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UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




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Form 10-K



|  |                                              
|- | ---------------------------------------------
|þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934


For the Fiscal Year Ended September 30,
2001

or



|  |                                                  
|- | -------------------------------------------------
|o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934


For the transition period
from                               to

Commission File No. 000-32487



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Simplex Solutions, Inc.

(Exact name of registrant as specified in its
charter)


|                                                                |  |                                         
|--------------------------------------------------------------- |  | ----------------------------------------
|Delaware                                                        |  | 77-0492528                              
|(State or other jurisdiction of
	incorporation or organization) |  | (I.R.S. Employer
	Identification Number)

521 Almanor Avenue, Sunnyvale, CA
94085

(Address of principal executive offices with
zip code)


(408) 617-6100

(Registrants telephone number, including
area code)


N/ A

(Former name, former address and former fiscal
year, if changed since last report)


Securities registered pursuant to
Section 12(b) of the Act:

None


Securities registered pursuant to
Section 12(g) of the Act:

Common Stock, $0.001 par value


Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the
past 90 days.     Yes
þ     No
o

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

The aggregate market value of the voting stock
(Common Stock) held by non-affiliates of the Registrant, as of
December 13, 2001, was approximately $266,000,000 based
upon the last sale price reported for such date on The Nasdaq
National Market. For purposes of this disclosure, shares of
Common Stock held by persons who hold more than 5% of the
outstanding shares of Common Stock and shares held by officers
and directors of the Registrant have been excluded because such
persons may be deemed to be affiliates. This determination is
not necessarily conclusive.

As of December 13, 2001, 15,234,470 shares
of the registrants Common Stock, $0.001 par value, were
outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

The Registrants definitive Proxy Statement
for the Annual Meeting of Stockholders to be held on
February 14, 2002 is incorporated by reference in Part III
of this Form 10-K to the extent stated herein.









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TABLE OF CONTENTS



|                                                              |                                                                                              |                                                                                           |  |  |  |  |  | 
|------------------------------------------------------------- | -------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------- |  |  |  |  |  | 
|PART I                                                       
|                                                              | Item 1.Business                                                                             
|                                                              | Item 2.Properties                                                                           
|                                                              | Item 3.Legal Proceedings                                                                    
|                                                              | Item 4.Submission of Matters to a Vote of Security Holders                                  
|PART II                                                      
|                                                              | Item 5.Market for Registrants Common Equity and Related Stockholder Matters                
|                                                              | Item 6.Selected Consolidated Financial Data                                                 
|                                                              | Item 7.Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                                              | Item 7A.Quantitative and Qualitative Disclosures About Market Risk                          
|                                                              | Item 8. Consolidated Financial Statements and Supplementary Data                            
|                                                              |                                                                                              | CONSOLIDATED BALANCE SHEETS                                                              
|                                                              |                                                                                              | CONSOLIDATED STATEMENTS OF OPERATIONS                                                    
|                                                              |                                                                                              | CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS EQUITY (DEFICIT)
|SIMPLEX SOLUTIONS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
|PART III                                                     
|                                                              | Item 10. Directors and Executive Officers of the Registrant                                 
|                                                              | Item 11. Executive Compensation                                                             
|                                                              | Item 12. Security Ownership of Certain Beneficial Owners and Management                     
|                                                              | Item 13. Certain Relationships and Related Transactions                                     
|PART IV                                                      
|                                                              | Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K                   
|                                                              | SIGNATURES                                                                                  
|                                                              | EXHIBIT INDEX                                                                               
|EXHIBIT 3.3                                                  
|EXHIBIT 10.12                                                
|EXHIBIT 23.1                                                 



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SIMPLEX SOLUTIONS, INC.

TABLE OF CONTENTS

|         |  |                                                                                        |  |      |    | 
|-------- |  | -------------------------------------------------------------------------------------- |  | ---- | -- | 
|         |  |                                                                                        |  | Page
|         |  |                                                                                        |  |     
|PART I  
|Item1.   |  | Business                                                                               |  |      | 3  | 
|Item2.   |  | Properties                                                                             |  |      | 15 | 
|Item3.   |  | Legal Proceedings                                                                      |  |      | 15 | 
|Item4.   |  | Submission of Matters to a Vote of Security
	Holders                                   |  |      | 15 | 
|PART II 
|Item5.   |  | Market for Registrants Common Equity and
	Related Stockholder Matters                 |  |      | 16 | 
|Item6.   |  | Selected Financial Data                                                                |  |      | 17 | 
|Item7.   |  | Managements Discussion and Analysis of
	Financial Condition and Results of Operations |  |      | 19 | 
|Item7A.  |  | Quantitative and Qualitative Disclosures About
	Market Risk                            |  |      | 40 | 
|Item8.   |  | Financial Statements and Supplementary Data                                            |  |      | 42 | 
|PART III
|Item10.  |  | Directors and Officers of the Registrant                                               |  |      | 68 | 
|Item11.  |  | Executive Compensation                                                                 |  |      | 68 | 
|Item12.  |  | Security Ownership of Certain Beneficial Owners
	and Management                        |  |      | 68 | 
|Item13.  |  | Certain Relationships and Related Transactions                                         |  |      | 68 | 
|PART IV 
|Item14.  |  | Exhibits, Financial Statement Schedules, and
	Reports on Form 8-K                      |  |      | 68 | 
|         |  | SIGNATURES                                                                             |  |      | 69 | 
|         |  | EXHIBIT INDEX                                                                          |  |      | 72 | 

Unless the context indicates otherwise, the terms
we, us, our, the
Company, or Simplex refer to Simplex
Solutions, Inc. a Delaware corporation.

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING
STATEMENTS

This Annual Report on Form 10-K contains
forward-looking statements within the meaning of federal
securities laws. These statements relate to our, and in some
cases our customers or partners, future plans,
objectives, expectations, intentions and financial performance,
and the assumptions that underlie these statements. These
forward-looking statements include, but are not limited to,
statements regarding the benefits obtainable by use of our
products and services, our intentions to introduce newer
software products, our intentions to expand our design capacity,
the design and performance improvements obtainable by the
X Architecture, our intentions to expand our
industry-partner and integration relationships, our intentions
to acquire strategic technology, the ability of our software and
services to enable our customers to achieve first-time
production success, our expectations relating to seasonal
variations in our revenue, our expectations for revenue outside
of North America to continue to be significant, our expectations
for demand for our existing products to increase from
technological advances, our expectations relating to adequacy of
cash resources, our expectations to invest in research and
development, our expectations for growth in personnel to
continue, our expectations regarding employee compensation, our
expectations to invest in new areas of our business, our
expectations to make investments in complementary companies,
products and technologies, our continued dependency on a small
number of customers, our continued effort to promote and support
the X Initiative, our expectations regarding infringement
claims including the Sequence lawsuit, and our anticipated
increase in sales denominated in the Japanese yen and the euro.
These forward-looking statements involve risks and uncertainties
that could cause actual results and events to differ materially.
For a detailed discussion of these risks and uncertainties, see
the Factors That May Affect Future Results of
Operations section of this Form 10-K. We undertake no
obligation to update these forward-looking statements to reflect
events or circumstances occurring after the date of this
Form 10-K.

The stockholder communication document
accompanying this Annual Report on Form 10-K contains
forward-looking statements within the meaning of federal
securities laws. These statements relate to our, and in some
cases our customers or partners, future plans,
objectives, expectations, intentions and financial performance,
and the assumptions that underlie these statements. These
forward-looking statements include, but are not limited to,
statements regarding the ability of our software and services to
achieve first-silicon success, the benefits and advantages
obtainable by use of our products and services, the design and
performance improvements resulting from the X Architecture,
the future production of chips using X Architecture, our
plans to make X Architecture chips available and our
continued effort to promote and support the X Initiative.
These forward-looking statements involve risks and uncertainties
that could cause actual results and events to differ materially.
For a detailed discussion of these risks and uncertainties, see
the Factors That May Affect Future Results of
Operations section of this Form 10-K. We undertake no
obligation to update these forward-looking statements to reflect
events or circumstances occurring after the date of this
Form 10-K.

Fire & Ice are registered trademarks and
Simplex Solutions, the Simplex logo, VoltageStorm,
ElectronStorm, ClockStorm, SI Report, First-Silicon
Success, SoC Design Foundry, 3D Adaptive Analytical Extraction,
SubstrateStorm and COSMIC are trademarks of Simplex Solutions,
Inc. or its subsidiaries.

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PART I




Item 1.     Business

General

We provide software and services for the design
and verification of integrated circuits to enable our
communications, computer and consumer products customers to
achieve first-time production success and rapid delivery of
complex system-on-chip semiconductors. A system-on-chipis an integrated circuit that includes the computing, memory
and communications components that previously had been available
only on separate chips. Our customers use our products and
services prior to manufacture to design and verify the
integrated circuits to help ensure that the integrated circuits
will perform as intended, taking into account the complex
effects of deep submicron semiconductor physics.

Simplex Solutions, Inc. was incorporated in
Delaware in April 1995. Our principal executive offices are
located at 521 Almanor Avenue, Sunnyvale, California 94085.
Our telephone number is (408) 617-6100. Our website can be
found at www.simplex.com.

Industry Overview

Advances in the communications and electronics
industries have stimulated consumer and business demand for
communications and networking equipment, desktop computers,
handheld computing wireless devices and other
semiconductor-powered products. Demand for system-on-chip
semiconductors is increasing dramatically as manufacturers seek
to remain competitive by rapidly introducing products with
higher performance, lower cost and smaller size.



| |                                     
| | ------------------------------------
| | Breakthrough Chip Design
	Technology

Successful development and commercialization of
system-on-chip designs require the design and manufacture of
integrated circuits with extremely small features, or
geometries. Feature size, which is measured in millionths of a
meter, or microns, refers to the size of physical structures
that underlie a semiconductor devices transistors and the
wires, or interconnect, that connect these transistors. The
configuration of the transistors and interconnect together make
up the chips geometry.

Advances in chip manufacturing technology have
reduced feature sizes from 3.0 micron in 1980 to
0.18 micron and below in todays advanced
semiconductors. Integrated circuit geometries at or below
0.18 micron are commonly referred to as deep submicron
geometries. Reductions in feature size make it possible to
increase the number of transistors on each chip dramatically,
producing corresponding increases in integrated circuit
computing power and functionality.



| |                                              
| | ---------------------------------------------
| | The New Era of Physics-Dominated Chip
	Design

Designing system-on-chip with geometries at 0.18
micron and below presents major challenges both to designers and
to traditional design software, making it extremely difficult to
build chips that function as intended. As geometries shrink,
chip devices and interconnect become so densely packed that the
different components of a chip interact in unintended ways and
impact the proper functioning of the whole chip. These
unintended interactions, which are negligible at larger
geometries and thus have traditionally been ignored in chip
design, are particularly acute at geometries of 0.18 micron
and below. As designs become more dense, accurate analysis, or
modeling, of interconnect signal transmission becomes
fundamental to first-time production success of complex
integrated circuits.

The laws of semiconductor physics ultimately
dictate an integrated circuits behavior. Yet, properly
accounting for the effects of semiconductor physics at 0.18
micron and below represents a significant barrier to the
successful manufacture of todays deep submicron designs.
Historically, chip design focused on modeling the electrical
properties of transistors alone in order to predict chip
performance and functionality, primarily because the effects of
other components at larger geometries were negligible. However,
due to the interrelated nature of electrical current flow across
an integrated circuits transistors, interconnect and
underlying silicon

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structure at deep submicron geometries, modeling
the entire semiconductor chip, including transistors,
interconnect and the underlying silicon, or substrate structure,
has become essential to timely, cost-effective chip production.


Discontinuity Between Manufacturing Capability
and Effective Design.The chip
industrys ability to manufacture integrated circuits at
deep submicron geometries has surpassed designers ability
to reliably deliver designs that function as intended once
manufactured in such densely configured geometries. The
continued move to deep submicron has had an inordinate impact on
design and manufacturing process efficiency including, but not
limited to:



| |   |                                                                             
| | - | ----------------------------------------------------------------------------
| |  | increasing the likelihood of prototype failure;                             
|
| |  | diminishing the ability to predict chip
	performance;                       
|
| |  | lowering manufacturing yield;                                               
|
| |  | decreasing the reliability of end-products used
	by customers over time; and
|
| |  | increasing run-time for analysis and completion
	of complex designs.        

To avoid these adverse effects, chip designers
have increasingly recognized a need for improved design
methodologies and enabling technologies that can analyze deep
submicron effects on all of the chips components without
sacrificing speed or accuracy. As a result, full-chip analysis
has become critical due to the interrelated nature of electrical
current flow across an integrated circuits transistors,
interconnect and underlying silicon structure. Segmented
analyses of separate system-on-chip components and regions are
frequently too inaccurate to ensure that new integrated circuits
will be fully operational when manufactured.

Trend of Market Disaggregation.The semiconductor industry is
comprised of three major segments: system design, silicon
engineering and semiconductor manufacturing. Over the last ten
years, the semiconductor industry has been disaggregating these
activities. In the early stages of this disaggregation, many
companies began to outsource semiconductor manufacturing,
focusing instead on system design and silicon engineering, also
referred to as design implementation, in an effort to reduce the
costs and risks associated with increasingly complex
semiconductor fabrication. This outsourcing of semiconductor
manufacturing led to the rise of silicon foundries,which
concentrate exclusively on the manufacture of semiconductor
chips. As the complexities of designing a system-on-chip
increase, many semiconductor companies have chosen to outsource
silicon engineering as well. This trend towards outsourcing
design implementation is reflected in the emergence of design
foundries,which aim to reduce the risk of designing complex
chips under aggressive time-to-market constraints. As a result,
todays integrated circuits are created in concept by
semiconductor and systems companies, implemented by design
foundries and manufactured by silicon foundries.



| |                                                            
| | -----------------------------------------------------------
| | Business Challenges Facing System-on-Chip
	Design Companies

Time-to-Market Delays.In todays increasingly
competitive high-technology economy, the inability to launch
products successfully and cost-effectively into narrow market
windows can mean the success or failure of products, divisions
and even companies. First-mover advantage in introducing new
products can be vital to capturing dominant market share for a
given product segment, making the efficiency of design and
manufacturing processes critical to competitive positioning.
Delays introduced by unanticipated design flaws can force
product launch postponement or cancellation. Design decisions
that cause chips to fail are frequently not identified until
significant manufacturing resources have been committed. As deep
submicron design becomes more prevalent, design companies are
increasingly experiencing time-to-market delays along with an
increased incidence of design flaws.

Increased Incidence of Design Flaws Identified
after Manufacturing.The lack of
accurate verification software used throughout the design and
final testing, or sign-off verification, processes has increased
the incidence of manufactured design flaws. Whether design flaws
are evident upon initial manufacture or become evident over time
with a products use, the costs associated with integrated
circuit redesign and remanufacture are significant.

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Managing the complexity of deep submicron effects
has emerged as a critical barrier to the design and first-time
production success of system-on-chip with the desired levels of
performance. Advances in manufacturing technologies alone can no
longer mitigate the increased risk of delayed system-on-chip
product introduction or failure without corresponding advances
in design technologies. As a result, the chip design industry
must integrate advanced methodologies and software products that
manage design complexity and that incorporate full-chip deep
submicron effects into all aspects of their design process.

Simplex Software and Services

Our system-on-chip verification software and
services are designed to provide comprehensive, high-speed
verification that an integrated circuit will perform as
designed, taking into account the complex effects of deep
submicron semiconductor physics. Our design foundry services
provide design implementation to help our customers achieve
first-to-market delivery of system-on-chip designs. We believe
our customers can gain a competitive advantage by using our
products in advance of manufacture to verify that the chip
design will perform as intended. The advantages of our platform,
which stem from our expertise in chip design, computer science
algorithms and software engineering, include the following key
benefits:

Enabling Deep Submicron Chip Design and
Manufacture.Our design technology is
engineered to analyze deep submicron effects throughout an
integrated circuit without sacrificing speed or accuracy. In the
environment of increasingly complex chip designs and
correspondingly increased system-on-chip design requirements, we
believe that we enable electrical correctness throughout the
full chip during the design process. Our modeling and analysis
capabilities are designed to enable our customers to verify the
integrity of their designs prior to completing the design
process and manufacturing the chip. A number of chips designed
with current technology fail without designers locating the
cause of such fatal failures. We believe our products provide
our customers with a competitive advantage in the design and
delivery of high-performance chips.

Accelerating Time-to-Market.Using our products, we believe our
customers can accelerate their time-to-market by incorporating
deep submicron effects during the design cycle, not simply after
the designs are released to manufacture, thus preventing
unanticipated design and manufacture iterations. Our software
and services help to provide customers with designs ready for
production volume, thus avoiding a significant delay and the
corresponding loss of revenue for the design supplier.

Lowering Cost per Chip.Designers using our products test
their chip designs during the design cycle. Our software is
designed to limit the number of iterations required to design a
reliable chip, thereby decreasing both the production cost per
chip and the opportunity cost of time spent redesigning instead
of innovating.

Our software and services offer the following key
attributes:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Comprehensive Platform for System-on-Chip
	Verification.We provide software
	products that model the entire semiconductor and help enable the
	delivery of designs with increased power integrity, timing
	integrity, signal integrity, and reliability. These products
	analyze complete system-on-chip designs without compromising
	speed or accuracy, enabling our customers to design and to test
	complex integrated circuits.                                                                                                                                                                                                      
|
| |  | High-Performance and High-Accuracy
	Verification.Our products have the
	capacity and speed to verify the full chip without partitioning
	it into smaller blocks. Without full-chip analysis, it is
	difficult to predict whether electricity will flow throughout a
	chip as intended. Our products also capture the higher accuracy
	of transistor-level models in the simpler gate-level analysis
	where transistors are grouped into blocks. Gate-level refers to
	the simplified representation of frequently used groups of
	transistors. As a result, we provide our customers with
	transistor-level accuracy at gate-level speeds.
|
| |  | Advanced Design Services for System-on-Chip
	Implementation.We offer services
	designed to help our customers be first-to-market by delivering
	electrically correct integrated circuits. A combination of our
	verification and design software and proprietary design
	methodology enables our design team to complete complex
	system-on-chip designs, which have been verified for electrical
	correctness in advance of manufacture.                                                                                                                                                                                                 

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Integrated Total Solution with Semiconductor
	Manufacturing Foundries.Anticipating
	the essential role physics would play in the chip design
	process, we were one of the first in the industry to create and
	to market an integration program with silicon foundries. Our
	program enables our research and development staff to work on
	site at silicon foundries to develop and to certify models of
	the foundries semiconductor processes. These models are
	then integrated with our existing software products for use by
	our customers who outsource their manufacturing to these
	foundries. Our program provides us with validation that our
	software is accurate and scalable. It also gives us a first-hand
	look at the manufacturers present and future technologies
	enabling us to focus our innovation in areas that will serve our
	customers needs. The resulting models are made available
	to our customers for use during system-on-chip design
	verification. To date, Chartered Semiconductor Manufacturing,
	IBM, NEC, Toshiba, Taiwan Semiconductor Manufacturing Co. Ltd.
	(TSMC) and United MicroElectronics Corp. (UMC) are among the
	members of our integration program.

Strategy

Our objective is to make our customers more
successful by enabling them to design system-on-chip designs
with ever decreasing geometries. In order to achieve this
objective, we employ a number of strategies:

Broaden Customer Service Offering.Because we view the continuing
disaggregation of the semiconductor industry as an opportunity
for silicon engineering, we have begun complementing our
verification software and services with design services. To
implement this strategy, we acquired Altius Solutions, a
system-on-chip design services company, in October 2000. We
intend to provide our customers with a more complete solution
for their design needs by combining design services, physical
design, intellectual property and system-on-chip verification
software.

Extend Market Leadership into Newer Products.We intend to use our leadership in
system-on-chip verification markets to introduce newer software
products to our customers. In our experience, once customers
have adopted one of our verification products, they are more
likely to adopt our other products.

Broaden Addressable Markets.We intend to expand our design
capacity to develop broader market acceptance of our
system-on-chip products and design services. As system-on-chip
designs become more prevalent, both system-on-chip design and
deep submicron physics expertise will become increasingly vital
to the successful design of integrated circuits. We intend to
leverage our expertise to help customers not only verify but
also create new chip designs and design techniques. In addition,
we anticipate that many companies will find it valuable to
outsource design capability due to the high cost of keeping up
with changing technology. In June 2001, we announced, along with
our development partner, Toshiba Corporation, a new
semiconductor architecture that we believe has the potential to
deliver simultaneous improvements of 10+ percent greater chip
performance, 20+ percent less power consumption, and 30+ percent
more working chips per wafer. This new architecture, called the
X Architecture, is the first to make possible the pervasive
use of diagonal interconnects, or wiring, for advanced
integrated circuits. We also announced our invention of the
interconnect design technology, including our liquid
routing technology, that enables the development of chips
based on the new X Architecture.

Continue our Commitment to Quality and
Customer Satisfaction.We focus on the
development of high-quality software, and we have a strong
emphasis on customer service. We believe our customer support
services are highly regarded in the industry not only for our
ability to integrate products from a variety of vendors, but
also for our proactive working relationships with chip
manufacturers and designers. We focus on the development of
quality software without the need for additional development
time. This Quality-on-TimeTM approach to software
development is a key component to customer satisfaction with our
software and services. Through our intensive focus on
company-wide quality, our engineering and support resources have
the freedom to devote more time and energy to innovation.

Advance and Develop Strategic Relationships.We intend to expand our
industry-partner relationships with technology leaders to
deliver to our customers further integration of the technologies
and design capabilities critical to successful system-on-chip
design and production. We intend to continue to develop
relationships with leading semiconductor manufacturers for the
next generation of our integration program. In

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addition, we intend to expand our integration
relationships with leading design tool vendors to provide
customers with integrated software solutions using our products
as well as the products of other vendors. To build an industry
infrastructure for the X Architecture, Simplex and Toshiba
co-founded the X Initiative consortium. Currently, there are 23
member companies, spanning the design-to-silicon supply chain
from semiconductor intellectual property to integrated circuit
manufacturing.


Pursue Strategic Acquisitions; Invest in
Next-Generation Technology.We intend
to acquire strategic technology that will broaden our product
offerings into related markets or will expand or improve our
customer solutions.

Technology

The adoption of geometries at 0.18 micron
and below has widened the gap between the performance potential
of chip manufacturing technology and the designers ability
to create high-performance designs. Because preparing an
integrated circuit design for manufacture is increasingly
expensive and time-consuming, it has become even more critical
to design with electrically correct methodology and to verify in
advance that each chip, once manufactured, will work as
specified. Further, the rapid emergence of system-on-chip design
styles has introduced new requirements for design tools and
methodologies that overcome the limitations of previously
available solutions.

To satisfy these requirements, we create software
models that capture the intricate details of semiconductor
physics that are relevant to real-world integrated circuit
designs. Our analysis tools then apply these models to a full
chip, providing the designer with an accurate assessment of the
expected performance and reliability of an integrated circuit
before manufacturing. It is only by bridging the disparate
disciplines of semiconductor physics, computer science and chip
design that we have been able to develop our innovative
technologies, and our strong emphasis on advanced software
engineering methodologies has resulted in the rapid development
of high-quality software products.

Semiconductor Physics.An integrated circuits behavior
is ultimately dictated by the laws of semiconductor physics. The
complexity of the interaction between different components of an
integrated circuit increases with higher design speeds and
increasingly dense geometries, and phenomena such as crosstalk,
voltage drops, and noise become severe. The continuing, dramatic
increase in the number of devices on a chip concomitantly
increases the likelihood of deep submicron-related design
failures.

Our technical staff has a significant breadth and
depth of experience, both in industry and academia, at modeling
semiconductor physics. Our expertise manifests itself in the
correlation of our models to silicon. To keep our products and
the designs we create at the forefront of semiconductor
technology, we maintain close relationships with semiconductor
manufacturers worldwide, providing us with ongoing access to the
leading experts in the field and to the most advanced
fabrication technologies.

Computer Science and Software Engineering.The rapidly rising complexity of
todays deep submicron integrated circuits can pose an
overwhelming challenge to both the designer and traditional
design software, making it extremely difficult to prevent chip
failure. For example, the power grid on a typical chip today is
more than ten times as complex as the power grids of just five
or six years ago, and transistors now switch more than one
billion times per second on the highest-performance chips. Even
with todays fast computers, accurately analyzing tens of
millions of wires overnight can be very difficult. We address
this problem through continual innovation in computer science.
For example, our unique technologies for computational geometry,
including the QIC Engine and our adaptive substrate grid, and
our matrix solver provide high speed and capacity, while our
adaptive analytical modeling technology provides high accuracy.
Our extensive computer science expertise draws from disciplines
as diverse as cartography, aeronautics, computational chemistry,
statistics and electronics.

Chip Design and Manufacturing.The design and manufacture of
todays integrated circuits involves dozens of complex
steps, each of which contains potential sources of error. A
thorough understanding of each step and its consequence is
necessary to design and verify deep submicron chips that work
upon first manufacture. Our organization includes design
engineers, software developers, salespeople, applications

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engineers and marketing and executive staff, who
apply our broad expertise in chip design and fabrication in both
developing our products and in building relationships with our
customers.


The intersection of these three key disciplines,
physics, software and design, is the foundation on which we have
built and continue to build our diverse technologies. Our
principal technologies and algorithms are listed below.

Selected Proprietary Technologies

|                                  |  |                                                           |  |                                                                                                                                                                                                               
|--------------------------------- |  | --------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Technology                        |  | Description                                               |  | Benefits                                                                                                                                                                                                      
|                                  |  |                                                           |  |                                                                                                                                                                                                               
|QIC Engine                        |  | Novel geometry data processing                            |  | Faster interconnect modeling and power integrity
	analysis modeling of more than 10 million gates overnight
	on one processor
	From approximately 200,000 to over 400,000 nets per hour on a
	single processor
|                                 
|Lightning                         |  | High-capacity matrix solver                               |  | Automatic computation of current distribution
	Solving networks with more than 200 million resistors
	overnight
	Capacity to handle designs of more than 120 million
	transistors                             
|                                 
|Thunder                           |  | Dynamic circuit simulation                                |  | High-capacity for full chip simulation
	100x faster than the industry standard SPICE                                                                                                                          
|                                 
|Accura                            |  | Static power estimation                                   |  | Vector-independent solution
	Statistical power estimation technology
	Combined speed and accuracy                                                                                                             
|                                 
|Adaptive Analytical 3D Extraction |  | Wire modeling                                             |  | Accuracy to a standard deviation of 4% versus
	silicon
	From approximately 200,000 to over 400,000 nets per hour on a
	single processor                                                                       
|                                 
|Self-Adjusting Grid               |  | Self-adjusting grid generation for substrate
	modeling    |  | High-accuracy substrate modeling
	100x improved performance over fixed-grid solution                                                                                                                          
|                                 
|COSMIC                            |  | Semiconductor process characterization                    |  | Capacitance measurement on silicon to femtofarad
	(10-15F) precision
	Certified models to foundry customers
	A standard for evaluating and tuning software models                                             
|                                 
|DFT                               |  | Design for testability (software engineering
	technology) |  | Improves software quality and reliability
	Increases software development productivity                                                                                                                        
|                                 
|APIGenTM                          |  | Automatic code generation                                 |  | Accelerates software development cycles
	Reduces common software errors                                                                                                                                       
|                                 
|QoTTM                             |  | Quality-on-Time                                           |  | High quality of software on schedule
	Enhances internal efficiency
	Software product management with quality on time                                                                                          
|                                 
|ECSMTM                            |  | Effective current source model                            |  | Improves performance of characterization
	Accuracy within 2% of SPICE                                                                                                                                         

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|               |  |                                            |  |                                                                                                                                            
|-------------- |  | ------------------------------------------ |  | -------------------------------------------------------------------------------------------------------------------------------------------
|Technology     |  | Description                                |  | Benefits                                                                                                                                   
|               |  |                                            |  |                                                                                                                                            
|X Placement    |  | Placement of standard cells into X designs |  |                                                                                                                                            
|              
|Liquid Routing |  | Gridless octilinear routing                |  | Potential for 20% less interconnect and 30% fewer
	vias which result in 10% performance gain, 20% power reduction
	and 10% die cost savings
|X Extraction   |  | Parasitic modeling of X wires              |  |                                                                                                                                            



| |                           
| | --------------------------
| | System-on-Chip Design Flow

In todays system-on-chip design
methodology, the chip design flow involves the following steps:

System Design.In
the system-level design phase, the designer specifies the
architecture and overall design of an integrated circuit,
partitioning the proposed system into hardware and software
components and defining which hardware is appropriate.

Design Implementation.Design implementation is an
implementation phase that maps the system design into a physical
representation that can be manufactured. Once design
implementation is complete, physical verification is necessary
to ensure that the manufactured chip will function correctly.

SoC Verification.The system-on-chip verification, or
SoC verification, step certifies that the results of design
implementation are electrically correct for manufacturing.



| |                                  
| | ---------------------------------
| | Simplex SoC Verification
	Process

Our verification software and services can be
used to perform system-on-chip verification both concurrently
during the design implementation and as part of the final
verification procedures prior to semiconductor manufacturing.
When used concurrently, system-on-chip verification software
provides early feedback to the designers in order for them to
reach deep submicron, or DSM, closure. DSM closure is the point
in the deep submicron chip design cycle where deep
submicron-related problems are corrected, and power integrity,
timing integrity, signal integrity and reliability goals are
met. Used in final verification procedures prior to
semiconductor manufacturing, our system-on-chip verification
software and services provide the last opportunity to ensure the
integrity of the design before the expensive manufacturing
process begins.

SoC verification consists of three major steps:
technology characterization; interconnect, device, and silicon
structure modeling; and the combination of power integrity,
timing integrity, signal integrity and reliability analysis.

Technology Characterization.Our technology characterization
constructs models by simulating the semiconductor process using
highly accurate field solvers, which are high-resolution
simulators of the physics of electromagnetic fields. This
characterization step is an essential part of the process
because it provides correlation between silicon and the software
models used by the SoC verification software. This task is
performed in close cooperation with the semiconductor
manufacturers to benefit from the expertise of their process
engineers.

Interconnect, Device and Silicon Structure
Modeling.The electrical properties of
the chips interconnect, devices and underlying silicon
structure, or substrate, must be modeled in order to perform
power integrity, timing integrity, signal integrity and
reliability verifications. This modeling must be accurate for
meaningful verification. Our modeling software is designed to
simultaneously deliver the accuracy, speed and capacity required
to create the models that describe the electrical behavior of
integrated circuits.

Power Integrity.To
verify whether electricity will flow as intended throughout the
entire chip, it is essential to perform full-chip analysis with
transistor-level accuracy. Our products are designed to model
integrated circuits at the transistor level with the efficiency
and performance of modeling them at the gate level. Gate level
refers to a simplified representation of frequently used groups
of transistors for faster analysis.

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Our solution is integrated at various points in
the chip design flow to provide early feedback as well as final
verification.


Timing Integrity.The timing integrity of complex
integrated circuits with geometries at or below 0.18 micron
is dictated by the performance of the interconnect. Timing
analysis products, such as those provided by our
interoperability partners, require the combination of accurate
models of an integrated circuits interconnect with
accurate delay calculation in order to predict chip timing
behavior. By providing both transistor-level and gate-level
interconnect modeling, we address the timing integrity needs of
each segment of the semiconductor community.

Signal Integrity.Frequently, noise problems, or
interference between signals, are incorrectly diagnosed as
manufacturing problems as they can be intermittent, appearing
only on certain chips when tested at certain operating speeds.
Identifying and modeling noise propagation through complex
integrated circuits is essential to ensure the performance and
functionality of both mixed-signal and high-performance digital
designs. Our signal integrity verification product is designed
to perform a detailed, transistor-level analysis of the noise
propagation through the interconnect and the underlying silicon
structure, providing an accurate measure of circuit noise
behavior. This technology is critical for radio-frequency,
mixed-signal and high-end digital chip designs.

Reliability.The
increasing operating frequencies of todays integrated
circuits, when combined with the reduction of power supply
levels, introduce significant electromigration risks.
Electromigration is an excessive wear of the interconnect,
potentially resulting in breakage due to the high density of
current flow. Identifying portions of the design where the
current density is excessive and can cause reliability problems
is an extremely complex task. The technologies in our
reliability product are designed to analyze the complete current
flows through both signal and supply wires, providing feedback
to designers so they can improve design reliability.

Products

We currently provide several products that
address our customers system-on-chip design and
verification needs. Since different customers encounter
different combinations of challenges in their designs, we often
provide integrated bundles of our various products and their
options in an attempt to address their needs. These bundles are
sold to customers in different configurations and at different
price points, depending on a customers needs. Although
customers frequently purchase these bundles, we have organized
the component products in the table below by their estimated
impact on fiscal 2001 revenue, ranging from largest to smallest.

Our products address the needs of system-on-chip
design and verification as described in this table:

|                          |  |                                                                                                       |  |                                      |  |                                                                                                                                                                                               
|------------------------- |  | ----------------------------------------------------------------------------------------------------- |  | ------------------------------------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Product                   |  | Features                                                                                              |  | Segments                             |  | Benefits                                                                                                                                                                                      
|                          |  |                                                                                                       |  |                                      |  |                                                                                                                                                                                               
|SoC Verification Products
|VoltageStorm SoC          |  | Power grid voltage and electromigration for IC
	designs                                               |  | Power Integrity and Reliability      |  | Large design capacity (over 100 million
	transistors)
	Production-proven technology
	Static and dynamic analysis                                                                              
|                         
|Fire & Ice QX             |  | Modeling interconnect in integrated circuits for
	timing integrity                                    |  | Interconnect and Device Modeling     |  | Designed for high throughput and unlimited
	capacity
	4% standard deviation to silicon                                                                                                        
|                         
|SubstrateStorm            |  | Integrated circuit modeling and noise analysis
	for radio- frequency, analog and mixed-signal designs |  | Substrate Modeling
	Signal Integrity |  | Estimate of interference between sensitive analog
	and noisy digital circuitry
	Support of most advanced semiconductor processes
	Graphical user interface for identifying noise-critical path

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|                        |  |                                                       |  |                                                     |  |                                                                                                                                                                                            
|----------------------- |  | ----------------------------------------------------- |  | --------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Product                 |  | Features                                              |  | Segments                                            |  | Benefits                                                                                                                                                                                   
|                        |  |                                                       |  |                                                     |  |                                                                                                                                                                                            
|                       
|Other Analysis Products
|ElectronStorm option    |  | Electromigration analysis option to VoltageStorm
	SoC |  | Reliability                                         |  | Full-chip reliability solution
	Identification of design flaws affecting integrated
	circuits longevity and manufacturing yields                                                          
|                       
|ClockStorm option       |  | High-speed clock analysis option to VoltageStorm
	SoC |  | Timing Integrity                                    |  | Transistor-level analysis
	providing timing accuracy within 10% of industry-standard
	SPICE
	Designed to analyze complex design styles
	Accounting for non-uniformity of power distribution
|                       
|SI Report option        |  | Noise Analysis option to Fire &
	Ice QX               |  | Signal Integrity                                    |  | Automatic calculation of worst- case noise
	conditions on full-chip
	Full integration for high performance and reduced data file size                                                      
|                       
|IP Station              |  | Analysis for system- on-chip electrical sign-off      |  | Timing Integrity
	Power Integrity
	Signal Integrity |  | Automatic IP characterization
	Accurate within 2% of SPICE
	Function recognition for complete automation                                                                                   

Services

We provide services in addition to our software
products to enable our customers to produce working chips while
focusing primarily on system-level design. Reflecting our
emphasis on customer satisfaction and proficiency in the use of
our software products, we offer design and verification services
to help our customers realize the full potential of our
software, thereby increasing the adoption of our technology. We
also offer design foundry services that aim to enable our
customers to create their most complex, system-on-chip designs.
We have organized the services in the table below in decreasing
order of their strategic importance to the business.

|                             |  |                                           |  |                                                                                                                                                                  
|---------------------------- |  | ----------------------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
|Services                     |  | Description                               |  | Benefits                                                                                                                                                         
|                             |  |                                           |  |                                                                                                                                                                  
|Contract Silicon Engineering |  | Contract chip design                      |  | Targeted use of our expertise on critical
	designs
	Electrically correct designs
	Fast turnaround from design to successful manufacture                          
|                            
|SoC Verification Services    |  | Single or multiple full-chip verification |  | Targeted use of our expertise on critical
	designs
	Fast adoption/ rollout of our products and solutions
	Additional support to meet customers project schedules

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|                                |  |                                                         |  |                                                                                                                                                                                  
|------------------------------- |  | ------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Services                        |  | Description                                             |  | Benefits                                                                                                                                                                         
|                                |  |                                                         |  |                                                                                                                                                                                  
|Technology Integration Services |  | Software integration in integrated circuit design
	flow |  | Custom integration for improved efficiency
	Fast adoption/ rollout of the technology
	Custom interface to third-party solutions
	Available for end customers and software vendors
|Research Services               |  | Contract research                                       |  | Development of specialized technology on a
	contract basis                                                                                                                       

Customers

We have customers in each segment of the
semiconductor community, including:



| |   |                                                            
| | - | -----------------------------------------------------------
| |  | design and engineering services;                           
|
| |  | microprocessor suppliers;                                  
|
| |  | embedded-memory manufacturers and designers;               
|
| |  | digital signal processor, or DSP, suppliers;               
|
| |  | application-specific integrated circuit, or ASIC,
	vendors;
|
| |  | application-specific standard products, or ASSP;           
|
| |  | high-end graphics; and                                     
|
| |  | networking, wireless and communications systems.           

Sony is both a customer of our software
technology and design foundry services. As our largest customer,
Sony accounted for approximately 22% of our total revenue in
fiscal 2001.

Strategic Alliances

Through our wide network of industry partners, we
seek to ensure complete interoperability of our software
products with those of our partners to facilitate faster
adoption and increased ease of use.

Interoperability.We
have interoperability alliances with Mentor Graphics Corp.,
Magma Design Automation, Monterey Design Systems, Silicon
Perspective Corp., Cadence Design Systems and Synopsys. These
alliance companies have entered into licensing arrangements with
us for the sole purpose of development and testing interfaces to
ensure compatibility. We work closely with the leading providers
of complementary technologies to provide seamless integration
with our products. These alliances range from interoperability
programs, for validation of our products interoperability,
to relationships through which customer-specific applications
are jointly developed.

Foundry.We have
developed relationships with Toshiba, IBM, NEC, TSMC, Chartered
Semiconductor Manufacturing, and UMC. Our alliances with these
leading foundries and semiconductor companies worldwide allows
us to demonstrate the accuracy of our chip verification products
by gaining access to silicon measurements of process parameters.
By jointly developing and supporting accurate models of the most
commonly-used semiconductor processes, we provide our mutual
customers with validated verification products. Part of our
close relationship with foundries revolves around our COSMIC
test chip program.

COSMIC Program.Our
COSMIC test chip program with semiconductor industry leaders
creates standards for measurement and characterization of
interconnect on silicon. Leading semiconductor vendors have
successfully used our COSMIC standard to manufacture test chips
and to validate the accuracy of our chip verification tools. To
date, we have completed test chips with Chartered Semiconductor
Manufacturing, IBM, NEC, TSMC and UMC.

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Intellectual Property
(IP) Partners.We have launched
an IP Partners Program with ARM and Virtual Silicon
Technology to provide power grid libraries for users of
VoltageStorm SoC. Our partnerships with these leading IP
companies allow customers to obtain transistor-accurate
libraries of frequently used semiconductor IP such as processor
cores and standard cell libraries. Our partners use our tools
and support to create, validate and distribute these libraries
to their customers who use VoltageStorm SoC.

X Initiative.In
June 2001, at the same time as the announcement of the
X Architecture, a revolutionary interconnect architecture
based on the pervasive use of diagonal routing, we co-sponsored
the formation of the X Initiative, a group of 23 leading
companies from throughout the semiconductor industry, including:

|                                                                                                                                                                                                                                                                                                                                          |  |                                                                                                                                                                                                                                                                                             
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Artisan Components, Inc.
	Dai Nippon Printing Co., Ltd.
	DuPont Photomasks, Inc.
	Etec Systems, Inc.,  an Applied Materials, Inc.
	company
	KLA-Tencor Corporation
	Matsushita Electric Industrial Co., Ltd.
	MicroArk Co., Ltd.
	Monterey Design Systems, Inc.
	Numerical Technologies, Inc.
	NurLogic Design, Inc.
	PDF Solutions, Inc. |  | Photronics, Inc.
	Prolific, Inc.
	Silicon Perspective Corporation
	Silicon Map, LLC
	Silicon Logic Engineering, Inc.
	Simplex Solutions, Inc.
	STMicroelecronics N.V.
	Tensilica, Inc.
	Toshiba Machine Co., Ltd.
	Toshiba Corporation
	Virage Logic Corp.
	Virtual Silicon Technology, Inc.

The X Initiative supports a five-year program
aimed at accelerating the availability and fabrication of the
X Architecture. This consortium of leaders in semiconductor
intellectual property, electronic design automation, integrated
circuit design services, photomask production, and semiconductor
equipment and manufacturing will pursue a three-pronged mission:
provide an independent source of education about the
X Architecture; facilitate support and fabrication of the
X Architecture through the semiconductor industry supply
chain; and survey usage of the X Architecture to track its
adoption.

Sales and Marketing

We sell and market our services primarily through
a direct sales force. Our sales force consists of salespeople,
pre-sales application engineers and post-sales application
engineers. As of September 30, 2001, we had 69 sales and
marketing employees of which 45 were located in the United
States, 15 were located in Europe and 9 were located elsewhere.
We intend to expand our direct sales organization to all major
global markets; specifically, we intend to focus expansion in
Europe and Asia.

We focus our marketing efforts on achieving brand
recognition, market awareness and sales campaign support. We
currently market our services through direct advertising and
targeted events, including trade shows, conferences, technical
publications and live and web-based seminars. Our current
customers provide references, and we feature customer
recommendations in our promotional activities.

Research and Development

From our inception through the first quarter of
fiscal 1997, our operations were primarily focused on research
and development related to the development of our early analysis
and extraction products. In fiscal 2001, our research and
development expenses were $12.6 million or 26% of revenue,
excluding stock-based compensation and amortization of
intangibles. In fiscal 2000, our research and development
expenses were $5.0 million or 22% of revenue, excluding
stock-based compensation and amortization of intangibles, and in
1999, our research and development expenses were
$6.4 million or 59% of revenue. Including stock-based
compensation and amortization of intangibles, our research and
development expenses were $14.8 million or 31% of revenue
in fiscal 2001, $5.3 million or 23% of revenue in fiscal
2000, and $6.4 million or 59% of revenue

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in fiscal 1999. As of September 30, 2001, we
had 81 employees in our research and development team of which
61 were located in the United States, 15 were located in Europe
and 5 were located elsewhere. We have made use of modern
networking and communications technologies to maintain close
working relationships with our geographically remote developers,
and we intend to continue recruiting developers worldwide.
Research and development capabilities are essential to our
strategy to enhance and expand our products and services. We
have invested, and expect to continue to invest, significant
resources in creating a structured process for undertaking all
of our research and development and have recruited personnel
with the appropriate computer science and software engineering
experience. The complexity of system-on-chip design and
verification at deep submicron levels requires expertise in
semiconductor physics, computer science and software
engineering, as well as chip design and manufacturing. We
believe that the multidisciplinary expertise of our team of
scientists and engineers will continue to advance our market and
technological leadership.


Competition

We compete with suppliers of software for the
design of integrated circuits. We believe that the key
competitive factors in this market are product capabilities and
performance, quality, price, interoperability and a reputation
for technical excellence and integrity. We believe that we
compete favorably with respect to each of these factors.

We compete with domestic and international
suppliers of software for chip design. Our principal competitors
include Avant!, Cadence Design Systems, Mentor Graphics and
Synopsys.

Many of our competitors have longer operating
histories and presence in key markets, greater name recognition,
access to larger customer bases and significantly greater
financial, sales and marketing, technical and other resources.
As a result, our competitors may be able to adapt more quickly
to new or emerging technologies and changes in customer
requirements or to devote greater resources to the development,
promotion and sale of their products. Current and potential
competitors have established or might establish financial or
strategic relationships among themselves or with existing or
potential customers or third parties. Accordingly, new
competitors or alliances among existing competitors might emerge
and rapidly acquire significant market share. For example,
Synopsys recently announced its pending acquisition of Avant!.
If successfully completed, this acquisition will strengthen
Synopsys product offerings in the area of SoC verification
software. In addition, our competitors might develop
technologies in the future that more effectively address the
design of integrated circuits at deep submicron levels at a
lower cost.

Intellectual Property

We regard the protection of our copyrights,
service marks, trademarks and trade secrets and other
intellectual property rights as critical to our future success.
We rely on various intellectual property laws and contractual
restrictions, such as confidentiality and nondisclosure
agreements and licensing arrangements, to protect our
proprietary rights in products and services. The license
agreements with our customers limit their rights to the
technologies that we offer and develop for our customers. In
addition, we seek to avoid disclosure of our trade secrets
through a number of means, including requiring those persons
with access to our proprietary information to execute
nondisclosure agreements and restricting access to such
information.

We also rely on technologies that we license from
third parties. For instance, in 1998, we entered into a license
agreement with Computational Applications and System Integration
to incorporate certain of their technologies into some of our
products. In 1995, we also entered into license agreements with
Digital Semiconductor (a business unit of Digital Equipment
Corporation) and Chris Terman (an independent contractor who was
formerly engaged by us). These licenses are perpetual but may be
terminated upon a material breach, including a failure to
protect the underlying intellectual property. Each of these
license agreements provides us with complementary technologies
from parties with specific expertise that we believe is an
effective means of expanding the features and functionality of
our products. These licenses might not continue to be available
to us on commercially reasonable terms in the future, if at all.
As a result, we might be required to develop or obtain
substitute technology at additional cost.

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We have applied for registration of the following
trademarks: ClockStorm, COSMIC, ElectronStorm, SignalStorm,
Simplex Solutions and VoltageStorm. Fire & Ice QX is our
registered trademark. We currently have three patents issued and
a number of patent applications filed in connection with our
existing products and technologies and our technologies and
intellectual property in development.

Employees

As of September 30, 2001, we had 220
employees, including 69 in sales and marketing, 81 in research
and development, 38 in design service and post sales support and
32 in general and administrative. None of our employees is
represented by a labor union. We have never experienced a work
stoppage and believe our relationship with our employees is good.




Item 2.     Properties

Our headquarters includes approximately 30,000
square feet in Sunnyvale, California pursuant to a lease that
expires May 31, 2002. Although we believe our facilities
are adequate for our needs in the near term, due to the rapid
growth of our employee base we might need either to lease or to
find alternative facilities in order to accommodate future
expansion. In addition, we have sales offices in Texas and North
Carolina, and we lease space in the United Kingdom, Germany,
France and Japan.




Item 3.     Legal
Proceedings

From time to time, we receive claims that arise
in the ordinary course of our business. We are currently subject
to some such claims related to intellectual property and
employee relations matters.

On August 10, 2001, Sequence Design, Inc.
filed a suit against us in the United States District Court for
the Northern District of California, alleging that we infringed
Sequences United States Patent No. 5,901,063. We have
filed an answer to Sequences complaint denying
infringement and asserting that the Sequence patent is not
valid. No trial date has been set.




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

No matters were submitted to a vote of
stockholders of Simplex during the fourth quarter of fiscal 2001.

Executive Officers

Set forth below is information concerning our
executive officers, and their ages as of September 30, 2001.

|                     |  |     |    |          |  |                                                                
|-------------------- |  | --- | -- | -------- |  | ---------------------------------------------------------------
|Name                 |  | Age |    | Position
|                     |  |     |    |         
|Penelope A. Herscher |  |     | 41 |          |  | Chief Executive Officer and Chairman of the Board
	of Directors
|Aki Fujimura         |  |     | 43 |          |  | President, Chief Operating Officer and Director                
|Aurangzeb Khan       |  |     | 45 |          |  | Executive Vice President and General Manager                   
|James D. Behrens     |  |     | 50 |          |  | Executive Vice President, Worldwide Field
	Operations          
|Luis P. Buhler       |  |     | 48 |          |  | Chief Financial Officer                                        
|Steven L. Teig       |  |     | 40 |          |  | Chief Technical Officer                                        

Penelope A. Herscherhas served as our Chief Executive
Officer since April 1996. From May 1996 to July 2000,
Ms. Herscher served as our President. In July 2000,
Ms. Herscher was appointed Chairman of our Board of
Directors. From June 1988 to April 1996, Ms. Herscher held
several management positions at Synopsys, Inc., an electronic
design automation company, including business development, Vice
President of Marketing and general management positions. Ms.
Herscher serves on the board of directors of the EDA Consortium.
Ms. Herscher holds a B.A. in mathematics from Cambridge
University in England.

Aki Fujimurahas
served as our Chief Operating Officer and as a member of our
Board of Directors since August 1997. In July 2000,
Mr. Fujimura was appointed our President. From April 1993
to October 1996,

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Mr. Fujimura served on the Board of
Directors and as Vice President for Pure Software, a developer
of automated software quality products and services.
Mr. Fujimura serves on the Board of Directors of Bristol
Technology Inc. Mr. Fujimura holds a B.S. and an M.S. in
electronic engineering and computer science from the
Massachusetts Institute of Technology.


Aurangzeb Khanhas
served as our Executive Vice President and General Manager since
October 2000. Mr. Khan co-founded Altius and has served as
its President and Chief Executive Officer since March 1999. From
February 1996 to March 1999, Mr. Khan was Vice President,
Silicon Engineering at Cirrus Logic, Inc. From October 1983 to
February 1996, Mr. Khan held various positions at Tandem
Computers, Inc., including Director of Engineering, Technology
& CAD Development. Prior to October 1983, Mr. Khan
served as Senior Design Engineer, SRAM Development, for
Fairchild Semiconductor Corp. Mr. Khan holds an M.S. in
Engineering Management and an M.S. in Electrical Engineering
from Stanford University, a B.S. in Electrical Engineering and
Computer Sciences and a B.S. in Nuclear Engineering from
University of California, Berkeley, and a B.Sc. in Physics and
Mathematics (with highest honors) from University of Punjab.

James D. Behrenshas
served as our Vice President of Worldwide Field Operations since
April 2000. From August 1999 to April 2000, Mr. Behrens
served as President and Chief Executive Officer of Snaketech,
S.A., which we acquired in March 2000. From January 1999 to
August 1999, Mr. Behrens served as a partner at Quanah
Consulting. From February 1998 to January 1999, Mr. Behrens
served as Vice President of Business Development for Aspec
Technology, Inc. (now Ingenuus Corporation), a provider of
electronic design automation software tools. From August 1997 to
February 1998 Mr. Behrens served as President of SIS
Microelectronics, which was acquired by Aspec Technology in
February 1998. From November 1989 to March 1997,
Mr. Behrens held various management roles at Cadence Design
Systems, Inc. Mr. Behrens holds a B.S. in chemistry from
Colorado State University.

Luis P. Buhlerhas
served as our Chief Financial Officer since January 1999. From
February 1998 to January 1999, Mr. Buhler served as a
consultant and as a principal at Rockledge Associates, a finance
and public affairs consulting firm. From January 1997 to
February 1998, Mr. Buhler served as Deputy Secretary for
Economic Development at the California Trade and Commerce
Agency, which included acting as Executive Director for
California Infrastructure and Economic Development Bank. From
August 1988 to September 1996, Mr. Buhler held several
positions at Trans Ocean Ltd., an international equipment
leasing company, including Vice President of International
Marketing and Vice President Treasurer. Mr. Buhler holds a
B.A. in economics and an M.B.A. from Stanford University and an
M.A. in Urban Studies from Occidental College.

Steven L. Teighas
served as our Chief Technical Officer since August 1998. From
April 1995 to August 1998, Mr. Teig served as
Vice-President, Advanced Technology at CombiChem, Inc., a drug
discovery company, where he developed their core Discovery
Engine technology. In June 1989, Mr. Teig co-founded BioCAD
Corporation, the commercial developer of the Catalyst drug
discovery software, and served as its Chief Technical Officer
until its merger with Molecular Simulations Inc. in August 1994.
Thereafter, Mr. Teig served as President and Chief
Technical Officer of Entropix Corp., a subsidiary of Molecular
Simulations, from August 1994 through April 1995. Mr. Teig
holds a B.S.E. in Electrical Engineering and Computer Science
from Princeton University.




PART II




Item 5.     Market
for Registrants Common Equity and Related Stockholder
Matters

Our common stock has traded on The Nasdaq
National Market under the symbol SPLX since our
initial public offering on May 2, 2001. As of
December 13, 2001 we had approximately 292 stockholders of
record and the closing price of our common stock was $20.60 per
share as reported by The Nasdaq National Market.

16



---



##### Table of Contents



The following table sets forth for the periods
indicated the high and low closing sale prices for our common
stock as reported by The Nasdaq National Market:

|               |  |      |       |     |  |   |       | 
|-------------- |  | ---- | ----- | --- |  | - | ----- | 
|Fiscal 2001    |  | High |       | Low
|               |  |      |       |    
|Third Quarter  |  | $    | 38.20 |     |  | $ | 19.83 | 
|Fourth Quarter |  | $    | 28.51 |     |  | $ | 11.15 | 

No cash dividends were declared or paid in fiscal
2001. We anticipate retaining all available funds to finance
future internal growth and product development.




Item 6.     Selected
Consolidated Financial Data

The following selected consolidated financial
data for the periods ended September 30 for each of the
five years indicated have been derived from our audited
financial statements. You should read the following table in
conjunction with Managements Discussion and Analysis
of Financial Condition and Results of Operations and the
consolidated financial statements and the notes related thereto
included in Items 7 and 8 of Part II of this
Form 10-K.

|                                            |                                                                               |                                       |   |         |   |      |   |        |   |      |   |        |   |  |   |        |   |  |   |        |  
|------------------------------------------- | ----------------------------------------------------------------------------- | ------------------------------------- | - | ------- | - | ---- | - | ------ | - | ---- | - | ------ | - |  | - | ------ | - |  | - | ------ | -
|                                            |                                                                               |                                      
|                                            |                                                                               | Years Ended September 30,            
|                                            |                                                                               |                                      
|                                            |                                                                               | 2001                                  |   | 2000    |   | 1999 |   | 1998   |   | 1997
|                                            |                                                                               |                                       |   |         |   |      |   |        |   |     
|                                            |                                                                               |                                      
|                                            |                                                                               | (In thousands, except per share data)
|Consolidated Statement of Operations
	Data: |                                                                               |                                       |   |         |   |      |   |        |   |      |   |        |   |  |   |        |   |  |   |       
|                                            | Revenue                                                                       |                                       | $ | 48,184  |   |      | $ | 22,817 |   |      | $ | 10,881 |   |  | $ | 6,537  |   |  | $ | 3,001  |  
|                                            | Gross profit                                                                  |                                       |   | 34,681  |   |      |   | 18,914 |   |      |   | 8,811  |   |  |   | 5,640  |   |  |   | 2,291  |  
|                                            | Operating loss                                                                |                                       |   | (11,506 | ) |      |   | (6,196 | ) |      |   | (7,119 | ) |  |   | (7,527 | ) |  |   | (5,278 | )
|                                            | Net loss                                                                      |                                       |   | (12,087 | ) |      |   | (6,722 | ) |      |   | (7,041 | ) |  |   | (7,215 | ) |  |   | (5,178 | )
|                                            | Basic and diluted net loss per share                                          |                                       | $ | (1.30   | ) |      | $ | (2.40  | ) |      | $ | (3.62  | ) |  | $ | (4.64  | ) |  | $ | (4.16  | )
|                                            | Number of shares used in calculation of basic and
	diluted net loss per share |                                       |   | 9,311   |   |      |   | 2,801  |   |      |   | 1,944  |   |  |   | 1,557  |   |  |   | 1,245  |  
|Other Financial Data (unaudited)(1):        |                                                                               |                                       |   |         |   |      |   |        |   |      |   |        |   |  |   |        |   |  |   |       
|                                            | Gross profit excluding non-cash charges                                       |                                       | $ | 38,243  |   |      | $ | 19,334 |   |      | $ | 8,811  |   |  | $ | 5,640  |   |  | $ | 2,291  |  
|                                            | Total operating expenses excluding non-cash
	charges                          |                                       |   | 35,879  |   |      |   | 18,160 |   |      |   | 15,917 |   |  |   | 12,669 |   |  |   | 7,562  |  
|                                            | Operating income (loss) excluding non-cash charges                            |                                       |   | 2,364   |   |      |   | 1,174  |   |      |   | (7,106 | ) |  |   | (7,029 | ) |  |   | (5,271 | )
|                                            | Net income (loss) excluding non-cash charges                                  |                                       | $ | 1,783   |   |      | $ | 648    |   |      | $ | (7,028 | ) |  | $ | (6,717 | ) |  | $ | (5,171 | )



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | In the Other Financial Data table above, we
	present gross profit, total operating expenses, operating income
	(loss) and net income (loss) as adjusted to exclude
	the following non-cash charges: stock-based compensation
	expense, in-process research and development charges, and
	amortization of goodwill and other intangibles. We consider
	these measures to be useful as they provide an additional basis
	upon which to evaluate our ability to fund our operations,
	growth and other capital expenditures. However, these measures
	are not indicators of performance under generally accepted
	accounting principles and may not be comparable to information
	reported by other companies. Further, these measures do not
	replace gross profit, total operating expenses, operating income
	(loss) and net income (loss) as indicators of our operating
	performance or cash flow as a measure of liquidity. For example,
	as indicated above, our operating income excluding non-cash
	charges for the year ended September 30, 2001 was
	$2,364,000, as compared to our net cash used in operating
	activities for the same period which was $220,000. The
	difference is primarily due to our assumption of Altius
	existing current liabilities which we paid down after the
	acquisition, as well as our use of cash to finance current
	assets net of current liabilities of our business. In addition,
	we believe that these measures are typically used by financial
	analysts when comparing and evaluating companies in our
	industry. With respect to stock-based compensation expense,

17



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##### Table of Contents



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | we believe that offering equity as a portion of
	compensation helps to align the interests of our employees with
	the interests of our stockholders. As a result, we expect equity
	will continue to be a part of the compensation we offer our
	employees. However, we do not currently intend to grant options
	with exercise prices below fair market value. Further, we do not
	have a policy with respect to the repricing of stock options or
	the grant of cash bonuses if the market price of our stock falls
	below the exercise prices of our granted options. For a
	reconciliation of these Other Financial Data items to those
	reported under generally accepted accounting principles, see
	Reconciliation between reported Statement of Operations
	Data and the amounts shown as Other Financial Data below.

|                                 |                                                              |               |  |        |  |      |  |         |   |      |  |         |   |  |  |         |   |  |  |        |  
|-------------------------------- | ------------------------------------------------------------ | ------------- |  | ------ |  | ---- |  | ------- | - | ---- |  | ------- | - |  |  | ------- | - |  |  | ------ | -
|                                 |                                                              |              
|                                 |                                                              | September 30,
|                                 |                                                              |              
|                                 |                                                              | 2001          |  | 2000   |  | 1999 |  | 1998    |   | 1997
|                                 |                                                              |               |  |        |  |      |  |         |   |     
|Consolidated Balance Sheet Data: |                                                              |               |  |        |  |      |  |         |   |      |  |         |   |  |  |         |   |  |  |       
|                                 | Cash, cash equivalents and short-term investments            |               |  | 50,672 |  |      |  | 7,447   |   |      |  | 4,466   |   |  |  | 7,041   |   |  |  | 3,277  |  
|                                 | Working capital                                              |               |  | 52,065 |  |      |  | 2,669   |   |      |  | 3,382   |   |  |  | 6,631   |   |  |  | 2,360  |  
|                                 | Total assets                                                 |               |  | 99,447 |  |      |  | 22,516  |   |      |  | 11,803  |   |  |  | 10,727  |   |  |  | 6,261  |  
|                                 | Convertible preferred stock and warrants                     |               |  |       |  |      |  | 24,251  |   |      |  | 24,184  |   |  |  | 23,333  |   |  |  | 11,044 |  
|                                 | Total common stock and other stockholders
	equity (deficit) |               |  | 81,743 |  |      |  | (14,332 | ) |      |  | (21,651 | ) |  |  | (14,854 | ) |  |  | (7,414 | )

|                                                     |  |                          |         |      |  |      |       |  |  |   |        |  
|---------------------------------------------------- |  | ------------------------ | ------- | ---- |  | ---- | ----- |  |  | - | ------ | -
|                                                     |  |                         
|                                                     |  | Year Ended September 30,
|                                                     |  |                         
|                                                     |  | 2001                     |         | 2000 |  | 1999
|                                                     |  |                          |         |      |  |     
|Consolidated Cash Flow Data:                         |  |                          |         |      |  |      |       |  |  |   |        |  
|Net cash (used in) provided by operating
	activities |  | $                        | (220    | )    |  | $    | 1,565 |  |  | $ | (5,384 | )
|Net cash (used in) provided by investing
	activities |  |                          | (34,151 | )    |  |      | 807   |  |  |   | (696   | )
|Net cash provided by financing activities            |  |                          | 45,369  |      |  |      | 871   |  |  |   | 3,243  |  

|                                                                                                                          |                                                  |                                                           |         |        |        |      |        |        |        |      |        |     |        |   |        |      |        |   |        |    |        |  
|------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------ | --------------------------------------------------------- | ------- | ------ | ------ | ---- | ------ | ------ | ------ | ---- | ------ | --- | ------ | - | ------ | ---- | ------ | - | ------ | -- | ------ | -
|                                                                                                                          |                                                  |                                                          
|                                                                                                                          |                                                  | Year Ended September 30,                                 
|                                                                                                                          |                                                  |                                                          
|                                                                                                                          |                                                  | 2001                                                      |         | 2000   |        | 1999 |        | 1998   |        | 1997
|                                                                                                                          |                                                  |                                                           |         |        |        |      |        |        |        |     
|Reconciliation between reported Statement of
	Operations Data and the amounts shown as Other Financial Data
	(unaudited): |                                                  |                                                           |         |        |        |      |        |        |        |      |        |     |        |   |        |      |        |   |        |   
|(a) Gross profit                                                                                                          |                                                  | $                                                         | 34,681  |        |        | $    | 18,914 |        |        | $    | 8,811  |     |        | $ | 5,640  |      |        | $ | 2,291  |   
|                                                                                                                          | Amortization of acquired technology              |                                                           |         | 453    |        |      |        | 166    |        |      |        |    |        |   |        |     |        |   |        |   |       
|                                                                                                                          | Stock-based compensation                         |                                                           |         | 3,109  |        |      |        | 254    |        |      |        |    |        |   |        |     |        |   |        |   |       
|                                                                                                                          |                                                  |                                                           |         |        |        |      |        |        |        |      |        |     |        |   |        |      |        |   |        |   
|                                                                                                                          |                                                  | Gross profit excluding non-cash charges                   |         | $      | 38,243 |      |        | $      | 19,334 |      |        | $   | 8,811  |   |        | $    | 5,640  |   |        | $  | 2,291  |  
|                                                                                                                          |                                                  |                                                           |         |        |        |      |        |        |        |      |        |     |        |   |        |      |        |   |        |   
|(b) Total operating expenses                                                                                              |                                                  | $                                                         | 46,187  |        |        | $    | 25,110 |        |        | $    | 15,930 |     |        | $ | 13,167 |      |        | $ | 7,569  |   
|                                                                                                                          | Amortization of goodwill and other intangibles   |                                                           |         | (6,117 | )      |      |        | (409   | )      |      |        |    |        |   |        |     |        |   |        |   |       
|                                                                                                                          | In-process and acquired research and development |                                                           |         |       |        |      |        | (5,000 | )      |      |        |    |        |   |        |     |        |   |        |   |       
|                                                                                                                          | Stock-based compensation                         |                                                           |         | (4,191 | )      |      |        | (1,541 | )      |      |        | (13 | )      |   |        | (498 | )      |   |        | (7 | )     
|                                                                                                                          |                                                  |                                                           |         |        |        |      |        |        |        |      |        |     |        |   |        |      |        |   |        |   
|                                                                                                                          |                                                  | Total operating expenses excluding non-cash
	charges      |         | $      | 35,879 |      |        | $      | 18,160 |      |        | $   | 15,917 |   |        | $    | 12,669 |   |        | $  | 7,562  |  
|                                                                                                                          |                                                  |                                                           |         |        |        |      |        |        |        |      |        |     |        |   |        |      |        |   |        |   
|(c) Operating income (loss)                                                                                               |                                                  | $                                                         | (11,506 | )      |        | $    | (6,196 | )      |        | $    | (7,119 | )   |        | $ | (7,527 | )    |        | $ | (5,278 | ) 
|                                                                                                                          | Amortization of goodwill and other intangibles   |                                                           |         | 6,570  |        |      |        | 575    |        |      |        |    |        |   |        |     |        |   |        |   |       
|                                                                                                                          | In-process and acquired research and development |                                                           |         |       |        |      |        | 5,000  |        |      |        |    |        |   |        |     |        |   |        |   |       
|                                                                                                                          | Stock-based compensation                         |                                                           |         | 7,300  |        |      |        | 1,795  |        |      |        | 13  |        |   |        | 498  |        |   |        | 7  |       
|                                                                                                                          |                                                  |                                                           |         |        |        |      |        |        |        |      |        |     |        |   |        |      |        |   |        |   
|                                                                                                                          |                                                  | Total operating income (loss) excluding
	non-cash charges |         | $      | 2,364  |      |        | $      | 1,174  |      |        | $   | (7,106 | ) |        | $    | (7,029 | ) |        | $  | (5,271 | )
|                                                                                                                          |                                                  |                                                           |         |        |        |      |        |        |        |      |        |     |        |   |        |      |        |   |        |   

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|             |                                                  |                                              |         |       |       |      |        |       |     |      |        |    |        |   |        |     |        |   |        |   |        |  
|------------ | ------------------------------------------------ | -------------------------------------------- | ------- | ----- | ----- | ---- | ------ | ----- | --- | ---- | ------ | -- | ------ | - | ------ | --- | ------ | - | ------ | - | ------ | -
|             |                                                  |                                             
|             |                                                  | Year Ended September 30,                    
|             |                                                  |                                             
|             |                                                  | 2001                                         |         | 2000  |       | 1999 |        | 1998  |     | 1997
|             |                                                  |                                              |         |       |       |      |        |       |     |     
|(d) Net loss |                                                  | $                                            | (12,087 | )     |       | $    | (6,722 | )     |     | $    | (7,041 | )  |        | $ | (7,215 | )   |        | $ | (5,178 | )
|             | Amortization of goodwill and other intangibles   |                                              |         | 6,570 |       |      |        | 575   |     |      |        |   |        |   |        |    |        |   |        |  |       
|             | In-process and acquired research and development |                                              |         |      |       |      |        | 5,000 |     |      |        |   |        |   |        |    |        |   |        |  |       
|             | Stock-based compensation                         |                                              |         | 7,300 |       |      |        | 1,795 |     |      |        | 13 |        |   |        | 498 |        |   |        | 7 |       
|             |                                                  |                                              |         |       |       |      |        |       |     |      |        |    |        |   |        |     |        |   |        |  
|             |                                                  | Net income (loss) excluding non-cash charges |         | $     | 1,783 |      |        | $     | 648 |      |        | $  | (7,028 | ) |        | $   | (6,717 | ) |        | $ | (5,171 | )
|             |                                                  |                                              |         |       |       |      |        |       |     |      |        |    |        |   |        |     |        |   |        |  




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

The following discussion and analysis of our
financial condition and results of operations should be read in
conjunction with our consolidated financial statements and
related notes included in Item 8 of Part II of this
Form 10-K. The following discussion and analysis contains
forward-looking statements that involve risks and uncertainties
that could cause our actual results to differ significantly from
those projected in the forward-looking statements. Actual
results may differ materially due to a number of factors,
including those discussed below and elsewhere in this Annual
Report on Form 10-K, particularly in Factors That May
Affect Future Results of Operations. See Cautionary
Note Regarding Forward-Looking Statements.

Overview

We provide software and services for integrated
circuit design and verification to enable our communications,
computer and consumer products customers to achieve first-time
production success and rapid delivery of complex system-on-chip
semiconductors. Our products and services are designed to enable
our customers to rapidly deliver high quality system-on-chip
semiconductors with geometries at and below 0.18 micron.

From our incorporation in April 1995 until we
shipped our first product in November 1996, we primarily focused
our activities on conducting research and development for our
software products. In November 1996, we shipped our first
product suite, which included Fire & Ice (a SoC
verification product) and the predecessor to VoltageStorm SoC (a
SoC verification product). In March 1999, we shipped
VoltageStorm along with the ElectronStorm, ClockStorm and SI
Report options (each analysis products). During the last two
years, we have substantially extended and improved our products.
In September 1999, we shipped our next-generation proprietary
modeling product, Fire & Ice QX, which resulted in a
100x increase in performance over the prior version. In May
2000, we introduced our next-generation power integrity product,
VoltageStorm SoC, which addresses the unique challenges of
system-on-chip design earlier in our customers design flow.

In March 2000, we acquired all the outstanding
capital stock of Snaketech S.A., or Snaketech, in exchange for a
total of approximately 929,000 shares of our common stock and
options to purchase approximately 104,000 additional shares of
our common stock. The acquisition of Snaketech added
SubstrateStorm to our SoC verification product family. We have
accounted for this transaction using the purchase method of
accounting.

In October 2000, we acquired Altius Solutions,
Inc., or Altius, which is now our wholly owned subsidiary, in
exchange for a total of approximately 2.6 million shares of
our common stock and options to purchase approximately 384,000
additional shares of our common stock. As a result of our Altius
acquisition, we now provide design foundry services that enable
accelerated chip development. Altius was incorporated in March
1998, and received its first revenue for system-on-chip design
services in March 1999. We have accounted for this transaction
using the purchase method of accounting.

In May 2001, we completed our initial public
offering of 4,600,000 shares of common stock at $12 per share.
The offering was managed by Credit Suisse First Boston
Corporation and co-managed by Robertson Stephens, Inc. and
SG Cowen Securities Corporation.

19



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##### Table of Contents



In June 2001, we announced, along with our
development partner, Toshiba Corporation, a new semiconductor
architecture that we believe has the potential to deliver
simultaneous improvements of 10+ percent greater chip
performance, 20+ percent less power consumption, and
30+ percent more working chips per wafer. This new
architecture, called the X Architecture, is the first to
make possible the pervasive use of diagonal interconnects, or
wiring, for advanced integrated circuits. We also announced our
invention of the interconnect design technology, including our
liquid routing technology, that enables the
development of chips based on the new X Architecture.

In June 2001, at the same time as the
announcement of the X Architecture, we co-sponsored the
formation of the X Initiative, a group of leading companies
from throughout the semiconductor industry which has grown to
23 members. The X Initiative supports a five-year
program aimed at accelerating the availability and fabrication
of the X Architecture.

In October 2001, the X Initiative announced the
successful effort of member Numerical Technologies to process
the first X Architecture photomask data with optical
proximity correction, based on design data provided by us.
Numerical Technologies was able to use its current mask data
preparation tool CATSTM, which is used in virtually
every photomask manufacturing facility worldwide to prepare
design information for mask manufacturing, to assess mask data
preparation for X Architecture designs. In a separate
announcement, the X Initiative announced the successful
production of the worlds first X Architecture mask by
X Initiative member Dupont Photomasks, Inc. Dupont
Photomasks was able to produce this first-of-its-kind photomask
using existing photomask manufacturing software and equipment,
including Numericals CATS, for current-generation
0.18 micron process technologies.

In the fourth quarter of fiscal 2001, general
economic conditions and conditions in the semiconductor
industry, impacted the ability of our customers to purchase our
products and services as uncertainty in their businesses has
increased. These conditions have caused our sales cycle to
lengthen, customer budgets for research and development to
decrease and customer purchases to be delayed or decreased. In
response to these events, we have tightened expense controls and
adjusted our sales compensation to focus sales efforts on the
first half of fiscal 2002.

Historically, our revenues have been flat or
slightly down in our first fiscal quarter, as compared to the
immediately preceding quarter, due in large part to the
structure of our sales incentives. In the current business and
customer environment, we expect this seasonal pattern to be
accentuated.



| |                  
| | -----------------
| | Source of Revenue

We derive our revenue from software licenses,
maintenance, consulting, design foundry services, training and
the development of technologies under research and development
contracts. Our end customers include microprocessor companies,
embedded memory or digital signal processor suppliers, design
and engineering service companies, application-specific
integrated circuit vendors and application-specific standard
products companies building high-end graphics, networking,
wireless and communications systems.

Our total revenue in the fiscal years ended
September 30, 2001 and 2000, and 1999 were comprised of the
following:

|                 |                                   |      |  |      |   |      |  |    |   |  |  |    |  
|---------------- | --------------------------------- | ---- |  | ---- | - | ---- |  | -- | - |  |  | -- | -
|                 |                                   | 2001 |  | 2000 |   | 1999
|                 |                                   |      |  |      |   |     
|License Revenue. |                                   |      |  |      |   |      |  |    |   |  |  |   
|                 | Term licenses (more than 3 years) |      |  | 12   | % |      |  | 39 | % |  |  | 49 | %
|                 | Term licenses (3 years or less)   |      |  | 19   | % |      |  | 7  | % |  |  |   |  
|                 | Time-based licenses               |      |  | 20   | % |      |  | 19 | % |  |  | 22 | %
|Service Revenue. |                                   |      |  |      |   |      |  |    |   |  |  |   
|                 | Maintenance services              |      |  | 17   | % |      |  | 19 | % |  |  | 17 | %
|                 | Software services                 |      |  | 5    | % |      |  | 16 | % |  |  | 12 | %
|                 | Design foundry services           |      |  | 27   | % |      |  |   |   |  |  |   |  

20



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##### Table of Contents





| |                
| | ---------------
| | License Revenue

We generate our revenue under time-based licenses
where revenue is recognized ratably and term licenses where
revenue is recognized at time of shipment. Our time-based
licenses are typically 1 year or less and can be renewed or
remixed periodically. Our term licenses exceed one year in
length and typically do not exceed 20 years. We intend to
increase the percentage of revenue derived from our time-based
licenses and our 3-year term licenses. License revenue was 51%
of total revenue for fiscal year 2001 reflecting the Altius
acquisition and related increases in design foundry services.
License revenue was 64% of our total revenue in fiscal 2000 and
71% of total revenue in fiscal 1999.



| |         
| | --------
| | Services

Services revenue is generated from:



| |   |                                        
| | - | ---------------------------------------
| |  | design foundry services;               
|
| |  | maintenance services;                  
|
| |  | short-term consulting and training; and
|
| |  | research and development contracts.    

Maintenance is sold to customers with term
licenses and is renewed by customers on an annual basis. We
perform short-term consulting for and provide training to end
customers. We also have a research and development project with
one customer. Services revenue accounted for 49% of our total
revenue for fiscal year 2001 reflecting the Altius acquisition
and related increases in design foundry services. Services
revenue accounted for 36% of our total revenue in fiscal 2000
and 29% of our total revenue in fiscal 1999.



| |                      
| | ---------------------
| | International Revenue

We have international sales offices located in
the United Kingdom, Germany, France, and Japan. North American
sales offices are located in North Carolina, Texas and
California. We also use distributors and sales agents in Taiwan.
Our sales outside of North America accounted for 47% of our
total revenue for fiscal year 2001, 34% of our total revenue in
fiscal 2000 and 23% of our total revenue in fiscal 1999.



| |                    
| | -------------------
| | Revenue Recognition

We report revenue in two categories: license
revenue and services revenue. License revenue is derived from
product sales to end users and distributors. Services revenue is
derived from providing design foundry, consulting, training and
maintenance services to end-users as well as services under
research and development contracts.

We recognize revenue in accordance with the
American Institute of Certified Public Accountants Statement of
Position 97-2, Software Revenue Recognition, as amended by
Statement of Position 98-4, Deferral of the Effective Date
of Certain Provisions of SOP 97-2, (SOP 97-2) and
Statement of Position 98-9, Modification of SOP 97-2,
Software Revenue Recognition with Respect to Certain
Transactions. License revenue is derived from term and
time-based licenses. License revenue from term licenses is
recognized upon shipment of the product, if an executed
agreement or purchase order has been received, the fee is fixed
and determinable and collection is deemed probable. We do not
generally include acceptance criteria or rights of return in our
arrangements.

For contracts with multiple obligations (e.g.,
product licenses, maintenance and other services), we allocate
revenue to each component of the contract based on vendor
specific objective evidence of its fair value, which is based on
either the price when each component is sold separately, or the
renewal rates for maintenance in future years as specified in
the arrangement. We recognize revenue allocated to undelivered
products and services when the criteria for revenue set forth
herein are met.

21



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##### Table of Contents



License and maintenance revenue from time-based
licenses for a term of one year or less is recognized ratably
over the period of the license, as maintenance for these
licenses is never sold separately from the license.

Services revenue from consulting, installation
and training is recognized as the related services are
performed, when collectibility is probable and the fee is fixed
and determinable. Revenue from maintenance and support
agreements are deferred and recognized on a straight-line basis
over the term of the related agreement. Payments of maintenance
fees are generally made in advance and are nonrefundable.

We recognize revenues derived from research and
development contracts in accordance with American Institute of
Certified Public Accountants Statement of Position No. 68,
Research and Development Arrangements and Statement of Position
No. 81-1, Contract Accounting under the
percentage-of-completion method of accounting based on the
estimated stage of completion of individual contracts. We
recognize revenues from design foundry engineering contracts in
accordance with Statement of Position No. 81-1, Contract
Accounting under the percentage-of-completion method.

Simplex also recognizes service and license
revenue for contracts which require significant customization or
modification of its software and service revenue for contracts
which do not include licenses, under SOP 81-1, using the
percentage-of-completion method based on the estimated stage of
completion of the individual contracts.

Deferred revenue primarily consists of
maintenance and support services under maintenance contracts and
unearned revenue on time-based licenses. For design foundry
engineering and research and development contracts, deferred
revenue represents the excess of amounts invoiced over the
revenue recognized. Deferred revenue fluctuates at each period
end in accordance with the mix of contracts entered into.



| |                
| | ---------------
| | Cost of Revenue

Cost of license revenue consists primarily of the
expenses related to royalties, amortization and maintenance
related to acquired or licensed technologies. We deliver our
product and associated documentation electronically. Cost of
services revenue consists primarily of personnel expenses,
including stock-based compensation expense, costs related to
outside consultants, travel and overhead expenses related to
program management, software installation, customer and
technical support and fees for sub-contractors and training.



| |                   
| | ------------------
| | Operating Expenses

Operating expenses consist of research and
development expenses, selling and marketing expenses, general
and administrative expenses, stock-based compensation expenses,
amortization of acquired intangibles and in-process research and
development expenses. We allocate the total costs for overhead
and facilities based on headcount to each of the functional
areas that use the relevant services. These allocated charges
include general overhead items such as building rent,
equipment-leasing costs, telecommunications charges and
depreciation expense.



| |                         
| | ------------------------
| | Research and Development

Research and development costs consist primarily
of expenses related to the development of new functionality and
upgrades of our software and to the amortization of acquired
intangibles. These expenses include compensation and benefits,
including stock-based compensation expense, for software
developers, quality assurance personnel and for third-party
contract development costs.



| |                    
| | -------------------
| | Sales and Marketing

Sales and marketing expenses consist primarily of
compensation and benefits, including stock-based compensation
expense, for direct sales and marketing personnel, travel cost,
public relations, sales and other promotional materials, trade
shows, advertising and other sales and marketing programs.

22



---



##### Table of Contents





| |                           
| | --------------------------
| | General and Administrative

General and administrative expenses consist
primarily of compensation and benefits, including stock-based
compensation expense, for general and administrative employees
and fees for professional advisors.



| |                                                
| | -----------------------------------------------
| | Amortization of Goodwill and Other
	Intangibles

Amortization of goodwill and other intangibles
arises through our acquisitions of Snaketech and Altius. These
acquisitions were each accounted for using the purchase method
of accounting and, accordingly, the purchase price has been
allocated to the tangible and intangible assets acquired and
liabilities assumed on the basis of their respective fair values
on the acquisition dates. Goodwill and other intangible assets
are amortized on a straight-line basis over their respective
estimated useful lives from three to seven years.



| |                         
| | ------------------------
| | Stock-based Compensation

For the year ended September 30, 2001 we
recorded an unearned stock-based compensation charge of
$11.8 million, $10.3 million of which related to the
stock options assumed in connection with the acquisition of
Altius in October 2000. During the year ended September 30,
2000 we granted stock options and issued restricted stock to our
officers, employees and consultants where, with respect to
officers and employees, the fair value was subsequently
determined to be greater than on the date of grant. As a result,
we recorded an unearned stock-based compensation charge of
$4.0 million for the year ended September 30, 2000. For
employees, such amount represents the difference at the grant
date between the exercise price of each stock option granted or
the purchase price for each share of restricted stock and the
fair market value of the underlying common stock. This amount is
being amortized, using the accelerated vesting method, over the
vesting period of the options or restricted stock, generally
four years. Stock-based compensation related to consultants is
measured on a fair-value basis using the Black-Scholes option
pricing methodology.

23



---



##### Table of Contents



Results of Operations

The following table presents certain financial
data as a percentage of total revenue for the periods indicated:

|                                         |                                                  |                           |     |      |     |      |     |    |     |  |     |    |     | 
|---------------------------------------- | ------------------------------------------------ | ------------------------- | --- | ---- | --- | ---- | --- | -- | --- |  | --- | -- | --- | 
|                                         |                                                  |                          
|                                         |                                                  | Years Ended September 30,
|                                         |                                                  |                          
|                                         |                                                  | 2001                      |     | 2000 |     | 1999
|                                         |                                                  |                           |     |      |     |     
|Net revenue:                             |                                                  |                           |     |      |     |      |     |    |     |  |     |   
|                                         | License                                          |                           |     | 51   | %   |      |     | 64 | %   |  |     | 71 | %  
|                                         | Services                                         |                           |     | 49   |     |      |     | 36 |     |  |     | 29 |    
|                                         |                                                  |                           |     |      |     |      |     |    |     |  |     |   
|                                         |                                                  | Total revenue             |     |      | 100 |      |     |    | 100 |  |     |    | 100 | 
|                                         |                                                  |                           |     |      |     |      |     |    |     |  |     |   
|Cost of revenue:                         |                                                  |                           |     |      |     |      |     |    |     |  |     |   
|                                         | License                                          |                           |     | 1    |     |      |     | 1  |     |  |     | 1  |    
|                                         | Services                                         |                           |     | 27   |     |      |     | 16 |     |  |     | 18 |    
|                                         |                                                  |                           |     |      |     |      |     |    |     |  |     |   
|                                         |                                                  | Total cost of revenue     |     |      | 28  |      |     |    | 17  |  |     |    | 19  | 
|                                         |                                                  |                           |     |      |     |      |     |    |     |  |     |   
|Gross profit                             |                                                  |                           | 72  |      |     |      | 83  |    |     |  | 81  |   
|                                         |                                                  |                           |     |      |     |      |     |    |     |  |     |   
|Operating expenses:                      |                                                  |                           |     |      |     |      |     |    |     |  |     |   
|                                         | Research and development                         |                           |     | 30   |     |      |     | 23 |     |  |     | 59 |    
|                                         | Sales and marketing                              |                           |     | 40   |     |      |     | 47 |     |  |     | 67 |    
|                                         | General and administrative                       |                           |     | 13   |     |      |     | 16 |     |  |     | 20 |    
|                                         | Amortization of goodwill and other intangibles   |                           |     | 13   |     |      |     | 2  |     |  |     |   |    
|                                         | In-process and acquired research and development |                           |     |     |     |      |     | 22 |     |  |     |   |    
|                                         |                                                  |                           |     |      |     |      |     |    |     |  |     |   
|                                         |                                                  | Total operating expenses  |     |      | 96  |      |     |    | 110 |  |     |    | 146 | 
|                                         |                                                  |                           |     |      |     |      |     |    |     |  |     |   
|Loss from operations                     |                                                  |                           | (24 | )    |     |      | (27 | )  |     |  | (65 | ) 
|Interest and other income (expense), net |                                                  |                           | 2   |      |     |      | 1   |    |     |  | 1   |   
|Interest expense                         |                                                  |                           | (1  | )    |     |      | (2  | )  |     |  | (1  | ) 
|                                         |                                                  |                           |     |      |     |      |     |    |     |  |     |   
|Loss before income taxes                 |                                                  |                           | (23 | )    |     |      | (28 | )  |     |  | (65 | ) 
|Provision for income taxes               |                                                  |                           | 2   |      |     |      | 1   |    |     |  |    |   
|                                         |                                                  |                           |     |      |     |      |     |    |     |  |     |   
|Net loss                                 |                                                  |                           | (25 | )%   |     |      | (29 | )% |     |  | (65 | )%
|                                         |                                                  |                           |     |      |     |      |     |    |     |  |     |   

Years Ended September 30, 2001 and
2000



| |        
| | -------
| | Revenue

Total Revenue.Total
revenue increased 111% from $22.8 million for the year
ended September 30, 2000 to $48.2 million for the year
ended September 30, 2001. Our contracts with Sony accounted
for 22% of total revenue for the year ended September 30,
2001. As a percentage of total revenue, license revenue
accounted for 51% for the year ended September 30, 2001 and
64% for the year ended September 30, 2000. Total revenue
from sales to customers outside North America accounted for 47%
of total revenue for the year ended September 30, 2001 and
34% of total revenue for the year ended September 30, 2000.
We expect that revenue derived from customers outside of North
America will continue to account for a significant portion of
our future revenue. We see the demand for our products and
services driven by our customers design starts at 0.18
micron and below.

License Revenue.License revenue increased 68% from $14.7 million for the
year ended September 30, 2000 to $24.7 million for the
year ended September 30, 2001 due to the introduction of
next generation models of our primary products as well as an
increase in the demand for our existing products primarily due
to technological advances in our industry which we expect to
continue.

24



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##### Table of Contents



Services Revenue.Services revenue increased 188% from $8.1 million for the
year ended September 30, 2000 to $23.5 million for the
year ended September 30, 2001. This increase was due primarily
to approximately $12.8 million in revenue from our design
foundry services which resulted from our acquisition of Altius
on October 4, 2000 and approximately $2.5 million
increase in maintenance and other support of our customers.



| |                
| | ---------------
| | Cost of Revenue



| |         
| | --------
| | Licenses

|                                    |                         |                |     |      |  |   |     |     | 
|----------------------------------- | ----------------------- | -------------- | --- | ---- |  | - | --- | --- | 
|                                    |                         |               
|                                    |                         | Year Ended    
|                                    |                         | September 30, 
|                                    |                         |               
|                                    |                         | 2001           |     | 2000
|                                    |                         |                |     |     
|                                    |                         |               
|                                    |                         | (In thousands)
|Other cost of license revenue       |                         | $              | 70  |      |  | $ | 92  |    
|Amortization of acquired technology |                         |                | 453 |      |  |   | 166 |    
|                                    |                         |                |     |      |  |   |     |    
|                                    | Cost of license revenue |                | $   | 523  |  |   | $   | 258 | 
|                                    |                         |                |     |      |  |   |     |    

Excluding amortization of acquired technology,
cost of license revenue decreased 24% from $92,000 for the year
ended September 30, 2000 to $70,000 for the year ended
September 30, 2001, due to lower royalties incurred. As a
percentage of license revenue, cost of license revenue,
excluding amortization of acquired technology were 0.3% for the
year ended September 30, 2001, and 0.6% for the year ended
September 30, 2000. Including amortization of acquired
technology of $453,000 for the year ended September 30,
2001, cost of license was $523,000, or 2.1% of license revenue.
Including amortization of acquired technology of $166,000 for
the year ended September 30, 2000, cost of license
increased to $258,000, or 1.8% of license revenue.



| |         
| | --------
| | Services

|                         |                  |                |       |        |  |   |       |       | 
|------------------------ | ---------------- | -------------- | ----- | ------ |  | - | ----- | ----- | 
|                         |                  |               
|                         |                  | Year Ended    
|                         |                  | September 30, 
|                         |                  |               
|                         |                  | 2001           |       | 2000  
|                         |                  |                |       |       
|                         |                  |               
|                         |                  | (In thousands)
|Other cost of services   |                  | $              | 9,871 |        |  | $ | 3,391 |      
|Stock-based compensation |                  |                | 3,109 |        |  |   | 254   |      
|                         |                  |                |       |        |  |   |       |      
|                         | Cost of services |                | $     | 12,980 |  |   | $     | 3,645 | 
|                         |                  |                |       |        |  |   |       |      

Excluding stock-based compensation expense, cost
of services increased 191% from $3.4 million in the year
ended September 30, 2000 to $9.9 million in the year
ended September 30, 2001, due to additional costs incurred
for the new design foundry service resulting from the Altius
acquisition. As a percentage of services revenue, cost of
services, excluding stock-based compensation expense, was 42%
for each of the years ended September 30, 2001 and 2000.
Including stock-based compensation expense of $3.1 million
for the year ended September 30, 2001, cost of service
increased to $13.0 million, or 55% of service revenue.
Including stock-based compensation expense of $254,000 for the
year ended September 30, 2000, cost of service was
$3.6 million, or 45% of service revenue.



| |                   
| | ------------------
| | Operating Expenses



| |                         
| | ------------------------
| | Research and Development

|                               |                          |                |        |        |  |   |       |       | 
|------------------------------ | ------------------------ | -------------- | ------ | ------ |  | - | ----- | ----- | 
|                               |                          |               
|                               |                          | Year Ended    
|                               |                          | September 30, 
|                               |                          |               
|                               |                          | 2001           |        | 2000  
|                               |                          |                |        |       
|                               |                          |               
|                               |                          | (In thousands)
|Other research and development |                          | $              | 12,598 |        |  | $ | 4,966 |      
|Stock-based compensation       |                          |                | 2,159  |        |  |   | 375   |      
|                               |                          |                |        |        |  |   |       |      
|                               | Research and development |                | $      | 14,757 |  |   | $     | 5,341 | 
|                               |                          |                |        |        |  |   |       |      

25



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##### Table of Contents



Excluding stock-based compensation expense and
amortization of intangibles, research and development expenses
increased 154% from $5.0 million for the year ended
September 30, 2000 to $12.6 million for the year ended
September 30, 2001. This increase resulted from the hiring
of new employees and the headcount increase related to the
acquisition of Snaketech in March 2000 and the acquisition of
Altius in October 2000. As a percentage of total revenue,
research and development expenses, excluding stock-based
compensation expense and amortization of intangibles, were 26%
for the year ended September 30, 2001 and 22% for the year ended
September 30, 2000. Including stock-based compensation
expense of $2.2 million for the year ended
September 30, 2001, research and development expense
increased to $14.8 million, or 31% of total revenue.
Including stock-based compensation expense of $375,000 for the
year ended September 30, 2000, research and development
expense was $5.3 million, or 23% of total revenue.



| |                    
| | -------------------
| | Sales and Marketing

|                          |                     |                |        |        |  |   |        |        | 
|------------------------- | ------------------- | -------------- | ------ | ------ |  | - | ------ | ------ | 
|                          |                     |               
|                          |                     | Year Ended    
|                          |                     | September 30, 
|                          |                     |               
|                          |                     | 2001           |        | 2000  
|                          |                     |                |        |       
|                          |                     |               
|                          |                     | (In thousands)
|Other sales and marketing |                     | $              | 17,831 |        |  | $ | 10,373 |       
|Stock-based compensation  |                     |                | 1,257  |        |  |   | 262    |       
|                          |                     |                |        |        |  |   |        |       
|                          | Sales and marketing |                | $      | 19,088 |  |   | $      | 10,635 | 
|                          |                     |                |        |        |  |   |        |       

Excluding stock-based compensation expense, sales
and marketing expenses increased 72% from $10.4 million for
the year ended September 30, 2000 to $17.8 million for the
year ended September 30, 2001. This increase resulted from
increased compensation expense due to the expansion of our sales
and marketing organization, including the effect of the
Snaketech and Altius acquisitions. As a percentage of total
revenue, sales and marketing expenses, excluding stock-based
compensation expense, were 37% for the year ended
September 30, 2001 and 45% for the year ended
September 30, 2000, due to the growth of revenue outpacing
the increase of sales and marketing expenses. Including
stock-based compensation expense of $1.3 million for the
year ended September 30, 2001, sales and marketing expense
increased to $19.1 million, or 40% of total revenue.
Including stock-based compensation expense of $262,000 for the
year ended September 30, 2000, sales and marketing expense
was $10.6 million, or 47% of total revenue.



| |                           
| | --------------------------
| | General and Administrative

|                                 |                            |                |       |       |  |   |       |       | 
|-------------------------------- | -------------------------- | -------------- | ----- | ----- |  | - | ----- | ----- | 
|                                 |                            |               
|                                 |                            | Year Ended    
|                                 |                            | September 30, 
|                                 |                            |               
|                                 |                            | 2001           |       | 2000 
|                                 |                            |                |       |      
|                                 |                            |               
|                                 |                            | (In thousands)
|Other general and administrative |                            | $              | 5,450 |       |  | $ | 2,820 |      
|Stock-based compensation         |                            |                | 775   |       |  |   | 905   |      
|                                 |                            |                |       |       |  |   |       |      
|                                 | General and administrative |                | $     | 6,225 |  |   | $     | 3,725 | 
|                                 |                            |                |       |       |  |   |       |      

Excluding stock-based compensation expense,
general and administrative expenses increased 93% from
$2.8 million for the year ended September 30, 2000 to
$5.5 million for the year ended September 30, 2001 due
to increased recruiting expenses and increased headcount from
the Altius acquisition. We also incurred increased expenses
associated with being a public company starting May 2,
2001, including annual and other reporting costs, increased
director and officer liability insurance, investor relations
programs and accounting and legal fees. As a percentage of total
revenue, general and administrative expenses, excluding
stock-based compensation expense, were 11% for the year ended
September 30, 2001 and 12% for the year ended
September 30, 2000. Including stock-based compensation
expense of $775,000 for the year ended September 30, 2001,
general and administrative expense increased to $6.2 million, or
13% of total revenue. Including stock-based compensation expense
of $904,000 for the year ended September 30, 2000, general
and administrative expense was $3.7 million, or 16% of
total revenue.

26



---



##### Table of Contents



Amortization of Goodwill and Other
Intangibles.Amortization of acquired
intangibles was $6.6 million for the year ended
September 30, 2001, of which $453,000 was allocated to cost
of license. Amortization of acquired intangibles was $575,000
for the year ended September 30, 2000, of which $166,000
was allocated to cost of license. Amortization of goodwill and
other intangibles relates to the Snaketech and Altius
acquisitions. Snaketech was acquired in March 2000 which
resulted in $5.5 million of goodwill and intangibles.
Altius was acquired in October 2000 which resulted in $25.8
million of goodwill and intangibles.

Stock-based Compensation.We recorded an unearned stock-based
compensation charge of $11.7 million for the year ended
September 30, 2001 and $4.0 million for the year ended
September 30, 2000. Stock-based compensation expense was
$7.3 million for the year ended September 30, 2001 and
$1.8 million for the year ended September 30, 2000.
This stock-based compensation expense has been allocated to its
respective category under cost of revenue, research and
development, sales and marketing and general and administrative.
This increased expense resulted from the increased level of
stock option grants and restricted stock issuances and increases
in the deemed fair market value of the underlying common stock.

Net Interest and Other Income (Expense).Net interest and other expense was
$509,000 for the year ended September 30, 2001 and a net
income of $284,000 for the year ended September 30, 2000.
Net interest and other expense for the year ended
September 30, 2001 includes interest expense incurred on
our line of credit and capital leases, amortization of debt
discount and foreign currency translation loss, offset by
interest income earned on our cash, cash equivalent and
short-term investment balances.



| |                           
| | --------------------------
| | Provision for Income Taxes

The income tax provision for the year ended
September 30, 2001 was $1.1 million which is the result of
alternative minimum taxes, foreign withholding taxes on revenue,
and tax on earnings generated from operations in certain foreign
jurisdictions. No provision for federal and state income taxes
has been recorded since inception because we have experienced
significant net losses, which have resulted in federal and state
operating loss carryforwards of approximately $27.2 million
as of September 30, 2001. In light of our cumulative
operating losses, we have provided a full valuation allowance
for all deferred tax assets since at present we are uncertain
whether such deferred tax assets will be realized.

Years Ended September 30, 2000 and
1999



| |        
| | -------
| | Revenue

Total Revenue.Total
revenue increased 110% from $10.9 million for the year
ended September 30, 1999 to $22.8 million for the year
ended September 30, 2000. Our contracts with Toshiba
accounted for 18% of total revenue for the year ended
September 30, 2000. As a percentage of total revenue,
license revenue accounted for 64% for the year ended
September 30, 2000 and 71% for the year ended
September 30, 1999. Total revenue from sales to customers
outside North America accounted for 34% of total revenue for the
year ended September 30, 2000 and 23% of total revenue for the
year ended September 30, 1999. We expect that revenue
derived from customers outside North America will continue to
account for a significant portion of our future revenue.

License Revenue.License revenue increased 91% from
$7.7 million for the year ended September 30, 1999 to
$14.7 million for the year ended September 30, 2000
due to the introduction of next generation models of our primary
products as well as an increase in the demand for our existing
products primarily due to technological advances in our industry
which we expect to continue.

Services Revenue.Services revenue increased 156% from
$3.2 million for the year ended September 30, 1999 to
$8.1 million for the year ended September 30, 2000. This
increase was due to an approximately $3.6 million increase
in maintenance and other support of our customers and
approximately $1.3 million increase in revenue related to
our research contract.

27



---



##### Table of Contents





| |                
| | ---------------
| | Cost of Revenue



| |         
| | --------
| | Licenses

|                                    |                 |                |     |      |  |   |    |    | 
|----------------------------------- | --------------- | -------------- | --- | ---- |  | - | -- | -- | 
|                                    |                 |               
|                                    |                 | Year Ended    
|                                    |                 | September 30, 
|                                    |                 |               
|                                    |                 | 2000           |     | 1999
|                                    |                 |                |     |     
|                                    |                 |               
|                                    |                 | (In thousands)
|Other cost of license               |                 | $              | 92  |      |  | $ | 96 |   
|Amortization of acquired technology |                 |                | 166 |      |  |   |   |   
|                                    |                 |                |     |      |  |   |    |   
|                                    | Cost of license |                | $   | 258  |  |   | $  | 96 | 
|                                    |                 |                |     |      |  |   |    |   

Excluding amortization of acquired technology,
cost of licenses decreased 4% from $96,000 for the year ended
September 30, 1999 to $92,000 for the year ended
September 30, 2000, due to lower royalties incurred. As a
percentage of licenses revenue, cost of licenses, excluding
amortization of acquired technology were 0.6% for the year ended
September 30, 2000, and 1.2% for the year ended
September 30, 1999. Including amortization of acquired
technology of $166,000 for the year ended September 30,
2000, cost of license increased to $258,000, or 1.8% of license
revenue. We incurred no amortization of acquired technology for
the year ended September 30, 1999.



| |         
| | --------
| | Services

|                         |                  |                |       |       |  |   |       |       | 
|------------------------ | ---------------- | -------------- | ----- | ----- |  | - | ----- | ----- | 
|                         |                  |               
|                         |                  | Year Ended    
|                         |                  | September 30, 
|                         |                  |               
|                         |                  | 2000           |       | 1999 
|                         |                  |                |       |      
|                         |                  |               
|                         |                  | (In thousands)
|Other cost of services   |                  | $              | 3,391 |       |  | $ | 1,974 |      
|Stock-based compensation |                  |                | 254   |       |  |   |      |      
|                         |                  |                |       |       |  |   |       |      
|                         | Cost of services |                | $     | 3,645 |  |   | $     | 1,974 | 
|                         |                  |                |       |       |  |   |       |      

Excluding stock-based compensation expense, cost
of services increased 72% from $2.0 million in the year
ended September 30, 1999 to $3.4 million in the year
ended September 30, 2000, due to cost of services related
to our research contract offset by a cost-saving program that
included a decrease in the use of outside consultants utilized
for application engineering in early fiscal 1999. As a
percentage of services revenue, cost of services, excluding
stock-based compensation expense, was 42% for the year ended
September 30, 2000, and 62% for the year ended
September 30, 1999. Including stock-based compensation
expense of $254,000 for the year ended September 30, 2000,
cost of service increased to $3.6 million, or 45% of
service revenue. We incurred no stock-based compensation expense
pertaining to services for the year ended September 30,
1999.



| |                   
| | ------------------
| | Operating Expenses



| |                         
| | ------------------------
| | Research and Development

|                               |                          |                |       |       |  |   |       |       | 
|------------------------------ | ------------------------ | -------------- | ----- | ----- |  | - | ----- | ----- | 
|                               |                          |               
|                               |                          | Year Ended    
|                               |                          | September 30, 
|                               |                          |               
|                               |                          | 2000           |       | 1999 
|                               |                          |                |       |      
|                               |                          |               
|                               |                          | (In thousands)
|Other research and development |                          | $              | 4,966 |       |  | $ | 6,378 |      
|Stock-based compensation       |                          |                | 375   |       |  |   | 9     |      
|                               |                          |                |       |       |  |   |       |      
|                               | Research and development |                | $     | 5,341 |  |   | $     | 6,387 | 
|                               |                          |                |       |       |  |   |       |      

Excluding stock-based compensation expense and
amortization of intangibles, research and development expenses
decreased 22% from $6.4 million for the year ended
September 30, 1999 to $5.0 million for the year ended
September 30, 2000. During the second quarter of fiscal
1999, we limited the use of higher-priced outside consultants
resulting in lower expenses. We started increasing the level of
staffing for research and development after the acquisition of
Snaketech in the quarter ended March 31, 2000. As a
percentage of total

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revenue, research and development expenses,
excluding stock-based compensation expense and amortization of
intangibles, were 22% for the year ended September 30, 2000
and 59% for the year ended September 30, 1999, attributable
to increases in total revenue and lower expenses. Including
stock-based compensation expense of $375,000 for the year ended
September 30, 2000, research and development expense
increased to $5.3 million, or 23% of total revenue. We
incurred $9,000 stock-based compensation expense for the year
ended September 30, 1999.




| |                    
| | -------------------
| | Sales and Marketing

|                          |                     |                |        |        |  |   |       |       | 
|------------------------- | ------------------- | -------------- | ------ | ------ |  | - | ----- | ----- | 
|                          |                     |               
|                          |                     | Year Ended    
|                          |                     | September 30, 
|                          |                     |               
|                          |                     | 2000           |        | 1999  
|                          |                     |                |        |       
|                          |                     |               
|                          |                     | (In thousands)
|Other sales and marketing |                     | $              | 10,373 |        |  | $ | 7,314 |      
|Stock-based compensation  |                     |                | 262    |        |  |   |      |      
|                          |                     |                |        |        |  |   |       |      
|                          | Sales and marketing |                | $      | 10,635 |  |   | $     | 7,314 | 
|                          |                     |                |        |        |  |   |       |      

Excluding stock-based compensation expense, sales
and marketing expenses increased 42% from $7.3 million for
the year ended September 30, 1999 to $10.4 million for the
year ended September 30, 2000. Approximately
$2.1 million of this increase was due to the addition of
sales personnel and increased commissions paid. As a percentage
of total revenue, sales and marketing expenses, excluding
stock-based compensation expense, were 45% for the year ended
September 30, 2000 and 67% for the year ended
September 30, 1999, due to the growth of revenue outpacing
the increase of sales and marketing expenses. Including
stock-based compensation expense of $262,000 for the year ended
September 30, 2000, sales and marketing expense increased
to $10.6 million, or 47% of total revenue. We incurred no
stock-based compensation expense pertaining to sales and
marketing for the year ended September 30, 1999.



| |                           
| | --------------------------
| | General and Administrative

|                                 |                            |                |       |       |  |   |       |       | 
|-------------------------------- | -------------------------- | -------------- | ----- | ----- |  | - | ----- | ----- | 
|                                 |                            |               
|                                 |                            | Year Ended    
|                                 |                            | September 30, 
|                                 |                            |               
|                                 |                            | 2000           |       | 1999 
|                                 |                            |                |       |      
|                                 |                            |               
|                                 |                            | (In thousands)
|Other general and administrative |                            | $              | 2,820 |       |  | $ | 2,225 |      
|Stock-based compensation         |                            |                | 905   |       |  |   | 4     |      
|                                 |                            |                |       |       |  |   |       |      
|                                 | General and administrative |                | $     | 3,725 |  |   | $     | 2,229 | 
|                                 |                            |                |       |       |  |   |       |      

Excluding stock-based compensation expense,
general and administrative expenses increased 27% from
$2.2 million for the year ended September 30, 1999 to
$2.8 million for the year ended September 30, 2000 due
to the addition of personnel and increased use of consultants
and third party advisors. As a percentage of total revenue,
general and administrative expenses, excluding stock-based
compensation expense, were 12% for the year ended
September 30, 2000 and 20% for the year ended
September 30, 1999. Including stock-based compensation
expense of $904,000 for the year ended September 30, 2000,
general and administrative expense increased to
$3.7 million, or 16% of total revenue. We incurred $4,000
of stock-based compensation expense for the year ended
September 30, 1999.

Amortization of Goodwill and Other
Intangibles.Amortization of acquired
intangibles was $0.6 million for the year ended
September 30, 2000, of which $166,000 was allocated to cost
of license revenue. The total amortization related to the
acquisition of Snaketech in March 2000. No amortization expense
was recorded in the year ended September 30, 1999.

Stock-based Compensation.We recorded an unearned stock-based
compensation charge of $4.0 million for the year ended
September 30, 2000 and $20,000 for the year ended
September 30, 1999. Stock-based compensation expense was
$1.8 million for the year ended September 30, 2000 and
$13,000 for the year ended September 30, 1999. This
stock-based compensation expense has been allocated to its
respective category

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under cost of revenue, research and development,
sales and marketing and general and administrative. This
increased expense resulted from the increased level of stock
option grants and restricted stock issuances and increases in
the deemed fair market value of the underlying common stock.


In-process and Acquired Research and
Development.On March 31, 2000,
we acquired Snaketech. In connection with this acquisition,
$1.1 million of in-process research and development has
been allocated based on established valuation techniques using
the incremental expected cash flows. At the date of the
acquisition, this amount was expensed as a non-recurring charge
as the in-process technology had not yet reached technological
feasibility and had no alternative future use. Snaketech had one
major in-process research and development project relating to
the development of chip design software in progress at the time
of the acquisition. We have completed the Snaketech in-process
project and continue to use it to assist in developing our own
next generation chip design technology.

In addition, Simplex also acquired a place and
route development tool in the Snaketech acquisition which will
be used exclusively in the development of one of Simplex
products. The development tool was valued based upon
Simplex estimate of fair value. In assigning fair value,
Simplex considered its market value if the product were
separately sold, its value if the product were sold or licensed
by Snaketech, as well as Simplex planned usage. As the
development tool had no probable alternative future use, Simplex
expensed the full fair market value of $3.9 million upon
purchase.

Net Interest and Other Income (Expense).Net interest and other expense was
$284,000 for the year ended September 30, 2000 and $78,000
for the year ended September 30, 2000. Net interest and
other expense for the year ended September 30, 2000
includes interest expense incurred on our line of credit and
capital leases, foreign withholding taxes, amortization of debt
discount and foreign currency translation loss, offset by
interest income earned on our cash, cash equivalent and
short-term investment balances. We utilized the line of credit
starting June 1999.

Income Taxes.During
the year ended September 30, 2000, Simplex incurred foreign
taxes of $242,000. We have never paid significant
U.S. federal or state income taxes and, at
September 30, 2000, had net federal operating loss
carryforwards of approximately $18.7 million. We have a
full valuation allowance to the extent of all deferred tax
assets since it is more likely than not that we will not realize
any benefit from these assets.



| |                                
| | -------------------------------
| | Liquidity and Capital Resources

Prior to our initial public offering, we financed
our operations primarily through private sales of preferred
stock, funds generated from operations, and the use of our line
of credit with Transamerica Business Credit Corporation which
was repaid in May 2001.

On May 2, 2001, we completed our initial
public offering and realized net proceeds from the offering of
approximately $47.5 million in cash. As of
September 30, 2001, we had $50.7 million of cash, cash
equivalents and short-term investments.

Net cash used in operating activities was
$220,000 in fiscal 2001, compared to net cash provided of
$1.6 million in fiscal 2000 and net cash used of
$5.4 million in fiscal 1999. Cash used in fiscal 2001
resulted primarily from payment of liabilities assumed in the
Altius acquisition. This was partially offset by the acquisition
of $2.3 million of cash from Altius reported in cash flows
from investing activities.

Net cash used in investing activities was
$34.2 million in fiscal 2001, compared to net cash provided
of $807,000 in fiscal 2000 and net cash used of $696,000 in
fiscal 1999. Cash used in fiscal 2001 consists primarily of
purchases of property, equipment and available-for-sale
securities, offset by cash received in the acquisition of
Snaketech and Altius and the proceeds from sales of
available-for-sale securities.

Net cash provided by financing activities was
$45.4 million, $871,000 and $3.2 million in fiscal
2001, 2000 and 1999 respectively. Cash generated in fiscal 2001
resulted primarily from the proceeds of $2.5 million from a
line of credit and from the net proceeds received from our
initial public offering and offset by the repayment of our
$5.0 million line of credit.

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We currently anticipate that our available cash
resources combined with the cash generated from operations will
be sufficient to meet our anticipated working capital and
capital expenditure requirements for at least the next
12 months. In addition, although there are no present
understandings, commitments or agreements with respect to any
acquisition of other businesses, services, products and
technologies, we may from time to time evaluate potential
acquisitions, which could increase our capital requirements.



| |                                 
| | --------------------------------
| | Recent Accounting Pronouncements

In July 2001, the Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting Standards
No. 141 (SFAS 141), Business Combinations.
SFAS 141 requires the purchase method of accounting for
business combinations initiated after June 30, 2001 and
eliminates the pooling-of-interests method. We believe that the
adoption of SFAS 141 will not have a significant impact on our
financial statements.

In July 2001, the FASB issued Statement of
Financial Accounting Standards No. 142 (SFAS 142),
Goodwill and Other Intangible Assets, which is
effective for fiscal years beginning after March 15, 2001.
SFAS 142 requires, among other things, the discontinuance
of goodwill amortization. In addition, the standard includes
provisions upon adoption for the reclassification of certain
existing recognized intangibles as goodwill, reassessment of the
useful lives of existing recognized intangibles,
reclassification of certain intangibles out of previously
reported goodwill and the testing for impairment of existing
goodwill and other intangibles. We intend to adopt SFAS 142
early. Based upon our initial assessment, we expect goodwill,
including acquired workforce of $2.7 million, would cease
to amortize at the beginning of fiscal 2002, which would reduce
amortization by $6.1 million on an annual basis.

In October 2001, the FASB issued Statement of
Financial Accounting Standards No. 144 (SFAS 144)
Accounting for the Impairment or Disposal of Long-Lived
Assets. SFAS 144 supercedes SFAS 121 and applies
to all long-lived assets including discontinued operations and
consequently amends Accounting Principals Board Opinion
No. 30, Reporting the Results of
Operations  Reporting the Effects of Disposal of a
Segment of a Business. SFAS 144 is effective for
financial statements issued for fiscal years beginning after
December 15, 2001.

Factors That May Affect Future Results of
Operations



| |                              
| | -----------------------------
| | Risks Related to Our Business



| |                                                                                                                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We have a history of losses and we have
	accumulated a deficit of $40.6 million as of
	September 30, 2001. If we fail to achieve and to maintain
	profitability in the future, investors could lose confidence in
	the value of our stock which could cause it to
	decline.

We have spent significant funds to date to
develop and to refine our current technologies and services and
to develop our sales and marketing resources. If we are unable
to execute on our strategy to become profitable, our stock price
could be negatively affected. We have incurred significant
operating losses in the past and have not yet achieved
profitability. As of September 30, 2001, we had an
accumulated deficit of $40.6 million. In addition, we
expect to continue to invest significantly in our
next-generation research and development projects and to
continue to hire additional people in all areas of our company
to support our growing business. As a result of these factors,
to achieve profitability we will need, among other matters, to
increase our customer base and to increase the number of and
amounts of products and services purchased by our customers. We
cannot assure you that we will be able to increase our revenue
or operating efficiencies in this manner or otherwise and
achieve and maintain profitability. Because we expect to
continue to increase our investment in new areas of our
business, our investment could outpace growth in our revenue,
thus preventing our ability to achieve and maintain
profitability. If we are unable to achieve and maintain
profitability, our stock price could be materially adversely
affected.

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| |                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our recent acquisitions have, and future
	acquisitions could, require significant management attention and
	might further distract our management and disrupt our
	business.

We acquired Snaketech in March 2000 and Altius in
October 2000. If we fail to successfully integrate Snaketech,
Altius, or any future acquisition into our company, the revenue
and operating results of the combined company would decline. To
realize the benefits of these recent acquisitions, we must
successfully integrate both companies research and
development facilities into our existing operations despite
differences in culture, language and legal environments, such as
the mandated 35 hour work week in France, specific work rules
covering the Altius Japan office, and different tax treatments
related to the issuance of equity to employees. Such integration
has required and will continue to require significant time and
resources to manage and we may not be able to manage such
integration successfully. If our customers are uncertain about
our ability to operate on a combined basis, they could delay or
cancel orders for our products. We intend to continue to make
investments in complementary companies, products or
technologies. If we buy a company or a division of a company, we
could have difficulty in assimilating that company or
divisions personnel and operations which could negatively
affect our operating results. In addition, the key personnel of
the acquired company may decide not to work for us. Furthermore,
we may have to incur debt or issue equity securities as we have
in past acquisitions to pay for any future acquisition, the
issuance of which would be dilutive to our existing stockholders.



| |                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our industries are characterized by rapid
	technological change. If we fail to design new products that
	gain market acceptance, it will result in reduced gross margins
	and loss of market share.

The semiconductor and design software industries
are characterized by rapid technological change, frequent new
product introductions and evolving industry standards. The
introduction of products embodying new technologies and the
emergence of new industry standards can render existing products
obsolete and unmarketable. We devote a substantial amount of our
resources to research and development to enable us to enhance
current products and develop new technologies. If we fail to
enhance our current products and develop and introduce new
generations of technology and products on a timely basis, we
will not be able to address the increasingly sophisticated needs
of our customers and our results of operations will be harmed.
In addition, if we develop new products that do not achieve
market acceptance, we may not be able to recoup development and
marketing expenses, which could lead to a loss of market share
which could harm our results of operations. For example, in the
second half of 2001 we announced the development of a new
physical design intellectual property called the X Architecture.
We cannot assure you that we will be successful in fully
developing and marketing this new technology, future product
enhancements or new products that respond to technological
change, that we will not experience difficulties that could
delay or prevent the successful development, introduction and
marketing of these products, or that our new products and
product enhancements will achieve market acceptance. If we are
unable to develop, introduce and successfully market products
and services in a timely manner in response to changing market
conditions or customer requirements, our business, operating
results and financial condition might be materially and
adversely affected.



| |                                                                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If chip designers and manufacturers do not
	integrate our software into existing software and design flows
	or if other software companies do not cooperate in integrating
	our products with their products, demand for our products may
	decrease.

To successfully implement our business strategy,
we must provide products that can be integrated with the
software of other design software companies. Execution of our
business strategy is dependent upon our ability to develop
superior products and cooperative relationships with competitors
so that they work with us to integrate our software into a
customers design flow. Most of these bigger design
software companies offer software intended to address a larger
part of the market, including software which offers similar
functionality as our software at highly discounted prices.
Therefore, to market our products, we must both convince our
customers of the technological superiority of our products and
convince our competitors to cooperate in integrating our
software with their products that provide different
functionality. Currently, we have integrated our software with
the existing software of Cadence, Mentor Graphics, Synopsys and
other interoperability partners. If we are unable to convince
customers to adopt our software solutions over those of
competitors

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offering a broader set of products or if we are
unable to convince other semiconductor companies to cooperate in
integrating our software with theirs to meet the complete
demands of chip designers and manufacturers, our business and
operating results will suffer.




| |                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If our products do not perform as expected,
	our reputation could be negatively affected, we could lose
	market share and our growth rate could be negatively
	impacted.

If the software that we provide to our customers
in the future performs poorly, contains errors or defects or is
otherwise unreliable, our customers would likely be
dissatisfied. Any failure or poor performance of our products
could result in:



| |   |                                                                                      
| | - | -------------------------------------------------------------------------------------
| |  | delayed or lost revenue;                                                             
|
| |  | hindered market acceptance of our products due to
	adverse customer reaction;        
|
| |  | negative publicity or loss of reputation
	regarding us and our products and services;
|
| |  | diversion of research and development and
	management resources; and                 
|
| |  | claims for substantial damages against us.                                           



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The sales cycle for our products and services
	generally lasts in excess of three months and is unpredictable.
	This long and unpredictable sales cycle makes it difficult to
	plan our expenses and forecast our results of operations for any
	given period. Our failure to adequately match our expenses to
	anticipated revenue in any given period could cause us not to
	meet market expectations which could have a material adverse
	effect on our stock price.

The period between our initial contact with a
potential customer and their purchase of our products and
services is relatively long, making it difficult to predict the
quarter in which a particular sale will occur and to plan our
expenditures accordingly. If we do not correctly predict the
timing of our sales, the amount of revenue we recognize in that
quarter could be negatively impacted, which could negatively
affect our operating results. Our sales cycle is long due to
several factors, including:



| |   |                                                                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | limited access to key decision-makers of
	potential customers to authorize the adoption of our products;                                                                             
|
| |  | long periods of time for potential customers to
	perform technical evaluations of our products and validation of
	the integration flow of our products with their existing
	products;
|
| |  | the significant investment of resources required
	by a customer to purchase and integrate our products;                                                                              
|
| |  | budget cycles of our customers which affect the
	timing of purchases; and                                                                                                            
|
| |  | delay of purchases due to announcements or
	planned introductions of new products by us or our competitors.                                                                          

The delay or failure to complete large orders and
sales in a particular quarter could significantly reduce revenue
in that quarter, as well as subsequent quarters over which
revenue for the sale would likely be recognized. If our sales
cycle unexpectedly lengthens in general or for one or more large
orders, it would adversely affect the timing of our revenue,
could cause us not to meet research analysts expectations
and cause our stock price to suffer. If we were to experience a
delay on a large order, it could harm our ability to meet our
forecasts for a given quarter.



| |                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our maintenance of operations in several
	different countries exposes us to risks inherent in doing
	business on an international level that could negatively impact
	our results of operations.

We currently operate Simplex Solutions, S.A.S. in
France, Simplex Solutions K.K. in Japan, Simplex Solutions U.K.
Limited in the United Kingdom and Simplex Solutions GmbH in
Germany. Maintenance of

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these entities subjects us to risks of conducting
business internationally which could harm our business,
financial condition and results of operations. These risks
include, among others:




| |   |                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | proper maintenance of corporate formalities for
	our international entities;                                                                               
|
| |  | the uncertainty of Japanese sales due to the
	typically lengthy Japanese sales cycle;                                                                      
|
| |  | potential adverse tax consequences, including
	restrictions on repatriation of earnings and taxation of equity
	compensation for employees and consultants;
|
| |  | foreign currency exchange rate fluctuations;                                                                                                               
|
| |  | greater difficulty in collecting accounts
	receivable; and                                                                                                 
|
| |  | burdens of complying with foreign laws,
	particularly with respect to intellectual property.                                                               

On a fiscal year basis, we generated 47% of our
consolidated revenue from sales outside North America in fiscal
2001, 34% of our consolidated revenue from sales outside North
America in fiscal 2000 and 23% of our consolidated revenue from
sales outside of North America in fiscal 1999. A significant
proportion of our international sales to date have been
denominated in U.S. dollars. As a result, a decrease in the
value of the U.S. dollar relative to foreign currencies could
increase the relative costs of our overseas operations which
could substantially reduce our operating margins. Any of the
above could negatively affect our results of operations.



| |                                                                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we fail to manage our rapid growth
	successfully, our infrastructure, management and resources could
	be strained and our ability to effectively manage our business
	could be diminished and our results of operations could
	suffer.

We have grown rapidly since our inception and to
be successful we need to grow quickly in the future. Any failure
to manage this growth could strain our resources, which would
impede our ability to increase revenue and achieve
profitability. For example, the number of our employees
increased from 69 at September 1999 to 220 at September 2001.
This increase in personnel was accompanied by increased
resources and management time focused on infrastructure,
training and integration. We expect this growth in personnel to
continue and require us to relocate to larger and more expensive
corporate offices within a year. Further, future expansion could
be expensive and strain our infrastructure, management and other
resources. To manage growth effectively, we must:



| |   |                                                                             
| | - | ----------------------------------------------------------------------------
| |  | maintain a high level of customer service and
	support;                     
|
| |  | improve our management, financial and information
	systems and controls;    
|
| |  | manage and expand our sales operations, which are
	in several locations; and
|
| |  | hire, train, manage and integrate new personnel.                            

There will be additional demands on our customer
service support, research and development, sales and marketing
and administrative resources as we try to increase our product
and service offerings and expand our target markets. The strains
imposed by these demands are magnified by our relatively limited
operating history. If we cannot manage our growth effectively,
our business and results of operations could be adversely
affected.



| |                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Because 10 customers represented 57% of our
	total revenue for the year ended September 30, 2001, the
	loss of any of these customers could substantially adversely
	impact our revenue.

We currently derive, and we expect to continue to
derive, a large percentage of our total revenue from a
relatively small number of customers. If any of these customers
terminates or substantially diminishes its

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relationship with us, our revenue could decline
significantly. Revenue concentration among our largest customers
is as follows:




| |   |                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our 10 largest customers accounted for
	approximately 57% of our revenue for fiscal year 2001 and
	approximately 53% of our revenue for fiscal year 2000; and
|
| |  | revenue from Sony Semiconductor accounted for
	approximately 22% of our revenue in fiscal 2001.                                                              

The loss of significant revenue from any of our
major customers could negatively impact our results of
operations, or limit our ability to execute our strategy. We
expect that we will continue to be dependent upon a limited
number of customers for a significant portion of our revenue in
future periods.



| |                                                                                                                                                                                                                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Because many of our current competitors have
	more market share than we do and pre-existing relationships with
	our potential customers and industry consolidation will create
	stronger competitors, we might not be able to achieve sufficient
	market penetration to achieve or sustain profitability or be
	able to gain additional market share.

Many of our competitors have substantially
greater financial, customer support, technical and marketing
resources, larger customer bases, longer operating histories,
greater name recognition and more established relationships in
the industry than we do. We cannot be sure that we will have the
resources or expertise to compete successfully in the future. If
we are unable to gain additional market share due to their
pre-existing relationships with our potential customers, our
operating results could be harmed. The design software industry
is comprised of companies that offer software products that are
used to facilitate the chip design process. Our products are
used to facilitate complex deep submicron chip designs. Our
competitors who offer products that are used for other segments
of the chip design process often bundle their products together
to offer discounts on products competitive with those we offer,
making it extremely attractive for our customers or potential
customers to use alternative products to ours. In addition,
these competitors may not support our effort to integrate our
products into their existing software. These competitors include
such companies as Avant!, Cadence, Mentor Graphics and Synopsys.
Since these competitors offer a more comprehensive range of
products than we do, they are often able to respond more quickly
or price more effectively to take advantage of new or changing
opportunities and respond to new technologies and customer
requirements. If we lose such opportunities to our competitors,
our results of operations could be harmed. These risks to our
business could be accentuated by consolidations by our
competitors. For example, Synopsys recently announced its
pending acquisition of Avant!. If successful, this consolidation
will create a larger single competitor with greater resources.
Consolidation and the creation of larger competitors offering
increasingly comprehensive product offerings could limit our
ability to penetrate our market and gain additional market share
which could cause serious harm to our business.



| |                                                                                                                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As the deep submicron market continues to
	grow, competitors will likely increase their focus on this
	market and apply substantially greater resources to the
	development and distribution of design software directly
	competitive with our software.

We currently encounter direct competition from
competitors such as Avant!, Cadence, Mentor Graphics and
Synopsys for design software at deep submicron geometries. If
the market for design software at 0.18 micron geometries
and below continues to grow, some of our competitors may
increase their focus on offering design software directly
competitive with ours, whether by internal development, external
development or acquisition. If competition for software
competitive with ours increases, our competitors may attempt to
keep us from integrating our software with theirs, making it
more difficult for our customers to adopt our software in their
design flows. If such increased competition were to result in
resistance to integration of our software with those of our
competitors, our business would be harmed.

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| |                                                                                                                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Failure to meet the industrys and our
	customers expectations for the technological improvements
	obtainable by use of the X Architecture or failure of the
	results of the X Initiative to successfully optimize the
	supply chain could disrupt our operations or delay execution of
	our business plan and consequently harm our business.

We have made a serious effort to promote the
development and proliferation of our recently publicized
X Architecture by assembling a group of leading companies
from the semiconductor industry to form the X Initiative.
Members of the X Initiative include leaders in intellectual
property, electronic design automation, integrated circuit
design services, photomask production, and semiconductor
equipment and manufacturing. These companies advocate the merits
of the X Architecture and their mandate is to validate,
support and survey the usage of the X Architecture through
the semiconductor industry supply chain.

Any actual or perceived failure by us or the
X Initiative consortium to deliver the technological
improvements claimed to be achievable through use of the
X Architecture in a reasonable period of time may impact
negatively on our image and reputation as inventor of the
X Architecture and founder and leader of the
X Initiative and materially impact our future business or
operating results. To the extent we continue to promote the
X Architecture and associate ourselves with the
X Initiative, we will be subject to the increased risk that
this technology encounters unforeseen technological or
implementation difficulties that make its anticipated benefits
unattainable. In addition, failure of the members of the
X Initiative to continue their support for the X
Architecture could limit the industry support for this
technology which is essential for its future success.



| |                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------
| | If we cannot continually attract and retain
	sufficient sales, marketing and technical personnel, our results
	of operations will be harmed.

Our future success depends on our continuing
ability to attract and retain highly qualified technical
personnel, particularly engineers, and qualified sales and
marketing personnel. If we cannot attract and retain the
necessary individuals we may not be able to continue our
innovation and sell our products, which could negatively affect
our operating results. For instance, during fiscal 2000 and
fiscal 1999, we experienced significant difficulty in hiring and
retaining engineers qualified to support our current products
and develop next generation technologies. We partially addressed
our hiring needs through the acquisitions of Altius and
Snaketech. Appropriate acquisition targets may not be available
in the future and we might not otherwise be able to find
adequate personnel. In addition, we have previously experienced
significant turnover in our sales force. Any future turnover
might adversely impact our revenue. If we are unable to hire and
retain qualified personnel in the future, which is particularly
difficult in Silicon Valley, our business could be seriously
harmed and our operating results could suffer.



| |                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------
| | If we lose any of our key personnel, our
	ability to manage our business and continue our growth would be
	negatively impacted.

Our future success depends upon the continued
service of our executive officers and other key personnel, and
their ability to work together. Of particular importance to our
continued operation are:



| |   |                                                                           
| | - | --------------------------------------------------------------------------
| |  | Penelope A. Herscher, Chairman and Chief
	Executive Officer;              
|
| |  | Aki Fujimura, President and Chief Operating
	Officer;                     
|
| |  | Aurangzeb Khan, Executive Vice President and
	General Manager;            
|
| |  | Luis P. Buhler, Chief Financial Officer;                                  
|
| |  | Steven L. Teig, Chief Technical Officer; and                              
|
| |  | James D. Behrens, Executive Vice President of
	Worldwide Field Operations.

Searching for replacements for our key management
could divert managements time and result in increased
operating expenses. Most of our executive officers or key
employees are not bound by an employment agreement for any
specific term and we do not maintain any key person life
insurance policies. If

36



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we lose the services of one or more of our
executive officers or key employees, or if one or more of them
decide to join a competitor or otherwise compete directly or
indirectly with us, our business could be seriously harmed.




| |                                                                                                                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Any inability to protect our intellectual
	property adequately could impair our competitive advantage,
	divert management attention, require additional intellectual
	property to be developed and/or cause us to incur expenses to
	enforce our rights.

Because our products are based on the technology
in our software, our success depends on our ability to protect
our intellectual property. If we are not able to successfully
protect our technology domestically and abroad, our results of
operations could suffer. We rely on a combination of patent,
copyright, trademark and trade secrets to establish and protect
our intellectual property rights. In addition, we seek to avoid
disclosure of our trade secrets through a number of means,
including requiring those with access to our intellectual
property to execute nondisclosure agreements with us and
restricting access to our technology. We currently have three
issued U.S. patents and we have several patent applications
pending relating to our technology. We cannot provide any
assurance that these applications will be granted. In addition,
we cannot assure that, even if granted, third parties have not
or will not develop competitive technologies or products without
infringing our current patent or any future patents, or that
such patents would be held valid and enforceable by a court
having jurisdiction over a dispute involving such patents. If
such patents are not held valid our use of technology under such
patents could result in a claim of infringement and we may be
unable to license the patented technology on commercially
reasonable terms, or at all. If we are unable to obtain licenses
to technology embedded in our software our business would be
materially harmed. Despite our efforts to protect our
intellectual property, unauthorized parties, including employees
may attempt to copy our software or obtain and use information
we regard as proprietary. Policing unauthorized use of software
is difficult, especially internationally. The laws of some
foreign countries in which we do business do not protect our
intellectual property to as great an extent as do the laws of
the United States. Patent infringement and trade secret
misappropriation litigation is highly visible and increasing in
our industry. As a result of all these factors, our means of
protecting our intellectual property may not be adequate and our
competitors may independently develop similar technology,
duplicate our products or design around our intellectual
property.



| |                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------
| | If we are unable to continue to license key
	third-party technology, our business would be significantly
	harmed.

We currently license certain third-party
technologies that are critical to our software products. For
instance, we currently have license agreements with
Computational Applications and System Integration, Inc., Random
Logic, Digital Semiconductor (a business unit of Digital
Equipment Corporation which has been acquired by Compaq Computer
Corporation) and Chris Terman (an independent contractor who was
formerly engaged by us) that are important to our current
software products. These and other third-party licenses are
generally perpetual but may be terminated upon a material
breach, including failure to protect the underlying intellectual
property. Some of these technologies would be difficult or
impossible to replace in the short term. The loss of the use of
these technologies would prevent us from selling a significant
portion of our software products, which would materially reduce
our revenue and significantly harm our business.



| |                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If third parties assert, regardless of merit,
	that our technologies infringe their intellectual property
	rights, our reputation and ability to license or sell our
	products could be harmed.

We expect that, like other software developers,
we may increasingly be subject to infringement claims for our
verification software and proprietary technologies. These claims
could injure our reputation and decrease or inhibit our ability
to license or sell our products. On August 10, 2001 a
complaint was filed in the United States District Court for the
Northern District of California by Sequence Design, Inc.
alleging patent infringement, Sequence Design Inc. v. Simplex
Solutions Inc.C01-20-760. We have filed an answer to the
complaint denying its allegations and asserting that the patent
is invalid or not infringed. This lawsuit follows written
notices from Sequence on November 1, 2000 of alleged
infringement and on March 15, 2001 that legal action is
imminent. Based on a review of the relevant intellectual
property, we believe any infringement

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allegation by Sequence to be without merit. We
intend to defend ourselves vigorously in this lawsuit. However,
because of the uncertainties of litigation, we cannot assure you
that we will ultimately prevail. A final judgment rendered
against us in litigation on this matter will have a significant
negative impact on our revenue and will have a material adverse
effect on our business. Further, claims of infringement relating
to our intellectual property, or technology we license from
third parties, regardless of merit, might be costly and
time-consuming to defend against, could divert managements
attention from the day-to-day operations of our company and
could seriously harm our ability to develop and market our
products and manage our daily operations. Our customer contracts
generally require us to indemnify customers for losses resulting
from third party infringement claims resulting from the use of
our products. Thus, in addition to any claims brought directly
against us, we could be responsible to indemnify customers for
claims brought against them. The competitive nature of the
semiconductor industry and the importance of our software
products to our customers design flows and
competitors businesses may contribute to a higher
likelihood of being subject to third party claims of
infringement.




| |                                                                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we need to raise additional funds in the
	foreseeable future to fund our operations or future
	acquisitions, they might not be available to us, on favorable
	terms or at all, and if unavailable, could impair our ability to
	run our business.

We anticipate that our cash resources will be
sufficient to meet our currently predicted working capital and
capital expenditure requirements for at least the next
12 months. We might, however, need to raise additional
funds through public or private financings, strategic
relationships or other arrangements to do any of the following:



| |   |                                                                   
| | - | ------------------------------------------------------------------
| |  | develop next-generation technologies or enhance
	current products;
|
| |  | fund additional sales and marketing programs;                     
|
| |  | acquire complementary businesses or technologies;                 
|
| |  | hire additional personnel;                                        
|
| |  | expand our operations faster than currently
	anticipated; or      
|
| |  | respond to competitive pressures in our industry.                 

If we are unable to fund such potential business
requirements, our results of operations could be harmed.



| |                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Future changes in accounting policies or
	standards, specifically changes affecting methods of revenue
	recognition, could cause adverse unexpected revenue
	fluctuations.

Future changes in accounting policies including
those affecting revenue recognition, could require the company
to change its methods of revenue recognition. Such changes could
cause deferment of revenue recognized in current periods to
subsequent periods or accelerated recognition of deferred
revenue to current periods, each of which could cause shortfalls
in meeting securities analysts and investors expectations.
Any such shortfalls could have an adverse impact on our stock
price.

Risks Related
to Our Industry



| |                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If the industries into which we sell our
	products experience recession or other cyclical effects
	impacting our customers research and development budgets,
	our operating results could be negatively impacted.

The primary customers for our products are
semiconductor design and manufacturing companies. Any
significant downturn in our customers markets, in
particular, or in general economic conditions which result in
the cut back of research and development budgets or the delay of
software purchases would likely result in a reduction in demand
for our products and services and could harm our business. In
addition, the markets for semiconductor products are cyclical.
For example, in recent years certain Asian countries have
experienced significant economic difficulties, including
currency devaluation and instability, business failures and a
depressed business environment. These difficulties triggered a
significant downturn in the semiconductor

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market, resulting in reduced budgets for chip
design tools which, in turn, negatively impacted us. Our
business is harmed when research and development budgets of our
customers are curtailed or when software purchases by our
customers are delayed. In addition, the electronics industry has
historically been subject to seasonal and cyclical fluctuations
in demand for its products, and this trend may continue in the
future. Such industry downturns have been, and may continue to
be, characterized by diminished product demand, excess
manufacturing capacity and subsequent erosion of average selling
prices.




| |                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we are unable to effectively manage our
	resources in anticipation of the expected seasonality of our
	revenue, our quarterly operating results may suffer and our
	stock price may decline.

We expect to experience significant seasonal
variations in our revenue due to sales incentives that result in
increased sales efforts at the end of the fiscal year. These
seasonal trends materially affect our quarter-to-quarter
operating results, which, if not effectively managed, could
negatively impact our stock price. Based on our limited
operating history, we expect that our revenue in the first
quarter each year will typically be lower than revenue in other
quarters. If we are unable to effectively manage our resources
in anticipation of the seasonality of our revenue and the costs
we expect to incur during periods of lower revenue, our
operating results might be lower than anticipated by investors.
This would likely cause the trading price of our stock to fall.



| |                                                                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we fail to maintain competitive stock
	option packages for our employees, or if our stock declines
	materially for a protracted period of time, we might have
	difficulty retaining our employees, particularly in the Silicon
	Valley, and our business may be harmed.

In todays competitive technology industry,
employment decisions of highly skilled personnel are influenced
by stock option packages, which offer incentives above
traditional compensation only where there is a consistent,
long-term upward trend over time of a companys stock
price. If our stock price declines due to market conditions,
investors perceptions of the technology industry or
managerial or performance problems we have, our stock option
incentives may lose value to key employees and we may lose such
employees or be forced to grant additional options to retain
such employees, which could result in the following material
adverse consequences to us:



| |   |                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------
| |  | loss of employees due to negative impact on our
	option packages;                                                                  
|
| |  | immediate and substantial dilution to investors
	resulting from the grant of additional options necessary to
	retain employees; and
|
| |  | potential compensation charges against the
	company which could negatively impact our operating results.                           



| |                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We might become subject to litigation by
	competitors or prior employees, which could be costly to defend
	and could divert managements attention from focusing on
	our business and operations.

We may be subject to claims by competitors for
infringement of their intellectual property or prior employees
for human resources-related claims. Our insurance is limited to
specific amounts per claim depending on the type of claim
involved. A successful liability claim brought against us in
excess of corresponding insurance coverage could be costly,
which would harm our business, financial condition and results
of operations.

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Risks Related
to the Securities Markets and Ownership of Our Common
Stock



| |                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------
| | Our securities have not been publicly traded
	very long and our stock price may be subject to significant
	fluctuations and volatility.

Our common stock has been publicly traded only
since May 2, 2001. The market price of our common stock has
been subject to significant fluctuations since the date of our
initial public offering. These fluctuations could continue.
Among the factors that could affect our stock price are:



| |   |                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------
| |  | quarterly variations in our operating results;                                                                
|
| |  | changes in revenue or earnings estimates or
	publication of research reports by analysts;                     
|
| |  | speculation in the press or investment community;                                                             
|
| |  | strategic actions by us or our competitors, such
	as new product announcements, acquisitions or restructuring;
|
| |  | actions by institutional stockholders;                                                                        
|
| |  | general market conditions; and                                                                                
|
| |  | domestic and international economic factors
	unrelated to our performance.                                    

The stock markets in general, and the markets for
high technology stocks in particular, have experienced extreme
volatility that has often been unrelated to the operating
performance of particular companies. These broad market
fluctuations may adversely affect the trading price of our
common stock. These fluctuations could also lead to costly class
action litigation that could significantly harm our business and
operating results.



| |                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------
| | Provisions in our charter documents and
	Delaware law may delay or prevent acquisition of us, which could
	decrease the value of our shares.

Our certificate of incorporation and bylaws and
Delaware law contain provisions that could make it harder for a
third party to acquire us without the consent of our board of
directors. These provisions include a classified board of
directors and limitations on actions by our stockholders by
written consent. Delaware law also imposes some restrictions on
mergers and other business combinations between us and any
holder of 15% or more of our outstanding common stock. In
addition, our board of directors has the right to issue
preferred stock without stockholder approval, which could be
used to dilute the stock ownership of a potential hostile
acquirer. Although we believe these provisions provide for an
opportunity to receive a higher bid by requiring potential
acquirers to negotiate with our board of directors, these
provisions apply even if the offer may be considered beneficial
by some stockholders.




Item 7A.     Quantitative
and Qualitative Disclosures About Market Risk

We develop products in the United States, France,
Asia and Japan and sell our products globally, through our
direct sales force and independent distributors. Our products
are sold primarily in North America, Europe, Asia and Japan.
Most of our sales are currently denominated in U.S. dollars;
however, we anticipate an increasing amount of sales to be
denominated in the Japanese yen and possibly the euro. As a
result, our financial results may be directly affected by
changes in foreign currency exchange rates and weak economic
conditions in foreign markets.

As of September 30, 2001, we had
$50.7 million of cash, cash equivalents and short-term
investments. Our interest income is sensitive to changes in the
general level of United States interest rates, particularly
since the majority of our investments are in short-term
instruments. Due to the nature of our short-term investments, we
concluded that we do not have material market risk exposure.

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Our investment policy requires us to invest funds
in excess of current operating requirements in:



| |   |                                                                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | obligations of the U.S. government and its
	agencies;                                                                                                                                               
|
| |  | investment grade state and local government
	obligations;                                                                                                                                           
|
| |  | securities of U.S. corporations rated A1 or P1 by
	Standard & Poors, or the Moodys equivalents; and/or                                                                                             
|
| |  | money market funds, deposits or notes issued or
	guaranteed by U.S. and non-U.S. commercial banks meeting certain
	credit rating and net worth requirements with maturities of less
	than two years.

As of September 30, 2001, our cash
equivalents consisted primarily of money market funds and U.S.
government agency notes, and our short-term investments
consisted primarily of U.S. government agency notes.

41



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##### Table of Contents






Item 8. Consolidated Financial
Statements and Supplementary Data

The following table sets forth selected unaudited
quarterly information for Simplexs last eight fiscal
quarters. Simplex believes that all necessary adjustments (which
consisted only of normal recurring adjustments) have been
included in the amounts stated below to present fairly the
results of such periods when read in conjunction with the
consolidated financial statements and related notes included
elsewhere herein.

|                                                                |  |                    |       |          |  |         |        |              |  |  |       |   |  |  |       |  
|--------------------------------------------------------------- |  | ------------------ | ----- | -------- |  | ------- | ------ | ------------ |  |  | ----- | - |  |  | ----- | -
|                                                                |  |                   
|                                                                |  | Three Months Ended
|                                                                |  |                   
|                                                                |  | December 31        |       | March 31 |  | June 30 |        | September 30
|                                                                |  |                    |       |          |  |         |        |             
|YEAR ENDED SEPTEMBER 30, 2000                                   |  |                    |       |          |  |         |        |              |  |  |       |   |  |  |       |  
|Net revenue                                                     |  |                    | 4,242 |          |  |         | 5,151  |              |  |  | 6,152 |   |  |  | 7,272 |  
|Net loss attributable to common stockholders                    |  |                    | (32   | )        |  |         | (5,595 | )            |  |  | (585  | ) |  |  | (510  | )
|Basic and diluted net loss attributable to common
	stockholders |  |                    | (0.01 | )        |  |         | (2.44  | )            |  |  | (0.18 | ) |  |  | (0.15 | )
|Shares used in computing basic and diluted net
	loss per share  |  |                    | 2,179 |          |  |         | 2,294  |              |  |  | 3,320 |   |  |  | 3,412 |  

|                                                                |  |                    |        |          |  |         |        |              |  |  |        |   |  |  |        |  
|--------------------------------------------------------------- |  | ------------------ | ------ | -------- |  | ------- | ------ | ------------ |  |  | ------ | - |  |  | ------ | -
|                                                                |  |                   
|                                                                |  | Three Months Ended
|                                                                |  |                   
|                                                                |  | December 31        |        | March 31 |  | June 30 |        | September 30
|                                                                |  |                    |        |          |  |         |        |             
|YEAR ENDED SEPTEMBER 30, 2001                                   |  |                    |        |          |  |         |        |              |  |  |        |   |  |  |        |  
|Net revenue                                                     |  |                    | 9,174  |          |  |         | 11,655 |              |  |  | 13,051 |   |  |  | 14,304 |  
|Net loss attributable to common stockholders                    |  |                    | (4,135 | )        |  |         | (3,040 | )            |  |  | (2,450 | ) |  |  | (2,462 | )
|Basic and diluted net loss attributable to common
	stockholders |  |                    | (0.77  | )        |  |         | (0.54  | )            |  |  | (0.21  | ) |  |  | (0.17  | )
|Shares used in computing basic and diluted net
	loss per share  |  |                    | 5,405  |          |  |         | 5,612  |              |  |  | 11,518 |   |  |  | 14,651 |  

INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS

|                                                                                           |  |      |    | 
|------------------------------------------------------------------------------------------ |  | ---- | -- | 
|                                                                                           |  | Page
|                                                                                           |  |     
|Report of Independent Accountants                                                          |  |      | 43 | 
|Consolidated Balance Sheets                                                                |  |      | 44 | 
|Consolidated Statements of Operations                                                      |  |      | 45 | 
|Consolidated Statements of Convertible Preferred
	Stock and Stockholders Equity (Deficit) |  |      | 46 | 
|Consolidated Statements of Cash Flows                                                      |  |      | 48 | 
|Notes to Consolidated Financial Statements                                                 |  |      | 49 | 

42



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##### Table of Contents



REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of 
 Simplex Solutions, Inc.

In our opinion, the accompanying consolidated
balance sheets and the related consolidated statements of
operations, of convertible preferred stock and
stockholders equity (deficit), and of cash flows present
fairly, in all material respects, the financial position of
Simplex Solutions, Inc. and its subsidiaries at
September 30, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in
the period ended September 30, 2001, in conformity with
accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of
Simplex Solutions, Inc.s management; our responsibility is
to express an opinion on these financial statements based on our
audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform
the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.

/s/ PRICEWATERHOUSECOOPERS LLP

San Jose, California

October 19, 2001


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SIMPLEX SOLUTIONS, INC.






CONSOLIDATED BALANCE SHEETS


|                                                                                                                   |                                                                                                       |                                                                                                              |                                                              |                                                                                                                         |    |        |        |         |   |         |        | 
|------------------------------------------------------------------------------------------------------------------ | ----------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------ | ----------------------------------------------------------------------------------------------------------------------- | -- | ------ | ------ | ------- | - | ------- | ------ | 
|                                                                                                                   |                                                                                                       |                                                                                                             
|                                                                                                                   |                                                                                                       | September 30,                                                                                               
|                                                                                                                   |                                                                                                       |                                                                                                             
|                                                                                                                   |                                                                                                       | 2001                                                                                                         |                                                              | 2000                                                                                                                   
|                                                                                                                   |                                                                                                       |                                                                                                              |                                                              |                                                                                                                        
|                                                                                                                   |                                                                                                       |                                                                                                             
|                                                                                                                   |                                                                                                       | (In thousands, except                                                                                       
|                                                                                                                   |                                                                                                       | share amounts)                                                                                              
|ASSETS                                                                                                            
|Current assets:                                                                                                    |                                                                                                       |                                                                                                              |                                                              |                                                                                                                         |    |        |        |        
|                                                                                                                   | Cash and cash equivalents                                                                             |                                                                                                              | $                                                            | 18,445                                                                                                                  |    |        | $      | 7,447   |  
|                                                                                                                   | Short-term investments                                                                                |                                                                                                              |                                                              | 32,227                                                                                                                  |    |        |        |        |  
|                                                                                                                   | Accounts receivable, net of allowance for
	doubtful accounts of $294 and $185, respectively           |                                                                                                              |                                                              | 17,237                                                                                                                  |    |        |        | 7,142   |  
|                                                                                                                   | Prepaid expenses and other current assets                                                             |                                                                                                              |                                                              | 1,588                                                                                                                   |    |        |        | 356     |  
|                                                                                                                   |                                                                                                       |                                                                                                              |                                                              |                                                                                                                         |    |        |        |        
|                                                                                                                   |                                                                                                       |                                                                                                              | Total current assets                                         |                                                                                                                         |    | 69,497 |        |         |   | 14,945  |       
|Property and equipment, net                                                                                        |                                                                                                       |                                                                                                              | 5,114                                                        |                                                                                                                         |    |        | 1,742  |        
|Other assets                                                                                                       |                                                                                                       |                                                                                                              | 457                                                          |                                                                                                                         |    |        | 891    |        
|Intangible assets, net                                                                                             |                                                                                                       |                                                                                                              | 24,379                                                       |                                                                                                                         |    |        | 4,938  |        
|                                                                                                                   |                                                                                                       |                                                                                                              |                                                              |                                                                                                                         |    |        |        |        
|                                                                                                                   |                                                                                                       |                                                                                                              | Total assets                                                 |                                                                                                                         | $  | 99,447 |        |         | $ | 22,516  |       
|                                                                                                                   |                                                                                                       |                                                                                                              |                                                              |                                                                                                                         |    |        |        |        
|LIABILITIES, CONVERTIBLE PREFERRED STOCK AND
	WARRANTS AND
	COMMON STOCK AND OTHER STOCKHOLDERS EQUITY
	(DEFICIT)
|Current liabilities:                                                                                               |                                                                                                       |                                                                                                              |                                                              |                                                                                                                         |    |        |        |        
|                                                                                                                   | Current portion of capital lease obligations                                                          |                                                                                                              | $                                                            | 23                                                                                                                      |    |        | $      | 29      |  
|                                                                                                                   | Current portion of notes payable                                                                      |                                                                                                              |                                                              | 146                                                                                                                     |    |        |        | 58      |  
|                                                                                                                   | Line of credit, net of discount                                                                       |                                                                                                              |                                                              |                                                                                                                        |    |        |        | 2,442   |  
|                                                                                                                   | Accounts payable                                                                                      |                                                                                                              |                                                              | 1,859                                                                                                                   |    |        |        | 741     |  
|                                                                                                                   | Accrued liabilities                                                                                   |                                                                                                              |                                                              | 1,839                                                                                                                   |    |        |        | 594     |  
|                                                                                                                   | Accrued payroll and related expenses                                                                  |                                                                                                              |                                                              | 5,784                                                                                                                   |    |        |        | 2,758   |  
|                                                                                                                   | Deferred revenue                                                                                      |                                                                                                              |                                                              | 7,781                                                                                                                   |    |        |        | 5,654   |  
|                                                                                                                   |                                                                                                       |                                                                                                              |                                                              |                                                                                                                         |    |        |        |        
|                                                                                                                   |                                                                                                       |                                                                                                              | Total current liabilities                                    |                                                                                                                         |    | 17,432 |        |         |   | 12,276  |       
|Capital lease obligations, net of current portion                                                                  |                                                                                                       |                                                                                                              |                                                             |                                                                                                                         |    |        | 23     |        
|Notes payable, net of current portion                                                                              |                                                                                                       |                                                                                                              | 150                                                          |                                                                                                                         |    |        | 298    |        
|Other long-term liabilities                                                                                        |                                                                                                       |                                                                                                              | 122                                                          |                                                                                                                         |    |        |       |        
|                                                                                                                   |                                                                                                       |                                                                                                              |                                                              |                                                                                                                         |    |        |        |        
|                                                                                                                   |                                                                                                       |                                                                                                              | Total liabilities                                            |                                                                                                                         |    | 17,704 |        |         |   | 12,597  |       
|                                                                                                                   |                                                                                                       |                                                                                                              |                                                              |                                                                                                                         |    |        |        |        
|Commitments and contingencies (Note 12)                                                                            |                                                                                                       |                                                                                                              |                                                              |                                                                                                                         |    |        |        |        
|Convertible preferred stock and warrants, $0.001
	par value:                                                       |                                                                                                       |                                                                                                              |                                                              |                                                                                                                         |    |        |        |        
|                                                                                                                   | Authorized: 14,000,000 shares                                                                         |                                                                                                              |                                                              |                                                                                                                         |    |        |        |         |  
|                                                                                                                   | Issued and outstanding: no shares at
	September 30, 2001 and 12,546,255 shares at
	September 30, 2000 |                                                                                                              |                                                              |                                                                                                                        |    |        |        | 24,251  |  
|                                                                                                                   |                                                                                                       |                                                                                                              |                                                              |                                                                                                                         |    |        |        |        
|Common stock and other stockholders equity
	(deficit):                                                            |                                                                                                       |                                                                                                              |                                                              |                                                                                                                         |    |        |        |        
|                                                                                                                   | Common stock, $0.001 par value:                                                                       |                                                                                                              |                                                              |                                                                                                                         |    |        |        |         |  
|                                                                                                                   |                                                                                                       | Authorized: 44,000,000 shares                                                                                |                                                              |                                                                                                                         |    |        |        |         |   |        
|                                                                                                                   |                                                                                                       | Issued and outstanding: 15,052,853 shares at
	September 30, 2001 and 3,657,110 shares at
	September 30, 2000 |                                                              |                                                                                                                         | 15 |        |        |         | 4 |        
|                                                                                                                   | Additional paid-in capital                                                                            |                                                                                                              |                                                              | 130,317                                                                                                                 |    |        |        | 17,744  |  
|                                                                                                                   | Notes receivable from stockholders                                                                    |                                                                                                              |                                                              | (1,283                                                                                                                  | )  |        |        | (1,293  | )
|                                                                                                                   | Unearned stock-based compensation                                                                     |                                                                                                              |                                                              | (6,725                                                                                                                  | )  |        |        | (2,247  | )
|                                                                                                                   | Accumulated other comprehensive income                                                                |                                                                                                              |                                                              | 46                                                                                                                      |    |        |        |        |  
|                                                                                                                   | Accumulated deficit                                                                                   |                                                                                                              |                                                              | (40,627                                                                                                                 | )  |        |        | (28,540 | )
|                                                                                                                   |                                                                                                       |                                                                                                              |                                                              |                                                                                                                         |    |        |        |        
|                                                                                                                   |                                                                                                       |                                                                                                              | Total common stock and other stockholders
	equity (deficit) |                                                                                                                         |    | 81,743 |        |         |   | (14,332 | )     
|                                                                                                                   |                                                                                                       |                                                                                                              |                                                              |                                                                                                                         |    |        |        |        
|                                                                                                                   |                                                                                                       |                                                                                                              |                                                              | Total liabilities, convertible preferred stock
	and warrants and common stock and other stockholders
	equity (deficit) |    | $      | 99,447 |         |   | $       | 22,516 | 
|                                                                                                                   |                                                                                                       |                                                                                                              |                                                              |                                                                                                                         |    |        |        |        

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

44



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##### Table of Contents



SIMPLEX SOLUTIONS, INC.






CONSOLIDATED STATEMENTS OF
OPERATIONS


|                                                                              |                                                                                    |                                |                          |        |       |        |        |        |     |        |        |       |   |        | 
|----------------------------------------------------------------------------- | ---------------------------------------------------------------------------------- | ------------------------------ | ------------------------ | ------ | ----- | ------ | ------ | ------ | --- | ------ | ------ | ----- | - | ------ | 
|                                                                              |                                                                                    |                               
|                                                                              |                                                                                    | Year Ended September 30,      
|                                                                              |                                                                                    |                               
|                                                                              |                                                                                    | 2001                           |                          | 2000   |       | 1999  
|                                                                              |                                                                                    |                                |                          |        |       |       
|                                                                              |                                                                                    |                               
|                                                                              |                                                                                    | (In thousands, except         
|                                                                              |                                                                                    | per share amounts)            
|Revenue:                                                                      |                                                                                    |                                |                          |        |       |        |        |        |     |        |        |      
|                                                                              | License                                                                            |                                | $                        | 24,722 |       |        | $      | 14,679 |     |        | $      | 7,704 |  
|                                                                              | Services                                                                           |                                |                          | 23,462 |       |        |        | 8,138  |     |        |        | 3,177 |  
|                                                                              |                                                                                    |                                |                          |        |       |        |        |        |     |        |        |      
|                                                                              |                                                                                    |                                | Total revenue            |        |       | 48,184 |        |        |     | 22,817 |        |       |   | 10,881 | 
|                                                                              |                                                                                    |                                |                          |        |       |        |        |        |     |        |        |      
|Cost of revenue:                                                              |                                                                                    |                                |                          |        |       |        |        |        |     |        |        |      
|                                                                              | Cost of license(1) (inclusive of amortization of
	acquired technology shown below) |                                |                          | 523    |       |        |        | 258    |     |        |        | 96    |  
|                                                                              | Cost of services(2) (inclusive of stock-based
	compensation shown below)           |                                |                          | 12,980 |       |        |        | 3,645  |     |        |        | 1,974 |  
|                                                                              |                                                                                    |                                |                          |        |       |        |        |        |     |        |        |      
|                                                                              |                                                                                    |                                | Total cost of revenue    |        |       | 13,503 |        |        |     | 3,903  |        |       |   | 2,070  | 
|                                                                              |                                                                                    |                                |                          |        |       |        |        |        |     |        |        |      
|Gross profit                                                                  |                                                                                    |                                | 34,681                   |        |       |        | 18,914 |        |     |        | 8,811  |      
|                                                                              |                                                                                    |                                |                          |        |       |        |        |        |     |        |        |      
|Operating expenses:                                                           |                                                                                    |                                |                          |        |       |        |        |        |     |        |        |      
|                                                                              | Research and development(2) (inclusive of
	stock-based compensation shown below)   |                                |                          | 14,757 |       |        |        | 5,341  |     |        |        | 6,387 |  
|                                                                              | Selling and marketing(2) (inclusive of
	stock-based compensation shown below)      |                                |                          | 19,088 |       |        |        | 10,635 |     |        |        | 7,314 |  
|                                                                              | General and administrative(2) (inclusive of
	stock-based compensation shown below) |                                |                          | 6,225  |       |        |        | 3,725  |     |        |        | 2,229 |  
|                                                                              | Amortization of goodwill and other intangibles(1)                                  |                                |                          | 6,117  |       |        |        | 409    |     |        |        |      |  
|                                                                              | In-process and acquired research and development                                   |                                |                          |       |       |        |        | 5,000  |     |        |        |      |  
|                                                                              |                                                                                    |                                |                          |        |       |        |        |        |     |        |        |      
|                                                                              |                                                                                    |                                | Total operating expenses |        |       | 46,187 |        |        |     | 25,110 |        |       |   | 15,930 | 
|                                                                              |                                                                                    |                                |                          |        |       |        |        |        |     |        |        |      
|Operating loss                                                                |                                                                                    |                                | (11,506                  | )      |       |        | (6,196 | )      |     |        | (7,119 | )    
|Interest and other income (expense), net                                      |                                                                                    |                                | 850                      |        |       |        | 178    |        |     |        | 211    |      
|Interest expense                                                              |                                                                                    |                                | (341                     | )      |       |        | (462   | )      |     |        | (133   | )    
|                                                                              |                                                                                    |                                |                          |        |       |        |        |        |     |        |        |      
|Loss before income taxes                                                      |                                                                                    |                                | (10,997                  | )      |       |        | (6,480 | )      |     |        | (7,041 | )    
|Provision for income taxes                                                    |                                                                                    |                                | 1,090                    |        |       |        | 242    |        |     |        |       |      
|                                                                              |                                                                                    |                                |                          |        |       |        |        |        |     |        |        |      
|Net loss                                                                      |                                                                                    | $                              | (12,087                  | )      |       | $      | (6,722 | )      |     | $      | (7,041 | )    
|                                                                              |                                                                                    |                                |                          |        |       |        |        |        |     |        |        |      
|Basic and diluted net loss per share                                          |                                                                                    | $                              | (1.30                    | )      |       | $      | (2.40  | )      |     | $      | (3.62  | )    
|                                                                              |                                                                                    |                                |                          |        |       |        |        |        |     |        |        |      
|Number of shares used in calculation of basic and
	diluted net loss per share |                                                                                    |                                | 9,311                    |        |       |        | 2,801  |        |     |        | 1,944  |      
|                                                                              |                                                                                    |                                |                          |        |       |        |        |        |     |        |        |      
|(1) Amortization of goodwill and other
	acquired intangibles:                 |                                                                                    |                                |                          |        |       |        |        |        |     |        |        |      
|                                                                              |                                                                                    | Cost of license                |                          | $      | 453   |        |        | $      | 166 |        |        | $     |  |       
|                                                                              |                                                                                    | Goodwill and other intangibles |                          |        | 6,117 |        |        |        | 409 |        |        |       |  |       
|                                                                              |                                                                                    |                                |                          |        |       |        |        |        |     |        |        |      
|                                                                              |                                                                                    | $                              | 6,570                    |        |       | $      | 575    |        |     | $      |       |      
|                                                                              |                                                                                    |                                |                          |        |       |        |        |        |     |        |        |      
|(2) Stock-based compensation:                                                 |                                                                                    |                                |                          |        |       |        |        |        |     |        |        |      
|                                                                              |                                                                                    | Cost of services               |                          | $      | 3,109 |        |        | $      | 254 |        |        | $     |  |       
|                                                                              |                                                                                    | Research and development       |                          |        | 2,159 |        |        |        | 375 |        |        |       | 9 |       
|                                                                              |                                                                                    | Selling and marketing          |                          |        | 1,257 |        |        |        | 262 |        |        |       |  |       
|                                                                              |                                                                                    | General and administrative     |                          |        | 775   |        |        |        | 905 |        |        |       | 4 |       
|                                                                              |                                                                                    |                                |                          |        |       |        |        |        |     |        |        |      
|                                                                              |                                                                                    | $                              | 7,300                    |        |       | $      | 1,796  |        |     | $      | 13     |      
|                                                                              |                                                                                    |                                |                          |        |       |        |        |        |     |        |        |      

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

45



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##### Table of Contents



SIMPLEX SOLUTIONS, INC.






CONSOLIDATED STATEMENTS OF CONVERTIBLE
PREFERRED STOCK


AND STOCKHOLDERS EQUITY
(DEFICIT)


|                                                                                           |  |                                      |            |            |  |              |        |            |  |        |      |         |  |  |           |   |  |   |   |  |  |   |        |  
|------------------------------------------------------------------------------------------ |  | ------------------------------------ | ---------- | ---------- |  | ------------ | ------ | ---------- |  | ------ | ---- | ------- |  |  | --------- | - |  | - | - |  |  | - | ------ | -
|                                                                                           |  |                                      |            |            |  |              |        |            |  |       
|                                                                                           |  | Convertible                          |            | Notes      |  |              |        |           
|                                                                                           |  | Preferred Stock                      |            | Receivable |  | Common Stock |        | Additional
|                                                                                           |  |                                      |            | from       |  |              |        | Paid-In   
|                                                                                           |  | Shares                               |            | Amount     |  | Stockholders |        | Shares     |  | Amount |      | Capital
|                                                                                           |  |                                      |            |            |  |              |        |            |  |        |      |        
|                                                                                           |  |                                     
|                                                                                           |  | (In thousands, except share amounts)
|Balances, September 30, 1998                                                               |  |                                      | 12,526,255 |            |  | $            | 24,029 |            |  | $      | (696 | )       |  |  | 2,242,656 |   |  | $ | 2 |  |  | $ | 538    |  
|Repayment of stockholder note receivable                                                   |  |                                      |           |            |  |              |       |            |  |        | 696  |         |  |  |          |   |  |   |  |  |  |   |       |  
|Issuance of restricted common stock in exchange
	for note receivable                       |  |                                      |           |            |  |              |       |            |  |        |     |         |  |  | 144,931   |   |  |   |  |  |  |   | 725    |  
|Interest accrued from stockholder notes receivable                                         |  |                                      |           |            |  |              |       |            |  |        |     |         |  |  |          |   |  |   |  |  |  |   |       |  
|Amortization of stockholder note forgiven                                                  |  |                                      |           |            |  |              |       |            |  |        |     |         |  |  |          |   |  |   |  |  |  |   |       |  
|Repurchase of restricted common stock                                                      |  |                                      |           |            |  |              |       |            |  |        |     |         |  |  | (34,003   | ) |  |   |  |  |  |   | (13    | )
|Issuance of common stock pursuant to exercise of
	stock options                            |  |                                      |           |            |  |              |       |            |  |        |     |         |  |  | 74,446    |   |  |   | 1 |  |  |   | 165    |  
|Warrants granted in consideration for capital
	lease financing                             |  |                                      |           |            |  |              | 155    |            |  |        |     |         |  |  |          |   |  |   |  |  |  |   |       |  
|Issuance of restricted common stock in exchange
	for cash                                  |  |                                      |           |            |  |              |       |            |  |        |     |         |  |  | 13,333    |   |  |   |  |  |  |   | 50     |  
|Issuance of stock options to non-employees in
	exchange for services                       |  |                                      |           |            |  |              |       |            |  |        |     |         |  |  |          |   |  |   |  |  |  |   | 20     |  
|Stock-based compensation expense                                                           |  |                                      |           |            |  |              |       |            |  |        |     |         |  |  |          |   |  |   |  |  |  |   |       |  
|Comprehensive loss net loss                                                                |  |                                      |           |            |  |              |       |            |  |        |     |         |  |  |          |   |  |   |  |  |  |   |       |  
|Unrealized gain on investments                                                             |  |                                      |           |            |  |              |       |            |  |        |     |         |  |  |          |   |  |   |  |  |  |   |       |  
|                                                                                           |  |                                      |            |            |  |              |        |            |  |        |      |         |  |  |           |   |  |   |   |  |  |   |        |  
|Comprehensive loss                                                                         |  |                                      |            |            |  |              |        |            |  |        |      |         |  |  |           |   |  |   |   |  |  |   |        |  
|Balances, September 30, 1999                                                               |  |                                      | 12,526,255 |            |  |              | 24,184 |            |  |        |     |         |  |  | 2,441,363 |   |  |   | 3 |  |  |   | 1,485  |  
|Repayment of stockholder note receivable                                                   |  |                                      |           |            |  |              |       |            |  |        |     |         |  |  |          |   |  |   |  |  |  |   |       |  
|Interest accrued from stockholder notes receivable                                         |  |                                      |           |            |  |              |       |            |  |        |     |         |  |  |          |   |  |   |  |  |  |   |       |  
|Amortization of stockholder note forgiven                                                  |  |                                      |           |            |  |              |       |            |  |        |     |         |  |  |          |   |  |   |  |  |  |   |       |  
|Issuance of common stock pursuant to exercise of
	stock options                            |  |                                      |           |            |  |              |       |            |  |        |     |         |  |  | 276,665   |   |  |   |  |  |  |   | 854    |  
|Issuance of common stock in connection with
	acquisition of Snaketech                      |  |                                      |           |            |  |              |       |            |  |        |     |         |  |  | 928,983   |   |  |   | 1 |  |  |   | 10,729 |  
|Issuance of fully vested common stock options in
	connection with acquisition of Snaketech |  |                                      |           |            |  |              |       |            |  |        |     |         |  |  |          |   |  |   |  |  |  |   | 609    |  
|Issuance of restricted common stock in exchange
	for cash                                  |  |                                      |           |            |  |              |       |            |  |        |     |         |  |  | 6,666     |   |  |   |  |  |  |   | 40     |  
|Issuance of preferred stock pursuant to exercise
	of warrants                              |  |                                      | 20,000     |            |  |              | 67     |            |  |        |     |         |  |  |          |   |  |   |  |  |  |   |       |  
|Repurchase of restricted common stock                                                      |  |                                      |           |            |  |              |       |            |  |        |     |         |  |  | (100      | ) |  |   |  |  |  |   |       |  
|Issuance of restricted common stock in exchange
	for services                              |  |                                      |           |            |  |              |       |            |  |        |     |         |  |  | 3,533     |   |  |   |  |  |  |   | 31     |  
|Unearned stock-based compensation                                                          |  |                                      |           |            |  |              |       |            |  |        |     |         |  |  |          |   |  |   |  |  |  |   | 3,996  |  
|Stock-based compensation expense                                                           |  |                                      |           |            |  |              |       |            |  |        |     |         |  |  |          |   |  |   |  |  |  |   |       |  

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                                                                                           |  |                                      |        |              |  |               |        |             |  |               |   |               |  |   |         |   |  |   |        |   |  |   |         |  
|------------------------------------------------------------------------------------------ |  | ------------------------------------ | ------ | ------------ |  | ------------- | ------ | ----------- |  | ------------- | - | ------------- |  | - | ------- | - |  | - | ------ | - |  | - | ------- | -
|                                                                                           |  | Notes                                |        |              |  | Accumulated   |        |             |  |               |   | Total        
|                                                                                           |  | Receivable                           |        | Unearned     |  | Other         |        |             |  |               |   | Stockholders
|                                                                                           |  | from                                 |        | Stock-Based  |  | Comprehensive |        | Accumulated |  | Comprehensive |   | Equity       
|                                                                                           |  | Stockholders                         |        | Compensation |  | Income        |        | Deficit     |  | Loss          |   | (Deficit)    
|                                                                                           |  |                                      |        |              |  |               |        |             |  |               |   |              
|                                                                                           |  |                                     
|                                                                                           |  | (In thousands, except share amounts)
|Balances, September 30, 1998                                                               |  | $                                    | (608   | )            |  | $             | (9     | )           |  | $             |  |               |  | $ | (14,777 | ) |  |   |        |   |  | $ | (14,854 | )
|Repayment of stockholder note receivable                                                   |  |                                      |       |              |  |               |       |             |  |               |  |               |  |   |        |   |  |   |        |   |  |   |        |  
|Issuance of restricted common stock in exchange
	for note receivable                       |  |                                      | (725   | )            |  |               |       |             |  |               |  |               |  |   |        |   |  |   |        |   |  |   |        |  
|Interest accrued from stockholder notes receivable                                         |  |                                      | (68    | )            |  |               |       |             |  |               |  |               |  |   |        |   |  |   |        |   |  |   | (68     | )
|Amortization of stockholder note forgiven                                                  |  |                                      | 94     |              |  |               |       |             |  |               |  |               |  |   |        |   |  |   |        |   |  |   | 94      |  
|Repurchase of restricted common stock                                                      |  |                                      |       |              |  |               |       |             |  |               |  |               |  |   |        |   |  |   |        |   |  |   | (13     | )
|Issuance of common stock pursuant to exercise of
	stock options                            |  |                                      |       |              |  |               |       |             |  |               |  |               |  |   |        |   |  |   |        |   |  |   | 166     |  
|Warrants granted in consideration for capital
	lease financing                             |  |                                      |       |              |  |               |       |             |  |               |  |               |  |   |        |   |  |   |        |   |  |   |        |  
|Issuance of restricted common stock in exchange
	for cash                                  |  |                                      |       |              |  |               |       |             |  |               |  |               |  |   |        |   |  |   |        |   |  |   | 50      |  
|Issuance of stock options to non-employees in
	exchange for services                       |  |                                      |       |              |  |               | (20    | )           |  |               |  |               |  |   |        |   |  |   |        |   |  |   |        |  
|Stock-based compensation expense                                                           |  |                                      |       |              |  |               | 13     |             |  |               |  |               |  |   |        |   |  |   |        |   |  |   | 13      |  
|Comprehensive loss net loss                                                                |  |                                      |       |              |  |               |       |             |  |               |  |               |  |   | (7,041  | ) |  | $ | (7,041 | ) |  |   | (7,041  | )
|Unrealized gain on investments                                                             |  |                                      |       |              |  |               |       |             |  |               | 2 |               |  |   |        |   |  |   | 2      |   |  |   | 2       |  
|                                                                                           |  |                                      |        |              |  |               |        |             |  |               |   |               |  |   |         |   |  |   |        |   |  |   |         |  
|Comprehensive loss                                                                         |  |                                      |        |              |  |               |        |             |  |               |   |               |  |   |         |   |  | $ | (7,039 | ) |  |   |         |  
|                                                                                           |  |                                      |        |              |  |               |        |             |  |               |   |               |  |   |         |   |  |   |        |   |  |   |         |  
|Balances, September 30, 1999                                                               |  |                                      | (1,307 | )            |  |               | (16    | )           |  |               | 2 |               |  |   | (21,818 | ) |  |   |        |   |  |   | (21,651 | )
|Repayment of stockholder note receivable                                                   |  |                                      | 16     |              |  |               |       |             |  |               |  |               |  |   |        |   |  |   |        |   |  |   | 16      |  
|Interest accrued from stockholder notes receivable                                         |  |                                      | (95    | )            |  |               |       |             |  |               |  |               |  |   |        |   |  |   |        |   |  |   | (95     | )
|Amortization of stockholder note forgiven                                                  |  |                                      | 93     |              |  |               |       |             |  |               |  |               |  |   |        |   |  |   |        |   |  |   | 93      |  
|Issuance of common stock pursuant to exercise of
	stock options                            |  |                                      |       |              |  |               |       |             |  |               |  |               |  |   |        |   |  |   |        |   |  |   | 854     |  
|Issuance of common stock in connection with
	acquisition of Snaketech                      |  |                                      |       |              |  |               |       |             |  |               |  |               |  |   |        |   |  |   |        |   |  |   | 10,730  |  
|Issuance of fully vested common stock options in
	connection with acquisition of Snaketech |  |                                      |       |              |  |               |       |             |  |               |  |               |  |   |        |   |  |   |        |   |  |   | 609     |  
|Issuance of restricted common stock in exchange
	for cash                                  |  |                                      |       |              |  |               |       |             |  |               |  |               |  |   |        |   |  |   |        |   |  |   | 40      |  
|Issuance of preferred stock pursuant to exercise
	of warrants                              |  |                                      |       |              |  |               |       |             |  |               |  |               |  |   |        |   |  |   |        |   |  |   |        |  
|Repurchase of restricted common stock                                                      |  |                                      |       |              |  |               |       |             |  |               |  |               |  |   |        |   |  |   |        |   |  |   |        |  
|Issuance of restricted common stock in exchange
	for services                              |  |                                      |       |              |  |               | (31    | )           |  |               |  |               |  |   |        |   |  |   |        |   |  |   |        |  
|Unearned stock-based compensation                                                          |  |                                      |       |              |  |               | (3,996 | )           |  |               |  |               |  |   |        |   |  |   |        |   |  |   |        |  
|Stock-based compensation expense                                                           |  |                                      |       |              |  |               | 1,796  |             |  |               |  |               |  |   |        |   |  |   |        |   |  |   | 1,796   |  

46



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##### Table of Contents



SIMPLEX SOLUTIONS, INC.

CONSOLIDATED STATEMENTS OF CONVERTIBLE
PREFERRED STOCK

AND STOCKHOLDERS EQUITY (DEFICIT)
(Continued)


|                                                                                                      |  |                                      |             |            |  |              |         |            |  |        |   |         |  |  |            |   |  |   |    |  |  |   |         | 
|----------------------------------------------------------------------------------------------------- |  | ------------------------------------ | ----------- | ---------- |  | ------------ | ------- | ---------- |  | ------ | - | ------- |  |  | ---------- | - |  | - | -- |  |  | - | ------- | 
|                                                                                                      |  |                                      |             |            |  |              |         |            |  |       
|                                                                                                      |  | Convertible                          |             | Notes      |  |              |         |           
|                                                                                                      |  | Preferred Stock                      |             | Receivable |  | Common Stock |         | Additional
|                                                                                                      |  |                                      |             | from       |  |              |         | Paid-In   
|                                                                                                      |  | Shares                               |             | Amount     |  | Stockholders |         | Shares     |  | Amount |   | Capital
|                                                                                                      |  |                                      |             |            |  |              |         |            |  |        |   |        
|                                                                                                      |  |                                     
|                                                                                                      |  | (In thousands, except share amounts)
|Net loss                                                                                              |  |                                      |            |            |  |              |        |            |  |        |  |         |  |  |            |   |  |   |    |  |  |   |         | 
|Realized loss on investments                                                                          |  |                                      |            |            |  |              |        |            |  |        |  |         |  |  |           |   |  |   |   |  |  |   |        | 
|                                                                                                      |  |                                      |             |            |  |              |         |            |  |        |   |         |  |  |            |   |  |   |    |  |  |   |         | 
|Comprehensive loss                                                                                    |  |                                      |             |            |  |              |         |            |  |        |   |         |  |  |            |   |  |   |    |  |  |   |         | 
|Balances, September 30, 2000                                                                          |  |                                      | 12,546,255  |            |  | $            | 24,251  |            |  | $      |  |         |  |  | 3,657,110  |   |  | $ | 4  |  |  | $ | 17,744  | 
|                                                                                                      |  |                                      |             |            |  |              |         |            |  |        |   |         |  |  |            |   |  |   |    |  |  |   |         | 
|Balances, September 30, 2000                                                                          |  |                                      | 12,546,255  |            |  | $            | 24,251  |            |  | $      |  |         |  |  | 3,657,110  |   |  | $ | 4  |  |  | $ | 17,744  | 
|Interest accrued from stockholder notes receivable                                                    |  |                                      |            |            |  |              |        |            |  |        |  |         |  |  |           |   |  |   |   |  |  |   |        | 
|Amortization of stockholder note forgiven                                                             |  |                                      |            |            |  |              |        |            |  |        |  |         |  |  |           |   |  |   |   |  |  |   |        | 
|Issuance of common stock pursuant to exercise of
	stock options                                       |  |                                      |            |            |  |              |        |            |  |        |  |         |  |  | 66,315     |   |  |   |   |  |  |   | 408     | 
|Issuance of common stock in connection with
	acquisition of Altius Solutions, Inc.                    |  |                                      |            |            |  |              |        |            |  |        |  |         |  |  | 2,551,434  |   |  |   | 2  |  |  |   | 25,460  | 
|Assumption of common stock warrant in connection
	with acquisition of Altius Solutions, Inc.          |  |                                      |            |            |  |              |        |            |  |        |  |         |  |  |           |   |  |   |   |  |  |   | 27      | 
|Issuance of common stock options in connection
	with acquisition of Altius Solutions, Inc.            |  |                                      |            |            |  |              |        |            |  |        |  |         |  |  |           |   |  |   |   |  |  |   | 3,108   | 
|Issuance of common stock in conjunction with
	initial public offering, net of cost incurred of $3,786 |  |                                      |            |            |  |              |        |            |  |        |  |         |  |  | 4,600,000  |   |  |   | 5  |  |  |   | 47,545  | 
|Conversion of preferred stock to common stock
	upon initial public offering                           |  |                                      | (12,546,255 | )          |  |              | (24,251 | )          |  |        |  |         |  |  | 4,182,061  |   |  |   | 4  |  |  |   | 24,247  | 
|Repurchases and cancellations of common stock,
	net of exercise of warrants to purchase common stock  |  |                                      |            |            |  |              |        |            |  |        |  |         |  |  | (5,067     | ) |  |   |   |  |  |   |        | 
|Issuance of restricted common stock in exchange
	for services                                         |  |                                      |            |            |  |              |        |            |  |        |  |         |  |  | 1,000      |   |  |   |   |  |  |   | 31      | 
|Unearned stock-based compensation                                                                     |  |                                      |            |            |  |              |        |            |  |        |  |         |  |  |           |   |  |   |   |  |  |   | 11,747  | 
|Stock-based compensation expense                                                                      |  |                                      |            |            |  |              |        |            |  |        |  |         |  |  |           |   |  |   |   |  |  |   |        | 
|Net loss                                                                                              |  |                                      |            |            |  |              |        |            |  |        |  |         |  |  |           |   |  |   |   |  |  |   |        | 
|Unrealized gain on investments                                                                        |  |                                      |            |            |  |              |        |            |  |        |  |         |  |  |           |   |  |   |   |  |  |   |        | 
|                                                                                                      |  |                                      |             |            |  |              |         |            |  |        |   |         |  |  |            |   |  |   |    |  |  |   |         | 
|Comprehensive loss                                                                                    |  |                                      |             |            |  |              |         |            |  |        |   |         |  |  |            |   |  |   |    |  |  |   |         | 
|Balances, September 30, 2001                                                                          |  |                                      |            |            |  | $            |        |            |  | $      |  |         |  |  | 15,052,853 |   |  | $ | 15 |  |  | $ | 130,317 | 
|                                                                                                      |  |                                      |             |            |  |              |         |            |  |        |   |         |  |  |            |   |  |   |    |  |  |   |         | 

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                                                                                                      |  |                                      |        |              |  |               |         |             |  |               |    |               |  |   |         |   |  |   |         |   |  |   |         |  
|----------------------------------------------------------------------------------------------------- |  | ------------------------------------ | ------ | ------------ |  | ------------- | ------- | ----------- |  | ------------- | -- | ------------- |  | - | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                                                                                      |  | Notes                                |        |              |  | Accumulated   |         |             |  |               |    | Total        
|                                                                                                      |  | Receivable                           |        | Unearned     |  | Other         |         |             |  |               |    | Stockholders
|                                                                                                      |  | from                                 |        | Stock-Based  |  | Comprehensive |         | Accumulated |  | Comprehensive |    | Equity       
|                                                                                                      |  | Stockholders                         |        | Compensation |  | Income        |         | Deficit     |  | Loss          |    | (Deficit)    
|                                                                                                      |  |                                      |        |              |  |               |         |             |  |               |    |              
|                                                                                                      |  |                                     
|                                                                                                      |  | (In thousands, except share amounts)
|Net loss                                                                                              |  |                                      |        |              |  |               |         |             |  |               |    |               |  |   | (6,722  | ) |  |   |         |   |  |   | (6,722  | )
|Realized loss on investments                                                                          |  |                                      |       |              |  |               |        |             |  |               | (2 | )             |  |   |        |   |  |   |         |   |  |   | (2      | )
|                                                                                                      |  |                                      |        |              |  |               |         |             |  |               |    |               |  |   |         |   |  | $ | (6,722  | ) |  |   |         |  
|                                                                                                      |  |                                      |        |              |  |               |         |             |  |               |    |               |  |   |         |   |  |   | (2      | ) |  |   |         |  
|                                                                                                      |  |                                      |        |              |  |               |         |             |  |               |    |               |  |   |         |   |  |   |         |   |  |   |         |  
|Comprehensive loss                                                                                    |  |                                      |        |              |  |               |         |             |  |               |    |               |  |   |         |   |  | $ | (6,724  | ) |  |   |         |  
|                                                                                                      |  |                                      |        |              |  |               |         |             |  |               |    |               |  |   |         |   |  |   |         |   |  |   |         |  
|Balances, September 30, 2000                                                                          |  | $                                    | (1,293 | )            |  | $             | (2,247  | )           |  | $             |   |               |  | $ | (28,540 | ) |  |   |         |   |  | $ | (14,332 | )
|                                                                                                      |  |                                      |        |              |  |               |         |             |  |               |    |               |  |   |         |   |  |   |         |   |  |   |         |  
|Balances, September 30, 2000                                                                          |  | $                                    | (1,293 | )            |  | $             | (2,247  | )           |  | $             |   |               |  | $ | (28,540 | ) |  | $ |        |   |  | $ | (14,332 | )
|Interest accrued from stockholder notes receivable                                                    |  |                                      | (76    | )            |  |               |        |             |  |               |   |               |  |   |        |   |  |   |        |   |  |   | (76     | )
|Amortization of stockholder note forgiven                                                             |  |                                      | 86     |              |  |               |        |             |  |               |   |               |  |   |        |   |  |   |        |   |  |   | 86      |  
|Issuance of common stock pursuant to exercise of
	stock options                                       |  |                                      |       |              |  |               |        |             |  |               |   |               |  |   |        |   |  |   |        |   |  |   | 408     |  
|Issuance of common stock in connection with
	acquisition of Altius Solutions, Inc.                    |  |                                      |       |              |  |               |        |             |  |               |   |               |  |   |        |   |  |   |        |   |  |   | 25,462  |  
|Assumption of common stock warrant in connection
	with acquisition of Altius Solutions, Inc.          |  |                                      |       |              |  |               |        |             |  |               |   |               |  |   |        |   |  |   |        |   |  |   | 27      |  
|Issuance of common stock options in connection
	with acquisition of Altius Solutions, Inc.            |  |                                      |       |              |  |               |        |             |  |               |   |               |  |   |        |   |  |   |        |   |  |   | 3,108   |  
|Issuance of common stock in conjunction with
	initial public offering, net of cost incurred of $3,786 |  |                                      |       |              |  |               |        |             |  |               |   |               |  |   |        |   |  |   |        |   |  |   | 47,550  |  
|Conversion of preferred stock to common stock
	upon initial public offering                           |  |                                      |       |              |  |               |        |             |  |               |   |               |  |   |        |   |  |   |        |   |  |   | 24,251  |  
|Repurchases and cancellations of common stock,
	net of exercise of warrants to purchase common stock  |  |                                      |       |              |  |               |        |             |  |               |   |               |  |   |        |   |  |   |        |   |  |   |        |  
|Issuance of restricted common stock in exchange
	for services                                         |  |                                      |       |              |  |               | (31     | )           |  |               |   |               |  |   |        |   |  |   |        |   |  |   |        |  
|Unearned stock-based compensation                                                                     |  |                                      |       |              |  |               | (11,747 | )           |  |               |   |               |  |   |        |   |  |   |        |   |  |   |        |  
|Stock-based compensation expense                                                                      |  |                                      |       |              |  |               | 7,300   |             |  |               |   |               |  |   |        |   |  |   |        |   |  |   | 7,300   |  
|Net loss                                                                                              |  |                                      |       |              |  |               |        |             |  |               |   |               |  |   | (12,087 | ) |  |   | (12,087 | ) |  |   | (12,087 | )
|Unrealized gain on investments                                                                        |  |                                      |       |              |  |               |        |             |  |               | 46 |               |  |   |        |   |  |   | 46      |   |  |   | 46      |  
|                                                                                                      |  |                                      |        |              |  |               |         |             |  |               |    |               |  |   |         |   |  |   |         |   |  |   |         |  
|Comprehensive loss                                                                                    |  |                                      |        |              |  |               |         |             |  |               |    |               |  |   |         |   |  | $ | (12,041 | ) |  |   |         |  
|                                                                                                      |  |                                      |        |              |  |               |         |             |  |               |    |               |  |   |         |   |  |   |         |   |  |   |         |  
|Balances, September 30, 2001                                                                          |  | $                                    | (1,283 | )            |  | $             | (6,725  | )           |  | $             | 46 |               |  | $ | (40,627 | ) |  |   |         |   |  | $ | 81,743  |  
|                                                                                                      |  |                                      |        |              |  |               |         |             |  |               |    |               |  |   |         |   |  |   |         |   |  |   |         |  

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

47



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##### Table of Contents






SIMPLEX SOLUTIONS, INC.

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                                      |                                                                                            |                                                                              |                                           |                                                      |       |        |         |         |       |        |        |        |     |        |        |  
|------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------ | ---------------------------------------------------------------------------- | ----------------------------------------- | ---------------------------------------------------- | ----- | ------ | ------- | ------- | ----- | ------ | ------ | ------ | --- | ------ | ------ | -
|                                                                                      |                                                                                            |                                                                             
|                                                                                      |                                                                                            | Year Ended September 30,                                                    
|                                                                                      |                                                                                            |                                                                             
|                                                                                      |                                                                                            | 2001                                                                         |                                           | 2000                                                 |       | 1999  
|                                                                                      |                                                                                            |                                                                              |                                           |                                                      |       |       
|                                                                                      |                                                                                            |                                                                             
|                                                                                      |                                                                                            | (In thousands)                                                              
|Cash flows from operating
	activities:                                                |                                                                                            |                                                                              |                                           |                                                      |       |        |         |         |       |        |        |       
|                                                                                      | Net loss                                                                                   |                                                                              | $                                         | (12,087                                              | )     |        | $       | (6,722  | )     |        | $      | (7,041 | )  
|                                                                                      | Adjustments to reconcile net loss to net cash
	(used in) provided by operating activities: |                                                                              |                                           |                                                      |       |        |         |         |       |        |        |        |    
|                                                                                      |                                                                                            | Amortization of discount on lease financing and
	line of credit              |                                           |                                                      | 58    |        |         |         | 83    |        |        |        | 19  |       
|                                                                                      |                                                                                            | Stock-based compensation                                                     |                                           |                                                      | 7,300 |        |         |         | 1,795 |        |        |        | 13  |       
|                                                                                      |                                                                                            | Interest accrued on stockholder notes receivable                             |                                           |                                                      | (76   | )      |         |         | (95   | )      |        |        | (68 | )     
|                                                                                      |                                                                                            | Allowance for doubtful accounts                                              |                                           |                                                      | 41    |        |         |         | 14    |        |        |        | 161 |       
|                                                                                      |                                                                                            | Depreciation and amortization of tangible assets                             |                                           |                                                      | 1,869 |        |         |         | 843   |        |        |        | 907 |       
|                                                                                      |                                                                                            | Amortization of stockholder note forgiven                                    |                                           |                                                      | 86    |        |         |         | 93    |        |        |        | 94  |       
|                                                                                      |                                                                                            | Amortization of goodwill and other intangibles                               |                                           |                                                      | 6,570 |        |         |         | 575   |        |        |        |    |       
|                                                                                      |                                                                                            | In-process and acquired research and development                             |                                           |                                                      |      |        |         |         | 5,000 |        |        |        |    |       
|                                                                                      |                                                                                            | Rental income paid for by waiver of deposit                                  |                                           |                                                      | (56   | )      |         |         |      |        |        |        |    |       
|                                                                                      |                                                                                            | Changes in operating assets and liabilities net
	of effects of acquisitions: |                                           |                                                      |       |        |         |         |       |        |        |        |     |       
|                                                                                      |                                                                                            |                                                                              | Accounts receivable, net                  |                                                      |       | (7,996 | )       |         |       | (1,607 | )      |        |     | (3,888 | )     
|                                                                                      |                                                                                            |                                                                              | Prepaid expenses and other current assets |                                                      |       | (1,068 | )       |         |       | 198    |        |        |     | (259   | )     
|                                                                                      |                                                                                            |                                                                              | Other assets                              |                                                      |       | 570    |         |         |       | (538   | )      |        |     | (17    | )     
|                                                                                      |                                                                                            |                                                                              | Accounts payable                          |                                                      |       | 952    |         |         |       | 189    |        |        |     | 96     |       
|                                                                                      |                                                                                            |                                                                              | Accrued liabilities                       |                                                      |       | 1,737  |         |         |       | 486    |        |        |     | 948    |       
|                                                                                      |                                                                                            |                                                                              | Deferred revenue                          |                                                      |       | 1,880  |         |         |       | 1,251  |        |        |     | 3,651  |       
|                                                                                      |                                                                                            |                                                                              |                                           |                                                      |       |        |         |         |       |        |        |       
|                                                                                      |                                                                                            |                                                                              |                                           | Net cash (used in) provided by operating
	activities |       |        | (220    | )       |       |        | 1,565  |        |     |        | (5,384 | )
|                                                                                      |                                                                                            |                                                                              |                                           |                                                      |       |        |         |         |       |        |        |       
|Cash flows from investing
	activities:                                                |                                                                                            |                                                                              |                                           |                                                      |       |        |         |         |       |        |        |       
|                                                                                      | Cash received from acquisitions                                                            |                                                                              |                                           | 2,307                                                |       |        |         | 1,591   |       |        |        |       |    
|                                                                                      | Purchases of property and equipment                                                        |                                                                              |                                           | (4,277                                               | )     |        |         | (1,044  | )     |        |        | (436   | )  
|                                                                                      | Proceeds from available-for-sale securities                                                |                                                                              |                                           | 12,024                                               |       |        |         | 1,066   |       |        |        | 404    |    
|                                                                                      | Purchase of available-for-sale securities                                                  |                                                                              |                                           | (44,205                                              | )     |        |         | (806    | )     |        |        | (664   | )  
|                                                                                      |                                                                                            |                                                                              |                                           |                                                      |       |        |         |         |       |        |        |       
|                                                                                      |                                                                                            |                                                                              |                                           | Net cash (used in) provided by investing
	activities |       |        | (34,151 | )       |       |        | 807    |        |     |        | (696   | )
|                                                                                      |                                                                                            |                                                                              |                                           |                                                      |       |        |         |         |       |        |        |       
|Cash flows from financing
	activities:                                                |                                                                                            |                                                                              |                                           |                                                      |       |        |         |         |       |        |        |       
|                                                                                      | Proceeds (repayment) from line of credit, net                                              |                                                                              |                                           | (2,500                                               | )     |        |         |        |       |        |        | 2,500  |    
|                                                                                      | Proceeds from issuance of convertible preferred
	stock                                     |                                                                              |                                           |                                                     |       |        |         | 67      |       |        |        |       |    
|                                                                                      | Proceeds from issuance of common stock pursuant
	to exercise of options and warrants       |                                                                              |                                           | 408                                                  |       |        |         | 894     |       |        |        | 216    |    
|                                                                                      | Repurchase of common stock                                                                 |                                                                              |                                           |                                                     |       |        |         |        |       |        |        | (13    | )  
|                                                                                      | Proceeds from initial public offering, net of
	issuance costs                              |                                                                              |                                           | 47,550                                               |       |        |         |        |       |        |        |       |    
|                                                                                      | Proceeds from stockholders note receivable                                                |                                                                              |                                           |                                                     |       |        |         | 16      |       |        |        | 696    |    
|                                                                                      | Repayment of capital leases and notes payable                                              |                                                                              |                                           | (89                                                  | )     |        |         | (106    | )     |        |        | (156   | )  
|                                                                                      |                                                                                            |                                                                              |                                           |                                                      |       |        |         |         |       |        |        |       
|                                                                                      |                                                                                            |                                                                              |                                           | Net cash provided by financing activities            |       |        | 45,369  |         |       |        | 871    |        |     |        | 3,243  |  
|                                                                                      |                                                                                            |                                                                              |                                           |                                                      |       |        |         |         |       |        |        |       
|Net increase (decrease) in cash and cash
	equivalents                                 |                                                                                            |                                                                              | 10,998                                    |                                                      |       |        | 3,243   |         |       |        | (2,837 | )     
|Cash and cash equivalents at beginning of year                                        |                                                                                            |                                                                              | 7,447                                     |                                                      |       |        | 4,204   |         |       |        | 7,041  |       
|                                                                                      |                                                                                            |                                                                              |                                           |                                                      |       |        |         |         |       |        |        |       
|Cash and cash equivalents at end of year                                              |                                                                                            | $                                                                            | 18,445                                    |                                                      |       | $      | 7,447   |         |       | $      | 4,204  |       
|                                                                                      |                                                                                            |                                                                              |                                           |                                                      |       |        |         |         |       |        |        |       
|Supplemental disclosures of cash flow
	information:                                   |                                                                                            |                                                                              |                                           |                                                      |       |        |         |         |       |        |        |       
|                                                                                      | Cash paid for interest                                                                     |                                                                              | $                                         | 283                                                  |       |        | $       | 379     |       |        | $      | 106    |    
|                                                                                      | Cash paid for income taxes                                                                 |                                                                              | $                                         | 175                                                  |       |        | $       |        |       |        | $      |       |    
|                                                                                      | Assets acquired under capital lease                                                        |                                                                              | $                                         |                                                     |       |        | $       |        |       |        | $      | 119    |    
|                                                                                      | Issuance of common stock for stockholder notes
	receivable                                 |                                                                              | $                                         |                                                     |       |        | $       |        |       |        | $      | 725    |    
|                                                                                      | Warrants granted for financing services                                                    |                                                                              | $                                         |                                                     |       |        | $       |        |       |        | $      | 155    |    
|                                                                                      | Issuance of restricted common stock in exchange
	for services                              |                                                                              | $                                         |                                                     |       |        | $       | 31      |       |        | $      |       |    
|                                                                                      | Unearned stock-based compensation                                                          |                                                                              | $                                         | 11,778                                               |       |        | $       | 3,996   |       |        | $      | 20     |    
|                                                                                      | Conversion of convertible preferred stock into
	common stock                               |                                                                              | $                                         | 24,251                                               |       |        | $       |        |       |        | $      |       |    
|Assets acquired and liabilities assumed in
	connection with acquisition of Snaketech: |                                                                                            |                                                                              |                                           |                                                      |       |        |         |         |       |        |        |       
|                                                                                      | Fair value of assets acquired                                                              |                                                                              |                                           |                                                      |       |        | $       | 7,676   |       |        |        |        |    
|                                                                                      | In-process and acquired research and development                                           |                                                                              |                                           |                                                      |       |        |         | 5,000   |       |        |        |        |    
|                                                                                      | Cash received                                                                              |                                                                              |                                           |                                                      |       |        |         | 1,591   |       |        |        |        |    
|                                                                                      | Common stock and fully vested common stock
	options issued                                 |                                                                              |                                           |                                                      |       |        |         | (11,339 | )     |        |        |        |    
|                                                                                      |                                                                                            |                                                                              |                                           |                                                      |       |        |         |         |       |        |        |       
|                                                                                      |                                                                                            |                                                                              | Liabilities assumed                       |                                                      |       |        |         |         | $     | 2,928  |        |        |     |        |       
|                                                                                      |                                                                                            |                                                                              |                                           |                                                      |       |        |         |         |       |        |        |       
|Assets acquired and liabilities assumed in
	connection with acquisition of Altius:    |                                                                                            |                                                                              |                                           |                                                      |       |        |         |         |       |        |        |       
|                                                                                      | Fair value of assets acquired                                                              |                                                                              | $                                         | 29,748                                               |       |        |         |         |       |        |        |        |    
|                                                                                      | Cash received                                                                              |                                                                              |                                           | 2,307                                                |       |        |         |         |       |        |        |        |    
|                                                                                      | Common stock and fully vested common stock
	options issued                                 |                                                                              |                                           | (28,597                                              | )     |        |         |         |       |        |        |        |    
|                                                                                      |                                                                                            |                                                                              |                                           |                                                      |       |        |         |         |       |        |        |       
|                                                                                      |                                                                                            |                                                                              | Liabilities assumed                       |                                                      | $     | 3,458  |         |         |       |        |        |        |     |        |       
|                                                                                      |                                                                                            |                                                                              |                                           |                                                      |       |        |         |         |       |        |        |       

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

48



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##### Table of Contents



SIMPLEX SOLUTIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

Note 1  Formation and Business
of the Company:

Simplex Solutions, Inc. (Simplex) was
incorporated in the State of Delaware in April 1995. Simplex
provides software and services that enable the design and
first-time production success of complex integrated circuits for
computer, communications, and consumer products. Simplex
products are designed to enable its customers to deliver timely,
competitive systems-on-chips implemented in deep submicron
technologies. Simplex also provides design foundry services that
enable accelerated chip development. Simplex customers use
its products and services prior to manufacture to design and
verify the integrated circuits to help ensure that the
integrated circuits will perform as intended, taking into
account the complex effects of deep submicron semiconductor
physics.

On May 2, 2001, Simplex completed its
initial public offering of 4.6 million shares of common stock
for net cash proceeds of approximately $47.5 million.

Note 2  Summary of Significant
Accounting Policies:

Principles of
Consolidation

The accompanying consolidated financial
statements include the accounts of Simplex and its wholly owned
subsidiaries, Simplex Solutions UK Ltd., Simplex Solutions
S.A.R.L., Simplex Solutions GmbH, Simplex Solutions KK, Simplex
Solutions, S.A.S. (together Simplex). All material
intercompany balances and transactions have been eliminated.

Use of
Estimates

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

Foreign
Currency Translation

The functional currency of Simplex foreign
subsidiaries is the U.S. dollar. Accordingly, the financial
statements of those subsidiaries, which are maintained in the
local currency, are remeasured into U.S. dollars in accordance
with Statement of Financial Accounting Standards No. 52,
Foreign Currency Translation. Exchange gains or
losses from remeasurement of monetary assets and liabilities
that are not denominated in U.S. dollars were not material for
any period presented and are included in the consolidated
statements of operations.

Cash and Cash
Equivalents

Simplex considers all highly liquid investments
with a maturity of three months or less at the date of purchase
to be cash equivalents, except those held as collateral for
Simplex lease arrangement (see Note 12).

Short-term
Investments

Investments with original maturities, or
maturities at the date of purchase greater than three months and
remaining maturities of less than one year are classified as
short-term investments. Short-term investments, which are
classified as available-for-sale, consist of corporate notes and
U.S. government agency notes and are reported at fair value. The
cost of securities sold is determined using the specific
identification method when computing realized gains and losses.
Fair value is determined using available market information. At
September 30, 2001 and 2000, there were no investments with
maturities greater than one year.

49



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##### Table of Contents



SIMPLEX SOLUTIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Business
Risks and Concentration of Credit Risk

Simplex licenses and services are
concentrated in the area of enabling companies to design complex
integrated circuits. This industry is characterized by rapid
technological advances, changes in customer requirements and
evolving industry standards.

Any failure by Simplex to anticipate or respond
adequately to technological changes in its industry, changes in
customer requirements or changes in industry standards could
have a material adverse effect on Simplex business and
operating results.

Financial instruments which potentially subject
Simplex to concentrations of credit risk consist primarily of
cash, cash equivalents, short term investments and accounts
receivable. Simplex places the majority of its cash and cash
equivalents with two high credit-quality financial institutions.
Deposits at any time may exceed federally insured limits. For
short term investments, Simplex invests in a variety of
financial instruments issued by high credit-quality institutions
or U.S. government. Markets for these securities generally are
highly liquid, and therefore bear minimal risk. Simplex has
established guidelines relative to credit rating,
diversification and maturities that seek to maintain safety and
liquidity. For accounts receivable, Simplex performs ongoing
credit evaluations of its customers financial condition
and does not require collateral. Simplex maintains allowances
for potential credit losses and such losses have been within
managements expectations.

At September 30, 2001, two customers each
accounted for 19% and 11% respectively, of aggregate accounts
receivable. At September 30, 2000, three customers each
accounted for 10%, 11%, and 15%, respectively, of aggregate
accounts receivable. One customer accounted for 22% of total
revenue for the year ended September 30, 2001. Revenue from
one customer accounted for 15% of total revenue for the year
ended September 30, 2000, exclusive of revenue of 3% sold
to this customer through a distributor. No customers accounted
for greater than 10% of total revenue for the year ended
September 30, 1999.



| |                                     
| | ------------------------------------
| | Fair Value of Financial
	Instruments

The carrying amounts of certain of Simplex
financial instruments including cash and cash equivalents,
accounts receivable, accounts payable, notes payable, and line
of credit approximate fair value.



| |                       
| | ----------------------
| | Property and Equipment

Property and equipment are stated at cost and
depreciated on a straight-line basis over the estimated useful
lives of the related assets, generally three to five years.
Leased assets are amortized on a straight-line basis over the
lesser of the estimated useful life or the lease term.

Maintenance and repairs are charged to expense as
incurred. When assets are sold or retired, the cost and related
accumulated depreciation are removed from the accounts and any
resulting gain or loss is included in operations.



| |                  
| | -----------------
| | Intangible Assets

Intangible assets include goodwill, assembled
workforce and acquired technology from the acquisition of
Snaketech, S.A. (Snaketech) and Altius Solutions,
Inc. (Altius) (see Note 3). Goodwill and other
intangible assets are amortized on a straight-line basis over
the estimated periods of benefit, which are as follow:

|                    |  |  |           | 
|------------------- |  |  | --------- | 
|Goodwill            |  |  | 5 years   | 
|Acquired technology |  |  | 3-5 years | 
|Assembled workforce |  |  | 3-7 years | 

50



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##### Table of Contents



SIMPLEX SOLUTIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                                 
| | --------------------------------
| | Impairment of Long-lived
	Assets

Simplex evaluates the recoverability of
long-lived assets, goodwill related to those assets and
enterprise goodwill in accordance with Statement of Financial
Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of (SFAS No. 121). SFAS No. 121
requires recognition of impairment of long-lived assets upon the
occurrence of certain events and in the event the net book value
of such assets exceeds the future undiscounted cash flows
attributable to such assets.



| |                    
| | -------------------
| | Revenue Recognition

Simplex reports revenue in two categories;
license and services revenue. License revenue is derived from
product sales to end users and distributors. Services revenue is
derived from providing consulting, training, maintenance and
support services to end users, research and development services
and customization services related to software and design
services.

Simplex recognizes revenue in accordance with the
American Institute of Certified Public Accountants Statement of
Position 97-2, Software Revenue Recognition,as amended
by Statement of Position 98-4, Deferral of the Effective
Date of Certain Provisions of SOP 97-2, (SOP
97-2) and Statement of Position 98-9, Modification
of SOP 97-2, Software Revenue Recognition With Respect to
Certain Transactions. License revenue is derived from term
and time-based licenses. Time-based licenses are for a period of
1 year or less. Term licenses are typically for a period of
3 to 20 years. License revenue of term licenses is
recognized upon shipment of the license, if an executed
agreement or purchase order has been received, a signed license
agreement exists, the fee is fixed and determinable and
collection is deemed probable. All licenses commence upon
execution of a Simplex license agreement. Simplex standard
payment terms are net 30. Simplex does not generally include
acceptance criteria or rights of return in its arrangements.
When acceptance criteria or rights of return are included in
these license arrangements, revenue is deferred until acceptance
is received or the rights of return expire.

For contracts with multiple obligations (e.g.,
product licenses, maintenance and other services), and which do
not involve significant customization or modification of
software, Simplex allocates revenue to each component of the
contract based on vendor specific objective evidence of its fair
value, which is based on either the price when each component is
sold separately, or the renewal rates for maintenance in future
years. Vendor specific objective evidence exists for
maintenance, consulting and training based upon a history of
separate sales of these services. As Simplex has not generally
sold its licenses separately, it uses the residual method to
determine the allocation of revenue to the license portion of
multiple-element arrangements and, as such, no revenue is
recognized until delivery. Simplex recognizes revenue allocated
to undelivered products when the criteria for product revenue
set forth above are met.

License and maintenance revenue from time-based
licenses are recognized ratably over the period of the license
as vendor specific objective evidence of the fair value of the
maintenance is not established, as maintenance for these
licenses is never sold separately from the license.

Services revenue from consulting and training are
recognized as the related services are performed, when
collectibility is probable and the fee is fixed and
determinable. Revenue from maintenance and support agreements is
deferred and recognized on a straight-line basis over the period
of the related agreement. Payments of maintenance fees are
generally made in advance and are nonrefundable.

Simplex recognizes service revenue derived from
long-term research and development contracts in accordance with
Statement of Financial Accounting Standard No. 68,
Research and Development Arrangementsand SOP 81-1,
Accounting for Performance of Construction-Type and Certain
Production-Type Contracts, SOP 81-1 under the
percentage-of-completion method of accounting based on the
estimated stage of completion of individual contracts. Simplex
currently has only one long-term research and development

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SIMPLEX SOLUTIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

contract. Revenue recorded related to this
contract amounted to $1.0 million for the year ended
September 30, 2001 and $1.7 million for the year ended
September 30, 2000.

Simplex also recognizes service and license
revenue for contracts which require significant customization or
modification of its software and service revenue for contracts
which do not include licenses, under SOP 81-1, using the
percentage-of-completion method based on the estimated stage of
completion of the individual contracts.

Deferred revenue primarily consists of
maintenance and support services under maintenance contracts and
unearned revenue on time-based licenses.



| |                        
| | -----------------------
| | Advertising and Selling

Simplex expenses advertising costs as they are
incurred. For the years ended September 2001, 2000 and 1999,
advertising expense was $370,000, $0 and $141,000 respectively.
Sales commissions related to both term and time-based licenses
are expensed when earned.



| |             
| | ------------
| | Income Taxes

Simplex accounts for income taxes using the
liability method whereby deferred tax assets and liabilities are
determined based on the differences between financial reporting
and tax bases of assets and liabilities and measured at tax
rates that will be in effect when the differences are expected
to reverse. Valuation allowances are established when necessary
to reduce deferred tax assets where it is more likely than not
the deferred tax assets will not be realized.



| |                         
| | ------------------------
| | Stock-based Compensation

Simplex has elected to adopt the disclosure only
provisions of Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based
Compensation, (SFAS No. 123). Simplex
accounts for stock-based compensation using Accounting
Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees, (APB No. 25) and,
accordingly, pro forma disclosures required under SFAS
No. 123 have been presented. Under APB No. 25,
compensation expense is based on the difference, if any, on the
date of the grant, between the deemed fair value of Simplex
common stock and the exercise price of the option. Additionally,
pursuant to Emerging Issues Task Force Issue 96-18, (EITF
96-18) Accounting for Equity Instruments that are
issued to other than Employees for Acquiring, or in conjunction
with Selling, Goods or Services, equity instruments issued
to non-employees are measured at fair value over the period of
performance using the Black-Scholes option pricing model.



| |                                       
| | --------------------------------------
| | Research and Development
	Expenditures

Costs related to research, design and development
of products are charged to research and development expense as
incurred. Software development costs are capitalized beginning
when a products technological feasibility has been
established and ending when a product is available for general
release to customers. To date, attaining technological
feasibility and general release have substantially coincided. As
a result, Simplex has not capitalized any software development
costs.



| |                   
| | ------------------
| | Net Loss Per Share

Simplex computes net loss per share in accordance
with Statement of Financial Accounting Standards No. 128,
Earnings per Share, (SFAS No. 128).
Under the provisions of SFAS No. 128, basic net loss per
share is computed by dividing the net loss available to common
stockholders for the period by the weighted average number of
common shares outstanding during the period. Diluted net income
(loss) per share is computed by dividing the net loss for
the period by the weighted average number of common and dilutive

52



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SIMPLEX SOLUTIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

common equivalent shares outstanding during the
period. For all periods presented, options, warrants and
convertible preferred stock were not included in the computation
of diluted net loss per share because the effect would be
antidilutive.

A reconciliation of shares used in the
calculation of basic and diluted net loss per share follows (in
thousands, except per share amounts):

|                                      |                                                                                                                                                  |                          |   |         |   |      |   |        |   |  |   |        |  
|------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------ | - | ------- | - | ---- | - | ------ | - |  | - | ------ | -
|                                      |                                                                                                                                                  |                         
|                                      |                                                                                                                                                  | Year Ended September 30,
|                                      |                                                                                                                                                  |                         
|                                      |                                                                                                                                                  | 2001                     |   | 2000    |   | 1999
|                                      |                                                                                                                                                  |                          |   |         |   |     
|Basic and diluted net loss per share: |                                                                                                                                                  |                          |   |         |   |      |   |        |   |  |   |       
|Numerator:                            |                                                                                                                                                  |                          |   |         |   |      |   |        |   |  |   |       
|                                      | Net loss                                                                                                                                         |                          | $ | (12,087 | ) |      | $ | (6,722 | ) |  | $ | (7,041 | )
|                                      |                                                                                                                                                  |                          |   |         |   |      |   |        |   |  |   |       
|Denominator:                          |                                                                                                                                                  |                          |   |         |   |      |   |        |   |  |   |       
|                                      | Weighted average common shares outstanding                                                                                                       |                          |   | 9,874   |   |      |   | 3,055  |   |  |   | 2,369  |  
|                                      | Weighted average unvested common shares subject
	to repurchase                                                                                   |                          |   | (563    | ) |      |   | (254   | ) |  |   | (425   | )
|                                      |                                                                                                                                                  |                          |   |         |   |      |   |        |   |  |   |       
|                                      | Denominator for basic and diluted calculation                                                                                                    |                          |   | 9,311   |   |      |   | 2,801  |   |  |   | 1,944  |  
|                                      |                                                                                                                                                  |                          |   |         |   |      |   |        |   |  |   |       
|                                      | Basic and diluted net loss per share attributable
	to common stockholders                                                                        |                          | $ | (1.30   | ) |      | $ | (2.40  | ) |  | $ | (3.62  | )
|                                      |                                                                                                                                                  |                          |   |         |   |      |   |        |   |  |   |       
|                                      | Antidilutive securities including options,
	warrants, unvested common stock and preferred stock not included
	in net loss per share calculations |                          |   | 3,753   |   |      |   | 6,339  |   |  |   | 5,303  |  
|                                      |                                                                                                                                                  |                          |   |         |   |      |   |        |   |  |   |       



| |                            
| | ---------------------------
| | Comprehensive Income (Loss)

Comprehensive income (loss) includes unrealized
gains and losses on available for sale securities that are
excluded from net loss and reflected instead in
stockholders equity (deficit).



| |                                  
| | ---------------------------------
| | Recent Accounting
	Pronouncements

In July 2001, the Financial Accounting Standards
Board (FASB) issued Statement of Financial
Accounting Standards No. 141 (SFAS
No. 141), Business Combinations.
SFAS 141 requires the purchase method of accounting for
business combinations initiated after June 30, 2001 and
eliminates the pooling-of-interests method. Simplex believes
that the adoption of SFAS No. 141 will not have a
significant impact on its financial statements.

In July 2001, the FASB issued Statement of
Financial Accounting Standards No. 142 (SFAS
No. 142), Goodwill and Other Intangible
Assets, which is effective for fiscal years beginning
after March 15, 2001. SFAS No. 142 requires, among
other things, the discontinuance of goodwill amortization. In
addition, the standard includes provisions for the
reclassification of certain existing recognized intangibles as
goodwill, reassessment of the useful lives of existing
recognized intangibles, reclassification of certain intangibles
out of previously reported goodwill and the testing for
impairment of existing goodwill and other intangibles. Simplex
is currently assessing, but has not yet determined, the impact
of SFAS No. 142 on its financial position and results of
operations. Simplex intends to adopt SFAS No. 142 early.

In October 2001, the FASB issued Statement of
Financial Accounting Standards No. 144, (SFAS
No. 144) Accounting for the Impairment or
Disposal of Long-Lived Assets. SFAS No. 144
supercedes SFAS No. 121 and applies to all long-lived
assets including discontinued operations and consequently amends
Accounting Principals Board Opinion No. 30, Reporting
the Results of Operations  Reporting the Effects of
Disposal of a Segment of a Business. SFAS No. 144 is
effective for financial statements issued for fiscal

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SIMPLEX SOLUTIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

years beginning after December 15, 2001.
Simplex has not yet determined the impact of the adoption of
SFAS No. 144 on the consolidated financial statements.

Note 3  Acquisition:

In March 2000, Simplex acquired all of the common
stock and outstanding options to purchase common stock of
Snaketech for a purchase price of approximately
$11.8 million, which consisted of 928,983 shares of
Simplex common stock, options to purchase approximately
104,000 shares of Simplex common stock, and related
acquisition expenses totaling approximately $442,000. Simplex
valued its stock issued based upon the then deemed fair market
value of $11.55 from a contemporaneous appraisal which
aggregated $10,729,935. Options to purchase Simplex stock issued
to replace outstanding options were reflected at fair-value,
using the Black-Scholes option pricing model method. The fair
market value of options issued amounted to $608,707 and was
calculated using the following assumptions: option term,
3 years; volatility 70%; risk-free rate of return 6.47% and
fair-market value of Simplex stock of $11.55. Snaketech was
incorporated in 1996 in France as a developer and marketer of
high performance physical design solutions for integrated
circuits. The acquisition was accounted for as a purchase and
accordingly, the purchase price has been allocated to the
tangible and intangible assets acquired and liabilities assumed
on the basis of their respective fair values on the acquisition
date. The allocation of the purchase price is summarized below
(in thousands):

|                                                 |                      |   |       |        | 
|------------------------------------------------ | -------------------- | - | ----- | ------ | 
|Acquired technology                              |                      | $ | 1,200 |       
|Assembled workforce                              |                      |   | 700   |       
|Goodwill                                         |                      |   | 3,613 |       
|In-process and acquired research and development |                      |   | 5,000 |       
|Property and equipment                           |                      |   | 303   |       
|Net current assets                               |                      |   | 1,014 |       
|                                                 |                      |   |       |       
|                                                 | Total purchase price |   | $     | 11,830 | 
|                                                 |                      |   |       |       

The excess of the purchase price over the fair
value of the net tangible and identifiable intangible assets
acquired has been recorded as goodwill. Simplex has included the
results of operations of Snaketech since April 1, 2000, the
date of acquisition.

In October 2000, Simplex acquired Altius
Solutions, Inc., which provides system-on-chip design foundry
services. Simplex issued 2,551,434 shares of common stock
and options to purchase approximately 384,000 shares of
Simplex common stock to Altius stockholders in exchange for
their shares and options of Altius common and preferred stock.
Related acquisition expenses totaled approximately $549,000.

The acquisition was accounted for as a purchase
and accordingly, the purchase price has been allocated to the
tangible and intangible assets acquired and liabilities assumed
on the basis of their respective fair values on the acquisition
date. The allocation of the purchase price is summarized below
(in thousands):

|                    |                      |   |        |        | 
|------------------- | -------------------- | - | ------ | ------ | 
|Acquired technology |                      | $ | 600    |       
|Assembled workforce |                      |   | 2,000  |       
|Goodwill            |                      |   | 23,411 |       
|Net current assets  |                      |   | 3,135  |       
|                    |                      |   |        |       
|                    | Total purchase price |   | $      | 29,146 | 
|                    |                      |   |        |       

Simplex has included the results of operations of
Altius since October 4, 2000, the date of acquisition.

The following unaudited pro forma financial
information reflects the results of operations for the year
ended September 30, 2000 as if the acquisitions of
Snaketech and Altius had occurred on October 1, 1999,

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SIMPLEX SOLUTIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

respectively, and after giving effect to purchase
accounting adjustments. These pro forma results have been
prepared for comparative purposes only and do not purport to be
indicative of what operating results would have been had the
acquisition actually taken place on October 1, 1999, and
may not be indicative of future operating results (in thousands,
except per share amounts):

|                                               |  |               |         |  
|---------------------------------------------- |  | ------------- | ------- | -
|                                               |  | Year Ended   
|                                               |  | September 30,
|                                               |  | 2000         
|                                               |  |              
|                                               |  | (Unaudited)  
|Net revenue                                    |  | $             | 31,681  |  
|Operating loss                                 |  |               | (12,730 | )
|Pro forma basic and diluted net loss per share |  | $             | (1.47   | )

Pro forma disclosures have not been presented for
the year ended September 30, 2001 as the results of both
acquisitions had been included in the results of Simplex for the
entire period.

Note 4  In-Process Research
and Development and Purchased Research and
Development:

In connection with the acquisition of Snaketech
in March 2000 (see Note 3), Simplex incurred purchased
in-process research and development costs of $1.1 million.
The fair values of Snaketechs existing products, as well
as the technology currently under development were determined
using the income approach, which discounts expected future cash
flows from the acquired in-process technology to present value.
The discount rates used in the present value calculations were
derived from a weighted average cost of capital of 21%, adjusted
upward by a premium of 5% for the in-process project from the
Snaketech acquisition to reflect additional risks inherent in
the development lifecycle. Although Simplex expects to achieve
certain expense reductions as a result of integrating the
acquired in-process technology, the valuation assumptions do not
include any expense reductions in the amounts allocated to
in-process research and development. The in-process software
product acquired is of reasonable complexity and its final
integration into Simplex products is uncertain. Should the
product not be successfully integrated into Simplex products, or
if such development efforts go beyond the timeframe estimated by
management, Simplex will not receive the full benefits
anticipated from the acquisition. The percent complete, the
estimated cost to complete and the value assigned for the
Snaketech project included in-process research and development
was as follows:

|        |  |            |      |           |  |          |         |  |  |   |           | 
|------- |  | ---------- | ---- | --------- |  | -------- | ------- |  |  | - | --------- | 
|        |  | Estimated  |      | Estimated |  |         
|        |  | Percent    |      | Cost to   |  | Value   
|Project |  | Completion |      | Complete  |  | Assigned
|        |  |            |      |           |  |         
|A       |  |            | 80.8 | %         |  | $        | 300,000 |  |  | $ | 1,100,000 | 

In addition, Simplex also acquired a place and
route development tool which is used exclusively in the
development of one of Simplex products. The development
tool was valued based upon Simplex estimate of fair value.
In assigning fair value, Simplex considered its market value if
the product were separately sold, its value if the product were
sold or licensed by Snaketech, as well as Simplex planned
usage. As the development tool had no probable alternative
future use, Simplex expensed the full fair market value of
$3.9 million upon purchase, in the year ended
September 30, 2000.

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##### Table of Contents



SIMPLEX SOLUTIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note 5  Short-Term
Investments:

Short-term investments consist of the following
(in thousands):

|                                           |  |               |        |      |  |   |   | 
|------------------------------------------ |  | ------------- | ------ | ---- |  | - | - | 
|                                           |  |              
|                                           |  | September 30,
|                                           |  |              
|                                           |  | 2001          |        | 2000
|                                           |  |               |        |     
|Cost  U.S. government securities          |  | $             | 32,181 |      |  | $ |  | 
|Unrealized gain/(loss)                     |  |               | 46     |      |  |   |  | 
|                                           |  |               |        |      |  |   |   | 
|Market value  U.S. government
	securities |  | $             | 32,227 |      |  | $ |  | 
|                                           |  |               |        |      |  |   |   | 

Note 6  Property and
Equipment:

Property and equipment consists of the following
(in thousands):

|                                                |  |               |        |      |  |   |        |  
|----------------------------------------------- |  | ------------- | ------ | ---- |  | - | ------ | -
|                                                |  |              
|                                                |  | September 30,
|                                                |  |              
|                                                |  | 2001          |        | 2000
|                                                |  |               |        |     
|Land and buildings                              |  | $             | 90     |      |  | $ | 94     |  
|Computer equipment and software                 |  |               | 8,477  |      |  |   | 3,810  |  
|Furniture and fixtures                          |  |               | 743    |      |  |   | 397    |  
|Leasehold improvements                          |  |               | 563    |      |  |   | 331    |  
|                                                |  |               |        |      |  |   |        |  
|                                                |  |               | 9,873  |      |  |   | 4,632  |  
|Less: Accumulated depreciation and amortization |  |               | (4,759 | )    |  |   | (2,890 | )
|                                                |  |               |        |      |  |   |        |  
|                                                |  | $             | 5,114  |      |  | $ | 1,742  |  
|                                                |  |               |        |      |  |   |        |  

Note 7  Intangible
Assets:

Intangible assets consist of the following (in
thousands):

|                               |  |               |        |      |  |   |       |  
|------------------------------ |  | ------------- | ------ | ---- |  | - | ----- | -
|                               |  |              
|                               |  | September 30,
|                               |  |              
|                               |  | 2001          |        | 2000
|                               |  |               |        |     
|Acquired technology            |  | $             | 1,800  |      |  | $ | 1,200 |  
|Assembled workforce            |  |               | 2,700  |      |  |   | 700   |  
|Goodwill                       |  |               | 27,024 |      |  |   | 3,613 |  
|                               |  |               |        |      |  |   |       |  
|                               |  |               | 31,524 |      |  |   | 5,513 |  
|Less: Accumulated amortization |  |               | (7,145 | )    |  |   | (575  | )
|                               |  |               |        |      |  |   |       |  
|                               |  | $             | 24,379 |      |  | $ | 4,938 |  
|                               |  |               |        |      |  |   |       |  

56



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##### Table of Contents



SIMPLEX SOLUTIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note 8  Accrued Payroll and
Related Expenses:

Accrued payroll and related expenses consist of
the following (in thousands):

|                                           |  |               |       |      |  |   |       | 
|------------------------------------------ |  | ------------- | ----- | ---- |  | - | ----- | 
|                                           |  |              
|                                           |  | September 30,
|                                           |  |              
|                                           |  | 2001          |       | 2000
|                                           |  |               |       |     
|Accrued bonus                              |  | $             | 1,637 |      |  | $ | 694   | 
|Accrued commissions                        |  |               | 1,518 |      |  |   | 1,336 | 
|Accrued ESPP contribution                  |  |               | 1,167 |      |  |   |      | 
|Accrued vacation                           |  |               | 930   |      |  |   | 450   | 
|Other accrued payroll and related expenses |  |               | 532   |      |  |   | 278   | 
|                                           |  |               |       |      |  |   |       | 
|                                           |  | $             | 5,784 |      |  | $ | 2,758 | 
|                                           |  |               |       |      |  |   |       | 

Note 9  Line of Credit and
Notes Payable:

At September 30, 2001, Simplex had a note
payable of $207,000 which had been assumed from Snaketech.
Snaketech had been granted two interest free advances from the
French government for software development projects, repayable
in three non-equal installments commencing March 31, 2001.
If the development project is unsuccessful as determined by the
Agence Nationale de Valorisation de la Recherche
(ANVAR), repayment of all or a portion of the
advances will not be required. Conversely, if the development
project is successful, Simplex is obligated to repay the loan.
Simplex believes these projects were successful and therefore
reported these advances as repayable loans at September 30,
2001.

At September 30, 2001, Simplex also had
$89,000 outstanding for a $107,000 note entered into in
September 1999 by Snaketech. This note is repayable in monthly
installments over 15 years at a fixed interest rate of
4.25% per annum. This loan is guaranteed by Snaketech and
collateralized by a building owned by a subsidiary of Snaketech.

Future maturities for the notes payable as of
September 30, 2001 are as follows (in thousands):

|                      |  |   |      |  
|--------------------- |  | - | ---- | -
|Year Ending           |  |  
|September 30,         |  |  
|                      |  |  
|2002                  |  | $ | 105  |  
|2003                  |  |   | 118  |  
|2004                  |  |   | 5    |  
|2005                  |  |   | 6    |  
|Thereafter            |  |   | 62   |  
|                      |  |   |      |  
|                      |  |   | 296  |  
|Less: Current portion |  |   | (146 | )
|                      |  |   |      |  
|Long-term portion     |  | $ | 150  |  
|                      |  |   |      |  

Prior to May 2001, Simplex had $5,000,000
outstanding under a $5,000,000 revolving line of credit. The
line of credit was fully paid and cancelled in May 2001.

Note 10  Convertible Preferred
Stock and Warrants:

In connection with the initial public offering in
May 2001, all convertible preferred stock was converted into
common stock. As of September 30, 2001, all warrants were
exercised and none were outstanding.

57



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##### Table of Contents



SIMPLEX SOLUTIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note 11  Stockholders
Equity (Deficit):



| |                                    
| | -----------------------------------
| | Notes Receivable from
	Stockholders

On February 12, 1998, Simplex entered into a
promissory note agreement with an employee in the amount of
$509,250 which bears interest at the rate of 6% per annum with
principal and interest due on February 12, 2002, unless
forgiven by Simplex. Under the terms of the note, Simplex shall
forgive up to a total of $375,000 of the outstanding principal
of this note at the rate of $93,750 one year from the vesting
date (August 1997) and $7,813 each month thereafter until a
total of $375,000 has been forgiven. This note is a full
recourse note collateralized by certain shares of Simplex
common stock. The note becomes due and payable immediately upon
termination of the employment relationship.

On May 26, 1998, Simplex entered into a
settlement agreement with a former employee, under which Simplex
loaned $556,191 to the former employee. The loan bears interest
at the rate of 5.69% per annum, is a non-recourse obligation and
is due on the earlier of May 15, 2002 or one year after the
closing of Simplex initial public offering in one lump sum
of cash or shares of Simplex common stock. The loan is
collateralized by 56,666 shares of Simplex common stock owned by
the former employee. In addition, Simplex paid the former
employee approximately $106,000 in consideration for an option
granted by the former employee to Simplex to purchase up to
33,333 shares of common stock of the 56,666 owned by him at
$6.75 per share. The option terminates on the earlier of
May 15, 2002 or the closing of Simplex initial public
offering. As the loan agreement is non-recourse, the excess of
this price over the deemed fair market value of $449,500 has
been reflected as compensation expense. During the year ended
September 30, 2001, Simplex exercised its option to
purchase 33,333 shares of common stock from the former employee.

In January 1999, Simplex accepted a full recourse
promissory note from an executive of Simplex in the amount of
$241,406 collateralized by 64,375 shares of restricted
common stock. Such note is due no later than January 19,
2004 and bears interest at 4.63% per annum.

In March 1999, Simplex accepted full recourse
promissory notes from two executives of Simplex in the amounts
of $283,334 and $200,000 collateralized by 47,222 and
33,333 shares of restricted common stock. Such notes are
due no later than March 30, 2004 and bear interest at 4.84%
per annum.



| |             
| | ------------
| | Common Stock

Each share of common stock is entitled to one
vote. The holders of common stock are also entitled to receive
dividends whenever funds are legally available and when declared
by the Board of Directors, subject to the prior rights of
holders of all classes of stock outstanding.



| |            
| | -----------
| | Stock Split

On April 18, 2001, the Delaware Secretary of
State approved a reverse-split of Simplex common stock on
a ratio of one for three. All references in the financial
statements to shares and per share amounts have been restated to
give effect to this reverse-split.



| |         
| | --------
| | Warrants

In connection with the acquisition of Altius,
Simplex assumed a warrant to purchase a total of
2,091 shares of common stock at an exercise price of $1.91
per share which expires on November 1, 2004. The fair value
of the warrant was calculated using the Black-Scholes option
pricing model and regarded as part of the purchase price. This
warrant was exercised as of September 30, 2001.

58



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##### Table of Contents



SIMPLEX SOLUTIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                                    
| | -----------------------------------
| | Common Stock Subject to
	Repurchase

Simplex, from inception to September 30,
2001 has issued approximately 1,706,000 shares of common stock
to the founders and others that were subject to repurchase by
Simplex. Simplex has the right to repurchase unvested shares at
book value, or the value paid per share by the original
purchaser, which is intended to approximate fair value at the
time of issuance. Vesting is generally over four years on a
monthly basis. All common stock subject to repurchase has been
issued out of the 1995 Stock Option Plan (the Plan)
except the founders shares. Stock purchase rights of
10,200 were granted under the Plan during the year ended
September 30, 2000. As of September 30, 2001, 366,018
shares were subject to repurchase by Simplex.

At September 30, 2001, Simplex had reserved
2,123,703 shares of common stock for future stock option
plan issuance.



| |                       
| | ----------------------
| | 1995 Stock Option Plan

In 1995, Simplex adopted the 1995 Stock Option
Plan, which was subsequently amended and restated as of March
2000 by the Board of Directors to include a sub-division called
the 2000 Stock Plan (together the Plans).

Options granted under the Plans have a term of
ten years measured from the grant date and are initially
unvested. Participants either vest in the option shares granted
over a four-year period with (i) twenty-five percent of the
option shares vesting upon the completion of one year of service
and (ii) the balance of the option shares in thirty-six
successive equal monthly installments upon the completion of
each additional month of service, over a four year period with
forty-eight successive equal monthly installments upon the
completion of additional month of service, or over a five-year
period with (i) twenty percent of the option shares vesting
upon the completion of one year of service and (ii) the
balance of the option shares in forty-eight successive equal
monthly installments upon the completion of each additional
month of service.

Under the Plan, incentive stock options may be
granted with a per share exercise price not lower than fair
market value at the date of grant or 110% of the fair market
value if the optionee, immediately prior to the grant, owns
stock representing 10% or more of the voting power or value of
all securities. Nonstatutory options may be granted with a per
share exercise price not lower than 85% of fair market value at
the date of grant or 110% of the fair market value if the
optionee, immediately prior to the grant, owns stock
representing 10% or more of the voting power or value of all
securities. Stock options granted under the Plan are exercisable
and vest at such times and under such conditions as determined
by the Board of Directors. Stock options generally expire from
five to ten years from date of grant. Stock purchase rights are
subject to repurchase by Simplex at such times as determined by
the Board of Directors, typically four years.



| |                       
| | ----------------------
| | 1999 Altius Stock Plan

In connection with the Altius acquisition,
Simplex assumed all outstanding options issued under the 1999
Altius Stock Plan. These assumed options became options to
purchase an aggregate of 383,955 shares of Simplex common
stock. All material terms of the Altius options are the same as
the terms of Simplex 1995 Stock Option Plan.

59



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##### Table of Contents



SIMPLEX SOLUTIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                          
| | -------------------------
| | 2001 Incentive Stock Plan

In May 2001, Simplex adopted the 2001 Incentive
Stock Plan (the 2001 Plan). Under the 2001 Plan,
Simplex initially reserved 2,389,807 shares of common stock
for the grant of stock purchase rights and stock options to
employees, directors or consultants under the terms and
provisions established by the Board of Directors. The 2001 Plan
also provides for an annual increase to be added on the first
day of Simplexs fiscal year beginning in 2002, equal to
the lesser of (i) 2,000,000 shares, (ii) 5% of the
outstanding shares on such date or (iii) an amount
determined by the Board of Directors.

The term of each option shall be stated in the
option agreement. In the case of an incentive stock option, the
term shall be ten years from the date of grant or such shorter
term as may be provided in the option agreement. In the case of
an incentive stock option granted to an optionee who, at the
time the option is granted, owns stock representing more than
10% of the total combined voting power of all securities, the
term of the incentive stock option shall be five years or
shorter, as provided in the option agreement.

Under the 2001 Plan, incentive stock options may
be granted with a per share exercise price not lower than fair
market value at the date of grant or 110% of the fair market
value if the optionee, immediately prior to the grant, owns
stock representing 10% or more of the voting power or value of
all securities. Nonstatutory options may be granted with a per
share exercise price not lower than 100% of fair market value at
the date of grant. Stock options granted under the 2001 Plan are
exercisable and vest at such times and under such conditions as
determined by the Board of Directors. Stock purchase rights are
subject to repurchase by Simplex at such times as determined by
the Board of Directors.

60



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##### Table of Contents



SIMPLEX SOLUTIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

A summary of the status of Simplex stock
option plans as of September 30, 1999, 2000 and 2001, and
changes during the years ended on these dates is presented below:

|                                                                                  |  |           |            |                     |  |                  |           |   |  |   |       | 
|--------------------------------------------------------------------------------- |  | --------- | ---------- | ------------------- |  | ---------------- | --------- | - |  | - | ----- | 
|                                                                                  |  |           |            |                    
|                                                                                  |  |           |            | Options Outstanding
|                                                                                  |  |           |            |                    
|                                                                                  |  | Options   |            | Number              |  | Weighted Average
|                                                                                  |  | Available |            | of Options          |  | Exercise Price  
|                                                                                  |  | for Grant |            | Outstanding         |  | Per Share       
|                                                                                  |  |           |            |                     |  |                 
|Balances, September 30, 1998                                                      |  |           | 96,041     |                     |  |                  | 847,936   |   |  | $ | 2.40  | 
|Additional shares reserved                                                        |  |           | 666,667    |                     |  |                  |          |   |  | $ |      | 
|Restricted stock granted                                                          |  |           | (158,264   | )                   |  |                  |          |   |  | $ | 4.89  | 
|Options granted                                                                   |  |           | (513,223   | )                   |  |                  | 513,223   |   |  | $ | 5.46  | 
|Options canceled                                                                  |  |           | 202,714    |                     |  |                  | (202,714  | ) |  | $ | 4.38  | 
|Options exercised                                                                 |  |           |           |                     |  |                  | (74,446   | ) |  | $ | 2.25  | 
|Restricted stock repurchased                                                      |  |           | 34,003     |                     |  |                  |          |   |  | $ | 0.42  | 
|                                                                                  |  |           |            |                     |  |                  |           |   |  |   |       | 
|Balances, September 30, 1999                                                      |  |           | 327,938    |                     |  |                  | 1,083,999 |   |  | $ | 3.48  | 
|Additional shares reserved                                                        |  |           | 1,401,002  |                     |  |                  |          |   |  | $ |      | 
|Restricted stock granted                                                          |  |           | (10,200    | )                   |  |                  |          |   |  | $ | 3.93  | 
|Options granted                                                                   |  |           | (1,441,168 | )                   |  |                  | 1,441,168 |   |  | $ | 8.82  | 
|Options canceled                                                                  |  |           | 122,362    |                     |  |                  | (122,362  | ) |  | $ | 6.51  | 
|Options exercised                                                                 |  |           |           |                     |  |                  | (276,665  | ) |  | $ | 3.09  | 
|Restricted stock repurchased                                                      |  |           | 100        |                     |  |                  |          |   |  | $ | 6.00  | 
|                                                                                  |  |           |            |                     |  |                  |           |   |  |   |       | 
|Balances, September 30, 2000                                                      |  |           | 400,034    |                     |  |                  | 2,126,140 |   |  | $ | 6.99  | 
|Additional shares reserved                                                        |  |           | 666,667    |                     |  |                  |          |   |  | $ |      | 
|Additional options authorized due to assumption
	of 1999 Altius Stock Option Plan |  |           | 851,753    |                     |  |                  |          |   |  | $ |      | 
|Retirement of 1999 Altius Stock Option Plan                                       |  |           | (467,798   | )                   |  |                  |          |   |  | $ |      | 
|Options granted                                                                   |  |           | (1,091,535 | )                   |  |                  | 1,091,535 |   |  | $ | 11.93 | 
|Options cancelled                                                                 |  |           | 148,537    |                     |  |                  | (148,537  | ) |  | $ | 7.81  | 
|Options exercised                                                                 |  |           |           |                     |  |                  | (66,315   | ) |  | $ | 6.13  | 
|Options granted in connection with acquisition of
	Altius Solutions, Inc.         |  |           | (383,955   | )                   |  |                  | 383,955   |   |  | $ | 13.24 | 
|Additional shares reserved due to adoption of
	2001 Stock Option Plan             |  |           | 2,000,000  |                     |  |                  |          |   |  | $ |      | 
|                                                                                  |  |           |            |                     |  |                  |           |   |  |   |       | 
|Balances, September 30, 2001                                                      |  |           | 2,123,703  |                     |  |                  | 3,386,778 |   |  | $ | 9.28  | 
|                                                                                  |  |           |            |                     |  |                  |           |   |  |   |       | 

61



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##### Table of Contents



SIMPLEX SOLUTIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The options outstanding and currently exercisable
by exercise price at September 30, 2001 are as follows:

|               |  |                                           |           |                        |  |                |      |             |  |                |       |  |  |  |           |  |  |   |       | 
|-------------- |  | ----------------------------------------- | --------- | ---------------------- |  | -------------- | ---- | ----------- |  | -------------- | ----- |  |  |  | --------- |  |  | - | ----- | 
|               |  |                                           |           |                       
|               |  | Options Outstanding at September 30, 2001 |           | Options Exercisable at
|               |  |                                           |           | September 30, 2001    
|               |  |                                           |           | Weighted Average       |  |                |      |            
|               |  |                                           |           | Remaining              |  | Weighted       |      |             |  | Weighted      
|               |  | Number                                    |           | Contractual            |  | Average        |      | Number      |  | Average       
|Exercise Price |  | Outstanding                               |           | Life (in Years)        |  | Exercise Price |      | Exercisable |  | Exercise Price
|               |  |                                           |           |                        |  |                |      |             |  |               
|$0.09-$3.75    |  |                                           | 510,032   |                        |  |                | 6.59 |             |  | $              | 2.80  |  |  |  | 386,730   |  |  | $ | 2.75  | 
|$4.29          |  |                                           | 5,575     |                        |  |                | 8.80 |             |  | $              | 4.29  |  |  |  | 1,119     |  |  | $ | 4.29  | 
|$6.00          |  |                                           | 826,688   |                        |  |                | 8.07 |             |  | $              | 6.00  |  |  |  | 389,619   |  |  | $ | 6.00  | 
|$8.00          |  |                                           | 493,698   |                        |  |                | 9.50 |             |  | $              | 8.00  |  |  |  | 61,168    |  |  | $ | 8.00  | 
|$11.15         |  |                                           | 144,166   |                        |  |                | 9.99 |             |  | $              | 11.15 |  |  |  | 5,498     |  |  | $ | 11.15 | 
|$11.55         |  |                                           | 601,432   |                        |  |                | 8.57 |             |  | $              | 11.55 |  |  |  | 228,053   |  |  | $ | 11.55 | 
|$12.00         |  |                                           | 129,699   |                        |  |                | 9.58 |             |  | $              | 12.00 |  |  |  | 962       |  |  | $ | 12.00 | 
|$14.01         |  |                                           | 551,223   |                        |  |                | 9.01 |             |  | $              | 14.01 |  |  |  | 108,008   |  |  | $ | 14.01 | 
|$22.45-$27.65  |  |                                           | 82,999    |                        |  |                | 9.76 |             |  | $              | 22.93 |  |  |  |          |  |  |   |      | 
|$31.85         |  |                                           | 41,266    |                        |  |                | 9.69 |             |  | $              | 31.85 |  |  |  | 3,000     |  |  | $ | 31.85 | 
|               |  |                                           |           |                        |  |                |      |             |  |                |       |  |  |  |           |  |  |   |       | 
|               |  |                                           | 3,386,778 |                        |  |                | 8.50 |             |  | $              | 9.28  |  |  |  | 1,184,157 |  |  | $ | 6.99  | 
|               |  |                                           |           |                        |  |                |      |             |  |                |       |  |  |  |           |  |  |   |       | 

Options exercisable at September 30, 2000
and 1999 were 531,758 and 325,989, respectively.



| |                         
| | ------------------------
| | Stock-Based Compensation

In connection with certain stock option grants to
employees during the year ended September 30, 2001, Simplex
recorded stock-based compensation approximating $11,747,000,
which is being amortized in accordance with FASB Interpretation
No. 28 over the vesting periods of the related options,
which is generally four years. Of this amount, $10,289,000 was
in relation to restricted common stock and unvested options
assumed in connection with the acquisition of Altius.
Stock-based compensation amortization recognized during the
years ended September 30, 2001 and 2000 totaled $7,300,000
and $1,796,000, respectively.



| |                      
| | ---------------------
| | Fair Value Disclosure

The following information concerning Simplex
stock option plans is provided in accordance with SFAS
No. 123. Simplex accounts for such plans in accordance with
APB No. 25.

The fair value of each option grant has been
estimated on the date of grant using the Black-Scholes option
pricing model with the following weighted average assumptions
for grants:

|                            |  |                          |         |      |  |      |         |  |  |  |         | 
|--------------------------- |  | ------------------------ | ------- | ---- |  | ---- | ------- |  |  |  | ------- | 
|                            |  |                         
|                            |  | Year Ended September 30,
|                            |  |                         
|                            |  | 2001                     |         | 2000 |  | 1999
|                            |  |                          |         |      |  |     
|Risk-free interest rate     |  |                          | 4.24%   |      |  |      | 5.93%   |  |  |  | 4.74%   | 
|Expected life               |  |                          | 5 years |      |  |      | 5 years |  |  |  | 5 years | 
|Dividend yield              |  |                          |        |      |  |      |        |  |  |  |        | 
|Expected volatility         |  |                          | 33%     |      |  |      | 0%      |  |  |  | 0%      | 
|Weighted average fair value |  |                          | $7.03   |      |  |      | $5.01   |  |  |  | $1.38   | 

62



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##### Table of Contents



SIMPLEX SOLUTIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

For purposes of pro forma disclosures, the
estimated fair value of the options are amortized over the
options vesting period. Pro forma information follows (in
thousands, except per share amounts):

|                                                              |  |                          |         |      |  |      |        |   |  |   |        |  
|------------------------------------------------------------- |  | ------------------------ | ------- | ---- |  | ---- | ------ | - |  | - | ------ | -
|                                                              |  |                         
|                                                              |  | Year Ended September 30,
|                                                              |  |                         
|                                                              |  | 2001                     |         | 2000 |  | 1999
|                                                              |  |                          |         |      |  |     
|Net loss                                                      |  | $                        | (12,087 | )    |  | $    | (6,722 | ) |  | $ | (7,041 | )
|                                                              |  |                          |         |      |  |      |        |   |  |   |        |  
|Net loss  SFAS No. 123 adjusted                              |  | $                        | (14,481 | )    |  | $    | (8,079 | ) |  | $ | (7,415 | )
|                                                              |  |                          |         |      |  |      |        |   |  |   |        |  
|Net loss per share  as reported basic
	and diluted           |  | $                        | (1.30   | )    |  | $    | (2.40  | ) |  | $ | (3.62  | )
|                                                              |  |                          |         |      |  |      |        |   |  |   |        |  
|Net loss per share  SFAS No. 123
	adjusted basic and diluted |  | $                        | (1.56   | )    |  | $    | (2.88  | ) |  | $ | (3.81  | )
|                                                              |  |                          |         |      |  |      |        |   |  |   |        |  

The effects of applying SFAS No. 123 in this
pro forma disclosure may not be indicative of future amounts.
Additional awards in future periods are anticipated.



| |                             
| | ----------------------------
| | Employee Stock Purchase Plan

In May 2001, the Board of Directors approved the
adoption of Simplexs 2001 Employee Stock Purchase Plan
(2001 Purchase Plan). A total of 500,000 shares
of common stock were initially reserved for issuance under the
2001 Purchase Plan. The Purchase Plan also provides for an
annual share increase to be added on the first day of
Simplexs fiscal year beginning in 2002, equal to the
lesser of (i) 1,200,000 shares, (ii) 3% of the
outstanding shares on such date or (iii) an amount
determined by the Administrator. The Purchase Plan permits
eligible employees to acquire shares of Simplexs common
stock through periodic payroll deductions of up to 15% of total
compensation. No more than 1,250 shares may be purchased on
any purchase date per employee. Each offering period will have a
maximum duration of 24 months. The price at which the
common stock may be purchased is 85% of the lesser of the fair
market value of Simplexs common stock on the first day of
the applicable offering period or on the last day of the
respective purchase period. The initial offering period
commenced on the effectiveness of the initial public offering
and will end on October 31, 2001 and the current offering
period will end on the last business day of October 31,
2003.

Note 12  Commitments and
Contingencies:

Simplex leases administrative, engineering and
sales facilities in the United States, United Kingdom, France
and Japan under noncancelable operating leases that expire at
various dates through 2005. Simplex is generally responsible for
insurance and property taxes. Simplex primary lease in
Sunnyvale, California is subject to annual payment increases
based on the consumer price index. Simplex also leases computer
equipment under leases classified as capital leases. Under the
terms of a facility lease agreement, Simplex is obligated to
provide the lessor with a letter of credit of approximately
$300,000. The letter of credit is collateralized by a
certificate of deposit, which is included in other long-term
assets. In addition, Simplex has provided the lessor, under the
terms of another facility lease agreement, a letter of credit of
$200,000. The letter of credit is collateralized by a
certificate of deposit which is included in other long-term
assets.

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SIMPLEX SOLUTIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

At September 30, 2001, the aggregate future
minimum lease payments under all noncancelable leases are as
follows (in thousands):

|                             |  |         |    |           |  |   |       | 
|---------------------------- |  | ------- | -- | --------- |  | - | ----- | 
|Year Ending                  |  | Capital |    | Operating
|September 30,                |  | Leases  |    | Leases   
|                             |  |         |    |          
|2002                         |  | $       | 23 |           |  | $ | 1,034 | 
|2003                         |  |         |   |           |  |   | 563   | 
|2004                         |  |         |   |           |  |   | 1,321 | 
|2005                         |  |         |   |           |  |   | 1,114 | 
|                             |  |         |    |           |  |   |       | 
|Total minimum lease payments |  | $       | 23 |           |  | $ | 4,032 | 
|                             |  |         |    |           |  |   |       | 

Rent expense in the years ended
September 30, 2001, 2000 and 1999 was $1,397,564 and
$789,621 and $744,167, respectively.

From time to time, Simplex may be involved in
litigation arising out of claims in the normal course of
business. Simplex is currently subject to some such claims
related to intellectual property and employee relations matters,
none of which management believes will materially impact the
Company.

On August 10, 2001, Sequence Design, Inc.
filed a suit against us in the United States District Court for
the Northern District of California, alleging that Simplex
infringed one of Sequences patents. Simplex has filed an
answer to Sequences complaint denying infringement and
asserting that the Sequence patent is not valid. As such,
Simplex has not accrued any amounts in relation to this suit. No
trial date has been set. Because of the uncertainties of the
legal process, if this matter leads to litigation there can be
no assurance that this matter will not materially impact the
Company.

Note 13  Income
Taxes:

Net income (loss) allocable to United States
and foreign sources are as follows (in thousands):

|              |  |                          |         |      |  |      |        |   |  |   |        |  
|------------- |  | ------------------------ | ------- | ---- |  | ---- | ------ | - |  | - | ------ | -
|              |  |                         
|              |  | Year Ended September 30,
|              |  |                         
|              |  | 2001                     |         | 2000 |  | 1999
|              |  |                          |         |      |  |     
|United States |  | $                        | (9,237  | )    |  | $    | (5,733 | ) |  | $ | (7,052 | )
|Foreign       |  |                          | (1,760  | )    |  |      | (747   | ) |  |   | 9      |  
|              |  |                          |         |      |  |      |        |   |  |   |        |  
|              |  | $                        | (10,997 | )    |  | $    | (6,480 | ) |  | $ | (7,043 | )
|              |  |                          |         |      |  |      |        |   |  |   |        |  

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SIMPLEX SOLUTIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The components of deferred tax assets and
liabilities as of September 30, 2001, 2000 and 1999 are as
follows (in thousands):

|                               |                                 |                                |        |       |        |      |         |       |        |   |        |       |       | 
|------------------------------ | ------------------------------- | ------------------------------ | ------ | ----- | ------ | ---- | ------- | ----- | ------ | - | ------ | ----- | ----- | 
|                               |                                 |                               
|                               |                                 | September 30,                 
|                               |                                 |                               
|                               |                                 | 2001                           |        | 2000  |        | 1999
|                               |                                 |                                |        |       |        |     
|Deferred tax assets:           |                                 |                                |        |       |        |      |         |       |        |   |        |      
|                               | Capitalized costs               |                                | $      |      |        |      | $       | 259   |        |   | $      | 424   |      
|                               | Accrued liabilities             |                                |        | 580   |        |      |         | 162   |        |   |        | 672   |      
|                               | Research and development credit |                                |        | 3,257 |        |      |         | 2,406 |        |   |        | 1,525 |      
|                               | Net operating loss              |                                |        | 6,419 |        |      |         | 7,000 |        |   |        | 7,091 |      
|                               | Property and equipment          |                                |        |      |        |      |         | 89    |        |   |        | 176   |      
|                               | Other                           |                                |        | 114   |        |      |         | 398   |        |   |        |      |      
|                               |                                 |                                |        |       |        |      |         |       |        |   |        |      
|                               |                                 | Total deferred tax assets      |        |       | 10,370 |      |         |       | 10,314 |   |        |       | 9,888 | 
|                               |                                 |                                |        |       |        |      |         |       |        |   |        |      
|Deferred tax liabilities:      |                                 |                                |        |       |        |      |         |       |        |   |        |      
|                               | Capitalized costs               |                                |        | 90    |        |      |         |      |        |   |        |      |      
|                               | Property and equipment          |                                |        | 306   |        |      |         |      |        |   |        |      |      
|                               |                                 |                                |        |       |        |      |         |       |        |   |        |      
|                               |                                 | Total deferred tax liabilities |        |       | 396    |      |         |       |       |   |        |       |      | 
|                               |                                 |                                |        |       |        |      |         |       |        |   |        |      
|Total deferred tax assets, net |                                 |                                | 9,974  |       |        |      | 10,314  |       |        |   | 9,888  |      
|Valuation allowance            |                                 |                                | (9,974 | )     |        |      | (10,314 | )     |        |   | (9,888 | )    
|                               |                                 |                                |        |       |        |      |         |       |        |   |        |      
|                               |                                 | $                              |       |       |        | $    |        |       |        | $ |       |      
|                               |                                 |                                |        |       |        |      |         |       |        |   |        |      

In accordance with generally accepted accounting
principles, a valuation allowance must be established for a
deferred tax asset if it is uncertain that a tax benefit may be
realized from the asset in the future. Simplex has established a
valuation allowance to the full extent of its deferred tax
assets since it is not certain that a benefit can be realized in
the future due to Simplexs recurring operating losses.

The increase (decrease) in the valuation
allowance was $(340,000), $426,000 and $4,514,000 for the years
ended September 30, 2001, 2000 and 1999, respectively.

Simplex had federal and state net operating loss
carryforwards of approximately $16.0 million and
$11.2 million, respectively at September 30, 2001.
Simplexs federal and state net operating loss
carryforwards will expire beginning in the year 2011 and 2003,
respectively, if not utilized. Simplex also has federal and
state research and development credits of approximately
$1.8 million and $1.5 million respectively, which
expire in years commencing 2011 through 2021 if not used. During
the year ended September 30, 2001, Simplex utilized federal
net operating loss of approximately $1.7 million.

The Tax Reform Act of 1986 limits the use of net
operating loss and tax credit carryforwards in certain
situations where changes occur in the stock ownership of a
company. In the event Simplex has a change in ownership,
utilization of the carryforwards could be restricted.

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SIMPLEX SOLUTIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The expected U.S. Federal statutory income tax
rate (34%) differs from the effective tax rate as follows:

|                                                        |  |               |       |      |  |      |       |    |  |  |       |   
|------------------------------------------------------- |  | ------------- | ----- | ---- |  | ---- | ----- | -- |  |  | ----- | --
|                                                        |  |              
|                                                        |  | September 30,
|                                                        |  |              
|                                                        |  | 2001          |       | 2000 |  | 1999
|                                                        |  |               |       |      |  |     
|U.S. Federal income tax benefit at statutory rates      |  |               | (34.0 | )%   |  |      | (34.0 | )% |  |  | (34.0 | )%
|Permanent differences/research and development
	credits |  |               | 44.7  |      |  |      | 35.0  |    |  |  | (24.0 | ) 
|State income tax benefit, net of federal benefit        |  |               | (5.3  | )    |  |      | (6.0  | )  |  |  | (6.0  | ) 
|Foreign tax                                             |  |               | 7.0   |      |  |      | 5.0   |    |  |  | 0.0   |   
|Change in valuation allowance                           |  |               | (29.0 | )    |  |      | 10.0  |    |  |  | 64.0  |   
|                                                        |  |               |       |      |  |      |       |    |  |  |       |   
|                                                        |  |               | 9.9   | %    |  |      | 10.0  | %  |  |  | 0.0   | % 
|                                                        |  |               |       |      |  |      |       |    |  |  |       |   

Tax expense for the year ended September 30,
2001 was limited to alternative minimum and foreign taxes of
$78,000 and $1,012,000, respectively, all of which were
currently payable.

Note 14  Employee Retirement
Plan:

Simplex maintains a 401(k) plan for its
employees. The plan allows eligible employees to defer up to 15%
of their earnings, not to exceed the statutory amount per year
on a pretax basis through contributions to the plan. The plan
provides for employer contributions at the discretion of the
Board of Directors; however, no such contributions were made
during the years ended September 30, 2001, 2000 and 1999.

Note 15  Segment
Information:

Simplex operates in a single business segment,
the development and licensing of software products and the
provision of services to companies which are used to verify the
design of integrated circuits. Simplex uses only one measure of
profitability. Operations of Simplex overseas subsidiaries
consist of license revenue and services.

Information regarding geographic areas at
September 30, 2001, 2000, and 1999 and for each of the
years then ended is as follows (in thousands):

|                                                 |                                     |          |   |        |  |      |   |              |  |       |   |        |  |  |   |   |  |  |   |        | 
|------------------------------------------------ | ----------------------------------- | -------- | - | ------ |  | ---- | - | ------------ |  | ----- | - | ------ |  |  | - | - |  |  | - | ------ | 
|                                                 |                                     | North    |   |        |  |      |   |              |  |      
|                                                 |                                     | American |   | Europe |  | Asia |   | Eliminations |  | Total
|                                                 |                                     |          |   |        |  |      |   |              |  |      
|September 30, 1999 and for the year then
	ended: |                                     |          |   |        |  |      |   |              |  |       |   |        |  |  |   |   |  |  |   |       
|                                                 | Revenue from unaffiliated customers |          | $ | 8,325  |  |      | $ | 1,665        |  |       | $ | 891    |  |  | $ |  |  |  | $ | 10,881 | 
|                                                 |                                     |          |   |        |  |      |   |              |  |       |   |        |  |  |   |   |  |  |   |       
|                                                 | Long-lived assets                   |          | $ | 1,535  |  |      | $ | 28           |  |       |   | 8      |  |  | $ |  |  |  | $ | 1,571  | 
|                                                 |                                     |          |   |        |  |      |   |              |  |       |   |        |  |  |   |   |  |  |   |       
|September 30, 2000 and for the year then
	ended: |                                     |          |   |        |  |      |   |              |  |       |   |        |  |  |   |   |  |  |   |       
|                                                 | Revenue from unaffiliated customers |          | $ | 15,041 |  |      | $ | 3,379        |  |       | $ | 4,397  |  |  | $ |  |  |  | $ | 22,817 | 
|                                                 |                                     |          |   |        |  |      |   |              |  |       |   |        |  |  |   |   |  |  |   |       
|                                                 | Long-lived assets                   |          | $ | 6,830  |  |      | $ | 445          |  |       | $ | 296    |  |  | $ |  |  |  | $ | 7,571  | 
|                                                 |                                     |          |   |        |  |      |   |              |  |       |   |        |  |  |   |   |  |  |   |       
|September 30, 2001 and for the year then
	ended: |                                     |          |   |        |  |      |   |              |  |       |   |        |  |  |   |   |  |  |   |       
|                                                 | Revenue from unaffiliated customers |          | $ | 25,315 |  |      | $ | 6,713        |  |       | $ | 16,156 |  |  | $ |  |  |  | $ | 48,184 | 
|                                                 |                                     |          |   |        |  |      |   |              |  |       |   |        |  |  |   |   |  |  |   |       
|                                                 | Long-lived assets                   |          | $ | 29,065 |  |      | $ | 433          |  |       | $ | 452    |  |  | $ |  |  |  | $ | 29,950 | 
|                                                 |                                     |          |   |        |  |      |   |              |  |       |   |        |  |  |   |   |  |  |   |       

Revenue from external customers are attributed
based upon the geographic location of the customer. European
revenue is principally from the France, and revenue in Asia is
principally from Japan.

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SIMPLEX SOLUTIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note 16  Related
Parties:

A partner in a law firm which operates as
Simplex general counsel is a member of the Board of
Directors. This firm provided legal services amounting to
approximately $1,885,000 and $704,000 to Simplex for the years
ended September 30, 2001 and 2000, respectively.

Simplex sold certain licenses and maintenance to
a subsidiary of a corporation which also was a shareholder. Such
sales amounted to $1,219,725, $349,175 and $217,500 for the
years ended September 30, 2001, 2000 and 1999, respectively.

During the year ended September 30, 2000,
Simplex sold software amounting to $269,000 to Altius Solutions,
Inc., a company with which it had entered into a definitive
merger agreement and subsequently purchased in October 2000.

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##### Table of Contents






PART III




Item 10. Directors and Executive
Officers of the Registrant

Information regarding our directors is
incorporated by reference from the information contained under
the heading Proposal One: Election of
Directors  Nominee and Other Directors of
Simplex in our 2002 Proxy Statement for the 2002 Annual
Meeting of Stockholders. Information regarding current executive
officers found under the heading Executive Officers
in Item 4 of Part I hereof is also incorporated by
reference into this Item 10. Information regarding
Section 16 reporting compliance is incorporated by
reference from information contained under the heading
Compensation of Executive Officers and Other
Matters  Section 16(a) Beneficial Ownership
Compliance in our 2002 Proxy Statement.




Item 11. Executive
Compensation

The information required by this item is
incorporated by reference from information contained under the
heading Compensation of Executive Officers and Other
Matters  Executive Compensation in our 2002
Proxy Statement.






|         |                                                                
|-------- | ---------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
	Owners and Management

The information required by this item is
incorporated by reference from information contained under the
heading General Information in our 2002 Proxy
Statement.




Item 13. Certain Relationships
and Related Transactions

The information required by this item is
incorporated by reference from information contained under the
heading Compensation of Executive Officers and Other
Matters  Certain Business Relationships in our
2002 Proxy Statement.




PART IV






|         |                                                                  
|-------- | -----------------------------------------------------------------
|Item 14. | Exhibits, Financial Statement Schedules,
	and Reports on Form 8-K

(a) The following documents are filed as
part of this report:



| |                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. Financial Statements: See Index to
	Consolidated Financial Statements under Item 8 on
	page 42 hereof.                                                                            
|
| | 2. Financial Statement Schedules: See Report
	of Independent Accountants on Financial Statement Schedule on
	page 70 hereof and Valuation and Qualifying Accounts on
	page 71 hereof.
|
| | 3. Exhibits: See Exhibit Index on
	page 72 hereof.                                                                                                                                   

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SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, as amended, the
Registrant has duly caused this Annual Report on Form 10-K
to be signed on its behalf by the undersigned, thereunto duly
authorized.



| |                        
| | -----------------------
| | SIMPLEX SOLUTIONS, INC.



| |     |                         
| | --- | ------------------------
| | By: | /s/ PENELOPE A. HERSCHER

| |                                                                
| | ---------------------------------------------------------------
| |                                                                
| | Penelope A. Herscher                                           
| | Chief Executive Officer and Chairman of the
	Board of Directors

Dated: December 28, 2001

KNOW ALL BY THESE PRESENTS, that each individual
whose signature appears below constitutes and appoints Penelope
A. Herscher and Luis P. Buhler, jointly and severally, as his or
her attorneys-in-fact, each with the power of substitution, for
him or her 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 connections therewith,
with the Securities and Exchange Commission, hereby ratifying
and confirming all that each of said attorneys-in-fact, or his
or her substitute or substitutes, may do or cause to be done by
virtue hereof.

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

|                                             |  |                                                                                              |  |                  
|-------------------------------------------- |  | -------------------------------------------------------------------------------------------- |  | -----------------
|Signature                                    |  | Title                                                                                        |  | Date             
|                                             |  |                                                                                              |  |                  
|                                            
|/s/ PENELOPE A. HERSCHERPenelope A. Herscher |  | Chief Executive Officer and Chairman of the Board
	of Directors(Principal Executive Officer) |  | December 28, 2001
|                                            
|/s/ AKI FUJIMURAAki Fujimura                 |  | President, Chief Operating Officer and Director                                              |  | December 28, 2001
|                                            
|/s/ LUIS P. BUHLERLuis P. Buhler             |  | Chief Financial Officer(Principal Financial and Accounting Officer)                          |  | December 28, 2001
|                                            
|/s/ JOSEPH B. COSTELLOJoseph B. Costello     |  | Director                                                                                     |  | December 28, 2001
|                                            
|/s/ HARVEY C. JONES, JR.Harvey C. Jones, Jr. |  | Director                                                                                     |  | December 28, 2001
|                                            
|A. Richard Newton                            |  | Director                                                                                     |  | December   , 2001
|                                            
|/s/ LARRY W. SONSINILarry W. Sonsini         |  | Director                                                                                     |  | December 28, 2001

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REPORT OF INDEPENDENT ACCOUNTANTS ON

FINANCIAL STATEMENT SCHEDULE


To the Board of Directors and Stockholders of
Simplex Solutions, Inc.:

Our audits of the consolidated financial
statements referred to in our report dated October 19, 2001
appearing in this Annual Report on Form 10-K also included
an audit of the financial statement schedule listed in
Item 14(a)(2) of this Form 10-K. In our opinion, this
financial statement schedule presents fairly, in all material
respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.

/s/  PricewaterhouseCoopers LLP

San Jose, California

October 19, 2001


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##### Table of Contents



VALUATION AND QUALIFYING ACCOUNTS

(IN THOUSANDS)


|                                             |                               |            |  |              |  |              |  |            |   |  |  |    |  |  |  |        | 
|-------------------------------------------- | ----------------------------- | ---------- |  | ------------ |  | ------------ |  | ---------- | - |  |  | -- |  |  |  | ------ | 
|                                             |                               | Balance at |  |              |  |              |  | Balance at
|                                             |                               | beginning  |  | Additions    |  | (Write-offs) |  | end       
|                                             |                               | of year    |  | (deductions) |  | recoveries   |  | of year   
|                                             |                               |            |  |              |  |              |  |           
|Allowance for doubtful accounts:             |                               |            |  |              |  |              |  |            |   |  |  |    |  |  |  |       
|                                             | Year ended September 30, 1999 |            |  | 10           |  |              |  | 161        |   |  |  |   |  |  |  | 171    | 
|                                             | Year ended September 30, 2000 |            |  | 171          |  |              |  | 14         |   |  |  |    |  |  |  | 185    | 
|                                             | Year ended September 30, 2001 |            |  | 185          |  |              |  | 41         |   |  |  | 68 |  |  |  | 294    | 
|                                            
|Valuation allowance for deferred tax assets: |                               |            |  |              |  |              |  |            |   |  |  |    |  |  |  |       
|                                             | Year ended September 30, 1999 |            |  | 5,374        |  |              |  | 4,514      |   |  |  |   |  |  |  | 9,888  | 
|                                             | Year ended September 30, 2000 |            |  | 9,888        |  |              |  | 426        |   |  |  |   |  |  |  | 10,314 | 
|                                             | Year ended September 30, 2001 |            |  | 10,314       |  |              |  | (340       | ) |  |  |   |  |  |  | 9,974  | 

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EXHIBIT INDEX

|        |         |             |  |                                                                                                                                                                                                                   
|------- | ------- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |         |            
|Number  |         | Description
|        |         |            
|        | 2.1*    |             |  | Form of Share Purchase Agreement by and between
	Simplex and SnakeTech S.A. dated as of March 13, 2000.                                                                                                           
|        | 2.2*    |             |  | Agreement and Plan of Reorganization by and among
	Simplex, Altius Solutions and certain additional parties dated
	as of October 4, 2000.                                                                         
|        | 3.1*    |             |  | Amended and Restated Certificate of Incorporation
	of the Registrant.                                                                                                                                             
|        | 3.2*    |             |  | Certificate of Amendment of the Certificate of
	Incorporation of the Registrant.                                                                                                                                  
|        | 3.3     |             |  | Amended and Restated Bylaws of the Registrant.                                                                                                                                                                    
|        | 4.1*    |             |  | Form of registrants Common Stock
	Certificate.                                                                                                                                                                   
|        | 10.1*   |             |  | Form of Indemnification Agreement entered into by
	and between the Registrant and each of its directors and
	executive officers.                                                                                  
|        | 10.2*   |             |  | Form of Management Continuity Agreement entered
	into by and between the Registrant and certain of its officers.                                                                                                  
|        | 10.3*   |             |  | 1995 Stock Plan.                                                                                                                                                                                                  
|        | 10.4*   |             |  | 2001 Incentive Stock Plan.                                                                                                                                                                                        
|        | 10.5*   |             |  | 2001 Employee Stock Purchase Plan.                                                                                                                                                                                
|        | 10.6*   |             |  | Fourth Amended and Restated Rights Agreement of
	the Registrant dated April 6, 1998.                                                                                                                              
|        | 10.7*   |             |  | Registration Rights Agreement dated
	March 31, 2000 by and between the Registrant and
	Shareholders of SnakeTech S.A.                                                                                             
|        | 10.8*   |             |  | Restricted Stock Purchase Agreement, Promissory
	Note and Stock Pledge Agreement of Aki Fujimura dated
	February 12, 1998.                                                                                        
|        | 10.9*   |             |  | Lease agreement by and between the Registrant and
	525 Almanor LLC dated March 1997.                                                                                                                              
|        | 10.10*  |             |  | Restricted Stock Purchase Agreement, Promissory
	Note and Stock Pledge Agreement of Aki Fujimura dated
	March 30, 1999.                                                                                           
|        | 10.11*  |             |  | Restricted Stock Purchase Agreement, Promissory
	Note and Stock Pledge Agreement of Steven Teig dated
	January 19, 1999.                                                                                          
|        | 10.12   |             |  | Restricted Stock Purchase Agreement, Promissory
	Note and Stock Pledge Agreement of Luis Buhler dated
	March 30, 1999.                                                                                            
|        | 10.13* |             |  | Software License Agreement between the Registrant
	and Computational Applications and System Integration, Inc.
	dated July 15, 1998.                                                                              
|        | 10.14* |             |  | Software License Agreement between the Registrant
	and Digital Semiconductor (a business unit of Digital Equipment
	Corporation which has been acquired by Compaq Computer
	Corporation) dated September 21, 1995.
|        | 10.15* |             |  | Cross License Agreement between the Registrant
	and Chris Terman dated July 24, 1995.                                                                                                                             
|        | 10.16*  |             |  | Offer Letter between the Registrant and James
	Behrens dated February 28, 2000.                                                                                                                                   
|        | 10.17*  |             |  | Employment Agreement between the Registrant and
	Aurangzeb Kahn dated September 8, 2000.                                                                                                                          
|        | 10.18*  |             |  | Management Continuity exhibit between the
	Registrant and Luis Buhler dated January 20, 1999.                                                                                                                     
|        | 23.1    |             |  | Consent of PricewaterhouseCoopers LLP.                                                                                                                                                                            
|        | 24.1    |             |  | Power of Attorney (see page 69)                                                                                                                                                                                   



---



|  |                                                                                                                                                                                                
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | Incorporated by reference from the
	registrants Registration Statement on Form S-1
	(No. 333-45504), as amended, declared effective by the
	Securities and Exchange Commission on May 1, 2001.



|  |                                                             
|- | ------------------------------------------------------------
| | Confidential treatment granted on portions of
	this exhibit.

72