Sheets at December 29, 1995 and December 30, 1994................     25
Consolidated Statements of Cash Flows for each of the three years in the period ended
  December 29, 1995...................................................................     26
Notes to Consolidated Financial Statements............................................     27
Consent of Ernst & Young LLP, Independent Auditors....................................     44
Schedule for each of the three years in the period ended December 29, 1995 included in
  Item 14(d):
     II Valuation and Qualifying Accounts and Reserves................................     45
</TABLE>
    
 
     Schedules other than those listed above have been omitted since the
required information is not present or not present in amounts sufficient to
require submission of the schedule, or because the information required is
included in the consolidated financial statements or the notes thereto.
 
                                       21
<PAGE>   23
 
               REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
 
The Board of Directors and Stockholders
of VLSI Technology, Inc.
 
     We have audited the accompanying consolidated balance sheets of VLSI
Technology, Inc. as of December 29, 1995 and December 30, 1994 and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three fiscal years in the period ended December 29, 1995. Our audits also
included the financial statement schedule listed in the index at Item 14(a)(2).
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
 
     We conducted our audits in accordance with generally accepted auditing
standards. 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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of VLSI
Technology, Inc. at December 29, 1995 and December 30, 1994, and the
consolidated results of its operations and its cash flows for each of the three
fiscal years in the period ended December 29, 1995, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
 
                                               /s/  ERNST & YOUNG LLP
 
                                          --------------------------------------
                                                    ERNST & YOUNG LLP
 
San Jose, California
January 16, 1996
 
                                       22
<PAGE>   24
 
                             VLSI TECHNOLOGY, INC.
 
                       CONSOLIDATED STATEMENTS OF INCOME
 
          (DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
THREE YEARS ENDED DECEMBER 29, 1995                            1995         1994         1993
-----------------------------------                          --------     --------     --------
<S>                                                          <C>          <C>          <C>
Net revenues...............................................  $719,919     $587,091     $515,946
Cost of sales(1)...........................................   431,342      356,858      327,774
                                                             --------     --------     --------
Gross profit...............................................   288,577      230,233      188,172
                                                             --------     --------     --------
Operating expenses:
  Research and development.................................    89,682       78,889       66,439
  Marketing, general and administrative....................   123,513      104,595       94,651
                                                             --------     --------     --------
Operating income...........................................    75,382       46,749       27,082
Litigation charge..........................................   (19,400)          --           --
Interest income and other expenses, net....................    13,985        3,301        1,512
Interest expense...........................................    (8,029)      (8,343)      (8,063)
                                                             --------     --------     --------
Income before provision for taxes on income................    61,938       41,707       20,531
Provision for taxes on income..............................    15,970       10,010        4,648
                                                             --------     --------     --------
Net income.................................................  $ 45,968     $ 31,697     $ 15,883
                                                             ========     ========     ========
Net income per share.......................................  $   1.05     $   0.85     $   0.45
                                                             ========     ========     ========
Weighted average common and common equivalent shares
  outstanding..............................................    43,890       37,446       35,276
                                                             ========     ========     ========
</TABLE>
 
---------------
 
(1) See Note 8 for related party disclosures.
 
          See accompanying Notes to Consolidated Financial Statements.
 
                                       23
<PAGE>   25
 
                             VLSI TECHNOLOGY, INC.
 
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
 
                       (DOLLARS AND SHARES IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                    RETAINED
                                    COMMON SHARES    ADDITIONAL     EARNINGS     STOCKHOLDERS'       TOTAL
  THREE YEARS ENDED DECEMBER 29,    --------------    PAID-IN     (ACCUMULATED       NOTES       STOCKHOLDERS'
               1995                 SHARES   AMOUNT   CAPITAL       DEFICIT)      RECEIVABLE        EQUITY
----------------------------------  ------   -----   ----------   ------------   -------------   -------------
<S>                                 <C>      <C>     <C>          <C>            <C>             <C>
BALANCES AT DECEMBER 26, 1992.....  33,301   $333     $ 209,416     $(24,419)        $(322)        $ 185,008
                                    ------   ----      --------     --------         -----          --------
Issuance of Common Shares under:
  Employee stock purchase plan....     766      8         3,934           --            --             3,942
  Stock option plans..............   1,189     12         5,983           --            --             5,995
Tax benefits related to stock
  plans...........................      --     --         1,680           --            --             1,680
Net income........................      --     --            --       15,883            --            15,883
                                    ------   ----      --------     --------         -----          --------
BALANCES AT DECEMBER 25, 1993.....  35,256    353       221,013       (8,536)         (322)          212,508
                                    ------   ----      --------     --------         -----          --------
Issuance of Common Shares under:
  Employee stock purchase plan....     960     10         6,851           --            --             6,861
  Stock option plans..............     469      4         2,838           --            --             2,842
Tax benefits related to stock
  plans...........................      --     --         1,200           --            --             1,200
Repayment of stockholders' notes
  receivable......................      --     --            --           --           322               322
Net income........................      --     --            --       31,697            --            31,697
                                    ------   ----      --------     --------         -----          --------
BALANCES AT DECEMBER 30, 1994.....  36,685    367       231,902       23,161            --           255,430
                                    ------   ----      --------     --------         -----          --------
Issuance of Common Shares under:
  Public offering.................   3,450     35        93,605           --            --            93,640
  Exercise of warrant by Intel....   2,678     27        31,217           --            --            31,244
  Conversion of long-term debt....   2,614     26        56,476           --            --            56,502
  Employee stock purchase plan....     739      7         8,206           --            --             8,213
  Stock option plans..............   1,028     10         7,018           --            --             7,028
Tax benefits related to stock
  plans and Intel warrant.........      --     --        32,604           --            --            32,604
Net income........................      --     --            --       45,968            --            45,968
                                    ------   ----      --------     --------         -----          --------
BALANCES AT DECEMBER 29, 1995.....  47,194   $472     $ 461,028     $ 69,129         $  --         $ 530,629
                                    ======   ====      ========     ========         =====          ========
</TABLE>
 
          See accompanying Notes to Consolidated Financial Statements.
 
                                       24
<PAGE>   26
 
                             VLSI TECHNOLOGY, INC.
 
                          CONSOLIDATED BALANCE SHEETS
 
          (DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                                                                     DECEMBER 29,     DECEMBER 30,
                                                                         1995             1994
                                                                     ------------     ------------
<S>                                                                  <C>              <C>
                              ASSETS
Current assets:
  Cash and cash equivalents........................................    $183,165         $ 93,310
  Liquid investments...............................................     182,416            9,801
  Accounts receivable, net of allowance for doubtful accounts and
     customer returns of $2,100 ($2,300 in 1994)...................     119,638           80,500
  Inventories:
     Raw materials.................................................       4,683            5,277
     Work-in-process...............................................      47,069           43,123
     Finished goods................................................       9,096           11,296
                                                                       --------         --------
  Total inventories................................................      60,848           59,696
  Deferred and refundable income taxes.............................      47,706           17,963
  Prepaid expenses and other current assets........................       4,362            4,966
                                                                       --------         --------
          Total current assets.....................................     598,135          266,236
                                                                       --------         --------
Property, plant and equipment:
  Land.............................................................      15,372           12,197
  Buildings and leasehold improvements.............................      85,341           67,171
  Machinery and equipment..........................................     456,085          346,268
  Assets leased under capital leases...............................      52,788           63,029
  Construction in progress.........................................      88,627           16,058
                                                                       --------         --------
                                                                        698,213          504,723
  Accumulated depreciation and amortization........................    (346,172)        (285,593)
                                                                       --------         --------
     Net property, plant and equipment.............................     352,041          219,130
Other assets.......................................................       9,711            4,850
                                                                       --------         --------
                                                                       $959,887         $490,216
                                                                       ========         ========
               LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable(1)..............................................    $100,099         $ 52,789
  Accrued compensation and benefits................................      24,802           20,512
  Deferred income..................................................       9,067           10,276
  Litigation reserve...............................................      18,543               --
  Other accrued liabilities........................................      36,367           28,439
  Current capital lease obligations................................       1,552            7,882
  Current portion of long-term debt................................       7,608            7,634
                                                                       --------         --------
          Total current liabilities................................     198,038          127,532
                                                                       --------         --------
Non-current capital lease obligations..............................       3,465            5,017
Long-term debt.....................................................     215,382           91,787
Deferred income taxes..............................................      12,373           10,450
Commitments and contingencies
Stockholders' equity:
  Preferred Shares, $.01 par value; 2,000 shares authorized........          --               --
  Common Stock, $.01 par value; 99,000 shares authorized (54,000 in
     1994), 47,194 shares issued and outstanding (36,685 in
     1994).........................................................         472              367
  Junior Common Stock, $.01 par value; 1,000 shares authorized.....          --               --
  Additional paid-in capital.......................................     461,028          231,902
  Retained earnings................................................      69,129           23,161
                                                                       --------         --------
          Total stockholders' equity...............................     530,629          255,430
                                                                       --------         --------
                                                                       $959,887         $490,216
                                                                       ========         ========
</TABLE>
 
---------------
 
(1) See Note 8 for related party disclosures.
 
          See accompanying Notes to Consolidated Financial Statements.
 
                                       25
<PAGE>   27
 
                             VLSI TECHNOLOGY, INC.
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
                             (DOLLARS IN THOUSANDS)
 
<TABLE>
<CAPTION>
            THREE YEARS ENDED DECEMBER 29, 1995                1995         1994         1993
-----------------------------------------------------------  --------     --------     --------
<S>                                                          <C>          <C>          <C>
Increase (decrease) in cash and cash equivalents
Operating activities:
  Net income...............................................  $ 45,968     $ 31,697     $ 15,883
  Adjustments to reconcile net income to cash generated
     by operations:
     Litigation charge.....................................    19,400           --           --
     Depreciation and amortization.........................    73,683       61,761       49,500
     Deferred income taxes.................................   (22,537)       4,613        5,837
     Changes in operating assets and liabilities:
       Accounts receivable.................................   (39,137)      (9,834)       2,826
       Inventories.........................................    (1,152)       2,416      (10,397)
       Refundable income taxes.............................    (5,283)      (5,997)     (11,966)
       Accounts payable, accrued liabilities and deferred
          income...........................................    60,101       20,283       10,984
       Other...............................................    (7,513)      (1,400)       1,748
                                                             --------     --------     --------
          Cash generated by operations.....................   123,530      103,539       64,415
                                                             --------     --------     --------
Investing activities:
  Purchases of liquid investments..........................  (329,198)     (64,570)     (53,109)
  Proceeds from maturities of liquid investments...........   156,633       85,870       22,009
  Purchases of property, plant and equipment...............  (153,573)     (64,622)     (51,824)
  Other....................................................      (600)        (550)      (1,145)
                                                             --------     --------     --------
          Net cash flow used for investing activities......  (326,738)     (43,872)     (84,069)
                                                             --------     --------     --------
Financing activities:
  Payments on debt and capital lease obligations...........   (18,790)     (17,965)     (18,421)
  Issuance of long-term debt...............................   172,500           --           --
  Conversion of long-term debt to equity...................      (845)          --           --
  Issuance of Common Shares, net of issuance costs.........   140,198       10,072        9,937
                                                             --------     --------     --------
          Net cash flow provided by (used for) financing
            activities.....................................   293,063       (7,893)      (8,484)
                                                             --------     --------     --------
Net increase (decrease) in cash and cash equivalents.......    89,855       51,774      (28,138)
Cash and cash equivalents, beginning of period.............    93,310       41,536       69,674
                                                             --------     --------     --------
Cash and cash equivalents, end of period...................  $183,165     $ 93,310     $ 41,536
                                                             ========     ========     ========
Supplemental disclosure:
  Cash outflows for property, plant and equipment..........  $153,573     $ 64,622     $ 51,824
     Add: Secured equipment loans..........................    19,341       26,072       11,651
     Add: Capital lease obligations incurred...............        --        3,752        8,140
     Add: Accrued property, plant and equipment
          additions........................................    30,558           --           --
                                                             --------     --------     --------
          Property, plant and equipment additions..........  $203,472     $ 94,446     $ 71,615
                                                             ========     ========     ========
  Interest paid............................................  $  8,732     $  8,100     $  8,319
  Income taxes paid, net...................................  $  6,533     $  9,615     $  3,889
                                                             ========     ========     ========
</TABLE>
 
          See accompanying Notes to Consolidated Financial Statements.
 
                                       26
<PAGE>   28
 
                             VLSI TECHNOLOGY, INC.
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      THREE YEARS ENDED DECEMBER 29, 1995
 
1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
     BASIS OF PRESENTATION.  The consolidated financial statements include the
accounts of VLSI Technology, Inc. ("VLSI" or the "Company") and its
majority-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
 
     FISCAL YEAR.  In 1994, the Company changed its fiscal year to end on the
last Friday in December, in years prior to 1994, the Company's fiscal year ended
on the last Saturday in December. Fiscal years 1995, 1994 and 1993 ended
December 29, 30 and 25, respectively. Fiscal year 1994 consisted of 53 weeks,
while all other years presented herein consisted of 52 weeks.
 
     CASH EQUIVALENTS AND LIQUID INVESTMENTS.  Cash equivalents reflect highly
liquid short-term investments with maturities at date of purchase of three
months or less. These investments are readily convertible to known amounts of
cash, while investments with maturities of between three and twelve months are
considered liquid investments.
 
     CONCENTRATIONS OF CREDIT RISK.  Financial instruments that potentially
subject VLSI to concentration of credit risk consist principally of cash
equivalents, liquid investments and trade receivables. VLSI invests cash through
high-credit-quality financial institutions. A majority of VLSI's trade
receivables are derived from sales to manufacturers of computer systems, with
the remainder spread across various other industries. Management believes that
any risk of accounting loss is reduced due to the diversity of its products, end
customers and geographic sales areas. VLSI performs ongoing credit evaluations
of its customers' financial condition and requires collateral, such as letters
of credit and bank guarantees, whenever deemed necessary.
 
     INVENTORIES.  Inventories are stated at the lower of cost or market. Cost
is computed on a semi-annual adjusted standard basis (which approximates average
cost on a FIFO basis); market is based upon estimated net realizable value. The
valuation of inventory at the lower of cost or market requires the use of
estimates as to the amounts of current inventory that will be sold. These
estimates are dependent on the Company's assessment of current and expected
orders from its customers, given that orders, particularly of core logic and
cellular handset chip sets, are subject to cancellation with limited advance
notice prior to shipment. In most instances, inventory is reserved if the units
in inventory exceed six months of estimated demand for that product. As a
considerable portion of the Company's sales are to the personal computer and
cellular handset markets, it is reasonably possible that the recoverability of
VLSI's investment in inventory associated with these markets will change in the
near term. No estimate can be made of a range of amounts of customer
cancellations that would materially affect the consolidated financial
statements.
 
     PROPERTY, PLANT AND EQUIPMENT.  Property, plant and equipment are stated at
cost. Depreciation and amortization are provided on the straight-line method for
financial reporting purposes and on accelerated methods for tax purposes. Assets
leased under capitalized leases are recorded at the present value of the lease
obligations and amortized on a straight-line basis over the lease term. The
valuation of property, plant and equipment at depreciated cost requires use of
estimates as to the estimated useful lives and salvage value of these assets. As
the Company competes in an industry that relies on rapidly changing technology
and manufacturing developments, the actual useful lives and salvage values may
eventually prove to be lower than those estimated. No estimate can be made of a
range of amounts of loss that are reasonably possible should actuals prove lower
than estimated.
 
     REVENUES.  Revenues from silicon product sales to customers are recognized
upon shipment.
 
     Revenues associated with software system sales and software licenses are
generally recognized at the time of shipment. Postcontract customer support
revenues are recognized ratably over the term of the related agreements.
Training and consulting revenues are recognized as the related services are
performed.
 
                                       27
<PAGE>   29
 
                             VLSI TECHNOLOGY, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                      THREE YEARS ENDED DECEMBER 29, 1995
 
     Revenues relating to the licensing of technology are generally recognized
when the significant contractual obligations have been fulfilled and the fees
are billable.
 
     TRANSLATION OF FOREIGN CURRENCIES.  During 1995, the Company changed the
functional currency of the majority of its larger foreign subsidiaries from the
local subsidiary currency to U.S. dollar-based currency. Results from foreign
operations are subject to exchange rate fluctuations and foreign currency
transaction costs. Net foreign currency transaction losses included in interest
income and other expenses, net, were not material in 1995, 1994 and 1993.
Foreign translation gains and losses and the effect of foreign currency exchange
rate fluctuations on cash flows in all years have not been material.
 
     FOREIGN EXCHANGE CONTRACTS.  The Company's policy is to hedge all material
monetary assets, liabilities and commitments denominated in currencies other
than the functional currency of the Company's subsidiaries. This activity is
primarily performed using forward contracts. This policy of hedging is intended
to minimize the effect of fluctuating foreign currencies on reported income on a
going-forward basis. No high correlation hedging activities are performed, as
all currency risks are hedged with instruments using the same currency. The
forward contracts qualify as hedges for financial reporting purposes and,
accordingly, are reported at market value with gains and losses on such hedges
included in other current assets or accrued liabilities and offset against
foreign exchange gains or losses on the exposures hedged. The forward contracts
position at December 29, 1995 relates to hedging foreign currency net asset and
liability positions as well as purchase orders and consists of foreign exchange
forward contracts to sell $25.8 million in foreign currency and buy $23.0
million in foreign currency. These contracts, which matured through January
1996, were with major international financial institutions resulting in a net
gain of $0.8 million on the forward contracts hedging foreign currency net asset
and liability positions and a $0.6 million deferred loss on the forward
contracts hedging purchase orders. The deferred loss is to be included in the
cost of the items to be acquired. The realized gain on the contracts
substantially equaled the offsetting loss of the underlying exposure.
 
     FAIR VALUE DISCLOSURES.  The following estimated fair values have been
determined by the Company using available market information and appropriate
valuation methodologies:
 
        Cash, cash equivalents and liquid investments -- The carrying amounts of
     these items are their fair values.
 
          Debt (See Note 2) -- Quoted market prices of the Company's convertible
     debt are currently available. Interest rates that are currently available
     to the Company for issuance of debt similar to existing secured equipment
     loans are used to estimate the fair value of remaining maturities of
     existing secured equipment loans.
 
          Foreign currency contracts -- The estimated fair value of foreign
     currency contracts is based on quoted market prices obtained from dealers.
 
     The carrying amount and fair value of the Company's financial instruments
at December 29, 1995 and December 30, 1994 are as follows:
 
<TABLE>
<CAPTION>
                                                                     CARRYING       FAIR
                                 1995                                 AMOUNT       VALUE
    ---------------------------------------------------------------  --------     --------
                                                                          (THOUSANDS)
    <S>                                                              <C>          <C>
    Cash and cash equivalents......................................  $183,165     $183,165
    Liquid investments.............................................  $182,416     $182,416
    Short-term debt................................................  $  7,608     $  7,919
    Long-term debt.................................................  $215,382     $202,795
    Foreign currency contracts.....................................  $     --     $    149
</TABLE>
 
                                       28
<PAGE>   30
 
                             VLSI TECHNOLOGY, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                      THREE YEARS ENDED DECEMBER 29, 1995
 
<TABLE>
<CAPTION>
                                                                     CARRYING       FAIR
                                 1994                                 AMOUNT       VALUE
    ---------------------------------------------------------------  --------     --------
                                                                          (THOUSANDS)
    <S>                                                              <C>          <C>
    Cash and cash equivalents......................................  $ 93,310     $ 93,310
    Liquid investments.............................................  $  9,801     $  9,801
    Short-term debt................................................  $  7,634     $  7,213
    Long-term debt.................................................  $ 91,787     $ 81,582
    Foreign currency contracts.....................................  $     --     $    187
</TABLE>
 
     The fair value estimates presented are based on pertinent information
available to management as of December 29, 1995 and December 30, 1994,
respectively. Although management is not aware of any factors that would
significantly affect the estimated fair value amounts, such amounts have not
been comprehensively revalued for purposes of these financial statements since
such dates, and current estimates of fair value may differ significantly from
the amounts presented.
 
     The Company classifies liquid investments as available-for-sale or
held-to-maturity at the time of purchase and reevaluates such designation as of
each balance sheet date in accordance with the nature of the securities and the
intent and investment goals of the Company. Debt securities are classified as
held-to-maturity when the Company has the positive intent and ability to hold
the securities to maturity. Held-to-maturity securities are stated at amortized
cost with corresponding premiums or discounts amortized over the life of the
investment to interest income. Marketable equity securities, and debt securities
not classified as held-to-maturity, are classified as available-for-sale and
reported at fair value. Unrealized gains or losses on available-for-sale
securities are included, net of tax, in equity until their disposition. Realized
gains and losses and declines in value judged to be other-than-temporary on
available-for-sale securities are included in interest income. The cost of
securities sold is based on the specific identification method.
 
     All liquid investments at December 29, 1995 are classified as
available-for-sale securities. Such investments, which mature through June 1996,
are categorized in the following table.
 
<TABLE>
<CAPTION>
                                                                  GROSS UNREALIZED
                                                    AMORTIZED     ----------------     ESTIMATED
                                                      COST        GAINS     LOSSES     FAIR VALUE
                                                    ---------     -----     ------     ----------
                                                                     (THOUSANDS)
    <S>                                             <C>           <C>       <C>        <C>
    Cash equivalents:
    Commercial paper..............................  $  90,533      $10       $  2       $  90,541
    EuroDollar time deposits......................     23,265        2         --          23,267
    Governmental securities.......................     10,054        1         --          10,055
    Money market funds............................     39,085       --         --          39,085
    Other.........................................      5,000       --         26           4,974
    Liquid investments:
    Commercial paper..............................    157,632       51         --         157,683
    Governmental securities.......................      4,912       --         --           4,912
    Medium-term notes.............................     14,999       --         --          14,999
    Treasury notes................................      4,822       --         --           4,822
                                                     --------      ---        ---        --------
    Total.........................................  $ 350,302      $64       $ 28       $ 350,338
                                                     ========      ===        ===        ========
</TABLE>
 
                                       29
<PAGE>   31
 
                             VLSI TECHNOLOGY, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                      THREE YEARS ENDED DECEMBER 29, 1995
 
     All investments at December 30, 1994 were classified as available-for-sale
securities. Such investments, which matured through April 1995, are categorized
in the following table.
 
<TABLE>
<CAPTION>
                                                                   GROSS UNREALIZED
                                                     AMORTIZED     ----------------     ESTIMATED
                                                       COST        GAINS     LOSSES     FAIR VALUE
                                                     ---------     -----     ------     ----------
                                                                      (THOUSANDS)
    <S>                                              <C>           <C>       <C>        <C>
    Cash equivalents:
    Commercial paper...............................   $61,814       $10       $ 59       $ 61,765
    EuroDollar time deposits.......................     6,000         1         --          6,001
    Money market funds.............................    13,357        --         --         13,357
    Liquid investments -- Commercial paper.........     9,800         2          1          9,801
                                                      -------       ---        ---        -------
    Total..........................................   $90,971       $13       $ 60       $ 90,924
                                                      =======       ===        ===        =======
</TABLE>
 
     There were no gains or losses realized on sales of available-for-sale
securities during 1995. Unrealized holding losses on available-for-sale
securities included in stockholders' equity in 1995 and 1994 were immaterial.
 
     CAPITALIZED INTEREST.  Of total interest expenditures in 1995 and 1994 of
$12.3 million and $8.7 million, respectively, the Company capitalized $4.3
million and $0.4 million. Amounts subject to capitalization in prior years were
not material.
 
     STOCK-BASED COMPENSATION.  The Company grants stock options for a fixed
number of shares to employees with an exercise price equal to the fair value of
the shares at the date of grant. The Company accounts for stock option grants in
accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees"
and, accordingly, recognizes no compensation expense for the stock option
grants.
 
     NET INCOME PER SHARE.  Net income per share is computed using the weighted
average number of shares of outstanding Common Stock and dilutive common
equivalent shares -- shares issuable under the stock option plans and through
late August 1995 a warrant held by Intel Corporation ("Intel"). Fully diluted
earnings per share have not been presented, because the amounts are not
materially different.
 
     USE OF ESTIMATES.  The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
 
     RECLASSIFICATIONS.  Certain prior year amounts previously reported have
been reclassified to conform to the 1995 presentation.
 
     NEW ACCOUNTING PRONOUNCEMENTS.  The Company must adopt Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("FAS 121") and
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123") with the commencement of fiscal 1996. Initial adoption
of FAS 121 will not have a material effect on the Company's consolidated
financial statements. The Company has elected to adopt the disclosure
requirements of FAS 123 rather than the accounting requirements of FAS 123.
 
                                       30
<PAGE>   32
 
                             VLSI TECHNOLOGY, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                      THREE YEARS ENDED DECEMBER 29, 1995
 
2.  LONG-TERM DEBT
 
     Total debt at December 29, 1995 and December 30, 1994 consists of the
following:
 
<TABLE>
<CAPTION>
                                                                        1995        1994
                                                                      --------     -------
                                                                          (THOUSANDS)
    <S>                                                               <C>          <C>
    Secured equipment loans, with interest at various rates (8.1% to
      10.6%; 9.1% weighted average at December 29, 1995), due
      through August 2002...........................................  $ 50,490     $41,921
    7% Convertible Subordinated Debentures, due 2012................        --      57,500
    8.25% Convertible Subordinated Notes, due 2005..................   172,500          --
                                                                      --------     -------
    Total debt......................................................   222,990      99,421
    Less current portion............................................     7,608       7,634
                                                                      --------     -------
    Long-term portion...............................................  $215,382     $91,787
                                                                      ========     =======
</TABLE>
 
     The Company has a two-year committed Credit Agreement (the "Credit
Agreement") with a syndicate of banks providing for borrowings of up to $52.5
million at various rates of interest that expires June 7, 1996. The Credit
Agreement has various covenants that preclude the Company from, among other
things, paying cash dividends and also places certain other limits on the
Company. The Company is required to maintain certain financial ratios as defined
in the Credit Agreement. The Credit Agreement also calls for a variable limit on
the Company's dollar amount of capital spending. Annual commitment fees, which
the Company believes are immaterial, are charged on the unused portion of the
committed credit amount. There are no compensating balance requirements.
Borrowings outstanding under the Credit Agreement are unsecured. At December 29,
1995 and December 30, 1994, the Company had no outstanding borrowings on the
Credit Agreement.
 
     Interest on short-term borrowing facilities was based on market rates.
Interest on long-term borrowing facilities is generally payable quarterly at
contractual rates based on U.S. Treasury securities. Certain secured equipment
loans require adherence to certain financial covenants, one of which prohibits
payment of cash dividends.
 
     In July 1995, the Company called for redemption of the 7% Convertible
Subordinated Debentures due 2012 ("Debentures"). Of the $57,500,000 in principal
amount of Debentures, $57,364,000 were converted into 2,607,359 shares of the
Company's Common Stock. The Debentures not converted, which amounted to
$136,000, were redeemed by the Company at a price of $1,032.86 for each $1,000
in principal amount of Debentures redeemed. This resulted in the issuance of
6,181 shares of the Company's Common Stock under an underwritten call agreement
that the Company had entered into with Bear, Stearns & Co. Inc. and Hambrecht &
Quist LLC.
 
     In September 1995, the Company completed the public offering of an
aggregate of $172.5 million of 8.25% Convertible Subordinated Notes ("Notes")
due 2005, for net proceeds of approximately $168 million. Interest on the Notes
is payable on April 1 and October 1 of each year commencing April 1, 1996. The
Notes are convertible into shares of VLSI Common Stock at any time on or before
the close of business on the last trading day prior to maturity, unless
previously redeemed, at a conversion price of $54.80 per share, subject to
adjustment in certain events. The Notes are redeemable, in whole or in part, at
the option of the Company, upon at least 15 days' notice, at any time on or
after October 3, 1997, at redemption prices starting at 103.3% and at
diminishing prices thereafter, plus accrued interest, except that the Notes may
not be redeemed prior to October 3, 1999 unless the closing price of the Common
Stock is at least 125% of the conversion price for at least 20 trading days
within a period of 30 consecutive trading days ending on the fifth trading day
prior to the notice of redemption. The Notes are unsecured and subordinated in
right of payment in full to all existing and future Senior Debt of the Company
(as defined). The Company expects from time to time to incur
 
                                       31
<PAGE>   33
 
                             VLSI TECHNOLOGY, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                      THREE YEARS ENDED DECEMBER 29, 1995
 
indebtedness constituting Senior Debt. Additionally, the terms of the Company's
existing Credit Agreement prohibit the Company from repaying any Notes prior to
maturity.
 
     Maturities of debt are as follows: 1996 -- $7.6 million, 1997 -- $7.8
million, 1998 -- $7.9 million, 1999 -- $8.4 million, 2000 -- $9.0 million and
thereafter (starting in 2001) -- $182.3 million.
 
3. LEASES AND OTHER COMMITMENTS
 
     Obligations under capital leases represent the present value of future
minimum rental payments under various agreements to lease manufacturing
equipment. The Company has options to purchase leased assets at the end of the
lease terms for their fair market values or at stipulated values up to 30% of
original cost. Accumulated amortization of these leased assets was $50.2 million
and $54.6 million at December 29, 1995 and December 30, 1994, respectively.
 
     The Company rents certain equipment and manufacturing and office facilities
under operating lease agreements that expire through 2037 and contain renewal
options and provisions adjusting the lease payments, based upon changes in the
Consumer Price Index or in fixed increments. VLSI is generally responsible for
taxes, insurance and utilities under these leases.
 
     Future minimum lease payments under capital leases, together with the
present value of those payments and the aggregate annual rental commitments
under noncancelable operating leases as of December 29, 1995, are shown as
follows:
 
<TABLE>
<CAPTION>
                                                                       CAPITAL     OPERATING
                          YEAR ENDING DECEMBER                         LEASES       LEASES
    -----------------------------------------------------------------  -------     ---------
                                                                            (THOUSANDS)
    <S>                                                                <C>         <C>
    1996.............................................................  $ 1,967      $ 8,946
    1997.............................................................    1,425        8,635
    1998.............................................................    1,552        7,814
    1999.............................................................    1,022        6,088
    2000.............................................................       --        4,970
    2001 and thereafter..............................................       --       21,944
                                                                        ------      -------
    Total minimum lease payments.....................................  $ 5,966      $58,397
                                                                                    =======
    Less amount representing interest................................     (949)
                                                                        ------
    Present value of future minimum lease payments...................  $ 5,017
                                                                        ======
</TABLE>
 
     Rental expense was approximately $10.2 million in 1995 ($9.0 million in
1994 and $11.3 million in 1993).
 
     OTHER COMMITMENTS. The Company has commitments for the purchase of
equipment totaling approximately $157.2 million at December 29, 1995, as well as
various other long-term committed contracts.
 
4. LITIGATION AND CONTINGENCIES
 
     In 1990, patent infringement claims were filed by Texas Instruments ("TI")
against the Company and four other defendants with the International Trade
Commission ("ITC") and the U.S. District Court for the Northern District of
Texas, Dallas Division ("District Court"), seeking to preclude importation into
the U.S. of, and an injunction against the sale and/or manufacture of, parts
using the allegedly protected process and seeking unspecified damages,
respectively. During 1991, the Company developed an alternate process and
discontinued use of the allegedly protected process. In February 1992, the ITC
determined that the Company infringed the original patented process, but found
the alternate process to be non-infringing. The Court of
 
                                       32
<PAGE>   34
 
                             VLSI TECHNOLOGY, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                      THREE YEARS ENDED DECEMBER 29, 1995
 
Appeals, for the Federal Circuit, affirmed the ITC decision in 1993. The U.S.
District Court proceedings resulted in a May 1995 jury verdict against the
Company for damages of $19.4 million. Although the Company was in the process of
contesting the verdict at the trial court level, the Company recorded a charge
to earnings of $19.4 million in the second quarter of 1995. In August 1995, the
trial judge issued an order overturning and setting aside the jury verdict and
conditionally granting a new trial on the matter in the event that his order is
reversed on appeal. TI has filed a notice of appeal and will seek a reversal of
the trial judge's order as well as enhanced damages (which by statute may be as
high as treble damages), pre-judgment interest and attorneys' fees. The Company
intends to continue to vigorously defend itself against the TI claims throughout
the appeals process. The Company has retained the $19.4 million charge taken
during the second quarter of 1995, pending resolution of this and related
intellectual property matters. The litigation charge is shown as a separate
liability on the balance sheet, net of TI litigation expenditures incurred
during 1995.
 
     While the final outcome of this matter is currently not determinable,
management believes that the ultimate resolution of this matter will not have a
material adverse effect on the Company's consolidated financial position or
results of operations. However, should the ultimate outcome of this matter be
unfavorable, VLSI may be required to pay damages and other expenses.
 
     In addition, in the normal course of business, the Company receives and
makes inquiries with regard to other possible patent infringement. Where deemed
advisable, the Company may seek or extend licenses or negotiate settlements.
 
5. STOCKHOLDERS' EQUITY
 
     The Company's amended certificate of incorporation authorizes 102,000,000
shares of Capital Stock for issuance, 100,000,000 shares of which are designated
Common Shares and 2,000,000 shares of which are designated Preferred Shares. The
Common Shares are authorized to be issued in series, with the first series
designated Common Stock and consisting of 99,000,000 shares. All other series of
Common Shares (other than Common Stock) are designated, as a group, Junior
Common Stock and consist of 1,000,000 shares. The Board of Directors ("Board")
has the authority to issue the Preferred Shares and the Common Shares (other
than Common Stock) in series, the rights, preferences and privileges of which
can be determined by the Board without stockholder approval.
 
     In June 1995, the Company completed the public offering of an aggregate of
3,450,000 shares of its Common Stock at a price to the public of $28.625 per
share, for net proceeds to the Company of approximately $94 million.
 
     In January 1996, the Board authorized the Company to repurchase shares of
the Company's Common Stock on the open market or in privately negotiated
transactions. The Board authorized the Company to re-issue those shares at a
later date through certain of its employee stock plans and/or to fund stock or
asset acquisitions authorized by the Board. By the end of January 1996, the
Company had repurchased 1.8 million shares at an average per share price of
$15.10, and had not yet re-issued any of these shares.
 
     INTEL AGREEMENTS. In the third quarter of 1992, VLSI and Intel entered into
two related agreements. On July 8, 1992, VLSI and Intel entered into a
Technology and Manufacturing Agreement ("Technology Agreement"), and on August
25, 1992, pursuant to the Intel/VLSI Stock and Warrant Purchase Agreement
("Equity Agreement") also entered into on July 8, 1992, Intel invested $50
million in VLSI to acquire 5,355,207 shares of the Company's Common Stock
("Intel Shares") plus a warrant ("Warrant") to purchase an additional 2,677,604
shares of the Company's Common Stock ("Warrant Shares") at $11.69 per share. In
addition, pursuant to the Technology Agreement, the two companies were working
together to manufacture -- with VLSI responsible for designing, marketing and
selling -- chips that would enable manufacturers to build handheld computers on
the standardized system platform to be developed by the companies. The
development
 
                                       33
<PAGE>   35
 
                             VLSI TECHNOLOGY, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                      THREE YEARS ENDED DECEMBER 29, 1995
 
efforts were completed in 1994; however, the market for handheld computers
developed more slowly than originally anticipated. As a result, in November
1994, the Company and Intel terminated the Technology Agreement, and in January
and February 1995, Intel sold all of the Intel Shares. In August 1995, Intel
exercised its Warrant, resulting in net proceeds to the Company of approximately
$31 million.
 
     The Equity Agreement currently provides Intel with demand registration
rights with respect to the Warrant Shares. The Equity Agreement also imposes
certain restrictions on Intel, including a limitation on Intel's ability to
acquire additional shares of VLSI voting stock (referred to as a standstill) and
a requirement that Intel vote its VLSI stock in the same proportion as other
stockholders on matters submitted to the VLSI stockholders for approval (unless
it would be materially adverse to Intel's interest). All other significant
rights of, and restrictions on, Intel under the Equity Agreement have
terminated.
 
     STOCKHOLDERS' RIGHTS PLAN. In August 1992, the Board approved the adoption
of the First Amended and Restated Rights Agreement ("Restated Rights
Agreement"), which replaces the Common Shares Rights Agreement dated as of
November 7, 1989 ("Prior Rights Agreement") and amends the outstanding rights
issued pursuant to the Prior Rights Agreement ("Rights"). Among other things,
the Restated Rights Agreement provides that each Right will now relate to a
fraction of a share of Series A Participating Preferred Stock of the Company (a
"Unit"), which is economically equivalent to one share of Common Stock. On
August 24, 1992, the Board further amended the Restated Rights Agreement for the
purpose of excepting certain transactions contemplated by the Equity Agreement
between the Company and Intel from operation of the Restated Rights Agreement.
The Rights can be transferred or exercised (initially at a price of $45 per
Unit) only upon the occurrence of certain events involving substantial transfers
of ownership of Common Shares. The Rights are redeemable, in whole but not in
part, at VLSI's option at $.01 per Right, at any time prior to becoming
exercisable and in certain other circumstances. The Rights expire no later than
November 7, 1999.
 
     DIRECTORS' STOCK OPTION PLAN. Under the Directors' Stock Option Plan, which
expires in 2001, options having ten-year terms are automatically granted
annually to non-employee directors. At December 29, 1995, non-employee directors
held options to purchase 115,000 shares of Common Stock at exercise prices
ranging from $6.75 to $14.25 per share, of which 65,000 were exercisable. In
addition, 160,000 shares were available for future grant under this Plan.
 
     EMPLOYEE STOCK PURCHASE PLAN. Under VLSI's Employee Stock Purchase Plan,
qualified employees are entitled to purchase shares of Common Stock at 85% of
the fair market value at certain specified dates. Of the 9,000,000 shares
authorized to be issued under this Plan, 6,816,094 shares have been issued
through December 29, 1995.
 
     STOCK OPTION PLANS. Employees and consultants may be granted options to
purchase shares of VLSI's Common Stock, as well as certain other awards, under
the Company's 1992 Stock Plan. Additionally, employees and consultants may
exercise options to purchase shares of VLSI Common Stock previously granted
under the 1982 Incentive Stock Option Plan. No new options may be granted under
the 1982 Incentive Stock Option Plan. Options granted under these Plans may
either be "incentive stock options" or "nonstatutory" options. All outstanding
options have exercise prices equal to the fair market value on the date of
grant. Generally, outstanding options expire ten years from date of grant and
become exercisable at a rate of 25% per year from date of grant. At December 29,
1995, 1,087,626 shares were available for grant under the 1992 Stock Plan. This
Plan expires in 2002. The Board has authorized an increase of 5,000,000 shares
under this Plan, subject to stockholder approval. The Board has also amended
this Plan to limit the total number of shares that may be granted under the Plan
to any one individual to 500,000 shares per annum for both new and existing
employees.
 
                                       34
<PAGE>   36
 
                             VLSI TECHNOLOGY, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                      THREE YEARS ENDED DECEMBER 29, 1995
 
     Additional information relative to the Plans is as follows:
 
<TABLE>
<CAPTION>
                                                                           OUTSTANDING OPTIONS
                                                                         -----------------------
                                                                         NUMBER OF     AGGREGATE
                                                                          SHARES         PRICE
                                                                         ---------     ---------
                                                                               (THOUSANDS)
<S>                                                                      <C>           <C>
Outstanding number of options at:
  December 30, 1994....................................................    3,788        $29,972
  December 29, 1995....................................................    4,201        $55,446
Options exercisable at:
  December 30, 1994....................................................    1,779        $10,478
  December 29, 1995....................................................    1,492        $10,314
</TABLE>
 
     During 1995, VLSI recorded a tax benefit related to options exercised under
the Plans, resulting in a $10,250,000 increase in stockholders' equity
($1,200,000 in 1994 and $1,680,000 in 1993).
 
6. EMPLOYEE BENEFIT PLANS
 
     The Company accrued approximately $7.6 million, $5.0 million and $3.8
million in 1995, 1994 and 1993, respectively, for its Employee Profit Sharing
Plan, Executive Performance Incentive Plan and Performance Recognition Plan. The
Company's contribution expenses associated with its 401(k) plan were
approximately $1.4 million, $0.6 million and $0.5 million in 1995, 1994 and
1993, respectively.
 
7. INCOME TAXES
 
     The provision for taxes on income is as follows:
 
<TABLE>
<CAPTION>
                                                                  YEAR ENDED DECEMBER
                                                            -------------------------------
                                                             1995        1994        1993
                                                            -------     -------     -------
                                                                      (THOUSANDS)
    <S>                                                     <C>         <C>         <C>
    Federal:
      Current.............................................  $22,758     $ 6,933     $ 4,464
      Deferred............................................   (8,600)     (1,468)     (2,400)
                                                            -------     -------     -------
                                                             14,158       5,465       2,064
    State:
      Current.............................................    1,292         970         295
      Deferred............................................   (3,004)         --          --
                                                            -------     -------     -------
                                                             (1,712)        970         295
    Foreign:
      Current.............................................    3,629       3,265       2,441
      Deferred............................................     (105)        310        (152)
                                                            -------     -------     -------
                                                              3,524       3,575       2,289
                                                            -------     -------     -------
         Total............................................  $15,970     $10,010     $ 4,648
                                                            =======     =======     =======
</TABLE>
 
     Pre-tax income from foreign operations was $9.6 million, $4.5 million and
$1.2 million in 1995, 1994 and 1993, respectively.
 
                                       35
<PAGE>   37
 
                             VLSI TECHNOLOGY, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                      THREE YEARS ENDED DECEMBER 29, 1995
 
     The provision for taxes reconciles with the amount computed by applying the
U.S. statutory rate to income before provision for taxes as follows:
 
<TABLE>
<CAPTION>
                                                                  YEAR ENDED DECEMBER
                                                            -------------------------------
                                                             1995        1994        1993
                                                            -------     -------     -------
                                                                      (THOUSANDS)
    <S>                                                     <C>         <C>         <C>
    Income before provision for taxes.....................  $61,938     $41,707     $20,531
    U.S. statutory rates..................................       35%         35%         35%
    Computed expected tax.................................   21,678      14,597       7,186
    R&D and investment tax credits........................      (67)     (5,048)     (4,572)
    Change in valuation allowance.........................   (8,325)     (1,252)        260
    State taxes, net of federal benefits..................   (2,164)        631         192
    Foreign income taxes in excess of U.S. statutory
      rates...............................................    4,605          --          --
    Foreign withholding taxes.............................       --          --         658
    Unbenefited foreign loss..............................      243       1,326       1,059
    Other, net............................................       --        (244)       (135)
                                                            -------     -------     -------
    Provision for taxes on income.........................  $15,970     $10,010     $ 4,648
                                                            -------     -------     -------
    Total effective tax rate..............................     25.8%       24.0%       22.6%
                                                            =======     =======     =======
</TABLE>
 
     Deferred income taxes reflect tax credits and loss carryforwards and the
tax effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes.
 
     Significant components of the Company's deferred tax liabilities and assets
are as follows:
 
<TABLE>
<CAPTION>
                                                                YEAR ENDED DECEMBER
                                                         ----------------------------------
                                                           1995         1994         1993
                                                         --------     --------     --------
                                                                    (THOUSANDS)
    <S>                                                  <C>          <C>          <C>
    Deferred tax liabilities:
      Depreciation and amortization expense............  $(12,373)    $(10,450)    $ (9,230)
      Other............................................        --          (93)        (399)
                                                         --------     --------     --------
         Total deferred tax liabilities................   (12,373)     (10,543)      (9,629)
                                                         --------     --------     --------
    Deferred tax assets:
      Tax credit and loss carryforwards................    17,228       11,589       14,196
      Litigation and other reserves....................    16,750        9,522        9,228
      Inventory reserves and adjustment................    10,203       10,492        6,080
      Warranty and deferred revenues...................     2,660        2,851        5,485
                                                         --------     --------     --------
         Total deferred tax assets.....................    46,841       34,454       34,989
                                                         --------     --------     --------
    Valuation allowance for deferred tax assets........    (4,419)     (18,309)     (20,828)
                                                         --------     --------     --------
         Net deferred taxes............................  $ 30,049     $  5,602     $  4,532
                                                         ========     ========     ========
</TABLE>
 
     In accordance with Financial Accounting Standards No. 109, the Company has
recorded net deferred tax assets totaling $30.0 million as of December 29, 1995
reflecting the benefit of credit and loss carryforwards, and other temporary
differences. The credit and loss carryforwards expire in various years between
1998 and 2010. Realization of the benefits is dependent on generating sufficient
U.S. taxable income prior to expiration of the carryforwards. Although
realization is not assured, management believes it is more likely than not that
all net deferred tax assets will be realized. The amount of the deferred tax
assets considered realizable could be reduced in the near term if estimates of
future taxable income during the carryforward period are reduced.
 
                                       36
<PAGE>   38
 
                             VLSI TECHNOLOGY, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                      THREE YEARS ENDED DECEMBER 29, 1995
 
     For U.S. tax purposes, at December 29, 1995, VLSI had general business and
alternative minimum tax credit carryforwards of approximately $9.9 million.
Foreign subsidiaries have tax loss carryforwards of approximately $8.7 million.
Such credit and loss carryforwards expire in various years beginning in 1998.
The Company's federal income tax returns have been examined by the Internal
Revenue Service ("IRS") for all years through 1990. All issues have been
resolved with no material effect, and the IRS has closed those years. Certain
foreign subsidiaries have accumulated earnings of $15.2 million, on which no
U.S. deferred taxes have been provided. There is no intention to distribute
these earnings. If distributed, there would be minimal incremental income taxes.
 
8.  RELATED PARTIES
 
     As of December 30, 1994, VLSI had received advances of $5.5 million from
Intel in accordance with the Technology Agreement, of which $3.3 million and
$2.2 million was amortized to income in 1994 and 1993, respectively, in
accordance with the terms of the Technology Agreement.
 
     VLSI purchased $42.6 million, $27.6 million and $38.1 million in 1995, 1994
and 1993, respectively, of production, assembly and test services from a company
with whom a director of the Company is affiliated. Outstanding amounts payable
to that company were $4.3 million and $1.9 million in 1995 and 1994,
respectively. Such company, which provides production, assembly and test
services, is one of three primary suppliers that provide substantially all of
the Company's assembly and test needs. Although the above company is not the
only provider of these services and, as a related party, is not believed likely
by management to precipitate a change in suppliers, a change in suppliers could
cause manufacturing delays and a possible loss of sales, which would adversely
affect operating results.
 
9.  INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION
 
     VLSI operates in a single industry segment and designs, manufactures and
markets primarily custom and semicustom integrated circuits of high complexity,
along with associated integrated circuit computer-aided engineering and design
software and systems. The Company focuses its products for the computing,
communications and consumer digital entertainment industries and distributes its
products through worldwide direct sales, commissioned representatives and
distributors.
 
     In 1995 and 1993, Apple Computer, Inc. ("Apple") accounted for 11% and 19%,
respectively, of net revenues. In 1994, Apple represented less than 10% of net
revenues. In 1994, Compaq Computer Corporation accounted for 22% of net
revenues.
 
     Major operations outside the United States include sales offices and
technology centers in Western Europe, Japan and Asia-Pacific. Foreign operations
are subject to risks of political instability and foreign currency exchange rate
fluctuations.
 
     Transfers between geographic areas are accounted for at amounts that are
generally above cost and consistent with the rules and regulations of governing
tax authorities. Such transfers are eliminated in the consolidated financial
statements. Identifiable assets are those assets that can be directly associated
with a particular geographic area and thus do not include assets used for
general corporate purposes, such as cash, cash equivalents and liquid
investments.
 
                                       37
<PAGE>   39
 
                             VLSI TECHNOLOGY, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                      THREE YEARS ENDED DECEMBER 29, 1995
 
     The following is a summary of operations located within the indicated
geographic areas for the three years ended December 29, 1995:
 
<TABLE>
<CAPTION>
                                          NET REVENUES    TRANSFERS
                                              FROM         BETWEEN                  OPERATING
                                          UNAFFILIATED   GEOGRAPHICAL      NET       INCOME     IDENTIFIABLE
                                           CUSTOMERS        AREAS       REVENUES     (LOSS)        ASSETS
                                          ------------   ------------   ---------   ---------   ------------
                                                                     (THOUSANDS)
<S>                                       <C>            <C>            <C>         <C>         <C>
1995
United States...........................    $506,330      $  143,573    $ 649,903    $66,489      $570,857
Europe..................................     172,903              --      172,903      5,785        49,165
Japan...................................      40,569              --       40,569      2,459        15,871
Asia-Pacific............................         117              --          117        154         1,743
Corporate...............................          --              --           --         --       365,581
Eliminations............................          --        (143,573)    (143,573)       495       (43,330)
                                            --------       ---------    ---------    -------      --------
     Consolidated.......................    $719,919      $       --    $ 719,919    $75,382      $959,887
                                            ========       =========    =========    =======      ========
1994
United States...........................    $447,233      $   87,153    $ 534,386    $42,815      $366,040
Europe..................................     121,250              --      121,250      7,557        38,832
Japan...................................      18,426              --       18,426     (3,877)        6,430
Asia-Pacific............................         182              --          182        197         1,274
Corporate...............................          --              --           --         --       103,111
Eliminations............................          --         (87,153)     (87,153)        57       (25,471)
                                            --------       ---------    ---------    -------      --------
     Consolidated.......................    $587,091      $       --    $ 587,091    $46,749      $490,216
                                            ========       =========    =========    =======      ========
1993
United States...........................    $382,620      $   83,828    $ 466,448    $26,112      $327,942
Europe..................................     118,542              --      118,542      4,551        32,002
Japan...................................      14,582              --       14,582     (3,111)        5,759
Asia-Pacific............................         202              --          202        152         1,944
Corporate...............................          --              --           --         --        72,636
Eliminations............................          --         (83,828)     (83,828)      (622)      (28,060)
                                            --------       ---------    ---------    -------      --------
     Consolidated.......................    $515,946      $       --    $ 515,946    $27,082      $412,223
                                            ========       =========    =========    =======      ========
</TABLE>
 
     U.S. export revenues, primarily to the Asia-Pacific region, were
approximately $153.8 million, $162.1 million and $126.7 million in 1995, 1994
and 1993, respectively.
 
ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE
 
     Not applicable.
 
                                       38
<PAGE>   40
 
                                    PART III
 
ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
     Information regarding directors appearing under the caption "Election of
Directors -- Nominees for Director" in the Proxy Statement is hereby
incorporated herein by reference.
 
     Information regarding executive officers who are not also directors is
incorporated herein by reference from Part I hereof under the heading "Executive
Officers of the Company" immediately following Item 4 in Part I hereof.
 
     Information regarding compliance with Section 16(a) of the Securities
Exchange Act of 1934, as amended, is hereby incorporated herein by reference
from the section entitled "Information Concerning Solicitation and
Voting -- Compliance with Section 16(a) Filing Requirements" in the Proxy
Statement.
 
ITEM 11.  EXECUTIVE COMPENSATION
 
     Incorporated herein by reference from the Proxy Statement under the
captions "Election of Directors -- Nominees for Director", "Election of
Directors -- Director Compensation", "Election of Directors -- Compensation
Committee Interlocks and Insider Participation" and "Executive Officer
Compensation" .
 
ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
     Incorporated herein by reference from the Proxy Statement under the caption
"Information Concerning Solicitation and Voting -- Security Ownership".
 
ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
     Incorporated herein by reference from the Proxy Statement under the
captions "Election of Directors -- Compensation Committee Interlocks and Insider
Participation", "Election of Directors -- Certain Transactions" and "Executive
Officer Compensation".
 
                                    PART IV
 
ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
 
     (a) 1. Financial Statements
 
     The financial statements (including the notes thereto) listed in the index
to financial statements and financial statement schedule (set forth in Item 8 of
Part II of this Form 10-K) are filed within this Annual Report on Form 10-K.
 
         2. Financial Statement Schedule
 
     The financial statement schedule listed in the Index to Consolidated
Financial Statements and Financial Statement Schedule (set forth in Item 8 of
Part II of this Form 10-K) are filed as part of this Annual Report on Form 10-K.
 
        3. Exhibits
 
     The exhibits listed under Item 14(c) hereof are filed as part of this
Annual Report on Form 10-K.
 
     (b) Reports on Form 8-K
 
     There were no Reports on Form 8-K filed by the Company during the fourth
quarter ended December 29, 1995.
 
                                       39
<PAGE>   41
 
     (c) Exhibits
 
   
<TABLE>
<CAPTION>
EXHIBIT
NUMBER                                         DESCRIPTION
-------     ---------------------------------------------------------------------------------
<C>         <S>
 3.1        Restated Certificate of Incorporation filed with the Secretary of State of the
            State of Delaware on September 16, 1987. Incorporated by reference from Exhibit
            to Annual Report on Form 10-K for the fiscal year ended December 27, 1987.
 3.2        Certificate of Designation of Rights, Preferences and Privileges of Series A
            Participating Preferred Stock filed with the Secretary of State of the State of
            Delaware on August 12, 1992. Incorporated by reference from Exhibit to Quarterly
            Report on Form 10-Q for the fiscal quarter ended September 26, 1992.
 3.3        Certificate of Amendment of Restated Certificate of Incorporation filed with the
            Secretary of State of the State of Delaware on August 20, 1992. Incorporated by
            reference from Exhibit to Quarterly Report on Form 10-Q for the fiscal quarter
            ended September 26, 1992.
 3.4        Certificate of Amendment of Restated Certificate of Incorporation filed with the
            Secretary of State of the State of Delaware on May 5, 1995. Incorporated by
            reference from Exhibit to Registration Statement on Form S-3 (File No. 33-60049).
 3.5        Composite Certificate of Incorporation. Incorporated by reference from Exhibit to
            Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1995.
 3.6        Restated Bylaws of the Company, as amended, effective March 12, 1996. Said
            document is included as an Exhibit to this Annual Report on Form 10-K for the
            fiscal year ended December 29, 1995.
 4.1        The Company hereby agrees to file upon request of the Commission a copy of all
            instruments, not otherwise filed, with respect to long-term debt of the Company
            or any of its subsidiaries for which the total amount of debt authorized under
            such instrument does not exceed 10% of the total assets of the Company and its
            subsidiaries on a consolidated basis.
 4.2        See Exhibits 3.1, 3.2, 3.3, 3.4 and 3.5.
 4.3        Indenture, dated as of May 1, 1987, between the Company and Citibank N.A.,
            Trustee, with respect to issuance of $57,500,000 of 7% Convertible Subordinated
            Debentures due May 1, 2012. Incorporated by reference from Exhibit to
            Registration Statement on Form S-3, No. 33-13463.
 4.4        Form of 7% Convertible Subordinated Debenture due May 1, 2012. Incorporated by
            reference from Exhibit to Registration Statement on Form S-3, No. 33-13463.
 4.5        Common Shares Rights Agreement, dated as of November 7, 1989, by and between the
            Company and the First National Bank of Boston, as Rights Agent, including the
            form of Rights Certificate attached as Exhibit A thereto. Incorporated by
            reference from Exhibit to Registration Statement on Form 8-A filed with the
            Securities and Exchange Commission on November 20, 1989.
 4.6        First Amended and Restated Rights Agreement (the "Restated Rights Agreement") by
            and between the Company and First National Bank of Boston, dated August 12, 1992,
            including form of Rights Certificate. Incorporated by reference from Exhibit to
            Quarterly Report on Form 10-Q for the fiscal quarter ended September 26, 1992.
 4.7        Amendment Number 1 to the Restated Rights Agreement, dated August 24, 1992.
            Incorporated by reference from Exhibit to Quarterly Report on Form 10-Q for the
            fiscal quarter ended September 26, 1992.
 4.8        Indenture, dated as of September 1, 1995, between the Company and Harris Trust
            and Savings Bank, as Trustee, with respect to issuance of $172,500,000 of 8.25%
            Convertible Subordinated Notes due October 1, 2005. Incorporated by reference
            from Exhibit to Quarterly Report on Form 10-Q for the fiscal quarter ended
            September 29, 1995.
 4.9        Form of 8.25% Convertible Subordinated Note due October 1, 2005. Incorporated by
            reference from Exhibit to Quarterly Report on Form 10-Q for the fiscal quarter
            ended September 29, 1995.
10.1*       Letter Agreement between the Company and Alfred J. Stein, dated February 12,
            1982. Incorporated by reference from Exhibit to Registration Statement on Form
            S-1, No. 2-81485.
</TABLE>
    
 
                                       40
<PAGE>   42
 
<TABLE>
<CAPTION>
EXHIBIT
NUMBER                                         DESCRIPTION
-------                                        -----------
<S>         <C>
10.2*       Agreement between the Company and Alfred J. Stein, dated March 8, 1996. Said
            document is included as an Exhibit to this Annual Report on Form 10-K for the
            fiscal year ended December 29, 1995.
10.3*       1982 Incentive Stock Option Plan, as amended May 9, 1991, and form of option
            agreement used thereunder. Incorporated by reference from Exhibit to Annual
            Report on Form 10-K for the fiscal year ended December 28, 1991.
10.4*       Registration Rights Agreement dated as of January 16, 1984 among the Company and
            certain security holders of the Company. Incorporated by reference from Exhibit
            to Registration Statement on Form S-1, No. 2-81485.
10.5*       Executive Performance Incentive Plan. Incorporated by reference from Exhibit to
            Annual Report on Form 10-K for the fiscal year ended December 29, 1985.
10.6*       1986 Directors' Stock Option Plan, as amended, and Forms of Option Agreement for
            use with such plan. Incorporated by reference from Exhibit to Annual Report on
            Form 10-K for the fiscal year ended December 30, 1994.
10.7*       1992 Stock Plan, as amended, and form of option agreement used thereunder. Said
            document, which is subject to stockholder approval, is included as an Exhibit to
            this Annual Report on Form 10-K for the fiscal year ended December 29, 1995.
10.8        COMPASS Design Automation, Inc. Series A Preferred Stock and Common Stock
            Purchase Agreement, dated December 27, 1991. Incorporated by reference from
            Exhibit to Annual Report on Form 10-K for the fiscal year ended December 28,
            1991.
10.9*       Amended and Restated Employee Stock Purchase Plan, as amended. Incorporated by
            reference from Exhibit to Annual Report on Form 10-K for the fiscal year ended
            December 30, 1994.
10.10*      COMPASS Design Automation, Inc. 1992 Stock Option Plan, as amended. Incorporated
            by reference from Exhibit to Annual Report on Form 10-K for the fiscal year ended
            December 30, 1994.
10.11       Proprietary Software OEM License between the Company and Xidak, Inc., dated
            January 1, 1987. Incorporated by reference from Exhibit to Annual Report on Form
            10-K for the fiscal year ended December 27, 1987.
10.12       Joint Venture and Shareholder Agreement, dated as of November 28, 1990, between
            Advanced RISC Machines Holdings Limited, Acorn Computers Limited, Apple Computer
            (UK) Limited and the Company. Incorporated by reference from Exhibit to Annual
            Report on Form 10-K for the fiscal year ended December 29, 1990.
10.13       Intercompany Agreement between COMPASS Design Automation, Inc. and the Company,
            dated July 1, 1991. Incorporated by reference from Exhibit to Annual Report on
            Form 10-K for the fiscal year ended December 28, 1991.
10.14       Intel/VLSI Stock and Warrant Purchase Agreement between the Company and Intel
            Corporation ("Intel"), dated July 8, 1992, including form of Warrant.
            Incorporated by reference from Exhibit to Quarterly Report on Form 10-Q for the
            fiscal quarter ended September 26, 1992.
10.15**     Technology and Manufacturing Agreement between Intel Corporation and the Company,
            dated July 8, 1992, as amended by Addendum Number 1. Incorporated by reference
            from Exhibit to Amendment Number 1 to Annual Report on Form 10-K for the fiscal
            year ended December 26, 1992.
10.16**     Amendment Number 2 to the Technology and Manufacturing Agreement between Intel
            Corporation and the Company, dated December 2, 1993. Incorporated by reference
            from Exhibit to Annual Report on Form 10-K for the fiscal year ended December 25,
            1993.
10.17       Letter dated July 18, 1994 from Intel Corporation to the Company waiving certain
            rights under the Intel/VLSI Stock and Warrant Purchase Agreement dated July 8,
            1992. Incorporated by reference from Exhibit to Quarterly Report on Form 10-Q for
            the fiscal quarter ended July 1, 1994.
</TABLE>
 
                                       41
<PAGE>   43
 
<TABLE>
<CAPTION>
EXHIBIT
NUMBER                                         DESCRIPTION
-------                                        -----------
<S>         <C>
10.18       Termination Agreement dated November 7, 1994 between Intel Corporation and the
            Company. Incorporated by reference from Exhibit to Quarterly Report on Form 10-Q
            for the fiscal quarter ended September 30, 1994.
10.19       Acquisition and Participation Agreement and Escrow Instructions dated April 22,
            1994 between Brazos Asset Management, Inc. and the Company. Incorporated by
            reference from Exhibit to Quarterly Report on Form 10-Q for the fiscal quarter
            ended July 1, 1994.
10.20       Net Building Space Lease dated February 15, 1985 between Mariani Financial
            Company and the Company for a property located at 1865 Lundy Drive, San Jose,
            California. Incorporated by reference from Exhibit to Annual Report on Form 10-K
            for the fiscal year ended December 30, 1984.
10.21       Ground Sublease between Price-Elliott Research Park, Inc., and ADIMIC Limited
            Partnership, dated October 1, 1986, for property in Tempe, Arizona. Incorporated
            by reference from Exhibit to Annual Report on Form 10-K for the fiscal year ended
            December 27, 1987.
10.22       Ground Sublease between Price-Elliott Research Park, Inc., and ADIMIC Limited
            Partnership, dated July 1, 1987, for property in Tempe, Arizona. Incorporated by
            reference from Exhibit to Annual Report on Form 10-K for the fiscal year ended
            December 27, 1987.
10.23       Agreement between ADIMIC Limited Partnership and the Company assigning interest
            of lessee under the two Ground Subleases referred to in Exhibits 10.21 and 10.22.
            Incorporated by reference from Exhibit to Annual Report on Form 10-K for the
            fiscal year ended December 27, 1987.
10.24       ASU Research Park Ground Sublease, dated as of December 18, 1990, between
            Price-Elliott Research Park, Inc. and the Company. Incorporated by reference from
            Exhibit to Annual Report on Form 10-K for the fiscal year ended December 29,
            1990.
10.25       Lease dated as of August 12, 1991, between Callahan-Pentz Properties, Ringwood
            Court One and the Company for property located at 1110 Ringwood Court, San Jose,
            California. Incorporated by reference from Exhibit to Annual Report on Form 10-K
            for the fiscal year ended December 28, 1991.
10.26       Lease dated as of February 15, 1993, between Sumitomo Life Realty (N.Y.), Inc.
            and the Company for property located at 67 South Bedford Street, Suite 304-W,
            Burlington, Massachusetts. Incorporated by reference from Exhibit to Quarterly
            Report on Form 10-Q for the fiscal quarter ended March 27, 1993.
10.27       Lease dated as of July 20, 1993, between Callahan-Pentz Properties and the
            Company for property located at 1120 Ringwood Court, San Jose, California.
            Incorporated by reference from Exhibit to Annual Report on Form 10-K for the
            fiscal year ended December 25, 1993.
10.28       Leasing Agreement dated September 21, 1994 between Sobrato-Sobrato Interests, as
            Lessor, and the Company, as lessee, for property located at 1240 McKay Drive, San
            Jose, California. Incorporated by reference from Exhibit to Quarterly Report on
            Form 10-Q for the fiscal quarter ended September 30, 1994.
10.29       Credit Agreement dated June 6, 1994 between Continental Bank N.A., as Agent, and
            the Company. Incorporated by reference from Exhibit to Form 10-Q/A Amendment
            Number 1 to Quarterly Report on Form 10-Q for the fiscal quarter ended July 1,
            1994.
10.30       Equipment Financing Agreement between New England Capital Corporation and the
            Company, dated August 12, 1991. Incorporated by reference from Exhibit to Annual
            Report on Form 10-K for the fiscal year ended December 28, 1991.
10.31       Master Security Agreement between The CIT Group/Equipment Financing, Inc. and the
            Company, dated December 19, 1991. Incorporated by reference from Exhibit to
            Annual Report on Form 10-K for the fiscal year ended December 28, 1991.
10.32       Loan and Security Agreement between AT&T and the Company, dated September 24,
            1993. Incorporated by reference from Exhibit to Annual Report on Form 10-K for
            the fiscal year ended December 25, 1993.
</TABLE>
 
                                       42
<PAGE>   44
 
   
<TABLE>
<CAPTION>
EXHIBIT
NUMBER                                         DESCRIPTION
-------     ---------------------------------------------------------------------------------
<C>         <S>
10.33       Loan and Security Agreement and Promissory Note between CIT Group and the
            Company, dated December 15, 1993. Incorporated by reference from Exhibit to
            Annual Report on Form 10-K for the fiscal year ended December 25, 1993.
10.34       Term Loan and Security Agreement dated June 17, 1994 and Promissory Notes dated
            June 17 and June 30, 1994 between Heller Financial, Inc. and the Company.
            Incorporated by reference from Exhibit to Form 10-Q/A Amendment Number 1 to
            Quarterly Report on Form 10-Q for the fiscal quarter ended July 1, 1994.
10.35       Equipment Leasing Agreement between NEMLC Leasing Associates, No. 3 and the
            Company, dated December 19, 1988. Incorporated by reference from Exhibit to
            Annual Report on Form 10-K for the fiscal year ended December 25, 1988.
10.36       Master Lease Agreement between Sentry Financial Corporation and the Company,
            dated January 2, 1991. Incorporated by reference from Exhibit to Annual Report on
            Form 10-K for the fiscal year ended December 28, 1991.
10.37       Master Lease 2094759 Lease Renewal Contracts with Guaranteed Purchase Options
            between Ellco Leasing Corporation and the Company, each dated December 30, 1992,
            relating to Schedules 034, 037, 038, 041 & 043 and Schedules 044, 045, 046, 048,
            049, 050, 051, 052 & 053, respectively. Incorporated by reference from Exhibit to
            Annual Report on Form 10-K for the fiscal year ended December 26, 1992.
10.38       Master Lease 2304202 Lease Renewal Contract with Guaranteed Purchase Option
            between GE Capital Corp. and the Company, dated December 30, 1992, relating to
            Schedules 002, 003, 004 & 007. Incorporated by reference from Exhibit to Annual
            Report on Form 10-K for the fiscal year ended December 26, 1992.
10.39*      Form of Management Continuity Agreement by and between the Company and each of
            the following officers of the Company: Donald L. Ciffone, Gregory K. Hinckley, L.
            Don Maulsby, Dieter J. Mezger, C. Clifford Roe and Alfred J. Stein. Incorporated
            by reference from Exhibit to Annual Report on Form 10-K for the fiscal year ended
            December 26, 1992.
11          Calculation of Earnings Per Share (for the three fiscal years ending December 29,
            1995).
21          Subsidiaries of the Company.
23          Consent of Ernst & Young LLP, Independent Auditors (see page 44).
24          Power of Attorney (see page 46).
27          Financial Data Schedule.
</TABLE>
    
 
---------------
 
 * Denotes a compensation plan in which an executive officer participates.
 
** Denotes a document for which confidential treatment has been granted for
   selected portions.
 
     (d) Financial Statement Schedules
 
     See Item 14(a)(2) above.
 
                                       43
<PAGE>   45
 
               CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
 
     We consent to the incorporation by reference in the Registration Statements
(Forms S-8 Nos. 2-86600, 2-90890, 33-4797, 33-12909, 33-21116, 33-27872,
33-39653, 33-52908, 33-62068, 33-57433 and 33-57991) pertaining to the Employee
Stock Purchase Plan, 1992 Stock Plan, 1982 Incentive Stock Option Plan and 1986
Directors' Stock Option Plan of VLSI Technology, Inc. and in the related
Prospectuses, of our report dated January 16, 1996, with respect to the
consolidated financial statements and schedule of VLSI Technology, Inc. included
in this Annual Report (Form 10-K) for the year ended December 29, 1995.
 
                                                /s/  ERNST & YOUNG LLP
                                          --------------------------------------
                                                     ERNST & YOUNG LLP
 
San Jose, California
March 22, 1996
 
                                       44
<PAGE>   46
 
                             VLSI TECHNOLOGY, INC.
 
         SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                   BALANCE AT     ADDITIONS                    BALANCE AT
                                                   BEGINNING       CHARGED                        END
                                                    OF YEAR       TO INCOME     DEDUCTIONS      OF YEAR
                                                   ----------     ---------     ----------     ----------
<S>                                                <C>            <C>           <C>            <C>
Allowance for doubtful accounts and customer
  returns(1):
Year ended December 25, 1993.....................   $  2,383       $   458       $   (591)      $  2,250
Year ended December 30, 1994.....................   $  2,250       $   107       $    (57)      $  2,300
Year ended December 29, 1995.....................   $  2,300       $  (108)      $    (92)      $  2,100
Reserve for special charges(2):
Year ended December 25, 1993.....................   $ 11,881       $ 1,008       $ (5,023)      $  7,866
Year ended December 30, 1994.....................   $  7,866       $ 1,400       $ (1,931)      $  7,335
Year ended December 29, 1995.....................   $  7,335       $    --       $ (7,335)      $     --
Litigation reserve(2):
Year ended December 25, 1993.....................   $     --       $    --       $     --       $     --
Year ended December 30, 1994.....................   $     --       $    --       $     --       $     --
Year ended December 29, 1995.....................   $     --       $19,400       $   (857)      $ 18,543
</TABLE>
 
---------------
 
(1) Deductions represent amounts written off against the allowance for doubtful
    accounts and customer returns.
 
(2) Deductions represent amounts written off against the reserves.
 
                                       45
<PAGE>   47
 
                                   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.
 
                                          VLSI TECHNOLOGY, INC.
                                          (Registrant)
 
                                          By: /s/  ALFRED J. STEIN
                                              ----------------------------------
                                              Alfred J. Stein,
                                              Chairman of the Board,
                                              Chief Executive Officer
                                              and President
 
Date: March 12, 1996
 
                               POWER OF ATTORNEY
 
     KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Alfred J. Stein and Gregory K. Hinckley,
and each of them his attorneys-in-fact, each with the power of substitution, for
him in any and all capacities, to sign any amendments to this Annual Report on
Form 10-K, and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue hereof.
 
     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
 
<TABLE>
<CAPTION>
                   SIGNATURE                                 TITLE                   DATE
                   ---------                                 -----                   ----     
<S>                                              <C>                            <C>
             /s/  ALFRED J. STEIN                Chairman of the Board, Chief   March 12, 1996
-----------------------------------------------  Executive Officer, President
                 (Alfred J. Stein)               (Principal Executive Officer)
                                                 and Director

           /s/  GREGORY K. HINCKLEY              Senior Vice President,         March 12, 1996
-----------------------------------------------  Finance and Chief Financial
               (Gregory K. Hinckley)             Officer (Principal Financial
                                                 Officer)

           /s/  BALAKRISHNAN S. IYER             Vice President and Controller  March 12, 1996
-----------------------------------------------  (Principal Accounting
               (Balakrishnan S. Iyer)            Officer)

            /s/  PIERRE S. BONELLI               Director                       March 12, 1996
-----------------------------------------------
                (Pierre S. Bonelli)

            /s/  ROBERT P. DILWORTH              Director                       March 12, 1996
-----------------------------------------------
                (Robert P. Dilworth)

               /s/  JAMES J. KIM                 Director                       March 15, 1996
-----------------------------------------------
                   (James J. Kim)

             /s/  HORACE H. TSIANG               Director                       March 12, 1996
-----------------------------------------------
                 (Horace H. Tsiang)
</TABLE>
 
                                       46
<PAGE>   48
 
                               INDEX TO EXHIBITS
 
   
<TABLE>
<CAPTION>
                                                                                     SEQUENTIALLY
    EXHIBIT                                                                            NUMBERED
    NUMBER                                  DESCRIPTION                                  PAGE
    -------     -------------------------------------------------------------------  ------------
    <S>         <C>                                                                  <C>
     3.1        Restated Certificate of Incorporation filed with the Secretary of
                State of the State of Delaware on September 16, 1987. Incorporated
                by reference from Exhibit to Annual Report on Form 10-K for the
                fiscal year ended December 27, 1987.
     3.2        Certificate of Designation of Rights, Preferences and Privileges of
                Series A Participating Preferred Stock filed with the Secretary of
                State of the State of Delaware on August 12, 1992. Incorporated by
                reference from Exhibit to Quarterly Report on Form 10-Q for the
                fiscal quarter ended September 26, 1992.
     3.3        Certificate of Amendment of Restated Certificate of Incorporation
                filed with the Secretary of State of the State of Delaware on
                August 20, 1992. Incorporated by reference from Exhibit to
                Quarterly Report on Form 10-Q for the fiscal quarter ended
                September 26, 1992.
     3.4        Certificate of Amendment of Restated Certificate of Incorporation
                filed with the Secretary of State of the State of Delaware on May
                5, 1995. Incorporated by reference from Exhibit to Registration
                Statement on Form S-3 (File No. 33-60049).
     3.5        Composite Certificate of Incorporation. Incorporated by reference
                from Exhibit to Quarterly Report on Form 10-Q for the fiscal
                quarter ended June 30, 1995.
     3.6        Restated Bylaws of the Company, as amended, effective March 12,
                1996. Said document is included as an Exhibit to this Annual Report
                on Form 10-K for the fiscal year ended December 29, 1995.
     4.1        The Company hereby agrees to file upon request of the Commission a
                copy of all instruments, not otherwise filed, with respect to
                long-term debt of the Company or any of its subsidiaries for which
                the total amount of debt authorized under such instrument does not
                exceed 10% of the total assets of the Company and its subsidiaries
                on a consolidated basis.
     4.2        See Exhibits 3.1, 3.2, 3.3, 3.4 and 3.5.
     4.3        Indenture, dated as of May 1, 1987, between the Company and
                Citibank N.A., Trustee, with respect to issuance of $57,500,000 of
                7% Convertible Subordinated Debentures due May 1, 2012.
                Incorporated by reference from Exhibit to Registration Statement on
                Form S-3, No. 33-13463.
     4.4        Form of 7% Convertible Subordinated Debenture due May 1, 2012.
                Incorporated by reference from Exhibit to Registration Statement on
                Form S-3, No. 33-13463.
     4.5        Common Shares Rights Agreement, dated as of November 7, 1989, by
                and between the Company and the First National Bank of Boston, as
                Rights Agent, including the form of Rights Certificate attached as
                Exhibit A thereto. Incorporated by reference from Exhibit to
                Registration Statement on Form 8-A filed with the Securities and
                Exchange Commission on November 20, 1989.
</TABLE>
    
<PAGE>   49
 
<TABLE>
<CAPTION>
                                                                                     SEQUENTIALLY
    EXHIBIT                                                                            NUMBERED
    NUMBER                                  DESCRIPTION                                  PAGE
    -------                                 -----------                              ------------
    <S>         <C>                                                                  <C>
     4.6        First Amended and Restated Rights Agreement (the "Restated Rights
                Agreement") by and between the Company and First National Bank of
                Boston, dated August 12, 1992, including form of Rights
                Certificate. Incorporated by reference from Exhibit to Quarterly
                Report on Form 10-Q for the fiscal quarter ended September 26,
                1992.
     4.7        Amendment Number 1 to the Restated Rights Agreement, dated August
                24, 1992. Incorporated by reference from Exhibit to Quarterly
                Report on Form 10-Q for the fiscal quarter ended September 26,
                1992.
     4.8        Indenture, dated as of September 1, 1995, between the Company and
                Harris Savings and Trust, as Trustee, with respect to issuance of
                $172,500,000 of 8.25% Convertible Subordinated Notes due September
                1, 2005. Incorporated by reference from Exhibit to Quarterly Report
                on Form 10-Q for the fiscal quarter ended September 29, 1995.
     4.9        Form of 8.25% Convertible Subordinated Debenture due September 1,
                2005. Incorporated by reference from Exhibit to Quarterly Report on
                Form 10-Q for the fiscal quarter ended September 29, 1995.
    10.1*       Letter Agreement between the Company and Alfred J. Stein, dated
                February 12, 1982. Incorporated by reference from Exhibit to
                Registration Statement on Form S-1, No. 2-81485.
    10.2*       Agreement between the Company and Alfred J. Stein, dated March 8,
                1996. Said document is included as an Exhibit to this Annual Report
                on Form 10-K for the fiscal year ended December 29, 1995.
    10.3*       1982 Incentive Stock Option Plan, as amended May 9, 1991, and form
                of option agreement used thereunder. Incorporated by reference from
                Exhibit to Annual Report on Form 10-K for the fiscal year ended
                December 28, 1991.
    10.4*       Registration Rights Agreement dated as of January 16, 1984 among
                the Company and certain security holders of the Company.
                Incorporated by reference from Exhibit to Registration Statement on
                Form S-1, No. 2-81485.
    10.5*       Executive Performance Incentive Plan. Incorporated by reference
                from Exhibit to Annual Report on Form 10-K for the fiscal year
                ended December 29, 1985.
    10.6*       1986 Directors' Stock Option Plan, as amended, and Forms of Option
                Agreement for use with such plan. Incorporated by reference from
                Exhibit to Annual Report on Form 10-K for the fiscal year ended
                December 30, 1994.
    10.7*       1992 Stock Plan, as amended, and form of option agreement used
                thereunder. Said document, which is subject to stockholder
                approval, is included as an Exhibit to this Annual Report on Form
                10-K for the fiscal year ended December 29, 1995.
    10.8        COMPASS Design Automation, Inc. Series A Preferred Stock and Common
                Stock Purchase Agreement, dated December 27, 1991. Incorporated by
                reference from Exhibit to Annual Report on Form 10-K for the fiscal
                year ended December 28, 1991.
    10.9*       Amended and Restated Employee Stock Purchase Plan, as amended.
                Incorporated by reference from Exhibit to Annual Report on Form
                10-K for the fiscal year ended December 30, 1994.
</TABLE>
<PAGE>   50
 
<TABLE>
<CAPTION>
                                                                                     SEQUENTIALLY
    EXHIBIT                                                                            NUMBERED
    NUMBER                                  DESCRIPTION                                  PAGE
    -------                                 -----------                              ------------
    <S>         <C>                                                                  <C>
    10.10*      COMPASS Design Automation, Inc. 1992 Stock Option Plan, as amended.
                Incorporated by reference from Exhibit to Annual Report on Form
                10-K for the fiscal year ended December 30, 1994.
    10.11       Proprietary Software OEM License between the Company and Xidak,
                Inc., dated January 1, 1987. Incorporated by reference from Exhibit
                to Annual Report on Form 10-K for the fiscal year ended December
                27, 1987.
    10.12       Joint Venture and Shareholder Agreement, dated as of November 28,
                1990, between Advanced RISC Machines Holdings Limited, Acorn
                Computers Limited, Apple Computer (UK) Limited and the Company.
                Incorporated by reference from Exhibit to Annual Report on Form
                10-K for the fiscal year ended December 29, 1990.
    10.13       Intercompany Agreement between COMPASS Design Automation, Inc. and
                the Company, dated July 1, 1991. Incorporated by reference from
                Exhibit to Annual Report on Form 10-K for the fiscal year ended
                December 28, 1991.
    10.14       Intel/VLSI Stock and Warrant Purchase Agreement between the Company
                and Intel Corporation ("Intel"), dated July 8, 1992, including form
                of Warrant. Incorporated by reference from Exhibit to Quarterly
                Report on Form 10-Q for the fiscal quarter ended September 26,
                1992.
    10.15**     Technology and Manufacturing Agreement between Intel Corporation
                and the Company, dated July 8, 1992, as amended by Addendum Number
                1. Incorporated by reference from Exhibit to Amendment Number 1 to
                Annual Report on Form 10-K for the fiscal year ended December 26,
                1992.
    10.16**     Amendment Number 2 to the Technology and Manufacturing Agreement
                between Intel Corporation and the Company, dated December 2, 1993.
                Incorporated by reference from Exhibit to Annual Report on Form
                10-K for the fiscal year ended December 25, 1993.
    10.17       Letter dated July 18, 1994 from Intel Corporation to the Company
                waiving certain rights under the Intel/VLSI Stock and Warrant
                Purchase Agreement dated July 8, 1992. Incorporated by reference
                from Exhibit to Quarterly Report on Form 10-Q for the fiscal
                quarter ended July 1, 1994.
    10.18       Termination Agreement dated November 7, 1994 between Intel
                Corporation and the Company. Incorporated by reference from
                Exhibits to Quarterly Report on Form 10-Q for the fiscal quarter
                ended September 30, 1994.
    10.19       Acquisition and Participation Agreement and Escrow Instructions
                dated April 22, 1994 between Brazos Asset Management, Inc. and the
                Company. Incorporated by reference from Exhibit to Quarterly Report
                on Form 10-Q for the fiscal quarter ended July 1, 1994.
    10.20       Net Building Space Lease dated February 15, 1985 between Mariani
                Financial Company and the Company for a property located at 1865
                Lundy Drive, San Jose, California. Incorporated by reference from
                Exhibit to Annual Report on Form 10-K for the fiscal year ended
                December 30, 1984.
    10.21       Ground Sublease between Price-Elliott Research Park, Inc., and
                ADIMIC Limited Partnership, dated October 1, 1986, for property in
                Tempe, Arizona. Incorporated by reference from Exhibit to Annual
                Report on Form 10-K for the fiscal year ended December 27, 1987.
</TABLE>
<PAGE>   51
 
<TABLE>
<CAPTION>
                                                                                     SEQUENTIALLY
    EXHIBIT                                                                            NUMBERED
    NUMBER                                  DESCRIPTION                                  PAGE
    -------                                 -----------                              ------------
    <S>         <C>                                                                  <C>
    10.22       Ground Sublease between Price-Elliott Research Park, Inc., and
                ADIMIC Limited Partnership, dated July 1, 1987, for property in
                Tempe, Arizona. Incorporated by reference from Exhibit to Annual
                Report on Form 10-K for the fiscal year ended December 27, 1987.
    10.23       Agreement between ADIMIC Limited Partnership and the Company
                assigning interest of lessee under the two Ground Subleases
                referred to in Exhibits 10.21 and 10.22. Incorporated by reference
                from Exhibit to Annual Report on Form 10-K for the fiscal year
                ended December 27, 1987.
    10.24       ASU Research Park Ground Sublease, dated as of December 18, 1990,
                between Price-Elliott Research Park, Inc. and the Company.
                Incorporated by reference from Exhibit to Annual Report on Form
                10-K for the fiscal year ended December 29, 1990.
    10.25       Lease dated as of August 12, 1991, between Callahan-Pentz
                Properties, Ringwood Court One and the Company for property located
                at 1110 Ringwood Court, San Jose, California. Incorporated by
                reference from Exhibit to Annual Report on Form 10-K for the fiscal
                year ended December 28, 1991.
    10.26       Lease dated as of February 15, 1993, between Sumitomo Life Realty
                (N.Y.), Inc. and the Company for property located at 67 South
                Bedford Street, Suite 304-W, Burlington, Massachusetts.
                Incorporated by reference from Exhibit to Quarterly Reports on Form
                10-Q for the fiscal quarter ended March 27, 1993.
    10.27       Lease dated as of July 20, 1993, between Callahan-Pentz Properties
                and the Company for property located at 1120 Ringwood Court, San
                Jose, California. Incorporated by reference from Exhibit to Annual
                Report on Form 10-K for the fiscal year ended December 25, 1993.
    10.28       Leasing Agreement dated September 21, 1994 between Sobrato-Sobrato
                Interests, as Lessor, and the Company, as lessee, for property
                located at 1240 McKay Drive, San Jose, California. Incorporated by
                reference from Exhibit to Quarterly Report on form 10-Q for the
                fiscal quarter ended September 30, 1994.
    10.29       Credit Agreement dated June 6, 1994 between Continental Bank N.A.,
                as Agent, and the Company. Incorporated by reference from Exhibit
                to Form 10-Q/A Amendment Number 1 to Quarterly Report on Form 10-Q
                for the fiscal quarter ended July 1, 1994.
    10.30       Equipment Financing Agreement between New England Capital
                Corporation and the Company, dated August 12, 1991. Incorporated by
                reference from Exhibit to Annual Report on Form 10-K for the fiscal
                year ended December 28, 1991.
    10.31       Master Security Agreement between The CIT Group/Equipment
                Financing, Inc. and the Company, dated December 19, 1991.
                Incorporated by reference from Exhibit to Annual Report on Form
                10-K for the fiscal year ended December 28, 1991.
    10.32       Loan and Security Agreement between AT&T and the Company, dated
                September 24, 1993. Incorporated by reference from Exhibit to
                Annual Report on Form 10-K for the fiscal year ended December 25,
                1993.
</TABLE>
<PAGE>   52
 
   
<TABLE>
<CAPTION>
                                                                                     SEQUENTIALLY
    EXHIBIT                                                                            NUMBERED
    NUMBER                                  DESCRIPTION                                  PAGE
    -------     -------------------------------------------------------------------  ------------
    <S>         <C>                                                                  <C>
    10.33       Loan and Security Agreement and Promissory Note between CIT Group
                and the Company, dated December 15, 1993. Incorporated by reference
                from Exhibit to Annual Report on Form 10-K for the fiscal year
                ended December 25, 1993.
    10.34       Term Loan and Security Agreement dated June 17, 1994 and Promissory
                Notes dated June 17 and June 30, 1994 between Heller Financial,
                Inc. and the Company. Incorporated by reference from Exhibit to
                Form 10-Q/A Amendment Number 1 to Quarterly Report on Form 10-Q for
                the fiscal quarter ended July 1, 1994.
    10.35       Equipment Leasing Agreement between NEMLC Leasing Associates, No. 3
                and the Company, dated December 19, 1988. Incorporated by reference
                from Exhibit to Annual Report on Form 10-K for the fiscal year
                ended December 25, 1988.
    10.36       Master Lease Agreement between Sentry Financial Corporation and the
                Company, dated January 2, 1991. Incorporated by reference from
                Exhibit to Annual Report on Form 10-K for the fiscal year ended
                December 28, 1991.
    10.37       Master Lease 2094759 Lease Renewal Contracts with Guaranteed
                Purchase Options between Ellco Leasing Corporation and the Company,
                each dated December 30, 1992, relating to Schedules 034, 037, 038,
                041 & 043 and Schedules 044, 045, 046, 048. 049, 050, 051, 052 &
                053, respectively. Incorporated by reference from Exhibit to Annual
                Report on Form 10-K for the fiscal year ended December 26, 1992.
    10.38       Master Lease 2304202 Lease Renewal Contract with Guaranteed
                Purchase Option between GE Capital Corp. and the Company dated
                December 30, 1992, relating to Schedules 002, 003, 004 & 007.
                Incorporated by reference from Exhibit to Annual Report on Form
                10-K for the fiscal year ended December 26, 1992.
    10.39*      Form of Management Continuity Agreement by and between the Company
                and each of the following officers of the Company: Donald L.
                Ciffone, Gregory K. Hinckley, L. Don Maulsby, Dieter J. Mezger, C.
                Clifford Roe and Alfred J. Stein. Incorporated by reference from
                Exhibit to Annual Report on Form 10-K for the fiscal year ended
                December 26, 1992.
    11          Calculation of Earnings Per Share (for the three fiscal years
                ending December 29, 1995).
    21          Subsidiaries of the Company.
    23          Consent of Ernst & Young LLP, Independent Auditors (see page 44).
    24          Power of Attorney (see page 46).
    27          Financial Data Schedule.
</TABLE>
    
 
---------------
 
 * Denotes a compensation plan in which an executive officer participates.
 
** Denotes a document for which confidential treatment has been granted selected
   portions.