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




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

|(Mark One)
|----------
|[X]       

|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(State or other jurisdiction ofincorporation or organization) | 77-0278185(I.R.S. Employer Identification Number)
|--------------------------------------------------------------------- | -------------------------------------------------

|141 Caspian Court
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  [X]    No  [_]


As of January 31, 2002
there were 16,696,779 shares of the Registrants Common Stock outstanding.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|ARTISAN COMPONENTS,
INC.

Form 10-Q

INDEX
|------------------------------------------

|                                                                          | Page No.
|------------------------------------------------------------------------- | --------
|Cover Page                                                                |         
|Index                                                                     |         
|                                                                         
|PART I - Financial Information                                            |         
|                                                                         
|ITEM 1 - Financial statements                                             |         
|                                                                         
|Condensed Consolidated Balance Sheets as of December 31, 2001, unaudited, |         
|and September 30, 2001                                                    |         
|Condensed Consolidated Statements of Operations, unaudited, for the       |         
|Three Months Ended December 31, 2001 and 2000                             |         
|Condensed Consolidated Statements of Cash Flows, unaudited, for the       |         
|Three Months Ended December 31, 2001 and 2000                             |         
|Notes to Condensed Consolidated Financial Statements                      |         
|                                                                         
|ITEM 2 - Managements Discussion and Analysis of Financial                |         
|Condition and Results of Operations                                       |         
|                                                                         
|ITEM 3 - Quantitative and Qualitative Disclosures about Market Risk       |         
|                                                                         
|PART II - Other Information                                               |         
|                                                                         
|ITEM 6 - Exhibits and Reports on Form 8-K                                 |         
|                                                                         
|Signatures                                                                |         

|2
|-

|ARTISAN COMPONENTS,
INC.CONDENSED CONSOLIDATED BALANCE SHEETS(in thousands, except per share data)
|--------------------------------------------------------------------------------------------------

|                                                    | December 31,2001 | September 30,2001
|--------------------------------------------------- | ---------------- | -----------------
|
|ASSETS                                              |                  |                  
|Current Assets:                                     |                 
|Cash and cash equivalents                           |                  | $ 24,754         
|Marketable securities                               |                  | 14,355           
|Contract receivables, net                           |                  | 11,205           
|Prepaid expenses and other current assets           |                  | 1,450            
|                                                    |                  |                  
|Total current assets                                |                  | 51,764           
|Property and equipment, net                         |                  | 4,354            
|Goodwill and other intangible assets, net           |                  | 17,487           
|Other assets                                        |                  | 457              
|                                                    |                  |                  
|Total assets                                        |                  | $ 74,062         
|                                                    |                  |                  
|LIABILITIES AND STOCKHOLDERS EQUITY                |                 
|Current liabilities:                                |                 
|Accounts payable and accrued expenses               |                  | $   4,261        
|Deferred revenue, current portion                   |                  | 4,852            
|                                                    |                  |                  
|Total current liabilities                           |                  | 9,113            
|Deferred revenue                                    |                  | 96               
|Other liabilities                                   |                  | 667              
|                                                    |                  |                  
|Total liabilities                                   |                  | 9,876            
|                                                    |                  |                  
|Stockholders Equity                                |                 
|Common Stock, $0.001 par value:                     |                 
|Authorized: 50,000;                                 |                 
|Issued and outstanding: 16,573 and 16,487           |                 
|shares at December 31, 2001 and September 30, 2001, |                  | 17               
|respectively                                        |                 
|Additional paid in capital                          |                  | 74,193           
|Accumulated deficit                                 |                  | (10,024          
|                                                    |                  |                  
|Total stockholders equity                          |                  | 64,186           
|                                                    |                  |                  
|Total liabilities and stockholders equity          |                  | $ 74,062         
|                                                    |                  |                  

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


3
|---------------------------------------------------------------------------------------------------------------

|ARTISAN COMPONENTS,
INC.CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(in thousands, except per
share data)(unaudited)
|-----------------------------------------------------------------------------------------------------------------------

|                                         | Three MonthsEnded December 31,
|---------------------------------------- | ------------------------------
|
|Revenue:                                 |                               
|License                                  |                               
|Net royalty                              |                               
|                                         |                               
|Total revenue                            |                               
|                                         |                               
|Costs and expenses:                      |                               
|Cost of revenue                          |                               
|Product development                      |                               
|Sales and marketing                      |                               
|General and administrative               |                               
|Amortization of acquired technology      |                               
|Amortization of intangible assets        |                               
|                                         |                               
|Total costs and expenses                 |                               
|                                         |                               
|Operating income (loss)                  |                               
|Interest and other income, net           |                               
|                                         |                               
|Income before provision for income taxes |                               
|Provision for income taxes               |                               
|                                         |                               
|Net income                               |                               
|                                         |                               
|Basic net income per share               |                               
|                                         |                               
|Diluted net income per share             |                               
|                                         |                               
|Shares used in computing:                |                               
|Basic net income per share               |                               
|Diluted net income per share             |                               

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



4
|----------------------------------------------------------------------------------------------------------------

|ARTISAN
COMPONENTS, INC.CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands)(unaudited)
|------------------------------------------------------------------------------------------------

|                                                     | Three Months EndedDecember 31,
|---------------------------------------------------- | ------------------------------
|
|Cash flows from operating activities:                |                               
|Net income                                           |                               
|Adjustments to reconcile net income to net cash      |                               
|used in operating activities:                        |                               
|Depreciation and amortization                        |                               
|Loss on sale of fixed assets                         |                               
|Compensation expense related to options granted      |                               
|Changes in assets and liabilities:                   |                               
|Contract receivables, net                            |                               
|Prepaid expenses and other assets                    |                               
|Accounts payable and accrued liabilities             |                               
|Deferred revenue and long-term liabilities           |                               
|                                                     |                               
|Net cash used in operating activities                |                               
|                                                     |                               
|Cash flows from investing activities:                |                               
|Purchase of property and equipment                   |                               
|Proceeds from sale of property and equipment         |                               
|Purchase of marketable securities                    |                               
|Proceeds from sale of marketable securities          |                               
|                                                     |                               
|Net cash provided by (used in) investing             |                               
|activities                                           |                               
|                                                     |                               
|Cash flows from financing activities:                |                               
|Proceeds from issuance of common stock               |                               
|                                                     |                               
|Net cash provided by financing activities            |                               
|                                                     |                               
|Net increase (decrease) in cash and cash equivalents |                               
|Cash and cash equivalents, beginning of period       |                               
|                                                     |                               
|Cash and cash equivalents, end of period             |                               
|                                                     |                               

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


5
|---------------------------------------------------------------------------------------------------------------

|ARTISAN COMPONENTS,
INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)
|---------------------------------------------------------------------------------------

|1. |  | BASIS
OF CONSOLIDATION AND PRESENTATION:
|-- |  | ----------------------------------------

|The accompanying unaudited
condensed consolidated financial statements include the accounts of Artisan
Components, Inc. (Artisan or the Company) and its wholly
owned subsidiaries after elimination of all inter-company transactions. The
Companys fiscal year ends September 30.


The accompanying unaudited
condensed consolidated financial statements of Artisan have been prepared in
accordance with generally accepted accounting principles in the United States of
America (GAAP) for interim financial information and in accordance
with the rules and regulations of the Securities and Exchange Commission
(SEC). 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 September
30, 2001 fiscal 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 month period ended December 31, 2001 is not
necessarily indicative of the results that may be expected for the fiscal year
ending September 30, 2002 or any other future period. The unaudited condensed
consolidated interim financial statements contained herein should be read in
conjunction with the audited financial statements and footnotes for the year
ended September 30, 2001 included in the Companys Annual Report on Form
10-K as filed with the SEC.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2. |  | USE
OF ESTIMATES:
|-- |  | -----------------

|The preparation of
financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and to disclose contingent liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reported
period. Actual results could differ from those estimates.
6
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|ARTISAN COMPONENTS,
INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSCONTINUED(unaudited)
|-------------------------------------------------------------------------------------------------

|3. |  | NET
INCOME PER SHARE:
|-- |  | ---------------------

|In accordance with the
disclosure requirements of SFAS No. 128, a reconciliation of the numerator and
denominator of basic and diluted net income is provided as follows (in
thousands, except per share amounts):
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                              | Three MonthsEnded December 31,
|----------------------------- | ------------------------------
|
|Numerator--Basic and Diluted  |                               
|Net income                    |                               
|                              |                               
|Denominator--Basic            |                               
|Common stock outstanding      |                               
|                              |                               
|Basic net income per share    |                               
|                              |                               
|Denominator--Diluted          |                               
|Denominator--Basic            |                               
|Effect of Dilutive Securities |                               
|Common stock options(1)       |                               
|                              |                               
|                              |                               
|                              |                               
|Diluted net income per share  |                               
|                              |                               

|(1) 521,058 options to
purchase shares of common stock were not included in the per share calculation
in the three month period ended December 31, 2001, because they were
anti-dilutive. 1,767,419 options to purchase shares of common stock were not
included in the per share calculation in the three month period ended December
31, 2000, because they were anti-dilutive.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4. |  | NEW
ACCOUNTING STANDARDS:
|-- |  | -------------------------

|In June 2001, the Financial
Accounting Standards Board issued FAS No. 141 Business Combinations
(FAS 141) and FAS No. 142 Goodwill and Other Intangible
Assets (FAS 142). FAS 141 requires that the purchase method Of
accounting be used for all business combinations initiated after June 30, 2001.
FAS 141 also specifies the criteria applicable to intangible assets acquired in
a purchase method business combination to be recognized and reported apart from
goodwill. FAS 142 requires that goodwill and intangible assets with indefinite
useful lives no longer be amortized, but instead be tested for impairment, upon
initial adoption of the standard and then annually. FAS 142 also requires that
intangible assets with definite useful lives be amortized over their respective
estimated useful lives to their estimated residual values, and be reviewed for
impairment.
7
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|ARTISAN COMPONENTS,
INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSCONTINUED(unaudited)


The Company adopted FAS 142
effective October 1, 2001. As a result of the adoption of FAS 142 workforce
intangibles of $1.0 were reclassified as goodwill. In addition the Company has
ceased amortization of goodwill and the workforce intangible reclassified into
goodwill. As of October 1, 2001, the net book value of these intangibles was
$13.7 million and amortization of $4.6 million was recorded for the year ended
September 30, 2001. If the Company had not adopted FAS 142, $1.5 million of
amortization related to these intangibles would have been recorded during the
quarter ended December 31, 2001.


The Company has also
completed the initial impairment review required upon adoption of FAS 142 and
did not record any impairment charge with respect to its goodwill intangibles.
The Company will complete the annual review of goodwill and intangibles during
the quarter ended September 30, 2002 and there can be no assurance that an
impairment charge will not be necessary at that time.


In August 2001, the FASB
issued SFAS No. 143 Accounting for Asset Retirement Obligations.
SFAS No. 143 requires, among other things, retirement obligations to be
recognized when they are incurred and displayed as liabilities, with a
corresponding amount capitalized as part of the related long-lived asset. The
capitalized element must be expensed over its useful life using a systematic and
rational method. The adoption of SFAS No. 143 is not expected to have a
significant impact on the Companys financial position, results of
operations or cash flows.


In October 2001, the FASB
issued SFAS No. 144 Accounting for the Impairment or Disposal of
Long-Lived Assets, which is required to be applied starting with fiscal
years beginning after December 12, 2001. SFAS No. 144 requires, among other
things, the application of one accounting model for long-lived assets that are
impaired or to be disposed of by sale. The adoption of SFAS No. 144 is not
expected to have a significant impact on our financial position, results of
operations or cash flows.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|5. |  | COMPREHENSIVE
INCOME:
|-- |  | ---------------------

|Comprehensive income (loss)
is defined as the change in equity of a business enterprise during a period from
transactions and other events and circumstances from non-owner sources. There is
no difference between comprehensive income and net income for the three month
periods ended December 31, 2001 and 2000.




8
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|ARTISAN COMPONENTS,
INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSCONTINUED(unaudited)
|-------------------------------------------------------------------------------------------------

|6. |  | BUSINESS
SEGMENT AND GEOGRAPHICAL INFORMATION:
|-- |  | ----------------------------------------------

|The Company currently
operates in one industry segment, the semiconductor intellectual property
segment, for financial reporting purposes, and uses one measure of profitability
for its business. The Company markets its products to customers in North
America, Europe and Asia.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                     | Three MonthsEnded December 31,
|------------------------------------ | ------------------------------
|($ In Thousands)                    
|Revenue from Unaffiliated Customers: |                               
|Taiwan                               |                               
|United States                        |                               
|Singapore                            |                               
|Japan                                |                               
|Other                                |                               
|                                     |                               
|                                     |                               
|                                     |                               

|We have been dependent on a
relatively small number of customers for a substantial portion of our revenue,
although the customers comprising this group have changed from time to time. In
the three month period ended December 31, 2001, Taiwan Semiconductor Manufacturing Company Ltd., or
TSMC, accounted for 44% of revenue and Chartered Semiconductor Manufacturing Ltd. accounted for 13% of
revenue. In the three month period ended December 31, 2000, TSMC accounted for
35% of revenue and Sharp accounted for 11% of revenue.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|7. |  | SHAREHOLDER
RIGHTS PLAN:
|-- |  | ------------------------

|Our board of directors 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 our stockholders.
If we issue any of these shares of preferred stock in the future, the rights of
holders of our common stock may be negatively affected. If we issue preferred
stock, a change of control of our company could be delayed, deferred or
prevented. We have no current plans to issue shares of preferred stock.


Section 203 of the
Delaware General Corporation Law restricts certain business combinations with
any interested stockholder as defined by that statute. In addition,
our certificate of incorporation and bylaws contain certain other provisions
that may have the effect of delaying, deferring or preventing a change of
control. These provisions include:
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | 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.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------

|On December 12, 2001, our board of
directors adopted a stockholder rights plan. Under this plan, we issued a dividend of one
right for each share of our common stock held by stockholders of record as of the close of business on
January 8,




9
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|ARTISAN COMPONENTS,
INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSCONTINUED(unaudited)


2002. Each right will
initially entitle stockholders to purchase a fractional share of our preferred
stock for $115. However, the rights are not immediately exercisable. If a person
or group acquires, or announces a tender or exchange offer that would result in
the acquisition of a certain percentage of our common stock, then, unless the
rights are redeemed by us for $0.001 per right, the rights will become
exercisable by all rights holders, except the acquiring person or group, for
shares of our preferred stock or of the third party acquirer having a value of
twice the rights then-current exercise price.


These provisions are
designed to encourage potential acquirors to negotiate with our board of
directors and give our board of directors an opportunity to consider various
alternatives to increase stockholder value. These provisions are also intended
to discourage certain tactics that may be used in proxy contests. However, the
issuance of preferred stock, our charter and bylaw provisions, the restrictions
in Section 203 of the Delaware General Corporation Law or our stockholder rights
plan could discourage potential acquisition proposals and could delay or prevent
a change in control, which may adversely affect the market price of our stock.
Such provisions and plans may also have the effect of preventing changes in our
management.



10
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|
|

|ITEM 2. |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- |  | -------------------------------------------------------------------------------------

|The following discussion
should be read in conjunction with the Unaudited Condensed Consolidated Interim
Financial Statements and the Notes thereto included elsewhere herein and the
audited consolidated financial statements contained in our Annual Report on Form
10-K for the year ended September 30, 2001 as filed with the Securities and
Exchange Commission. 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. The
forward-looking statements contained herein are based on current expectations
and entail various risks and uncertainties that could cause actual results to
differ materially from those expressed in such forward-looking statements.
Forward-looking statements can often be identified by the use of forward-looking
words such as may, will, could,
should, expect, believe,
anticipate, estimate, continue,
plan, intend, project, or other similar
words.



OVERVIEW


We are a leading developer
of high performance, high density and low power embedded memory, standard cell
and input/output intellectual property components used for the design and
manufacture of complex integrated circuits. We license our products to
semiconductor manufacturers and fabless semiconductor companies for the design
of integrated circuits used in complex, high volume applications, such as
portable computing devices, cellular phones, consumer multimedia products,
automotive electronics, personal computers and workstations.



The worldwide electronics
industry slowdown has continued into fiscal 2002. This slowdown, particularly in
the semiconductor industry, has had and may continue to have a material adverse
effect on our results of operations.


Our customers include
foundries, which are companies that only manufacture integrated circuits, and
integrated device manufacturers, which are companies that both design and
manufacture integrated circuits. Foundries and integrated device manufacturers
invest significant resources in libraries that are designed to match their
specific manufacturing processes. Our intellectual property components are
designed to enable these companies to achieve the best combination of
performance, density, power and yield for a given manufacturing process.
Typically, a customer licenses one or more products designed for its
manufacturing process. These products are accompanied by layout databases,
software to support a customers integrated circuit design tool environment
and design methodology documentation.


We license our products on
a nonexclusive, worldwide basis to semiconductor manufacturers and grant the
manufacturer the right to distribute our intellectual property components to
their internal design teams and to their application specific integrated circuit
and fabless semiconductor customers. We also generally grant the semiconductor
manufacturer the right to distribute and sublicense our intellectual property
components to semiconductor design companies that manufacture at their facility.
We charge manufacturers an up-front license fee that gives them the right to
manufacture semiconductors containing our products. In addition, manufacturers
agree to pay us royalties based on manufacturing volumes of integrated circuits
that include our products.
11
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Our customers also include
semiconductor design companies that participate in our library distribution
program. We distribute our products to companies that are customers of our
licensed foundries. While the basic elements of the libraries are distributed at
no charge, design companies can pay us a direct license and support fee to
receive modified products and support from us. As part of the license agreement
that is entered into by the design companies to obtain our products, the design
companies agree to manufacture any semiconductor design using any of these
libraries at the particular foundry for which the library was developed. The
foundry then pays us a royalty based on the volume of the foundrys sales
containing our intellectual property.


In addition, we have
several industry partner programs. Our industry partners provide a wide variety
of intellectual property solutions, design services and tool support to
streamline the design process for our library users. Through these programs, we
provide our products and support to over 150 companies who agree to limit the
use and distribution of such libraries to design companies that are customers of
foundries with which we have license agreements. These design companies agree to
manufacture the semiconductor designs using these libraries at the particular
foundry for which the library was developed. These leading partner programs have
given our products additional value as customers demand streamlined and
integrated design solutions to accelerate their time to market.


The license of our products
to a semiconductor manufacturer typically involves a sales cycle of six to 12
months and often coincides with a customers migration to a new
manufacturing process. Our contracts with semiconductor manufacturers generally
require them to pay a license fee to us ranging from approximately $250,000 to
$600,000 for each product delivered under a contract. Our contracts generally
require payment of a portion of the license fees upon signing of the contract
with the final payment due within 30 to 60 days after the completion of
customization, which generally takes three to six months.


Royalty revenue is
calculated based on unit sales by manufacturers of integrated circuits or wafers
containing our intellectual property components. Given that we provide our
products early in the customers integrated circuit design process, there
is a significant delay between the time we deliver a product and the time we
receive royalty revenue when the semiconductors have been manufactured.


To date, the substantial
majority of our license revenue has been recognized using the percentage of
completion method of accounting. Provisions for estimated losses on uncompleted
contracts are recognized in the period in which such losses are determined to be
likely. As the completion period for a project ranges from three to six months,
revenue in any quarter is dependent on our progress toward completion of the
project. We cannot assure you that our estimates will be accurate, and, in the
event they are not, our business, operating results and financial condition in
subsequent periods could be materially adversely affected.


As described above, our
business model is intended to generate revenue from both license fees and
royalties paid by foundries and integrated device manufacturers. To date, a
substantial portion of our royalty revenue has been derived from one customer,
Taiwan Semiconductor Manufacturing Company Ltd., or TSMC. Net royalty revenue as
a percentage of total revenue was 26% in the three month period ended December
31, 2001, and 20% in the three month period ended December 31, 2000. We expect
royalty revenue to grow as a percent of total revenue; however, we expect that
royalty revenue as a percentage of total revenue may vary significantly from
quarter to quarter.
12
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|According to contract
terms, a portion of each royalty payment is credited back to the customers
account for use as payment of license fees for future orders placed with us. The
remaining portion of the royalty is reported as net royalty revenue. The amount
of credits that can be earned by a customer is limited to the cumulative amount
of orders placed by that customer for a given process technology. A customer has
a limited time to use the credits before they expire, generally approximately 18
months. If the customer does not use the credits within this period, we record
the amount of expired credits as revenue and no longer have an obligation to
provide any future products for such credits. Our success will depend, in part,
on our ability to generate royalty revenue from a substantially larger number of
designs and on many of these designs achieving large manufacturing volumes.


We have been dependent on a
relatively small number of customers for a substantial portion of our revenue,
although the customers comprising this group have changed from time to time. In
the three month period ended December 31, 2001, TSMC accounted for 44% of
revenue and Chartered Semiconductor Manufacturing Ltd. accounted for 13% of
revenue. In the three month period ended December 31, 2000, TSMC accounted for
35% of revenue and Sharp accounted for 11% of revenue. We anticipate that our
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 our products.


Historically, a substantial
portion of our total revenue has been derived from customers outside the United
States, primarily from Asia and Europe. International revenue as a percentage of
our total revenue was approximately 84% in the three month period ended December
31, 2001 and 89% in the three month period ended December 31, 2000. We
anticipate that international revenue will remain a substantial portion of our
total revenue in the future. To date, all of the revenue from international
customers has been denominated in U.S. dollars.


We derive a substantial
majority of all of our revenue from license fees associated with the sale of
products, including support and maintenance fees. Together, these license fees
and support and maintenance fees accounted for 74% of total revenue in the three
month period ended December 31, 2001, and 80% of total revenue in the three
month period ended December 31, 2000. We expect that license revenue will
continue to account for a substantial portion of our total revenue for the
foreseeable future.



13
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|REVENUE RECOGNITION



We recognize and report
revenue in two separate categories: license revenue and royalty revenue. License
revenue is derived from license fees, maintenance fees and support fees. License
fees are derived from the purchase of our products. Maintenance fees are derived
from maintenance contracts, which are part of a licensing arrangement. Support
fees are derived from arrangements with customers of our licensed foundries to
support the use of our libraries in their designs. Royalty revenue is derived
from fees associated with the volume of a licensees production and sales
containing our intellectual property.


The customization of our
products generally takes up to six months and we use the percentage of
completion method to recognize revenue from the sale of licensed products. We
estimate the percentage of completion based on our estimate of the costs
incurred to date as a percentage of the estimated total costs required to
complete the project. Revenue recognized in any quarter is dependent on our
progress toward completion of projects in development. Significant management
judgment and discretion is used to estimate total project completion costs. Any
changes in or deviation from these estimates could have a material effect on the
amount of revenue recognized in any period.


For all licenses, we use
either a binding purchase order or signed license agreement as evidence of the
arrangement. Our standard payment terms require that a portion of the total license
fee be paid upon signing of the contract and the remaining balance be paid within 60 days of product
delivery. We do not generally enter into extended payment terms. However, at the
time the transaction is entered into, we assess whether associated fees are
fixed, determinable and within normal payment terms. In the
event that we determine that the fees are not fixed and determinable, we
recognize revenue based on the lower of the percentage of completion method or
the amount of fees actually becoming due.


We assess collections based
on a number of factors, including past transaction history with the customer and
the credit worthiness of the customer. We do not request collateral from our
customers. If we determine that collection of a fee is not reasonably assured,
we defer the revenue and recognize it at the time collection becomes reasonably
assured.


Our customers can purchase maintenance contracts, generally for one-year periods.
Under the terms of our maintenance agreements, our customers will receive any updates made by us during the maintenance period of the contract.
We recognize revenue for such contracts ratably over the contract period. For multiple
element transactions involving license fees and ongoing maintenance, we allocate
a portion of the fee to the ongoing maintenance contract based on the renewal rates
stated in the contracts.


Royalty revenue is
recognized based on notifications or royalty reports received from our
customers. Under our credit-back programs with some of our
customers, a percentage of the royalty payments are credited against future
license purchases. As a result we defer any royalty revenue associated with our
credit-back program until the customer purchases additional licenses
or the credit-back expires, whichever is earlier.


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.




14
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|RESULTS OF OPERATIONS


The following table sets
forth, for the periods indicated, selected statements of operations data as a
percentage of total revenue:
|-----------------------------------------------------------------------------------------------------------------------------------------------------------

|                                         | Three MonthsEnded December 31,
|---------------------------------------- | ------------------------------
|
|Revenue:                                 |                               
|License                                  |                               
|Net royalty                              |                               
|                                         |                               
|Total revenue                            |                               
|                                         |                               
|Costs and expenses:                      |                               
|Cost of revenue                          |                               
|Product development                      |                               
|Sales and marketing                      |                               
|General and administrative               |                               
|Amortization of acquired technology      |                               
|Amortization of other intangible assets  |                               
|                                         |                               
|Total costs and expenses                 |                               
|                                         |                               
|Operating income (loss)                  |                               
|Other income, net                        |                               
|                                         |                               
|Income before provision for income taxes |                               
|Provision for income taxes               |                               
|                                         |                               
|Net income                               |                               
|                                         |                               

|REVENUE
|-------

|                 | Three Months EndedDecember 31,
|---------------- | ------------------------------
|($ In Thousands)
|License          |                               
|Net royalty      |                               
|                 |                               
|Total revenue    |                               
|                 |                               

|Total revenue increased 36%
in the first quarter of fiscal 2002, as compared to the first quarter of fiscal
2001, due to an increase in license revenue as well as higher net royalty
revenue. Gross royalty revenue is calculated based on per unit sales by our
customers of integrated circuits or wafers containing our IP components. Total
gross royalties for the first quarter of fiscal 2001 were $2.8 million and total
gross royalties for the first quarter of fiscal 2000 were $1.6 million. From
gross royalties, a portion was credited back to the customers account for
use as payment of license fees for future orders to be placed with us. The
remaining portion of gross royalty revenue was reported as net royalty revenue.
Net royalty revenue increased as a percentage of revenue from 20% for the three
months ended December 31, 2000 to 26% for the three months ended December 31,
2001, primarily due to increased net royalty revenue in the latter period.
15
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|COSTS AND EXPENSES
|------------------

|                    | Three Months EndedDecember 31,
|------------------- | ------------------------------
|($ In Thousands)   
|Cost of revenue     |                               
|Product development |                               
|                    |                               
|Engineering costs   |                               
|                    |                               

|Engineering costs are
allocated between cost of revenue and product development expenses. Engineering
efforts devoted to developing products as part of specific customer projects are
recognized as cost of revenue. The balance of engineering costs, incurred for
general development of our technology, is charged to product development.
Engineering costs generally are expensed as incurred. Engineering costs
increased 36% in the first quarter of fiscal 2002 as compared to the same period
in fiscal 2001. The absolute dollar increase in engineering costs of $1.2
million was primarily due to an increase in headcount and personnel expenses of
$1.0 million, increased leasing costs associated with the relocation of our
principal offices of $407,000, increased use of outside services of $136,000,
and an increased warranty expense of $81,000, partially offset by a one-time
decrease in computer and networking equipment maintenance and depreciation costs
of $463,000. The increase in engineering headcount-related costs in the three
month period ended December 31, 2001 as compared to the same period in fiscal
2000, was primarily due to our acquisition of the physical library business of
Synopsys Inc.


Cost of revenue increased
55% in the first quarter of fiscal 2002 as compared to the same period in fiscal
2001. The absolute dollar increase of cost of revenue of $560,000 in the first
quarter of fiscal 2002, as compared to the same period in fiscal 2001 was due to
an increase in engineering hours allocated to revenue-generating projects of
$440,000, increased warranty expense of $81,000 and increase use of outside
services of $39,000.


Product development
expenses increased 27% in the first quarter of fiscal 2002 as compared to the
same period in fiscal 2001. The absolute dollar increase of $623,000 in the
first quarter of fiscal 2002, as compared to the same period in fiscal 2001, was
due to an increase in headcount and personnel-related expenses of $1.0 million,
increased leasing costs associated with the relocation of our principal offices
of $407,000, and increased use of outside services of $97,000, partially offset
by a one-time decrease in computer and networking related costs of $463,000 and
an increase in engineering hours allocated to revenue-generating projects of
$440,000. We expect that product development expenses will continue to increase
in absolute dollars.




16
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|
|

|                            | Three Months EndedDecember 31,
|--------------------------- | ------------------------------
|($ In Thousands)           
|Sales and marketing expense |                               
|                            |                               

|Sales and marketing
expenses include salaries, commissions, travel expenses and costs associated
with trade shows, advertising and other marketing efforts. Sales and marketing
expenses increased by 43% in the first quarter of fiscal 2002, compared to the
first quarter of fiscal 2001. The increase in absolute dollars in sales and
marketing expenses of $618,000 in the first quarter of fiscal 2002, as compared
with the first quarter of fiscal 2001, was primarily attributable to an increase
in headcount and personnel expenses of $535,000 and increased leasing costs
associated with the relocation of our principal offices of $131,000, partially
offset by decreased marketing program expenses of $44,000.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                    | Three Months EndedDecember 31,
|----------------------------------- | ------------------------------
|($ In Thousands)                   
|General and administrative expenses |                               
|                                    |                               

|General and administrative
expenses decreased 9% in the first quarter of fiscal 2002 as compared to the
same period in fiscal 2001. The absolute dollar decrease in general and
administrative expenses of $61,000 in the first quarter of fiscal 2002, as
compared to the same period in fiscal 2001, was due to decreased personnel
related costs of $84,000, decreased costs of outside services of $80,000 and
decreased travel costs of $22,000, partially offset by increased directors and
officers insurance, legal and accounting costs of $94,000 and increased
leasing costs associated with the relocation of our principal offices of
$32,000. We expect general and administrative expenses to grow in absolute
dollars in future periods.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                            | Three Months EndedDecember 31,
|------------------------------------------- | ------------------------------
|($ In Thousands)                           
|Amortization of acquired technology         |                               
|Amortization of purchased intangible assets |                               
|                                            |                               
|Acquisition-related expenses                |                               
|                                            |                               

|The amortization of
acquired technology and purchased intangible assets are both due to the
acquisition of the physical library business of Synopsys.



17
|-----------------------------------------------------------------------------------------------------------------------------------------------------------

|INTEREST AND OTHER
INCOME, NET
|------------------------------

|                               | Three Months EndedDecember 31,
|------------------------------ | ------------------------------
|($ In Thousands)              
|Interest and other income, net |                               
|                               |                               

|Other income decreased by
72% in the first quarter of fiscal 2002, as compared to the corresponding period
in fiscal 2001. The decrease in other income was primarily due to lower
investment balances as a result of cash paid for the physical library business
of Synopsys as well as lower average interest rates.



INCOME TAXES
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                           | Three Months EndedDecember 31,
|-------------------------- | ------------------------------
|($ In Thousands)          
|Provision for income taxes |                               
|                           |                               

|The effective tax rate was
40% in the three month period ended December 31, 2001 and was 34% in the three
month period ended December 31, 2000. The tax provision for the period ended December 31, 2001
was primarily due to foreign taxes withheld for which no tax benefit could be taken in the U.S.


LIQUIDITY AND CAPITAL
RESOURCES


We have funded our
operations primarily from license and royalty revenue received from inception to
December 31, 2001, the net proceeds of $27.1 million from our February 1998
initial public offering of Common Stock, the net proceeds of $15.8 million from
our April 1998 secondary offering of Common Stock and, to a lesser extent, the
proceeds of approximately $7.7 million from the sale of Preferred Stock and a
warrant.


Net cash used in operating
activities was $3.3 million in the three month period ended December 31, 2001
and $1.1 million in the three month period ended December 31, 2000. Net cash
used in operating activities in the three month period ended December 31, 2001
was primarily due to an increase in total working capital as a result of an
increase in contract receivables and a decrease in accounts payable and other
liabilities, partially offset by an increase in deferred revenue, plus
depreciation. Net cash used by operating activities in the three month period
ended December 31, 2000 was primarily due to an increase in total working
capital as a result of an increase in contract receivables and prepaid expenses
and a decrease in deferred revenue offset by depreciation and an increase in
accounts payable.


Net cash used in investing
activities was $4.2 million in the three month period ended December 31, 2001.
Net cash provided by investing activities was $1.4 million in the three month
period ended December 31, 2000. In the three months ended December 31, 2001,
investing activities consisted primarily of net purchases of marketable
securities and acquisition of property and equipment. In the three month period ended
December 31, 2000, investing activities consisted primarily of net sales of marketable.




18
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Net cash provided by
financing activities was $683,000 in the three month period ended December 31,
2001 and $285,000 in the three month period ended December 31, 2000. Net cash
provided by financing activities in both periods consisted of proceeds from the
issuance of common stock to employees upon the exercise of stock options and the
purchase of stock through the employee stock purchase plan.


At December 31, 2001, we
had cash, cash equivalents and current marketable securities of $39.1 million
and working capital of $42.7 million.


We intend to continue to
invest in the development of new products and enhancements to our existing
products. Our 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 our
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
and royalty revenue, available borrowings under line of credit arrangements and
other factors. We believe that our current cash and investment balances and any
cash generated from operations and from available or future debt financing will
be sufficient to meet our operating and capital requirements for at least the
next 12 months. However, from time to time, we 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 us, 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 us to relinquish our rights to
certain of our technologies or products. Our failure to raise capital when
needed could have a material adverse effect on our business, operating results
and financial condition.


NEW ACCOUNTING STANDARDS


In June 2001, the Financial
Accounting Standards Board issued FAS No. 141 Business Combinations
(FAS 141) and FAS No. 142 Goodwill and Other Intangible
Assets (FAS 142). FAS 141 requires that the purchase method Of
accounting be used for all business combinations initiated after June 30, 2001.
FAS 141 also specifies the criteria applicable to intangible assets acquired in
a purchase method business combination to be recognized and reported apart from
goodwill. FAS 142 requires that goodwill and intangible assets with indefinite
useful lives no longer be amortized, but instead be tested for impairment, upon
initial adoption of the standard and then annually. FAS 142 also requires that
intangible assets with definite useful lives be amortized over their respective
estimated useful lives to their estimated residual values, and be reviewed for
impairment.


The Company adopted FAS 142
effective October 1, 2001. As a result of the adoption of FAS 142 workforce
intangibles of $1.0 were reclassified as goodwill. In addition the Company has
ceased amortization of goodwill and the workforce intangible assumed into
goodwill. As of October 1, 2001, the net book value of these intangibles was
$13.7 million and amortization of $4.6 million was recorded for the year ended
September 30, 2001. If the Company had not adopted FAS 142, $1.5 million of
amortization related to these intangibles would have been recorded during the
quarter ended December 31, 2001.



19
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|The Company has also
completed the initial impairment review required upon adoption of FAS 142 and
did not record any impairment charge with respect to its goodwill intangibles.
The Company will complete the annual review of goodwill and intangibles during
the quarter ended September 30, 2002, and there can be no assurance that an
impairment charge will not be necessary at that time.


In August 2001, the FASB
issued SFAS No. 143 Accounting for Asset Retirement Obligations.
SFAS No. 143 requires, among other things, retirement obligations to be
recognized when they are incurred and displayed as liabilities, with a
corresponding amount capitalized as part of the related long-lived asset. The
capitalized element must be expensed over its useful life using a systematic and
rational method. The adoption of SFAS No. 143 is not expected to have a
significant impact on the Companys financial position, results of
operations or cash flows.


In October 2001, the FASB
issued SFAS No. 144 Accounting for the Impairment or Disposal of
Long-Lived Assets, which is required to be applied starting with fiscal
years beginning after December 12, 2001. SFAS No. 144 requires, among other
things, the application of one accounting model for long-lived assets that are
impaired or to be disposed of by sale. The adoption of SFAS No. 144 is not
expected to have a significant impact on our financial position, results of
operations or cash flows.


20
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|
|

|ITEM 3. |  | QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|------- |  | ----------------------------------------------------------

|We are exposed to the
impact of interest rate changes and changes in the market values of our
investments.



Interest Rate Risk


Our exposure to market risk
for changes in interest rates relate primarily to our investment portfolio. We
have not used derivative financial instruments in our investment portfolio. We
invest our excess cash in high-quality corporate issuers and in debt instruments
of the U.S. Government and, by policy, limit the amount of credit exposure to
any one issuer. As stated in our policy, we are averse to principal loss and
seek to preserve our invested funds by limiting default risk, market risk and
reinvestment risk. We mitigate default risk by investing in high credit quality
securities and by positioning our portfolio to respond appropriately to a
significant reduction in a credit rating of any investment issuer or guarantor.
The portfolio includes only marketable securities with active secondary or
resale markets to ensure portfolio liquidity.


Investments in both fixed
and floating rate interest-earning instruments carry a degree of interest rate
risk. Fixed rate securities may have their fair market value adversely impacted
due to rising interest rates, while floating rate securities may produce less
income than expected if interest rates fall. Due in part to these factors, our
future investment income may fall short of expectations due to changes in
interest rates or we may suffer losses in principal if forced to sell securities
which have declined in market value due to changes in interest rates.


The table below presents
the carrying value and related weighted average interest rates for our
investment portfolio. The carrying values approximate fair values at December
31, 2001 and September 30, 2001. All investments mature in one year or less.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                         | CARRYINGVALUE ATDECEMBER 31,2001 | AVERAGE RATEOF RETURN ATDECEMBER 31,2001 | CARRYINGVALUE ATSEPTEMBER 30,2001 | AVERAGE RATEOF RETURN ATSEPTEMBER 30,2001
|------------------------ | -------------------------------- | ---------------------------------------- | --------------------------------- | -----------------------------------------
|
|INVESTMENT SECURITIES:   |                                  |                                          |                                   |                                          
|Cash Equivalents -       |                                 
|variable rate            |                                  | $  1,271                                 |                                   | 2.2                                      
|Money market funds -     |                                 
|variable rate            |                                  | 3,503                                    |                                   | 1.9                                      
|Cash Equivalents -       |                                 
|fixed rate               |                                  | 19,980                                   |                                   | 3.4                                      
|Short-term investments - |                                 
|fixed rate               |                                  | 14,355                                   |                                   | 3.1                                      
|                         |                                  |                                          |                                   |                                          
|Total                    |                                  | $39,109                                  |                                   |                                          
|                         |                                  |                                          |                                   |                                          

|21
|--

|FACTORS AFFECTING FUTURE
OPERATING RESULTS



Our business depends on
continued demand for complex system-on-a-chip semiconductors and the electronic
equipment that incorporate them





Our success is
substantially dependent on the adoption of our technology by semiconductor
manufacturers and on an increasing demand for products requiring complex
system-on-a-chip integrated circuits, such as portable computing devices,
cellular phones, consumer multimedia products, automotive electronics, personal
computers and workstations. A system-on-a-chip is a semiconductor that includes
the computing, memory and communications components that previously had been
available only on separate chips. Our business is subject to many risks beyond
our control that influence the success of our customers including, among others,
competition faced by each customer in its particular industry, market acceptance
of the customers products that incorporate our technology, the
engineering, sales and marketing capabilities of the customer and the financial
and other resources of the customer. Demand for our products may also be
affected by mergers in the semiconductor and systems industries, which may
reduce the aggregate level of purchases of our products and services by the
combined companies. If there is faltering growth in the semiconductor and
systems industries, a reduced number of design starts, shifts in the types of
integrated circuits manufactured, tightening of customers operating
budgets or consolidation among our customers, operations and our business could
suffer.


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 decline in general
economic conditions during which the number of new semiconductor design projects
often decreases. Revenue from licenses of our products is influenced by the
level of design efforts by our customers. If these industries experience a
downturn, then our business could suffer.


The semiconductor industry
suffered a sharp decline in orders and revenue in calendar 2001. Many
semiconductor manufacturers and vendors of products incorporating semiconductors
announced earnings shortfalls and employee layoffs. Overall, customer spending
tightened. These conditions negatively affected our business in calendar 2001,
and will continue to do so in the future if these conditions persist. The
outlook for the electronics industry is uncertain and it is very difficult to
predict how long the current slowdown will last.


The semiconductor
industry is cyclical in nature and a general economic downturn in the United
States or abroad may reduce our revenue and harm our business


The primary customers for
our intellectual property components 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. In addition,
the markets for semiconductor products are cyclical. For example, in recent
years certain Asian countries have experienced significant economic
difficulties, including currency devaluation and instability, business failures
and a depressed business environment. These difficulties have triggered a
significant downturn in the semiconductor market, resulting in reduced budgets
for chip design tools which, in turn, has negatively impacted us. Economic
growth in the United States has slowed significantly in recent months and many
commentators believe the U.S. economy has experienced or is experiencing a
recession. These conditions have negatively affected our business in calendar
2001, and will in the future if these conditions persist. The outlook for the
electronics industry is uncertain and it is very difficult to predict how long
the current slowdown will last.




22
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Our
quarterly operating results may fluctuate, which could cause our stock price to decline


Our 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 we receive during a given
period;
| | - |  | -----------------------------------------------------------------------------------------------

| |  |  | the
timing of customer orders, including the capital budgeting and purchasing cycles of our
customers;
| | - |  | ------------------------------------------------------------------------------------------------------

| |  |  | delays
in the design process due to changes by a customer to its order after it is placed;
| | - |  | ------------------------------------------------------------------------------------------

| |  |  | our
progress on contracts that are billed and recognized to revenue on a percentage of
completion basis, which represent a substantial majority of our contracts and have
completion periods of three to six months;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | the
accuracy of our estimates for project completion costs and costs incurred to date, which
estimates involve significant management judgment and discretion;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | the
length of our sales cycle;
| | - |  | ------------------------------

| |  |  | our
ability to develop, introduce and market new products and product enhancements;
| | - |  | -----------------------------------------------------------------------------------

| |  |  | the
timing of our new product announcements and introductions and those of our competitors;
| | - |  | -------------------------------------------------------------------------------------------

| |  |  | market
acceptance of our products; and
| | - |  | --------------------------------------

| |  |  | fluctuations
in the demand for semiconductors and end user products that incorporate semiconductors.
| | - |  | ----------------------------------------------------------------------------------------------------

|Our future revenue may
fluctuate from quarter to quarter and on an annual basis as a result of these
and other factors. Our expense levels are based in part on our expectations
regarding future revenue. If revenue is below our expectations in any quarter
and we are not able to adjust spending in a timely manner, the negative effect
of such shortfall may be increased. We intend to continue our investment in
research and development as well as in product promotion, licensing and support
programs in an effort to maximize the growth of future royalties. Accordingly,
it is likely that in some future quarters our operating results will be below
the expectations of public market analysts and investors, which could cause our
stock price to decline, perhaps substantially.


We have incurred
operating losses in recent periods and may be unable to maintain profitability


Although we returned to profitability
in the first quarter of fiscal 2002, we have incurred net
operating losses in fiscal 2001, 2000 and 1999. If our revenue in future periods
increases more slowly than we expect or not at all, we may not maintain profitability. In addition, most of our operating expenses
are fixed in the short term, so any shortfall in anticipated revenue in a given
period could significantly reduce our operating results below expectations. We
expect to continue to incur significant expenses in connection with funding for
research and development and expansion of our sales and marketing efforts. As a
result, we will need to increase revenue to achieve profitability. We may be unable to sustain or increase profitability
on a quarterly or annual basis. If we fail to maintain profitability, our business and financial condition would suffer, we
could lose the benefit of tax credits and other deferred tax assets and our
stock price could decline.



23
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|We have relied and
expect to continue to rely on a license fee and royalty-based business model and
if we fail to realize expected royalties our business will suffer


Our customers include
foundries, which only manufacture integrated circuits, and integrated device
manufacturers, which both design and manufacture semiconductors. Our
intellectual property library products are designed to enable these
manufacturers to achieve the best combination of performance, density, power and
yield for a given manufacturing process. We license our products on a
nonexclusive, worldwide basis to major semiconductor manufacturers and grant
these manufacturers the right to distribute our products to their internal
design teams and to their application specific integrated circuit and fabless
semiconductor customers. We receive license fees and royalties under the terms
of license agreements with such manufacturers.


We received our first
royalty revenue in the third quarter of fiscal 1999. Royalty payments are
calculated based on per unit sales by our customers of integrated circuits or
wafers containing our intellectual property components. A portion of these
payments is credited back to the customers account for use as payment of
license fees. There is a significant delay between the delivery of our product
and the generation of royalty revenue because we provide our products early in
the integrated circuit design process. Additionally, the quarter in which we
recognize royalty revenue lags behind the quarter in which the related product
is sold by our customer by at least one quarter. Our success depends, in part,
on our ability to generate royalty revenue from a substantial number of designs
and on many of these designs achieving large manufacturing volumes. Our ability
to generate such royalty revenue in turn depends, in part, on our ability to
negotiate, structure, monitor and enforce agreements for the determination and
payment of royalties. We cannot be certain that this business strategy will be
successful in expanding the number of royalty bearing contracts with customers,
nor can we be certain that we will receive significant royalty revenue in the
future.


We believe that our long
term success is substantially dependent on future royalties. As a result, we
face risks inherent in a royalty based business model. In particular, our
ability to forecast royalty revenue is limited by factors that are beyond our
control. Royalties are recognized in the quarter in which we receive a royalty
report from a customer. In addition, our revenue is dependent upon sales by our
customers of products that incorporate our technology. Even if our technology is
adopted, we cannot be certain that it will be used in a product that is
ultimately brought to market, achieve commercial acceptance or result in
significant royalties. The royalty rate that we negotiate with our partners
varies, and in certain cases, with respect to a specific process geometry,
changes over time. On a period-to-period basis, royalty revenue as a percentage
of total revenue may vary significantly due to factors such as the timing of the
manufacture of new royalty-bearing integrated circuits, and the demand for
products incorporating royalty-bearing integrated circuits. For example, net
royalty revenue as a percentage of total revenue was 26% in the three month
period ended December 31, 2001, and 20% in the three month period ended December
31, 2000.
24
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|We also face risks relating
to the accuracy and completeness of the royalty collection process. We have only
limited experience and systems in place to conduct reviews of the accuracy of
the royalty reports we receive from our licensees. We have the right to audit
the records of semiconductor manufacturers who license our products to ensure
the integrity of their royalty reporting systems; however, such audits may only
be conducted periodically and may be at our expense. We cannot be certain that
the costs incurred by us to improve our systems and processes and in conducting
these audits will not exceed the royalties that result from these efforts.


If the market for third
party intellectual property components does not expand, our business may suffer


Our ability to achieve
sustained revenue growth and profitability in the future will depend on the
continued development of the market for third party intellectual property
components and, to a large extent, on the demand for system-on-a-chip integrated
circuits. System-on-a-chip integrated circuits are characterized by rapid
technological change and competition from an increasing number of alternate
design strategies such as combining multiple chips to create a
system-on-package. We cannot be certain that the market for third party
intellectual property components and system-on-a-chip integrated circuit markets
will continue to develop or grow at a rate sufficient to support our business.
If either of these markets fails to grow or develops slower than expected, then
our business will suffer. A significant majority of our existing and potential
customers currently rely on components developed internally and/or by other
vendors. Our future growth, if any, is dependent on the adoption of, and
increased reliance on, third party design components by both existing and
potential customers.


We continue to
experience intense competition from other intellectual property component and
electronic design automation companies, and this competition could negatively
affect our business and our revenues


Our strategy of targeting
semiconductor manufacturers that participate in, or may enter, the
system-on-a-chip market requires us to compete in intensely competitive markets.
Within the third party intellectual property component market, we compete
primarily against Avant!, Nurlogic, Virage Logic and Virtual Silicon Technology.
In addition, we may face competition from consulting firms and companies that
typically have operated in the generic library segment of the market and that
now seek to offer customized intellectual property components as enhancements to
their generic solutions. We also face significant competition from internal
design groups of semiconductor manufacturers that have expanded their
manufacturing capabilities and portfolio of intellectual property components to
participate in the system-on-a-chip market. These internal design groups compete
with us for access to the parents intellectual property component
requisitions and may eventually compete with us to supply intellectual property
components to third parties on a merchant basis. If internal design groups
expand their product offerings to compete directly with our products or actively
seek to participate as vendors in the intellectual property component market by
selling to third party semiconductor manufacturers, then our revenue and
operating results could be negatively affected. We also face competition from
vendors that supply EDA software tools. We cannot be certain that we will be
able to compete successfully against such EDA companies.

25
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|We expect competition to
increase in the future from existing competitors and from new market entrants
with products that may be less expensive than ours or that may provide better
performance or additional features not currently provided by our products. Many
of our 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 us. As a result, they may be able to
adapt more quickly to new or emerging technologies and changes in customer
requirements. In addition, some of our principal competitors maintain their own
design tools and intellectual property component libraries which allow them to
offer a single vendor solution. Internal design groups provide intellectual
property components developed to utilize the qualities of a given manufacturing
process, and may therefore benefit from certain capacity, cost and technical
advantages.


Our ability to compete
successfully in the market for intellectual property components will depend upon
factors, many of which are beyond our 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 our current or potential
competitors);
| | - |  | ----------------------------------------------------------------------------------------------------

| |  |  | the
price, quality and timing of our new product introductions and those of our competitors;
| | - |  | --------------------------------------------------------------------------------------------

| |  |  | the
emergence of new intellectual property component interchangeability standards;
| | - |  | ----------------------------------------------------------------------------------

| |  |  | the
widespread licensing of intellectual property components by semiconductor manufacturers
or their design groups to third party manufacturers;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | our
ability to protect our intellectual property;
| | - |  | -------------------------------------------------

| |  |  | market
acceptance of our intellectual property components;
| | - |  | ----------------------------------------------------------

| |  |  | success
of competitive products; and
| | - |  | ------------------------------------

| |  |  | continued
market acceptance of products using system-on-a-chip integrated circuits and industry and
general economic conditions.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------

|We cannot be certain that
we will be able to compete successfully in the market for third party
intellectual property components.


If we fail to enhance
our intellectual property component libraries and develop and introduce new
products 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

26
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Our 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, our future
success will depend on our ability to continue to enhance our 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. If we fail to
anticipate or adequately respond to changes in manufacturing processes or
customer requirements, or if we experience significant delays in product
development, our business and operating results will be negatively affected. We
cannot be certain that we will avoid difficulties that could delay or prevent
the successful introduction, development and sale of new or enhanced products or
that such new or enhanced products will achieve market acceptance. If we do not
satisfy our delivery commitments, then we could also be exposed to litigation or
claims from our customers. Any such claim could have a material negative effect
on our business, which could cause our stock price to decline.


From time to time, we
experience delays in the progress of certain projects, and we may continue to
experience such delays in the future. Any delay or failure to achieve progress
could result in damage to customer relationships and our reputation,
underutilization of engineering resources or a delay in the market acceptance of
our products, any of which could negatively affect our business.


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


The license of our 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 intellectual property or intellectual
property solutions and require that we expend substantial time, effort and
resources to educate them about the value of our products. Despite these
efforts, potential customers may select an alternate solution or delay or forego
a license of our products. Once we receive and accept an order from a customer,
we must commit significant resources to customizing our products for the
customers manufacturing process. This customization is complex and time
consuming and is subject to a number of risks over which we have little or no
control. These risks include the customers alterations of its
manufacturing process or the timing of its migration to a new process.
Typically, this customization takes from three to six months to complete. If
there are delays in product customization, our operating results could suffer.
As a result, the sales cycle for our products is long, typically ranging from
six to 12 months. Our ability to forecast the timing and scope of specific sales
is limited.


Due to the significant
dollar amounts represented by a single customer order, the timing of the receipt
of an order can have a significant impact on our revenue for a particular
period. Because our 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 our operating results in such period to be negatively affected. 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, then the amount of revenue
we recognize in a given quarter could be negatively impacted, which could harm
our operating results. If we fail to obtain new orders from customers or fail to
collect outstanding accounts receivable our business will be negatively
affected.
27
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|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 negatively affect the timing of our revenue recognition,
which would cause us to fail to meet market expectations and our stock price to
suffer.


We face risks from
foreign operations, which could reduce our operating results and harm our
financial condition


Historically, a large
portion of our total revenue has been revenue from outside of the United States.
International revenue, primarily from Asia and Europe, represented 84% of our
revenue in the three month period ended December 31, 2001 and 89% of our revenue
the three month period ended December 31, 2000. We anticipate that international
revenue will remain a substantial portion of our total revenue in the future. To
date, all of the revenue from international customers has been denominated in
U.S. dollars. If our competitors denominate their sales in a currency that
becomes relatively inexpensive in comparison to the U.S. dollar, then we may
experience fewer orders from international customers whose business is based
primarily on the less expensive currency. In addition, present or future
dislocations with respect to international financial markets may materially harm
our business.


Our plan to expand in
international markets will result in increased costs and may not be successful,
which could harm our business. We intend to continue to expand our sales and
marketing activities in Asia and Europe. Our expansion of international activity
involves a number of risks including:
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | the
impact of possible recessions in economies outside the United States;
| | - |  | -------------------------------------------------------------------------

| |  |  | political
and economic instability, including such instability related to terrorist attacks in the
United States or abroad;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------

| |  |  | exchange
rate fluctuations;
| | - |  | ---------------------------

| |  |  | longer
accounts receivable collection periods and greater difficulty in accounts receivable
collection;
| | - |  | -------------------------------------------------------------------------------------------------------

| |  |  | compliance
with, and unexpected changes in regulatory requirements, which could prevent us from
delivering our products into markets outside the United States;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | reduced
or limited protection for intellectual property rights;
| | - |  | ---------------------------------------------------------------

| |  |  | export
license requirements;
| | - |  | ----------------------------

| |  |  | difficulties
and costs of staffing and managing foreign operations; and
| | - |  | -----------------------------------------------------------------------

| |  |  | tariffs
and other trade barriers and potentially adverse tax consequences.
| | - |  | --------------------------------------------------------------------------

|28
|--

|If we are unable to sustain
or increase revenue derived from international customers or minimize the
foregoing risks, our business will be materially and negatively affected, which
could cause our stock price to decline.


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


We derive a substantial
majority of all our revenue from license fees associated with the sales of our
products, including support and maintenance. License fees accounted for 74% of
total revenue for the three months ended December 31, 2001 and 80% of total
revenue the three months ended December 31, 2000. We expect that license revenue
will continue to account for a substantial portion of our revenue for the
foreseeable future. We cannot be certain that we will continue to derive
sufficient revenue from license revenue. If license revenue were to decline, our
business would suffer in the short term, and our royalty revenue may decline in
the long term as fewer semiconductors incorporate our products. Our future
license revenue will depend in part on the successful development, introduction
and customer acceptance of new products.


Because we rely on a
relatively small number of customers for a large portion of our revenue, our
revenue could decline if our existing customers do not continue to purchase and
use our products


We have been dependent on a
relatively small number of customers for a large portion of our revenue,
although the customers comprising this group have changed from time to time. In
the three month period ended December 31, 2001, TSMC accounted for 44% of our
revenue and Chartered Semiconductor Manufacturing Ltd. accounted for 13% of our
revenue. In the three month period ended December 31, 2000, TSMC accounted for
35% of revenue and Sharp accounted for 11% of revenue. We anticipate that our
revenue will continue to depend on a limited number of major customers for the
foreseeable future. The companies considered to be our 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
produced that utilize our products.


None of our customers has a
written agreement with us that obligates it to license future generations of
products or new products from us, and we cannot be certain that any customer
will license intellectual property components from us in the future. In
addition, we cannot be certain that any of our customers will produce products
incorporating our technology or that, if such production occurs, they will
generate significant royalty revenue. If one or more of our major customers
stops licensing our products, reduces their orders, fails to pay license or
royalty fees due or does not produce products containing our intellectual
property components, then our operating results could be materially and
negatively affected.


We face numerous risks in
successfully obtaining orders from customers on terms consistent with our
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 our 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 ours, 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 we can license our technology in a manner
consistent with our business model and we cannot be certain that such
manufacturers will rely on merchant intellectual property components or adopt
our products.



29
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|If we lose any of our
key personnel or are unable to attract, train and retain qualified personnel,
our ability to manage our business and continue our growth would be negatively
impacted


Our success depends in
large part on the continued contributions of our key management, engineering,
sales and marketing personnel, many of whom are highly skilled and would be
difficult to replace. None of our senior management or key technical personnel
is bound by a written employment contract to remain with us for a specified
period. In addition, we do not currently maintain key man life insurance
covering our key personnel. Our success also depends on our ability to attract,
train and retain highly skilled managerial, engineering, sales, marketing and
finance personnel and on the abilities of new personnel to function effectively,
both individually and as a group. Our senior management team consisted of
persons as of 11 persons as of December 31, 2001, four of whom were hired after
September 30, 2000. Our sales and support staff consisted of 17 persons as of
December 31, 2001, eight of whom were hired after September 30, 2000. If we are
unable to effectively integrate and utilize newly hired management, sales or
engineering personnel, the execution of our business strategy may be impeded and
our business could suffer. Competition for personnel is intense, and we cannot
be certain that we will be successful in attracting and retaining effective
personnel. If we lose the services of any key personnel, are unable to attract
or retain qualified personnel in the future or experience delays in the
integration of new personnel, our business and operations will suffer.


Our historical growth
and recent acquisitions have placed 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 ability to license our
products and manage our business successfully in a rapidly evolving market
requires an effective planning and management process. Our historical growth and
our acquisition of certain assets and personnel from Synopsys in January 2001
have placed, and are expected to continue to place, a significant strain on our
managerial, operational and financial resources. As of December 31, 2001, we had
145 employees or full-time equivalents. Our customers rely heavily on our
technological expertise in designing, testing and manufacturing products
incorporating our intellectual property components. Relationships with new
customers generally require significant engineering support. As a result, any
increase in the demand for our products will increase the strain on our
personnel, particularly our engineers. Our financial and management controls,
reporting systems and procedures are also limited. We have recently implemented
some new controls, systems and procedures. However, our future growth, if any,
will depend on our ability to continue to implement and improve operational,
financial and management information and control systems on a timely basis. If
we fail to do so, our business could be harmed. We cannot be certain that our
systems, procedures and controls will be adequate to support our operations or
that our management will be able to achieve the rapid execution necessary to
implement our business plan. We also cannot be sure that our revenue will
continue to grow at a sufficient rate to absorb the costs associated with our
increased personnel.

30
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|If we are not able to
effectively integrate and develop operations relating to our acquisition of
certain assets of Synopsys physical library business, our business will
suffer


We continue to integrate
the workforce and operations relating to the acquired assets of the physical
library business of Synopsys into our organizational structure and work towards
the effective utilization of the additional workforce. We face various risks as
a result of this acquisition including, but not limited to, difficulty in
combining the technology, operations or work force of the physical library
business; difficulty in realizing the potential financial or strategic benefits
of the acquisition; substantial unanticipated integration costs; and disruption
of our ongoing business. If we are not able to successfully develop and
commercially exploit the assets acquired, our business will be negatively
affected in future periods, which may cause our stock price to decline. In
addition, if the value of other intangible assets acquired becomes impaired, we
may be required to write down the value of such assets, which would negatively
affect our financial results. If our efforts to refocus the physical library
business and integrate it with our existing business are not successful, our
future revenues and operating results could be negatively affected, which could
cause our stock price to decline.


Our acquisition of
certain assets of Synopsys physical library business will make planning
and predicting our future growth rates and operating results more difficult


Our acquisition of certain
assets of Synopsys physical library business may reduce our revenue growth
rate and make prediction of our future revenues, costs and expenses and
operating results more difficult. In fiscal 2001, the acquisition has resulted
in a significant increase in our costs and expenses relating primarily to the
increased headcount and amortization of goodwill and other intangibles
associated with the acquisition. We expect the strategic and operational
integration of Synopsys physical library business to make prediction of
our future revenues, costs and expenses and operating results more difficult
because our results of operations in future periods will reflect an expanded
workforce and research and development effort. Due to the acquisition, we may
not be able to accurately predict:
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | how
the combined business will evolve;
| | - |  | --------------------------------------

| |  |  | the
possible impairment of relationships with employees and customers as a result of the
integration of the combined businesses;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------

| |  |  | the
impairment of goodwill resulting from the acquisition; and
| | - |  | --------------------------------------------------------------

| |  |  | the
effect of new accounting standards or policy changes directed by the Financial Accounting
Standard Board or other regulatory body on future operating results.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

|If
we are not able to preserve the value of the intellectual property included in our
products, our business will suffer


We rely primarily on a
combination of nondisclosure agreements and other contractual provisions and
patent, trademark, trade secret and copyright law to protect our proprietary
rights. If we fail to enforce our patents, trademarks or copyrights or to
protect our trade secrets, our business could suffer, which could cause our
stock price to decline. We cannot be certain that our intellectual property
rights can be successfully asserted in the future or will not be invalidated,
circumvented or challenged.



31
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|In certain instances, we
have elected to rely on trade secret law rather than patent law to protect our
proprietary technology. However, trade secrets are difficult to protect. We
protect our proprietary technology and processes, in part, through
confidentiality agreements with our employees and customers. We cannot be
certain that these contracts have not and will not be breached, that we will
have adequate remedies for any breach, or that our 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.


An
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 third party intellectual property components 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 products infringe. From time to time, third
parties, including our competitors, may assert patent, copyright and other
intellectual property rights to technologies that are important to our business.
We cannot be certain that we would ultimately prevail in any such dispute or be
able to license any valid and infringed patents from third parties on
commercially reasonable terms. Infringement claims, regardless of the outcome,
could:
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | result
in substantial cost to us;
| | - |  | ---------------------------------

| |  |  | divert
our managements attention and resources;
| | - |  | ------------------------------------------------

| |  |  | be
time consuming to defend;
| | - |  | ----------------------------

| |  |  | result
in substantial damage awards;
| | - |  | ------------------------------------

| |  |  | cause
product shipment delays; or
| | - |  | ---------------------------------

| |  |  | require
us to seek to enter into royalty or other licensing agreements.
| | - |  | -----------------------------------------------------------------------

|Any infringement claim or
other litigation against or by us could have a material negative affect on our
business, which could cause our stock price to decline.


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 products to
decrease.

32
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Defects in our
proprietary technologies and intellectual property components could decrease our
revenue and our competitive market share


If the intellectual
property components we provide to a customer contain defects that increase our
customers cost of goods sold and time to market, these defects could
significantly decrease the market acceptance of our intellectual property
components. Any actual or perceived defects with our products may also hinder
our ability to attract or retain industry partners or customers, leading to a
decrease in our revenue. These defects are frequently found during the period
following introduction of new proprietary technologies or enhancements to
existing proprietary technologies. Our intellectual property components may
contain errors not discovered until after customer utilization of the
intellectual property components provided by us. If our products contain errors
or defects, it could require us to expend significant resources to alleviate
these problems, which could result in the diversion of technical and other
resources from our other development efforts.


Our future capital needs
may require that we seek additional debt or equity funding which, if not
available, could cause our business to suffer


We intend to continue to
invest heavily in the development of new products and enhancements to our
existing products. Our 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 our 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 and royalty revenue; and
| | - |  | --------------------------------------------------------

| |  |  | available
borrowings under line of credit arrangements and other factors.
| | - |  | -------------------------------------------------------------------------

|We believe that our current
cash and investment balances and any cash generated from operations and from
available or future debt financing will be sufficient to meet our operating and
capital requirements for at least the next 12 months. However, from time to
time, we may be required to raise additional funds through public or private
financing, strategic relationships or other arrangements. We cannot be certain
that such funding, if needed, will be available on attractive terms, 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 us to
relinquish our rights to certain of our technologies or products. If we fail to
raise capital when needed, our business will be negatively affected, which could
cause our stock price to decline.



33
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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


The trading price of our
common stock has in the past been and could in the future be subject to
significant fluctuations in response to:
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | quarterly
variations in our results of operations;
| | - |  | --------------------------------------------------

| |  |  | announcements
regarding our product developments;
| | - |  | -------------------------------------------------

| |  |  | announcements
of technological innovations or new products by us, our customers or competitors;
| | - |  | -----------------------------------------------------------------------------------------------

| |  |  | release
of reports by securities analysts;
| | - |  | ------------------------------------------

| |  |  | sales
or the perception in the market of possible sales of a large number of shares of our
common stock by our directors, officers, employees or principal stockholders;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | changes
in security analysts recommendations; and
| | - |  | --------------------------------------------------

| |  |  | developments
or disputes concerning patents or proprietary rights or other events.
| | - |  | ----------------------------------------------------------------------------------

|If our revenues and results
of operations are below the expectations of public market securities analysts or
investors, then significant fluctuations in the market price of our common stock
could occur. 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 negatively affect the market price of our
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 negative effect on our business, which could further reduce our
stock price. Any adverse decision in such litigation could also subject us to
significant liabilities.


Our charter documents,
Delaware law and our recently adopted stockholder rights plan contain provisions
that may inhibit potential acquisition bids, which may adversely affect the
market price of our common stock, discourage merger offers or prevent changes in
our management


Our board of directors 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 our stockholders.
If we issue any of these shares of preferred stock in the future, the rights of
holders of our common stock may be negatively affected. If we issue preferred
stock, a change of control of our company could be delayed, deferred or
prevented. We have no current plans to issue shares of preferred stock.

34
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Section 203 of the
Delaware General Corporation Law restricts certain business combinations with
any interested stockholder as defined by that statute. In addition,
our certificate of incorporation and bylaws contain certain other provisions
that may have the effect of delaying, deferring or preventing a change of
control. These provisions include:
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | 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.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------

|On December 12, 2001, our
board of directors adopted a stockholder rights plan. Under this plan, we issued
a dividend of one right for each share of our common stock held by stockholders
of record as of the close of business on January 8, 2002. Each right will
initially entitle stockholders to purchase a fractional share of our preferred
stock for $115. However, the rights are not immediately exercisable. If a person
or group acquires, or announces a tender or exchange offer that would result in
the acquisition of a certain percentage of our common stock, then, unless the
rights are redeemed by us for $0.001 per right, the rights will become
exercisable by all rights holders, except the acquiring person or group, for
shares of our preferred stock or of the third party acquirer having a value of
twice the rights then-current exercise price.


These provisions are
designed to encourage potential acquirors to negotiate with our board of
directors and give our board of directors an opportunity to consider various
alternatives to increase stockholder value. These provisions are also intended
to discourage certain tactics that may be used in proxy contests. However, the
issuance of preferred stock, our charter and bylaw provisions, the restrictions
in Section 203 of the Delaware General Corporation Law or our stockholder rights
plan could discourage potential acquisition proposals and could delay or prevent
a change in control, which may adversely affect the market price of our stock.
Such provisions and plans may also have the effect of preventing changes in our
management.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|PART II. |  | OTHER INFORMATION
|-------- |  | -----------------

|ITEM 6. |  | EXHIBITS AND REPORTS ON FORM 8-K.
|------- |  | ---------------------------------

|(a) |  | Exhibits
|--- |  | --------

| | None.
| | -----

|(b) |  | Reports
on Form 8-K.
|--- |  | --------------------

| | We filed our report on Form 8-K regarding the adoption of a Stockholder Rights Plan on
December 14, 2001.
| | ---------------------------------------------------------------------------------------------------------

|35
|--

|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: February 14, 2002
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | ARTISAN COMPONENTS, INC.   (Registrant)By: /s/ Mark R. Templeton
Mark R. Templeton President, Chief Executive Officer and Director(Principal Executive Officer)
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | By: /s/ Joy E. Leo
Joy E. LeoVice President, Finance and Administration, Chief 
Financial Officer and Secretary
(Principal Financial and Accounting Officer)
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|36
|--