---

---

UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-K

---

|(Mark One) |                                                                                                                                                   
|---------- | --------------------------------------------------------------------------------------------------------------------------------------------------
|           |                                                                                                                                                   
|ý          | Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended September 30, 2003                 
|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 number: 000-33291

---

NASSDA CORPORATION(Exact name of registrant as specified in its charter)

|Delaware(State or other jurisdiction of
incorporation or organization) |  | 77-0494462(I.R.S. Employer
Identification Number)
|---------------------------------------------------------------------- |  | -------------------------------------------------

2650 San Tomas Expressway
Santa Clara, California 95051(Address of principal executive offices, including zip code))

(408) 988-9988(Registrant's Telephone Number, including area code)

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
requirements for the past 90 days. Yes ý    No o

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

Indicate
by check mark if the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as
amended). ý

The
aggregate market value of the voting stock held by non-affiliates of the Registrant, based on the closing sale price of the Registrant's common stock on March 31, 2003, the last
business day of Registrant's most recently completed second fiscal quarter, as reported on the Nasdaq National Market, was approximately $55,041,406. Shares of common stock held by each executive
officer and director and by each person who may be deemed to be an affiliate of the Registrant have been excluded from this computation. The determination of affiliate status for this purpose is not
necessarily a conclusive determination for other purposes. As of November 14, 2003, the Registrant had 26,247,661 shares of its common stock, $0.001 par value, issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

The
Registrant has incorporated by reference into Part III of this Form 10-K portions of its Proxy Statement for the 2004 Annual Meeting of Stockholders.

---

---

---

NASSDA CORPORATION

ANNUAL REPORT ON FORM 10-K

For The Fiscal Year Ended September 30, 2003

TABLE OF CONTENTS

|PART I   |            | 1 
|-------- | ---------- | --
|         | ITEM 1.    |   
|         | ITEM 2.    |   
|         | ITEM 3.    |   
|         | ITEM 4.    |   
|PART II  |            | 20
|         | ITEM 5.    |   
|         | ITEM 6.    |   
|         | ITEM 7.    |   
|         | ITEM 7A.   |   
|         | ITEM 8.    |   
|         | ITEM 9.    |   
|         | ITEM 9A.   |   
|PART III |            | 78
|         | ITEM 10.   |   
|         | ITEM 11.   |   
|         | ITEM 12.   |   
|         | ITEM 13.   |   
|         | ITEM 14.   |   
|PART IV  |            | 79
|         | ITEM 15.   |   
|         | SIGNATURES |   

---

PART I

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934 about Nassda Corporation ("Nassda," "we," "us" or "our company"). These statements include, among other things, statements concerning our
future operations, financial condition and prospects, and business strategies. The words "may," "will," "continue," "estimate," "project," "intend," "believe," "expect," "anticipate" and other similar
expressions generally identify forward-looking statements. Forward-looking statements in this Form 10-K include, but are not limited to, statements regarding the following: the
effectiveness and advantages of our products, our marketing and product development strategies, factors relating to demand for our products, hiring of additional personnel, the proprietary nature of
our products, including infringement and enforcement of proprietary rights, competition and our ability to compete, sufficiency of our facilities and resolution of legal
proceedings.

Investors in our common stock are cautioned not to place undue reliance on forward-looking statements. Forward-looking statements are not guarantees of future
performance. The forward-looking statements are subject to substantial risks and uncertainties that could cause our future business, financial condition, or results of operations to differ materially
from our historical results or currently anticipated results. Investors should carefully review the information contained under the caption "Factors Affecting Future Results" contained in
"Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in, or incorporated by reference into, this report. All forward-looking statements are based on
information available to us on the date hereof, and we assume no obligation to update forward-looking statements. These forward-looking statements are made in reliance upon the safe harbor provision
of The Private Securities Litigation Reform Act of 1995.

ITEM 1.    Business

Overview

We are a leading provider of full-chip circuit simulation and analysis software for the design and verification of complex nanometer-scale
semiconductors. We believe that our initial product, HSIM, which as of April 2003 was available in Version 3.0, is the industry's first hierarchical simulator that meets the circuit
verification challenges of today's integrated circuit designs, and we believe our second product, LEXSIM, is the leading electronic design automation tool able to simulate the nanometer effects of
both the power network and signal interconnects for complex integrated circuits,
or ICs, with millions of transistors. In December 2002, we released our third product, CRITIC, which we believe is the first electronic design automation tool able to provide accurate analysis
of nanometer effects automatically on critical signal paths and clock networks for complex, high-performance digital ICs with high-end applications specific integrated circuits
(ASIC) or customer-owned tooling flows. In April 2003, we released version 3.0 of HSIM with many new enhancements and a new digital co-simulation interface option. In
May 2003, we also announced the limited customer release of our fourth product, HANEX, which we believe to be the first hybrid timing analysis tool to automatically identify critical paths and
report timing violations, which incorporate the impact of crosstalk effects on signal delays in high-speed custom digital ICs. By enabling semiconductor designers to identify and correct
nanometer design and verification problems, our software provides a number of key benefits to our customers, including an improved ability to achieve first silicon success, reduced chip production
costs, accelerated time-to-market through shortened design cycles and enhanced chip performance.

We
were incorporated in California in August 1998. We reincorporated in Delaware in September 2001. Our principal executive offices are located at 2650 San Tomas
Expressway, Santa Clara, California 95051. Our telephone number at that location is (408) 998-9988. Our website iswww.nassda.com,
which includes links to reports we have filed with or furnished to the Securities Exchange Commission, such as our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current
Reports on Form 8-K and amendments to those reports. The contents of our website are not incorporated by reference in this Annual Report on Form 10-K.

---

Industry Background

Technological advances in the semiconductor industry have stimulated strong demand for communications equipment, personal computers, wireless devices, digital
consumer and other semiconductor-based products. Competition and the rapid pace of electronic innovation have also decreased the life cycles of these products, making
time-to-market critical to the success of new product introductions. Electronics manufacturers have been able to offer smaller, higher performance products by using faster and
more complex semiconductors. These advances have been driven in significant part by reductions in the size of semiconductor circuit elements, or feature sizes. Feature sizes have shrunk from 3.0
microns in the 1980s to 0.5 microns ten years ago and 0.09 microns, or 90 nanometers, today. Several semiconductor companies have begun their efforts of developing the technology necessary for feature
sizes that are 65 nanometers and below. We believe that the proportion of chips with feature sizes at or below 0.18 microns, which we refer to as nanometer-scale semiconductors, will increase
significantly in the future.

Decreasing
feature sizes have enabled the development of higher capacity and more complex memory and processor circuits, as well as systems-on-a-chip,
or SoCs. SoCs combine traditionally separate microprocessor, memory and communications devices onto a single chip. Mixed-signal designs combine both analog and digital circuits. Today's SoCs typically
incorporate embedded memory blocks with digital and analog circuit components. SoCs offer significant cost, power and performance advantages over systems that use discrete chips to achieve the same
functionality.



The sequence of procedures used to develop and verify integrated circuit designs is commonly referred to as the design flow. This design flow can be broadly
divided into two types: a digital design flow and a custom design flow, including analog, mixed-signal and memory designs. Complex SoCs devices that incorporate multiple memory and analog components
use separate design flows for the analog/mixed - signal/memory and digital portions of the design. The digital design flow is relatively straightforward and designers can use simple models of the
logic gates to describe the design. Analog, mixed-signal and memory components require a more complex design flow that models the circuit at the transistor-level to account for the greater circuit
sensitivity to transistor behavior and electrical effects from the interconnects, or the wires connecting individual transistors.

As
semiconductor designs continue to incorporate increasingly smaller nanometer-scale feature sizes, circuit simulation and analysis in both the digital and custom design flows become
more critical to ensure that chips function as intended. In nanometer-scale semiconductors, transistors and interconnects are so densely packed that the different components of a chip may interact in
unintended ways and interfere with the proper functioning of the whole chip. The pre-layout verification stage assumes that the wiring or interconnect is ideal and these effects are either
ignored or estimated in the analysis. These effects can be more accurately analyzed after the design has been committed to a specific layout for a silicon chip. This is known as the
post-layout stage of the design process. Most of these unintended physical and electrical interactions, or parasitic effects, are negligible at larger feature sizes and thus have
traditionally been ignored in chip design. As designs become more dense, however, accurate circuit simulation and analysis of transistor behavior and parasitic effects become fundamentally important
and critical to the successful design and manufacture of complex nanometer-scale semiconductors.



The trends toward nanometer-scale feature sizes and the increased use of embedded memories, analog and mixed-signal components have created new challenges for
detailed simulation and analysis of designs prior to manufacture. In addition, the integration of designs from third-party suppliers, known as intellectual property, or IP, cores, into SoCs
dramatically increases the total transistor count, thus creating additional potential points of failure. As feature sizes decrease, the parasitic effects that occur in

2

---

nanometer-scale
analog and mixed-signal circuits make the design and analysis of these circuits increasingly more difficult than digital circuits. As a result, circuit verification of complex
nanometer-scale semiconductor designs requires sophisticated simulation and analysis of the following:



3

---



Managing
the challenges associated with simulation and analysis of complex designs has emerged as a critical hurdle in the design and first silicon success of complex nanometer-scale
semiconductors such as SoCs. The size and features of complex nanometer-scale semiconductors demand full-chip simulation and analysis. However, the volume of data required for the
simulation of complex nanometer-scale semiconductors has in general exceeded the capacity of traditional simulation software.

Designers
using traditional simulation software must perform partial simulations by partitioning the circuit into smaller blocks and verifying them independently. Independent simulation
and analysis of these blocks alone may lead to a potential for error when these independent blocks are ultimately integrated. For example, when all components are brought together, inconsistent signal
exchanges among adjacent blocks, subtle timing errors or an excessive local supply voltage drop can cause a design to fail, or total power usage may exceed specified limits. If the design fails, the
chip must be redesigned and remanufactured, which can be time consuming and costly. We believe that the cost for the redesign and remanufacture of a flawed semiconductor may be $1.0 million or
more for a 0.18 micron semiconductor. We expect this cost to increase substantially for semiconductors with feature sizes of 0.13 microns and lower.

In
addition to the high cost to redesign and remanufacture a flawed chip, delays caused by design flaws can cause product launch postponements or cancellation, lost revenue or reduced
market share, each of which can result in failure of products, divisions and even businesses. As a result, we believe that there is a significant market opportunity for a solution that enables
semiconductor manufacturers to achieve first silicon success by providing rapid, accurate, full-chip circuit simulation and analysis of complex nanometer-scale semiconductor designs.

The Nassda Solution

We provide full-chip circuit simulation and analysis software solutions for the design and verification of complex nanometer-scale semiconductor
designs. Our software helps our customers reduce time-to-market and achieve first silicon success by simulating and analyzing complex chip designs rapidly and accurately. Our
software assists semiconductor designers to confirm that their designs perform as intended at the pre-layout and post-layout verification stages. In particular, our software
enables our customers to simulate and analyze the behavior of designs at the level of the semiconductor's smallest and most fundamental circuit structures, consisting of transistors and interconnect
elements.

Our
software provides the following key benefits to our customers:



4

---



Key
features of our software include the following:



5

---



Nassda Strategy

Our goal is to become the leader in full-chip circuit simulation, analysis and optimization of complex nanometer-scale semiconductor designs. To
achieve this goal, we have pursued and intend to continue to pursue the following strategies:

Enhance technology leadership position.We intend to maintain and expand our technology leadership position in the field of
circuit simulation and analyses of complex nanometer-scale semiconductor designs by continuing to devote significant resources to technology development. We intend to
introduce new products and options to address many other aspects of complex nanometer-scale semiconductor design, simulation, analyses and optimization. In addition, we plan to continue to expand our
software's interoperability with complementary products. We also may acquire or license technologies we believe are strategic and synergistic to extend or improve our software offerings.

Expand market for simulation products.We intend to expand the markets we serve by enhancing our current products and
developing new products to address the needs of designers of complex nanometer-scale semiconductors. We believe the capacity constraints of traditional simulation software have limited its application
in the circuit design and verification process to less complex designs. We also believe that

6

---

traditional
simulation software has not been used in the post-layout stage of the design process. Through continued innovation, we intend to extend the use of circuit simulation tools into
applications where they are not effectively used today, such as faster turnaround analog simulations, high performance digital circuit analyses, mixed-signal SoC circuit simulations and
post-layout full-chip simulation, verification and problem analyses.

Expand customer relationships.End users of our products include 18 of the 20 largest semiconductor manufacturers. We believe
that we have a significant opportunity to penetrate this customer base further with our current and future products, particularly in those design groups within our customers' organizations that do not
currently use our software. We believe that the strategic importance of our software to our customers allows us to develop relationships with their senior design and software managers, which will help
us proliferate our software throughout the organizations. We will also continue to leverage our customer relationships to gain feedback to assist us to develop new features and product capabilities
for our software that meet the critical needs of our current and future customers.

Continue to emphasize customer support.We have built a support team with expertise in software development, semiconductor
device modeling, circuit design and analyses. We believe that further growth in the size of our customer support organization will continue to facilitate our customers' design successes, build brand
loyalty and strengthen our competitive advantage. Our support helps to build strong customer references that we believe help to shorten our sales cycle. We plan to continue to increase our staff of
product specialists and application engineers dedicated to technical support and customer service.

Develop strategic alliances.We believe that forging strategic alliances with electronic design automation companies whose
solutions are complementary to ours will assist us to deliver comprehensive semiconductor design solutions. We work closely with several companies through informal technology alliances and joint
marketing arrangements, and we intend to continue to develop these relationships to reinforce our position in the market for complex nanometer-scale semiconductor simulation and analysis solutions. We
also intend to develop additional strategic alliances to increase our market penetration.

Products

HSIM provides full-chip circuit simulation, analysis and optimization of complex nanometer-scale semiconductors. HSIM combines the simulation of
functionality, timing, power, signal integrity, spectral behavior and related parasitic effects to allow comprehensive analysis of complex circuits in many design styles. To meet our customers'
varying needs, we offer HSIM in three separate configurations: HSIM-XL, HSIM-MS and HSIM-SC.

Our
HSIM-XL, the highest capacity configuration of HSIM, is designed for simulation of memories, SoCs and other large, complex designs containing 10 million
transistors or more. The XL configuration of HSIM is also particularly well suited for simulation and analysis of high production volume chips where thorough verification of the design is crucial
before large numbers of chips are produced. HSIM-XL's high capacity is designed to enable simulation of complex nanometer-scale chips at both the pre-layout and
the more computationally intensive post-layout phases of the semiconductor design flow.

Our
HSIM-MS configuration is designed to provide high speed simulation and analysis of mixed-signal designs and other circuits containing up to 10 million transistors.
Relative to traditional circuit simulators, HSIM-MS operates significantly faster and with greater accuracy for the mid-ranged circuit sizes. Like HSIM-XL,
HSIM-MS can be used to simulate chips at both the pre-layout and post-layout stages of the design flow, although post-layout simulation of very complex
nanometer-scale designs may require HSIM-XL or LEXSIM.

Our
HSIM-SC configuration is designed for rapid and accurate simulation of smaller analog and mixed-signal circuits of up to 100,000 transistors. HSIM-SC is used
primarily during the initial design

7

---

stages
of these semiconductors or for block level design verification and optimization. It is also often used for cell library and small memory IP characterizations.

LEXSIM
employs sophisticated techniques to read in high volume post-layout parasitic data, reduce parasitic networks associated with voltage supply and ground buses as well
as signal interconnects. It can also back annotate the extracted post-layout parasitics onto the pre-layout hierarchical netlist of a given design. This combination of
techniques enables LEXSIM to provide the highest capacity and speed for effective post-layout simulation of large nanometer-scale ICs. In particular, LEXSIM is effective in its dynamic
supply voltage drop simulation so that designers can use it to investigate the circuit performance degradation caused by
such supply voltage variations. As process technology migrates to feature sizes of 0.13 microns or lower, supply voltage fluctuation problems become increasingly severe. LEXSIM's ability to predict
dynamic instantaneous supply voltage drop effects on circuit behavior helps reduce silicon iterations and get semiconductor products to market sooner. The initial release of LEXSIM was targeted at
full-chip post-layout verification of large IC memories and embedded memory intellectual property. Today, LEXSIM has demonstrated its ability to start handling small to
medium-sized mixed-signal SoC designs.

CRITIC
is a full-chip critical timing delay calculator designed for rapid post-layout timing analysis of high-speed ASIC and cell-based
digital ICs, including their associated clock networks. CRITIC complements traditional gate-level based static timing analysis verification methods with fast, accurate transistor-level
analysis of timing performance of circuits based on nanometer process technologies of 0.13 microns and lower. The important cross coupling capacitance effects on delay are fully accounted in CRITIC to
assure the analysis accuracy. CRITIC automates such post-layout timing delay analysis of both signal nets and clock nets with minimal designer intervention, which can help designers to
ensure their final timing sign-off.

HANEX
is a circuit-level timing and crosstalk analysis tool for leading-edge custom digital designs, which include pre-charged, dynamic logic and domino logic
circuit design styles. HANEX analyzes the timing of nanometer circuits and determines critical delay paths using a hybrid of dynamic and static methods that accurately capture nanometer parasitic
effects on circuit signal delays and reduce the number of false paths reported. Without test vectors, HANEX can identify worst-case critical signal delay paths that limit the circuit speed
performance. HANEX fills the gap between static analysis methods and the increasing requirements for more accurate timing analysis to ensure successful silicon for leading-edge
high-performance nanometer designs. We believe HANEX delivers results with the accuracy of dynamic simulation and the speed and comprehensive coverage of static analysis. As a result, we
believe HANEX helps custom digital IC designers gain detailed timing results with SPICE-like accuracy in hours, improved substantially from the days or weeks required by traditional
simulation approaches or from the less accurate, less reliable results by pure static timing analyzers.

8

---

Customers

Our software has been licensed to over 200 organizations worldwide. Based upon revenues generated from inception to September 30, 2003, the following table
lists our top 20 end users and what we believe to be the types of designs for which they use our software.

End User

Communications

Memory

Analog
/Mixed
Signal

CPU/MCUAdvanced Micro Devices, Inc.

X

X



XAltera Corporation

XBroadcom Corporation

X

X

XFujitsu Limited

X

X

X

XHitachi, Ltd.



X



XInfineon Technologies AG

X

XMatsushita Electric Industrial Co., Ltd.

X

X

XMicron Technology, Inc.



XMitsubishi Corporation

X

X

X

XMotorola Inc.

X

X

X

XName Withheld at Request of Customer

X

X

X

XNEC Electronics Corporation

X

X

X

XPhilips Electronics Nederland B.V.

X

X

XSamsung Electronics Co., Ltd.

X

X

X

XSanDisk Corporation



X



XSony Corporation

X

X

XSTMicroelectronics

X

X

X

XToshiba Corporation

X

X

X

XVIA Technologies Inc.

X

X

X

XVirage Logic Corporation



X


9

---



In our fiscal years ended September 30, 2001 ("fiscal 2001"), 2002 ("fiscal 2002") and 2003 ("fiscal 2003"), Marubeni Solutions, our Japanese distributor, accounted for
approximately 24.1%, 19.4% and 15.5% of our total revenue, respectively. In fiscal 2003, Broadcom Corporation accounted for approximately 10.5% of our total revenue. No other customer or distributor
accounted for more than 10% of our total revenue during any of these periods.

Technology

Our software is designed to provide more accurate results, significantly higher capacity and faster speed through the following technologies:



10

---



Customer Service and Support

Our software is designed to be installed quickly and used effectively by our customers, thus minimizing the level of support required. However, our customers'
design activities are highly complex. We believe that high quality user service and support are critical to the success of our business. We have developed, and expect to continue to improve, our
comprehensive service and support organization to manage user accounts. In fiscal 2003, we established a support office in Dallas, Texas and as of September 30, 2003 had 14 direct service and
support offices worldwide. We plan to continue to expand existing and establish additional service and support sites to support customers in those markets.

Our
service and support organization assists customers with product evaluation, installation and configuration. Our service and support organization also assists customers to resolve
issues that arise from their complex design tasks. We generally respond to user support requests quickly and provide supplemental software patches to address individual user design issues. Effective
execution of these tasks requires highly skilled engineers familiar with our customers' design tasks and with third-party products that may be used by the designer in connection with our software. We
provide our support via electronic mail, our web site, facsimile, telephone and on-site as necessary.

Sales and Marketing

We sell our software directly through our sales force in North America and Europe and primarily indirectly through distributors in Asia. Revenue attributable to
sales outside North America accounted for 51.0%, 42.0% and 39.6% of our total revenue in fiscal 2001, 2002 and 2003, respectively. While we continue to seek to diversify our user base and expand the
portion of our total revenue which is derived from direct sales, we anticipate that our operating results will continue to depend, to a lesser extent, on a relatively high volume of sales through a
relatively small number of international distributors and other channel partners.



As of September 30, 2003, our direct sales and support staff consisted of 45 employees based in 17 sales and support offices. We have domestic direct sales
and support offices in Scottsdale, Arizona; Santa Clara, California; Irvine, California; Meritt Island, Florida; Cambridge, Massachusetts; Austin and Dallas, Texas; Redbank and Allendale, New Jersey;
and Brooklyn, New York. We also have direct sales and/or support offices in Vancouver, Canada; Grenoble, France; Munich, Germany; Bangalore, India; Israel; Singapore; Taipei, Taiwan; and Hatfield,
England. Direct sales accounted for approximately 61.2%, 72.1% and 75.3% of our total revenue in fiscal 2001, 2002 and 2003, respectively. Our sales teams generally

11

---

include
sales managers and applications engineers for each territory. Our typical sales cycle ranges from three to six months and may be longer, particularly in today's challenging economic
environment.



In addition to our direct sales strategy, we have established indirect sales channels through distributors in Asia. Currently, our software is distributed by
exclusive distributors in China, Hong Kong, Korea, Japan, Malaysia and Taiwan. Our relationships with distributors play a critical role in extending our reach to more customers. Revenue from
distributors was approximately 38.8%, 27.9% and 24.7% of our total revenue in fiscal 2001, 2002 and 2003 respectively. Our distributors typically perform marketing, sales and technical support
functions in their country or region. We typically grant the distributor exclusive rights to sell our software in a particular country or region. Our agreements with our distributors do not obligate
the distributors to purchase or sell any minimum number of licenses of our software. Most arrangements provide incentives to the distributors to provide a small number of sales and support personnel
dedicated to our software, provide basic support to end users and use their best efforts to jointly promote our software in their territory. We provide product enhancements and backup support for more
complex questions and issues raised by end users who purchase our software through our distributors. Most of our distributor arrangements are for a term of one year and are renewed annually upon
mutual consent. Generally, either party may terminate the arrangement for a material default by the other party or by written request within a specified period prior to the end of each annual term.

Revenue
from Marubeni Solutions, our Japanese distributor, accounted for approximately 24.1%, 19.4% and 15.5% of our total revenue for fiscal 2001, 2002 and 2003, respectively. Marubeni
Solutions accounted for 28.1% of our accounts receivable at September 30, 2001, 23.0% of our accounts receivable at September 30, 2002 and 18.4% of our accounts receivable at
September 30, 2003. We renewed our agreement with Marubeni Solutions as of October 1, 2003 for a one-year period on substantially similar terms to our prior arrangements.



We focus our marketing efforts to create awareness of Nassda and our software and generate leads for our sales organization. Our strategy is to distinguish our
software by its high capacity, accuracy and performance, ease-of-use and time-to-market advantages. We employ a wide variety of communication channels
to inform customers and potential customers about our software. These channels include our web site, print and web advertising, public relations, live seminars, trade shows and technical publications.

Research and Development

We believe that strong product development capabilities are essential to our strategy of enhancing our core technology, developing additional software and
increasing the competitiveness of our software offerings. We have invested significant time and resources in creating a structured process for undertaking all product development projects. This
process involves key functional groups within our company and is designed to provide a framework for defining and addressing the steps required to bring product concepts and development projects to
market successfully. Our product development strategy emphasizes rapid innovation and product releases.

We
actively recruit engineers and software developers with expertise and degrees in computer science, semiconductor physics, electrical engineering and other engineering disciplines. As
of September 30, 2003, we had 42 employees engaged in research and development activities, of whom 20 held doctorate degrees. Our research and development expenses were $5.1 million in
fiscal 2001, $5.5 million in fiscal 2002 and $7.1 million in fiscal 2003.

12

---

Proprietary Rights

Our software relies on our internally developed intellectual property and other proprietary rights. We rely primarily on a combination of patent, copyright,
trademark and trade secret laws, confidentiality procedures and contractual provisions to protect our intellectual property and other proprietary rights. However, we believe that these measures afford
only limited protection. To date we have filed two patent applications, one of which was issued by the U.S. Patent and Trademark Office in June 2003. We have two registered trademarks, Nassda
and HSIM, and four trademarks, CircuitCheck, CRITIC, HANEX and LEXSIM. We also generally enter into confidentiality agreements with our employees and
technical consultants. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our software or obtain and use information that we regard as
proprietary. Policing unauthorized use of our software is difficult and we are unable to determine the extent to which piracy of our software exists. In addition, the laws of some foreign countries do
not protect our proprietary rights as fully as the laws of the United States. We are not aware that our software employs technologies that infringe any proprietary rights of third parties. We expect
that software developers will increasingly be subject to infringement claims as the number of products and competitors in our industry segment grows and the functionality of products in different
industry segments overlaps. Except as described under the heading "BusinessLitigation," we are unaware of any claims that our software violates any other party's proprietary rights.

Competition

We compete in markets that are intensely competitive and rapidly evolving. We face competition primarily from large electronic design automation software product
vendors that provide software suites to perform a variety of design functions for all types of semiconductors. We have experienced and expect to continue to experience increased competition from
current and potential competitors, many of which have significantly greater financial, technical, marketing and other resources.

Companies
offering competitive products vary in scope and breadth. Our competitors include providers of general purpose semiconductor design and verification software such as Cadence
Design Systems, Inc., Mentor Graphics Corporation, Synopsys, Inc. and privately held companies. In addition, our software also competes with software developed internally by design
groups of semiconductor companies. While all of these organizations compete with us, some also have cooperative marketing or sales relationships with us.

We
believe that the principal competitive factors in our market include:



We
believe that we compete favorably on these factors. However, we expect competition in the electronic design automation software market for complex nanometer-scale semiconductors to
increase significantly as new companies enter the market and current competitors expand their product lines and

13

---

services.
Many of these potential competitors are likely to enjoy substantial competitive advantages, including greater resources that can be devoted to the development, promotion and sale of their
products. In addition, these potential competitors may have more established sales channels, broader product offerings, greater software development experience and/or greater name recognition.

Employees

As of September 30, 2003, we had 100 full time employees, of whom 42 were engaged in research and development, 47 in sales, user support services and
marketing, and 11 in finance, administration and operations. None of our employees is represented by a labor union. We have not experienced any work stoppages and consider our relations with our
employees to be good.

Executive Officers and Key Employees

The following table lists our executive officers and key employees and their ages as of September 30, 2003:

|Name                        |  | Age |  | Position(s)                                                           
|--------------------------- |  | --- |  | ----------------------------------------------------------------------
|Sang S. Wang, Ph.D.         |  | 58  |  | Chief Executive Officer and Chairman                                  
|An-Chang Deng, Ph.D.        |  | 48  |  | President, Chief Operating Officer and Director                       
|Tammy S. Liu                |  | 47  |  | Chief Financial Officer and Vice President, Finance and Administration
|John A. Yelinek             |  | 54  |  | Vice President, Worldwide Sales and Support                           
|Walter Chan                 |  | 39  |  | Vice President, Software Engineering                                  
|Iouri Feinburg              |  | 36  |  | Vice President, Technology Research                                   
|Jeong-Tyng Li               |  | 46  |  | Vice President, Digital Product Development                           
|Andrei V. Tcherniaev, Ph.D. |  | 39  |  | Vice President, Simulation Core Technology                            
|Graham P. Bell              |  | 47  |  | Senior Director, Marketing                                            

Sang S. Wanghas served as our Chief Executive Officer and Chairman of the board of directors since April 1999. From
March 1997 to March 1998, Dr. Wang served as Senior Vice President and Co-General Manager of the EPIC Technology Group of Synopsys and as a member of the board of
director of Synopsys. From September 1986 to February 1997, Dr. Wang served as Chairman and Chief Executive Officer of EPIC Design Technology, Inc., a publicly traded
electronic design automation software company that was acquired by Synopsys in February 1997. Prior to co-founding EPIC Design Technology, Dr. Wang was a member of the senior
technical staff and manager of computer aided design at Advanced Micro Devices. Dr. Wang also serves as a member of the board of directors of Electronic Design Automation Consortium, an
industry group. Dr. Wang holds a B.S. in electrical engineering from National Taiwan University, an M.S. in physics from Ohio State University and a Ph.D. in electrical engineering from
Stanford University.

An-Chang Deng, one of our co-founders, served as our Chief Executive Officer from August 1998 to
April 1999, Chief Financial Officer from August 1998 to September 2000 and President and Chief Operating Officer since August 1998. He has served on our board of directors
since August 1998. From March 1997 to August 1998, Dr. Deng was Vice President of Research and Development of the EPIC Technology Group of Synopsys. From
January 1992 to February 1997, Dr. Deng served as Vice President of Research and Development for EPIC Design Technology. From September 1989 to January 1992,
Dr. Deng served as a developer of timing and analysis products at Cadence. From 1986 to September 1989, Dr. Deng was an assistant professor of electrical engineering at Texas A&M
University. Dr. Deng holds a B.S. in electrical engineering from National Taiwan University, an M.S. in electrical engineering from the University of Notre Dame and a Ph.D. in electrical
engineering and computer science from the University of California at Berkeley.

14

---

Tammy S. Liuhas served as our Chief Financial Officer, Vice President, Finance and Administration and Secretary since
September 2000. From August 1997 to August 2000, Ms. Liu was an independent financial consultant for startup companies. From March 1997 to July 1997,
Ms. Liu served as Interim Acting Chief Financial Officer of Synopsys. From January 1994 through February 1997, Ms. Liu served as Chief Financial Officer and Secretary of
EPIC Design Technology. From January 1990 to September 1993, Ms. Liu served as Chief Financial Officer of PiE Design Systems, Inc., a manufacturer of system level
verification tools. From 1988 to December 1989, she served as Corporate Controller of Plexus Computers, Inc., a manufacturer of image processing computers. Prior to 1988, Ms. Liu
served in a variety of financial management positions at Cadence and Finnigan Corporation, a manufacture of mass spectrometers. Ms. Liu holds a B.S. in accounting from Baruch College and an
M.B.A. from Santa Clara University.

John A. Yelinekhas served as our Vice President, Worldwide Sales and Support since October 2002 and served as our Vice President,
Sales from January 2000 to September 2002. From March 1997 to December 1999, Mr. Yelinek served as Vice President of Sales of the EPIC Technology Group of Synopsys.
From November 1992 to March 1997, Mr. Yelinek served in a variety of positions with EPIC Design Technology, including Vice President, North American Sales. From 1983 to
April 1992, Mr. Yelinek served in a variety of positions at Cadence, the most recent of which was Director of
Integrated Circuit Sales. Mr. Yelinek holds a B.A. in biology from the University of California at San Diego.

Walter Chan, one of our co-founders, has served as our Vice President, Software Engineering since September 2002 and
Director of Software Development from August 1998 to September 2002. Mr. Chan served as a development manager of Synopsys in the EPIC Technology Group from March 1997 to
August 1998. From January 1993 to March 1997, Mr. Chan served as software developer and software development manager at EPIC Design Technology. From December 1988 to
January 1993, Mr. Chan served as a system software engineer at Sun Microsystems. Mr. Chan holds a B.A. in computer science from the University of California at Berkeley.

Iouri Feinberg,one of our co-founders, has served as our Vice President, Technology Research since September 2002 and
Director of Technology Research from August 1998 to September 2002. Mr. Feinberg served as an Engineer Manager of the EPIC Design Technology Group of Synopsys from
March 1997 to August 1998. From May 1995 to February 1997, Mr. Feinberg served in a variety of positions with EPIC Design Technology, including Senior Developer and
Staff Engineer. Prior to joining EPIC Design Technology, Mr. Feinberg was the Senior Engineer of Silvaco Data Systems, an electronic design automation company. Mr. Feinberg holds a M.S.
in computer science from St. Petersburg Engineering Academy.

Jeong-Tyng Lihas served as our Vice President, Digital Product Development since April 2003, Director of Circuit
Analysis Development from November 2001 to March 2003 and Architect of Physical Design and Analysis from December 2000 to October 2001. Dr. Li served as a Director
of Router at Mentor Graphics from July 2000 to November 2000. Dr. Li also held a variety positions at Avant! Corporation, which was acquired by Synopsys in June 2002, from
July 1995 to June 2000, including Head of Physical Synthesis. Prior to joining Avant!, from January 1990 to June 1995, Dr. Li was a co-founder and
Director of Emulation Compiler of PiE Design Systems, Inc., a manufacturer of system level verification tools which later merged with Quickturn Design Systems, Inc. Dr. Li holds a
B.S. in electrical engineering from National Taiwan University and a Ph.D. in electrical engineering from University of California at Berkeley.

Andrei V. Tcherniaev, one of our co-founders, has served as our Vice President, Simulation Core Technology since
September 2002 and Director of Technology Development from August 1998 to September 2002. From March 1997 to August 1998, Dr. Tcherniaev served as a project
leader of the EPIC Technology Group of Synopsys. From April 1995 to March 1997, Dr. Tcherniaev served as a developer of timing simulation tools at EPIC Design Technology. From
September 1991 to April 1995, Dr. Tcherniaev

15

---

served
as a developer of circuit and device simulation tools at Silvaco Data Systems. From July 1990 to August 1991, Dr. Tcherniaev served as a research scientist in Moscow
Institute of Physics and Technology. Dr. Tcherniaev holds a M.S. in physics and Ph.D. in microelectronics from the Moscow Institute of Physics and Technology.

Graham P. Bellhas served as our Senior Director of Marketing since June 2003 and served as our Director of Marketing from
January 2001 to May 2003. From February 1999 to December 2000, Mr. Bell served as Director of Marketing of Averant, Inc., an electronic design automation
software company. From February 1998 to February 1999, Mr. Bell served as a product line manager of the EPIC Technology Group of Synopsys. From September 1996 to
December 1997, Mr. Bell served as a Marketing Manager of View Logic. From June 1995 to September 1996, Mr. Bell served as a co-founder of Avista Design
Systems, Inc., a design verification software company. Mr. Bell holds a B.C.S. in computer science from Carleton University, Ottawa, Canada.

ITEM 2.    Properties

Our principal offices consist of 23,716 square feet of leased office space in Santa Clara, California which house substantially all of our research and
development and a majority of our domestic sales and support services employees, as well as all marketing, administration and finance employees. We maintain leased sales or support offices, each of
which is 1,600 square feet or less, in or near Scottsdale, Arizona; Irvine, California; Austin and Dallas, Texas; Cambridge, Massachusetts; Hatfield, England; Grenoble, France; Munich, Germany; and
Taipei, Taiwan. We also have sales or support centers in Florida, New Jersey, and New York domestically and Canada, India, Israel and Singapore internationally. Other than the leases for our Santa
Clara, California and Grenoble, France offices, none of the leases for our sales offices is of more than 12 months in duration. As we continue to grow our field sales and support offices, we
may also choose to expand some of our existing sales and support offices or establish new offices during fiscal 2004.

ITEM 3.    Legal Proceedings

Synopsys has filed claims against us in state and federal court. These claims are based on the alleged facts and circumstances relating to the departure of our
five founders from their employment at Synopsys, the founding of our company and the development and sale of HSIM and our other products. Each of our founders and Dr. Sang S. Wang, our Chief
Executive Officer, became an employee of Synopsys when Synopsys acquired EPIC Design Technology in February 1997. Dr. Wang resigned from Synopsys in March 1998 and served as a
consultant to Synopsys until June 1998. Dr. An-Chang Deng, our President, and our four other founders resigned from Synopsys at approximately the same time in
August 1998 and became employees of our company immediately thereafter. Dr. Wang became an employee of our company in April 1999. None of Drs. Wang or Deng or our four other
founders was subject to a noncompetition agreement with Synopsys at any time.

In
February 2000, Synopsys filed a complaint in the Superior Court of the State of California in the County of Santa Clara (Case No. CV787950) against us and Dr. Deng, our
President. The complaint alleged breach of contract, breach of fiduciary trust, diversion of corporate opportunity and constructive trust. In September 2001, Synopsys filed its second amended
complaint, which added claims of inducing/aiding and abetting breach of fiduciary duty, including/aiding and abetting diversion of corporate opportunity, misappropriation of trade secrets, civil
conspiracy, breach of confidence and unfair competition, and added as individual defendants Dr. Wang and our four other founders. In September 2002, Synopsys filed a supplemental second
amended complaint that contained supplemental allegations but added no new claims or parties. In January 2003, the discovery referee issued orders creating rebuttable presumptions in favor of
Synopsys on certain evidentiary issues to sanction us for erasure of certain computer files requested in discovery by Synopsys. These rulings mean that we must prove at trial that we did not take or
use Synopsys' source code or other confidential information, rather

16

---

than
the usual requirement that Synopsys provide such proof in the first instance. However, none of these rulings resolves any of the claims made by Synopsys in the case and the trial judge or jury
can reach their own conclusions based upon the evidence presented at trial. We filed a motion for reconsideration of this order and in March 2003, the court denied our motion, concluding that
it was barred on procedural grounds. In January 2003, Synopsys filed a third amended complaint, which contained supplemental allegations but added no new claims or parties. We have filed an
answer denying Synopsys' allegations. In August 2003, Synopsys filed several motions for terminating sanctions against us which are scheduled for hearing in January 2004. We oppose each
of these motions and intend to file oppositions within the time permitted by law. Synopsys has requested unspecified damages of at least $25 million, an injunction, a constructive trust on
unspecified intellectual property belonging to us and other relief. Further, in September 2003, Synopsys notified us that it reserves the right to seek up to $80 million in punitive
damages with respect to claims for which punitive damages are allowed under California Civil Code Section 3294, and up to $50 million in punitive damages with respect to the trade secret
claims under California Civil Code Section 3426.3(c). This action is currently in discovery. A trial date has not yet been set.

We
believe that we have meritorious defenses to Synopsys' allegations and claims and we intend to continue to defend ourselves vigorously. However, because of the inherent uncertainty of
litigation in general, and the fact that the discovery related to this litigation is ongoing, we cannot assure you that we will ultimately prevail. Should Synopsys ultimately succeed in the
prosecution of its claims, we could be permanently enjoined from selling our software and deriving related maintenance revenue. In addition, we could be required to pay substantial monetary damages to
Synopsys. Further, we could be enjoined preliminarily from selling our software during the course of the litigation. Litigation such as the suit Synopsys has brought against us can take years to
resolve and can be expensive to defend. Although the final outcome of the litigation may not occur for some time, the parties periodically conduct evidence gathering, meet to discuss the status of the
litigation and file motions and other requests for the court to act. The results of these periodic activities, particularly the court's decisions on current pending and future motions, could have the
effect of determining the ultimate outcome of the litigation, either for or against us, prior to a trial on the merits, or strengthen or weaken our ability to assert claims and defenses. For example,
in November 2001, the court denied a motion brought by Synopsys for injunctive relief that, if granted, could have prevented us from selling our products. If any of Synopsys' motions ultimately
prevail, our ability to defend ourselves against the claims brought against us in this litigation could be severely limited. It is possible that our relationships with our customers will be seriously
harmed in the future as a result of the Synopsys litigation. Accordingly, an
adverse judgment, if entered in favor of any Synopsys claim, could seriously harm our business, financial position and results of operations and cause our stock price to decline substantially. In
addition, the Synopsys allegations and claims, even if ultimately determined to be without merit, could be time consuming to defend, result in costly litigation, divert our management's attention and
resources, cause product shipment delays or require us to enter into royalty or license agreements. These royalty or license agreements may not be available on terms acceptable to us, if at all, and
the prosecution of the Synopsys allegations and claims could significantly harm our business, financial position and results of operations and cause our stock price to decline substantially.

In
May 2001, Synopsys filed a complaint in the United States District Court, Northern District of California, San Jose division (Case No. CO1-20423 PVT) against us,
alleging that our HSIM software infringes U.S. Patent No. 5,878,053 entitled "Hierarchical Power Network Simulation and Analysis tool for reliability testing of Deep Submicron IC Designs" (the
"053 patent"), which is purportedly assigned to Synopsys. Since the case began, Synopsys has also alleged that our subsequently released HSIM 2.0 and LEXSIM products, infringe the 053 patent. Synopsys
has requested relief including damages from $4.1 million to $13.7 million and an injunction. Synopsys has also requested that any damage award be trebled for alleged willful
infringement. In June 2001, we filed an answer to the complaint denying infringement of a valid, enforceable patent and asserting counterclaims. We have since amended our counterclaims. Our
current counterclaims allege that, among other things, the 053 patent is invalid,

17

---

unenforceable
and not infringed and that Synopsys has violated federal antitrust and state unfair competition laws.

From
time to time, the court has ruled on summary judgment motions in the case. In May 2002, the court granted summary judgment in favor of Synopsys on our invalidity defenses and
counterclaims, concluding that they were barred by the doctrine of assignor estoppel. The court denied Synopsys' motion with respect to our unenforceability defense and counterclaim. In
November 2002, the court issued an order granting summary judgment in favor of Synopsys on certain antitrust counterclaims based on the doctrine of assignor estoppel. However, the court
declined to rule on Synopsys' motion with respect to our other antitrust and unfair competition counterclaims. In addition, the court issued a ruling construing the claims of the 053 patent in
August 2002.

In
September 2002, the U.S. Patent and Trademark Office granted our request for ex parte reexamination of the 053 patent based on prior art not previously considered by the Patent
Office. We moved to stay the federal litigation pending the outcome of the reexamination and the court granted our motion in December 2002. During the reexamination of the 053 patent, the
Patent Office may determine that the subject matter in the patent is patentable as originally claimed, that the subject matter is patentable if the claims are modified or that the subject matter is
not patentable. We cannot predict what the result of the reexamination procedure will be or how long it will take to complete.

Activity
on several other summary judgment motions has been suspended because the court stayed the federal litigation. In November 2002, Synopsys filed three motions for summary
judgment. The first motion asked the court to enter judgment before trial that Nassda's products infringe the 053 patent. The second motion asked the court to rule before trial against us on our
defense that the 053 patent is unenforceable because Synopsys committed inequitable conduct in obtaining the patent. We submitted oppositions to both of these motions. Synopsys' third motion asked the
court to rule before trial against us on our remaining antitrust counterclaims. Because of the court's prior rulings against us on our other antitrust counterclaims, we did not oppose this motion. In
November 2002, we also filed a summary judgment motion, which asked the court to enter judgment before trial that our products do not infringe the 053 patent. Synopsys opposed this motion. The
court issued its order staying the federal litigation before the parties' reply briefs were due.

In
June 2003, Synopsys filed a second complaint in the United States District Court, Northern District of California, San Francisco Division (Case No. C03-2664 RS)
against us, alleging that the our products, including, but not limited to HSIM and HANEX software products, infringe Synopsys' U.S. Patent No. 6,249,898 entitled "Methods and Systems for
Reliability Analysis of CMOS VLSI Circuits Based on Stage Partitioning and Node Activities" (the "898 Patent"). In July 2003, we filed an answer denying that we infringe the 898 Patent and
asserting as defenses that the 898 Patent is invalid and unenforceable. We also brought a declaratory judgment counterclaim seeking judgment that the 898 Patent is not infringed by us and that the 898
Patent is invalid and unenforceable. In August 2003, Synopsys filed a motion to dismiss these defenses and counterclaims on the ground that we are barred from contesting the validity and
enforceability of the 898 Patent based on the doctrine of assignor estoppel. Synopsys' motion also sought to strike our defenses of laches, patent misuse and unclean hands on the ground that we had
not pleaded them with sufficient particularity. We opposed Synopsys' motions. In October 2003, the court denied Synopsys' motion to dismiss and strike the invalidity and unenforceability
defenses and counterclaims and granted Synopsys' motion to strike the laches, patent misuse and unclean hands defenses with leave to amend the pleadings. The court has scheduled a case management
conference for December 2003.

We
believe we have meritorious defenses to Synopsys' claims and intend to defend ourselves vigorously. However, because of the high degree of complexity of the intellectual property at
issue, the inherent uncertainties of litigation in general and the preliminary nature of this litigation, we cannot assure you that we will ultimately prevail. Should Synopsys ultimately succeed in
the prosecution of its claims, we could be permanently enjoined from selling our software and deriving related maintenance revenue. In

18

---

addition,
we may be required to pay substantial monetary damages to Synopsys. Further, we could be enjoined preliminarily from selling our software during the course of the litigation. Litigation such
as the suit Synopsys has brought against us can take years to resolve and can be expensive to defend. The court's decisions on current pending and future motions could have the effect of determining
the ultimate outcome of the litigation prior to a trial on the merits, or strengthen or weaken our ability to assert claims and defenses. It is possible that our relationships with our customers will
be seriously harmed in the future as a result of the Synopsys litigation. Accordingly, an adverse judgment, if entered on any Synopsys claim, could seriously harm our business, financial position and
results of operations and cause our stock price to decline substantially. In addition, the Synopsys allegations and claims, even if ultimately determined to be without merit, could be time consuming
to defend, result in costly litigation, divert our management's attention and resources, cause product shipment delays or require us to enter into royalty or license agreements. These royalty or
license agreements may not be available on terms acceptable to us, if at all, and the prosecution of the Synopsys allegations and claims could significantly harm our business, financial position and
results of operations and cause our stock price to decline substantially.

On
July 1, 2003, a purported derivative complaint was filed against us and our directors in the United States District Court for the Northern District of California. This
complaint alleged violations of California Corporations Code Section 25402, breach of fiduciary duty, waste of corporate assets and unjust enrichment based generally on the facts and
circumstances alleged in the Synopsys litigations. The complaint seeks equitable relief and an unspecified amount of damages on behalf of Nassda. The case is still in the preliminary stages, and it is
not possible for us to quantify the impact, if any, on Nassda. An unfavorable outcome in this case could have a material adverse effect on our business, financial condition, results of operations and
cash flow. In addition, the expense of defending any litigation may be costly and divert management's attention from the day-to-day operations of our business.

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

None.

19

---



PART II

ITEM 5.    Market for Common Equity and Related Stockholder Matters

Our common stock has been traded on the Nasdaq National Market under the symbol "NSDA" since our initial public offering in December 2001. The following
table sets forth, for the periods indicated, the high and low closing prices reported on the Nasdaq National Market.

|                                      |                                        | High |   | Low  
|------------------------------------- | -------------------------------------- | ---- | - | -----
|Fiscal Year Ended September 30, 2003: |                                        |      |   |      
|                                      | Fourth Quarter                         |      | $ | 9.22 
|                                      | Third Quarter                          |      |   | 9.05 
|                                      | Second Quarter                         |      |   | 11.93
|                                      | First Quarter                          |      |   | 13.87
|Fiscal Year Ended September 30, 2002: |                                        |      |   |      
|                                      | Fourth Quarter                         |      | $ | 14.08
|                                      | Third Quarter                          |      |   | 19.02
|                                      | Second Quarter                         |      |   | 19.20
|                                      | First Quarter (from December 13, 2001) |      |   | 22.49

The
closing price of our common stock on the Nasdaq National Market was $8.16 on November 14, 2003. As of November 14, 2003, there were 26,247,661 shares of our common
stock issued and outstanding and held by approximately 68 stockholders of record.

The
information required by this Item regarding equity compensation is incorporated by reference to the information set forth in Item 12 of this Annual Report on
Form 10-K.

Dividend Policy

We have never declared or paid cash dividends on our capital stock. We currently expect to retain future earnings, if any, for use in the operation and expansion
of our business and do not anticipate paying any cash dividends in the foreseeable future.

ITEM 6.    Selected Consolidated Financial Data

The selected consolidated financial data set forth below are qualified in their entirety by, and should be read in conjunction with, the Consolidated Financial
Statements and Notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this report. The results for the fiscal year ended
September 30, 2003 are not necessarily indicative of the results for any future period.

20

---

The
historical results presented below are not necessarily indicative of future results.

|                                            |                            | Fiscal Years Ended September 30, |      
|------------------------------------------- | -------------------------- | -------------------------------- | -----
|
|
|Consolidated Statement of Operations Data:  |                            |                                  |      
|Revenue:                                    |                            |                                  |      
|                                            | Product                    |                                  | $    
|                                            | Subscription               |                                  |      
|                                            | Maintenance                |                                  |      
|                                            |                            |                                  |      
|                                            |                            | Total revenue                    |      
|                                            |                            |                                  |      
|Cost of revenue:                            |                            |                                  |      
|                                            | Product                    |                                  |      
|                                            | Subscription               |                                  |      
|                                            | Maintenance                |                                  |      
|                                            |                            |                                  |      
|                                            |                            | Total cost of revenue            |      
|                                            |                            |                                  |      
|Gross profit                                |                            |                                  | 162  
|                                            |                            |                                  |      
|Operating expenses:                         |                            |                                  |      
|                                            | Research and development   |                                  |      
|                                            | Sales and marketing        |                                  |      
|                                            | General and administrative |                                  |      
|                                            | Stock-based compensation*  |                                  |      
|                                            |                            |                                  |      
|                                            |                            | Total operating expenses         |      
|                                            |                            |                                  |      
|Income (loss) from operations               |                            |                                  | (641 
|Interest income                             |                            |                                  | 36   
|Other income (expense), net                 |                            |                                  |     
|                                            |                            |                                  |      
|Income (loss) before taxes                  |                            |                                  | (605 
|Provision for income taxes                  |                            |                                  | (1   
|                                            |                            |                                  |      
|Net income (loss)                           |                            | $                                | (606 
|                                            |                            |                                  |      
|Basic net income (loss) per share           |                            | $                                | (0.21
|Basic weighted average shares outstanding   |                            |                                  | 2,829
|Diluted net income (loss) per share         |                            | $                                | (0.21
|Diluted weighted average shares outstanding |                            |                                  | 2,829
|*Stock-based compensation includes:         |                            |                                  |      
|                                            | Research and development   |                                  | $    
|                                            | Sales and marketing        |                                  |      
|                                            | General and administrative |                                  |      
|                                            |                            |                                  |      
|                                            |                            | Operating expenses               |      
|                                            |                            |                                  |      

|                                                  |  | As of September 30,
|------------------------------------------------- |  | -------------------
|
|
|Consolidated Balance Sheet Data                   |  |                    
|Cash, cash equivalents and short-term investments |  | $                  
|Working capital                                   |  |                    
|Total assets                                      |  |                    
|Long-term debt, less current portion              |  |                    
|Convertible preferred stock                       |  |                    
|Total stockholders' equity (deficit)              |  |                    

21

---



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

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. These statements include, among other things, statements concerning our future operations, financial condition and prospects and business
strategies. The words"may," "will,"
"continue," "estimate," "project,"
"intend," "believe," "expect,"
"anticipate,"and other similar expressions generally identify forward-looking statements. Forward-looking statements in this
Item 7 include, but are not limited to, statements regarding the following: impact of quarterly fluctuations of revenue, revenue from the sale of our products, including the future composition of our
revenues and future revenues from international operations, future operating results, increased spending due to legal fees and the hiring of new personnel, future liquidity and capital requirements,
sufficiency of cash and cash equivalents and availability of funds, effect of and exposure to foreign currency exchange rates, intellectual property rights and consequences of intellectual property
disputes. In evaluating these statements, you should specifically consider various factors including those discussed in "Factors Affecting Future Results."

Investors in our common stock are cautioned not to place undue reliance on forward-looking statements. Forward-looking statements are not guarantees of future
performance. Forward-looking statements are subject to substantial risks and uncertainties that could cause our future business, financial condition or results of operations to differ materially from
our historical results or currently anticipated results. Investors should carefully review the information contained under the caption "Factors Affecting Future Results" beginning on page 34 of this
Management's Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in or incorporated by reference into this report. The following discussion and analysis also should
be read in conjunction with "Selected Consolidated Financial Data" and our Consolidated Financial Statements and Notes thereto included elsewhere in this report. All forward-looking statements
included in this document are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. These forward-looking statements are
made in reliance upon the safe harbor provision of The Private Securities Litigation Reform Act of 1995.

Overview

We are a leading provider of full-chip circuit simulation and analysis software for the design and verification of complex semiconductors. Our
customers use our software to reduce time-to-market and achieve first silicon success by simulating complex designs rapidly and accurately. We released our first product, HSIM,
in July 1999 and began recognizing revenue from HSIM in the three months ended September 30, 1999. In February 2002, with the release of HSIM 2.0, we also introduced two new
options, CircuitCheck and Cadence Analog Artist Integration, which are sold as separate options. We released our second major product, LEXSIM, in
May 2002, and our third product, CRITIC, in December 2002. In April 2003, we released HSIM 3.0 with a new digital co-simulation interface option, and in
May 2003, we released on a limited basis our fourth product, HANEX.



We derive all of our revenue from software licensing and maintenance fees. To date, we have derived substantially all of this revenue from the licensing and
support of HSIM. We do not expect LEXSIM, CRITIC and HANEX to account for any meaningful percent of our total revenue until the second half of fiscal 2004. Our software does not require customization
and generally does not require on-site implementation services. As a result, we have not generated a significant amount of professional service or consulting revenue. We do not consider
backlog to be a meaningful measure of future revenue because our customers can generally cancel orders without penalty.

22

---



Historically, we have generated the majority of our total revenue from perpetual licenses. As more customers have been purchasing time-based licenses,
product revenue as a percent of total revenue and in absolute dollars has decreased and accounted for only 33.6% of our total revenue in fiscal 2003 as compared to 56.3% of our total revenue in fiscal
2002. We expect that over time product revenue will continue to decrease as a percent of our total revenue. Perpetual license customers pay a one-time license fee and are entitled to use
the software as long as they desire. To receive support, periodic updates and new enhancements from us, perpetual license customers must purchase maintenance contracts.



Our time-based licenses give the customer the right to use our software for a fixed period of time, typically one to three years, and include
maintenance. Time-based licenses can be renewed for one or more years. At times, customers may also acquire additional licenses for a shorter term, typically multiples of
one-month licenses, to be used when they reach certain stages of the design process in conjunction with their other time-based or perpetual licenses. These shorter term
licenses are sold primarily to help customers with their peak usage demands. To date, revenue from these shorter term licenses has not
been significant. An increasing absolute dollar amount and proportion of our total revenue is derived from time-based licenses, as more of our large customers who initially subscribe to
time-based licenses renew those licenses or subscribe to additional time-based licenses. In today's challenging economic environment, some of the customers who had purchased
perpetual licenses previously and new customers are also choosing to purchase time-based licenses due to their flexible licensing and payment terms and we expect this trend to continue.



Our perpetual license customers typically purchase maintenance contracts and renew them annually. Customers who purchase maintenance receive support, updates and
enhancements when we make them available to our general installed base. We anticipate that as an increasing proportion of our future licenses come from time-based licenses, maintenance
revenue may decrease as a percent of total revenue. Maintenance revenue may also fluctuate from quarter to quarter due to the timing of annual renewals.



We include in deferred revenue time-based licenses and maintenance that are invoiced in advance and are either paid or due. We generally recognize
deferred revenue from these sources ratably over the contract period on a straight-line basis. Deferred revenue also consists of deferred perpetual license fees for which all of the
revenue recognition criteria have not been met. Deferred revenue fluctuates depending on the timing of perpetual licenses meeting all the revenue recognition criteria, as well as the number,
subscription period, payment terms and timing of renewals or new purchases of time-based licenses and maintenance contracts. We classify deferred revenue expected to be recognized beyond
one year from the balance sheet date as long-term deferred revenue.



Our revenue is generally denominated in United States dollars; however, our operating expenses in international locations are denominated in local currencies.
Historically, our exposure to foreign exchange fluctuations has been minimal; however, as our international sales and operations expand, we anticipate that our exposure to risks associated with
foreign currency fluctuations will increase.

23

---

Critical Accounting Policies



We recognize revenue in accordance with the provisions of American Institute of Certified Public Accountants Statement of Position 97-2 ("SOP
97-2"), "Software Revenue Recognition. The application of SOP 97-2 requires judgment, including whether a software arrangement
includes multiple elements, and if so, whether vendor-specific objective evidence ("VSOE") of fair value exists for each of those elements. When certain elements of an arrangement are delivered at
different times, the ability to identify VSOE for those undelivered elements could materially impact the amount of earned and unearned revenue.

We
recognize and report revenue in three separate categories: product revenue, subscription revenue and maintenance revenue. Product revenue is derived from perpetual license fees.
Subscription revenue is derived from time-based license fees and includes maintenance during the license period. We recognize product revenue and subscription revenue when all of the
following conditions are met:



VSOE
exists for maintenance on perpetual licenses based on renewal rates. Our customers generally purchase the first year of maintenance when they purchase a perpetual license, so we use
the residual method to determine the allocation of revenue to the license portion of multiple element arrangements involving perpetual licenses. Because we bundle both the license and maintenance into
our agreements for time-based licenses for the entire term, VSOE does not exist for each element of the arrangement. Therefore, we recognize subscription revenue from
time-based licenses ratably over the period of the license. Maintenance revenue is derived from the annual maintenance contracts that are purchased by perpetual licensees. We generally
recognize revenue from maintenance ratably over the maintenance period, which is typically one year.

Future
changes in accounting pronouncements, including those affecting revenue recognition, could require us to change our methods of revenue recognition. These changes could cause us to
defer revenue from current periods to subsequent periods or accelerate recognition of deferred revenue to current periods.



We maintain an allowance for doubtful accounts based on management's best estimate of probable losses inherent in the outstanding accounts receivable balance.
Management determines the allowance based on known troubled accounts, historical experience and other currently available evidence. If the financial condition of our customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional allowances may be required.



Sales commissions are earned and paid to our sales force for each order received, shipped and collected. Based on our policies, we pay a portion of the sales
commissions based on both bookings and collections and the commission rate varies depending on each sales person's ability to attain his or her annual quota. Commission rates increase as the sales
person achieves a certain percent of his or her annual quota. We determine an estimated average annual commission rate during the first three fiscal quarters for

24

---

purposes
of accruing commissions. We adjust the balance of the commission accrual and the actual commission expense at the end of each fiscal year based on each sales person's actual commission rates.



We are subject to several legal proceedings and claims, the outcomes of which are subject to significant uncertainty. Standard Financial Accounting Standards
(SFAS) No. 5,Accounting for Contingencies, requires that an estimated loss from a loss contingency should be accrued by a charge to income if it
is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably evaluated, taking into account the degree of probability of an unfavorable
outcome and the ability to make a reasonable estimate of the amount of loss, among other factors. Changes in these factors could materially impact our financial position or our results of operations.
We regularly evaluate current information available to us to determine whether such accruals should be recorded. To date, we have not accrued any loss contingencies.

Recent Accounting Pronouncements

In October 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 144,Accounting for the Impairment or
Disposal of Long-Lived Assets,which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS
No. 144 supersedes SFAS No. 121,Accounting for the Impairment of Long-Lived Assets and for Assets to Be Disposed of. We
adopted SFAS No. 144 for fiscal 2003 beginning October 1, 2002. The adoption of SFAS No. 144 had no impact on our financial position, results of operations or cash flows.

In
December 2002, the FASB issued SFAS No. 148,Accounting for Stock-Based CompensationTransition and
Disclosure.SFAS No. 148 amends SFAS No. 123,Accounting
for Stock-Based Compensation,to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS No. 148 is effective for fiscal years ending after December 15,
2002. We adopted the disclosure provisions of SFAS No. 148 for the quarterly period beginning on January 1, 2003. We do not expect to change to the fair value based method of accounting
for stock-based employee compensation; therefore, the adoption of SFAS No. 148 had no impact on our financial position, results of operation or cash flows.

In
January 2003, the FASB issued FASB Interpretation 46 ("FIN 46"),Consolidation of Variable Interest Entities.FIN 46 clarifies
the application of Accounting Research Bulletin 51,Consolidated Financial Statements,for certain entities that do not have sufficient equity at risk
to finance their activities without additional subordinated financial support from other parties or in which equity investors do not have the characteristics of a controlling financial interest
("variable interest entities"). Variable interest entities within the scope of FIN 46 will be required to be consolidated by their primary beneficiary. The primary beneficiary of a variable interest
entity is determined to be the party that absorbs a majority of the entity's expected losses, receives a majority of its expected returns, or both. FIN 46 applies immediately to variable interest
entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period
beginning after December 15, 2003 to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. We are in the process of
determining what impact, if any, the adoption of the provisions of FIN 46 will have upon our financial condition or results of operations. However, we do not expect that FIN 46 will have a material
impact on our financial condition or results of operations.

In
April 2003, the FASB issued SFAS No. 149,Amendment of Statement 133 on Derivative Instruments and Hedging Activities.
SFAS No. 149 amends and clarifies financial accounting and reporting for derivative

25

---

instruments,
including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133,Accounting for Derivative Instruments
and Hedging Activities. SFAS No. 149 amends SFAS No. 133 for decisions made as part of the Derivatives Implementation Group process and in connection with
implementation issues raised in relation to the application of the definition of a derivative. SFAS 149 is effective for contracts entered into or modified after June 30, 2003. The
adoption of SFAS No. 149 had no impact on our financial position or results of operations.

In
May 2003, the FASB issued SFAS No. 150,Accounting for Certain Financial Instruments with Characteristics of both Liabilities and
Equity, which requires that certain financial instruments be presented as liabilities that were previously presented as equity or as temporary equity. Such instruments include
mandatory redeemable preferred and common stock, and certain options and warrants. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003 and is
generally effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 had no impact on our financial position or results of
operations.

Results of Operations

The following table sets forth the results of our operations expressed as a percent of total revenue. Our historical operating results are not necessarily
indicative of the results for any future period.

|                            |                            | Years Ended September 30, |     
|--------------------------- | -------------------------- | ------------------------- | ----
|
|Revenue:                    |                            |                           |     
|                            | Product                    |                           | 69.0
|                            | Subscription               |                           | 18.3
|                            | Maintenance                |                           | 12.7
|                            |                            |                           |     
|                            |                            | Total revenue             |     
|                            |                            |                           |     
|Cost of revenue:            |                            |                           |     
|                            | Product                    |                           | 1.4 
|                            | Subscription               |                           | 0.5 
|                            | Maintenance                |                           | 1.9 
|                            |                            |                           |     
|Gross profit                |                            | 96.2                      |     
|                            |                            |                           |     
|Operating expenses:         |                            |                           |     
|                            | Research and development   |                           | 23.3
|                            | Sales and marketing        |                           | 32.5
|                            | General and administrative |                           | 15.3
|                            | Stock-based compensation   |                           | 10.8
|                            |                            |                           |     
|                            |                            | Total operating expenses  |     
|                            |                            |                           |     
|Income from operations      |                            | 14.3                      |     
|Interest income             |                            | 1.9                       |     
|Other income (expense), net |                            |                          |     
|                            |                            |                           |     
|Income before taxes         |                            | 16.2                      |     
|Provision for taxes         |                            | (6.6                      | )   
|                            |                            |                           |     
|Net income                  |                            | 9.6                       | %   
|                            |                            |                           |     

26

---

Fiscal Years Ended September 30, 2002 and 2003



Total Revenue.Total revenue consists of product, subscription and maintenance revenue. Total revenue increased by 3.4%, or
$1.2 million, from $33.9 million in fiscal 2002 to $35.1 million in fiscal 2003. The increase was primarily attributable to an increase in our end user base resulting in
substantial growth in subscription and maintenance revenue, partially offset by decreases in perpetual license sales.

Revenue
from sales outside of North America accounted for 42.0% and 39.6% of total revenue for fiscal 2002 and 2003, respectively. The percent of total revenue from outside of North
America decreased due to domestic revenue growing at a faster rate than revenue from outside of North America. Revenue from Japan was 19.4% and 15.5% of our total revenue in fiscal 2002 and 2003,
respectively. No other country outside North America accounted for more than 10% of our total revenue in either period. We expect that revenue from sales outside of North America will continue to
account for a significant portion of our total revenue in the future.

Marubeni
Solutions, our exclusive distributor for Japan, accounted for approximately 19.4% and 15.5% of our total revenue for fiscal 2002 and 2003, respectively. Broadcom Corporation
accounted for approximately 10.5% of our total revenue for fiscal 2003. No other customer or distributor accounted for more than 10% of our total revenue during either period.

Deferred
revenue includes perpetual license fees for which all of the revenue recognition criteria has not been met, time-based license fees that have been invoiced and are
due or collected for which we recognize revenue ratably over the term of the license period, and maintenance fees on perpetual licenses for which we also recognize revenue ratably over the term of the
maintenance period. Our total deferred revenue increased from $6.1 million as of September 30, 2002 to $9.8 million as of September 30, 2003. The increase in deferred
revenue was primarily due to increases in both deferred time-based license revenue and deferred maintenance revenue from new purchases and renewals of time-based licenses and
maintenance for perpetual licenses. We expect deferred revenue to fluctuate from quarter to quarter depending on the number of additional time-based license purchases, the timing of
renewals of time-based licenses and maintenance and their respective payment terms. Additionally, deferred revenue may not increase if more customers prefer quarterly payments for
time-based licenses and maintenance.

Product Revenue.Product revenue decreased by 38.2%, or $7.3 million, from $19.1 million for fiscal 2002 to
$11.8 million for fiscal 2003. The decrease was primarily due to more customers, particularly major accounts, purchasing time-based licenses as compared to perpetual licenses and
lower customer demand due to tighter budgets in a prolonged economic downturn. As a percent of total revenue, product revenue decreased from 56.3% for fiscal 2002 to 33.6% for fiscal 2003.

Subscription Revenue.Subscription revenue increased by 52.3%, or $5.0 million, from $9.6 million for fiscal
2002 to $14.6 million for fiscal 2003. The increase was primarily due to new customers purchasing time-based licenses, as well as existing customers purchasing additional
time-based licenses and renewing their expired time-based licenses. As a percent of total revenue, subscription revenue rose from 28.3% for fiscal 2002 to 41.7% for fiscal
2003. We expect time-based licenses to account for an increasing percent of total revenue in the future.

Maintenance Revenue.Maintenance revenue increased by 65.9%, or $3.5 million, from $5.2 million for fiscal 2002
to $8.7 million for fiscal 2003. The increase in maintenance revenue was due to the increase in the number of perpetual licenses in our installed base. As a percent of total revenue,
maintenance revenue increased from 15.4% for fiscal 2002 to 24.7% for fiscal 2003. We expect maintenance revenue to vary as a percent of total revenue based on the growth rate of product revenue
relative to subscription revenue and the number of customers renewing annual maintenance. If maintenance revenue increases as

27

---

a
percent of total revenue, our gross profit as a percent of total revenue, or gross margin, may decrease because of lower margins on maintenance revenue due to incremental maintenance support costs.



Cost of Product Revenue.Cost of product revenue consists primarily of royalties due from us to third-parties under original
equipment manufacturer arrangements. We incur only minimal costs to deliver our software as the product and documentation are primarily sent electronically. Our cost of product revenue decreased by
6.9%, or $18,000, from $259,000 for fiscal 2002 to $241,000 for fiscal 2003 due to a decrease in the sublicensing of third-party products. As a percent of total revenue, the cost of product revenue
decreased from 0.8% for fiscal 2002 to 0.7% for fiscal 2003. We expect the cost of product revenue as a percent of total revenue to vary in the future based on the level of sales of third-party
products.

Cost of Subscription Revenue.Cost of subscription revenue consists primarily of personnel and allocated overhead expenses
for support of time-based licenses. Our cost of subscription revenue increased by 24.3%, or $67,000, from $276,000 for fiscal 2002 to $343,000 for fiscal 2003. The increase in cost of
subscription revenue was primarily due to the increase in personnel and other costs associated with the support of a larger number of time-based licenses. As a percent of total revenue,
the cost of subscription revenue increased from 0.8% in fiscal 2002 to 1.0% for fiscal 2003. We expect the absolute dollar amount of the cost of subscription revenue to increase over the next
12 months as we continue to increase our support organization to accommodate an increasing installed base of time-based licenses.

Cost of Maintenance Revenue.Cost of maintenance revenue consists primarily of personnel and other expenses related to
providing maintenance support to our customers who purchase perpetual licenses. Our cost of maintenance revenue increased by 17.1%, or $117,000, from $685,000 for fiscal 2002 to $802,000 for fiscal
2003. The increase in cost of maintenance revenue was primarily due to increased hiring of dedicated support personnel to provide support to a growing installed user base. As a percent of total
revenue, the cost of maintenance revenue increased from 2.0% for fiscal 2002 to 2.3% for fiscal 2003. We expect that the absolute dollar amount of cost of maintenance revenue will grow in the next
12 months as we continue to increase support for our growing base of domestic and international customers.



We anticipate that our operating expenses will continue to increase in the future as we fund more research and development projects, increase our sales and
marketing operations both domestically and internationally, develop new sales channels, broaden our technical support and improve our operational and financial systems. Our increased operating
expenses will result primarily from higher headcount in all areas, and we expect our headcount to double over the next 18 to 24 months. In fiscal 2002 and fiscal 2003, legal fees and other
expenses related to our litigation with Synopsys were $5.6 million and $7.8 million, respectively. We also expect the cost of the Synopsys litigation to increase as we continue to defend
ourselves vigorously and the lawsuits move toward trial. Additionally, we also expect costs related to being a public company, such as directors' and officers' liabilities insurance, professional fees
and various filing fees to increase our general and administrative expenses. We believe that our operating expenses will continue to grow in absolute dollars in future periods although the rate of
growth in expenses from period to period may vary. We expect, however, that as a percent of revenue, operating expenses will not decline significantly, if at all. We will need to generate significant
revenue in the future to maintain profitability.

To
increase market share in international locations and better serve our customers, we plan to further expand our international operations. As a result of these investments in our
international operations, we may experience an increase in cost of sales and other operating expenses disproportionate to revenue from those operations. For example, during fiscal 2003, we opened a
support office in Bangalore, India.

In
fiscal 2003, we accrued bonuses of an aggregate of $900,000 earned by our employees for their services in fiscal 2003. These bonuses will be paid in December 2003. In fiscal
2002, we accrued bonuses of

28

---

an
aggregate of $760,000 earned by our employees for their services in fiscal 2002 to be paid on specified schedules. In addition, our executive officers orally agreed that they would not receive
their base salaries in fiscal 2002 and fiscal 2003. In October 2003, our compensation committee of our board of directors reinstated the salaries of our executive officers and we expect to pay
base salaries of approximately $691,000 to these officers in fiscal 2004. As a result of our significant bonus accruals and the foregone salaries in fiscal 2002 and fiscal 2003, our compensation
expense in fiscal 2004 may not be consistent with compensation expense in fiscal 2002 or fiscal 2003 or indicative of future periods.

Research and Development.Research and development expenses consist of engineering costs to develop new products, such as
LEXSIM, CRITIC and HANEX, enhance existing products, such as the release of HSIM 3.0 in April 2003, and perform quality assurance activities. Our research and development expenses increased by
30.4%, or $1.6 million, from $5.5 million for fiscal 2002 to $7.1 million for fiscal 2003. The increase in research and development expenses was primarily due to the hiring of
additional research and development personnel and increases in bonuses. Research and development headcount increased from 30 at September 30, 2001 to 39 at September 30, 2002 and to 42
at September 30, 2003. As a percent of total revenue, research and development expenses increased from 16.2% in fiscal 2002 to 20.4% in fiscal 2003. To maintain our competitive position and
continue to deliver new technologies that solve our customers' nanometer design challenges, we anticipate that research and development expenses will continue to increase in absolute dollars as we
invest in additional resources in existing and future products.

Sales and Marketing.Sales and marketing expenses consist primarily of salaries, commissions, travel, promotional and
advertising costs. Our sales and marketing expenses increased by 14.8%, or $1.4 million, from $9.4 million for fiscal 2002 to $10.8 million for fiscal 2003. The absolute dollar
increases in sales and marketing expenses were primarily due to the hiring of additional sales, application engineering and marketing personnel, the total number of whom increased from 27 at
September 30, 2001 to 46 at September 30, 2002 and to 47 at September 30, 2003. As a percent of total revenue, sales and marketing expenses increased from 27.7% in fiscal 2002 to
30.7% in fiscal 2003. We expect that sales and marketing expenses will continue to increase in absolute dollars in future periods as we further expand our global sales and support organization.

General and Administrative.General and administrative expenses represent corporate, finance, human resource, administrative,
legal and consulting expenses. Our general and administrative expenses increased by 37.1%, or $2.9 million, from $7.8 million for fiscal 2002 to $10.7 million for fiscal 2003. As
a percent of total revenue, general and administrative expenses increased from 22.9% for fiscal 2002 to 30.4% for fiscal 2003. The increase in general and administrative expenses was primarily due to
legal fees and costs related to being a public company. As a percent of total revenue, legal fees increased from 17.0% for fiscal 2002 to 23.4% for fiscal 2003 primarily due to increased litigation
related costs as we continued to defend ourselves vigorously against the lawsuits brought against us by Synopsys.
General and administrative headcount increased from 10 at September 30, 2002 to 11 at September 30, 2003. We expect that general and administrative expenses will continue to increase in
absolute dollars to support the growth of our future operations, as well as from increased legal fees, directors and officers liability insurance and the costs of public company compliance reporting.

Stock-Based Compensation.We did not record any deferred stock-based compensation in fiscal 2002 or fiscal 2003. We have been
amortizing stock-based compensation recorded previously over the vesting period of the related options, which is generally four years. We amortized $1.0 million and $955,000 of stock-based
compensation in fiscal 2002 and fiscal 2003, respectively. We expect aggregate stock-based compensation expense of approximately $842,000 during fiscal 2004 and approximately $275,000 during fiscal
2005.

29

---

Stock-based compensation expense decreased by 5.0%, or $50,000, from $1.0 million for fiscal 2002 to $955,000 for fiscal 2003. As a percent of total revenue, stock-based
compensation expense decreased slightly from 3.0% for fiscal 2002 to 2.7% for fiscal 2003.



Interest income increased by 3.9%, or $37,000, from $949,000 for fiscal 2002 to $986,000 for fiscal 2003. Due to profitability and positive cash flow, our cash
and investment balances increased in fiscal 2003, which resulted in increased interest income despite lower interest rates. As a percent of total revenue, interest income stayed flat at 2.8% of total
revenue for fiscal 2002 and fiscal 2003.



Our other income (expense), net remained relatively unchanged and was insignificant for fiscal 2002 and fiscal 2003.



The provision for income taxes as a percent of income before taxes was 35.9% and 30.0% for fiscal 2002 and fiscal 2003, respectively. The decrease in the
effective tax rate from the prior year was primarily due to the reduction of state income taxes as a result of increases in tax credits.

Fiscal Years Ended September 30, 2001 and 2002



Total Revenue.Total revenue increased $12.0 million, from $21.9 million for fiscal 2001 to
$33.9 million for fiscal 2002. This increase was attributable to an increase in our end user base resulting in substantial growth in product, subscription and maintenance revenue, as well as
additional sales to our existing end users.

Revenue
from sales outside of North America accounted for 51.0% and 42.0% of total revenue for fiscal 2001 and fiscal 2002, respectively. The percent of total revenue from outside of
North America decreased due to domestic revenue growing at a faster rate than revenue from outside of North America primarily because of increased sales to more domestic major customers. Revenue from
Japan was 24.1% and 19.4% of total revenue in fiscal 2001 and fiscal 2002, respectively. No other country outside North America accounted for more than 10% of our total revenue in either period.

Marubeni
Solutions accounted for approximately 24.1% and 19.4% of our total revenue for fiscal 2001 and 2002, respectively. No other customer or distributor accounted for more than 10%
of our total revenue during either period.

Deferred
revenue increased from $4.5 million as of September 30, 2001 to $6.1 million as of September 30, 2002. This increase in deferred revenue was
attributable to an increase in deferred time-based license revenue and deferred maintenance revenue from new purchases and renewals of maintenance for perpetual licenses.

Product Revenue.Product revenue increased by $3.9 million, from $15.2 million for fiscal 2001 to
$19.1 million for fiscal 2002. As a percent of total revenue, product revenue decreased from 69.0% for fiscal 2001 to 56.3% for fiscal 2002, as the growth rate in sales of perpetual licenses
was outpaced by growth in time-based licenses.

Subscription Revenue.Subscription revenue increased by $5.6 million, from $4.0 million for fiscal 2001 to
$9.6 million for fiscal 2002. This increase was primarily due to new customers purchasing time-based licenses, as well as existing customers purchasing additional
time-based licenses. As a percent of total revenue, subscription revenue rose from 18.3% for fiscal 2001 to 28.3% for fiscal 2002.

30

---

Maintenance Revenue.Maintenance revenue increased by $2.4 million, from $2.8 million for fiscal 2001 to
$5.2 million for fiscal 2002. The increase in maintenance revenue was due to the increase in the number of perpetual licenses in our installed base. As a percent of total revenue, maintenance
revenue increased from 12.7% for fiscal 2001 to 15.4% for fiscal 2002.



Cost of Product Revenue.Cost of product revenue decreased by $49,000, from $308,000 for fiscal 2001 to $259,000 for fiscal
2002. As a percent of total revenue, the cost of product revenue decreased from 1.4% for fiscal 2001 to 0.8% for fiscal 2002. The decrease in the cost of product revenue was primarily due to a
decrease in third-parties royalties from lower sales of third-party products.

Cost of Subscription Revenue.Cost of subscription revenue increased by $155,000, from $121,000 for fiscal 2001 to $276,000
for fiscal 2002. The increase in cost of subscription revenue was primarily due to increased personnel and other costs associated with the support of a larger number of time-based
licenses. As a percent of total revenue, the cost of subscription revenue increased from 0.5% for fiscal 2001 to 0.8% for fiscal 2002.

Cost of Maintenance Revenue.Cost of maintenance revenue increased by $273,000, from $412,000 for fiscal 2001 to $685,000 for
fiscal 2002. The increase in cost of maintenance revenue was primarily due to the increased hiring of dedicated support personnel to provide support to a growing installed user base. As a percent of
total revenue, the cost of maintenance revenue increased slightly from 1.9% for fiscal 2001 to 2.0% for fiscal 2002.



Research and Development.Research and development expenses increased by $371,000, from $5.1 million for fiscal 2001
to $5.5 million for fiscal 2002. The increase in research and development expenses in absolute dollars was primarily due to the hiring of additional research and development personnel,
partially offset by the decrease in bonuses. As a percent of total revenue, research and development expenses decreased from 23.3% in fiscal 2001 to 16.2% in fiscal 2002.

Sales and Marketing.Sales and marketing expenses increased by $2.3 million, from $7.1 million for fiscal 2001
to $9.4 million for fiscal 2002. The absolute dollar increase in sales and marketing expenses was primarily due to the hiring of additional sales, support and marketing personnel and, to a
lesser extent, increased trade show and other marketing activities and the expansion of our sales offices. As a percent of total revenue, sales and marketing expenses decreased from 32.5% in fiscal
2001 to 27.7% in fiscal 2002.

General and Administrative.General and administrative expenses increased by $4.4 million, from $3.4 million
for fiscal 2001 to $7.8 million for fiscal 2002. As a percent of total revenue, general and administrative expenses increased from 15.3% for fiscal 2001 to 22.9% for fiscal 2002. The increase
in general and administrative expenses was primarily due to legal fees, the hiring of additional finance and operations personnel and costs related to being a public company. As a percent of total
revenue, legal fees increased from 4.9% during fiscal 2001 to 17.0% during fiscal 2002 primarily due to increased litigation related costs.

Stock-Based Compensation.We recorded deferred stock-based compensation of $2.5 million in connection with stock
option grants in fiscal 2001. We amortized $2.4 million and $1.0 million of stock-based compensation in fiscal 2001 and fiscal 2002, respectively. As a percent of total revenue,
stock-based compensation expense decreased from 10.8% for fiscal 2001 to 3.0% for fiscal 2002. Stock-based compensation expense decreased due to the one-time charge resulting from the
acceleration of certain non-qualified stock options in fiscal 2001.

31

---



Interest income increased by $534,000, from $415,000 for fiscal 2001 to $949,000 for fiscal 2002. Due to net proceeds from our initial public offering and
increasing profitability and cash flow, cash and investment balances increased in fiscal 2002, which resulted in increased interest income despite lower interest rates. As a percent of total revenue,
interest income increased from 1.9% for fiscal 2001 to 2.8% for fiscal 2002.



Our other income (expense), net remained relatively unchanged and was immaterial for fiscal 2001 and fiscal 2002.



The provision for income taxes as a percent of income before taxes was 41.0% for fiscal 2001 and 35.9% for fiscal 2002. The decrease in the effective tax rate
from the prior year was primarily due to the reduction of amortization of stock-based compensation as a percent of income before taxes.

Liquidity and Capital Resources

From inception through fiscal 2003, we have financed our operations primarily through public offerings of our common stock, the sale of common stock to employees
and cash from net income. Total net proceeds of our December 2001 initial public offering after deducting underwriting discounts and offering expenses, including the exercise of the
over-allotment option, were approximately $57.2 million.

As
of September 30, 2003, we had cash, cash equivalents and short-term investments of $92.2 million, an increase of $13.7 million from
$78.5 million as of September 30, 2002, and working capital of $80.7 million, an increase of $9.1 million from $71.6 million as of September 30, 2002.

Average
days sales outstanding increased from 24 days as of September 30, 2001 to 38 days as of September 30, 2002 and decreased to 20 days as of
September 30, 2003. The increase in average days sales outstanding in fiscal 2002 was due to increased sales and revenue being invoiced more unevenly during the fourth quarter. The decrease in
days sales outstanding in fiscal 2003 was due to a majority of our total revenue in the fourth quarter of fiscal 2003 being either derived from deferred revenue or backlog that was invoiced early in
the quarter, which left little uncollected as of September 30, 2003.

Net
cash provided by operating activities was $8.4 million, $9.0 million and $11.8 million for fiscal 2001, fiscal 2002 and fiscal 2003, respectively. Net cash
provided by operating activities for fiscal 2001, fiscal 2002 and fiscal 2003 resulted primarily from net income and increases in accrued liabilities and deferred revenue. In addition, in fiscal 2002,
an increase in accounts receivable and a decrease in long-term liabilities partially offset the increase in net cash provided by operating activities. In fiscal 2003, a decrease in
accounts receivable also resulted in additional increase in net cash provided by operating activities.

Net
cash used in investing activities was $7.4 million, $29.1 million and $4.2 million for fiscal 2001, fiscal 2002 and fiscal 2003, respectively. In these periods,
the net cash used primarily related to the purchase of investment securities with maturities of 91 days to one year and purchases of property and equipment.

Capital
expenditures were approximately $904,000, $331,000 and $482,000 for fiscal 2001, fiscal 2002 and fiscal 2003, respectively. Our capital expenditures consisted of purchases of
computer equipment, software and office furniture and fixtures.

Net
cash provided by financing activities was $221,000, $57.5 million and $2.4 million for fiscal 2001, fiscal 2002 and fiscal 2003, respectively. For fiscal 2001, net cash
provided by financing activities was primarily from proceeds from the exercise of employee stock options. For fiscal 2002, net cash provided by

32

---

financing
activities was primarily due to the net proceeds from the sale of 5.75 million shares of common stock in our initial public offering. For fiscal 2003, net cash provided by financing
activities was primarily due to the net proceeds from stock option exercises and employee stock plan purchases.

As
of September 30, 2003, we had no borrowings, lines of credit, outstanding equipment leases or lease lines.

We
intend to continue to invest heavily in the development of new products and enhancements to existing products. We also intend to increase our sales and marketing operations. Our
future liquidity and capital requirements will depend on numerous factors, including:



We
believe that our current cash and investment balances and any cash generated from operations, will be sufficient to meet our operating and capital requirements for at least the next
12 months. However, it is possible that we may require additional financing within this period. We have no current plans, and we are not currently negotiating to obtain additional financing.
The factors described above will affect our future capital requirements and the adequacy of our available funds. In addition, even if we raise sufficient funds to meet our anticipated cash needs
during the next 12 months, we may need to raise additional funds beyond this time. We may be required to raise those funds through public or private financings, strategic relationships or other
arrangements. We cannot assure you that such funding, if needed, will be available on terms attractive to us, or at all. Furthermore, any additional equity financing may be dilutive to stockholders,
and debt financing, if available, may involve restrictive covenants. If we fail to raise capital as and when needed, our failure could have a negative impact on our ability to pursue our business
strategy and maintain profitability.



In October 2002, our Board of Directors authorized a stock repurchase program of up to $5.0 million of our common stock over a 12 month
period, which our Board extended for another 12 month period in October 2003. Shares will be repurchased in the open market at times and prices we consider appropriate. The timing of
purchases and the exact number of shares to be purchased will depend on market conditions. Common shares reacquired are intended to be used for general corporate purposes. As of the date we filed this
Annual Report on Form 10-K with the SEC, we had not repurchased any shares under this program.



We lease our facilities under various noncancelable operating leases. In December 2002, we entered into a three-year operating lease for our
headquarters located in Santa Clara, California, which began in February 2003. These noncancelable operating leases began expiring in October 2003. Rent expense was

33

---

$365,000
in fiscal 2001, $600,000 in fiscal 2002 and $784,000 in fiscal 2003. As of September 30, 2003, the aggregate future noncancelable minimum rentals or operating leases are as follows (in
thousands):

Years Ending September 30,2004

$
5852005


5292006


252Total:

$
1,366


Factors Affecting Future Results

We have relied and expect to continue to rely on HSIM for a substantial majority of our revenue, and a decline in sales of licenses for HSIM could cause our revenue to
decline.

Historically,
we have derived substantially all of our revenue from HSIM. We believe HSIM is the first hierarchical simulator that meets the circuit verification challenges of complex
nanometer semiconductors. We expect that the revenue from this product will continue to account for substantially
all of our revenue for at least the next six months. The electronic design automation software market, including the market for hierarchical simulator software, is characterized by rapid technological
change, frequent new product introductions, uncertain product life cycles and evolving industry standards. If our competitors introduce new products and/or offer aggressive pricing that compete with
HSIM, our revenue could decline materially and our results of operations could be harmed. For instance, in fiscal 2003, certain competitors were offering extremely competitive prices either by
substantial discounting or bundling their products which resulted in a longer sales cycle for HSIM or delays by prospective customers in making their purchasing decisions. Since we expect HSIM to
continue to account for substantially all of our revenue until at least the second half of fiscal 2004, any factors adversely affecting the pricing of our licenses of or demand for HSIM, including
competition or technological change, could cause our revenue to decline materially and our business to suffer.

Our revenue would decline substantially if our existing customers do not purchase additional licenses or renew existing time-based licenses and maintenance from
us.

We
rely on additional perpetual and time-based license revenue from our existing customers, as well as annual maintenance renewals for our perpetual licenses and renewals of
our time-based licenses when they expire. Even if we are successful in generating revenue from our software to new customers, if our existing customers do not purchase additional licenses
of our software or renew their expired time-based licenses or annual maintenance for perpetual licenses, we would experience a decline in revenue. In fiscal 2003, our revenue from
perpetual licenses decreased as a result of more customers' preference to purchase time-based licenses and lower demand due to much tighter budgets. Revenue from time-based
licenses and maintenance has increased steadily over the last 12 months and we expect it to continue to increase. For instance, in fiscal 2003, 66.4% of our total revenue was derived from
time-based licenses and maintenance as compared to 43.7% for fiscal 2002. As more of our revenue is attributable to time-based licenses, our revenue could decline materially if
our customers do not renew their existing time-based licenses or purchase additional time-based licenses.

If semiconductor design and manufacturing companies continue to experience recession or other conditions which impact their operating budgets, they may delay or cancel
purchases of our software, which would reduce our revenues and cause our business to suffer.

The
primary customers for our software are semiconductor design and manufacturing companies. Any significant downturn in our customers' markets, or domestic and global conditions, which
result in the reduction of research and development budgets or the delay of software purchases, would likely result in a decline in demand for our software and services and could harm our business.
Since early 2000, the

34

---

semiconductor
industry has experienced a substantial decline in order volume and revenue and that downturn has continued. This could result in our customers delaying or canceling the purchase of our
software. Any of these occurrences could have a significant impact on our operating results, revenues and costs and may cause the market price of our common stock to decline or become more volatile.
For example, we experienced a substantial change in customers' purchasing behavior during the three months ended March 31, 2003 due to the prolonged economic downturn and concerns for their own
financial stability. Consequently, as a cost-cutting measure, customers either suspended or reduced their capital budgets dramatically, which adversely affected our revenue. In addition,
we were unable to meet revenue and earnings expectations for the quarter ended March 31, 2003 and had to lower our revenue and earnings guidance for the quarter ended June 30, 2003 and
fiscal 2003. As a result, the market price of our common stock was negatively impacted.

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. More recently, certain Asian countries have also experience difficulties from concerns about and the
impact of closures due to SARS. These difficulties have triggered a significant downturn in the semiconductor market, resulting in reduced budgets for semiconductor design tools which, in turn, has
negatively impacted us. We cannot predict what impact the recent prolonged economic slowdown and in particular, the semiconductor industry, will have on our business, but it may result in fewer
purchases of licenses of our software, substitution to our lower priced configurations by customers who previously licensed our higher priced configurations or nonrenewal of time-based
licenses or maintenance. If the current economic slowdown continues, we may not meet our revenue expectations for upcoming quarters and fiscal 2004.

We are currently a defendant in three lawsuits brought by Synopsys. The prosecution of these lawsuits could have a substantial negative impact on our business. Should Synopsys
prevail, we may be required to pay substantial monetary damages or be prevented from selling our software.

Synopsys
has filed claims against us in state and federal court. These claims are based on the alleged facts and circumstances relating to the departure of our five founders from their
employment at Synopsys, the founding of our company and the development and sale of HSIM and our other products. Each of our founders and Dr. Sang S. Wang, our Chief Executive Officer, became
an employee of Synopsys when Synopsys acquired EPIC Design Technology in February 1997. Dr. Wang resigned from Synopsys in March 1998 and served as a consultant to Synopsys until
June 1998. Dr. An-Chang Deng, our President, and our four other founders resigned from Synopsys at approximately the same time in August 1998 and became employees of
our company immediately
thereafter. Dr. Wang became an employee of our company in April 1999. None of Drs. Wang or Deng or our four other founders was subject to a noncompetition agreement with Synopsys at any
time.

In
February 2000, Synopsys filed a complaint in the Superior Court of the State of California in the County of Santa Clara (Case No. CV787950) against us and Dr. Deng, our
President. The complaint alleged breach of contract, breach of fiduciary trust, diversion of corporate opportunity and constructive trust. In September 2001, Synopsys filed its second amended
complaint, which added claims of inducing/aiding and abetting breach of fiduciary duty, including/aiding and abetting diversion of corporate opportunity, misappropriation of trade secrets, civil
conspiracy, breach of confidence and unfair competition, and added as individual defendants Dr. Wang and our four other founders. In September 2002, Synopsys filed a supplemental second
amended complaint that contained supplemental allegations but added no new claims or parties. In January 2003, the discovery referee issued orders creating rebuttable presumptions in favor of
Synopsys on certain evidentiary issues to sanction us for erasure of certain computer files requested in discovery by Synopsys. These rulings mean that we must prove at trial that we did not take or
use Synopsys' source code or other confidential information, rather than the usual requirement that Synopsys provide such proof in the first instance. However, none of these rulings resolves any of
the claims made by Synopsys in the case and the trial judge or jury can reach their

35

---

own
conclusions based upon the evidence presented at trial. We filed a motion for reconsideration of this order and in March 2003, the court denied our motion, concluding that it was barred on
procedural grounds. In January 2003, Synopsys filed a third amended complaint, which contained supplemental allegations but added no new claims or parties. We have filed an answer denying
Synopsys' allegations. In August 2003, Synopsys filed several motions for terminating sanctions against us which are scheduled for hearing in January 2004. We oppose each of these
motions and intend to file oppositions within the time permitted by law. Synopsys has requested unspecified damages of at least $25 million, an injunction, a constructive trust on unspecified
intellectual property belonging to us and other relief. Further, in September 2003, Synopsys notified us that it reserves the right to seek up to $80 million in punitive damages with
respect to claims for which punitive damages are allowed under California Civil Code Section 3294, and up to $50 million in punitive damages with respect to the trade secret claims under
California Civil Code Section 3426.3(c). This action is currently in discovery. A trial date has not yet been set.

We
believe that we have meritorious defenses to Synopsys' allegations and claims and we intend to continue to defend ourselves vigorously. However, because of the inherent uncertainty of
litigation in general, and the fact that the discovery related to this litigation is ongoing, we cannot assure you that we will ultimately prevail. Should Synopsys ultimately succeed in the
prosecution of its claims, we could be permanently enjoined from selling our software and deriving related maintenance revenue. In addition, we could be required to pay substantial monetary damages to
Synopsys. Further, we could be enjoined preliminarily from selling our software during the course of the litigation. Litigation such as the suit Synopsys has brought against us can take years to
resolve and can be expensive to defend. Although the final outcome of the litigation may not occur for some time, the parties periodically conduct evidence gathering, meet to discuss the status of the
litigation and file motions and other requests for the court to act. The results of these periodic activities, particularly the court's decisions on current pending and future motions, could have the
effect of determining the ultimate outcome of the litigation, either for or against us, prior to a trial on the merits, or strengthen or weaken our ability to
assert claims and defenses. For example, in November 2001, the court denied a motion brought by Synopsys for injunctive relief that, if granted, could have prevented us from selling our
products. If any of Synopsys' motions ultimately prevail, our ability to defend ourselves against the claims brought against us in this litigation could be severely limited. It is possible that our
relationships with our customers will be seriously harmed in the future as a result of the Synopsys litigation. Accordingly, an adverse judgment, if entered in favor of any Synopsys claim, could
seriously harm our business, financial position and results of operations and cause our stock price to decline substantially. In addition, the Synopsys allegations and claims, even if ultimately
determined to be without merit, could be time consuming to defend, result in costly litigation, divert our management's attention and resources, cause product shipment delays or require us to enter
into royalty or license agreements. These royalty or license agreements may not be available on terms acceptable to us, if at all, and the prosecution of the Synopsys allegations and claims could
significantly harm our business, financial position and results of operations and cause our stock price to decline substantially.

In
May 2001, Synopsys filed a complaint in the United States District Court, Northern District of California, San Jose division (Case No. CO1-20423 PVT) against us,
alleging that our HSIM software infringes U.S. Patent No. 5,878,053 entitled "Hierarchical Power Network Simulation and Analysis tool for reliability testing of Deep Submicron IC Designs" (the
"053 patent"), which is purportedly assigned to Synopsys. Since the case began, Synopsys has also alleged that our subsequently released HSIM 2.0 and LEXSIM products, infringe the 053 patent. Synopsys
has requested relief including damages from $4.1 million to $13.7 million and an injunction. Synopsys has also requested that any damage award be trebled for alleged willful
infringement. In June 2001, we filed an answer to the complaint denying infringement of a valid, enforceable patent and asserting counterclaims. We have since amended our counterclaims. Our
current counterclaims allege that, among other things, the 053 patent is invalid, unenforceable and not infringed and that Synopsys has violated federal antitrust and state unfair competition laws.

36

---

From
time to time, the court has ruled on summary judgment motions in the case. In May 2002, the court granted summary judgment in favor of Synopsys on our invalidity defenses and
counterclaims, concluding that they were barred by the doctrine of assignor estoppel. The court denied Synopsys' motion with respect to our unenforceability defense and counterclaim. In
November 2002, the court issued an order granting summary judgment in favor of Synopsys on certain antitrust counterclaims based on the doctrine of assignor estoppel. However, the court
declined to rule on Synopsys' motion with respect to our other antitrust and unfair competition counterclaims. In addition, the court issued a ruling construing the claims of the 053 patent in
August 2002.

In
September 2002, the U.S. Patent and Trademark Office granted our request for ex parte reexamination of the 053 patent based on prior art not previously considered by the Patent
Office. We have moved to stay the federal litigation pending the outcome of the reexamination and the court granted our motion in December 2002. During the reexamination of the 053 patent, the
Patent Office may determine that the subject matter in the patent is patentable as originally claimed, that the subject matter is patentable if the claims are modified or that the subject matter is
not patentable. We cannot predict what the result of the reexamination procedure will be or how long it will take to complete.

Activity
on several other summary judgment motions has been suspended because the court stayed the federal litigation. In November 2002, Synopsys filed three motions for summary
judgment. The first motion asked the court to enter judgment before trial that Nassda's products infringe the 053 patent. The second motion asked the court to rule before trial against us on our
defense that the 053 patent is unenforceable because Synopsys committed inequitable conduct in obtaining the patent. We submitted oppositions to both of these motions. Synopsys' third motion asked the
court to rule before trial against us on our remaining antitrust counterclaims. Because of the court's prior rulings against us on our other antitrust counterclaims, we did not oppose this motion. In
November 2002, we also filed a summary judgment motion, which asked the court to enter judgment before trial that our products do not infringe the 053 patent. Synopsys opposed this motion. The
court issued its order staying the federal litigation before the parties' reply briefs were due.

In
June 2003, Synopsys filed a second complaint in the United States District Court, Northern District of California, San Francisco Division (Case No. C03-2664 RS)
against us, alleging that the our products, including but not limited to HSIM and HANEX software products, infringe Synopsys U.S. Patent No. 6,249,898 entitled "Methods and Systems for
Reliability Analysis of CMOS VLSI Circuits Based on Stage Partitioning and Node Activities" (the "898 Patent"). In July 2003, we filed an answer denying that we infringe the 898 Patent and
asserting as defenses that the 898 Patent is invalid and unenforceable. We also brought a declaratory judgment counterclaim seeking judgment that the 898 Patent is not infringed by us and that the 898
Patent is invalid and unenforceable. In August 2003, Synopsys filed a motion to dismiss these defenses and counterclaims on the ground that we are barred from contesting the validity and
enforceability of the 898 Patent based on the doctrine of assignor estoppel. Synopsys' motion also sought to strike our defenses of laches, patent misuse and unclean hands on the ground that we had
not pleaded them with sufficient particularity. We opposed Synopsys' motions. In October 2003, the court denied Synopsys' motion to dismiss and strike the invalidity and unenforceability
defenses and counterclaims and granted Synopsys' motion to strike the laches, patent misuse and unclean hands defenses with leave to amend the pleadings. The court has scheduled a case management
conference for December 2003.

We
believe we have meritorious defenses to Synopsys' claims and intend to defend ourselves vigorously. However, because of the high degree of complexity of the intellectual property at
issue, the inherent uncertainties of litigation in general and the preliminary nature of this litigation, we cannot assure you that we will ultimately prevail. Should Synopsys ultimately succeed in
the prosecution of its claims, we could be permanently enjoined from selling our software and deriving related maintenance revenue. In addition, we may be required to pay substantial monetary damages
to Synopsys. Further, we could be enjoined preliminarily from selling our software during the course of the litigation. Litigation such as the suit Synopsys has brought against us can take years to
resolve and can be expensive to defend. The court's

37

---

decisions
on current pending and future motions could have the effect of determining the ultimate outcome of the litigation prior to a trial on the merits, or strengthen or weaken our ability to
assert claims and defenses. It is possible that our relationships with our customers will be seriously harmed in the future as a result of the Synopsys litigation. Accordingly, an adverse judgment, if
entered on any Synopsys claim, could seriously harm our business, financial position and results of operations and cause our stock price to decline substantially. In addition, the Synopsys allegations
and claims, even if ultimately determined to be without merit, could be time consuming to defend, result in costly litigation, divert our management's attention and resources, cause product shipment
delays or require us to enter into royalty or license agreements. These royalty or license agreements may not be available on terms acceptable to us, if at all, and the prosecution of the Synopsys
allegations and claims could significantly harm our business, financial position and results of operations and cause our stock price to decline substantially.

On
July 1, 2003, a purported derivative complaint was filed against us and our directors in the United States District Court for the Northern District of California. This
complaint alleged violations of California Corporations Code Section 25402, breach of fiduciary duty, waste of corporate assets and unjust enrichment based generally on the facts and
circumstances alleged in the Synopsys litigations. The complaint seeks equitable relief and an unspecified amount of damages on behalf of Nassda. The case is still in the preliminary stages, and it is
not possible for us to quantify the impact, if any, on Nassda. An unfavorable outcome in this case could have a material adverse effect on our business, financial condition, results of operations and
cash flow. In addition, the expense of defending any litigation may be costly and divert management's attention from the day-to-day operations of our business.

Because many of our current competitors have greater resources than we do and pre-existing relationships with our potential customers, we might not be able to
achieve sufficient market penetration to sustain profitability or gain additional market share.

We
face significant competition from larger companies that market suites of electronic design automation products that address all or almost all steps in the semiconductor design
process. Many of these 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.

Our
software is used to simulate and analyze complex nanometer-scale semiconductor designs. Our competitors in the electronics design automation industry who offer products that are used
for other segments of the semiconductor design process often bundle their products together to offer discounts on products competitive with those we offer, making those products extremely attractive
for our customers or potential customers to use. In addition, these competitors may not support our effort to integrate our software into their existing software. These competitors include such
companies as Cadence, Synopsys and Mentor Graphics. 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. We cannot assure you that we will be able to compete successfully in such
environments. If we lose such opportunities to our competitors, our results of operations could be harmed significantly.

Our business depends on continued demand for complex nanometer-scale semiconductors and the electronic equipment that incorporate them.

Our
software is used to design complex nanometer-scale semiconductors that are an integral part of portable consumer electronics, networking equipment, wireless communications equipment,
multimedia devices and personal computers. As a result, if the demand for these devices and businesses of the manufacturers of these products do not continue to grow, our revenue and business will
suffer. Demand for portable consumer electronics may decrease if mobile phone, electronic mail or Internet use declines,

38

---

the
cost of those services increases or consumers fail to adopt latest generation portable electronics. Potential consumers of portable consumer electronics may use or modify existing equipment and
never adopt next generation portable consumer electronics. Demand for other complex electronic equipment, such as networking equipment, may decrease if service providers do not experience subscriber
growth or defer network build outs or other capital spending.

Purchases
of licenses of our software are largely dependent upon the commencement of new design projects by semiconductor manufacturers and their customers, the number of design
engineers and the increasing complexity of designs. Since late 2000, the semiconductor industry has experienced a sharp decline in orders and revenue and many companies have reduced the number of
design engineers and/or design projects. The outlook for the electronics industry is uncertain and we cannot predict how long the current downturn will last. Many semiconductor manufacturers and
vendors of products incorporating semiconductors have announced earnings shortfalls and employee layoffs.

Budget
cuts have impacted the number of orders we receive from our customers and our customers in general have been seeking larger discounts and extended payment terms or purchasing
time-based licenses in lieu of more costly perpetual licenses. We believe our customers' and potential customers' internal budgets have been and will continue to be subject to heightened
scrutiny and the time required to receive budgetary approvals has lengthened. We cannot predict whether purchases of licenses of our software will be further deferred due to budget constraints or
whether the number of complex nanometer-scale semiconductor design starts by our customers will be slower or decline even further.

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 in part on our ability to enhance our existing products and achieve market acceptance of new, innovative products and technologies. Our software and
technologies are complex and to successfully implement our business strategy and manage our business, an in depth understanding of circuit design and the physical behavior of complex nanometer-scale
semiconductors is required. We depend substantially on the expertise of Sang S. Wang, our Chairman and Chief Executive Officer, and our existing engineering personnel, especially An-Chang
Deng, our President, and our other founders. We do not have long-term employment agreements with our founders and the loss of the services of any of our key employees could adversely
affect our business and slow our product development process. We do not maintain key person life insurance on any of our employees.

If we do not continue to expand our sales force and customer service and support organization, our revenue may not grow.

Approximately
61.2%, 72.1% and 75.3% of our total revenue for fiscal 2001, fiscal 2002 and fiscal 2003, respectively, were from our direct sales efforts. Our software requires
sophisticated sales efforts by experienced and knowledgeable personnel. Competition for these individuals is intense due to the limited number of people available with the necessary sales experience
and technical understanding of electronic design automation products. Hiring customer service and support personnel is also very competitive in our industry due to the limited number of people
available with the necessary technical skills. Our sales and support staff consisted of 45 persons as of September 30, 2003. If we are unable to successfully train and integrate sales and
support personnel and continue to identify, hire, train and retain new qualified individuals, our revenue may not grow.

If we are unable to attract and retain qualified research and development personnel, our business will suffer.

There
are a limited number of qualified software engineer and research and development personnel with the necessary experience and understanding of complex nanometer-scale semiconductor
design products in the San Francisco Bay Area, where our primary facility is located. The scarcity of qualified persons may cause us to incur higher salary costs or require us to provide larger stock
option grants. We

39

---

have
a small research and development facility in Taiwan, out of which four of our engineers currently operate, to broaden the pool of software engineers from which we can recruit. We cannot assure
you that this strategy will help us satisfy our need for qualified personnel. Further, we may encounter other difficulties with managing geographically separate research and development activities. If
we fail to attract, motivate and retain engineers and research and development personnel, we may be unable to develop or enhance our software, meet the demands of our customers in a timely manner or
remain competitive and our business would suffer.

Because we rely on distributors for a large portion of our revenue, our revenue could decline if our existing distributors do not continue to purchase software licenses from us
or represent us in those markets.

A
majority of our sales outside North America and Europe are conducted through distributors. Sales by our distributors accounted for approximately 38.8%, 27.9% and 24.7% of our total
revenue in fiscal 2001, fiscal 2002 and fiscal 2003, respectively. We rely on Marubeni Solutions as the exclusive distributor of our software in Japan. Sales to Marubeni Solutions accounted for 24.1%,
19.4% and 15.5% of our total revenue in fiscal 2001, fiscal 2002 and fiscal 2003, respectively. We cannot be certain that we will be able to attract distributors that market our software effectively
or provide timely and cost effective user support and service. Further, our agreements with our distributors provide exclusive distribution rights, but do not obligate the distributor to purchase any
amount of licenses of our software or sell licenses of our software. Consequently, one or more of our distributors may not continue to represent our software or devote a sufficient amount of effort
and resources to selling our licenses of software in their territories. We may from time to time be forced to terminate relationships with distributors who do not maintain an appropriate level of
sales. We may also decide to sell our software in a particular territory directly and terminate relationships with a particular distributor. As a result, our sales in a given territory may decrease
substantially or cease until a suitable replacement distributor can be found or we are able to establish or provide adequate sales and support efforts for that territory. Even if we are successful in
selling licenses of our software through new distributors, the rate of growth of our total revenue could be harmed if our existing distributors do not continue to sell licenses of our software.

If we fail to adequately match our expenses to anticipated revenue in any given quarter, our operating results could fall below market expectations and cause the price of our
stock to decline.

Because
of the prolonged economic downturn, extended sales cycle, seasonal fluctuations in our business, cyclicality of the semiconductor industry and the rapidly evolving market for
complex
nanometer-scale semiconductors, our ability to accurately forecast our quarterly revenue is limited. As a result, it is difficult to predict the revenue we will recognize in any given quarter.

We
expect to experience seasonal fluctuations in our revenue due to:



Commissions
represent a significant portion of our sales force compensation, which is structured to encourage sales closures prior to fiscal year end. As a result, we expect that sales
efforts will intensify in the fourth fiscal quarter which could result in our revenue being flat or slightly lower in the first and second quarters of the subsequent fiscal year.

It
is difficult for us to evaluate the degree to which these factors may reduce our sales because our revenue growth historically had masked the impact of these factors. In addition,
most of our costs are

40

---

relatively
fixed in the short term and our business may not grow rapidly enough to absorb the costs of our personnel and facilities. As a result, we may be unable to reduce our expenses to avoid or
minimize the negative impact on our quarterly operating results if anticipated revenue is not realized. For example, for the three months ended March 31, 2003, our revenue and earnings fell
short of our previous guidance and market expectation and we revised our guidance for the quarter ended June 30, 2003 and fiscal 2003 to project much lower revenue and earnings than previously
given, which negatively impacted the trading price of our common stock. Although we were able to achieve revenue and earnings results that met the revised guidance for the three months ended
June 30, 2003 and September 30, 2003, we did not see any meaningful improvements in our customers' spending pattern and our outlook continues to be cautious. These trends could
materially affect our quarter to quarter operating results, which could negatively impact our stock price.

We may not succeed in creating market acceptance for LEXSIM, CRITIC and HANEX, and our operating results may decline as a result.

We
released our second major product, LEXSIM, in May 2002, our third product, CRITIC, in December 2002 and our fourth product, HANEX, in May 2003. To date, LEXSIM,
CRITIC and HANEX have accounted for only an immaterial portion of our revenues. Even though we do not expect LEXSIM, CRITIC or HANEX to account for a meaningful percentage of our total revenue until
the second half of fiscal 2004, our future growth and profitability could be affected by our ability to increase sales of these new products. Furthermore, marketing new products requires significant
additional expenses and resources. If we fail to market them successfully, our profitability may decline.

If we fail to enhance our circuit simulation and analysis software and develop and introduce new circuit simulation and analysis software on a timely basis, we may not be able
to address the needs of our customers, our technology may become obsolete and our results of operations may be harmed.

The
electronic design automation software market is characterized by rapid technological change, frequent new product introductions and enhancements, uncertain product life cycles,
changes in user demands and evolving industry standards. The introduction of software embodying new technologies and the emergence of new industry standards can render existing software in the
semiconductor design industry obsolete and unmarketable. For instance, if customers widely adopt new engineering languages to describe their semiconductor designs and our software fails to support
those languages adequately, demand for our software will suffer. To be successful, we must devote a substantial amount of our resources to enhance our software, keep pace with changes within our
industry and develop and market new technologies. If our enhanced products or our future products and technologies do not achieve market acceptance, we may not be able to maintain our market share or
recoup our development costs. As a result, our operating results would be harmed.

Our sales cycle is unpredictable and may be more than six months, so we may fail to adequately match our expenses to anticipated revenue in any given period or meet market
expectations.

Our
sales cycle, or the period between our initial contact with a potential customer and the customer's purchase of a license of our software, generally ranges from three to six months
but may be longer, particularly in the current economic downturn. We cannot predict the exact length of our sales cycle, which at times has exceeded six months. The unpredictability of our sales cycle
makes it difficult to plan our expenses and forecast our results of operations for any given period. If we do not correctly predict the timing of our customers' purchases, the amount of revenue we
recognize in a given quarter could be negatively impacted, which could harm our operating results. Our sales cycle may lengthen because of several factors, including:



41

---



If
we were to experience a delay in our orders, it could harm our ability to meet our forecasts or investors' expectations for a given quarter and ultimately result in the decrease of
our stock price. Further, if our sales cycle unexpectedly lengthens in general, it would adversely affect the timing of our revenue recognition, which could cause us not to meet market expectations
and cause our stock price to suffer. For instance, for the three months ended June 30, 2003 and March 31, 2003, our revenue decreased as compared to the previous quarters because we
experienced longer sales cycles, which negatively impacted our ability to receive orders and recognize revenue.

Our expansion into international markets will result in higher personnel costs or distributor commissions and could reduce our operating margins.

In
order to penetrate international markets further, we must either expand the number of distributors who sell licenses of our software or increase our direct international sales
presence. As we increase our direct international sales presence, our sales efforts may be delayed as we begin our local sales activities and we may incur higher personnel costs that may not result in
additional revenue. These costs and the time to establish a local sales presence could harm our operating results. We may not realize corresponding growth in operating margins from growth in
international sales due to the higher costs of these sales. We have increased our sales and support resources in Europe over the last two years and have established offices in England, France,
Germany, India, Israel and Singapore. However, the expected returns on those investments have not been realized, primarily due to the economic slowdown. To date, we have relied primarily on
international distributors in Asia and have only recently begun to employ direct sales personnel in Singapore and India. Even if we expand our direct and indirect international selling efforts, our
efforts may not create or increase international market demand for our software or generate revenue sufficient to recoup the cost of this expansion.

If we experience losses in the future, the market price of our common stock could decline.

Although
we had net income for the past four fiscal years, we may incur losses in the future. In order to fund our growth and implement our strategies, we must continue to increase our
investment in research and development, sales and marketing and other operations. As a result, we will need to generate significant revenue to maintain profitability. If we do not maintain
profitability, the market price of our common stock may decline, perhaps substantially.

We
anticipate that our expenses will increase substantially in the next 12 months as we:



42

---



Any
failure to significantly increase our revenue as we implement our strategies would also harm our ability to maintain profitability and could negatively impact the market price of our
common stock.

If we are not able to preserve the value of our software's intellectual property, our business will suffer.

Our
software is differentiated from that of our competitors by our internally developed technology. If we fail to protect our intellectual property, other vendors could sell circuit
simulation and analysis software with capabilities similar to ours, and this could reduce demand for our software. We protect our intellectual property through a combination of copyright, patent,
trade secret and trademark laws. We have a patent program and to date have filed two patent applications, one of which was issued by the U.S. Patent and Trademark Office in June 2003. We
generally enter into confidentiality or license agreements with our employees, consultants and corporate partners, and generally seek to control
access to our intellectual property and the distribution of our software, documentation and other proprietary information. However, we believe that these measures afford only limited protection.
Others may develop technologies that are similar or superior to our technology or design around the copyrights and trade secrets we own. Unauthorized parties may attempt to copy or otherwise obtain
and use our software or technology. Policing unauthorized use of our software is difficult and expensive, and we cannot be certain that the steps we have taken will prevent misappropriation of our
technology, particularly in foreign countries where the laws may not protect our proprietary rights as fully as those in the United States. If our means of protecting our proprietary rights is
inadequate or ineffective, our business may be severely harmed.

A protracted infringement claim or a significant damage award would adversely impact our operating results.

Substantial
litigation and threats of litigation regarding intellectual property rights exist in our industry. We expect that circuit simulation and analysis design software may be
increasingly subject to third-party infringement claims as the number of competitors in our industry segment grows and the functionality of products in different industry segments overlaps. We are not
aware of any valid proprietary rights of third parties that our software infringes. We are currently a defendant in three lawsuits brought by Synopsys. Additional third parties other than Synopsys may
claim that we infringe their intellectual property rights. Any claims, with or without merit, could:



These
royalty or licensing agreements may not be available on terms acceptable to us, if at all. A successful claim of product infringement against us or our failure to license the
infringed or similar technology could adversely affect our business. We would not be able to sell licenses of the impacted software without exposing ourselves to litigation risk and damages or we may
be required to redevelop the software and incur significant additional expense. Because we expect to derive substantially all of our revenue from HSIM in fiscal 2004, anything that would limit our
ability to license HSIM would harm our business.

43

---



Any potential dispute involving our intellectual property could include our customers and strategic partners, which could trigger our indemnification obligations with them and
result in substantial expense.

In
any potential dispute involving our intellectual property, our customers and strategic partners could also become the target of litigation. This could trigger our technical support
and indemnification obligations in our license agreements which could result in substantial expense to us. In addition to the time and expense required for us to supply such support or indemnification
to our customers and strategic partners, any such litigation could severely disrupt or shut down the business of our customers and strategic partners, which in turn could hurt our relations with our
customers and strategic partners and cause licenses for our software to decrease.

Significant errors in our software, our inability to correct errors or the failure of our software to conform to specifications could result in our customers demanding refunds
from us or asserting claims for damages against us.

Because
our circuit simulation and analysis software is complex, our software could fail to perform as anticipated. Further, significant errors in our software may be found in the future
or errors may not be corrected satisfactorily for our customers. The detection of any significant errors may result in:



We
have warranted that our software will operate in accordance with our user documentation. If our software fails to conform to these specifications, customers could demand a refund for
the purchase price or assert and collect on claims for damages.

Moreover,
because our software is used in connection with other vendors' products that are used to design complex nanometer-scale semiconductors, significant liability claims may be
asserted against us if our software does not work properly individually or with other vendors' products. Our agreements with customers typically contain provisions intended to limit our exposure to
liability claims. However, these limitations may not preclude all potential claims and we have only minimal insurance against such liabilities. Regardless of their merit, liability claims could
require us to spend significant time and expense in litigation and divert management's attention from other business pursuits. If successful, a product liability claim could require us to pay
significant damages. Any claims, whether or not successful, could seriously damage our reputation and our business.

Because our strategy to expand our international operations is subject to uncertainties, we may not be able to enter new markets outside North America or generate a significant
level of revenue or profit margins from those markets.

Customers
outside North America accounted for 51.0%, 42.0% and 39.6% of our total revenue in fiscal 2001, fiscal 2002 and fiscal 2003, respectively. We plan to increase our international
sales activities, but we have limited experience marketing and directly licensing our software internationally.

We
have direct sales offices in England, France, Germany, India, Israel, Singapore and Taiwan, and rely primarily on indirect sales in Asia. Although our sales contracts provide for
payment for our software licenses in United States dollars, our expenses incurred in foreign locations are generally denominated in

44

---

the
applicable local currency. To date we have not undertaken any foreign currency hedging transactions, and as a result, our future expense levels from international operations may be unpredictable
due to exchange rate fluctuations. Our international operations are subject to other risks, including:



We intend to pursue strategic relationships but these efforts could substantially divert management attention and resources.

In
order to establish strategic relationships with semiconductor technology leaders and leading electronic design automation tool providers, we may need to expend significant resources
and will need to commit a significant amount of management time and attention, with no guarantee of success. We may be unable to establish key industry strategic relationships if any of the following
occur:



We
have only recently entered into our current strategic relationships. These relationships may not continue or be successful. We also may be unable to find additional industry partners
that are suitable.

We may not be able to expand our proprietary technologies if we do not make acquisitions or investments or fail to successfully integrate the acquired companies with our
business.

To
expand our proprietary technologies, we may acquire or make investments in complementary businesses, technologies or products if appropriate opportunities arise. We may be unable to
identify suitable acquisition or investment candidates at reasonable prices or on reasonable terms, or complete future acquisitions or investments, any of which could slow our growth strategy. We may
have difficulty integrating the products, personnel, culture, ideologies or technologies of any acquisitions we might make. These difficulties could disrupt our ongoing business, distract our
management and employees and increase our expenses. In addition, the key personnel of the acquired company may decide not to work for us and if our customers are uncertain about our ability to operate
on a combined basis, they could delay or cancel orders for our software. Furthermore, we may have to incur debt or issue equity securities to pay for

45

---

any
future acquisition, the issuance of which would be dilutive to our existing stockholders. We also could have difficulty in assimilating the acquired company's or division's personnel and
operations, which could negatively affect our operating results.

The markets for complex nanometer-scale semiconductors are evolving rapidly and if these markets do not develop and expand as we anticipate, the demand for our software and our
revenue would decline.

We
expect that a substantial majority of our revenue will continue to come from sales of HSIM in fiscal 2004. We depend on the growing use of circuit simulation and analysis software to
design complex nanometer-scale semiconductors for use in portable consumer electronics, networking equipment and other applications. The market for complex nanometer-scale semiconductors may not grow
if customers choose to use other types of semiconductors that might be more affordable or available with shorter time-to-market schedules. This could cause electronic equipment
manufacturers to limit the number of new complex nanometer-scale semiconductors they design and would reduce their need for our software. If demand for our software were to decline, we may choose to
lower the prices of our software or we may sell fewer licenses and have lower maintenance renewal rates. In addition, if equipment manufacturers do not widely adopt the use of complex nanometer-scale
semiconductors or if there is a wide acceptance of alternative semiconductors that provide enhanced capabilities, the market price of our stock could decline due to our lower operating results or
investors' assessment that the growth potential for licenses of our software is limited.

The
markets for complex nanometer-scale semiconductors are evolving rapidly and we cannot predict their potential sizes or future growth rates. Our success in generating revenue in these
evolving markets will depend on, among other things, our ability to:



We face competition from internally developed semiconductor design software and if our customers elect to continue to use internally designed tools, our business may
suffer.

We
face significant competition from internal design software groups of semiconductor manufacturers. These internal groups compete with us for access to potential customers' circuit
simulation and analysis software budgets and may eventually compete with us to supply circuit simulation and analysis software to other semiconductor manufacturers. We cannot assure you that internal
groups will not expand their internally designed tools to compete directly with ours or actively sell their internally designed tools to other semiconductor manufacturers or, if they do, that we will
be able to compete against them successfully.

Our revenue could be reduced if large electronic design automation companies make acquisitions in order to utilize their extensive distribution capabilities with our
competitors' products.

Large
electronic design automation vendors, such as Cadence Design, Mentor Graphics or Synopsys, may acquire or establish cooperative relationships with our other current competitors,
including private companies. For example, Synopsys acquired Numerical Technologies, Inc., a provider of sub-wavelength lithography-enabling technology, in February 2003, and
InnoLogic Systems, Inc., a provider of memory and full-custom equivalence checking technology, in June 2003. Because large electronic design automation vendors have
significant financial and organizational resources, they may be able to further penetrate our

46

---

markets
by leveraging the technology and expertise of smaller companies and utilizing their own extensive distribution channels. We expect that the electronic design automation product industry will
continue to consolidate. For example, Cadence completed its acquisition of Celestry Design Technologies, Inc., a provider of silicon modeling and circuit simulation tools, in
January 2003, Get2Chip, Inc., a provider of advanced nanometer-scale synthesis technology, in April 2003 and Verplex Systems, Inc., a provider of formal verification
electronic design software, in August 2003. It is possible that new competitors or alliances among competitors may emerge and rapidly acquire significant market share, which would harm our
business and financial prospects.

We may not be able to compete effectively if our software is delayed or does not incorporate new required features.

Our
future success depends on our ability to enhance existing software, develop and introduce new products, satisfy user requirements, meet industry standards and achieve market
acceptance. We may not successfully identify new product opportunities or develop and bring new products to market in a timely and cost effective manner. Significant delays in our new software
releases or significant problems or delays in enhancing existing products to keep pace with new design techniques for complex nanometer-scale semiconductors could seriously damage our business. We
have, from time to time, experienced delays in the scheduled introduction of new and enhanced software and we may experience similar delays in the future. For example, in early 2001 we experienced
delays in the development of a new product which caused us to revise our expected release date for this product by several months. More recently, we have also delayed the release of another product in
order to allow for an extended beta testing period. We cannot assure you that we will not experience additional difficulties that could delay or prevent the successful development, introduction and
marketing of this software or that our new software and product enhancements will achieve market acceptance. If we are unable to develop, introduce and successfully market new or enhanced software in
a timely manner in response to changing market conditions or customer requirements, our business, operating results and financial condition may be harmed.

We may sell fewer licenses of our products if other vendors' products are no longer compatible with ours.

Our
ability to sell licenses of our software depends in part on the compatibility of our software with other vendors' software and hardware products. These vendors may change their
products so that they
will no longer be compatible with our software. If that were to happen, our business and future operating results would suffer if we were no longer able to offer commercially viable or competitive
products.

We do not have a consulting staff, and our revenue may suffer if customers demand extensive consulting or other support services.

Our
software is designed to be deployed quickly and easily by our customers and to require limited support from us. Many of our competitors offer extensive consulting services in
addition to circuit simulation and analysis products. If we introduce software that requires extensive consulting services for specific designs, or if our customers wish to purchase a broad spectrum
of software and services that includes extensive consulting services from a single vendor, we would be required to change our business model and cost structure to provide consulting services.
Specifically, we would be required to hire and train consultants or outsource the required consulting services. If these events were to occur, our future gross margin would likely suffer because of
the added expense of hiring and retaining consulting personnel.

Our common stock is subject to substantial price and volume fluctuations due to a number of factors, many of which are beyond our control, and those fluctuations may prevent
our stockholders from reselling our common stock at a profit.

The
securities markets have experienced extreme price and volume fluctuations recently and the market prices of the securities of technology companies have been especially volatile. This
market volatility, as well as general economic or political conditions, could reduce the market price of our common stock regardless of our operating performance. In addition, our operating results
could be below the

47

---

expectations
of investment analysts and investors and, in response, the market price of our common stock may decrease significantly and prevent investors from reselling their shares of our common
stock at or above the price at which they purchased the shares. For example, in April 2003 we reported our financial results for the three months ended March 31, 2003, which were below
previous guidance and market expectations. As a result, the stock price of our common stock was adversely impacted.

Our growth could place a significant strain on our management systems and resources and we may be unable to effectively control our costs and implement our business strategies
as a result.

Our
total number of employees was 100 as of September 30, 2003, and we expect our headcount to double over the next 18 to 24 months. Our productivity and the quality of our
software may be adversely affected if we do not integrate, train and motivate our new employees quickly and effectively
and manage our resources efficiently. We also cannot be sure that our revenue will continue to grow at a sufficient rate to absorb the costs associated with the increased personnel.

We
expect that any future growth we experience will continue to place a significant strain on our management, systems and resources. To manage the anticipated growth of our operations,
we will be required to:



ITEM 7A.    Quantitative and Qualitative Disclosures About Market Risk

We develop products primarily in the United States and sell those products primarily in North America, Europe and Japan. Our revenue for sales outside of North
America was approximately 51.0%, 42.0% and 39.6% of total revenue for fiscal 2001, fiscal 2002 and fiscal 2003, respectively. As a result, our financial results could be affected by factors such as
changes in foreign currency exchange rates or weak economic conditions in foreign markets. As all of our sales are currently made in United States dollars, a strengthening of the United States dollar
could make our software less competitive in foreign markets.

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. We expect that our interest income will continue to be negatively affected by recent declines in short-term interest rates. A sensitivity analysis assuming a hypothetical 10%
movement
in interest rates applied to our cash equivalent and short-term investments balances at September 30, 2003 would change interest income by approximately $75,000 on an annual basis.
However, due to the nature of our short-term investments, we have concluded that we do not have material market risk exposure.

We
invest funds in excess of current operating requirements in short-term tax exempt and taxable instruments that meet high credit quality standards, as specified in our
investment policy. The policy also limits the amount of credit exposure to any one issue, issuer or type of instrument. As of September 30, 2003, our cash, cash equivalents and
short-term investments primarily consisted of the following instruments:



48

---



ITEM 8.    Financial Statements and Supplementary Data

Quarterly Results of Operations

The following table presents our operating results for each of the eight quarters in the period ended September 30, 2003. The information for each of these
quarters is unaudited and has been prepared on the same basis as our audited financial statements appearing elsewhere in this report. In the opinion of our management, all necessary adjustments,
consisting only of normal recurring adjustments, have been included to present fairly the unaudited quarterly results when read in conjunction with our audited consolidated financial statements and
the related notes appearing elsewhere in this report. These operating results are not necessarily indicative of the results of any future period.

|                              |                            | Quarters Ended           |       
|----------------------------- | -------------------------- | ------------------------ | ------
|
|
|Revenue:                      |                            |                          |       
|                              | Product                    |                          | $     
|                              | Subscription               |                          |       
|                              | Maintenance                |                          |       
|                              |                            |                          |       
|                              |                            | Total revenue            |       
|                              |                            |                          |       
|Cost of revenue:              |                            |                          |       
|                              | Product                    |                          |       
|                              | Subscription               |                          |       
|                              | Maintenance                |                          |       
|                              |                            |                          |       
|                              |                            | Total cost of revenue    |       
|                              |                            |                          |       
|Gross profit                  |                            |                          | 6,805 
|                              |                            |                          |       
|Operating expenses:           |                            |                          |       
|                              | Research and development   |                          |       
|                              | Sales and marketing        |                          |       
|                              | General and administrative |                          |       
|                              | Stock-based compensation   |                          |       
|                              |                            |                          |       
|                              |                            | Total operating expenses |       
|                              |                            |                          |       
|Income (loss) from operations |                            |                          | 1,459 
|Interest income               |                            |                          | 119   
|Other income (expense), net   |                            |                          | (3    
|                              |                            |                          |       
|Income before taxes           |                            |                          | 1,575 
|Provision for taxes           |                            |                          | (554  
|                              |                            |                          |       
|Net income                    |                            | $                        | 1,021 
|                              |                            |                          |       
|Basic shares                  |                            |                          | 11,770
|Basic earnings per share      |                            | $                        | 0.09  
|Diluted shares                |                            |                          | 23,943
|Diluted earnings per share    |                            | $                        | 0.04  



We believe seasonal factors in our business may cause both the total revenue and each of its components to fluctuate from quarter to quarter. These seasonal
factors include patterns in the capital budgeting, purchasing cycles of our current and prospective customers, the mix between perpetual and

49

---

time-based
licenses, timing of the renewals of time-based licenses and maintenance, and payment terms which may impact the timing of revenue recognition. During the three
months ended March 31, 2003, we experienced a substantial change in customers' purchasing behavior due to the prolonged economic downturn and concerns about their own financial stability.
Therefore, as a cost-cutting measure, customers either suspended or reduced their capital budgets dramatically, which adversely affected our revenue. Consequently, total revenue and
earnings were lower than expected for the quarter ended March 31, 2003. In addition, more customers preferred to purchase time-based licenses due to their flexible licensing
structure and payment terms. As a result, we also experienced decreases in perpetual license purchases in the three months ended March 31, 2003 and June 30, 2003. Further, commissions
represent a significant portion of our sales force compensation, which is structured to encourage sales booking closures prior to fiscal year end. As a result, we expect that sales efforts will
intensify in the fourth fiscal quarter, which could result in our revenue being flat or slightly lower in the second and third quarters of the subsequent fiscal year. General and administrative
expenses increased by approximately $861,000 in the three months ended September 30, 2003 relative to the three months ended June 30, 2003 primarily due to the increases in litigation
and related costs.

50

---



NASSDA CORPORATION        INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

|                                                                                                                                                    |  | Page
|--------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|Independent Auditors' Report                                                                                                                        |  | 52  
|Consolidated Balance Sheets as of September 30, 2002 and 2003                                                                                       |  | 53  
|Consolidated Statements of Income for each of the three fiscal years ended September 30, 2001, 2002 and 2003                                        |  | 54  
|Consolidated Statements of Stockholders' Equity and Comprehensive Income for each of the three fiscal years ended September 30, 2001, 2002 and 2003 |  | 55  
|Consolidated Statements of Cash Flows for each of the three fiscal years ended September 30, 2001, 2002 and 2003                                    |  | 56  
|Notes to Consolidated Financial Statements                                                                                                          |  | 57  

51

---



INDEPENDENT AUDITORS' REPORT

To
the Board of Directors and Stockholders of
Nassda Corporation:

We
have audited the accompanying consolidated balance sheets of Nassda Corporation and subsidiaries (the "Company") as of September 30, 2002 and 2003, and the related consolidated
statements of income, stockholders' equity and comprehensive income and cash flows for each of the three years in the period ended September 30, 2003. Our audits also included the consolidated
financial statement schedule listed in Item 15(a)(2). These consolidated financial statements and consolidated financial statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on the consolidated financial statements and consolidated financial statement schedule based on our audits.

We
conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In
our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2002 and 2003 and the
results of its operations and its cash flows for each of the three years in the period ended September 30, 2003 in conformity with accounting principles generally accepted in the United States
of America. Also, in our opinion, such consolidated financial statement schedule listed in Item 15(a)(2), when considered in relation to the basic consolidated financial statements as a whole,
presents fairly, in all material respects, the information set forth therein.

/s/DELOITTE & TOUCHE LLP

San
Jose, California
October 28, 2003

52

---



NASSDA CORPORATION        CONSOLIDATED BALANCE SHEETS  (in thousands, except share and per share amounts)

|                                               |                                                                                                                                                                        | September 30,              |       
|---------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------
|
|Assets:                                        |                                                                                                                                                                        |                            |       
|Current assets:                                |                                                                                                                                                                        |                            |       
|                                               | Cash and cash equivalents                                                                                                                                              |                            | $     
|                                               | Short-term investments                                                                                                                                                 |                            |       
|                                               | Accounts receivable, net of allowances of $87 and $92 at September 30, 2002 and September 30, 2003, respectively                                                       |                            |       
|                                               | Prepaid expenses and other current assets                                                                                                                              |                            |       
|                                               | Deferred income taxes                                                                                                                                                  |                            |       
|                                               |                                                                                                                                                                        |                            |       
|                                               |                                                                                                                                                                        | Total current assets       |       
|Property and equipment, net                    |                                                                                                                                                                        |                            | 784   
|Other assets                                   |                                                                                                                                                                        |                            | 727   
|                                               |                                                                                                                                                                        |                            |       
|Total assets                                   |                                                                                                                                                                        | $                          | 86,722
|                                               |                                                                                                                                                                        |                            |       
|Liabilities and Stockholders' Equity:          |                                                                                                                                                                        |                            |       
|Current liabilities:                           |                                                                                                                                                                        |                            |       
|                                               | Accounts payable                                                                                                                                                       |                            | $     
|                                               | Accrued liabilities                                                                                                                                                    |                            |       
|                                               | Deferred revenue                                                                                                                                                       |                            |       
|                                               |                                                                                                                                                                        |                            |       
|                                               |                                                                                                                                                                        | Total current liabilities  |       
|Deferred revenue                               |                                                                                                                                                                        |                            |      
|Other long-term liabilities                    |                                                                                                                                                                        |                            | 54    
|                                               |                                                                                                                                                                        |                            |       
|                                               |                                                                                                                                                                        | Total liabilities          |       
|                                               |                                                                                                                                                                        |                            |       
|Commitments and Contingencies (Notes 5 and 11) |                                                                                                                                                                        |                            |       
|Stockholders' equity:                          |                                                                                                                                                                        |                            |       
|                                               | Preferred stock, $0.001 par value, 10,000,000 shares authorized: no shares issued and outstanding                                                                      |                            |       
|                                               | Common stock, par value $0.001: 110,000,000 shares authorized; 24,935,036 and 25,999,439 shares outstanding at September 30, 2002 and September 30, 2003, respectively |                            |       
|                                               | Additional paid-in capital                                                                                                                                             |                            |       
|                                               | Deferred stock-based compensation                                                                                                                                      |                            |       
|                                               | Accumulated other comprehensive income/(loss)                                                                                                                          |                            |       
|                                               | Retained earnings                                                                                                                                                      |                            |       
|                                               |                                                                                                                                                                        |                            |       
|                                               |                                                                                                                                                                        | Total stockholders' equity |       
|                                               |                                                                                                                                                                        |                            |       
|Total liabilities and stockholders' equity     |                                                                                                                                                                        | $                          | 86,722
|                                               |                                                                                                                                                                        |                            |       

See
accompanying notes to consolidated financial statements.

53

---

NASSDA CORPORATION        CONSOLIDATED STATEMENTS OF INCOME  (in thousands, except per share and per share amounts)

|                                             |                            | Years Ended September 30, |       
|-------------------------------------------- | -------------------------- | ------------------------- | ------
|
|Revenue:                                     |                            |                           |       
|                                             | Product                    |                           | $     
|                                             | Subscription               |                           |       
|                                             | Maintenance                |                           |       
|                                             |                            |                           |       
|                                             |                            | Total revenue             |       
|                                             |                            |                           |       
|Cost of revenue:                             |                            |                           |       
|                                             | Product                    |                           |       
|                                             | Subscription               |                           |       
|                                             | Maintenance                |                           |       
|                                             |                            |                           |       
|                                             |                            | Total cost of revenue     |       
|                                             |                            |                           |       
|Gross profit                                 |                            |                           | 21,102
|                                             |                            |                           |       
|Operating expenses:                          |                            |                           |       
|                                             | Research and development   |                           |       
|                                             | Sales and marketing        |                           |       
|                                             | General and administrative |                           |       
|                                             | Stock-based compensation*  |                           |       
|                                             |                            |                           |       
|                                             |                            | Total operating expenses  |       
|                                             |                            |                           |       
|Income from operations                       |                            |                           | 3,131 
|Interest income                              |                            |                           | 415   
|Other income (expense), net                  |                            |                           | (1    
|                                             |                            |                           |       
|Income before taxes                          |                            |                           | 3,545 
|Provision for income taxes                   |                            |                           | (1,454
|                                             |                            |                           |       
|Net income                                   |                            | $                         | 2,091 
|                                             |                            |                           |       
|Earnings per share:                          |                            |                           |       
|                                             | Basic                      |                           | $     
|                                             |                            |                           |       
|                                             | Diluted                    |                           | $     
|                                             |                            |                           |       
|Shares used in computing earnings per share: |                            |                           |       
|                                             | Basic                      |                           |       
|                                             |                            |                           |       
|                                             | Diluted                    |                           |       
|                                             |                            |                           |       
|*Stock-based compensation includes:          |                            |                           |       
|                                             | Research and development   |                           | $     
|                                             | Sales and marketing        |                           |       
|                                             | General and administrative |                           |       
|                                             |                            |                           |       
|                                             |                            | Total                     |       
|                                             |                            |                           |       

See
accompanying notes to consolidated financial statements.

54

---



NASSDA CORPORATION        CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY  AND COMPREHENSIVE INCOME  (in thousands, except share amounts)

|                                                                       |  | Common Stock |  |   |    |  |   | Accumulated
Other
Comprehensive
Income/(Loss) |   |   |        |   |   |     |  
|---------------------------------------------------------------------- |  | ------------ |  | - | -- |  | - | --------------------------------------------- | - | - | ------ | - | - | --- | -
|
|
|Balance at October 1, 2000                                             |  | 7,642,000    |  | $ | 8  |  | $ | 1,790                                         |   | $ | (1,679 | ) | $ |    |  
|Exercise of stock options                                              |  | 4,507,867    |  |   | 4  |  |   | 217                                           |   |   |        |   |   |     |  
|Deferred stock-based compensation                                      |  |              |  |   |    |  |   | 2,472                                         |   |   | (2,472 | ) |   |     |  
|Amortization of employee deferred stock-based compensation             |  |              |  |   |    |  |   |                                               |   |   | 722    |   |   |     |  
|Issuance of common stock options to nonemployees                       |  |              |  |   |    |  |   | 1,647                                         |   |   |        |   |   |     |  
|Unrealized gain on short-term investments                              |  |              |  |   |    |  |   |                                               |   |   |        |   |   | 11  |  
|Net income                                                             |  |              |  |   |    |  |   |                                               |   |   |        |   |   |     |  
|                                                                       |  |              |  |   |    |  |   |                                               |   |   |        |   |   |     |  
|Balance at September 30, 2001                                          |  | 12,149,867   |  |   | 12 |  |   | 6,126                                         |   |   | (3,429 | ) |   | 11  |  
|                                                                       |  |              |  |   |    |  |   |                                               |   |   |        |   |   |     |  
|Exercise of stock options                                              |  | 422,252      |  |   |   |  |   | 187                                           |   |   |        |   |   |     |  
|Issuance of common stock under employee stock purchase plan            |  | 36,920       |  |   |   |  |   | 345                                           |   |   |        |   |   |     |  
|Conversion of preferred stock                                          |  | 6,575,997    |  |   | 7  |  |   | 1,843                                         |   |   |        |   |   |     |  
|Issuance of common stock to public, net of issuance costs of $6,076    |  | 5,750,000    |  |   | 6  |  |   | 57,168                                        |   |   |        |   |   |     |  
|Amortization of employee deferred stock-based compensation             |  |              |  |   |    |  |   |                                               |   |   | 1,005  |   |   |     |  
|Reversal of stock-based compensation for cancellation of stock options |  |              |  |   |    |  |   | (216                                          | ) |   | 216    |   |   |     |  
|Income tax benefit from employee stock transactions                    |  |              |  |   |    |  |   | 925                                           |   |   |        |   |   |     |  
|Unrealized loss on short-term investments                              |  |              |  |   |    |  |   |                                               |   |   |        |   |   | (5  | )
|Net income                                                             |  |              |  |   |    |  |   |                                               |   |   |        |   |   |     |  
|                                                                       |  |              |  |   |    |  |   |                                               |   |   |        |   |   |     |  
|Balance at September 30, 2002                                          |  | 24,935,036   |  |   | 25 |  |   | 66,378                                        |   |   | (2,208 | ) |   | 6   |  
|                                                                       |  |              |  |   |    |  |   |                                               |   |   |        |   |   |     |  
|Exercise of stock options                                              |  | 900,203      |  |   | 1  |  |   | 1,370                                         |   |   |        |   |   |     |  
|Issuance of common stock under employee stock purchase plan            |  | 164,200      |  |   |    |  |   | 1,002                                         |   |   |        |   |   |     |  
|Amortization of employee deferred stock-based compensation             |  |              |  |   |    |  |   |                                               |   |   | 955    |   |   |     |  
|Reversal of stock-based compensation for cancellation of stock options |  |              |  |   |    |  |   | (136                                          | ) |   | 136    |   |   |     |  
|Income tax benefit from employee stock transactions                    |  |              |  |   |    |  |   | 1,729                                         |   |   |        |   |   |     |  
|Unrealized loss on short-term investments                              |  |              |  |   |    |  |   |                                               |   |   |        |   |   | (10 | )
|Net income                                                             |  |              |  |   |    |  |   |                                               |   |   |        |   |   |     |  
|                                                                       |  |              |  |   |    |  |   |                                               |   |   |        |   |   |     |  
|Balance at September 30, 2003                                          |  | 25,999,439   |  | $ | 26 |  | $ | 70,343                                        |   | $ | (1,117 | ) | $ | (4  | )
|                                                                       |  |              |  |   |    |  |   |                                               |   |   |        |   |   |     |  

See accompanying notes to consolidated financial statements.

55

---

NASSDA CORPORATION        CONSOLIDATED STATEMENTS OF CASH FLOWS  (in thousands)

|                                                                                            |                                              | Years Ended September 30,                 |        
|------------------------------------------------------------------------------------------- | -------------------------------------------- | ----------------------------------------- | -------
|
|Operating activities                                                                        |                                              |                                           |        
|Net income                                                                                  |                                              | $                                         | 2,091  
|Adjustments to reconcile net income to net cash provided by (used in) operating activities: |                                              |                                           |        
|                                                                                            | Depreciation                                 |                                           |        
|                                                                                            | Provision for doubtful accounts              |                                           |        
|                                                                                            | Loss on disposal of property and equipment   |                                           |        
|                                                                                            | Stock-based compensation                     |                                           |        
|                                                                                            | Deferred income taxes                        |                                           |        
|                                                                                            | Changes in operating assets and liabilities: |                                           |        
|                                                                                            | Accounts receivable                          |                                           |        
|                                                                                            | Prepaid expenses and other current assets    |                                           |        
|                                                                                            | Accounts payable                             |                                           |        
|                                                                                            | Accrued liabilities                          |                                           |        
|                                                                                            | Deferred revenue                             |                                           |        
|                                                                                            | Long-term liabilities                        |                                           |        
|                                                                                            |                                              |                                           |        
|                                                                                            |                                              | Net cash provided by operating activities |        
|                                                                                            |                                              |                                           |        
|Investing activities                                                                        |                                              |                                           |        
|Purchases of short-term investments                                                         |                                              |                                           | (11,017
|Proceeds from maturity of short-term investments                                            |                                              |                                           | 4,508  
|Purchases of property and equipment                                                         |                                              |                                           | (904   
|Other assets                                                                                |                                              |                                           | (32    
|                                                                                            |                                              |                                           |        
|                                                                                            |                                              | Net cash used in investing activities     |        
|                                                                                            |                                              |                                           |        
|Financing activities                                                                        |                                              |                                           |        
|Proceeds from issuance of common stock, net of issuance costs                               |                                              |                                           |       
|Proceeds from sale of common stock                                                          |                                              |                                           | 221    
|Repurchase of preferred stock                                                               |                                              |                                           |       
|                                                                                            |                                              |                                           |        
|                                                                                            |                                              | Net cash provided by financing activities |        
|                                                                                            |                                              |                                           |        
|Increase in cash and cash equivalents                                                       |                                              |                                           | 1,182  
|Cash and cash equivalents, beginning of period                                              |                                              |                                           | 4,473  
|                                                                                            |                                              |                                           |        
|Cash and cash equivalents, end of period                                                    |                                              | $                                         | 5,655  
|                                                                                            |                                              |                                           |        
|Supplemental disclosure of cash flow information                                            |                                              |                                           |        
|Cash paid for income taxes                                                                  |                                              | $                                         | 2,855  
|                                                                                            |                                              |                                           |        
|Noncash investing and financing activities                                                  |                                              |                                           |        
|Unrealized gain (loss) on short-term investments                                            |                                              | $                                         | 11     
|                                                                                            |                                              |                                           |        
|Deferred stock-based compensation (reversal)                                                |                                              | $                                         | 2,472  
|                                                                                            |                                              |                                           |        
|Income tax benefit from employee stock transactions                                         |                                              | $                                         |       
|                                                                                            |                                              |                                           |        
|Conversion of preferred stock to common stock                                               |                                              | $                                         |       
|                                                                                            |                                              |                                           |        

See
accompanying notes to consolidated financials statements.

56

---



NASSDA CORPORATION        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.     Business and Summary of Significant Accounting Policies

BusinessNassda Corporation (the "Company") was incorporated in California on August 31, 1998
to provide full-chip circuit simulation and analysis software for the design and verification of complex nanometer-scale semiconductors. On September 28, 2001 the Company
reincorporated in the State of Delaware.

The
Company operates on a 52 week fiscal year ending September 30. Fiscal 2001 ended on September 30, 2001, fiscal 2002 ended on September 30, 2002 and fiscal 2003
ended on September 30, 2003. Fiscal 2004 will end on September 30, 2004.

Initial Public OfferingThe Company commenced its initial public offering in which the Company sold 5 million shares of
common stock at $11.00 per share in December 2001. The net proceeds the Company received from this offering after deducting underwriting discounts and offering expenses were approximately
$49.6 million. All outstanding shares of preferred stock were automatically converted into common stock on a share for share basis immediately prior to the first closing of the sale of the
shares in the initial public offering. The Company's common stock began trading on the Nasdaq National Market on December 13, 2001.

In
January 2002, the underwriters of the Company's initial public offering exercised their over-allotment option to purchase an additional 750,000 shares of common
stock at $11.00 per share. The net proceeds the Company received pursuant to this over-allotment option after deducting underwriting discounts were approximately $7.6 million.

Basis of PresentationThe consolidated financial statements include the Company and its wholly owned subsidiaries. All
significant intercompany accounts and intercompany profits have been eliminated.

Fair Value of Financial InstrumentsCash and cash equivalents, accounts receivable and accounts payable are carried at cost,
which approximates fair value due to the short maturity of these instruments.

Certain Significant Risks and UncertaintiesThe Company is subject to certain risks and uncertainties. The Company is a
defendant in three lawsuits brought by Synopsys (see Note 11). Should Synopsys prevail in any of these lawsuits, the Company may be required to pay substantial monetary damages and/or be
prevented from selling the Company's software. In addition, the Company believes changes in any of the following areas could have a material adverse effect on the Company's future financial position
or results of operations: the economic environment; new product development, including market receptiveness; changes in overall demand for products and services offered by the Company; changes in
customer relationships; litigation or claims against the Company based on intellectual property, patent, product regulatory or other factors; competition from other products; existing product
obsolescence; the ability to attract and retain qualified employees; and the ability to obtain additional financing.

Concentration of Credit RiskFinancial instruments that potentially subject the Company to concentration of credit risk
consist of cash, cash equivalents, short-term investments and accounts receivables. The Company maintains its cash, cash equivalents and short-term investments with high credit
quality financial institutions. Credit risk is mitigated by the Company's credit evaluation process and reasonably short terms for collection. The Company does not require collateral or other security
to support accounts receivable.

Use of EstimatesThe preparation of consolidated financial statements in accordance 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 at the date of the consolidated

57

---

financial
statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash and EquivalentsThe Company considers all liquid debt instruments with maturities of three months or less as of the date
of purchase to be cash equivalents. The Company's cash equivalents are maintained with high quality credit institutions and their recorded cost approximates their fair market value.

Short-Term InvestmentsThe Company classifies its short-term investments as available for sale. In
accordance with Statement of Financial Accounting Standards ("SFAS") No. 115,Accounting for Certain Investments in Debt and Equity Securities,
instruments are reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders' equity.

Property and EquipmentProperty and equipment are stated at cost and are depreciated over their estimated useful lives of
three years using the straight line method.

Long-Lived AssetsIn accordance with SFAS No. 144,Accounting for the Impairment or
Disposal of Long-Lived Assets, the Company evaluates its long-lived assets for impairment whenever events or changes in circumstances indicated that the
carrying amount of an asset may not be recoverable. When the sum of the undiscounted future net cash flows expected to result from the use of the asset and its eventual disposition is less than its
carrying amount, an impairment loss would be measured based on the discounted cash flows compared to the carrying amount. No impairment charge has been recorded in any of the periods presented. See
"Recently Issued Accounting Standards" regarding the Company's adoption of SFAS No. 144.

Software Development CostsCosts for the development of new software products and substantial enhancements to existing
software products are expensed as incurred until technological feasibility has been established, at which time any additional costs are capitalized in accordance with SFAS No. 86, Computer Software To Be Sold, Leased, or
Otherwise Marketed. The costs to develop such software have not been capitalized as the Company believes its
current software development process is essentially completed concurrent with the establishment of technological feasibility.

Revenue RecognitionThe Company recognizes revenue in accordance with the provisions of American Institute of Certified Public
Accountants Statement of Position ("SOP") 97-2,Software Revenue Recognition, as amended by SOP 98-4, Deferral of the Effective Date of Certain Provisions of SOP
97-2, and SOP 98-9,Modification of SOP
97-2, Software Revenue Recognition with Respect to Certain Transactions.The Company recognizes and reports revenue in three separate categories: product revenue,
subscription revenue and maintenance revenue. Product revenue is derived from perpetual license fees. Subscription revenue is derived from time-based license fees and includes maintenance
during the license period. The Company recognizes product revenue and subscription revenue when all of the following conditions are met:



Vendor
specific objective evidence exists for maintenance on perpetual licenses based on renewal rates. The Company's customers generally purchase the first year of maintenance when they
purchase a

58

---

perpetual
license, so the Company uses the residual method to determine the allocation of revenue to the license portion of multiple element arrangements involving perpetual licenses. Because the
Company bundles both the license and maintenance into its agreements for time-based licenses for the entire term, vendor specific objective evidence does not exist for each element of the
arrangement. Therefore, the Company recognizes subscription revenue from time-based licenses ratably over the period of the license. Maintenance revenue is derived from the annual
maintenance contracts that are purchased by perpetual licensees. The Company generally recognizes revenue from maintenance ratably over the maintenance period, which is typically one year.

For
sales made through all distributors, the Company recognizes revenue when the software has been sold to the end users and all other revenue recognition criteria have been met. When
the distributor is the primary obligor in the arrangement, has latitude in establishing prices and has credit risk, the Company records revenue based on amounts invoiced to the distributor (rather
than the amount invoiced by the distributor to the end users). When the Company is the primary obligor in the arrangement, has latitude in establishing price and has credit risk, the Company records
revenue based on amounts invoiced to the end customer (with the related commissions paid to the distributors reported as sales and marketing expense).

Research and DevelopmentResearch and development expenses are charged to operations as incurred.

Stock-Based CompensationThe Company accounts for stock-based awards to employees using the intrinsic value method in
accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and all of its interpretations and presents pro forma disclosures required by SFAS No. 123, Accounting for Stock-Based Compensation.

The
Company accounts for equity instruments issued to nonemployees in accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force Issue
No. 96-18,Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services, which requires that the fair value of such instruments be recognized as an expense over the period in which the related services are received.

Under
SFAS No. 123, the Company is required to disclose pro forma information regarding option grants made to its employees based on specified valuation techniques that produce
estimated compensation charges. The Company's calculations are based on a single option valuation approach and forfeitures are recognized as they occur. For pro forma purposes, the estimated fair
value of the Company's stock-based awards is amortized over the respective vesting period. The weighted-average estimated fair value of stock options issued during fiscal 2001, fiscal 2002 and fiscal
2003 was $1.68, $5.88 and $4.32 per share, respectively. The Company's pro forma net income, basic earnings per share and

59

---

diluted
earnings per share under SFAS No. 123 would have been as follows (in thousands, except per share amounts):

|                                                                                                       |             | September 30, |       
|------------------------------------------------------------------------------------------------------ | ----------- | ------------- | ------
|
|Net income as reported                                                                                 |             | $             | 2,091 
|Add: stock based employee compensation expense included in reported net income, net of taxes           |             |               | 722   
|                                                                                                       |             |               |       
|Less: stock-based employee compensation expense determined under fair value based method, net of taxes |             |               | (1,026
|                                                                                                       |             |               |       
|Pro forma net income (loss)                                                                            |             | $             | 1,787 
|                                                                                                       |             |               |       
|Basic earnings (loss) per share:                                                                       |             |               |       
|                                                                                                       | As reported |               | $     
|                                                                                                       |             |               |       
|                                                                                                       | Pro forma   |               | $     
|                                                                                                       |             |               |       
|Diluted earnings (loss) per share:                                                                     |             |               |       
|                                                                                                       | As reported |               | $     
|                                                                                                       |             |               |       
|                                                                                                       | Pro forma   |               | $     
|                                                                                                       |             |               |       

The
fair value of options at the date of grant was estimated using the minimal value method for fiscal 2001 and through the date of the Company's initial public offering in
December 2001, and the Black-Scholes option pricing model for options granted thereafter, with the following weighted-average assumptions:

|                              |  | Years Ended September 30, |  
|----------------------------- |  | ------------------------- | -
|
|Stock Option Plans:           |  |                           |  
|Risk-free interest rate       |  | 5.5                       | %
|Expected volatility           |  | 0.0                       | %
|Expected life (in years)      |  | 4.5                       |  
|Expected dividend             |  | 0.0                       | %
|Employee Stock Purchase Plan: |  |                           |  
|Risk-free interest rate       |  |                          |  
|Expected volatility           |  |                          |  
|Expected life (in years)      |  |                          |  
|Expected dividend             |  |                          |  

Income TaxesThe Company accounts for income taxes using an asset and liability approach. Deferred tax assets are recognized
for future deductions and operating loss and credit carryforwards, net of a valuation allowance to reduce net deferred tax assets to amounts that are more likely than not to be realized.

Earnings Per ShareBasic earnings per share ("EPS") is computed by dividing net income by the weighted average common shares
outstanding for the period. Diluted EPS reflects the potential dilution that would occur if securities or other contracts to issue common stock were exercised or converted into common stock.

60

---

Foreign Currency TranslationThe functional currency of the Company's foreign subsidiaries is the United States dollar.
Accordingly, assets and liabilities are translated to United States dollars at the exchange rates in effect as of the balance sheet date, and results of operations are translated using the average
rates in effect for the period presented. Transaction gains and losses, which are included in other income (expense) in the accompanying consolidated statements of income, have not been significant.

Comprehensive IncomeComprehensive income for the fiscal 2002 and 2003 has been disclosed within the consolidated statement of
stockholders' equity and comprehensive income.

Recently Issued Accounting StandardsIn October 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets,which addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. SFAS No. 144 supersedes SFAS No. 121,Accounting for the Impairment of Long-Lived Assets and
for Assets to Be Disposed of. The Company adopted SFAS No. 144 for fiscal 2003 beginning October 1, 2002. The adoption of SFAS No. 144 had no impact on the
Company's financial position, results of operations or cash flows.

In
December 2002, the FASB issued SFAS No. 148,Accounting for Stock-Based CompensationTransition and
Disclosure.SFAS No. 148 amends SFAS No. 123,Accounting for Stock-Based Compensation, to provide alternative
methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of
SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method
used on reported results. SFAS No. 148 is effective for fiscal years ending after December 15, 2002. The Company adopted the disclosure provisions of SFAS No. 148 for the
quarterly period beginning on January 1, 2003. The Company does not expect to change to the fair value based method of accounting for stock-based employee compensation; therefore, the adoption
of SFAS No. 148 had no impact on the Company's financial position, results of operation or cash flows.

In
January 2003, the FASB issued FASB Interpretation 46 ("FIN 46"),Consolidation of Variable Interest Entities.FIN 46 clarifies
the application of Accounting Research Bulletin 51,Consolidated Financial Statements,for certain entities that do not have sufficient equity at risk
to finance their activities without additional subordinated financial support from other parties or in which equity investors do not have the characteristics of a controlling financial interest
("variable interest entities"). Variable interest entities within the scope of FIN 46 will be required to be consolidated by their primary beneficiary. The primary beneficiary of a variable interest
entity is determined to be the party that absorbs a majority of the entity's expected losses, receives a majority of its expected returns, or both. FIN 46 applies immediately to variable interest
entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period
beginning after December 15, 2003 to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The Company is in the process
of determining what impact, if any, the adoption of the provisions of FIN 46 will have upon its financial condition or results of operations. However, the Company does not expect that FIN 46 will have
a material impact on its financial condition or results of operations.

In
April 2003, the FASB issued SFAS No. 149,Amendment of Statement 133 on Derivative Instruments and Hedging Activities.
SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities
under SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities. SFAS No. 149 amends SFAS No. 133 for decisions
made as part of the Derivatives Implementation Group process and in connection with implementation issues raised in relation to the application of the definition of a derivative.

61

---

SFAS 149
is effective for contracts entered into or modified after June 30, 2003. The adoption of SFAS No. 149 had no impact on the Company's financial position or results of
operations.

In
May 2003, the FASB issued SFAS No. 150,Accounting for Certain Financial Instruments with Characteristics of both Liabilities and
Equity, which requires that certain financial instruments be presented as liabilities that were previously presented as equity or as temporary equity. Such instruments include
mandatory redeemable preferred and common stock, and certain options and warrants. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003 and is
generally effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 had no impact on the Company's financial position or results
of operations.

2.Investments

The
Company classifies investments with original maturities of three months or less when acquired as cash equivalents and all investments with original maturities of longer than three
months but one year or less as short term investments. All of the Company's cash equivalents and short-term investments are classified as available-for-sale and are
reported at fair value, with unrealized gains and losses included in stockholders' equity as a component of accumulated other comprehensive income, net of taxes, if any. The fair value of
short-term investments is determined based on quoted market prices. The cost of securities sold is based on the specific identification method and realized gains and losses are included in
other income, net. The Company has cash equivalents and investments with various high quality institutions and all investments are made in accordance with the policy approved by the board of directors
which includes limiting the amount of credit risk to any one institution. The cost basis and estimated fair values of available-for-sale investment securities are shown below
(in thousands):

|                                                        |  | Cost |        | Unrealized
Gain |   | Unrealized
(Loss) |  | Fair Market
Value
|------------------------------------------------------- |  | ---- | ------ | --------------- | - | ----------------- |  | -----------------
|September 30, 2002                                      |  |      |        |                 |   |                   |  |                  
|Cash and cash equivalents:                              |  |      |        |                 |   |                   |  |                  
|Cash                                                    |  | $    | 563    |                 | $ |                  |  | $                
|Money Market funds                                      |  |      | 10,710 |                 |   |                  |  |                  
|Corporate notes                                         |  |      | 2,792  |                 |   |                  |  |                  
|Tax-exempt municipal obligations                        |  |      | 29,092 |                 |   |                  |  |                  
|                                                        |  |      |        |                 |   |                   |  |                  
|Total cash and cash equivalents                         |  |      | 43,157 |                 |   |                  |  |                  
|                                                        |  |      |        |                 |   |                   |  |                  
|Short-term investments:                                 |  |      |        |                 |   |                   |  |                  
|Corporate notes                                         |  |      | 2,043  |                 |   | 4                 |  |                  
|U.S. government agency notes                            |  |      | 33,246 |                 |   | 17                |  |                  
|                                                        |  |      |        |                 |   |                   |  |                  
|Total short-term investments                            |  |      | 35,289 |                 |   | 21                |  |                  
|                                                        |  |      |        |                 |   |                   |  |                  
|Total cash, cash equivalents and short-term investments |  | $    | 78,446 |                 | $ | 21                |  | $                
|                                                        |  |      |        |                 |   |                   |  |                  
|                                                        |  |      |        |                 |   |                   |  |                  

62

---

|September 30, 2003                                      |  |   |        |  |   |   |  |   |    |   |   |       
|------------------------------------------------------- |  | - | ------ |  | - | - |  | - | -- | - | - | ------
|Cash and cash equivalents:                              |  |   |        |  |   |   |  |   |    |   |   |       
|Cash                                                    |  | $ | 2,511  |  | $ |  |  | $ |   |   | $ | 2,511 
|Money Market funds                                      |  |   | 8,265  |  |   |  |  |   |   |   |   | 8,265 
|Corporate Notes                                         |  |   | 2,000  |  |   |  |  |   |   |   |   | 2,000 
|Tax-exempt municipal obligations                        |  |   | 40,369 |  |   |  |  |   |   |   |   | 40,369
|                                                        |  |   |        |  |   |   |  |  
|Total cash and cash equivalents                         |  |   | 53,145 |  |   |  |  |   |   |   |   | 53,145
|                                                        |  |   |        |  |   |   |  |  
|Short-term investments:                                 |  |   |        |  |   |   |  |   |    |   |   |       
|Corporate Notes                                         |  |   | 3,873  |  |   | 2 |  |   | (1 | ) |   | 3,874 
|Tax-exempt municipal obligations                        |  |   | 3,400  |  |   |  |  |   | (3 | ) |   | 3,397 
|U.S. government agency notes                            |  |   | 31,753 |  |   |  |  |   | (4 | ) |   | 31,749
|                                                        |  |   |        |  |   |   |  |  
|Total short-term investments                            |  |   | 39,026 |  |   | 2 |  |   | (8 | ) |   | 39,020
|                                                        |  |   |        |  |   |   |  |  
|Total cash, cash equivalents and short-term investments |  | $ | 92,171 |  | $ | 2 |  | $ | (8 | ) | $ | 92,165
|                                                        |  |   |        |  |   |   |  |  

3.     Property and Equipment

Property and equipment consists of (in thousands):

|                              |  | September 30, |      
|----------------------------- |  | ------------- | -----
|
|Computer equipment.           |  | $             | 768  
|Furniture and fixtures        |  |               | 321  
|Software                      |  |               | 437  
|Leasehold improvements        |  |               |     
|                              |  |               |      
|                              |  |               | 1,526
|Less accumulated depreciation |  |               | (742 
|                              |  |               |      
|Property and equipment, net   |  | $             | 784  
|                              |  |               |      

4.     Accrued Liabilities

Accrued liabilities consist of (in thousands):

|                                           |  | September 30,
|------------------------------------------ |  | -------------
|
|Accrued compensation and related benefits. |  | $            
|Accrued bonuses                            |  |              
|Income taxes payable                       |  |              
|Accrued legal                              |  |              
|Other                                      |  |              
|                                           |  |              
|Total                                      |  | $            
|                                           |  |              

During
fiscal 2002, the Company accrued bonuses of $760,000 earned by its employees. The Company distributed approximately $709,000 of these bonuses during fiscal 2003 and the remaining
$51,000 will be

63

---

paid
during the first quarter of fiscal 2004. Employees whose employment by the Company terminates prior to the applicable payment date will receive the undistributed amounts on December 15,
2006.

During
fiscal 2003, the Company accrued bonuses of $900,000 earned by its employees. These bonuses are expected to be distributed to the employees in December 2003.

5.     Lease Commitments

The Company leases its facilities under various noncancelable operating leases. In December 2002, the Company entered into a three-year
operating lease for its headquarters located in Santa Clara, California, which began in February 2003 and will expire in March 2006. These noncancelable operating leases began expiring
in October 2003. Rent expense was $365,000 in fiscal 2001, $600,000 in fiscal 2002 and $784,000 in fiscal 2003. The aggregate future noncancelable minimum rentals or operating leases are as
follows (in thousands):

Years Ending September 30,2004

$
5852005


5292006


252$
1,366


6.     Stockholders' Equity



In August 2001, the Company's Board of Directors approved and, in September 2001, the stockholders approved, the authorization of 10,000,000 shares
of undesignated preferred stock to be available for issuance concurrently with the effectiveness of the Company's initial public offering. As of September 30, 2003, there were no such shares
issued or outstanding.



In September 2001, the Company's Board of Directors and stockholders authorized the Company to issue up to 110,000,000 shares of its common stock.

In
December 2001 and January 2002, the Company sold 5,750,000 shares of common stock in an initial public offering at a price of $11.00 per share. Net proceeds from all
shares sold, less underwriting discounts and related expenses, were approximately $57.2 million.

Common
stock issued to certain employees is subject to repurchase agreements whereby the Company has the option to repurchase the unvested shares upon termination of employment at the
original issuance price. The number of shares subject to repurchase is generally reduced at a rate of 1/48th per month, with a certain amount being vested immediately. At September 30, 2003,
248,335 shares were subject to repurchase by the Company.

64

---



At September 30, 2003, the Company had reserved the following authorized but unissued shares of common stock:

|Stock Options:               |  |           
|---------------------------- |  | ----------
|Options outstanding          |  | 7,306,212 
|Reserved for future grants   |  | 3,016,858 
|Employee Stock Purchase Plan |  | 1,712,299 
|                             |  |           
|Total                        |  | 12,035,369
|                             |  |           

Employee and Director Stock Plans



In 1998, the Company adopted the 1998 Stock Option Plan, which included both incentive and nonstatutory stock options. Under the 1998 Stock Option Plan, the
Company could grant options to purchase up to 11,069,197 shares of common stock to employees, directors and service providers at prices not less than the fair market value at date of grant for
incentive stock options and not less than
85% of the fair market value for nonstatutory options. These options generally expired ten years from the date of grant and were generally exercisable at any time after the date of grant and when the
shares were vested. Options granted to a person who, at the time of the grant, owned more than 10% of the voting power of all classes of stock, were at prices no less than 110% of the fair market
value and had a term of no more than five years. Incentive stock options and nonstatutory options generally vested at a rate of 25% on the first anniversary of the grant date and 1/48
per month thereafter. Shares issued upon exercise prior to vesting were subject to a right of repurchase by the Company, which lapsed according to the original option-vesting schedule. At
September 30, 2003, 248,335 shares of common stock issued upon exercise of options under the 1998 Stock Option Plan were subject to repurchase by the Company. Upon the effectiveness of the
Company's initial public offering in December 2001, the 1998 Stock Option Plan was terminated as to future grants.



In August 2001, the Company adopted the 2001 Stock Option Plan and 3,999,999 shares of common stock were reserved for issuance thereunder. The 2001 Stock
Option Plan became effective in December 2001, upon the Company's initial public offering. On October 1 of each year, the number of shares in the reserve will increase by the lesser of
3,999,999 shares of common stock; 6.0% of outstanding shares of common stock on the last day of the previous fiscal year; or an amount determined by the Board of Directors. Pursuant to the 2001 Stock
Option Plan, the Board of Directors may grant either incentive or non-qualified stock options to purchase shares of the Company's common stock to eligible individuals at not less than 100%
of the fair market value of those shares on the date of the grant. Stock options generally vest over a period of four years and expire ten years from the date of grant. The plan will terminate in
August 2011, unless the Board of Directors terminates it sooner. As of September 30, 2003, 2,770,451 shares of common stock were reserved for future grants under the 2001 Stock Option
Plan. On October 20, 2003, the Board of Directors approved an increase to the reserve of 1,559,966 shares, representing 6.0% of the Company's outstanding common stock on September 30,
2003.

65

---



In August 2001, the Company adopted the 2001 Employee Stock Purchase Plan ("ESPP") and 666,667 shares of common stock were reserved for issuance
thereunder. The ESPP became effective upon the Company's initial public offering in December 2001. Under the ESPP, eligible employees are permitted to have salary withholdings of up to 15% of
their compensation to purchase shares of common stock at a price equal to 85% of the lesser of the fair market value per share of Company common stock on the start date of the offering period or the
end of the purchase period. On October 1 of each year, the number of shares in the reserve will increase by the lesser of 2,666,666 shares of common stock; 5.0% of outstanding shares of common
stock on the last day of the previous fiscal year; or an amount
determined by the Board of Directors. The plan will terminate in August 2011, unless the Board of Directors terminates it sooner. In fiscal 2002 and 2003, 36,920 and 164,200 shares of common
stock were issued under the ESPP at a weighted average price of $9.35 and $6.11, respectively. The weighted average fair value of the fiscal 2002 and 2003 issuances were $6.16 and $7.18, respectively.
As of September 30, 2003, 1,712,299 shares of common stock were reserved for future issuance under the ESPP. On October 20, 2003, the Board of Directors approved an increase to the
reserve of 1,299,972 shares, representing 5.0% of the Company's outstanding common stock on September 30, 2003.



In August 2001, the Company adopted the 2001 Director Option Plan and 266,667 shares of common stock were reserved for issuance thereunder. The 2001
Director Option Plan became effective upon the Company's initial public offering in December 2001. On October 1 of each year, the number of shares in the reserve will increase by the
lesser of 100,000 shares of common stock; 0.4% of outstanding shares of common stock on the last day of the previous fiscal year; or an amount determined by the Board of Directors. The plan will
terminate in August 2011, unless the Board of Directors terminates it sooner. The 2001 Director Option Plan provides for an initial grant to a new nonemployee director of an option to purchase
40,000 shares of common stock. Subsequent to the initial grants, each nonemployee director will be automatically granted an option to purchase 20,000 shares of common stock on October 1 of each
year. As of September 30, 2003, 246,407 shares of common stock were reserved for future issuance under the 2001 Director Option Plan. On October 20, 2003, the Board of Directors approved
an increase to the reserve of 100,000 shares.

Option
activities under the Stock Option Plans were as follows:

|                                                                                                                               |  | Number of Shares |   | Weighted
Average
Exercise Price
|------------------------------------------------------------------------------------------------------------------------------ |  | ---------------- | - | -------------------------------
|Outstanding, October 1, 2000(1,360,200 shares vested and exercisable at a weighted average exercise price of $0.03 per share)  |  | 7,107,167        |   | $                              
|Granted (weighted average fair value of $1.68 per share)                                                                       |  | 2,751,287        |   |                                
|Exercised                                                                                                                      |  | (4,507,867       | ) |                                
|Canceled                                                                                                                       |  |                 |   |                                
|                                                                                                                               |  |                  |   |                                
|Outstanding, September 30, 2001(986,814 shares vested and exercisable at a weighted average exercise price of $0.67 per share) |  | 5,350,587        |   |                                
|Granted (weighted average fair value of $5.88 per share)                                                                       |  | 2,065,320        |   |                                
|Exercised                                                                                                                      |  | (422,252         | ) |                                
|Canceled                                                                                                                       |  | (211,667         | ) |                                
|                                                                                                                               |  |                  |   |                                

66

---

|Outstanding, September 30, 2002(2,340,499 shares vested and exercisable at a weighted average exercise price of $1.48 per share) |  | 6,781,988 |   |  | 4.06
|-------------------------------------------------------------------------------------------------------------------------------- |  | --------- | - |  | ----
|Granted (weighted average fair value of $4.32 per share)                                                                         |  | 1,771,900 |   |  | 6.55
|Exercised                                                                                                                        |  | (900,203  | ) |  | 1.52
|Canceled                                                                                                                         |  | (347,473  | ) |  | 6.71
|                                                                                                                                 |  |           |   |  |     
|Outstanding, September 30, 2003(3,304,703 shares vested and exercisable at a weighted average exercise price of $2.90 per share) |  | 7,306,212 |   |  | 4.85
|                                                                                                                                 |  |           |   |  |     

At
September 30, 2003, 3,016,858 shares were available for future grant under the 2001 Stock Option Plan and the 2001 Directors Option Plan.

Additional
information regarding options outstanding as of September 30, 2003 was as follows:

|                |  | Options Outstanding |  |      |  |  
|--------------- |  | ------------------- |  | ---- |  | -
|
|
|$0.02 - $0.10   |  | 1,792               |  | 6.26 |  | $
|$1.13           |  | 445                 |  | 7.06 |  | $
|$1.88 - $2.25   |  | 623                 |  | 5.75 |  | $
|$3.00 - $3.38   |  | 651                 |  | 7.10 |  | $
|$5.35 - $6.60   |  | 1,634               |  | 9.32 |  | $
|$7.09 - $9.00   |  | 1,288               |  | 8.42 |  | $
|$11.00 - $11.89 |  | 783                 |  | 8.42 |  | $
|$13.45 - $16.96 |  | 90                  |  | 8.65 |  | $
|$0.02 - $16.96  |  | 7,306               |  | 7.67 |  | $

Additional Stock Plan Information

As discussed in Note 1, the Company accounts for its stock-based awards using the intrinsic value method in accordance with Accounting Principles Board
No. 25,Accounting for Stock Issued to Employees, and its related interpretations. The Company uses the intrinsic value method in accounting for
its stock-based compensation arrangements for employees, whereby compensation is recognized to the extent the fair value of the underlying common stock exceeds the exercise price of the stock options
at the date of grant. Deferred stock-based compensation of $2.5 million was recorded during fiscal 2001 for the excess of the fair value of the common stock underlying the options at the grant
date over the exercise price of the options. This amount is being amortized on a straight line basis over the vesting period, generally four years. Amortization of deferred compensation related to
employee grants was $722,000, $1.0 million and $955,000 in fiscal 2001, fiscal 2002 and fiscal 2003, respectively.

Issuance of Stock Options to Consultants

During fiscal 2001, under the 1998 Stock Option Plan, the Company issued nonstatutory options to consultants for the purchase of 203,997 shares of common stock at
a weighted average exercise price of $1.89, of which 6,667 shares vested immediately. All of the options granted during fiscal 2001 were valued

67

---

or
revalued using the Black-Scholes pricing model with the following weighted average assumptions: contractual life of ten years; risk free interest rate of 5.5%; volatility of 70%; and no dividends
expected during the term. In accordance with SFAS No. 123 and its related interpretations, the Company accounted for these awards under the fair value method and as variable awards.
Accordingly, the Company recorded compensation expense at the grant date equal to the fair value of the options and their vesting schedule (using the Black-Scholes option pricing model) and adjusted
the compensation expense at the end of each period until the awards vested and became fixed. The expense recognized for fiscal 2001 was $1.6 million. On August 15, 2001, the Company
modified certain option grants to consultants, which resulted in the options becoming fully vested on the date of modification. Accordingly, the expense recognized in fiscal 2001 includes the effect
of this modification. All options were fully vested at September 30, 2001.

7.     Earnings per Share

Basic EPS is computed by dividing net income by the weighted average common shares outstanding of the period. Diluted EPS reflects the potential dilution that
would occur if securities or other contracts to issue common stock were exercised or converted into common stock.

During
fiscal 2001, fiscal 2002 and fiscal 2003, the Company had securities outstanding that could potentially dilute basic earnings per share in the future, but these securities were
excluded in the computation of diluted earnings per share in such periods as their effect would have been antidilutive. At September 30, 2001, 2002 and 2003, options to purchase 99,000, 494,000
and 1.8 million shares of common stock, respectively, were excluded from the diluted net income per share computation. The following table is a reconciliation of the numerators and denominators
used in computing basic and diluted earnings per share (in thousands, except per share data):

|                                                                              |                                                      | Years Ended September 30, |      
|----------------------------------------------------------------------------- | ---------------------------------------------------- | ------------------------- | -----
|
|Net income (numerator):                                                       |                                                      | $                         | 2,091
|                                                                              |                                                      |                           |      
|Shares (denominator):                                                         |                                                      |                           |      
|                                                                              | Weighted average common shares outstanding           |                           |      
|                                                                              | Weighted average common shares subject to repurchase |                           |      
|                                                                              |                                                      |                           |      
|Shares used in basic computation                                              |                                                      |                           | 7,461
|Weighted average common shares subject to repurchase                          |                                                      |                           | 3,796
|Common shares issuable upon exercise of stock options (treasury stock method) |                                                      |                           | 3,759
|Convertible preferred stock                                                   |                                                      |                           | 6,600
|                                                                              |                                                      |                           |      
|                                                                              | Shares used in diluted computation                   |                           |      
|                                                                              |                                                      |                           |      
|Basic earnings per share                                                      |                                                      | $                         | 0.28 
|Diluted earnings per share                                                    |                                                      | $                         | 0.10 

68

---

8.     Income Taxes

The income tax provision consisted of the following (in thousands):

|                           |         | Years Ended September 30, |       
|-------------------------- | ------- | ------------------------- | ------
|
|Current:                   |         |                           |       
|                           | Federal |                           | $     
|                           | State   |                           |       
|                           | Foreign |                           |       
|                           |         |                           |       
|                           |         |                           | 4,369 
|Deferred:                  |         |                           |       
|                           | Federal |                           |       
|                           | State   |                           |       
|                           |         |                           |       
|                           |         |                           | (2,915
|                           |         |                           |       
|Provision for income taxes |         | $                         | 1,454 
|                           |         |                           |       

The
amount of income tax recorded differed from the amount using the statutory federal income tax rate (35.0%) for the following reasons:

|                                              |  | Years Ended September 30, |  
|--------------------------------------------- |  | ------------------------- | -
|
|Federal statutory tax                         |  | 35.0                      | %
|State income taxes net of federal tax benefit |  | 2.3                       |  
|Tax credits                                   |  | (3.2                      | )
|Foreign withholding tax                       |  | 1.7                       |  
|Deferred stock-based compensation             |  | 7.3                       |  
|ETI exclusion                                 |  | (3.7                      | )
|Other                                         |  | 1.6                       |  
|                                              |  |                           |  
|Effective tax rate                            |  | 41.0                      | %
|                                              |  |                           |  

Income
(loss) before income taxes was as follows (in thousands):

|                                  |  | Years Ended September 30, |      
|--------------------------------- |  | ------------------------- | -----
|
|Domestic                          |  | $                         | 3,434
|Foreign                           |  |                           | 111  
|                                  |  |                           |      
|Income (loss) before income taxes |  | $                         | 3,545
|                                  |  |                           |      

69

---



Significant components of the Company's net deferred tax assets were as follows (in thousands):

|                               |                                  | Years Ended September 30, |      
|------------------------------ | -------------------------------- | ------------------------- | -----
|
|Deferred tax assets:           |                                  |                           |      
|                               | Net operating loss carryforward  |                           | $    
|                               | Accrued compensation             |                           |      
|                               | Reserves and accrued liabilities |                           |      
|                               | Deferred revenue                 |                           |      
|                               | Stock compensation               |                           |      
|                               | Credits                          |                           |      
|                               |                                  |                           |      
|Total deferred tax assets      |                                  |                           | 2,957
|                               |                                  |                           |      
|Deferred tax liabilities:      |                                  |                           |      
|                               | Depreciation and amortization    |                           |      
|                               | Prepaid expenses                 |                           |      
|                               |                                  |                           |      
|Total deferred tax liabilities |                                  |                           | (178 
|                               |                                  |                           |      
|Total net deferred tax asset   |                                  |                           | 2,779
|                               |                                  |                           |      
|Valuation allowance            |                                  |                           | (35  
|                               |                                  |                           |      
|Net deferred tax assets        |                                  | $                         | 2,744
|                               |                                  |                           |      

Current
net deferred taxes at September 30, 2002 and 2003 were $2.0 million and $2.6 million, respectively. Noncurrent net deferred tax assets at
September 30, 2002 and 2003 of $694,000 and $1.1 million, respectively, were included in other assets.

At
September 30, 2003, the Company had foreign loss carryforwards of approximately $37,000, which expire in 2008. At September 30, 2002 and 2003, the Company's valuation
allowance related to foreign loss carryforwards based on the Company's evaluation of the likelihood of realization of future tax benefits resulting from these loss carryforwards.

At
September 30, 2003, the Company had federal and California research and development credit carryforwards of approximately $107,000 and $366,000, respectively, to offset future
tax liabilities. The federal credits begin expiring in 2023 and the state credits have no expiration. The Company also had a California Manufacturers' Investment credit carryforward of approximately
$21,000. These credits begin expiring in 2011.

The
valuation allowance decreased by $41,000 in fiscal 2002 and $22,000 in fiscal 2003 primarily due to the release of valuation allowance against foreign deferred tax assets
attributable to utilization of foreign net operating losses.

Current
federal and California state tax laws include substantial restrictions on the utilization of tax credits in the event of an ownership change of a corporation. Accordingly, the
Company's ability to utilize tax credit carryforwards may be limited as a result of such ownership change as defined. Such a limitation could result in the expiration of carryforwards before they are
utilized.

The
pretax income (loss) from foreign operations was $111,000, $171,000 and $(883,000) in fiscal 2001, 2002 and 2003, respectively. Undistributed earnings of the Company's foreign
subsidiaries are considered to be indefinitely reinvested and, accordingly, no provision for federal and state income taxes

70

---

has
been provided thereon. Upon distribution of those earnings in the form of a dividend or otherwise, the Company would be subject to both United States income taxes (subject to an adjustment for
foreign tax credits) and withholding taxes payable to the various foreign countries. It is not practical to estimate the income tax liability that might be incurred on the remittance of such earnings.

9.     Employee Benefit Plan

The Company has established a 401(k) tax deferred savings plan (the "401(k) Plan") which permits participants to make contributions by salary deduction pursuant
to Section 401(k) of the Internal Revenue Code. The Company may, at its discretion, make matching contributions to the 401(k) Plan. The Company is responsible for administrative costs of the
401(k) Plan. The Company did not make any matching contributions in fiscal 2001, fiscal 2002 or fiscal 2003.

10.   Contingencies

Legal Proceedings

Synopsys has filed claims against the Company in state and federal court. These claims are based on the alleged facts and circumstances relating to the departure
of the Company's five founders from their employment at Synopsys, the founding of the Company and the development and sale of HSIM and the Company's other products. Each of the Company's founders and
Dr. Sang S. Wang, its Chief Executive Officer, became an employee of Synopsys when Synopsys acquired EPIC Design Technology in February 1997. Dr. Wang resigned from Synopsys in
March 1998 and served as a consultant to Synopsys until June 1998. Dr. An-Chang Deng, the Company's President, and the Company's four other founders resigned from
Synopsys at approximately the same time in August 1998 and became employees of the Company immediately thereafter. Dr. Wang became an employee of the Company in April 1999. None
of Drs. Wang or Deng or the Company's four other founders was subject to a noncompetition agreement with Synopsys at any time.

In
February 2000, Synopsys filed a complaint in the Superior Court of the State of California in the County of Santa Clara (Case No. CV787950) against the Company and
Dr. Deng, the Company's President. The complaint alleged breach of contract, breach of fiduciary trust, diversion of corporate opportunity and constructive trust. In September 2001,
Synopsys filed its second amended complaint, which added claims of inducing/aiding and abetting breach of fiduciary duty, including/aiding and abetting diversion of corporate opportunity,
misappropriation of trade secrets, civil conspiracy, breach of confidence and unfair competition, and added as individual defendants Dr. Wang and the Company's four other founders. In
September 2002, Synopsys filed a supplemental second amended complaint that contained supplemental allegations but added no new claims or parties. In January 2003, the discovery referee
issued orders creating rebuttable presumptions in favor of Synopsys on certain evidentiary issues to sanction the Company for erasure of certain computer files requested in discovery by Synopsys.
These rulings mean that the Company must prove at trial that the Company did not take or use Synopsys' source code or other confidential information, rather than the usual requirement that Synopsys
provide such proof in the first instance. However, none of these rulings resolves any of the claims made by Synopsys in the case and the trial judge or jury can reach their own conclusions based upon
the evidence presented at trial. The Company filed a motion for reconsideration of this order and in March 2003, the court denied its motion, concluding that it was barred on procedural
grounds. In January 2003, Synopsys filed a third amended complaint, which contained supplemental allegations but added no new claims or parties. The Company has filed an answer denying
Synopsys' allegations. In August 2003, Synopsys filed several motions for terminating sanctions against the Company which are scheduled for hearing in January 2004. The Company opposes
each of these motions and intends to file oppositions within the time permitted by

71

---

law.
Synopsys has requested unspecified damages of at least $25 million, an injunction, a constructive trust on unspecified intellectual property belonging to the Company and other relief.
Further, in September 2003, Synopsys notified the Company that it reserves the right to seek up to $80 million in punitive damages with respect to claims for which punitive damages are
allowed under California Civil Code Section 3294, and up to $50 million in punitive damages with respect to the trade secret claims under California Civil Code Section 3426.3(c).
This action is currently in discovery. A trial date has not yet been set.

The
Company believes that it has meritorious defenses to Synopsys' allegations and claims and the Company intends to continue to defend itself vigorously. However, because of the
inherent uncertainty of litigation in general, and the fact that the discovery related to this litigation is ongoing, the Company cannot assure you that it will ultimately prevail. Should Synopsys
ultimately succeed in the prosecution of its claims, the Company could be permanently enjoined from selling its software and deriving related maintenance revenue. In addition, the Company could be
required to pay substantial monetary damages to Synopsys. Further, the Company could be enjoined preliminarily from selling its software during the course of the litigation. Litigation such as the
suit Synopsys has brought against the Company can take years to resolve and can be expensive to defend. Although the final outcome of the litigation may not occur for some time, the parties
periodically conduct evidence gathering, meet to discuss the status of the litigation and file motions and other requests for the court to act. The results of these periodic activities, particularly
the court's decisions on current pending and future motions, could have the effect of determining the ultimate outcome of the litigation, either for or against the Company, prior to a trial on the
merits, or strengthen or weaken the Company's ability to assert claims and defenses. For example, in November 2001, the court denied a motion brought by Synopsys for injunctive relief that, if
granted, could have prevented the Company from selling its products. If any of Synopsys' motions ultimately prevail, the Company's ability to defend itself against the claims brought
against the Company in this litigation could be severely limited. It is possible that the Company's relationships with its customers will be seriously harmed in the future as a result of the Synopsys
litigation. Accordingly, an adverse judgment, if entered in favor of any Synopsys claim, could seriously harm the Company's business, financial position and results of operations and cause its stock
price to decline substantially. In addition, the Synopsys allegations and claims, even if ultimately determined to be without merit, could be time consuming to defend, result in costly litigation,
divert management's attention and resources, cause product shipment delays or require the Company to enter into royalty or license agreements. These royalty or license agreements may not be available
on terms acceptable to the Company, if at all, and the prosecution of the Synopsys allegations and claims could significantly harm the Company's business, financial position and results of operations
and cause its stock price to decline substantially.

In
May 2001, Synopsys filed a complaint in the United States District Court, Northern District of California, San Jose division (Case No. CO1-20423 PVT) against the
Company, alleging that the Company's HSIM software infringes U.S. Patent No. 5,878,053 entitled "Hierarchical Power Network Simulation and Analysis tool for reliability testing of Deep
Submicron IC Designs" (the "053 patent"), which is purportedly assigned to Synopsys. Since the case began, Synopsys has also alleged that the Company's subsequently released HSIM 2.0 and LEXSIM
products, infringe the 053 patent. Synopsys has requested relief including damages from $4.1 million to $13.7 million and an injunction. Synopsys has also requested that any damage award
be trebled for alleged willful infringement. In June 2001, the Company filed an answer to the complaint denying infringement of a valid, enforceable patent and asserting counterclaims. The
Company has since amended its counterclaims. The Company's current counterclaims allege that, among other things, the 053 patent is invalid, unenforceable and not infringed and that Synopsys has
violated federal antitrust and state unfair competition laws.

72

---

From
time to time, the court has ruled on summary judgment motions in the case. In May 2002, the court granted summary judgment in favor of Synopsys on the Company's invalidity
defenses and counterclaims, concluding that they were barred by the doctrine of assignor estoppel. The court denied Synopsys' motion with respect to the Company's unenforceability defense and
counterclaim. In November 2002, the court issued an order granting summary judgment in favor of Synopsys on certain antitrust counterclaims based on the doctrine of assignor estoppel. However,
the court declined to rule on Synopsys' motion with respect to the Company's other antitrust and unfair competition counterclaims. In addition, the court issued a ruling construing the claims of the
053 patent in August 2002.

In
September 2002, the U.S. Patent and Trademark Office granted the Company's request for ex parte reexamination of the 053 patent based on prior art not previously considered by
the Patent Office. The Company has moved to stay the federal litigation pending the outcome of the reexamination and the court granted the Company's motion in December 2002. During the
reexamination of the 053 patent, the Patent Office may determine that the subject matter in the patent is patentable as originally claimed, that the subject matter is patentable if the claims are
modified or that the subject matter is not patentable. The Company cannot predict what the result of the reexamination procedure will be or how long it will take to complete.

Activity
on several other summary judgment motions has been suspended because the court stayed the federal litigation. In November 2002, Synopsys filed three motions for summary
judgment. The first motion asked the court to enter judgment before trial that the Company's products infringe the 053 patent. The second motion asked the court to rule before trial against the
Company on its defense that the 053 patent is unenforceable because Synopsys committed inequitable conduct in obtaining the patent. The Company submitted oppositions to both of these motions.
Synopsys' third motion asked the court to rule before trial against the Company on its remaining antitrust counterclaims. Because of the court's prior rulings against the Company on its other
antitrust counterclaims, the Company did not oppose this motion. In November 2002, the Company also filed a summary judgment motion, which asked the court to enter judgment before trial that
its products do not infringe the 053 patent. Synopsys opposed this motion. The court issued its order staying the federal litigation before the parties' reply briefs were due.

In
June 2003, Synopsys filed a second complaint in the United States District Court, Northern District of California, San Francisco Division (Case No. C03-2664 RS)
against the Company, alleging that the Company's products, including but not limited to HSIM and HANEX software products, infringe Synopsys U.S. Patent No. 6,249,898 entitled "Methods and
Systems for Reliability Analysis of CMOS VLSI Circuits Based on Stage Partitioning and Node Activities" (the "898 Patent"). In July 2003, the Company filed an answer denying that the Company
infringes the 898 Patent and asserting as defenses that the 898 Patent is invalid and unenforceable. The Company also brought a declaratory judgment counterclaim seeking judgment that the 898 Patent
is not infringed by the Company and that the 898 Patent is invalid and unenforceable. In August 2003, Synopsys filed a motion to dismiss these defenses and counterclaims on the ground that the
Company is barred from contesting the validity and enforceability of the 898 Patent based on the doctrine of assignor estoppel. Synopsys' motion also sought to strike the Company's defenses of laches,
patent misuse and unclean hands on the ground that the Company had not pleaded them with sufficient particularity. The Company opposed Synopsys' motions. In October 2003, the court denied
Synopsys' motion to dismiss and strike the invalidity and unenforceability defenses and counterclaims and granted Synopsys' motion to strike the laches, patent misuse and unclean hands defenses with
leave to amend the pleadings. The court has scheduled a case management conference for December 2003.

The
Company believes it has meritorious defenses to Synopsys' claims and intend to defend itself vigorously. However, because of the high degree of complexity of the intellectual
property at issue, the inherent uncertainties of litigation in general and the preliminary nature of this litigation, the Company

73

---

cannot
assure you that it will ultimately prevail. Should Synopsys ultimately succeed in the prosecution of its claims, the Company could be permanently enjoined from selling its software and deriving
related maintenance revenue. In addition, the Company may be required to pay substantial monetary damages to Synopsys. Further, the Company could be enjoined preliminarily from selling its software
during the course of the litigation. Litigation such as the suit Synopsys has brought against the Company can take years to resolve and can be expensive to defend. The court's decisions on current
pending and future motions could have the effect of determining the ultimate outcome of the litigation prior to a trial on the merits, or strengthen or weaken the Company's ability to assert claims
and defenses. It is possible that the Company's relationships with its customers will be seriously harmed in the future as a result of the Synopsys litigation. Accordingly, an adverse judgment, if
entered on any Synopsys claim, could seriously harm the Company's business, financial position and results of operations and cause its stock price to decline substantially. In addition, the Synopsys
allegations and claims, even if ultimately determined to be without merit, could be time consuming to defend, result in costly litigation, divert the Company's management's attention and resources,
cause product shipment delays or require the Company to enter into royalty or license agreements. These royalty or license agreements may not be available on terms acceptable to the Company, if at
all, and the prosecution of the Synopsys allegations and claims could significantly harm the Company's business, financial position and results of operations and cause its stock price to decline
substantially.

On
July 1, 2003, a purported derivative complaint was filed against the Company and its directors in the United States District Court for the Northern District of California. This
complaint alleged violations of California Corporations Code Section 25402, breach of fiduciary duty, waste of corporate assets and unjust enrichment based generally on the facts and
circumstances alleged in the Synopsys litigations. The complaint seeks equitable relief and an unspecified amount of damages on behalf of the Company. The case is still in the preliminary stages, and
it is not possible for the Company to quantify the impact, if any, on the Company. An unfavorable outcome in this case could have a material adverse effect on its business, financial condition,
results of operations and cash flow. In addition, the expense of defending any litigation may be costly and divert management's attention from the day-to-day operations of its
business.

No
amount has been accrued for any loss contingencies which may result from the resolution of the lawsuits filed by Synopsys, as the outcome of the matters is too uncertain to predict.

Other Contingencies

The Company from time to time enters into certain types of contracts that contingently require it to indemnify parties against third party claims. These contracts
primarily relate to: (i) certain agreements
with the Company's officers, directors and employees and third parties, under which the Company may be required to indemnify such persons for liabilities arising out of their duties to the Company and
(ii) agreements under which the Company indemnifies customers and partners for claims arising from intellectual property infringement.

The
terms of such obligations vary. Generally, a maximum obligation is not explicitly stated. Because the obligated amounts of these types of agreements often are not explicitly stated,
the overall maximum amount of the obligations cannot be reasonably estimated. Historically, the Company has not been obligated to make significant payments for these obligations, and no liabilities
have been recorded for these obligations on the Company's balance sheet as of September 30, 2003.

In
general, the Company provides its customers a 90-day limited warranty in connection with the licensing of its software that the software will perform substantially in
accordance with the Company's documentation. The Company does not maintain a general warranty reserve for estimated costs at the time

74

---

revenue
is recognized due to its extensive quality testing of the software. To date, the Company has incurred minimal costs related to this limited warranty obligation.

The
Company's standard software license and maintenance agreements include an infringement indemnification provision for claims from third parties related to the Company's intellectual
property. The agreements generally limit the scope of the available remedies in a variety of industry-standard methods, including but not limited to a right to control the defense or settlement of any
claim, procure the right for continued usage, and a right to replace or modify the infringing products to make them non-infringing. Such indemnification provisions are accounted for in
accordance with SFAS No. 5. To date, the Company has not incurred any costs related to any claims under such indemnification provisions.

11.   Customer and Geographic Information

The Company operates in one reportable segment to provide full-chip circuit simulation and analysis software solutions for the design and verification
of complex nanometer-scale semiconductors.

Revenue
from customers by geographic area was as follows (in thousands):

|         |               | Years Ended September 30,
|-------- | ------------- | -------------------------
|
|Revenue: |               |                          
|         | United States |                          
|         | Japan         |                          
|         | Other         |                          
|         |               |                          
|         |               | $                        
|         |               |                          

For
fiscal 2002 and fiscal 2003, the long-lived assets with the Company's foreign subsidiaries located outside the United States totaled approximately $80,000 and $53,000,
respectively, and the remainder was located within the United States.

The
Company had revenue from individual customers in excess of 10% of revenue as follows:

|         |  | Years Ended September 30, |  
|-------- |  | ------------------------- | -
|
|Customer |  |                           |  
|A*       |  | 24                        | %
|B        |  |                          |  

---

75

---

The
Company had accounts receivable from individual customers in excess of 10% of gross accounts receivable as follows:

|         |  | Years Ended September 30, |  
|-------- |  | ------------------------- | -
|
|Customer |  |                           |  
|A        |  | 23                        | %
|B        |  | 13                        | %
|C        |  | 11                        | %
|D        |  | 10                        | %

76

---



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

Not applicable.

ITEM 9A.    Controls and Procedures

(a)    Evaluation of disclosure controls and procedures.

We have carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief
Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Exchange Act) as of the end of the period covered by this Annual Report. Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls
and procedures are effective to ensure that material information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange Commission rules and forms. It should be noted, however, that the design of any system of controls is based in part upon
certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of
how remote.

(b)    Changes in internal controls.

There was no change in our internal control over financial reporting during the fourth quarter of the period covered by this Annual Report that had materially
affected, or is reasonably likely to materially affect, our internal control over financial reporting.

77

---

PART III

ITEM 10.    Directors and Executive Officers

The information required by this item concerning our directors is incorporated by reference to the sections captioned "Election of Directors" and
"Section 16(a) Beneficial Ownership Reporting Compliance" contained in our Proxy Statement related to the 2004 Annual Meeting of Stockholders, to be filed with the Securities and Exchange
Commission within 120 days of the end of our fiscal year pursuant to General Instruction G(3) of Form 10-K (the "Proxy Statement"). Certain information required by this item
concerning executive officers is set forth in Part I of this Report in "BusinessExecutive Officers."

ITEM 11.    Executive Compensation

The information required by this item is incorporated by reference in the Proxy Statement.

ITEM 12.    Security Ownership of Certain Beneficial Owners and Management

The information required by this item is incorporated by reference in the Proxy Statement.

ITEM 13.    Certain Relationships and Related Transactions

The information required by this item is incorporated by reference in the Proxy Statement.

ITEM 14.    Principal Accountant Fees And Services

The information required by this item is incorporated by reference in the Proxy Statement.

78

---



PART IV

ITEM 15.    Exhibits, Financial Statement Schedules, and Reports on Form 8-K

(a)(1)     Financial Statements

The following consolidated financial statements are set forth in Item 8 of this Annual Report:

|                                                                                                                                      |  | Page
|------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|Independent Auditors' Report                                                                                                          |  | 52  
|Consolidated Balance Sheets, September 30, 2002 and 2003                                                                              |  | 53  
|Consolidated Statements of Income for the fiscal years ended September 30, 2001, 2002 and 2003                                        |  | 54  
|Consolidated Statements of Stockholders' Equity and Comprehensive Income for the fiscal years ended September 30, 2001, 2002 and 2003 |  | 55  
|Consolidated Statements of Cash Flows for the fiscal years ended September 30, 2001, 2002 and 2003                                    |  | 56  
|Notes to Consolidated Financial Statements                                                                                            |  | 57  

(a)(2)     Financial Statement Schedules

SCHEDULE II: VALUATION AND QUALIFYING ACCOUNTS  For the years ended September 30, 2001, 2002 and 2003  (in thousands)

|Allowance for Doubtful Accounts: |      | Balance at
Beginning
of Period |   | Additions
Charged
to Expense |  | Deductions |     | Balance
at End
of Period
|-------------------------------- | ---- | ------------------------------ | - | ---------------------------- |  | ---------- | --- | ------------------------
|Years Ended September 30,        |      |                                |   |                              |  |            |     |                         
|                                 | 2001 |                                | $ | 35                           |  | $          | 100 |                         
|                                 | 2002 |                                | $ | 112                          |  | $          | 25  |                         
|                                 | 2003 |                                | $ | 87                           |  | $          | 15  |                         

79

---

(a)(3)     Exhibits

|Exhibit No. |  | Exhibit Title                                                                                                                                                                    
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1.1*      |  | Amended and Restated Certificate of Incorporation                                                                                                                                
|3.2*        |  | Bylaws                                                                                                                                                                           
|10.1*       |  | Form of Indemnification Agreement between the Registrant and each of its directors and officers                                                                                  
|10.2*       |  | Amended and Restated 1998 Stock Option Plan                                                                                                                                      
|10.2.1*     |  | Form of Stock Option Agreement under the 1998 Stock Option Plan                                                                                                                  
|10.3*       |  | 2001 Stock Option Plan                                                                                                                                                           
|10.3.1*     |  | Form of Stock Option Agreement under the 2001 Stock Option Plan                                                                                                                  
|10.4*       |  | 2001 Director Option Plan                                                                                                                                                        
|10.4.1*     |  | Form of Director Option Agreement under 2001 Director Option Plan                                                                                                                
|10.5*       |  | 2001 Employee Stock Purchase Plan                                                                                                                                                
|10.5.1*     |  | Form of Subscription Agreement under the 2001 Employee Stock Purchase Plan                                                                                                       
|10.6*       |  | Letter of Employment dated September 15, 2000 between the Registrant and Tammy Shu-Hua Liu                                                                                       
|10.8*      |  | Exclusive Distributor Agreement dated October 1, 1999 between the Registrant and Marubeni Solutions Corporation                                                                  
|10.8.1*    |  | Amendment dated November 21, 2000 to Exclusive Distributor Agreement dated October 1, 1999 between the Registrant and Marubeni Solutions Corporation                             
|10.8.2**    |  | Amendment II dated February 14, 2002 to Exclusive Distributor Agreement dated October 1, 1999 between the Registrant and Marubeni Solutions Corporation                          
|10.8.3     |  | Amendment III dated October 1, 2003 to Exclusive Distributor Agreement dated October 1, 1999 between the Registrant and Marubeni Solutions Corporation                           
|10.9.1***   |  | Lease dated December 20, 2002 between the Registrant and San Tomas Properties, LLC for the premises located at Second Floor of 2650 San Tomas Expressway, Santa Clara, California
|10.9.2***   |  | Addendum No. 1 to the Lease dated December 20, 2002 between the Registrant and San Tomas Properties, LLC                                                                         
|14.1        |  | Code of Ethics for Principal Executive and Senior Financial Officers                                                                                                             
|21.1        |  | Subsidiaries                                                                                                                                                                     
|23.1        |  | Independent Auditors' Consent                                                                                                                                                    
|24.1        |  | Power of Attorney (see Page 82)                                                                                                                                                  
|31.1        |  | Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                  
|32.1        |  | Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                  

---

80

---

(b)   Reports on Form 8-K

On July 16, 2003, we furnished pursuant to Item 12 under Item 9 (in accordance with the interim guidance for these items) the press release announcing our
results for the quarter ended June 30, 2003, which was also filed as an exhibit under Item 7.

(c)   Exhibits

See Item 15(a)(3) above.

(d)   Financial Statement Schedules

See Item 15(a)(2) above.

81

---



SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this annual report on Form 10-K to be
signed on its behalf by the undersigned thereunto duly authorized in the City of Santa Clara, California, on November 26, 2003.

| |  | NASSDA CORPORATION
| |  | ------------------
| |  | By                
| |  |                   
| |  | By                
| |  |                   

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Sang S. Wang and Tammy S. Liu and each of them
acting individually, as his or her attorney-in-fact, each with full power of substitution, for him or her in any and all capacities, to sign any and all amendments to this
Report on Form 10-K, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission.

Pursuant
to the requirements of the Securities Exchange Act of 1934, this Report on Form 10-K has been signed on behalf of the Registrant by the following persons and
in the capacities and on the dates indicated:

|Signature                     |  | Title                                                                                                |  | Date             
|----------------------------- |  | ---------------------------------------------------------------------------------------------------- |  | -----------------
|                              |  |                                                                                                      |  |                  
|/s/SANG S. WANGSang S. Wang   |  | Chief Executive Officer and Chairman of the Board
(Principal Executive Officer)                      |  | November 26, 2003
|/s/TAMMY S. LIUTammy S. Liu   |  | Chief Financial Officer and Vice President, Finance and Administration
(Principal Financial Officer) |  | November 26, 2003
|/s/AN-CHANG DENGAn-Chang Deng |  | President, Chief Operating Officer and Director                                                      |  | November 26, 2003
|                              |  |                                                                                                      |  |                  

82

---

|/s/YEN-SON HUANGYen-Son Huang         |  | Director |  | November 26, 2003
|------------------------------------- |  | -------- |  | -----------------
|/s/EDWARD C. V. WINNEdward C. V. Winn |  | Director |  | November 26, 2003
|/s/BERNARD ARONSONBernard Aronson     |  | Director |  | November 26, 2003

83

---

EXHIBIT INDEX

|Exhibit No. |  | Exhibit Title                                                                                                                                                                    
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1.1*      |  | Amended and Restated Certificate of Incorporation                                                                                                                                
|3.2*        |  | Bylaws                                                                                                                                                                           
|10.1*       |  | Form of Indemnification Agreement between the Registrant and each of its directors and officers                                                                                  
|10.2*       |  | Amended and Restated 1998 Stock Option Plan                                                                                                                                      
|10.2.1*     |  | Form of Stock Option Agreement under the 1998 Stock Option Plan                                                                                                                  
|10.3*       |  | 2001 Stock Option Plan                                                                                                                                                           
|10.3.1*     |  | Form of Stock Option Agreement under the 2001 Stock Option Plan                                                                                                                  
|10.4*       |  | 2001 Director Option Plan                                                                                                                                                        
|10.4.1*     |  | Form of Director Option Agreement under 2001 Director Option Plan                                                                                                                
|10.5*       |  | 2001 Employee Stock Purchase Plan                                                                                                                                                
|10.5.1*     |  | Form of Subscription Agreement under the 2001 Employee Stock Purchase Plan                                                                                                       
|10.6*       |  | Letter of Employment dated September 15, 2000 between the Registrant and Tammy Shu-Hua Liu                                                                                       
|10.8*      |  | Exclusive Distributor Agreement dated October 1, 1999 between the Registrant and Marubeni Solutions Corporation                                                                  
|10.8.1*    |  | Amendment dated November 21, 2000 to Exclusive Distributor Agreement dated October 1, 1999 between the Registrant and Marubeni Solutions Corporation                             
|10.8.2**    |  | Amendment II dated February 14, 2002 to Exclusive Distributor Agreement dated October 1, 1999 between the Registrant and Marubeni Solutions Corporation                          
|10.8.3     |  | Amendment III dated October 1, 2003 to Exclusive Distributor Agreement dated October 1, 1999 between the Registrant and Marubeni Solutions Corporation                           
|10.9.1***   |  | Lease dated December 20, 2002 between the Registrant and San Tomas Properties, LLC for the premises located at Second Floor of 2650 San Tomas Expressway, Santa Clara, California
|10.9.2***   |  | Addendum No. 1 to the Lease dated December 20, 2002 between the Registrant and San Tomas Properties, LLC                                                                         
|14.1        |  | Code of Ethics for Principal Executive and Senior Financial Officers                                                                                                             
|21.1        |  | Subsidiaries                                                                                                                                                                     
|23.1        |  | Independent Auditors' Consent                                                                                                                                                    
|24.1        |  | Power of Attorney (see Page 82)                                                                                                                                                  
|31.1        |  | Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                  
|32.1        |  | Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                  

---

---

QuickLinks