<PAGE>
 
================================================================================

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

                               ----------------
                                   FORM 10-Q
                               ----------------

(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
      Exchange Act of 1934 for the period ended March 31, 1998
 
                               OR
 
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
      Exchange Act of 1934
 
Commission file number:  000-23649

                            ARTISAN COMPONENTS, INC.
            (Exact name of registrant as specified in its charter)

               DELAWARE                                77-0278185
   (State or other jurisdiction of       (I.R.S. Employer Identification Number)
    incorporation or organization)

                              1195 Bordeaux Drive
                          Sunnyvale, California 94089
                   (Address of principal executive offices)

                        Telephone Number (408) 734-5600
             (Registrant's telephone number, including area code)

 
     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
 
               Yes                  No       X
                         -----             -----     
 
As of March 31, 1998 there were 12,297,541 shares of the Registrant's Common
Stock outstanding.
================================================================================
<PAGE>
 
                            ARTISAN COMPONENTS, INC.

                                   Form 10-Q

                                     INDEX


                                                                        Page No.
                                                                        --------

Cover Page..................................................................1
Index.......................................................................2
                                                                     
PART I - Financial Information                                       
                                                                     
     ITEM 1 - Financial statements                                   
                                                                     
     Condensed balance sheets - March 31, 1998 and September 30, 1997.......3
     Condensed statements of operations                              
                Three months and six months ended March 31, 1998 and 1997...4
     Condensed statements of cash flows -- six months ended        
                 March 31, 1998 and 1997....................................5
     Notes to condensed financial statements................................6
                                                                     
     ITEM 2 - Management's Discussion and Analysis of Financial      
                 Condition and Results of Operations........................9
                                                                     
PART II - Other Information                                          
                                                                     
     ITEM 2 - Changes in Securities and Use of Proceeds....................26
                                                                     
     ITEM 6 - Exhibits.....................................................26
                                                                     
Signatures.................................................................27

                                      2
<PAGE>
 
                           ARTISAN  COMPONENTS, INC.

                           CONDENSED BALANCE SHEETS

                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
<TABLE>
<CAPTION>
                                                       MARCH 31,   SEPTEMBER 30,
                                                     ------------- -------------
                                                         1998          1997(1)
                                                     ------------- -------------
                                                      (UNAUDITED)
<S>                                                  <C>           <C>
                       ASSETS                        
Current assets:                                      
  Cash and cash equivalents.........................    $ 1,579       $ 1,069
  Contract receivables (net of allowance of 
   $275 and $275 at September 30, 1997 and                          
   March 31, 1998, respectively)....................      3,068         2,834
  Marketable securities.............................     29,141         2,499
  Prepaid expenses and other current assets.........        947           564
                                                        -------       -------
    Total current assets............................     34,735         6,966
Marketable securities...............................          -           986
Property and equipment, net.........................      5,330         3,969
Deferred tax asset..................................          6             6
Other assets........................................        314            84
                                                        -------       -------
    Total assets....................................    $40,385       $12,011
                                                        =======       =======
        LIABILITIES AND STOCKHOLDERS' EQUITY                                 
Current liabilities:                                                         
  Accounts payable and accrued expenses.............    $ 1,198       $   631
  Accrued warranty..................................        138           165
  Deferred tax liability............................        384           384
  Deferred revenue..................................      1,153         1,434
                                                        -------       -------
    Total current liabilities.......................      2,873         2,614
Deferred rent.......................................         23            49
Deferred revenue....................................        209             -
                                                        -------       -------
    Total liabilities...............................      3,105         2,663
                                                        -------       -------
 Stockholders' Equity:                                                       
 Convertible Preferred Stock, $0.001 par value:                              
  Authorized: 3,436 and 5,000 shares at                              
   September 30, 1997 and March 31, 1998,                           
   respectively;                                                             
  Issued and outstanding: 3,386 and none at                          
   September 30, 1997 and March 31, 1998............                    7,564
  (Liquidation value: $9,995 at September 30, 1997)                          
 Common Stock, $0.001 par value:                                             
  Authorized: 50,000 shares;                                                 
  Issued and outstanding: 5,644 and 12,298                           
   shares at September 30, 1997 and March                          
   31, 1998, respectively...........................         12             6
 Warrant ...........................................          -           125
 Additional paid in capital.........................     35,705           688
 Retained earnings..................................      1,563           965
                                                        -------       -------
    Total stockholders' equity......................     37,280         9,348
                                                        -------       -------
    Total liabilities and stockholders' equity......    $40,385       $12,011
                                                        =======       =======
</TABLE>
------------
(1) Derived from the Company's audited Balance Sheet as of September 30, 1997.
 
   The accompanying notes are an integral part of these condensed financial 
                                  statements.
 
                                       3

<PAGE>
 
                            ARTISAN COMPONENTS, INC.
 
                      CONDENSED STATEMENTS OF OPERATIONS
 
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
                                  (UNAUDITED)
<TABLE>
<CAPTION>
                                     THREE MONTHS      SIX MONTHS
                                    ENDED MARCH 31,  ENDED MARCH 31,
                                  ------------------ ---------------
                                    1998      1997    1998    1997
                                  --------  -------- ------- -------
<S>                               <C>       <C>      <C>     <C>
Revenue.......................... $  3,760  $  1,770 $ 7,089 $ 3,155        
Cost and expenses:                                                          
  Cost of revenue................    1,076       501   2,100     926        
  Product development............      871       485   1,714     841        
  Sales and marketing............    1,017       351   1,802     704        
  General and administrative.....      438       316     893     501        
                                  --------  -------- ------- -------        
    Total cost and expenses......    3,402     1,653   6,509   2,972        
                                  --------  -------- ------- -------        
Operating income.................      358       117     580     183        
Other income.....................      192        90     307     132        
                                  --------  -------- ------- -------        
Income before provision for                                                 
 income taxes....................      550       207     887     315        
Provision for income taxes.......      159        72     289     109        
                                  --------  -------- ------- -------        
Net income ...................... $    391  $    135 $   598 $   206        
                                  ========  ======== ======= =======        
Basic earnings per share......... $   0.04  $   0.02 $  0.08 $  0.04        
                                  ========  ======== ======= =======        
Diluted earnings per share....... $   0.03  $   0.01 $  0.05 $  0.02        
                                  ========  ======== ======= =======        
</TABLE> 

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

                                       4
<PAGE>
 
                            ARTISAN COMPONENTS, INC.
 
                      CONDENSED STATEMENTS OF CASH FLOWS
 
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                      SIX MONTHS
                                        ENDED
                                       MARCH 31,
                                    ---------------
                                     1998     1997   
                                    ------  -------   
<S>                                 <C>     <C>     
Cash flows from operating                          
 activities:                                       
  Net income ....................   $   598  $  206  
  Adjustments to reconcile net                       
   income to net cash provided by 
   operating activities:                             
    Depreciation and                                 
     amortization................       829     244  
    Gain on sale of fixed                    
     assets......................       (38)      -  
    Provision for doubtful                           
     accounts....................         -      75  
    Issuance of Common Stock to                      
     employees as a stock bonus..         -      51  
    Compensation expense for                         
     options granted.............        35      16  
    Changes in assets and                          
     liabilities:                                  
      Contract receivables.......      (533) (1,597) 
      Deferred revenue...........       227   1,095  
      Prepaid expenses and other                   
       assets....................      (613)     89  
      Deferred rent..............       (26)     33  
      Deferred taxes.............         -     164  
      Accounts payable and                         
       accrued expenses..........       517     (81) 
                                    -------  ------    
        Net cash provided by                       
         operating activities....       996     295  
                                    -------  ------    
Cash flows from investing                          
 activities:                                       
  Acquisition of property and                      
   equipment.....................    (2,179)   (929) 
  Proceeds from sale of property                   
   and equipment.................        50       -  
  Purchase of marketable                           
   securities....................   (25,656) (3,697) 
                                    -------  ------    
        Net cash used in                           
         investing activities....   (27,785) (4,626) 
                                    -------  ------    
Cash flows from financing                          
 activities:                                       
  Net proceeds from issuance of                    
   Series B Preferred Stock and                    
   Warrant.......................         -   4,211  
  Proceeds from issuance of                        
   Common Stock..................    27,299      15  
                                    -------  ------    
        Net cash provided by                       
         financing activities....    27,299   4,226  
                                    -------  ------    
Net increase (decrease) in cash                    
 and cash equivalents............       510    (105) 
Cash and cash equivalents,                         
 beginning of period.............     1,069     709  
                                    -------  ------    
Cash and cash equivalents, end of                  
 period..........................   $ 1,579  $  604  
                                    =======  ======  
CASH PAID FOR:                                     
  Income taxes...................   $    23  $    2  
                                    =======  ======  
SUPPLEMENTAL DISCLOSURE OF                         
 NONCASH ACTIVITIES:                               
  Fixed asset acquisitions in                      
   exchange for accounts payable.   $    23  $   34  
                                    =======  ======  
  Issuance of Common Stock to em-                  
   ployees as a stock bonus......   $     -  $   51  
                                    =======  ======  
  Compensation expense for op-                     
   tions granted.................   $    35  $   16  
                                    =======  ======  
</TABLE>
 
        The accompanying notes are an integral part of these condensed 
                             financial statements.

                                       5
<PAGE>
 
                           ARTISAN COMPONENTS, INC.

                    NOTES TO CONDENSED FINANCIAL STATEMENTS
                                  (Unaudited)


1.   BASIS OF PRESENTATION:

     The accompanying unaudited condensed financial statements of ARTISAN
COMPONENTS, INC. (the "Company") have been prepared in accordance with generally
accepted accounting principles ("GAAP") for interim financial information and in
accordance with instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by GAAP for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation have been included. The year end balance sheet data was
derived from the audited financial statements and does not include all
disclosures required by GAAP. Operating results for the three and six month
periods ended March 31, 1998 are not necessarily indicative of the results that
may be expected for the fiscal year ending September 30, 1998. The unaudited
condensed, interim financial statements contained herein should be read in
conjunction with the audited financial statements and footnotes for the year
ended September 30, 1997 included in the Company's Registration Statement on
Form S-1 (Reg. No. 333-41219).

2. EARNINGS PER SHARE (EPS) DISCLOSURES:
 
  The Company adopted the provisions of Statement of Financial Accounting
Standards No. 128, Earnings Per Share ("SFAS 128") effective December 31,
1997. SFAS 128 requires the presentation of basic and diluted earnings per
share. Basic EPS is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding for
the period. Diluted EPS is computed giving effect to all dilutive potential
common shares that were outstanding during the period. Dilutive potential
common shares consist of the incremental common shares issuable upon the
conversion of convertible preferred stock (using the "if converted" method)
and exercise of stock options and warrants for all periods. All prior period
earnings per share amounts have been restated to comply with the SFAS 128.

                                      6
<PAGE>
 
                           ARTISAN COMPONENTS, INC.
 
                  NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
                                  (Unaudited)
 
 
2. EARNINGS PER SHARE (EPS) DISCLOSURES:

   In accordance with the disclosure requirements of SFAS 128, a reconciliation
of the numerator and denominator of basic and diluted EPS is provided as
follows (in thousands, except per share amounts).
<TABLE>
<CAPTION>
                                                          Six Months
                                          Three Months       Ended
                                         Ended March 31,   March 31,
                                       ----------------- --------------
                                         1998     1997    1998   1997  
                                       -------- -------- ------ ------ 
                                                 (Unaudited)
<S>                                    <C>      <C>      <C>     <C>    
Numerator--Basic and Diluted EPS                                               
  Net income.......................... $    391 $    135 $   598 $  206 
                                       ======== ======== ======= ====== 
Denominator--Basic EPS                                                         
  Common stock outstanding............    9,780    5,504   7,771  5,314 
                                       -------- -------- ------- ------ 
Basic earnings per share.............. $   0.04 $   0.02 $  0.08 $ 0.04 
                                       ======== ======== ======= ====== 
Denominator--Diluted EPS                                                       
  Denominator--Basic EPS..............    9,780    5,504   7,771  5,314 
  Effect of Dilutive Securities:                                               
    Common stock options..............    1,432    1,012   1,158  1,150 
    Convertible preferred stock.......    1,308    3,386   2,332  2,918 
                                       -------- -------- ------- ------ 
                                         12,520    9,902  11,261  9,382 
                                       -------- -------- ------- ------ 
Diluted earnings per share............ $   0.03 $   0.01 $  0.05 $ 0.02 
                                       ======== ======== ======= ====== 
</TABLE>

3.  New Accounting Standards

  In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income." This statement establishes standards
for reporting and displaying comprehensive income and its components in the
financial statements. It does not, however, require a specific format for the
statement, but requires the Company to display an amount representing total
comprehensive income for the period in that financial statement. This statement
is effective for the Company's 1999 fiscal year.

 
                                       7                                    
<PAGE>
 
                           ARTISAN COMPONENTS, INC.
             NOTES TO CONDENSED FINANCIAL STATEMENTS -- CONTINUED
                                  (Unaudited)


  In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an 
Enterprise and Related Information." The statement establishes standards for how
public business enterprises are to report information about operating segments 
in annual financial statements and requires those enterprises to report selected
information about operating segments in interim financial reports issued to 
stockholders. This statement is effective for the Company's 1999 fiscal year.
The Company is currently studying the impact of these pronouncments.

4.  Stockholders Equity

  On February 6, 1998, the Company completed the public offering of 3,015,000 
shares of Common Stock through a Registration Statement declared effective by 
the Securities and Exchange Commission on February 2, 1998. In connection with 
such public offering, certain stockholders of the Company sold 320,000 shares of
the Company's Common Stock.

5.  Subsequent Events

  On April 16, 1998, the Company filed a Registration Statement with the
Securities and Exchange Commission relating to a public offering of 3,300,000
shares of the Company's Common Stock, including the sale of 2,331,130 shares
held by certain stockholders of the Company.


                                       8
<PAGE>
 
                            ARTISAN COMPONENTS, INC.

                    Management's Discussion and Analysis of
                 Financial Condition and Results of Operations



The following Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. These statements include those 
in the third paragraph under "Overview" regarding estimates for project
completion, the statements in the fourth paragraph under "Overview" regarding
royalties, the statements in the fifth paragraph under "Overview" regarding
customer concentration and dependence on a limited number of customers, the
statements in the sixth paragraph in "Overview" regarding international revenue,
the statements in the seventh paragraph in "Overview" regarding product
concentration, the statements in the eighth paragraph in "Overview" regarding
growth in expenses, the statements in the ninth paragraph in "Overview"
regarding project delays, the statements in the sixth paragraph under "Liquidity
and Capital Resources" regarding the sufficiency of the Company's available
resources to meet working capital and capital expenditure requirements, the
statements in the seventh paragraph in "Liquidity and Capital Resources"
regarding future fund raising activities and the statements below under "Factors
Affecting Future Operating Results" among others. These forward looking
statements are based on current expectations and entail various risks and
uncertainties that could cause actual results to differ materially from those
projected in the forward looking statements. Such risks and uncertainties are
set forth below under "Factors Affecting Future Operating Results."

OVERVIEW
 
  Artisan Components, Inc. ("Artisan" or the "Company") is a leading developer
of high performance, low power and high density embedded memory and other 
intellectual property ("IP") components for the design and manufacture of
complex integrated circuits ("ICs"). The Company licenses its products to
semiconductor manufacturers and fabless semiconductor companies for the design
of ICs used in complex, high volume applications, such as portable computing
devices, cellular phones, consumer multimedia products, automotive electronics,
personal computers and workstations.


                                       9
<PAGE>
 
 
  Revenue consists of license fees received under the terms of license
agreements with customers to provide the Company's IP component products.
Typically, a customer licenses one or more products that are accompanied by
layout databases, views to support a customer's IC design tool environment and
design methodology documentation. The license of the Company's products
typically involves a sales cycle of six to 12 months and often coincides with
a customer's migration to a new manufacturing process. The Company's contracts
generally require a customer to pay a license fee to Artisan ranging from
approximately $400,000 to $800,000 for each product delivered under a contract.
A contract typically calls for an upfront payment of approximately one third of
the full contract value with the remainder due upon delivery, generally three to
six months later. See "Factors Affecting Future Operating Results--Lengthy Sales
Cycle and Design Process."

 To date, the substantial majority of the Company's revenue has been
recognized on a percentage of completion method. Provisions for estimated
losses on the uncompleted contracts are recognized in the period in which the
likelihood of such losses is determined. As the completion period for a
project ranges from three to six months, revenue in any quarter is dependent
on the Company's progress toward completion of the project. There can be no
assurance that the Company's estimates will be accurate, and, in the event
they are not, the Company's business, operating results and financial
condition in subsequent periods could be materially adversely affected.
 
  Currently, license fees represent substantially all of revenue. Beginning in
late fiscal 1996, however, the Company began implementation of a royalty based
business model that is intended to generate revenue from both license fees and
future royalties. Royalties will be based on per unit sales of ICs and will
generally be based on the silicon area of an IC occupied by the Company's IP
components. To date, the Company has received no royalty revenue, and it does
not anticipate receiving any until fiscal 1999 due to the typical length of
time required for the Company to design a component for a customer and for
such customer to manufacture and bring to market a product incorporating such
component. There can be no assurance that the Company will be successful in
expanding the number of royalty bearing contracts with customers. The Company
generally licenses its products on a nonexclusive, worldwide basis to major
semiconductor manufacturers and grants these manufacturers the right to
distribute the Company's IP components freely to their internal design teams
and to fabless semiconductor companies that manufacture at the same facility.
Given that Artisan provides its products early in the customer's IC design
process, there will be a significant delay between the delivery of a product and
the generation of royalty revenue. There can be no assurance that the Company
will receive any royalty revenue or that, if it does, the amount will be
significant. See "Factors Affecting Future Operating Results--Dependence on New
Business Model."

 
                                      10
<PAGE>
 
 
  The Company has been dependent on a relatively small number of customers for
a substantial portion of its annual revenue, although the customers comprising
this group have changed from time to time. In the three month period ended March
31, 1998, Newport Wafer Fab, Ltd. ("Newport"), Hitachi, Ltd. ("Hitachi"),Taiwan
Semiconductor Manufacturing Corporation ("TSMC"), VLSI Technology, Inc. ("VLSI
Technology") and NEC Electronics, Inc. ("NEC") accounted for 20%, 18%, 16%, 11%
and 10% of revenue, respectively. In the six month period ended March 31, 1998,
TSMC, OKI Electric Industry Co., Ltd. ("OKI"), SGS-THOMSON MICROELECTRONICS
S.r.l. ("SGS-THOMSON"), NEC and Newport accounted for 13%, 13%, 12%, 12% and 11%
of revenue, respectively. The Company anticipates that its revenue will continue
to depend on a limited number of major customers for the foreseeable future,
although the companies considered to be major customers and the percentage of
revenue represented by each major customer may vary from period to period
depending on the addition of new contracts and the number of designs utilizing
the Company's products. See "Factors Affecting Future Operating Results--
Customer Concentration; Limited Customer Base."
 
  A substantial portion of the Company's revenue is derived from customers
outside the United States. In the three and six month periods ended March
31, 1998, revenue from customers outside the United States, primarily in Asia
and Europe, represented approximately 86% and 74%, respectively, of the
Company's revenue. The Company anticipates that international revenue will
remain a substantial portion of its revenue in the future. To date, all of the
revenue from international customers has been denominated in U.S. dollars. See
"Factors Affecting Future Operating Results--Risks Associated with International
Customers."
 
  The Company derives substantially all of its revenue from sales of its memory
and standard cell products that, together, accounted for 98% of revenue in each
of the three and six month periods ended March 31, 1998. The Company expects
that memory products, in combination with standard cell products, will continue
to account for a substantial portion of the Company's revenue for the
foreseeable future. There can be no assurance that the Company will continue to
derive revenue from memory or standard cell products and a decline in revenue
from such products would have a material adverse effect on the Company's
business, operating results and financial condition. The Company's future
financial performance will depend in significant part on the successful
development, introduction and customer acceptance of new products.
 
  Since the Company's inception in April 1991, each of the Company's cost and
expense categories has progressively increased as the Company has added
personnel and increased its activities in these areas. The Company intends to
continue making significant expenditures associated with engineering costs and
sales and marketing, and expects that these costs and expenses will continue
to be a significant percentage of revenue in future periods. Whether such
expenses increase or decrease as a percentage of revenue will be substantially
dependent upon the rate of change of the Company's revenue. 

 
  The Company in the past has experienced delays in the progress of certain
projects, and there can be no assurance that such delays will not occur in the
future. Any delay or failure to achieve such progress could result in damage
to customer relationships and the Company's reputation, under-utilization of
engineering resources or a delay in the market acceptance of the Company's
products, any of which could have a material adverse effect on the Company's
 
                                      11
<PAGE>
 
business, operating results and financial condition. In addition, the
Company's contracts with customers may generally be canceled without cause,
and if a customer cancels or delays performance under any such contracts, the
Company's business, operating results and financial condition could be
materially adversely affected. The Company's costs and expenses will be based
in part on the Company's expectations of future revenue from license fees.
Accordingly, if the Company does not realize its expected revenue, its
business, operating results and financial condition could be materially
adversely affected. See "Factors Affecting Future Operating Results--
Fluctuations in Operating Results."
 
  In connection with the grant of options for the purchase 96,200 shares of
Common Stock to employees during the period from December 1996 through March
1997, the Company recorded aggregate deferred compensation of approximately
$198,000 representing the difference between the deemed fair value of the
Common Stock and the option exercise price at the date of grant. Such deferred
compensation will be amortized over the vesting period relating to the options,
of which approximately $12,000 and $24,000 was amortized during three and six
month periods ended March 31, 1998, respectively, all of such amounts were
recorded in product development expenses. In addition, the amortization will
result in charges over the next 12 quarters aggregating approximately $12,000
per quarter, all of which will be recorded in product development expenses.
 
RESULTS OF OPERATIONS
 
  The following table sets forth for the periods indicated selected statements
of operations data as a percentage of revenue:
<TABLE>
<CAPTION>
                             THREE MONTHS ENDED   SIX MONTHS ENDED
                                  MARCH 31,           MARCH 31,
                             ------------------  ------------------
                               1997      1998      1997      1998
                             --------  --------  --------  --------
<S>                          <C>       <C>       <C>       <C>
Revenue.....................    100.0%    100.0%    100.0%    100.0%
Cost and expenses:           
  Cost of revenue...........     28.3      28.6      29.4      29.6
  Product development.......     27.4      23.2      26.7      24.2
  Sales and marketing.......     19.8      27.0      22.3      25.4
  General and                
   administrative...........     17.9      11.6      15.9      12.6
                             --------  --------  --------  --------
    Total cost and expenses.     93.4      90.5      94.2      91.8
                             --------  --------  --------  --------
Operating income............      6.6       9.5       5.8       8.2
Other income, net...........      5.1       5.1       4.1       4.3
                             --------  --------  --------  --------
Income before provision for  
 income taxes...............     11.7      14.6       9.9      12.5
Provision for income taxes..      4.1       4.2       3.4       4.1
                             --------  --------  --------  --------
Net income..................      7.6%     10.4%      6.5%      8.4%
                             ========  ========  ========  ========
</TABLE>
 
 Revenue
 
  Revenue increased by 112.4% from $1.8 million in the three month period ended
March 31, 1997 to $3.8 million in the three month period ended March 31, 1998.
Revenue increased by 124.7 % from $3.2 million in the six month period ended
March 31, 1997 to $7.1 million in the six month period ended March 31, 1998. The
growth in revenue in the second quarter and first half of fiscal 1998 as
compared with the same periods in fiscal 1997 was primarily attributable to
increased licensing of the Company's memory and standard cell products, which
more than offset a decline in the sale of I/O products.

                                      12
<PAGE>
 
 Cost and Expenses
 
  Engineering costs are allocated between cost of revenue and product
development expenses. Engineering efforts devoted to developing products for
specific customer projects are recognized as cost of revenue. The balance of
engineering costs, incurred for general development of the Company's technology,
is charged to product development. Engineering costs are generally charged as
incurred and do not necessarily correspond to the recognition of revenue under
related contracts. Engineering costs increased by 97.5% from $986,000 in the
three month period ended March 31, 1997 to $1.9 million in the three month
period ended March 31, 1998. Engineering costs increased by 115.8% from $1.8
million in the six month period ended March 31, 1997 to $3.8 million in the six
month period ended March 31, 1998. Engineering costs as a percentage of revenue
declined from 55.7% and 56.0% in the three and six month periods ended March 31,
1997, respectively, to 51.8% and 53.8% in the three and six month periods ended
March 31, 1998, respectively. The absolute dollar increases in engineering costs
in the second quarter and first half of fiscal 1998, as compared with the same
periods in fiscal 1997, were due primarily to an increase in engineering
personnel and, to a lesser extent, purchases of computer equipment, software
tools and networking infrastructure and equipment and legal costs associated
with the Company's patent program.

   Cost of Revenue. Cost of revenue increased by 114.8% from $501,000 in the
  three month period ended March 31, 1997 to $1.1 million in the three month
  period ended March 31, 1998. Cost of revenue increased by 126.8% from $926,000
  in the six month period ended March 31, 1997 to $2.1 million in the six month
  period ended March 31, 1998. Cost of revenue as a percentage of revenue was
  28.3% and 28.6% for the three month periods ended March 31, 1997 and 1998,
  respectively. Cost of revenue as a percentage of revenue was 29.4% and 29.6%
  for the six month periods ended March 31, 1997 and 1998, respectively. The
  absolute dollar increases in cost of revenue in the second quarter and first
  half of fiscal 1998, as compared with the same periods of fiscal 1997, were
  due to increases in headcount and costs associated with delivering product to,
  and supporting, a growing customer base.
 
    Product Development Expenses. Product development expenses increased by
  79.6% from $485,000 in the three month period ended March 31, 1997 to $871,000
  in the three month period ended March 31, 1998. Product development expenses
  increased by 103.8% from $841,000 in the six month period ended March 31, 1997
  to $1.7 million in the six month period ended March 31, 1998. Product
  development expenses as a percentage of revenues decreased from 27.4% to 23.2%
  in the three month periods ended March 31, 1997 and 1998, respectively.
  Product development expenses as a percentage of revenue declined from 26.7% to
  24.2% for the six month periods ended March 31, 1997 and 1998, respectively.
  The absolute dollar increases in product development expenses in the second
  quarter and first half of fiscal 1998, as compared with the same periods in
  fiscal 1997, were attributable to an increase in engineering personnel and, to
  a lesser extent, purchases of computer equipment, software tools and
  networking infrastructure and equipment and legal costs associated with the
  Company's patent program.

      Sales and Marketing Expenses. Sales and marketing expenses include
  salaries, commissions, travel expenses and costs associated with trade shows,
  advertising and other marketing efforts. Costs of pre-sale customer support
  are also charged to sales and marketing. Sales and marketing expenses
  increased by 189.7% from $351,000 in the three month period ended March 31,
  1997 to $1.0 million in the three month period ended March 31, 1998. Sales and
  marketing expenses increased by 156% from $704,000 in the six month period
  ended March 31, 1997 to $1.8 million in the six month period ended March 31,
  1998. Sales and marketing expense as a percentage of revenue increased from
  19.8% and 22.3% for the three and six month periods ended March 31, 1997,
  respectively, to 27.0% and 25.4% for the three and six month periods ended
  March 31, 1998, respectively. The increases in absolute dollars in sales and
  marketing expenses in the second quarter and first half of fiscal 1998, as
  compared with the same periods in fiscal 1997, were primarily attributable to
  increases in sales headcount and commissions expense to support an expanded
  customer coverage model and increases in marketing headcount and promotional
  activity.
 
                                        13
<PAGE>
 

    General and Administrative Expenses. General and administrative expeneses
  increased by 38.6% from $316,000 in the three month period ended March 31,
  1997 to $438,000 in the three month period ended March 31, 1998. General and
  administrative expenses increased by 78.2% from $501,000 in the six month
  period ended March 31, 1997 to $893,000 in the six month period ended March
  31, 1998. As a percentage of revenue, general and administrative expenses
  decreased from 17.9% and 15.9% in the three and six month periods ended March
  31, 1997, respectively, to 11.6% and 12.6% in the three and six month periods
  ended March 31, 1998, respectively. The absolute dollar increases in general
  and administrative expenses in the second quarter and first half of fiscal
  1998, as compared with the same periods in fiscal 1997, were primarily due to
  increases in general and administrative personnel and increases in
  professional services fees.

 Other Income
 
  Other income increased by 113.3% from 90,000 in the three month period ended 
March 31, 1997 to $192,000 in the three month period ended March 31, 1998. 
Other income increased by 132.6% from $132,000 in the six month period ended
March 31, 1997 to $307,000 in the six month period ended March 31, 1998. Other
income as a percentage of revenue remained constant at 5.1% for the three month
periods ended March 31, 1997 and 1998, respectively. Other income as a
percentage of revenue remained relatively constant at 4.2% and 4.3% for the six
month periods ended March 31, 1997 and 1998, respectively. The growth in the
absolute level of other income in the second quarter and first half of fiscal
1998, as compared with the same periods in fiscal 1997, primarily reflects
interest income earned on the proceeds from the Company's initial public
offering which was completed in February 1998.

Income Taxes
 
  The provision for income taxes was $72,000 and $159,000 for the three month
periods ended March 31, 1997 and 1998, respectively. The provision for income
taxes was $109,000 and $289,000 in the six month periods ended March 31, 1997
and 1998, respectively. The effective tax rate decreased to 28.9% and 32.6% in
the second quarter and first half of fiscal 1998, respectively, as compared with
34.8% and 34.6% in the second quarter and first half of fiscal 1997,
respectively. The change in effective tax rates for the respective periods was
primarily due to the Company investing the proceeds from its initial public
offering in securities that are exempt from federal taxation.
 
                                      14
<PAGE>
 
LIQUIDITY AND CAPITAL RESOURCES
 
  The Company has funded its operations primarily from license revenue
received from inception to March 31, 1998, the net proceeds of $27.1 million
from its initial public offering of Common Stock in February 1998 and, to a
lesser extent, the proceeds of approximately $7.7 million from the sale of
Preferred Stock and a warrant.
 
  The Company's operating activities provided net cash of $295,000 in the six
month period ended March 31, 1997 and provided net cash of $1.0 million in the
six month period ended March 31, 1998. Net cash provided by operating activities
in both periods was due primarily to net income plus depreciation
and amortization.
 
  Net cash used in investing activities was $4.6 million and $27.8 million in
the six month periods ended March 31, 1997 and 1998, respectively. Investing
activities consisted primarily of net purchases of marketable securities and
purchases of property and equipment.
 
  Net cash provided by financing activities was $4.2 million and $27.3 million
in the six month periods ended March 31, 1997 and 1998, respectively. In the six
month period ended March 31, 1997, financing activities consisted primarily of
the Company's Series B Preferred Stock. In the six month period ended March 31,
1998, financing activities consisted primarily of the sale of the Company's
Common Stock in its initial public offering.

 At March 31, 1998, the Company had cash, cash equivalents and current
marketable securities of $30.7 million. As of March 31, 1998, the Company had
retained earnings of $1.6 million and working capital of $31.9 million, net of
a short term component comprised of deferred revenue of $1.2 million. The
Company anticipates spending at least $765,000 for office lease payments and
approximately $2.5 million for capital expenditures over the next 12 months.
 
  The Company intends to continue to invest heavily in the development of new
products and enhancements to its existing products. The Company's future
liquidity and capital requirements will depend upon numerous factors,
including the costs and timing of expansion of product development efforts and
the success of these development efforts, the costs and timing of expansion of
sales and marketing activities, the extent to which the Company's existing and
new products gain market acceptance, competing technological and market
developments, the costs involved in maintaining and enforcing patent claims
and other intellectual property rights, the level and timing of license
 
                                      15
<PAGE>
 
revenue, available borrowings under line of credit arrangements and other
factors. The Company believes that its current cash and investment balances 
together with any cash generated from operations and from available or future
debt or equity financings, will be sufficient to meet the Company's operating
and capital requirements for at least the next 12 months. However, there can be
no assurance that the Company will not require additional financing within this
time frame. On April 16, 1998 the Company filed a Registration Statement with
the Securities and Exchange Commission relating to the public offering of
3,300,000 shares of the Company's Common Stock, of which 2,331,130 shares are to
be sold by selling stockholders. The Company's forecast period of time through
which its financial resources will be adequate to support its operations is a
forward looking statement that involves risks and uncertainties, and actual
results could vary. The factors described in this paragraph will affect the
Company's future capital requirements and the adequacy of its available funds.

 From time to time, the Company may be required to raise additional funds
through public or private financing, strategic relationships or other
arrangements. There can be no assurance that such funding, if needed, will be
available on terms attractive to the Company, or at all. Furthermore, any
additional equity financing may be dilutive to stockholders, and debt financing,
if available, may involve restrictive covenants. Strategic arrangements, if
necessary to raise additional funds, may require the Company to relinquish its
rights to certain of its technologies or products. The failure of the Company to
raise capital when needed could have a material adverse effect on the Company's
business, operating results and financial condition. See "Factors Affecting
Future Operating Results--Future Capital Needs; Uncertainty of Additional
Funding."

  In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income." 
This statement establishes standards for reporting and displaying comprehensive 
income and its components in the financial statements. It does not, however,
require a specific format for the statement, but requires the Company to display
an amount representing total comprehensive income for the period in that
financial statement. This statement is effective for the Company's 1999 fiscal
year.

  In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an 
Enterprise and Related Information." The statement establishes standards for how
public business enterprises are to report information about operating segments 
in annual financial statements and requires those enterprises to report selected
information about operating segments in interim financial reports issued to 
stockholders. This statement is effective for the Company's 1999 fiscal year.
The Company is currently studying the impact of these pronouncements.
  


                                      16
<PAGE>

 FACTORS AFFECTING FUTURE OPERATING RESULTS
 
  FLUCTUATIONS IN OPERATING RESULTS. The Company's operating results have
fluctuated in the past as a result of a number of factors including the
relatively large size and small number of customer orders during a given
period; the timing of customer orders; delays in the design process due to
changes by a customer to its order after it is placed; the Company's ability
to achieve progress on percentage of completion contracts; the length of the
Company's sales cycle; the Company's ability to develop, introduce and market
new products and product enhancements; the timing of new product announcements
and introductions by the Company and its competitors; market acceptance of the
Company's products; the demand for semiconductors and end user products that
incorporate semiconductors; and general economic conditions. The Company's
future operating results may fluctuate from quarter to quarter and on an
annual basis as a result of these and other factors, in particular the
relatively large size and small number of customer orders during a given
period and the rate of royalties recognized in a given period. Accordingly, it
is likely that in some future quarter the Company's operating results will be
below the expectations of public market analysts and investors. In such event,
the price of the Company's Common Stock would likely decline, perhaps
substantially.
 
  Revenue in any quarter is dependent on a number of factors, and is not
predictable with any degree of certainty. Since the Company's expense levels
are based in part on management's expectations regarding future revenue, if
revenue is below expectations in any quarter, the adverse effect may be
magnified by the Company's inability to adjust spending in a timely manner to
compensate for any revenue shortfall. The Company also intends to increase its
sales and marketing expenses in an attempt to broaden its market coverage. The
Company's costs and expenses will be based in part on the Company's
expectations of future revenue from product licenses. Accordingly, if the
Company does not realize its expected revenue, its business, operating results
and financial condition could be materially adversely affected.
 
  The Company's sales cycle can be lengthy and is subject to a number of risks
over which the Company has little or no control. As a result of the
significant dollar amounts represented by a single customer order, the timing
of the receipt of an order can have a significant impact on the Company's
revenue for a particular period. In addition, because the Company's revenue is
concentrated among a small number of customers, a decline or a delay in the
recognition of revenue from one customer in a period may cause the Company's
business, operating results and financial condition in such period to be
materially adversely affected and may lead to significant fluctuations from
quarter to quarter. Any significant or ongoing failure to obtain new orders
from customers would have a material adverse effect on the Company's business,
operating results and financial condition.
 
  To date, a substantial majority of the Company's revenue has been recognized
on a percentage of completion method. Provisions for estimated losses on the
uncompleted contracts are recognized in the period in which the likelihood of
such losses is determined. As the completion period ranges from three to six
months, the revenue in any quarter is dependent
 
                                      17
<PAGE>
 
on the Company's progress toward completion of the project. There can be no
assurance that the Company's estimates will be accurate, and, in the event
they are not, the Company's business, operating results and financial
condition in subsequent periods could be materially adversely affected. From
time to time, the Company experiences delays in the progress of certain
projects, and there can be no assurance that such delays will not occur in the
future. Any delay or failure to achieve such progress could result in damage
to customer relationships and the Company's reputation, under-utilization of
engineering resources or a delay in the market acceptance of the Company's
products, any of which could have a material adverse effect on the Company's
business, operating results and financial condition. In addition, the
Company's contracts with customers generally may be canceled without cause,
and, if a customer cancels or delays performance under any such contracts, the
Company's business, operating results and financial condition could be
materially adversely affected. 
 
  DEPENDENCE ON EMERGENCE OF MERCHANT IP COMPONENT MARKET AND BROAD MARKET
ACCEPTANCE OF THE COMPANY'S PRODUCTS. The market for merchant IP components
has only recently begun to emerge. The Company's ability to achieve sustained
revenue growth and profitability in the future will depend on the continued
development of this market and, to a large extent, on the demand for complex 
single chip system ("System-on-a-Chip") ICs. There can be no assurance that the
merchant IP component and System-on-a-Chip markets will continue to develop or
grow at a rate sufficient to support the Company's business. If either of these
markets fails to grow or develops slower than expected, the Company's business,
operating results and financial condition would be materially adversely
affected. To date, the Company's IP products have been licensed only by a
limited number of customers. The vast majority of the Company's existing and
potential customers currently rely on components developed internally and/or by
other vendors. The Company's future growth, if any, is dependent on the adoption
of, and increased reliance on, merchant IP components by both existing and
potential customers. Moreover, if the Company's products do not achieve broad
market acceptance, the Company's business, operating results and financial
condition would be materially adversely affected.
 
  COMPETITION. The Company's strategy of targeting semiconductor manufacturers
that participate in, or may enter, the System-on-a-Chip market requires the
Company to compete in intensely competitive markets. Within the merchant segment
of the IP component market, the Company competes primarily against Aspec
Technology, Inc., Avant! Corporation, Duet Corporation, Mentor Graphics
Corporation and the Silicon Architects group of Synopsys, Inc. In addition, the
Company may face competition from consulting firms and companies that typically
have operated in the generic library segment of the IP market and that now seek
to offer customized IP components as enhancements to their generic solutions.
The Company also faces significant competition from the internal design groups
of the semiconductor manufacturers that are expanding their manufacturing
capabilities and portfolio of IP components to participate in the System-on-a-
Chip market. These internal design groups compete with the Company for access to
the parent's IP component requisitions and may eventually compete with the
Company to supply IP components to third parties on a merchant basis. There can
be no assurance that internal design groups will not expand their product
offerings to compete directly with those of the Company or will not actively
seek to participate as merchant vendors in the IP component market by selling to
third party semiconductor manufacturers or, if they do, that the Company will be
able to compete against them successfully. In addition to competition from
companies in the merchant IP component market, the Company faces competition
from vendors that supply electronic design automation ("EDA") software tools,
including certain of those mentioned above, and there can be no assurance that
the Company will be able to compete successfully against them.

                                      18
<PAGE>
 
  The Company expects competition to increase in the future from existing
competitors and from new market entrants with products that may be less
expensive than the Company's IP components or that may provide better
performance or additional features not currently provided by the Company. For
example, the Company believes that Synopsys is developing and will shortly
introduce a product in the standard cell library area that is intended to
compete with the standard cell products of the Company. Many of the Company's
current and potential competitors have substantially greater financial,
technical, manufacturing, marketing, distribution and other resources, greater
name recognition and market presence, longer operating histories, lower cost
structures and larger customer bases than the Company. As a result, they may
be able to adapt more quickly to new or emerging technologies and changes in
customer requirements. In addition, certain of the Company's principal
competitors offer a single vendor solution, since, in the case of EDA tools
companies, they maintain their own EDA design tools and IP libraries or, in
the case of internal design groups, they provide IP components developed to
utilize the qualities of a given manufacturing process, and may therefore
benefit from certain capacity, cost and technical advantages. The Company's
ability to compete successfully in the emerging market for IP components will
depend upon certain factors, many of which are beyond the Company's control
including, but not limited to, success in designing new products; implementing
new designs at smaller process geometries; access to adequate EDA tools (many
of which are licensed from the Company's current or potential competitors);
the price, quality and timing of new product introductions by the Company and
its competitors; the emergence of new IP component interchangeability
standards; the widespread licensing of IP components by semiconductor
manufacturers or their design groups to third party manufacturers; the ability
of the Company to protect its intellectual property; market acceptance of the
Company's IP components; success of competitive products; market acceptance of
products using System-on-a-Chip ICs; and industry and general economic
conditions. There can be no assurance that the Company will be able to compete
successfully in the emerging merchant IP component market. 
 
  DEPENDENCE ON SEMICONDUCTOR MANUFACTURERS; DEPENDENCE ON SEMICONDUCTOR AND
ELECTRONICS INDUSTRIES. The Company's success is substantially dependent both
on the adoption of the Company's technology by semiconductor manufacturers and
on an increasing demand for products requiring complex System-on-a-Chip ICs,
such as portable computing devices, cellular phones, consumer multimedia
products, automotive electronics, personal computers and workstations. The
Company is subject to many risks beyond its control that influence the success
of its customers, including, among others, competition faced by each customer
in its particular industry, market acceptance of the customer's products that
incorporate the Company's technology, the engineering, sales and marketing
capabilities of the customer, and the financial and other resources of the
customer.
 
  The semiconductor and electronics products industries are characterized by
rapid technological change, frequent introductions of new products, short
product life cycles, fluctuations in manufacturing capacity and pricing and
gross margin pressures. Each of these industries is highly cyclical and has
periodically experienced significant downturns, often in connection with or in
anticipation of declines in general economic conditions during which the
number of new IC design projects often decreases. Revenue from licenses of the
Company's products is influenced by the level of design efforts by its
customers and factors negatively affecting these industries could have a
material adverse effect on the Company's business, operating results and
financial condition. The Company's business, operating results and financial
condition may fluctuate in the future from period to period as a consequence
of general economic conditions in the semiconductor and electronics
industries.
 
  DEPENDENCE ON NEW BUSINESS MODEL. The Company has historically generated
revenue from license fees. Beginning in late fiscal 1996, however, the Company
began implementation of a royalty based business model that is intended to
generate revenue from both license fees
 
                                      19
<PAGE>
 
and future royalties. The Company is still in the process of implementing this
royalty based business model. The Company believes the introduction, as
opposed to the operation, of the royalty based business model has been a
limited success in that the majority of the Company's licensees, including all
new licensees with whom the Company has contracted since August 1996, have
agreed to a royalty based model. However, certain licensees, which have
previously contracted with the Company based on the older model, have resisted
conversion to a royalty based model. As a result, the Company believes that
until all of its customers have adopted the royalty based model, the
introduction of such model can only be described as a limited success. There
can be no assurance that the Company will be able to complete the
implementation of the royalty based model successfully, or that, when fully
implemented, this model will have the anticipated benefits. The failure of the
Company to implement its new business model successfully could have a material
adverse effect on the Company's business, operating results and financial
condition. To date, the Company has received no royalty revenue, and it does
not anticipate receiving any prior to fiscal 1999 due to the typical length of
time required for the Company to design a component for a customer and for
such customer to manufacture and bring to market a product incorporating such
component. There can be no assurance that the Company will ever receive any
royalty revenue or that, if it does, the amount will be significant. See "--
Dependence on Semiconductor Manufacturers; Dependence on Semiconductor and
Electronics Industries" and "--Customer Concentration; Limited Customer Base."
 
  The Company believes that its long term success will be substantially
dependent on future royalties. However, even if the Company successfully
implements its new business model, the Company will face risks inherent in
such a model. In particular, the Company's ability to forecast royalty revenue
will be limited by factors that are beyond the Company's ability to control or
assess in advance. Royalties, if any, will be recognized in the quarter in
which the Company receives a royalty report from its customers and will be
dependent upon fluctuating sales volumes. In addition, under the royalty based
business model, the Company's revenue will be dependent upon the sales by its
customers of products that incorporate the Company's technology. Even if the
Company's technology is adopted, there can be no assurance that it will be
used in a product that is ultimately brought to market, achieves commercial
acceptance or results in significant royalties to the Company. The Company
will also face risks relating to the accuracy and completeness of the royalty
collection process.
 
  CUSTOMER CONCENTRATION; LIMITED CUSTOMER BASE. The Company has been
dependent on a relatively small number of customers for a substantial portion
of its annual revenue, although the customers comprising this group have
changed from time to time. In the three month period ended March 31, 1998,
Newport, Hitachi, TSMC, VLSI Technology and NEC accounted for 20%, 18%, 16%, 11%
and 10% of revenue, respectively. In the six month period ended March 31, 1998,
TSMC, OKI, SGS-THOMSON, NEC and Newport accounted for 13%, 13%, 12%, 12% and 11%
of revenue, respectively. The Company anticipates that its revenue will continue
to depend on a limited number of major customers for the foreseeable future,
although the companies considered to be major customers and the percentage of
revenue represented by each major customer may vary from period to period
depending on the addition of new contracts and the number of designs utilizing
the Company's products. None of the Company's customers has a written agreement
with the Company that obligates it to license future generations of products or
new products, and there can be no assurance that any customer will license IP
components from the Company in the future. In addition, there can be no
assurance that any of the Company's customers will ship products incorporating
the Company's technology or that, if such shipments occur, they will


                                      20
<PAGE>
 
generate significant revenue. The loss of one or more of the Company's major
customers, reduced orders by one or more of such customers or the failure of a
customer to ship products containing the Company's IP components could
materially adversely affect the Company's business, operating results and
financial condition. 
 
  The Company faces numerous risks in successfully obtaining orders from
customers on terms consistent with the Company's business model, including,
among others, the lengthy and expensive process of building a relationship
with a potential customer before reaching an agreement with such party to
license the Company's products; persuading large semiconductor manufacturers
to work with, to rely for critical technology on, and to disclose proprietary
information to, a smaller company, such as the Company; and persuading
potential customers to bear certain development costs associated with
development of customized components. There are a relatively limited number of
semiconductor manufacturers to which the Company can license its technology in
a manner consistent with its business model and there can be no assurance that
such manufacturers will rely on merchant IP components or adopt the Company's
products. See "--Competition" and "Business--Customers."
 
  PRODUCT CONCENTRATION. The Company derives substantially all of its revenue
from sales of its memory and standard cell products that, together, accounted
for 98% of revenue in each of the three and six month periods ended March 31,
1998. The Company expects that memory products, in combination with standard
cell products, will continue to account for a substantial portion of the
Company's revenue, for the foreseeable future. There can be no assurance that
the Company will continue to derive revenue from memory or standard cell
products and a decline in revenue from such products would have a material
adverse effect on the Company's business, operating results and financial
condition. The Company's future financial performance will depend in significant
part on the successful development, introduction and customer acceptance of new
products. See "--New Product Development and Technological Change."

 LENGTHY SALES CYCLE AND DESIGN PROCESS. The license of the Company's
products typically involves a significant commitment of capital by the
customer and a purchase will often be timed to coincide with a customer's
migration to a new manufacturing process. Potential customers generally commit
significant resources to an evaluation of available IP solutions and require
the Company to expend substantial time, effort and resources to educate them
about the value of the Company's products. A variety of factors, including
factors over which the Company has little or no control, may cause potential
customers to favor an alternate solution or to delay or forego a license of
the Company's products. As a result of these and other factors, the sales
cycle for the Company's products is long, typically ranging from six to 12
months. The Company's ability to forecast the timing and scope of specific
sales is limited, and delay of or failure to complete one or more large
contracts could have a material adverse effect on the Company's business,
operating results and financial condition and could cause the Company's
operating results to fluctuate significantly from quarter to quarter.
 
  Once the Company receives and accepts an order from a customer, the Company
must commit significant resources to customizing its products for the
customer's manufacturing process. This customization is complex and time
consuming and is subject to a number of risks over which the Company has
little or no control, including the customer's adjustments and alterations of
its manufacturing process or the timing of migration to a new process.
Typically, this customization takes from three to six months to complete.
Delays in product customization could have a material adverse effect on the
Company's business, operating results and financial condition and could cause
the Company's operating results to vary significantly from quarter to quarter.
 
  RISKS ASSOCIATED WITH INTERNATIONAL CUSTOMERS. A substantial portion of the
Company's revenue is derived from customers outside the United States. In
the three and 
 
                                      21
<PAGE>
 
the six month periods ended March 31, 1998, revenue derived from customers
outside the United States, primarily in Asia and Europe, represented
approximately 86% and 74%, respectively, of the Company's revenue.
The Company anticipates that international revenue will remain a substantial
portion of revenue in the future. To date, all of the revenue from
international customers has been denominated in U.S. dollars. In the event
that the Company's competitors denominate their sales in a currency that
becomes relatively inexpensive in comparison to the U.S. dollar, the Company
may experience fewer orders from international customers whose business is
based primarily on the less expensive currency. To date, the Company has not
experienced any negative impact as a result of the financial and stock market
dislocations that occurred in the Asian financial markets during 1997 and to
date in 1998; however, there can be no assurance that present or future
dislocations will not have a material adverse effect on the Company's
business, operating results and financial condition. The Company intends to
continue to expand its sales and marketing activities in Asia and Europe. The
Company's expansion of its international business involves a number of risks
including the impact of possible recessionary environments in economies
outside the United States; political and economic instability; exchange rate
fluctuations; longer accounts receivable collection periods; greater
difficulty in accounts receivable collection; unexpected changes in regulatory
requirements; reduced or limited protection for intellectual property rights;
export license requirements; tariffs and other trade barriers and potentially
adverse tax consequences. There can be no assurance that the Company will be
able to sustain or increase revenue derived from international customers or
that the foregoing factors will not have a material adverse effect on the
Company's business, operating results and financial condition. 
 
  NEW PRODUCT DEVELOPMENT AND TECHNOLOGICAL CHANGE. The Company's customers
compete in the semiconductor industry, which is subject to rapid technological
change, frequent introductions of new products, short product life cycles,
changes in customer demands and requirements and evolving industry standards.
The development of new manufacturing processes, the introduction of products
embodying new technologies and the emergence of new industry standards can
render existing products obsolete and unmarketable. Accordingly, the Company's
future success will depend on its ability to continue to enhance its existing
products and to develop and introduce new products that satisfy increasingly
sophisticated customer requirements and that keep pace with new product
introductions, emerging manufacturing process technologies and other
technological developments in the semiconductor industry. Any failure by the
Company to anticipate or respond adequately to changes in manufacturing
processes or customer requirements, or any significant delays in product
development or introduction, would have a material adverse effect on the
Company's business, operating results and financial condition. There can be no
assurance that the Company will not experience difficulties that could delay
or prevent the successful development, introduction and sale of new or
enhanced products or that such new or enhanced products will achieve market
acceptance. Any delay in release dates of new or enhanced products could
materially adversely affect the Company's business, operating results and
financial condition. The Company could also be exposed to litigation or claims
from its customers in the event that it does not satisfy its delivery
commitments. There can be no assurance that any such claim would not have a
material adverse effect on the Company's business, operating results and
financial condition. 
 
  DEPENDENCE ON KEY PERSONNEL. The Company's success depends in large part on
the continued contributions of its key management, engineering, sales and
marketing personnel, many of whom are highly skilled and would be difficult to
replace. None of the Company's senior management or key technical personnel is
bound by an employment contract. In addition, the Company does not currently
maintain key man life insurance covering its key


                                     22
<PAGE>
 
personnel. The Company believes that its success depends to a significant
extent on the ability of its management to operate effectively, both
individually and as a group. Certain of the Company's senior management have
only recently joined the Company and there can be no assurance they and other
newly hired employees will be assimilated into the Company successfully. The
Company must also attract and retain highly skilled managerial, engineering,
sales and marketing and finance personnel. Competition for such personnel is
intense, and there can be no assurance that the Company will be successful in
attracting and retaining such personnel. The loss of the services of any of
the key personnel, the inability to attract or retain qualified personnel in
the future or delays in hiring required personnel, particularly engineers,
could have a material adverse effect on the Company's business, operating
results and financial condition. 
 
  MANAGEMENT OF GROWTH. The ability of the Company to license its products and
manage its business successfully in a rapidly evolving market requires an
effective planning and management process. The Company's rapid growth has
placed, and is expected to continue to place, a significant strain on the
Company's managerial, operational and financial resources. From September 30,
1996 to March 31, 1998, the Company grew from 28 to 74 fulltime employees. The
Company's customers rely heavily on the Company's technological expertise in
designing, testing and manufacturing products incorporating the Company's IP
components. Relationships with new customers generally require significant
engineering support. As a result, any increase in the demand for the Company's
products will increase the strain on the Company's personnel, particularly its
engineers. The Company's financial and management controls, reporting systems
and procedures are also limited. Although some new controls, systems and
procedures have been implemented, the Company's future growth, if any, will
depend on its ability to continue to implement and improve operational,
financial and management information and control systems on a timely basis,
together with maintaining effective cost controls and any failure to do so
would have a material adverse effect on the Company's business, operating
results and financial condition. Further, the Company will be required to
manage multiple relationships with various customers and other third parties
and must successfully implement its new business model. There can be no
assurance that the Company's systems, procedures or controls will be adequate
to support the Company's operations or that the Company's management will be
able to achieve the rapid execution necessary to offer its services and
products successfully and to implement its business plan. The Company's
inability to manage any future growth effectively would have a material
adverse effect on the Company's business, operating results and financial
condition. 
 
  RISKS ASSOCIATED WITH PROTECTION OF INTELLECTUAL PROPERTY. The Company
relies primarily on a combination of nondisclosure agreements and other
contractual provisions and patent, trademark, trade secret and copyright law
to protect its proprietary rights. Failure of the Company to enforce its
patents, trademarks or copyrights or to protect its trade secrets could have a
material adverse effect on the Company's business, operating results and
financial condition. There can be no assurance that such intellectual property
rights can be successfully asserted in the future or will not be invalidated,
circumvented or challenged. From time to time, third parties, including
competitors of the Company, may assert patent, copyright and other
intellectual property rights to technologies that are important to the
Company. There can be no assurance that third parties will not assert
infringement claims against the Company in the future, that assertions by
third parties will not result in costly litigation or that the Company would
prevail in any such litigation or be able to license any valid and infringed
patents from third parties on commercially reasonable terms. Litigation,
regardless of the outcome, could result in substantial cost and diversion of
resources of the Company. Any infringement claim or other litigation against
or by the Company could materially adversely affect the Company's business,
operating results and financial condition.


                                      23
<PAGE>
 
  In certain instances, the Company has elected to rely on trade secret law
rather than patent law to protect its proprietary technology. However, trade
secrets are difficult to protect. The Company seeks to protect its proprietary
technology and processes, in part, by confidentiality agreements with its
employees and customers. There can be no assurance that these contracts will
not be breached, that the Company will have adequate remedies for any breach,
or that the Company's trade secrets will not otherwise become known or be
independently discovered by competitors. In addition, effective trade secret
protection may be unavailable or limited in certain foreign countries.
 
  In addition, there can be no assurance that competitors of the Company, many
of which have substantial resources and have made substantial investments in
competing technologies, do not have, or will not seek to apply for and obtain,
patents that will prevent, limit or interfere with the Company's ability to
make, use or sell its products either in the United States or in international
markets. There can be no assurance that the Company will not in the future
become subject to patent infringement claims and litigation or interference
proceedings declared by the United States Patent and Trademark Office
("USPTO") to determine the priority of inventions. The defense and prosecution
of intellectual property suits, USPTO interference proceedings and related
legal and administrative proceedings are both costly and time consuming. Any
such suit or proceeding involving the Company could have a material adverse
effect on the Company's business, operating results and financial condition.
 
  FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING. The Company intends
to continue to invest heavily in the development of new products and
enhancements to its existing products. The Company's future liquidity and
capital requirements will depend upon numerous factors, including the costs and
timing of expansion of product development efforts and the success of these
development efforts, the costs and timing of expansion of sales and marketing
activities, the extent to which the Company's existing and new products gain
market acceptance, competing technological and market developments, the costs
involved in maintaining and enforcing patent claims and other intellectual
property rights, the level and timing of license revenue, available borrowings
under line of credit arrangements and other factors. The Company believes that
the Company's current cash balances together with any cash generated from
operations and from available or future debt or equity financings, will be
sufficient to meet the Company's operating and capital requirements for at least
the next 12 months. On April 16, 1998, the Company filed a Registration
Statement with the Securities and Exchange Commission relating to the public
offering of 3,300,000 shares of the Company's Common Stock, of which 2,331,130
shares are to be sold by selling stockholders. There can be no assurance that
such offering will be completed. However, there can be no assurance that the
Company will not require additional financing within this time frame. The
Company's forecast period of time through which its financial resources will be
adequate to support its operations implies assumptions about its business that
are forward looking and that involve risks and uncertainties, and actual results
could vary. The factors described in this paragraph will affect both the
Company's future capital requirements and the adequacy of its available funds.
From time to time, the Company may be required to raise additional funds through
public or private financing, strategic relationships or other arrangements.
There can be no assurance that such funding, if needed, will be available on
terms attractive to the Company, or at all. Furthermore, any additional equity
financing may be dilutive to stockholders, and debt financing, if available, may
involve restrictive covenants. Strategic arrangements, if necessary to raise
additional funds, may require the Company to relinquish its rights to certain of
its technologies or products. The failure of the Company to raise capital when
needed could have a material adverse effect on the Company's business, operating
results and financial condition.
 
  POTENTIAL VOLATILITY OF STOCK PRICE. The trading price of the Company's
Common Stock has in the past been and could in the future be subject to
significant fluctuations in response to quarterly variations in the Company's
results of operations, announcements regarding the


                                      24
<PAGE>
 
Company's product developments, announcements of technological innovations or
new products by the Company, its customers or competitors, release of reports
by securities analysts, changes in security analysts' recommendations,
developments or disputes concerning patents or proprietary rights or other
events. Also, at some future time, the Company's revenues and results of
operations may be below the expectations of public market securities analysts
or investors, resulting in significant fluctuations in the market price of the
Company's Common Stock. In addition, the securities markets have from time to
time experienced significant price and volume fluctuations which have
particularly affected the market prices for high technology companies and
which often are unrelated and disproportionate to the operating performance of
particular companies. These broad market fluctuations as well as general
economic, political and market conditions, may adversely affect the market
price of the Company's Common Stock. In the past, following periods of
volatility in the market price of a company's stock, securities class action
litigation has occurred against that company. Such litigation could result in
substantial costs and would at a minimum divert management's attention and
resources, which could have a material adverse effect on the Company's
business, financial condition and results of operations. Any adverse
determination in such litigation could also subject the Company to significant
liabilities. 
 
  CERTAIN ANTI-TAKEOVER PROVISIONS. The Board of Directors of the Company has
the authority to issue up to 5,000,000 shares of Preferred Stock and to
determine the rights, preferences, privileges and restrictions, including
voting rights, of such shares without any further vote or action by the
stockholders. The rights of the holders of Common Stock will be subject to,
and may be adversely affected by, the rights of the holders of any Preferred
Stock that may be issued in the future. The issuance of Preferred Stock could
have the effect of delaying, deferring or preventing a change in control of
the Company. The Company has no current plans to issue shares of Preferred
Stock. In addition, Section 203 of the Delaware General Corporation Law
("Section 203") restricts certain business combinations with any "interested
stockholder" as defined by such statute. In addition, the Company's
Certificate of Incorporation and Bylaws contain certain other provisions that
may have the effect of delaying, deferring or preventing a change of control
of the Company including cumulative voting for the election of directors, the
elimination of actions by written consent of stockholders and the
establishment of an advance notice procedure for stockholder proposals and
director nominations to be acted upon at annual meetings of the stockholders.
These provisions are designed to encourage potential acquirors to negotiate
with the Company's Board of Directors and give the Board of Directors
sufficient opportunity to consider various alternatives to maximize
stockholder value. These provisions are also intended to discourage certain
tactics that may be used in proxy contests. However, issuance of Preferred
Stock, charter and bylaw provisions or restrictions from Section 203 could
discourage potential acquisition proposals and could delay or prevent a change
in control of the Company and, as a consequence, they also may adversely
affect the market price of the Company's Common Stock. Such provisions may
also have the effect of preventing changes in the management of the Company.


                                      25
<PAGE>
 

ITEM 2. Changes in Securities and Use of Proceeds

     On February 6, 1998, the Company completed the sale of 3,015,000 Common
Shares at a per share price of $10.00 in a firm commitment underwritten public
offering, and certain stockholders of the Company sold 320,000 shares of the
Company's Common Stock in connection with the offering.  The offering was
effected pursuant to a Registration Statement on Form S-1 (Registration No. 333-
41219), which the United States Securities and Exchange Commission declared
effective on February 2, 1998. The offering was underwritten by Deutsche Morgan
Grenfell Inc., Hambrecht & Quist LLC and Wessels, Arnold & Henderson, L.L.C.

     Of the $30,150,000 million in aggregate proceeds raised by the Company in
connection with the February 1998 offering, (i) approximately $2,110,500 was
paid to the underwriters in connection with underwriting discounts, and (ii)
approximately $947,000 was paid by the Company in connection with offering
expenses, including legal, printing, and filing fees.  The Company did not
receive any of the proceeds of or pay the underwriting discount in connection
with the shares sold by the selling stockholders.  There were no direct or
indirect payments to directors or officers of the Company or any other person or
entity. None of the offering proceeds have been used for the construction of
plant, building or facilities or the purchase or installation of machinery or
equipment or for purchases of real estate or the acquisition of other
businesses.  The Company is currently investing the net offering proceeds for
future use as additional working capital. Such net proceeds have been invested
in short-term, interest-bearing, investment grade securities. A portion of the
net proceeds may be used for the acquisition of technologies, businesses or
products that are complementary to those of the Company.

ITEM 6: Exhibits

     (a)  Exhibits

        27.1   Financial Data Schedule

                                      26
<PAGE>
 
                                   SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

Dated:  April 20, 1998

                             ARTISAN COMPONENTS, INC.
                                    (Registrant)

                             /s/ Mark R. Templeton
                             --------------------------------------------
                             Mark R. Templeton
                             Chief Executive Officer

                             /s/ Robert D. Selvi
                             --------------------------------------------
                             Robert D. Selvi
                             Vice President, Finance and Chief Financial Officer


                                      27

<PAGE>
 
                               INDEX TO EXHIBITS

EXHIBITS
--------


27.1 Financial Data Schedule

                                      28