UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One) ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 2004 or o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

ý		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the quarterly period ended March 31, 2004
or
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the transition period from to

For the transition period from to

Commission file number: 000-33291

NASSDA CORPORATION

(Exact name of registrant as specified in its charter)

Delaware		77-0494462
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)
2650 San Tomas Expressway, Santa Clara, CA 95051-0953
(Address of principal executive offices) (Zip Code)

~~2650~~Registrant’s ~~San~~telephone ~~Tomas Expressway~~number, including ~~Santa~~area ~~Clara,~~code: ~~CA 95051~~(408) 988-9988

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (408) 562-9168

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 ý No o

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

Yes ý No o

At ~~April~~January 2831, ~~2004~~2005, 26 27,~~499~~650,~~821~~251 shares of common stock of the registrant were outstanding.

NASSDA CORPORATION

INDEX

PART I.	FINANCIAL INFORMATION	PAGE NO.
Item 1.	Financial Statements	3
	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Income Statements
	Condensed Consolidated Statements of Operations	4
	Condensed Consolidated Statements of Cash Flows	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	51
Item 4.	Controls and Procedures	52
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	53
Item 4	Submission of Matters to a Vote of Security Holders
Item 6.	Exhibits	57
Item 6.	Exhibits and Reports on Form 8-K
SIGNATURES		58
SIGNATURES

PART I -– FINANCIAL INFORMATION

ITEM 1:. FINANCIAL STATEMENTS

NASSDA CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

	March 31, 2004			September 30, 2003 (1)
	(unaudited)
Assets:
Current assets:
Cash and cash equivalents	$	58,845		$	53,145
Short-term investments	37,310			39,020
Accounts receivable, net of allowances of $82 and $92 at March 31, 2004 and September 30, 2003, respectively	2,079			1,874
Prepaid expenses and other current assets	1,206			996
Deferred income taxes	2,595			2,568
Total current assets	102,035			97,603
Property and equipment, net	543			704
Other assets	1,133			1,165
Total assets	$	103,711		$	99,472
Liabilities and Stockholders’ Equity:
Current liabilities:
Accounts payable	$	2,574		$	230
Accrued liabilities	5,698			7,682
Deferred revenue	8,899			8,982
Total current liabilities	17,171			16,894
Deferred revenue	1,008			849
Other long-term liabilities	64			64
Total liabilities	18,243			17,807
Stockholders’ equity:
Common stock, par value $0.001: 110,000,000 shares authorized; 26,486,643 and 25,999,439 shares outstanding at March 31, 2004 and September 30, 2003, respectively	26			26
Additional paid-in capital	72,290			70,343
Deferred stock-based compensation	(589		)	(1,117		)
Accumulated other comprehensive loss	—			(4		)
Retained earnings	13,741			12,417
Total stockholders’ equity	85,468			81,665
Total liabilities and stockholders’ equity	$	103,711		$	99,472

(unaudited)

(1) Derived from the audited consolidated balance sheet of Nassda Corporation as of September 30, 2003.

	December 31, 2004				September 30, 2004
Assets:
Current assets:
Cash and cash equivalents	$		57,013		$		59,298
Short-term investments	44,007				42,142
Accounts receivable, net of allowances of $82 at December 31, 2004 and September 30, 2004	1,689				1,302
Prepaid expenses and other current assets	1,006				1,093
Deferred income taxes	6,780				3,768
Total current assets	110,495				107,603
Property and equipment, net	444				483
Other assets	921				921
Total assets	$		111,860		$		109,007

Liabilities and Stockholders’ Equity:
Current liabilities:
Accounts payable	$	1,993			$		2,168
Accrued litigation settlements (Notes 7 and 9)	76,463				67,463
Other accrued liabilities	8,133				8,342
Deferred revenue	10,243				10,143
Total current liabilities	96,832				88,116
Deferred revenue	453				482
Other long-term liabilities	53				57
Total liabilities	97,338				88,655
Stockholders’ equity:
Common stock, par value $0.001: 110,000,000 shares authorized; 27,462,262 and 27,025,604 shares outstanding at December 31, 2004 and September 30, 2004, respectively	27				27
Additional paid-in capital	74,140				73,117
Deferred stock-based compensation	(110			)	(235			)
Accumulated other comprehensive loss	(88			)	(76			)
Accumulated deficit	(59,447			)	(52,481			)
Total stockholders’ equity	14,522				20,352
Total liabilities and stockholders’ equity	$	111,860			$	109,007

See accompanying notes to the condensed consolidated financial statements.

NASSDA CORPORATION

CONDENSED CONSOLIDATED ~~INCOME~~ STATEMENTS OF OPERATIONS

(in thousands, except per share data)

	Three Months Ended March 31,						Six Months Ended March 31,
	2004			2003			2004			2003
	(unaudited)
Revenue:
Product	$	1,571		$	3,211		$	4,574		$	7,843
Subscription	5,755			3,443			9,997			7,191
Maintenance	2,461			2,145			4,943			4,100
Total revenue	9,787			8,799			19,514			19,134
Cost of revenue:
Product	74			63			165			129
Subscription	104			84			209			170
Maintenance	259			197			485			398
Total cost of revenue	437			344			859			697
Gross profit	9,350			8,455			18,655			18,437
Operating expenses:
Research and development	2,010			1,706			4,042			3,235
Sales and marketing	2,662			2,873			5,340			5,749
General and administrative	3,623			2,414			7,397			4,878
Stock-based compensation*	218			248			442			496
Total operating expenses	8,513			7,241			17,221			14,358
Income from operations	837			1,214			1,434			4,079
Interest income	242			256			478			524
Other expense, net	(4		)	(10		)	(20		)	(30		)
Income before taxes	1,075			1,460			1,892			4,573
Provision for taxes	(323		)	(438		)	(568		)	(1,528		)
Net income	$	752		$	1,022		$	1,324		$	3,045
Earnings per share:
Basic	$	0.03		$	0.04		$	0.05		$	0.12
Diluted	$	0.03		$	0.04		$	0.05		$	0.11
Shares used in computing earnings per share:
Basic	26,251			24,889			26,104			24,626
Diluted	29,213			28,487			29,181			28,705

(unaudited)

*Stock-based compensation includes:
	Three Months Ended December 31,
Research and development	$	95		$	107		$	194	$	214
	2004			2003
Sales and marketing	65			83			132		166
Revenue:
General and administrative	58			58			116		116
Product	$	2,207		$	3,003
Total	$	218		$	248		$	442	$	496
Subscription	6,414			4,242
Maintenance	2,642			2,482
Total revenue	11,263			9,727
Cost of revenue:
Product	33			91
Subscription	168			105
Maintenance	377			226
Total cost of revenue	578			422
Gross profit	10,685			9,305
Operating expenses:
Research and development	2,151			2,032
Sales and marketing	2,814			2,678
General and administrative	4,059			3,774
Litigation settlement (Note 7)	9,000			—
Stock-based compensation*	99			224
Total operating expenses	18,123			8,708
Income (loss) from operations	(7,438		)	597
Interest income	395			236
Other expense, net	(18		)	(16		)
Income (loss) before taxes	(7,061		)	817
Benefit (provision) for taxes	95			(245		)
Net income (loss)	$	(6,966	)	$	572
Earnings (loss) per share:
Basic	$	(0.25	)	$	0.02
Diluted	$	(0.25	)	$	0.02
Shares used in computing earnings (loss) per share:
Basic	27,319			25,957
Diluted	27,319			29,149
*Stock-based compensation includes:
Research and development	$	50		$	99
Sales and marketing	33			67
General and administrative	16			58
Total	$	99		$	224

See accompanying notes to condensed consolidated financial statements.

NASSDA CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

	Six Months Ended March 31,
	2004			2003
	(unaudited)
Operating activities
Net income	$	1,324		$	3,045
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	241			245
Stock-based compensation	442			496
Deferred income taxes	5			(273		)
Provision for bad debt	(10		)	—
Changes in operating assets and liabilities:
Accounts receivable	(195		)	1,229
Prepaid expenses and other current assets	(210		)	(885		)
Accounts payable	2,344			(504		)
Accrued liabilities	(1,279		)	797
Deferred revenue	76			1,387
Long-term liabilities	—			65
Net cash provided by operating activities	2,738			5,602
Investing activities
Purchase of short-term investments	(25,445		)	(35,518		)
Proceeds from maturity of short-term investments	27,159			33,234
Purchases of property and equipment	(80		)	(382		)
Other assets	—			(1		)
Net cash provided by (used in) investing activities	1,634			(2,667		)
Financing activities
Proceeds from issuance of common stock	1,328			1,326
Net cash provided by financing activities	1,328			1,326
Increase in cash and cash equivalents	5,700			4,261
Cash and cash equivalents, beginning of period	53,145			43,157
Cash and cash equivalents, end of period	$	58,845		$	47,418
Supplemental disclosure of cash flow information
Cash paid for income taxes	$	479		$	—
Supplemental schedule of non-cash activities
Unrealized gain on short-term investments	$	4		$	4
Deferred stock-based compensation reversal	$	(86	)	$	—
Income tax benefit from employee stock transactions	$	705		$	1,385

(unaudited)

See accompanying notes to condensed consolidated financial statements.

	Three Months Ended December 31,
	2004			2003
Operating activities
Net income (loss)	$	(6,966	)	$	572
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation	83			138
Stock-based compensation	99			224
Deferred income taxes	(3,012		)	(444		)
Provision for bad debt	—			(10		)
Changes in operating assets and liabilities:
Accounts receivable	(387		)	(154		)
Prepaid expenses and other current assets	87			137
Accounts payable	(175		)	1,710
Other accrued liabilities	(80		)	(1,452		)
Accrued litigation settlement	9,000			—
Deferred revenue	71			1,429
Long-term liabilities	(4		)	—
Net cash provided by (used in) operating activities	(1,284		)	2,150

Investing activities
Purchase of short-term investments	(9,569		)	(11,935		)
Proceeds from maturity of short-term investments	7,691			12,122
Purchases of property and equipment	(44		)	(38		)
Net cash provided by (used in) investing activities	(1,922		)	149

Financing activities
Proceeds from issuance of common stock	921			759
Net cash provided by financing activities	921			759
Increase (decrease) in cash and cash equivalents	(2,285		)	3,058
Cash and cash equivalents, beginning of period	59,298			53,145
Cash and cash equivalents, end of period	$	57,013		$	56,203

Supplemental disclosure of cash flow information
Cash paid for income taxes	$	77		$	341

Supplemental schedule of non-cash activities
Unrealized loss on short-term investments	$	(12	)	$	(7	)
Reversal of deferred stock-based compensation	$	(26	)	$	(51	)
Income tax benefit from employee stock transactions	$	128		$	476

5See accompanying notes to condensed consolidated financial statements.

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~5

~~1. Basis~~NOTES TO ofCONDENSED ~~Presentation~~CONSOLIDATED FINANCIAL STATEMENTS

~~The~~1. Basis of ~~Company~~Presentation

~~Nassda~~The Corporation was incorporated in California in August 1998 to provide full-chip circuit simulation and analysis software for the design and verification of complex nanometer-scale semiconductors. We reincorporated in the State of Delaware in September 2001. Our fiscal year ends on September 30.Company

~~Condensed~~Nassda ~~Consolidated~~Corporation ~~Financial~~was incorporated ~~Statements~~in California in August 1998 to provide full-chip circuit simulation and analysis software for the design and verification of complex nanometer-scale semiconductors. We reincorporated in the State of Delaware in September 2001. Our fiscal year ends on September 30.

~~The~~On ~~interim~~November 30, ~~condensed~~2004, we ~~consolidated~~entered ~~financial~~into ~~statements~~an ~~included~~Agreement ~~herein have~~of ~~been~~Merger ~~prepared~~with bySynopsys, ~~Nassda Corporation~~Inc., ~~without~~a ~~audit pursuant to the rules~~Delaware ~~and~~corporation ~~regulations of the Securities and Exchange Commission~~ (“~~SEC~~Synopsys”)~~. Certain~~ ~~information~~ and ~~footnote~~North ~~disclosures normally~~Acquisition ~~included~~Sub, inInc., ~~annual~~a ~~financial statements prepared in accordance with~~Delaware ~~accounting~~corporation ~~principles~~and ~~generally~~wholly ~~accepted~~owned insubsidiary ~~the United States~~ of ~~America~~Synopsys ~~have been~~(“Merger ~~condensed~~Sub”), orpursuant ~~omitted. The interim~~to ~~consolidated financial statements reflect~~which, insubject ~~the opinion of management, all adjustments necessary (consisting only of normal recurring adjustments)~~ to ~~present~~ asatisfaction ~~fair~~or ~~statement~~waiver of ~~results for~~ the ~~interim~~conditions ~~periods presented. The operating results for any interim period are not necessarily indicative of the results that may be expected for the fiscal year ending September 30~~therein, ~~2004. The~~we ~~accompanying condensed consolidated financial statements should be~~will ~~read~~merge ~~in conjunction~~ with ~~the consolidated financial statements~~ and ~~notes included~~into ~~in our Annual Report on Form 10-K for~~ the ~~fiscal~~Merger ~~year ended September 30, 2003~~Sub.

~~Use~~Condensed ofConsolidated ~~Estimates~~Financial Statements

The ~~preparation~~interim condensed consolidated financial statements included herein have been prepared by Nassda Corporation, without audit pursuant to the rules and regulations of ~~consolidated~~the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America ~~requires~~ ~~our~~have ~~management~~been tocondensed ~~make~~or omitted. The ~~estimates~~interim ~~and~~consolidated financial ~~assumptions~~statements ~~that~~reflect, ~~affect~~in the opinion of management, all adjustments ~~reported~~necessary ~~amounts~~(consisting only of ~~assets~~normal ~~and~~recurring ~~liabilities~~adjustments) atto ~~the~~present ~~date~~a fair statement of results for the interim ~~condensed~~periods presented. The operating results for any interim period ~~consolidated~~are ~~financial~~not ~~statements~~necessarily ~~and~~indicative of the ~~reported~~results ~~amounts~~that ofmay ~~revenues~~be ~~and expenses~~expected ~~during~~for the fiscal ~~reporting~~year ~~period~~ending September 30, 2005. ~~Such~~The ~~estimates~~accompanying ~~include,~~condensed ~~but~~consolidated ~~are~~financial ~~not~~statements ~~limited~~should ~~to,~~be read ~~revenue~~in ~~recognition~~conjunction ~~and allowances,~~with ~~accrued~~the ~~liabilities,~~consolidated ~~deferred~~financial ~~revenue,~~statements ~~loss~~and ~~contingencies~~notes ~~and~~included ~~accounting~~in ~~for~~our ~~income~~Annual ~~taxes. Actual results~~Report ~~could~~on ~~differ~~Form 10-K ~~from~~for ~~these~~the ~~estimates~~fiscal year ended September 30, 2004.

~~Critical~~Use ~~Accounting~~of ~~Policies~~Estimates

~~Revenue~~The ~~Recognition~~preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States of America requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the interim condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Such estimates include, but are not limited to, revenue recognition and allowances, accrued liabilities, deferred revenue, loss contingencies and accounting for income taxes. Actual results could differ from these estimates.

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

WeRevenue recognize and report revenue in three separate categories: product revenue, subscription revenue and maintenance revenue. Product revenue is derived from perpetual license fees. Subscription revenue isRecognition

6We recognize revenue in accordance with the provisions of American Institute of Certified Public Accountants Statement of Position (“SOP”) 97-2, Software Revenue Recognition, as amended by SOP 98-4, Deferral of the Effective Date of Certain Provisions of SOP 97-2, and SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain Transactions. We recognize and report revenue in three separate categories: product revenue, subscription revenue and maintenance revenue. Product revenue

~~derived from time-based license fees, which include maintenance during the license period. We recognize product revenue and subscription revenue when all of the following conditions are met:~~6

~~• a~~is ~~written~~derived ~~purchase~~from perpetual ~~order,~~license fees. Subscription revenue is derived from time-based license ~~agreement~~fees orand ~~other~~includes ~~contract~~maintenance during ~~has~~the ~~been~~license period. We recognize ~~executed;~~product revenue and subscription revenue when all of the following conditions are met:

• ~~the~~a ~~product~~written ~~and~~purchase ~~the~~order ~~production~~and license ~~key~~agreement ~~have~~or other contract has been ~~delivered~~executed;

• ~~user~~the ~~acceptance~~product ~~periods,~~and ifthe ~~any,~~production license key have ~~expired~~been delivered;

• ~~the~~user ~~license~~acceptance ~~fee~~periods, isif ~~fixed~~any, orhave ~~determinable~~expired; ~~and~~

• ~~collection of~~ the license fee is ~~probable.~~fixed and determinable; and

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

~~For~~Vendor ~~sales~~specific ~~made~~objective evidence ~~through~~exists ~~our~~for ~~distributors,~~maintenance weon ~~recognize~~perpetual ~~revenue~~licenses ~~when~~based ~~the~~on renewal ~~software~~rates. Our ~~has~~customers ~~been~~generally ~~sold to~~ purchase the ~~end~~first ~~users~~year ~~and~~of ~~all~~maintenance ~~other~~when ~~revenue~~they ~~recognition criteria~~purchase ~~have~~a ~~been~~perpetual ~~met. When~~license, ~~the distributor~~so iswe use the ~~primary~~residual ~~obligor~~method into determine the ~~arrangement~~allocation ~~and~~of ~~has~~revenue ~~latitude~~to inthe ~~establishing~~license ~~prices~~portion ~~and~~of ~~credit~~multiple ~~risk,~~element arrangements involving perpetual licenses. Because we ~~record~~bundle ~~revenue~~both ~~based~~the onlicense ~~amounts~~and maintenance ~~invoiced~~into toour agreements for time-based licenses for the entire ~~distributor~~term, ~~(rather~~vendor ~~than~~specific ~~the~~objective ~~amount~~evidence ~~invoiced~~does bynot ~~the~~exist ~~distributor~~for toeach ~~the~~element ~~end~~of the ~~users)~~arrangement. ~~When~~Therefore, we ~~are the primary obligor~~recognize insubscription ~~the~~revenue ~~arrangement~~from ~~and~~time-based ~~have~~licenses ~~latitude~~ratably inover ~~establishing~~the ~~price~~period ~~and~~of the ~~credit~~license. Maintenance ~~risk,~~revenue weis ~~record~~derived ~~revenue~~from ~~based~~the onannual ~~amounts~~maintenance ~~invoiced~~contracts tothat ~~the~~are ~~end~~purchased ~~customer~~by ~~(with~~perpetual licensees. We ~~the~~generally ~~related~~recognize ~~commissions~~revenue ~~paid~~from tomaintenance ~~the~~ratably ~~distributors~~over ~~reported~~the asmaintenance ~~sales~~period, ~~and~~which ~~marketing~~is typically ~~expense)~~one year.

~~Future~~For ~~changes~~sales inmade ~~accounting~~through ~~pronouncements~~all distributors, ~~including~~we ~~those~~recognize ~~affecting~~ revenue ~~recognition,~~when ~~could~~the ~~require~~software ushas been sold to ~~change~~the ~~our~~end users ~~methods~~and ofall other revenue recognition criteria have been met. ~~These~~When ~~changes~~the ~~could~~distributor ~~cause~~is the primary obligor usin tothe ~~defer~~arrangement, has latitude in establishing prices and has credit risk, we record revenue ~~from~~based ~~current~~on ~~periods~~amounts invoiced to ~~subsequent~~the ~~periods~~distributor or(rather ~~accelerate~~than the ~~recognition~~amount ofinvoiced ~~deferred~~by the distributor to the end users). When we are the primary obligor in the arrangement, have latitude in establishing price and have credit risk, we record revenue based on amounts invoiced to ~~current~~the ~~periods~~end user customer (with the related commissions paid to the distributors reported as sales and marketing expense).

Allowance for Doubtful Accounts

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

Sales Commission Accrual and Expenses

Sales commissions are earned and bypaid to our sales force for each order received, shipped and collected. Based on our policies, sales commissions are paid upon booking and collection. Commission rates increase as the sales person achieves a certain percentage of his or her annual quota. We determine an estimated average annual commission rate during the first three fiscal quarters for purposes of accruing commissions. We adjust the balance of the commission accrual and the actual commission expense at the end of each fiscal year based on each sales person’s actual commission rates.

~~We adjust the~~Contingent ~~balance of the commission accrual and the actual commission expense at the end of each fiscal year based on each sales person’s actual commission rates.~~Liabilities

~~Contingent~~We are subject to several ~~Liabilities~~legal proceedings and claims, the outcomes of which are subject to significant uncertainty. Statement of Financial Accounting Standards (SFAS) No. 5, Accounting for Contingencies, requires that an estimated loss from a loss contingency should be accrued by a charge to income if it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably evaluated, taking into account the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss, among other factors. Changes in these factors could materially impact our financial position or our results of operations. We regularly evaluate current information available to us to determine whether such accruals should be recorded.

WeUpon ~~are subject to several legal proceedings and claims,~~ the ~~outcomes~~closing of ~~which~~ ~~are subject to uncertainty (see Note 7).~~ the ~~Standard~~merger ~~Financial~~with ~~Accounting~~Merger ~~Standards (SFAS) No. 5~~Sub, ~~Accounting for~~our ~~Contingencies~~officers, ~~requires~~directors ~~that~~and anemployees ~~estimated~~who ~~loss from a loss~~are ~~contingency~~defendants ~~should~~in bethe ~~accrued~~litigation bybetween aSynopsys ~~charge~~and tous ~~income~~(see ifNotes it7 isand ~~probable~~9) ~~that an~~will ~~asset~~make ~~has~~settlement ~~been~~payments ~~impaired~~to orSynopsys ain ~~liability has been incurred and~~ the aggregate amount of ~~the~~$61.6 million ~~loss~~and ~~can~~will benot ~~reasonably~~exercise ~~evaluated,~~options ~~taking~~to ~~into~~purchase ~~account~~our ~~the~~common ~~degree~~stock ofvalued ~~probability~~at ofapproximately an$5.9 ~~unfavorable~~million. As ~~outcome and the ability to make~~ a ~~reasonable estimate~~ result of the ~~amount~~ ofproposed ~~loss~~litigation settlement, ~~among~~we ~~other~~recorded ~~factors. Changes~~a inlitigation ~~these factors could materially impact our financial position~~settlement orcharge ~~our results~~ of ~~operations~~approximately $67. ~~We regularly~~5 ~~evaluate~~million ~~current~~in ~~information~~the ~~available~~quarter toand usfiscal toyear ~~determine whether~~ended ~~such~~September ~~accruals should be recorded. To date~~30, ~~we have not accrued any loss contingencies~~2004.

2In July 2004, we and certain of our officers and directors were named in a securities class action lawsuit filed in the United States District Court for the Northern District of California. ~~Earnings~~ The ~~Per~~complaint ~~Share~~asserts claims against our company, Sang S. Wang, An-Chang Deng, Tammy Shu-Hua Liu and Yen-Son Huang on behalf of a putative class of persons who purchased our stock between December 13, 2001 and June 11, 2004. A second class action was filed on September 9, 2004 in the United States District Court for the Northern District of California. On September 27, 2004, one plaintiff moved for lead plaintiff status in the first filed class action. These two cases were consolidated on October 7, 2004. On November 4, 2004, the judge granted the motion of NECA-IBEW Pension Fund for appointment as lead plaintiff. In late January 2005, the parties reached an agreement in principle to resolve this matter for a payment to the class of $9.0 million. The settlement is subject to preliminary and final approval of the Court. As a result of the proposed settlement, we recorded a litigation settlement charge of $9.0 million in the three months ended December 31, 2004.

~~Basic earnings per share~~ 2. Earnings (~~“EPS”~~Loss) isPer computed by dividing net income by the weighted average common shares outstanding of the period. Diluted EPS reflects the potential dilution that would occur if securities or other contracts to issue common stock were exercised or converted into common stock.Share

~~During~~Basic earnings ~~the~~(loss) ~~three~~per ~~and~~share ~~six~~(“EPS”) ~~months~~is ~~ended~~computed ~~March 31,~~by ~~2004~~dividing ~~and 2003, we~~net ~~had~~income ~~securities~~(loss) ~~outstanding~~by ~~that~~the ~~could~~weighted ~~potentially~~average ~~dilute~~common ~~basic~~shares ~~earnings~~outstanding ~~per share~~of in the period. Diluted ~~future,~~EPS ~~but~~reflects ~~these securities were excluded in~~ the ~~computation of~~ ~~diluted~~potential ~~earnings~~dilution ~~per~~that ~~share~~would inoccur ~~such~~if ~~periods~~securities asor ~~their~~other ~~effect~~contracts ~~would~~to ~~have been~~issue ~~antidilutive. At~~common ~~March 31,~~stock ~~2004 and~~were ~~2003,~~exercised ~~weighted~~or ~~average~~converted ~~options~~into tocommon ~~purchase 2~~stock.1 The ~~million~~effects ~~and 2.2 million shares~~ of ~~common~~any ~~stock~~potential ~~with~~dilutive securities awere ~~weighted~~excluded ~~average~~from ~~exercise~~the ~~price~~calculation of ~~$9.93~~EPS ~~and $9.95,~~during ~~respectively,~~periods ~~were~~with ~~excluded~~a ~~from~~net loss as the ~~diluted~~effect ~~net~~would ~~income~~be ~~per share computation~~anti-dilutive.

~~The~~During ~~following~~the ~~table~~three ismonths ended aDecember 31, ~~reconciliation~~2004 ofand 2003, we had securities outstanding that could potentially dilute basic earnings (loss) per share in the ~~numerators~~future, ~~and~~but these ~~denominators~~securities ~~used~~were excluded in ~~computing~~the ~~basic~~computation ~~and~~of diluted earnings ~~per~~(loss) per share (in such periods as their effect would have been antidilutive. At December 31, 2004 and 2003, weighted ~~thousands~~average options to purchase 7,019,461 ~~except~~and 1,846,448 shares of common stock with a weighted average exercise price of $4.51 and $10.18, respectively, were excluded from the diluted net income (loss) per share ~~data):~~computation.

	Three Months Ended March 31,						Six Months Ended March 31,
	2004			2003			2004			2003
Net income (numerator):	$	752		$	1,022		$	1,324		$	3,045
Shares (denominator):
Weighted average common shares outstanding	26,385			25,473			26,276			25,327
Weighted average common shares subject to repurchase	(134		)	(584		)	(172		)	(701		)
Shares used in basic computation	26,251			24,889			26,104			24,626
Weighted average common shares subject to repurchase	134			584			172			701
Common shares issuable upon exercise of stock options (treasury stock method)	2,828			3,014			2,905			3,378
Shares used in diluted computation	29,213			28,487			29,181			28,705
Basic earnings per share	$	0.03		$	0.04		$	0.05		$	0.12
Diluted earnings per share	$	0.03		$	0.04		$	0.05		$	0.11

The following table is a reconciliation of the numerators and denominators used in computing basic and diluted earnings (loss) per share (in thousands, except per share data):

3. Comprehensive Income

	Three Months Ended December 31,
	2004			2003
Net income (loss) (numerator):	$	(6,966	)	$	572
Shares (denominator):
Weighted average common shares outstanding	27,319			26,166
Weighted average common shares subject to repurchase	—			(209		)
Shares used in basic computation	27,319			25,957
Weighted average common shares subject to repurchase	—			209
Common shares issuable upon exercise of stock options (treasury stock method)	—			2,983
Shares used in diluted computation	27,319			29,149
Basic earnings (loss) per share	$	(0.25	)	$	0.02
Diluted earnings (loss) per share	$	(0.25	)	$	0.02

~~The~~3. Comprehensive Income ~~components of comprehensive income, net of tax, were as follows~~ (~~in thousands~~Loss):

	Three Months Ended March 31,					Six Months Ended March 31,
	2004		2003			2004		2003
Net income	$	752	$	1,022		$	1,324	$	3,045
Unrealized gain (loss) on investments	7		(6		)	4		4
Comprehensive Income	$	759	$	1,016		$	1,328	$	3,049

The components of comprehensive income (loss), net of tax, were as follows (in thousands):

4. Bonuses and Management Compensation

	Three Months Ended December 31,
	2004			2003
Net income (loss)	$	(6,966	)	$	572
Unrealized loss on investments	(12		)	(3		)
Comprehensive Income (loss)	$	(6,978	)	$	569

~~During fiscal 2001, we accrued bonuses of $3~~4.~~7 million earned by our~~ Bonuses employees for their services in fiscal 2001. We paid approximately $2.0 million of these bonuses during fiscal 2002, with the majority of the amount paid in the first quarter of fiscal 2002. In the first quarter of fiscal 2003, we paid $1.2 million of these bonuses with the remainder paid ratably over the balance of fiscal 2003. These bonuses had been fully paid as of September 30, 2003. In addition, our executive officers orally agreed that they would not receive their base salaries in fiscal 2002 and ~~fiscal~~Management ~~2003.~~Compensation

During fiscal ~~2002~~2001, we accrued bonuses of $~~760,000~~3.7 million earned by our employees for their services in fiscal 2001. We paid approximately $2.0 million of these bonuses during fiscal 2002, with the majority of the amount paid in the first quarter of fiscal 2002. In the first ~~fiscal~~ quarter of fiscal 2003, we paid $~~252,000~~1.2 million of these bonuses, with the remainder paid ratably ~~through~~over the ~~first~~balance ~~quarter~~ of fiscal ~~2004~~ 2003. These bonuses had been fully paid as of ~~October~~ September 3130, 2003.

InDuring fiscal ~~2003~~2002, we accrued bonuses of $~~900~~760,000 earned by our employees for their services in fiscal ~~2003. These bonuses were paid in~~ ~~December 2003~~2002. ~~We also accrued bonuses of $175,000 earned by our employees for their services for the six months ended March 31, 2004.~~ In ~~October 2003,~~ the ~~compensation committee~~first offiscal ~~our~~quarter ~~board~~ of ~~directors reinstated the salaries of our executive~~ ~~officers~~fiscal ~~and~~2003, we ~~expect~~paid ~~to pay base salaries totaling approximately~~ $~~743~~252,000 ~~to these officers in fiscal 2004. As a result~~ of ~~our~~these ~~significant~~bonuses, ~~bonus~~with ~~accruals~~the inremainder ~~fiscal~~paid ~~2001~~ratably through ~~and fiscal 2002 and~~ the ~~foregone~~ ~~salaries~~first inquarter ~~fiscal~~of ~~2002 and~~ fiscal ~~2003, our compensation expense in~~2004. ~~fiscal~~These ~~2004~~bonuses ~~may~~had ~~not~~been befully ~~consistent~~paid ~~with~~as ~~compensation~~of ~~expense~~October 31, ~~in prior years~~2003.

5In fiscal 2003, we accrued bonuses of $900,000 earned by our employees for their services in fiscal 2003. ~~Lease~~ These ~~Commitments~~bonuses were paid in December 2003. We also accrued bonuses of $175,000 earned by our employees for their services for the three months ended December 31, 2003. In addition, our executive officers orally agreed that they would not receive their base salaries in fiscal 2002 and fiscal 2003. In October 2003, the compensation committee of our board of directors reinstated the salaries of our executive officers and we paid base salaries totaling approximately $756,000 to these officers in fiscal 2004.

WeIn ~~lease~~fiscal ~~our~~2004, ~~facilities~~we ~~under various noncancelable operating~~accrued ~~leases. In~~bonuses ~~December 2002,~~of ~~we entered~~an ~~into~~aggregate aof ~~three-year~~approximately ~~operating~~$1.5 ~~lease~~million ~~for~~earned by our ~~current~~employees ~~headquarters located~~for their services in ~~Santa~~fiscal ~~Clara~~2004, ~~California,~~all of which ~~began~~were inpaid ~~February~~by December ~~2003~~2004. There ~~and~~was ~~will~~no ~~expire~~such inaccrual ~~March 2006. These~~for ~~noncancelable operating~~the ~~leases~~three ~~began~~months ~~expiring~~ended inDecember ~~October 2003~~31, 2004. ~~Rent~~As ~~expense~~a ~~was~~result ~~$600,000~~of inour ~~fiscal~~significant ~~2002~~bonus accruals and ~~$784,000~~the foregone salaries in fiscal ~~2003. As~~ of2002 ~~September 30,~~and fiscal 2003, our compensation ~~the~~expense ~~aggregate~~in ~~future~~fiscal ~~noncancelable~~2004 ~~minimum~~was ~~rentals~~not orconsistent ~~operating~~with ~~leases~~compensation ~~are~~expense asin fiscal ~~follows~~2002 ~~(in~~and ~~thousands):~~fiscal 2003 and may not be indicative of future periods.

Year Ending September 30,
2004	$	585
2005	529
2006	252
	$	1,366

95. Lease Commitments

6We lease our facilities under various noncancelable operating leases. ~~Stock~~ In December 2002, we entered into a three-~~based~~year ~~Awards~~operating lease for our current headquarters located in Santa Clara, California, which began in February 2003 and will expire in March 2006. These noncancelable operating leases began expiring in October 2003. Rent expense was $784,000 in fiscal 2003 and $742,000 in fiscal 2004. As of September 30, 2004 the aggregate future noncancelable minimum rentals or operating leases are as follows (in thousands):

We account for our stock-based awards to employees using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and all of its related interpretations. Accordingly, compensation expense has been recognized in the consolidated financial statements for employee stock arrangements to the extent the fair value of the underlying common stock exceeds the exercise price of the stock options at the date of grant. Deferred stock-based compensation of $2.5 million and $1.8 million was recorded during fiscal 2001 and fiscal 2000, respectively, for the excess of the fair value of the common stock underlying the options at the grant date over the exercise price of the options. These amounts are being amortized on a straight-line basis over the vesting period, generally four years. Amortization of deferred stock-based compensation related to employee grants was $442,000 and $496,000 for the six months ended March 31, 2004 and 2003, respectively.

Year Ending September 30,
2005	$	603
2006	252
	$	855

~~We account for stock-based awards to non-employees in accordance with the provisions of SFAS No~~6. ~~123, “Accounting for~~ Stock-~~Based Compensation.” Accordingly, we recognize the fair value for non-employee awards as stock compensation expense over the vesting terms of the awards. There were no stock-~~based ~~awards to~~ ~~non-employees or amortization of stock compensation expenses recognized previously for non-employees during the six months ended March 31, 2004 and 2003.~~Awards

~~SFAS~~We currently ~~No.~~account ~~148~~for ~~amends~~our ~~the~~stock-based ~~disclosure~~awards ~~requirements~~to ~~of SFAS~~employees ~~No.~~using ~~123~~the tointrinsic value ~~require~~method ~~prominent disclosures~~ in ~~both~~accordance ~~annual~~with ~~and~~Accounting ~~interim~~Principles Board ~~financial~~Opinion ~~statements~~No. ~~about~~25, ~~the~~“Accounting ~~method~~for ofStock ~~accounting~~Issued to ~~for~~Employees,” ~~stock-based~~(“Opinion ~~employee compensation~~25”) and ~~the~~all ~~effect~~ of ~~the~~its ~~method~~related interpretations. Accordingly, compensation ~~used~~expense onhas ~~reported~~been ~~results. With~~recognized in the ~~adoption~~financial ofstatements ~~SFAS~~for employee ~~No.~~stock ~~148,~~arrangements weto ~~are required~~the toextent ~~disclose~~the ~~pro~~fair ~~forma~~value ~~information~~of ~~regarding~~the ~~option~~underlying common ~~grants~~stock ~~made~~exceeds tothe ~~our employees~~exercise ~~based~~price onof ~~specified~~the ~~valuation~~stock ~~techniques~~options ~~that~~at ~~produce~~the ~~estimated compensation~~date ~~charges~~of grant. ~~Our~~Deferred ~~calculations~~stock-based compensation ~~are~~of ~~based~~$2.5 onmillion aand ~~single~~$1.8 ~~option~~million ~~valuation~~was ~~approach~~recorded ~~and~~during ~~forfeitures~~fiscal ~~are~~2001 ~~recognized~~and fiscal as2000, ~~they~~respectively, ~~occur. The~~for the excess of the fair value of the common stock underlying the options at the grant date ofover ~~grant~~the ~~was~~exercise ~~estimated~~price ~~using~~of the ~~minimal~~options. These ~~value~~amounts ~~method~~are being amortized on a ~~through~~straight-line basis over the ~~date~~vesting period, generally four years. Amortization of ~~our~~deferred ~~initial~~compensation ~~public~~related to ~~offering~~employee ingrants ~~December 2001~~was $99,000 and ~~the Black-Scholes~~$224,000 ~~option~~for ~~pricing~~the ~~model~~three ~~for~~months ~~options~~ended ~~granted thereafter~~December 31, ~~with~~2004 ~~the following~~and ~~weighted-average~~2003, ~~assumptions:~~respectively.

	Three Months Ended March 31,				Six Months Ended March 31,
	2004		2003		2004		2003
Stock Option Plans:
Risk-free interest rate	3.15	%	3.0	%	3.17	%	3.0	%
Expected volatility	70	%	90	%	70	%	90.0	%
Expected life (in years)	4.5		4.5		4.5		4.5
Expected dividend	0.0	%	0.0	%	0.0	%	0.0	%
Employee Stock Purchase Plan:
Risk-free interest rate	1.0	%	1.39	%	1.0	%	1.39	%
Expected volatility	70	%	90	%	70	%	90.0	%
Expected life (in years)	1.0		2.0		1.0		2.0
Expected dividend	0.0	%	0.0	%	0.0	%	0.0	%

We currently account for stock-based awards to non-employees in accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation.” Accordingly, we recognize the fair value for non-employee awards as stock compensation expense over the vesting terms of the awards. There were no stock-based awards to non-employees or amortization of stock compensation expenses recognized previously for non-employees during the three months ended December 31, 2004 and 2003.

IfOn December 16, 2004, the Financial ~~computed~~Accounting ~~minimum~~Standards ~~values~~Board issued SFAS No. 123 (revised in 2004), “Share-Based Payment” (“SFAS 123R”). SFAS 123R eliminates the alternative of applying ~~our~~the intrinsic value measurement provisions of Opinion 25 to stock~~-based~~ compensation awards issued to employees. ~~had~~Rather, ~~been~~the ~~amortized~~new standard requires enterprises to ~~expense~~measure ~~over~~the cost of employee services received in exchange for an award of equity instruments based on the ~~period~~grant-date fair value of the ~~awards~~award. That ascost ~~specified~~will ~~under~~be recognized over the period during which an employee is ~~SFAS~~required ~~No.~~to ~~123~~provide services in exchange for the award, ~~our~~known ~~pro~~as ~~forma~~the ~~net~~requisite service ~~income~~period (~~loss~~usually the vesting period),.

10We have not yet quantified the effects of the adoption of SFAS 123R, but we expect that the new standard may result in significant stock-based compensation expense. The pro forma effects on net income and earnings per share if we had applied the fair value recognition provisions of original SFAS 123 on stock compensation awards (rather than applying the intrinsic value measurement provisions of Opinion 25) are disclosed below. Although such pro forma effects of applying original SFAS 123 may be indicative of the effects of adopting SFAS 123R, the provisions of these two statements differ in some important respects. The actual effects of adopting SFAS 123R will be dependent on numerous factors including, but not limited to, the

~~basic income (loss) per share and diluted income (loss) per share under SFAS No. 123 (as compared to such items as reported) would have been as follows (in thousands, except per share amounts):~~10

	Three Months Ended March 31,						Six Months Ended March 31,
	2004			2003			2004			2003
Net income as reported	$	752		$	1,022		$	1,324		$	3,045
Add: stock based employee compensation expense included in reported net income, net of taxes	177			205			362			396
Less: stock-based employee compensation expense determined under fair value based method, net of taxes	(1,337		)	(1,363		)	(2,667		)	(2,690		)
Pro forma net income (loss)	$	(408	)	$	(136	)	$	(981	)	$	751
Basic earnings (loss) per share:
As reported	$	0.03		$	0.04		$	0.05		$	0.12
Pro forma	$	(0.02	)	$	(0.01	)	$	(0.04	)	$	0.03
Diluted earnings (loss) per share:
As reported	$	0.03		$	0.04		$	0.05		$	0.11
Pro forma	$	(0.01	)	$	(0.01	)	$	(0.03	)	$	0.03

valuation model chosen by us to value stock-based awards; the assumed award forfeiture rate; the accounting policies adopted concerning the method of recognizing the fair value of awards over the requisite service period; and the transition method (as described below) chosen for adopting SFAS 123R.

7SFAS 123R will be effective for our fiscal quarter beginning July 1, 2005, and requires the use of the modified prospective application method. ~~Contingencies~~ Under this method, SFAS 123R is applied to new awards and to awards modified, repurchased or cancelled after the effective date. Additionally, compensation cost for the portion of awards for which the requisite service has not been rendered (such as unvested options) that are outstanding as of the date of adoption will be recognized as the remaining requisite services are rendered. The compensation cost relating to unvested awards at the date of adoption will be based on the grant-date fair value of those awards as calculated for pro forma disclosures under the original SFAS123. In addition, companies may use the modified retrospective application method. This method may be applied to all prior years for which the original SFAS 123 was effective or only to prior interim periods in the year of initial adoption. If the modified retrospective application method is applied, financial statements for prior periods will be adjusted to give effect to the fair-value-based method of accounting for awards on a consistent basis with the pro forma disclosures required for those periods under the original SFAS 123.

~~Legal~~Our ~~Proceedings~~calculations are based on a single option valuation approach and forfeitures are recognized as they occur. The fair value of options at the date of grant was estimated using the minimal value method through the date of our initial public offering in December 2001, and the Black-Scholes option pricing model for options granted thereafter, with the following weighted-average assumptions:

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

	Three Months Ended December 31,
	2004		2003
Stock Option Plans:
Risk-free interest rate	3.46	%	3.22	%
Expected volatility	77	%	57	%
Expected life (in years)	4.5		4.5
Expected dividend	0.0	%	0.0	%

Employee Stock Purchase Plan:
Risk-free interest rate	2.2	%	1.3	%
Expected volatility	72	%	57	%
Expected life (in years)	1.0		1.0
Expected dividend	0.0	%	0.0	%

InIf ~~February 2000, Synopsys filed a complaint in~~ the ~~Superior~~computed ~~Court of~~minimum ~~the~~values ~~State~~ of ~~California~~our instock-based ~~the~~awards ~~County~~to ~~of Santa Clara (Case No. CV787950)~~employees ~~against~~had usbeen ~~and~~amortized ~~Dr.~~to ~~Deng,~~expense ~~our~~over ~~President. The~~the ~~complaint~~period ~~alleged breach~~ of ~~contract,~~the ~~breach~~awards ofas ~~fiduciary~~specified ~~trust,~~under ~~diversion~~SFAS ~~of corporate opportunity and constructive trust~~No. In ~~September 2001~~123, ~~Synopsys~~our ~~filed~~pro ~~its~~forma ~~second amended~~net ~~complaint,~~income ~~which added claims of inducing/aiding and abetting breach of fiduciary duty~~(loss), ~~including/aiding~~basic ~~and~~income ~~abetting~~(loss) ~~diversion~~per ~~of corporate~~share ~~opportunity, misappropriation of trade secrets, civil conspiracy, breach of confidence~~ and ~~unfair~~diluted ~~competition,~~income ~~and~~(loss) ~~added~~per asshare ~~individual~~under ~~defendants~~SFAS DrNo. ~~Wang and~~123 ~~our~~(as ~~four~~compared ~~other~~to ~~founders. In~~such ~~September 2002,~~items ~~Synopsys~~as ~~filed~~reported) awould ~~supplemental~~have ~~second~~been ~~amended~~as ~~complaint that~~follows ~~contained~~(in ~~supplemental allegations but added no new claims or parties. In January 2003~~thousands, ~~the discovery~~except ~~referee~~per ~~issued~~share ~~orders creating rebuttable presumptions in favor of Synopsys on certain evidentiary issues to sanction us for erasure of certain computer files requested in~~amounts):

	Three Months Ended December 31,
	2004			2003
Net income (loss) as reported	$	(6,966	)	$	572
Add: stock based employee compensation expense included in reported net income (loss), net of taxes	99			185
Less: stock-based employee compensation expense determined under fair value based method, net of taxes	(114		)	(1,329		)

discovery by Synopsys. These rulings mean that we must prove at trial that we did not take or use Synopsys’ source code or other confidential information, rather than the usual requirement that Synopsys provide such proof in the first instance. However, none of these rulings resolves any of the claims made by Synopsys in the case and the trial judge or jury can reach their own conclusions based upon the evidence presented at trial. We filed a motion for reconsideration of this order and in March 2003, the court denied our motion, concluding that it was barred on procedural grounds. In January 2003, Synopsys filed a third amended complaint, which contained supplemental allegations but added no new claims or parties. We have filed an answer denying Synopsys’ allegations. In August 2003, Synopsys filed several motions for terminating sanctions against us, which were heard in January 2004 and the discovery referee has not yet ruled. We oppose each of these motions and intend to file oppositions within the time permitted by law. Synopsys has requested unspecified damages of at least $25 million, an injunction, a constructive trust on unspecified intellectual property belonging to us and other relief. Further, in September 2003, Synopsys notified us that it reserves the right to seek up to $80 million in punitive damages with respect to claims for which punitive damages are allowed under California Civil Code Section 3294, and up to $50 million in punitive damages with respect to the trade secret claims under California Civil Code Section 3426.3(c). This action is currently in discovery. A trial date has not yet been set.11

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

	Three Months Ended December 31,
	2004			2003

Pro forma net income (loss)	$	(6,981	)	$		(572	)
Basic earnings (loss) per share:
As reported	$	(0.25	)	$		0.02
Pro forma	$	(0.26	)	$		(0.02	)
Diluted earnings (loss) per share:
As reported	$	(0.25	)	$		0.02
Pro forma	$	(0.26	)	$	(0.02		)

~~In May 2001, Synopsys filed a complaint in the United States District Court, Northern District of California, San Jose division (Case No~~7. CO1-20423 PVT) against us, alleging that our HSIM software infringes U.S. Patent No. 5,878,053 entitled “Hierarchical Power Network Simulation and Analysis tool for reliability testing of Deep Submicron IC Designs” (the “053 patent”), which is purportedly assigned to Synopsys. Since the case began, Synopsys has also alleged that our subsequently released HSIM 2.0 and Contingencies

12Legal Proceedings

~~LEXSIM~~Synopsys ~~products~~has filed claims against us in state and federal court, ~~infringe~~which we refer to in this document as the ~~053~~State ~~patent~~Court Action and the Federal Court Actions. ~~Synopsys~~These ~~has~~claims ~~requested~~are ~~relief~~based ~~including~~on ~~damages~~the ~~from~~alleged ~~$4.1 million~~facts and circumstances relating to ~~$13.7~~the ~~million~~departure ~~and~~of anour ~~injunction.~~ five founders from their ~~Synopsys~~employment ~~has~~at ~~also~~Synopsys, ~~requested~~the ~~that~~founding ~~any~~of ~~damage~~our ~~award~~company beand ~~trebled~~the ~~for~~development ~~alleged~~and ~~willful~~sale ~~infringement~~of HSIM and our other products. In ~~June~~Each of our founders and Dr. ~~2001~~Sang S. Wang, weour ~~filed~~Chief Executive Officer, became an ~~answer~~employee toof ~~the~~Synopsys ~~complaint~~when ~~denying~~Synopsys ~~infringement~~acquired ofEPIC aDesign ~~valid,~~Technology ~~enforceable~~in ~~patent~~February 1997. Dr. Wang resigned from Synopsys in March 1998 and ~~asserting~~served ~~counterclaims. We~~as ~~have~~a consultant ~~since~~to ~~amended~~Synopsys ~~our~~until June 1998. ~~counterclaims~~Dr. ~~Our~~ An-Chang ~~current counterclaims~~Deng, ~~allege~~our ~~that~~President, ~~among~~and our four other ~~things,~~founders resigned from Synopsys at approximately the ~~053~~same ~~patent~~time isin ~~invalid, unenforceable~~August 1998 and ~~not~~became employees ~~infringed~~of ~~and~~our ~~that~~company ~~Synopsys~~immediately ~~has~~thereafter. Dr. Wang ~~violated~~became ~~federal~~an employee of our ~~antitrust~~company ~~and~~in ~~state~~April ~~unfair~~1999. None ~~competition~~of ~~laws~~Drs. Wang or Deng or our four other founders was subject to a noncompetition agreement with Synopsys at any time.

~~From~~In ~~time~~February ~~to time~~2000, Synopsys filed a complaint in the ~~court~~Superior ~~has~~Court ~~ruled~~of onthe ~~summary~~State ~~judgment~~of ~~motions~~California in the County ~~case~~of Santa Clara (Case No. In ~~May~~CV787950) ~~2002~~against us and Dr. Deng, ~~the~~our ~~court~~President. The ~~granted~~State ~~summary~~Court ~~judgment~~Action incomplaint ~~favor~~alleged breach of contract, breach of fiduciary trust, diversion of corporate opportunity and constructive trust. In September 2001, Synopsys onfiled ~~our~~its ~~invalidity~~second amended ~~defenses~~complaint, which added claims of inducing/aiding and abetting breach of ~~counterclaims~~fiduciary duty, ~~concluding~~including/aiding ~~that~~and ~~they~~abetting ~~were~~diversion ~~barred~~of bycorporate opportunity, ~~the~~misappropriation ~~doctrine~~of trade secrets, civil conspiracy, breach of confidence ~~assignor~~and unfair competition, and added as individual defendants ~~estoppel~~Dr. ~~The~~ Wang ~~court~~and ~~denied~~our four other founders. In September 2002, Synopsys’ filed a supplemental second amended ~~motion~~complaint ~~with~~that ~~respect~~contained tosupplemental ~~our~~allegations ~~unenforceability~~but ~~defense~~added ~~and~~no ~~counterclaim~~new claims or parties. In ~~November 2002~~January 2003, the ~~court~~discovery referee issued ~~an order~~orders ~~granting~~creating ~~summary~~rebuttable ~~judgment~~presumptions in favor of Synopsys on certain evidentiary issues to sanction us for erasure of certain ~~antitrust~~computer files ~~counterclaims~~requested ~~based~~in ondiscovery by Synopsys. These rulings meant that we must prove at trial that we did not take or use Synopsys’ source code or other confidential information, rather than the usual ~~doctrine~~requirement ofthat ~~assignor~~Synopsys ~~estoppel~~provide such proof in the first instance. ~~However~~We filed a motion for reconsideration of this order and in March 2003, the court ~~declined~~denied toour ~~rule~~motion, concluding that it was barred on procedural grounds. In January 2003, Synopsys filed a third amended complaint, which contained supplemental allegations but added no new claims or parties. We have filed an answer denying Synopsys’ ~~motion~~allegations. In ~~with~~August ~~respect~~2003, toSynopsys ~~our~~filed ~~other~~several motions ~~antitrust~~for ~~and~~terminating ~~unfair~~sanctions ~~competition~~against us, which were heard in January ~~counterclaims~~2004. In ~~addition~~June 2004, the ~~court~~Court ruled on ~~issued~~Synopsys’ amotions ~~ruling~~for ~~construing~~terminating sanctions. The Discovery Referee vacated the ~~claims~~orders of January 2003 that created the ~~053~~rebuttable ~~patent~~presumptions in ~~August 2002~~favor of Synopsys, but issued new orders. These orders limit our defenses regarding the timing and the development of the initial HSIM source code and the evidence that we and the remaining individual defendants can present at trial. For purposes of trial, among

In September 2002, the U.S. Patent and Trademark Office granted our request for ex parte reexamination of the 053 patent based on prior art not previously considered by the Patent Office. We have moved to stay the federal litigation pending the outcome of the reexamination and the court granted our motion in December 2002. During the reexamination of the 053 patent, the Patent Office may determine that the subject matter in the patent is patentable as originally claimed, that the subject matter is patentable if the claims are modified or that the subject matter is not patentable. We cannot predict what the result of the reexamination procedure will be or how long it will take to complete.12

~~Activity~~other onthings, ~~several~~the ~~other~~orders ~~summary~~established ~~judgment~~as ~~motions~~facts that: ~~has~~(i) ~~been~~the ~~suspended because~~first 60,000 lines of source code of HSIM and all the ~~court~~ideas ~~stayed~~and concepts reflected therein, to the ~~federal~~extent ~~litigation. In~~they ~~November 2002~~were not publicly known, were copied or derived from Synopsys’ ~~filed~~source ~~three~~code ~~motions~~or ~~for~~other ~~summary~~Synopsys’ materials while ~~judgment. The~~the ~~first~~individual ~~motion~~defendants ~~asked~~were employed by Synopsys and (ii) we and the ~~court~~individual defendants acted in concert to ~~enter~~intentionally ~~judgment~~alter, ~~before~~destroy, ~~trial~~lose ~~that~~or misplace ~~Nassda’s~~items ~~products~~requested ~~infringe~~in ~~the~~discovery ~~053 patent~~and conceal evidence. ~~The~~These ~~second~~orders ~~motion~~also ~~asked~~struck the answer of one ~~court~~individual todefendant, ~~rule~~Jeh-Fu ~~before~~Tuan. The Discovery ~~trial~~Referee ~~against~~denied usSynopsys’ onrequest to strike our ~~defense~~answers ~~that~~and the answers ~~053~~of ~~patent~~the isremaining individual defendants. ~~unenforceable~~In ~~because~~August ~~Synopsys~~2004, ~~committed~~we ~~inequitable~~filed ~~conduct~~a inwrit ~~obtaining~~petition in the California Court of ~~patent. We~~Appeal, ~~submitted~~Sixth ~~oppositions~~Appellate District in San Jose, seeking to ~~both~~ ofoverturn these ~~motions~~ orders. ~~Synopsys’~~In ~~third motion~~October ~~asked~~2004, the ~~court~~Court of Appeal requested that Synopsys file opposition to ~~rule~~the ~~before~~petition ~~trial~~and ~~against~~provided us with onthe ~~our~~opportunity ~~remaining antitrust~~to ~~counterclaims~~file a reply to Synopsys’ opposition. ~~Because~~In ofOctober 2004, the Superior Court vacated ~~court’s~~the ~~prior~~previously ~~rulings~~set ~~against~~January us2005 ontrial ~~our~~date ~~other~~and ~~antitrust~~stayed ~~counterclaims,~~all wetrial ~~did~~proceedings ~~not~~pending ~~oppose~~final ~~this~~determination ~~motion~~of the writ proceedings. InSynopsys has requested unspecified damages of ~~November 2002,~~at weleast ~~also~~$25 ~~filed~~million, an injunction, a ~~summary~~constructive ~~judgment~~trust ~~motion~~on unspecified intellectual property belonging to us and other relief. Further, ~~which~~in ~~asked~~September ~~the~~2003, Synopsys notified ~~court~~us that it reserves the right to ~~enter~~seek ~~judgment~~up ~~before~~to ~~trial~~$80 ~~that~~million ~~our~~in ~~products~~punitive dodamages with ~~not~~respect ~~infringe~~to ~~the~~claims ~~053~~for which punitive damages are allowed under California ~~patent. Synopsys~~Civil ~~opposed~~Code ~~this~~Section 3294, and up to $50 million in punitive damages with respect ~~motion~~to the trade secret claims under California Civil Code Section 3426.3(c). ~~The~~On ~~court~~December ~~issued~~14, ~~its~~2004, ~~order staying~~ the ~~federal~~Court ~~litigation~~of ~~before~~Appeal stayed the ~~parties’~~case ~~reply~~in ~~briefs~~its ~~were~~entirety ~~due~~pending approval of the proposed merger discussed below.

In ~~June 2003~~May 2001, Synopsys filed a ~~second~~ complaint in the United States District Court, Northern District of California, San ~~Francisco~~Jose ~~Division~~ division (Case No. ~~C03~~CO1-~~2664~~20423 RSPVT) against us, alleging that ~~the~~ our ~~products, including but not limited to~~ HSIM ~~and HANEX~~ software ~~products,~~infringes ~~infringe Synopsys~~ U.S. Patent No. 65,~~249~~878,~~898~~053 entitled “~~Methods~~Hierarchical Power ~~and~~Network ~~Systems~~Simulation ~~for~~and ~~Reliability~~ Analysis ~~of CMOS~~tool ~~VLSI~~for ~~Circuits~~reliability ~~Based~~testing onof ~~Stage~~Deep Submicron ~~Partitioning~~IC ~~and Node Activities~~Designs” (the “~~898~~ 053 Patent”)~~. In July 2003~~, wewhich ~~filed an~~is ~~answer~~purportedly ~~denying~~assigned ~~that~~to Synopsys. Since ~~we infringe~~ the ~~898~~case ~~Patent~~began, ~~and~~Synopsys has ~~asserting~~also asalleged ~~defenses~~ that ~~the~~our ~~898~~subsequently ~~Patent~~released isHSIM ~~invalid~~2.0 and ~~unenforceable. We~~LEXSIM ~~also brought a declaratory judgment counterclaim seeking~~products, ~~judgment~~infringe ~~that~~ the ~~898~~053 Patent. Synopsys ishas requested ~~not~~relief ~~infringed~~including bydamages usfrom ~~and~~$4.1 ~~that~~million ~~the~~to ~~898~~$13.7 ~~Patent~~million ~~is invalid~~ and ~~unenforceable~~an injunction. ~~In August 2003,~~ Synopsys ~~filed~~has aalso ~~motion~~requested that toany ~~dismiss~~damage ~~these~~award ~~defenses~~be ~~and~~trebled ~~counterclaims~~for onalleged ~~the ground~~willful ~~that~~infringement. In June 2001, we ~~are~~filed ~~barred~~an ~~from~~answer ~~contesting~~to the complaint ~~validity~~denying ~~and~~infringement ~~enforceability~~ of ~~the~~ ~~898~~a ~~Patent~~valid, ~~based~~enforceable onpatent ~~the~~and ~~doctrine of assignor estoppel~~asserting counterclaims. ~~Synopsys’~~We ~~motion~~have ~~also~~since ~~sought~~amended ~~to strike~~ our ~~defenses~~counterclaims. Our ofcurrent ~~laches~~counterclaims allege that, ~~patent~~among ~~misuse~~other ~~and~~things, ~~unclean~~the ~~hands~~053 onPatent ~~the~~is ~~ground~~invalid, ~~that~~unenforceable ~~we had~~and not ~~pleaded~~infringed ~~them~~and ~~with~~that ~~sufficient~~Synopsys ~~particularity. We~~has ~~opposed~~violated ~~Synopsys’~~federal ~~motions. In~~antitrust ~~October 2003,~~and ~~the~~state ~~court~~unfair competition ~~denied Synopsys’~~laws.

13From time to time, the court has ruled on summary judgment motions in the case. In May 2002, the court granted summary judgment in favor of Synopsys on our invalidity defenses and counterclaims, concluding that they were barred by the doctrine of assignor estoppel. The court denied Synopsys’ motion with respect to our unenforceability defense and counterclaim. In November 2002, the court issued an order granting summary judgment in favor of Synopsys on certain antitrust counterclaims based on the doctrine of assignor estoppel. However, the court declined to rule on Synopsys’ motion with respect to our other antitrust and unfair competition counterclaims. In addition, the court issued a ruling construing the claims of the 053 Patent in August 2002.

~~motion~~In toSeptember ~~dismiss~~2002, ~~and strike~~ the ~~invalidity and unenforceability~~U.S. ~~defenses~~Patent and ~~counterclaims~~Trademark ~~and~~Office granted ~~Synopsys’~~our ~~motion~~request tofor ~~strike~~ex ~~the~~parte ~~laches,~~reexamination of the ~~patent~~053 ~~misuse~~Patent ~~and~~based ~~unclean~~on ~~hands~~prior ~~defenses~~art ~~with~~not ~~leave~~previously toconsidered ~~amend~~by the Patent ~~pleadings~~Office. InWe ~~March 2004, Synopsys~~moved ~~filed~~to astay ~~motion~~the ~~for~~federal litigation ~~partial~~pending ~~summary judgment on~~ the ~~ground~~outcome ~~that~~of ~~we are barred from contesting~~ the ~~validity~~reexamination and ~~enforceability of~~ the ~~898~~court ~~Patent~~granted ~~based~~our onmotion ~~the~~in ~~doctrine~~December ~~of assignor estoppel~~2002. In ~~April~~ August 2004, the ~~Court~~U.S. ~~ruled~~Patent ~~that we~~and ~~are~~Trademark ~~barred~~Office ~~under~~issued ~~the~~a ~~doctrine~~final rejection of ~~assignor~~all ~~estoppel~~of ~~from~~the claims ~~asserting~~of the ~~898~~ 053 Patent. Synopsys ishas appealed ~~invalid~~the orfinal ~~unenforceable~~rejection byto ~~virtue~~the ~~of pre-assignment inequitable conduct~~U.S. ~~The~~Patent ~~court~~and ~~has~~Trademark ~~set~~Office ~~the~~Board ~~case~~of Patent ~~for~~Appeals ~~trial~~and ~~beginning on April 25, 2005~~Interferences.

We believe that we have meritorious defenses to Synopsys’ claims and intend to defend ourselves vigorously. However, because of the high degree of complexity of the intellectual property at issue, the inherent uncertainties of litigation in general and the preliminary nature of this litigation, we cannot assure you that we will ultimately prevail. Should Synopsys ultimately succeed in the prosecution of its claims, we could be permanently enjoined from selling our software and deriving related maintenance revenue. In addition, we may be required to pay substantial monetary damages to Synopsys. Further, we could be enjoined preliminarily from selling our software during the course of the litigation. Litigation such as the suit Synopsys has brought against us can take years to resolve and can be expensive to defend. The court’s decisions on current pending and future motions could have the effect of determining the ultimate outcome of the litigation prior to a trial on the merits, or strengthen or weaken our ability to assert claims and defenses. It is possible that our relationships with our customers will be seriously harmed in the future as a result of the Synopsys litigation. Accordingly, an adverse judgment, if entered on any Synopsys claim, could seriously harm our business, financial position and results of operations and cause our stock price to decline substantially. In addition, the Synopsys allegations and claims, even if ultimately determined to be without merit, could be time consuming to defend, result in costly litigation, divert our management’s attention and resources, cause product shipment delays or require us to enter into royalty or license agreements. These royalty or license agreements may not be available on terms acceptable to us, if at all, and the prosecution of the Synopsys allegations and claims could significantly harm our business, financial position and results of operations and cause our stock price to decline substantially.13

NoActivity ~~amount~~on several other summary judgment motions has been ~~accrued~~suspended ~~for~~because ~~any~~the ~~loss~~court ~~contingencies~~stayed the federal litigation. In November 2002, Synopsys ~~which~~filed ~~may~~three ~~result~~motions for summary judgment. The first motion asked the court to enter ~~from~~judgment before trial that our products infringe the ~~resolution~~053 ofPatent. The second motion asked the ~~above~~court ~~lawsuits~~to ~~filed~~rule before trial against us, ason our defense that the ~~outcome~~053 Patent is unenforceable because Synopsys committed inequitable conduct in obtaining the patent. We submitted oppositions to both of these motions. Synopsys’ third motion asked the ~~matters~~court isto ~~too~~rule ~~uncertain~~before trial against us on our remaining antitrust counterclaims. Because of the court’s prior rulings against us on our other antitrust counterclaims, we did not oppose this motion. In November 2002, we also filed a summary judgment motion, which asked the court to ~~predict~~enter judgment before trial that our products do not infringe the 053 Patent. Synopsys opposed this motion. The court issued its order staying the federal litigation before the parties’ reply briefs were due. On December 7, 2004, the court stayed the case in its entirety pending approval of the proposed merger discussed below.

~~Other~~In ~~Contingencies~~June 2003, Synopsys filed a second complaint in the United States District Court, Northern District of California, San Francisco Division (Case No. C03-2664 RS) against us, alleging that the our products, including but not limited to HSIM and HANEX software products, infringe Synopsys U.S. Patent No. 6,249,898 entitled “Methods and Systems for Reliability Analysis of CMOS VLSI Circuits Based on Stage Partitioning and Node Activities” (the “898 Patent”). In July 2003, we filed an answer denying that we infringe the 898 Patent and asserting as defenses that the 898 Patent is invalid and unenforceable. We also brought a declaratory judgment counterclaim seeking judgment that the 898 Patent is not infringed by us and that the 898 Patent is invalid and unenforceable. In August 2003, Synopsys filed a motion to dismiss these defenses and counterclaims on the ground that we are barred from contesting the validity and enforceability of the 898 Patent based on the doctrine of assignor estoppel. Synopsys’ motion also sought to strike our defenses of laches, patent misuse and unclean hands on the ground that we had not pleaded them with sufficient particularity. We opposed Synopsys’ motions. In October 2003, the court denied Synopsys’ motion to dismiss and strike the invalidity and unenforceability defenses and counterclaims and granted Synopsys’ motion to strike the laches, patent misuse and unclean hands defenses with leave to amend the pleadings. In March 2004, Synopsys filed a motion for partial summary judgment on the ground that we are barred from contesting the validity and enforceability of the 898 Patent based on the doctrine of assignor estoppel. In April 2004, the court ruled that we are barred under the doctrine of assignor estoppel from asserting the 898 Patent is invalid or unenforceable by virtue of pre-assignment inequitable conduct. The court issued a ruling construing the claims of the 898 Patent in July 2004. The court has set the case for trial beginning on April 25, 2005. On December 7, 2004, the court stayed the case in its entirety pending approval of the proposed merger discussed below.

We ~~from~~entered ~~time~~into an agreement of merger dated as of November 30, 2004 with Synopsys and Merger Sub, pursuant to ~~time~~which, ~~enter~~subject to satisfaction or waiver of the conditions therein, Merger Sub will merge with and into ~~certain~~our ~~types~~company and we will become a wholly owned subsidiary of ~~contracts~~Synopsys. Subject ~~that~~to ~~require~~the usconsummation of the merger, Synopsys, our company and certain employees, officers and directors of our company, as applicable, have agreed to ~~indemnify~~settle ~~parties~~the State ~~against~~Court ~~third~~Action ~~party~~and ~~claims~~the Federal Court Actions. ~~These~~In ~~contracts~~connection ~~primarily~~with ~~relate~~the merger agreement, the parties have submitted stipulations in the State Court Action and Federal Court Actions to: toll the proceedings pending the consummation of the merger. ~~(i)~~Pursuant ~~certain~~to the tolling agreements, we, Synopsys and the individual defendants have agreed not to take further action with ~~our~~respect ~~officers,~~to ~~directors~~the State Court Action and ~~employees~~the Federal Court Actions during the period prior to the closing of the proposed merger. In the event that the proposed merger did not occur and ~~third~~the ~~parties,~~merger ~~under~~agreement ~~which~~were terminated, we, ~~may~~Synopsys beand ~~required~~the individual defendants would no longer have any obligation to ~~indemnify~~settle ~~such~~the ~~persons~~State ~~for~~Court Action ~~liabilities~~or ~~arising~~the ~~out~~Federal ofCourt ~~their~~Actions. We ~~duties~~expect that toif usthe merger did not occur and ~~(ii)~~the ~~agreements~~merger ~~under~~agreement ~~which~~was terminated, that wea ~~indemnify~~period ~~customers~~of ~~and~~time ~~partners~~would be necessary for ~~claims~~the ~~arising~~applicable ~~from~~Courts ~~intellectual property~~to ~~infringement.~~reschedule

The terms of such obligations vary. Because the obligated amounts of these types of agreements often are not explicitly stated, the overall maximum amount of the obligations cannot be reasonably estimated. Historically, we have not been obligated to make any significant payments for these obligations other than those in connection with defending our directors, officers and employees in the Synopsys litigation and derivative complaint, and no liabilities were recorded for these obligations on our balance sheet as of March 31, 2004.14

Invarious ~~general~~hearings and trials and that there would be a substantial delay from the original trial dates. Although we continue to believe that we would have meritorious defenses if the parties were to proceed with the State Court Action and the Federal Court Actions, we cannot provide any assurance that we will prevail or that our ~~customers~~defenses aor ~~90-day~~our ~~limited~~ability ~~warranty~~to inachieve a desirable outcome ~~connection~~will ~~with~~not be affected by the ~~licensing~~proposed merger and related events. See also Note 9 of the notes to our ~~software~~condensed consolidated ~~that~~financial statements. As noted above, the ~~software~~State ~~will~~Court ~~perform~~Action and Federal Court Actions have now been ~~substantially~~stayed in ~~accordance~~their ~~with~~entirety ~~our~~pending ~~documentation. We~~approval doof ~~not~~the proposed merger.

14In July 2004, we and certain of our officers and directors were named in a securities class action lawsuit filed in the United States District Court for the Northern District of California. The complaint asserts claims against our company, Sang S. Wang, An-Chang Deng, Tammy Shu-Hua Liu and Yen-Son Huang on behalf of a putative class of persons who purchased our stock between December 13, 2001 and June 11, 2004. The class action alleges that the named defendants violated certain provisions of the Securities Exchange Act of 1934 by making materially false and misleading representations in press releases and financial statements filed with the SEC relating to our financial results. The complaint’s allegations derive largely from allegations contained in the State Court Action, and derive from allegations contained in the complaint concerning the 053 Patent. A second class action was filed on September 9, 2004 in the United States District Court for the Northern District of California. On September 27, 2004, one plaintiff moved for lead plaintiff status in the first filed class action. These two cases were consolidated on October 7, 2004. On November 4, 2004, the judge granted the motion of NECA-IBEW Pension Fund for appointment as lead plaintiff. In late January 2005, the parties reached an agreement in principle to resolve this matter for a payment to the class in the amount of $9.0 million. The settlement is subject to preliminary and final approval by the court.

~~maintain~~On August 16, 2004, a purported ~~general~~derivative ~~warranty~~complaint ~~reserve~~was ~~for~~filed ~~estimated~~against ~~costs~~us atand our directors in the Court ~~time~~of Chancery of the State of Delaware. ~~revenue~~This iscomplaint ~~recognized~~alleged ~~due~~that the board of directors breached its fiduciary duty by failing to appoint a special committee to investigate the claims asserted in the Synopsys litigation and by allowing two directors to destroy evidence in the State Court Action. The complaint also alleges that the board of directors breached its fiduciary duty by allowing our ~~extensive~~company ~~quality~~to ~~testing~~go public with the knowledge of the ~~software~~alleged trade secret misappropriation and by causing the issuance of allegedly false public statements regarding our financial condition on account of this alleged misappropriation. The Tocomplaint seeks ~~date~~equitable relief and an unspecified amount of damages on behalf of our company. On October 15, we2004, ~~have~~the defendants ~~incurred~~filed ~~minimal~~a ~~costs~~motion ~~related~~to Dismiss or Stay on the grounds that the case is not ripe for adjudication and also filed a Motion for Protective Order Staying Discovery. On December 3, 2004, plaintiff filed oppositions to these motions. On January 5, 2005, the parties stipulated to stay this ~~limited~~matter ~~warranty~~until ~~obligation~~such time as plaintiff’s counsel provides two weeks notice to defendants that the stay shall be lifted. The Judge signed the order staying the case on January 5, 2005 and conditioned the stay on the parties providing status reports to the court on a quarterly basis. The case is still in the preliminary stages, and it is not possible for us to quantify the impact, if any, on our company. An unfavorable outcome in this case could have a material adverse effect on our business, financial condition, results of operations and cash flow. In addition, the expense of defending any litigation may be costly and divert management’s attention from the day to day operations of our business.

~~Our~~On ~~standard~~December ~~software~~1, ~~license~~2004, we and certain ~~maintenance~~of ~~agreements~~our ~~include~~officers ~~an infringement~~and ~~indemnification~~directors ~~provision~~were ~~for~~named ~~claims~~in ~~from~~a ~~third~~class ~~parties~~action ~~related to~~complaint ~~our~~filed ~~intellectual~~against ~~property. The agreements~~us ~~generally~~and ~~limit~~certain ~~the scope~~ of ~~the~~our ~~available~~officers ~~remedies~~and directors in athe ~~variety~~Court of ~~industry-standard~~Chancery ~~methods~~of the State of Delaware. This complaint, ~~including~~brought ~~but~~by ~~not~~Robert ~~limited~~Israel, toalleges athat ~~right~~defendants toentered ~~control~~into the ~~defense~~merger oragreement ~~settlement~~with ofSynopsys ~~any~~for ~~claim,~~inadequate ~~procure~~consideration. The ~~the~~complaint ~~right~~also ~~for~~alleges ~~continued~~that ~~usage~~the ~~and~~merger ~~replace~~agreement orwas ~~modify~~an ~~the~~unlawful ~~infringing~~plan ~~products~~ to ~~make~~shield ~~them~~our ~~non-infringing. Such~~board ~~indemnification~~of ~~provisions~~directors ~~are~~and ~~accounted~~certain members ~~for~~of inour ~~accordance~~management ~~with~~from ~~SFAS~~liability ~~No. 5. To~~to ~~date,~~Synopsys wein ~~have~~the ~~not~~State ~~incurred~~Court ~~any~~Action ~~costs~~and ~~related~~Federal Court Actions, and to ~~any~~shield ~~claims~~them ~~under~~from ~~such~~liability ~~indemnification~~to ~~provisions.~~our

~~8. Recent Accounting Pronouncements~~15

~~The~~company ~~Financial~~for ~~Accounting~~claims ~~Standards~~asserted ~~Board~~by ~~(“FASB”)~~the ~~issued Interpretation~~plaintiff 46in ~~(“FIN~~the ~~46”),~~pending ~~Consolidation~~derivative ~~of Variable~~action. ~~Interest~~Plaintiff ~~Entities~~seeks ~~in January 2003~~to enjoin the proposed merger, ~~and~~or aalternatively ~~revised~~seeks damages ~~interpretation~~if ofthe ~~FIN~~proposed 46merger ~~(“FIN~~is ~~46-R”)~~consummated. ~~FIN~~ The 46parties ~~requires~~stipulated ~~certain~~to ~~variable~~stay ~~interest~~this ~~entities~~case, ~~(“VIEs”)~~and totherefore ~~be consolidated~~any response by defendants to the ~~primary~~complaint ~~beneficiary~~will ofnow ~~the~~be ~~entity~~due ifupon ~~the~~plaintiff’s ~~equity~~counsel ~~investors~~giving two inweeks ~~the~~notice ~~entity~~to dodefendants ~~not~~of ~~have~~plaintiff’s ~~the~~request ~~characteristics~~that ofdefendants arespond ~~controlling financial~~to ~~interest~~the orcomplaint. On ~~sufficient~~January ~~equity~~6, at2005, ~~risk~~the Judge ~~for~~signed the ~~entity~~order tostaying ~~finance~~the ~~its~~case, ~~activities without~~subject ~~additional~~to ~~subordinated~~the ~~financial~~same ~~support~~reporting obligations ~~from~~in ~~other~~the ~~parties~~pending derivative case. The ~~provisions~~case ofis ~~FIN~~still 46in ~~are effective~~the ~~immediately~~preliminary stages, and it is not possible for us ~~all~~to ~~arrangements~~quantify ~~entered~~the ~~into~~impact, ~~after~~if ~~January 31~~any, ~~2003~~ on our company. WeAn ~~have~~unfavorable ~~not~~outcome ~~invested~~ in ~~any~~this case could ~~entities~~have ~~that~~a wematerial ~~believe~~adverse ~~are~~effect ~~variable~~on ~~interest~~our ~~entities~~business, ~~for~~financial ~~which~~condition, weresults ~~are~~of operations and cash flow and our ability to complete the ~~primary~~ ~~beneficiary~~proposed merger. ~~The~~In ~~adoption~~addition, the expense of defending any ~~FIN~~litigation ~~46-R~~may ~~had~~be nocostly ~~impact~~and ondivert ~~our~~management’s ~~financial~~attention ~~position,~~from ~~results~~the ofday to day operations orof ~~cash flows~~our business.

InOn ~~May~~December ~~2003~~3, 2004, we and certain of our officers and directors were named in a complaint filed in the Superior ~~FASB~~Court ~~issued~~of ~~SFAS~~California, NoSanta Clara County. The ~~150,~~complaint ~~Accounting~~is ~~for~~a ~~Certain~~purported ~~Financial~~stockholder class ~~Instruments~~action ~~with~~brought ~~Characteristics~~by Frank A. Lettieri arising out of defendants’ conduct in ~~both~~selling ~~Liabilities~~our company to Synopsys at an allegedly inadequate and ~~Equity,~~unfair price. The ~~which~~plaintiffs ~~requires~~allege that ~~certain financial~~the ~~instruments~~defendants bearrived ~~presented~~at asan ~~liabilities~~unfair price so that ~~were~~at ~~previously~~least ~~presented~~two asof its directors ~~equity~~could avoid or assignificantly ~~temporary~~reduce ~~equity~~their exposure in a pending lawsuit. ~~Such instruments~~The ~~include~~plaintiffs ~~mandatory~~allege ~~redeemable~~that ~~preferred~~as ~~and~~a ~~common~~result ~~stock~~of this conduct, ~~and certain~~the ~~options~~defendants ~~and~~breached ~~warrants~~fiduciary duties. ~~SFAS~~The ~~No.~~plaintiffs allege that the defendants ~~150~~structured isthe ~~effective~~terms ~~for~~of ~~financial~~the ~~instruments~~proposed ~~entered~~merger ~~into~~to orfit ~~modified~~the ~~after~~needs ~~May 31~~of Synopsys, instead ~~2003~~of ~~and~~seeking ~~was~~to ~~effective~~obtain at the ~~beginning~~highest price reasonably available to us. The complaint seeks an injunction of the acquisition, ~~first~~and ~~interim~~the ~~period~~implementation of a procedure to ensure the highest ~~beginning~~possible ~~after~~price ~~June 15,~~for ~~2003~~stockholders. InThe complaint ~~November 2003,~~also seeks to direct the ~~FASB~~individual ~~issued~~defendants ~~FASB~~to exercise their ~~Staff~~fiduciary ~~Position~~duties ~~(“FSP”)~~to ~~No.~~obtain ~~150-3,~~a ~~Effective~~transaction ~~Date,~~in ~~Disclosures,~~the ~~and~~best ~~Transition~~interest ~~for~~of the ~~Mandatorily~~stockholders ~~Redeemable~~at ~~Financial~~the ~~Instruments~~highest ofprice. The complaint ~~Certain~~seeks ~~Nonpublic~~to ~~Entities~~rescind the merger agreement and to impose a constructive ~~Certain~~trust ~~Mandatorily~~upon ~~Redeemable~~any ~~Noncontrolling~~benefits ~~Interests~~improperly ~~under~~received ~~SFAS~~by Nodefendants as a result of improper conduct. The ~~150~~parties filed a stipulation on January 20, ~~which~~2005 ~~defers~~extending the ~~effective~~ ~~date~~time for ~~various~~defendants ~~provisions~~to ofrespond ~~SFAS~~to the ~~No.~~complaint ~~150~~until March 4, 2005. The case ~~Company~~is ~~believes~~in ~~that~~the preliminary stages, and it ~~has~~is ~~properly~~not possible for us to quantify ~~classified~~the ~~and~~impact, ~~measured~~if any, on our company. An unfavorable outcome in ~~its~~this ~~balance~~case ~~sheets~~could ~~and~~have ~~disclosed~~a inmaterial ~~its~~adverse ~~interim~~effect on our ~~consolidated~~business, financial ~~statements~~condition, ~~certain~~results ~~financial~~of ~~instruments~~operations ~~with~~and cash flow and our ~~characteristics~~ability to complete the proposed merger. In addition, the expense of ~~both~~defending ~~liabilities~~any litigation may be costly and divert ~~equity~~our attention from the day to day operations of our business.

15Other Contingencies

~~MANAGEMENT’S~~We ~~DISCUSSION~~from ~~AND~~time to time enter ~~ANALYSIS~~into OFcertain types of contracts that require us to indemnify parties against ~~FINANCIAL~~third ~~CONDITION~~party ~~AND~~claims. These ~~RESULTS~~contracts primarily OFrelate ~~OPERATIONS~~to: (i) certain agreements with our officers, directors and employees and third parties, under which we may be required to indemnify such persons for liabilities arising out of their duties to us and (ii) agreements under which we indemnify customers and partners for claims arising from intellectual property infringement.

~~This Quarterly~~The ~~Report~~terms onof ~~Form 10-Q contains forward-looking statements within~~such ~~the~~obligations ~~meaning~~vary. Because ~~of Section 27A of~~ the ~~Securities Act of 1933 and~~obligated ~~Section 21E~~amounts of ~~the~~these ~~Securities~~types ~~Exchange Act~~ of ~~1934. These~~agreements ~~statements~~often ~~relate~~are tonot ~~future~~explicitly ~~events~~stated, orthe ~~our~~overall ~~future~~maximum ~~financial~~amount ~~performance~~of ~~and~~the ~~involve~~obligations ~~known~~cannot ~~and~~be ~~unknown~~reasonably ~~risks~~estimated. Historically, ~~uncertainties~~ ~~and~~we ~~other~~have ~~factors~~not ~~that~~been ~~may~~obligated ~~cause our or our industry’s actual results, levels of activity, performance or achievements~~ to ~~be materially~~ ~~different~~make ~~from~~ any ~~future~~significant ~~results,~~payments ~~levels~~for ofthese ~~activity,~~obligations ~~performance~~other ~~or achievements~~than ~~expressed~~those ~~or implied by the forward-looking statements. In some cases you can identify~~in ~~forward-looking~~connection ~~statements~~with bydefending ~~terminology~~our ~~such as “may~~directors,” ~~“will,”~~officers ~~“should,” “expects,”~~and ~~“plans,”~~employees ~~“anticipates,”~~in ~~“believes,” “estimates,” “predicts,” “potential,” “continue” or~~ the ~~negative of these terms or other comparable~~Synopsys ~~terminology. These~~litigation ~~statements~~and ~~are~~derivative ~~only predictions~~complaint, and ~~you~~no ~~should~~liabilities ~~not~~were ~~place~~recorded ~~undue~~for ~~reliance~~these obligations on ~~these~~our ~~statements. Actual~~balance ~~events~~sheet oras ~~results~~of ~~may~~December ~~differ materially. In evaluating these statements~~31, ~~you should specifically consider various factors including those discussed in “Factors Affecting Future Operating Results” below~~2004.

~~Although~~In general, we ~~believe~~provide ~~that the expectations~~our ~~reflected~~customers ina ~~our forward~~90-~~looking~~day ~~statements~~limited ~~are~~warranty ~~reasonable,~~in weconnection ~~cannot~~with ~~guarantee future~~the ~~results,~~licensing ~~levels~~ of ~~activity,~~our software ~~performance~~that orthe ~~achievements. Moreover,~~software ~~neither~~will weperform ~~nor~~substantially ~~any~~in ~~other~~accordance ~~person assumes~~with ~~responsibility for the accuracy and completeness of these~~our ~~statements~~documentation. We ~~are~~do ~~under~~not nomaintain ~~duty to~~a ~~update~~general ~~any~~warranty ofreserve ~~the~~for ~~forward-looking~~estimated ~~statements~~costs ~~after~~at the ~~date~~time ofrevenue ~~this~~is ~~Quarterly~~recognized ~~Report~~due ~~on Form 10-Q~~ to ~~conform~~ our ~~prior statements to actual results, as a result of new information or otherwise.~~extensive

~~Overview~~16

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

InOur standard software ~~April 2004,~~license weand ~~released~~maintenance ~~the~~agreements ~~HSIMplus~~include ~~platform~~an ~~for~~infringement ~~the~~indemnification provision ~~comprehensive~~for ~~simulation~~claims ~~and~~from ~~analysis~~third ofparties ~~high-performance~~related ~~analog,~~to ~~mixed-signal, memory~~our ~~and~~intellectual ~~system-on-chip~~property. The ~~designs~~agreements ~~including~~generally ~~important~~limit ~~post-layout~~the ~~effects.~~scope ~~The~~of ~~platform,~~the ~~based~~available onremedies ~~version~~in ~~5.0~~a variety of ~~our~~industry-standard ~~HSIM hierarchical simulator~~methods, ~~provides~~including abut ~~new~~not ~~suite~~limited ofto ~~analyses~~a ~~for~~right ~~ICs~~to ~~manufactured~~control inthe ~~130~~defense ~~nanometer~~or ~~processes~~settlement ~~and~~of any claim, ~~below.~~procure ~~These~~the ~~analyses~~right ~~address~~for ~~major~~continued ~~concerns~~usage ofand ~~nanometer~~replace ICor ~~designers~~modify the infringing ~~including~~products ~~reliability~~to ofmake ~~power~~them ~~and~~non-infringing. Such ~~signal~~indemnification ~~networks,~~provisions ~~the~~are accounted ~~timing~~for ~~impact~~in ~~of dynamic~~accordance ~~voltage~~with ~~drop~~SFAS inNo. ~~power~~5. To ~~networks~~date, ~~dynamic~~we ~~crosstalk~~have ~~noise~~not ~~due~~incurred any costs related to ~~coupling capacitance~~any ~~and~~claims ~~MOSFET~~under ~~device~~such indemnification ~~reliability~~provisions.

~~Current~~8. Recent Accounting ~~Economic Environment~~Pronouncements

~~The~~In ~~general~~January ~~economic~~2003, ~~environment~~the ~~has~~Financial ~~been~~Accounting ~~challenging~~Standards ~~over~~Board ~~the~~(“FASB”) ~~last~~issued Interpretation ~~three~~46 ~~years~~(“FIN as46”), ~~the~~Consolidation ~~semiconductor~~of ~~industry~~Variable Interest ~~experienced~~Entities, and a revised ~~prolonged~~interpretation ~~economic~~of ~~downturn~~FIN 46 (“FIN 46-R”). As FIN a46 ~~result,~~requires certain ~~research~~variable ~~and~~interest ~~development~~entities (“VIEs”) to be consolidated by the primary ~~capital~~beneficiary ~~budgets~~of the entity if the equity investors in the entity do not have ~~been~~the characteristics ~~reduced~~of ~~substantially~~a ~~and~~controlling financial interest or sufficient equity at risk for the ~~same~~entity ~~time~~to finance its activities without additional subordinated financial support from other parties. The provisions of FIN 46 are effective immediately for all arrangements entered into after January 31, 2003. We have not invested in any entities that we believe are variable interest entities for which we are the primary beneficiary. The adoption of ~~numbers~~FIN 46 had no impact on our financial position, results of ~~design~~operations ~~starts~~or ~~and~~cash flows.

16In November 2003, the Emerging Issues Task Force (“EITF”) reached an interim consensus on Issue No. 03-01, “The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investment” to require additional disclosure requirements for securities classified as available-for-sale or held-to-maturity for fiscal years ending after December 15, 2003. In March 2004, the EITF reached a final consensus on this Issue and provided additional guidance in determining whether investment securities have an impairment which should be considered other-than-temporary in reporting periods after June 15, 2004. The adoption of this Issue had no impact on our financial position, results of operations or cash flows.

~~potential~~On ~~users~~December ~~have decreased due to budget cuts and layoffs. The electronic design automation (“EDA”) industry has endured this difficult period by providing flexible license structures and payment terms~~16, ~~such as time-based licenses with installment payments~~2004, ~~competitive pricing, bundling/packaging of suites of tools and~~the ~~continuing~~Financial toAccounting ~~consolidate,~~Standards ~~especially~~Board ~~large~~issued ~~EDA~~SFAS ~~vendors~~No. 123R. AsSFAS a123R ~~relatively~~eliminates ~~small~~the ~~company~~alternative inof applying the ~~EDA industry~~intrinsic ~~offering~~value ameasurement ~~limited~~provisions ~~number~~ of ~~products~~Opinion as25 ~~compared~~ to ~~the large EDA~~stock ~~vendors~~compensation ~~who~~awards ~~offer~~issued ~~products~~to ~~for~~employees. Rather, the ~~whole~~new ~~design~~standard ~~flow,~~requires weenterprises ~~have had~~ to ~~compete~~measure ~~by creating~~the ~~leading~~cost ~~technology and solutions, providing high levels~~ of ~~customer~~ ~~support,~~employee ~~remaining~~services ~~flexible~~received in ~~licensing~~exchange ~~structure~~for ~~and~~an ~~payment~~award ~~terms~~of ~~and offering~~equity ~~substantial~~instruments ~~discounts~~based on ~~which~~the ~~lower~~grant-date ~~our~~fair ~~average~~value ~~selling~~of ~~prices. More~~the ~~recently, there have been some~~award. ~~improvements~~That incost ~~the~~will ~~global~~be ~~economy~~recognized ~~and~~over the ~~semiconductor~~period ~~industry. However,~~during wewhich ~~have~~an ~~not~~employee ~~experienced any~~is ~~material~~required ~~changes in our customers’ purchasing behavior and continue~~ to ~~believe that~~provide ~~our~~services ~~customers~~in ~~will~~exchange ~~spend~~for ~~conservatively~~the inaward, ~~calendar~~known ~~2004~~as ~~with~~the ~~tight~~requisite ~~control~~service onperiod ~~their~~(usually ~~research~~the ~~and~~vesting ~~development budgets~~period).

~~For~~We have not yet quantified the ~~remainder~~effects of ~~fiscal~~the ~~2004~~adoption of SFAS 123R, but it we expect tothat ~~continue~~the ~~to experience~~new ~~longer~~standard ~~sales~~may ~~cycles,~~result ~~pressure~~in onsignificant ~~average~~stock-based ~~selling~~compensation ~~prices,~~expense. The ~~flexible~~pro ~~licensing structures~~forma effects on net income and earnings ~~extended~~per ~~payment~~share ~~terms. Nonetheless,~~if we ~~will~~had ~~maintain~~applied ~~our~~the ~~focus~~fair invalue ~~delivering~~recognition ~~our~~provisions ~~upcoming~~of 5original SFAS 123 on stock compensation awards (rather than applying the intrinsic value measurement provisions of Opinion 25) are disclosed on page 10.0 Although ~~release,~~such ~~increasing~~pro forma effects of applying original SFAS 123 may be indicative of the ~~adoption~~effects of ~~our~~adopting ~~newer~~SFAS ~~products~~123R, ~~enhancing and~~the ~~executing~~provisions ~~our~~of ~~major~~these ~~account~~two ~~strategies~~statements differ in ~~order~~some toimportant ~~increase~~respects. The ~~market~~actual ~~penetration~~effects of adopting SFAS 123R will be dependent on numerous factors including, but not limited to, the valuation ~~expanding~~model ~~our~~chosen ~~worldwide~~by ~~organization~~us ~~cautiously~~to ~~while~~value ~~providing~~stock-based ~~first~~awards; ~~class~~the assumed award forfeiture ~~customer~~rate; ~~support~~the accounting policies adopted concerning the method of recognizing the fair value of awards over the requisite service period; and ~~controlling~~the ~~costs~~transition method to(as ~~achieve~~described ~~continued~~below) ~~profitability~~chosen for adopting SFAS 123R.

Our fiscal year ends on September 30. Throughout this report we refer to the fiscal year ended September 30, 2003 as fiscal 2003, the fiscal year ending September 30, 2004 as fiscal 2004 and so on.17

~~Sources~~SFAS 123R will be effective for our fiscal quarter beginning July 1, 2005, and requires the use of ~~Revenue~~the modified prospective application method. Under this method SFAS 123R is applied to new awards and to awards modified, repurchased or cancelled after the effective date. Additionally, compensation cost for the portion of awards for which the requisite service has not been rendered (such as unvested options) that are outstanding as of the date of adoption will be recognized as the remaining requisite services are rendered. The compensation cost relating to unvested awards at the date of adoption will be based on the grant-date fair value of those awards as calculated for pro forma disclosures under the original SFAS123. In addition, companies may use the modified retrospective application method. This method may be applied to all prior years for which the original SFAS 123 was effective or only to prior interim periods in the year of initial adoption. If the modified retrospective application method is applied, financial statements for prior periods will be adjusted to give effect to the fair-value-based method of accounting for awards on a consistent basis with the pro forma disclosures required for those periods under the original SFAS 123.

~~We derive all of our revenue from software licensing and maintenance fees~~9. ~~To date, we have derived~~ Proposed ~~substantially~~Merger ~~all of this revenue from the licensing~~ and ~~support~~Litigation of HSIM. Even though, as a percent of total orders received, sales of other products other than HSIM have increased for the first half of fiscal 2004 as compared to fiscal 2003, we do not expect these other products to account for any meaningful percentage of our total revenue until fiscal 2005. Our software does not require customization and generally does not require on-site implementation services. As a result, we have not generated any professional service or consulting revenue. We do not consider backlog to be a meaningful measure of future revenue because our customers can generally cancel orders without penalty.Settlement

~~Product~~We ~~Revenue~~entered —into ~~Perpetual~~an ~~Licenses~~agreement of merger dated November 30, 2004 with Synopsys and Merger Sub. The merger agreement provides that Merger Sub will be merged with and into our company and we will become a wholly owned subsidiary of Synopsys. Under the terms of the merger agreement, upon completion of the merger (i) each outstanding share of our common stock will be converted into the right to receive $7.00 in cash and (ii) each option to purchase shares of our common stock (excluding certain options that will not be exercised) will be converted into an option to purchase that number of shares of Synopsys common stock based on the ratio of the $7.00 per share merger consideration to the average closing price of Synopsys common stock during a ten-trading day period ending on and including the second trading day prior to the closing. The per share exercise price of each option assumed will be adjusted by dividing the existing per share exercise price by the ratio referenced in the prior sentence. The merger is conditioned upon, among other things, (i) approval of the holders of the majority of our common stock, (ii) approval of the holders of the majority of our common stock casting votes affirmatively or negatively on the merger agreement at our 2005 annual meeting of stockholders (excluding our officers and directors, the individual defendants and the related parties of the individual defendants), (iii) holders of no more than 17.5% of the shares of our common stock as of the date of the completion of the merger having demanded appraisal rights, (iv) clearance under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the “HSR Act”), and (v) other conditions, as set forth in the merger agreement which was filed as an exhibit to the Form 8-K/A we filed with the SEC on December 3, 2004. The Federal Trade Commission has requested additional information and documentary material in connection with its review of the proposed merger, which will result in an extension of the waiting period under the HSR Act.

~~Perpetual~~Upon ~~license~~the ~~customers~~closing ~~pay~~of athe merger, ~~one-time~~our ~~license~~officers, ~~fee~~directors and employees who are ~~entitled to~~defendants ~~use~~in the ~~software~~State Court asAction ~~long~~will asmake ~~they~~settlement ~~desire. To~~payments ~~receive~~to ~~support,~~Synopsys ~~periodic~~in ~~updates~~the ~~and~~aggregate ~~new~~amount of ~~enhancements~~$61.6 ~~from~~million ~~us, perpetual~~and ~~license~~will ~~customers~~not ~~must~~exercise ~~purchase~~options ~~maintenance~~to ~~contracts. .Prior~~purchase toour ~~fiscal~~common ~~2003,~~stock valued weat ~~generated~~approximately ~~the majority~~$5.9 ofmillion ~~our~~(based ~~total~~on ~~revenue~~a ~~from~~value ~~perpetual~~of ~~licenses~~$7. As00 ~~more~~per ~~customers~~share ~~have~~of our ~~been~~common ~~purchasing~~stock). Although the ~~time-based~~settlement ~~licenses,~~payments ~~product~~are ~~revenue~~being asmade aby ~~percent~~these ofindividuals ~~total~~and ~~revenue~~they ~~and~~will innot be ~~absolute~~reimbursed ~~dollars~~by ~~has~~our ~~decreased~~company, ~~and~~the ~~accounted~~settlement ~~for~~is ~~only~~deemed ~~16.1%~~to ~~and~~be ~~23.5%~~an ofexpense ~~our~~in ~~total~~accordance ~~revenue~~with ~~for~~Staff ~~the~~Accounting ~~three~~Bulletin ~~and~~Topic ~~six~~5-T, ~~months~~“Accounting ~~ended~~for ~~March 31, 2004,~~Expenses ~~respectively,~~or asLiabilities ~~compared~~Paid toby ~~36.5%~~Principal ~~and~~Stockholders,” ~~41.0%~~because ofwe ~~our~~are ~~total~~a ~~revenue~~defendant ~~for~~ in the ~~three and~~State ~~six~~Court ~~months~~Action. As ~~ended~~a ~~March 31~~result, ~~2003.~~ we Werecorded ~~expect~~a ~~that~~litigation ~~over~~settlement ~~time~~charge ~~product~~of ~~revenue~~approximately ~~will~~$67.5 ~~continue~~million toin ~~decrease~~the quarter asand ~~a percent~~fiscal ofyear ~~our~~ended ~~total~~September ~~revenue~~30, 2004.

~~Subscription Revenue — Time-Based Licenses~~18

~~Our time-based licenses give the customer the right to use our software~~MANAGEMENT’S ~~for~~DISCUSSION aAND ~~fixed~~ANALYSIS ~~period of time, typically one to three years, and include~~OF ~~maintenance. Time-based~~FINANCIAL ~~licenses~~CONDITION ~~can~~AND ~~be renewed~~RESULTS ~~for~~OF ~~one or more~~OPERATIONS

17This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by the forward-looking statements. In some cases you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue” or the negative of these terms or other comparable terminology. These statements are only predictions and you should not place undue reliance on these statements. Actual events or results may differ materially. In evaluating these statements, you should specifically consider various factors including those discussed in “Factors Affecting Future Operating Results” below.

~~years. At~~Although ~~times,~~we ~~customers~~believe ~~may also~~that ~~acquire~~the ~~additional~~expectations ~~licenses~~reflected ~~for~~in ~~a shorter term, typically multiples of~~our ~~one~~forward-~~month~~looking ~~licenses,~~statements toare bereasonable, ~~used~~we ~~when~~cannot ~~they~~guarantee ~~reach~~future ~~certain~~results, levels ~~stages~~ of ~~the~~activity, ~~design process~~performance ~~in conjunction with their other time-based~~ or ~~perpetual licenses~~achievements. ~~These~~Moreover, ~~shorter~~neither ~~term~~we ~~licenses~~nor ~~are~~any ~~sold~~other person ~~primarily~~assumes toresponsibility ~~help~~for ~~customers~~the ~~with~~accuracy ~~their~~and ~~peak~~completeness ~~usage~~of ~~demands. To date, revenue from~~ these ~~shorter term~~ ~~licenses has not been significant~~statements. ~~An increasing~~We ~~proportion~~are ofunder ~~our~~no ~~total~~duty ~~revenue is derived from time-based licenses,~~to asupdate ~~more~~any of ~~our~~the ~~large customers initially subscribe to time~~forward-~~based~~looking ~~licenses, renew~~statements ~~their~~after ~~expired~~the ~~time-based~~date ~~licenses or subscribe to additional time-based licenses. In today’s challenging economic environment, some~~ of ~~the~~this ~~customers who had purchased perpetual~~Quarterly ~~licenses~~Report ~~previously~~on ~~and~~Form 10-Q ~~new~~to ~~customers~~conform ~~are~~our ~~also~~prior ~~choosing~~statements to ~~purchase time-based~~actual ~~licenses~~results, ~~due~~as toa ~~their~~result ~~flexible~~of ~~licensing~~new ~~and~~information ~~payment~~or ~~terms and we expect this trend to continue~~otherwise.

~~Maintenance Revenue~~Overview

~~Our~~We ~~perpetual~~are ~~license~~a ~~customers~~leading ~~typically~~provider ~~purchase maintenance~~of ~~contracts~~full-chip circuit simulation and ~~renew~~analysis ~~them~~software ~~annually~~for the design and verification of complex semiconductors. ~~Customers~~Our ~~who~~customers ~~purchase~~use ~~maintenance~~our ~~receive~~software ~~support,~~to ~~updates~~reduce time-to-market and achieve ~~enhancements~~first ~~when~~silicon wesuccess ~~make~~by ~~them~~simulating ~~available~~complex todesigns rapidly and accurately. We released our ~~general~~first product, ~~installed~~HSIM, ~~base~~in July 1999. WeIn ~~anticipate~~February ~~that~~2002, with the release of HSIM 2.0, we also introduced two new options, CircuitCheck and Cadence Analog Artist Integration, which are sold as anseparate ~~increasing~~options. We released our second major product, LEXSIM, ~~proportion~~in ofMay 2002, and our ~~future~~third ~~licenses~~product, ~~come~~CRITIC, ~~from~~in ~~time-based~~December ~~licenses~~2002. In April 2003, ~~maintenance~~we released HSIM 3.0 with a ~~revenue~~new ~~may~~digital ~~decrease~~co-simulation asinterface option, and in May 2003, we released on a limited ~~percent~~basis our fourth product, HANEX. In addition, we released the HSIMplus platform in April 2004 for the comprehensive simulation and analysis of ~~total~~high-performance analog, ~~revenue~~mixed-signal, memory and system-on-chip designs including important post-layout effects. ~~Maintenance~~ ~~revenue~~The ~~may~~LEXSIM ~~also~~product ~~fluctuate~~was ~~from~~no ~~quarter~~longer tooffered ~~quarter~~for sale as a ~~due~~separate toproduct ~~the~~as ~~timing~~of August 2004, since all of ~~annual~~its ~~renewals~~features are now supported by the HSIMplus platform.

~~Quarterly~~Our ~~Fluctuations~~fiscal year ends on September 30. Throughout this report we refer to the fiscal year ended September 30, 2003 as fiscal 2003, the fiscal year ended September 30, 2004 as fiscal 2004 and so on.

~~Through~~Recent the fiscal quarter ended December 31, 2002, we achieved 13 quarters of sequential revenue growth. Our revenue for the fiscal quarters ended March 31, 2003 and June 30, 2003 decreased sequentially but recovered in part and rose in each of the following quarters, including the quarter ended March 31, 2004. We believe the prolonged economic slowdown and seasonal factors in our business have caused and will continue to cause both the total revenue and each of its components to fluctuate from quarter to quarter. Our customers and prospective customers are controlling their spending in order to conserve capital and maintain or increase profitability, which causes extended sales cycles, smaller number of license purchases or decreased or canceled budgets and decreasing average selling prices. Other seasonal factors include the mix between perpetual and time-based licenses, timing of the renewals of time-based licenses and maintenance, and payment terms, which may impact the timing of revenue recognition. Further, commissions represent a significant portion of our sales force compensation, which is structured to encourage sales closures prior to fiscal year end. As a result, we expect that sales efforts will intensify in the fourth fiscal quarter, which could result in our order receipts and revenue being lower in the first half of the subsequent fiscal year.Developments

~~Deferred~~We ~~Revenue~~entered into an agreement of merger dated as of November 30, 2004 with Synopsys and North Acquisition Sub, Inc. The merger agreement provides that, subject to the satisfaction or waiver of the conditions set forth therein, North Acquisition Sub, Inc. will be merged with and into our company and we will become a wholly owned subsidiary of Synopsys.

Time-based licenses and maintenance that are invoiced in advance and are either paid or due are included in deferred revenue and generally recognized ratably over the contract period on a straight line basis. Deferred revenue also consists of deferred perpetual license fees for which all of the revenue recognition criteria have not been met. Deferred revenue fluctuates depending on the timing of perpetual licenses meeting all the revenue recognition criteria, as well as the number, subscription period, payment terms, and timing of renewals of time-based licenses and maintenance contracts. Deferred revenue expected to be recognized beyond one year from the balance sheet date is classified as long-term deferred revenue.19

~~Operating~~Under ~~Expenses~~the terms of the merger agreement, upon the completion of the merger (i) each outstanding share of our common stock will be converted into the right to receive $7.00 in cash and (ii) each option to purchase shares of our common stock will be converted into an option to purchase that number of shares of Synopsys common stock based on the ratio of the $7.00 per share merger consideration to the average closing price of Synopsys common stock during a ten-trading day period ending on and including the second trading day prior to the closing. The per share exercise price of each option assumed will be adjusted by dividing the existing per share exercise price by the ratio referenced in the prior sentence.

~~Since~~The ~~our~~merger ~~inception~~is inconditioned upon, ~~August 1998~~among other things, we(i) ~~have~~approval ~~incurred~~of ~~substantial~~the holders of the majority of our ~~costs~~common tostock, ~~develop~~(ii) approval of the holders of the majority of our ~~technology~~common stock casting votes affirmatively or negatively on the merger agreement at our 2005 annual meeting of stockholders (excluding our officers and ~~products~~directors, ~~recruit~~the individual defendants and ~~train~~the ~~personnel~~related ~~for~~parties of the individual defendants), (iii) holders of no more than 17.5% of the shares of our ~~engineering~~common stock as of the date of the completion of the merger having demanded appraisal rights, ~~sales~~(iv) clearance under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the “HSR Act”), and (v) ~~marketing~~other conditions. The Federal Trade Commission has requested additional information and ~~technical~~documentary ~~support~~material in connection with its review of the proposed merger, which will result in an extension of the waiting period under the HSR Act. There can be no assurance that the merger will be consummated in a timely manner, if at all.

18Upon the closing of the merger, our officers, directors and employees who are defendants in the State Court Action among Synopsys, us and the individuals will make settlement payments to Synopsys in the aggregate amount of $61.6 million and will not exercise options to purchase our common stock valued at approximately $5.9 million (based on a value of $7.00 per share of our common stock). Although the settlement payments are being made by these individuals and they will not be reimbursed by us, the settlement is deemed to be an expense in accordance with Staff Accounting Bulletin Topic 5-T, “Accounting for Expenses or Liabilities Paid by Principal Stockholders,” because we are a defendant in the State Court Action. As a result, we recorded a litigation settlement charge of approximately $67.5 million in the quarter and fiscal year ended September 30, 2004. This settlement charge excludes legal fees, which are recorded within general and administrative expenses.

~~departments~~Current ~~and~~Economic establish an administrative organization. We anticipate that our operating expenses will increase in the future as we fund more research and development projects, increase our sales and marketing operations both domestically and internationally, develop new sales channels, broaden our technical support and improve our operational and financial systems. In fiscal 2002, fiscal 2003 and the six months ended March 31, 2004, legal fees and other expenses related to our litigation with Synopsys were $5.6 million, $7.8 million and $5.7 million, respectively. We expect the cost of the Synopsys litigation to increase as we continue to defend ourselves vigorously and the lawsuits move toward trial. Additionally, we also expect costs related to being a public company, such as directors’ and officers’ liability insurance, compliance with corporate governance rules adopted by The Nasdaq Stock Market and the Securities and Exchange Commission, professional fees and various filing fees to increase our general and administrative expenses. We believe that our operating expenses will continue to grow in absolute dollars in future periods although the rate of growth in expenses from period to period may vary. We expect, however, that as a percent of revenue, operating expenses will fluctuate from quarter to quarter depending primarily upon the rate of growth in revenue. We will need to generate significant revenue in the future to maintain profitability.Environment

ToThe ~~increase~~general ~~market~~economic environment ~~share~~has inbeen ~~international~~challenging ~~locations~~over the last three years as the semiconductor industry experienced a prolonged economic downturn. As a result, research and ~~better~~development ~~serve~~capital ~~our~~budgets ~~customers~~have been reduced substantially and at the same time, wethe ~~plan~~numbers of design starts and potential users have decreased due to ~~further~~budget ~~expand~~cuts ~~our~~and layoffs. The ~~international~~EDA ~~operations~~industry has endured ~~selectively~~this difficult period by providing flexible license structures and payment terms, such as time-based licenses with installment payments, competitive pricing, bundling/packaging of suites of tools and continuing the trend toward industry consolidation, especially by large EDA vendors. As a ~~result~~relatively small company in the EDA industry offering a limited number of ~~these~~products, as compared to the large EDA ~~investments~~vendors inwho ~~our~~offer ~~international~~products ~~operations~~for the whole design flow, we ~~may~~have ~~experience~~had anto ~~increase~~compete by creating leading technology and solutions, providing high levels of customer support, remaining flexible in licensing structure and payment terms and ~~cost~~offering substantial discounts, all of which factors contributed to the decrease in our average selling prices. Even though the semiconductor industry sales grew in 2004, there are concerns about excessive inventories, softening market demands and ~~other~~decreasing average ~~operating~~selling ~~expenses~~prices ~~disproportionate~~which tomay ~~revenue~~result ~~from~~in a flat or negative growth for the ~~those~~semiconductor ~~operations~~sales in 2005. Design starts for 180nm and below integrated circuits have increased and designers need tools that can solve their nanometer design problems. However, we have not experienced any

In fiscal 2002, we accrued bonuses of an aggregate of $760,000 earned by our employees for their services in fiscal 2002. These bonuses were paid over time on specified schedules and were paid in full as of October 31, 2003. In fiscal 2003, we accrued bonuses of an aggregate of $900,000 earned by our employees for their services in fiscal 2003. These bonuses were paid in full as of December 31, 2003. We also accrued bonuses of $175,000 earned by our employees for their services for the six months ended March 31, 2004. In addition, our executive officers orally agreed that they would not receive their base salaries in fiscal 2002 and fiscal 2003. In October 2003, the compensation committee of our board of directors reinstated the salaries of our executive officers and we expect to pay base salaries totaling approximately $743,000 to these officers in fiscal 2004. As a result of our significant bonus accruals in fiscal 2001 and fiscal 2002 and the foregone salaries in fiscal 2002 and fiscal 2003, our compensation expense in fiscal 2004 may not be consistent with compensation expense in prior years and compensation expense in prior years may not be indicative of future periods.20

~~Stock-Based~~material ~~Compensation~~changes in our customers’ purchasing behavior and continue to believe that our customers will continue to spend conservatively in fiscal 2005 with tight control on their research and development budgets.

WeSources did not record any deferred stock-based compensation in fiscal 2002, fiscal 2003 or in the six months ended March 31, 2004. We have been amortizing stock-based compensation recorded previously over the vesting period of the related options, which is generally four years. We amortized $1.0 million and $955,000 of stock-based compensation in fiscal 2002 and fiscal 2003, respectively. During the three and six months ended March 31, 2004, we recognized aggregate stock-based compensation expense of approximately $218,000 and $442,000, respectively. We expect aggregate stock-based compensation expense of approximately $354,000 during the remainder of fiscal 2004 and approximately $235,000 during fiscal 2005.Revenue

~~Foreign~~We ~~Currency~~derive ~~Transactions~~all of our revenue from software licensing and maintenance fees. To date, we have derived substantially all of our revenue from the licensing and support of HSIM. To the extent we remain a stand-alone company, we do expect HSIM to continue to account for a majority of our revenue. To the extent we remain a stand-alone company, we also expect our other products, CRITIC and HANEX together with the options of HSIMplus, to account for an increasing portion of our revenue. Our software does not require customization and generally does not require on-site implementation services. As a result, we have not generated a significant amount of professional service or consulting revenue. We do not consider backlog to be a meaningful measure of future revenue because our customers can generally cancel orders without penalty.

~~Our~~Product ~~revenue~~Revenue is— ~~generally~~Perpetual ~~denominated in United States dollars; however, our operating expenses in international locations are denominated in local currencies. Historically, our exposure to foreign exchange~~Licenses

Historically, we have generated the majority of our total revenue from perpetual licenses. As more customers have been purchasing time-based licenses, product revenue as a percent of total revenue and in absolute dollars has decreased and accounted for only 19.6% of our total revenue for the three months ended December 31, 2004 as compared to 30.9% of our total revenue for the three months ended December 31, 2003. Perpetual license customers pay a one-time license fee and are entitled to use the software as long as they desire. To receive support, periodic updates and new enhancements from us, perpetual license customers must purchase maintenance contracts.

~~fluctuations~~Subscription ~~has~~Revenue ~~been~~— ~~minimal;~~Time-Based ~~however, as our international sales and operations expand, we anticipate that our exposure to risks associated with foreign currency fluctuations will increase.~~Licenses

~~Critical~~Our ~~Accounting~~time-based ~~Policies~~licenses give the customer the right to use our software for a fixed period of time, typically one to three years, and include maintenance. Time-based licenses can be renewed for one or more years. At times, customers may also acquire additional licenses for a shorter term, typically multiples of one-month licenses, to be used when they reach certain stages of the design process in conjunction with their other time-based or perpetual licenses. These shorter term licenses are sold primarily to help customers with their peak usage demands. To date, revenue from these shorter term licenses has not been significant. An increasing proportion of our total revenue is derived from time-based licenses, as more of our large customers initially subscribe to time-based licenses, renew their expired time-based licenses or subscribe to additional time-based licenses. Time-based license revenue accounted for 56.9% of our total revenue for the three months ended December 31, 2004 as compared to 43.6% of our total revenue for the three months ended December 31, 2003. In today’s challenging economic environment, some of the customers who had purchased perpetual licenses previously and new customers are also choosing to purchase time-based licenses due to their flexible licensing and payment terms.

~~Revenue~~Maintenance ~~Recognition~~Revenue

WeOur ~~recognize~~perpetual ~~revenue in accordance with the provisions of American~~license ~~Institute~~customers oftypically ~~Certified~~purchase ~~Public~~maintenance ~~Accountants~~contracts ~~Statement~~and ofrenew ~~Position 97-2 (“SOP~~them ~~97-2”), Software Revenue Recognition~~annually. ~~The~~Customers ~~application~~who ofpurchase maintenance ~~SOP~~receive ~~97-2 requires judgment~~support, ~~including~~ ~~whether~~updates aand ~~software~~enhancements ~~arrangement~~when ~~includes~~we ~~multiple~~make ~~elements, and if so,~~them ~~whether~~available ~~vendor-specific~~to ~~objective~~our ~~evidence~~general ~~(“VSOE”)~~installed ~~of fair value exists for each of those elements~~base. ~~When certain~~ ~~elements~~To ofthe anextent ~~arrangement~~we ~~are~~remain ~~delivered~~a atstand-alone ~~different times~~company, ~~the~~we ~~ability~~anticipate tothat ~~identify~~as ~~VSOE~~an ~~for~~increasing ~~those~~proportion ~~undelivered~~of ~~elements~~our ~~could~~future ~~materially~~licenses ~~impact~~come ~~the~~from ~~amount~~time-based oflicenses, ~~earned~~maintenance ~~and unearned~~ revenue. may

We recognize and report revenue in three separate categories: product revenue, subscription revenue and maintenance revenue. Product revenue is derived from perpetual license fees. Subscription revenue is derived from time-based license fees, which include maintenance during the license period. We recognize product revenue and subscription revenue when all of the following conditions are met:21

~~• a~~decrease ~~written~~as ~~purchase~~a ~~order,~~percent ~~license~~of ~~agreement~~total orrevenue. Maintenance ~~other~~revenue ~~contract~~may ~~has~~also ~~been~~fluctuate from ~~executed;~~quarter to quarter due to the timing of annual renewals.

~~• the~~Quarterly ~~product and the production license key have been delivered;~~Fluctuations

~~• user~~We ~~acceptance~~believe ~~periods~~seasonal factors in our business may cause both the total revenue and each of its components to fluctuate from quarter to quarter. These seasonal factors include patterns in the capital budgeting, ifpurchasing ~~any~~cycles of our current and prospective customers, ~~have~~the ~~expired;~~mix between perpetual and time-based licenses, timing of the renewals of time-based licenses and maintenance, and payment terms which may impact the timing of revenue recognition. During the three months ended March 31, 2003, we experienced a substantial change in customers’ purchasing behavior due to the prolonged economic downturn and concerns about their own financial stability. Therefore, as a cost-cutting measure, customers either suspended or reduced their capital budgets dramatically, which adversely affected our revenue. Consequently, total revenue and earnings were lower than expected for the quarter ended March 31, 2003. In addition, more customers preferred to purchase time-based licenses due to their flexible licensing structure and payment terms. As a result, we also experienced decreases in perpetual license purchases in fiscal 2004 as compared to fiscal 2003. Further, commissions represent a significant portion of our sales force compensation, which is structured to encourage sales booking closures prior to fiscal year end. As a result, we expect that sales efforts will intensify in the fourth fiscal quarter, which could result in our revenue being flat or slightly lower in the second and third quarters of the subsequent fiscal year.

~~• the~~Deferred ~~license fee is fixed or determinable; and~~Revenue

~~• collection~~Time-based licenses and maintenance that are invoiced in advance and are either paid or due are included in deferred revenue and generally recognized ratably over the contract period on a straight line basis. Deferred revenue also consists of deferred perpetual license fees for which all of the revenue ~~fee~~recognition criteria have not been met. Deferred revenue fluctuates depending on the timing of perpetual licenses meeting all the revenue recognition criteria, as well as the number, subscription period, payment term and timing of renewals of time-based licenses and maintenance contracts. Deferred revenue expected to be recognized beyond one year from the balance sheet date is ~~probable~~classified as long-term deferred revenue.

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

~~For~~In ~~sales~~the ~~made~~three ~~through~~months ~~all distributors~~ended December 31, we2003 ~~recognize~~and ~~revenue~~2004, ~~when~~legal ~~the software~~fees ~~has~~and ~~been~~other ~~sold~~expenses related to the State ~~end~~Court ~~users~~Action and ~~all~~Federal ~~other~~Court ~~revenue~~Actions, ~~recognition criteria~~which ~~have~~are ~~been~~included ~~met. When~~within ~~the~~general ~~distributor~~and isadministrative ~~the~~expenses, ~~primary~~were ~~obligor~~$2.9 million inand $2.5 million, respectively. In the ~~arrangement~~event ~~and~~that ~~has latitude in~~the ~~establishing~~merger ~~prices~~with ~~and~~Synopsys ~~credit~~is ~~risk~~not consummated, we ~~record~~expect ~~revenue~~the ~~based~~cost onof ~~amounts~~the State Court ~~invoiced~~Action toand ~~the~~Federal ~~distributor~~Court ~~(rather~~Actions ~~than~~to ~~the~~increase ~~amount~~as ~~invoiced~~we bycontinue ~~the~~to ~~distributor~~defend ourselves tovigorously and the ~~end~~lawsuits ~~users). When~~move wetoward ~~are the~~trial. ~~primary~~Additionally, ~~obligor~~ in the ~~arrangement~~event ~~and~~we ~~have~~were ~~latitude~~to incontinue ~~establishing~~as ~~price~~a ~~and~~stand-alone ~~credit risk~~company, we ~~record~~also ~~revenue~~expect ~~based~~costs onrelated ~~amounts~~to ~~invoiced~~being toa ~~the~~public ~~end~~company, ~~customer~~such as ~~(with~~directors’ ~~the~~and ~~related~~officers’ ~~commissions~~liability ~~paid~~insurance, toprofessional fees, particularly for the ~~distributors~~compliance ~~reported~~of asSarbanes-Oxley ~~sales~~Act 404, and various filing fees to ~~marketing~~increase ~~expense)~~our general and administrative expenses.

20In fiscal 2004, we accrued bonuses of an aggregate of approximately $1.5 million earned by our employees for their services in fiscal 2004, all of which were paid by December 2004. In fiscal 2003, we accrued bonuses of an aggregate of $900,000 earned by our employees for their services in fiscal 2003. These bonuses were paid in December 2003. There was no such accrual for the three months ended December 31, 2004. In addition, our executive officers orally agreed that they would not receive their base salaries in fiscal 2002 and fiscal 2003. In October 2003, our compensation committee of our board of directors reinstated the

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.22

~~Allowance~~salaries ~~for~~of ~~Doubtful~~our ~~Accounts~~executive officers and we paid base salaries of approximately $756,000 to these officers in fiscal 2004. As a result of our varying significant bonus accruals and the foregone salaries in fiscal 2002 and fiscal 2003, our compensation expense in fiscal 2004 was not consistent with compensation expense in fiscal 2002 or fiscal 2003 and may not be indicative of future periods.

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

~~Sales~~We ~~Commission~~did ~~Accrual~~not record any deferred stock-based compensation in the three months ended December 31, 2003 or 2004. We have been amortizing stock-based compensation recorded previously over the vesting period of the related options, which is generally four years. During the three months ended December 31, 2004 and ~~Expenses~~2003, we recognized aggregate stock-based compensation expense of approximately $99,000 and $224,000, respectively.

~~Sales~~Foreign ~~commissions~~Currency are earned by our sales force for each order received, shipped and collected. Based on our policies, sales commissions are paid upon booking and collection. Commission rates increase as the sales person achieves a certain percentage of his or her annual quota. We determine an estimated average annual commission rate during the first three fiscal quarters for purposes of accruing commissions. We adjust the balance of the commission accrual and the actual commission expense at the end of each fiscal year based on each sales person’s actual commission rates.Transactions

~~Contingent~~Our revenue is generally ~~Liabilities~~denominated in United States dollars; however, our operating expenses in international locations are denominated in local currencies. Historically, our exposure to foreign exchange fluctuations has been minimal.

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

21Revenue Recognition

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

~~The~~We ~~following~~recognize ~~table~~and report ~~sets~~revenue ~~forth~~in ~~the~~three ~~results~~separate ofcategories: ~~our~~product ~~operations~~revenue, ~~expressed~~subscription asrevenue aand ~~percent~~maintenance ~~of total~~ revenue. ~~Our~~Product ~~historical~~revenue ~~operating~~is ~~results~~derived ~~are~~from ~~not~~perpetual ~~necessarily~~license ~~indicative~~fees. Subscription ofrevenue ~~the~~is ~~results~~derived ~~for~~from time-based license fees, which ~~any~~include ~~future~~maintenance during the license period. We recognize product revenue and subscription revenue when all of the following conditions are met:

	Three Months Ended March 31,				Six Months Ended March 31,
	2004		2003		2004		2003
Revenue:
Product	16.1	%	36.5	%	23.5	%	41.0	%
Subscription	58.8		39.1		51.2		37.6
Maintenance	25.1		24.4		25.3		21.4
Total revenue	100.0		100.0		100.0		100.0
Cost of revenue:
Product	0.8		0.7		0.8		0.7
Subscription	1.1		1.0		1.1		0.9
Maintenance	2.6		2.2		2.5		2.1
Total cost of revenue	4.5		3.9		4.4		3.7
Gross profit	95.5		96.1		95.6		96.3
Operating expenses:
Research and development	20.5		19.4		20.7		16.9
Sales and marketing	27.2		32.7		27.4		30.0
General and administrative	37.0		27.4		37.9		25.5
Stock-based compensation	2.2		2.8		2.3		2.6
Total operating expenses	86.9		82.3		88.3		75.0
Income from operations	8.6		13.8		7.3		21.3
Interest income	2.4		2.9		2.4		2.7
Other expense, net	—		(0.1	)	—		(0.1	)
Income before taxes	11.0		16.6		9.7		23.9
Provision for taxes	(3.3	)	(5.0	)	(2.9	)	(8.0	)
Net income	7.7	%	11.6	%	6.8	%	15.9	%

• a written purchase order, license agreement or other contract has been executed;

~~Three~~• the product and ~~Six~~the ~~Months~~production ~~Ended~~license ~~March 31,~~key ~~2004~~have been delivered;

~~Revenue~~• user acceptance periods, if any, have expired;

~~Total Revenue. Our revenue consists of product, subscription and maintenance revenue. Total revenue increased by 11.2%, or $988,000, to $9.8 million in~~ • the ~~three~~license ~~months~~fee ~~ended~~is ~~March 31,~~fixed ~~2004 from $8.8 million for the three months ended March 31, 2003,~~ and ~~increased~~determinable; by 2.0%, or $380,000, to $19.5 million for the six months ended March 31, 2004 from $19.1 million for the six months ended March 31, 2003. The increases were attributable to an increase in our end user base, resulting in substantial growth in subscription and ~~maintenance revenue, partially offset by decreases in additional perpetual license sales.~~

~~Revenue~~• collection ~~from sales outside~~ of ~~North America accounted for 39.8% and 37.9% of total revenue for~~ the ~~three~~fee ~~months~~is ~~ended March 31, 2004 and 2003, respectively, and 39~~probable.7% and 38.8% of total revenue for the six months ended March 31, 2004 and 2003, respectively. The percent of total revenue from outside of North America increased due to revenue from outside of North America growing at a faster rate than domestic revenue, particularly from Japan. Revenue from Japan was 20.0% and 14.8% of our total revenue in the three months ended March 31, 2004 and 2003, respectively, and 18.9% and 14.5% of total revenue for the six months ended March 31, 2004 and 2003, respectively. No other country outside North America accounted

22VSOE exists for maintenance on perpetual licenses based on renewal rates. Our customers generally purchase the first year of maintenance when they purchase a perpetual license, so we use the residual method to determine the allocation of revenue to the license portion of multiple element arrangements involving perpetual licenses. Because we bundle both the license and maintenance into our agreements for time-based

for more than 10% of our total revenue in any of these periods. We expect that revenue from sales outside of North America will continue to account for a significant portion of our total revenue in the future.23

~~Marubeni~~licenses ~~Solutions, our exclusive distributor~~ for ~~Japan, accounted for approximately 20.0% and 14.8% of our total revenue for~~ the ~~three months ended~~entire ~~March 31~~term, ~~2004~~VSOE ~~and~~does ~~2003,~~not ~~respectively,~~exist ~~and~~for ~~18.9%~~each ~~and~~element ~~14.5%~~ of ~~total revenue for~~ the ~~six months ended March 31~~arrangement. Therefore, ~~2004~~we ~~and~~recognize ~~2003, respectively. Broadcom~~subscription ~~Corporation~~revenue ~~accounted~~from ~~for~~time-based ~~approximately~~licenses ~~10.3%~~ratably ~~and~~over ~~12.9%~~the period of ~~our~~the ~~total~~license. Maintenance revenue ~~for~~is ~~the~~derived ~~three~~from the ~~months~~annual ~~ended~~maintenance ~~March 31,~~contracts ~~2004~~that ~~and~~are ~~the~~purchased ~~six~~by ~~months~~perpetual ~~ended March 31, 2003, respectively~~licensees. NoWe ~~other~~generally ~~direct~~recognize ~~customer~~revenue from ormaintenance ~~distributor~~ratably ~~accounted~~over ~~for~~the ~~more~~maintenance ~~than~~period, ~~10%~~which ofis ~~our~~typically ~~total~~one ~~revenue during any of these periods~~year.

~~Deferred~~ Future ~~revenue~~changes ~~includes~~in ~~perpetual~~accounting ~~license fees for which all of the revenue recognition criteria had not been met~~pronouncements, ~~time-based license fees that~~ ~~have~~including ~~been~~those ~~invoiced~~affecting ~~and due for which we recognize~~ revenue ~~ratably over the term of the license period~~recognition, ~~and~~could ~~maintenance~~require ~~fees~~us onto ~~perpetual~~change ~~licenses for which we~~our ~~also~~methods ~~recognized~~of revenue ~~ratably over the term of the maintenance period~~recognition. ~~Our~~These changes ~~total~~could ~~short~~cause ~~term~~us ~~and long term deferred revenue increased~~ to ~~$9.9 million~~defer ~~as of March 31, 2004 from $9.8 million as of September 30, 2003 and from $7.5 million as of March 31, 2003. We expect deferred~~ revenue ~~to fluctuate~~ from ~~quarter~~current toperiods ~~quarter due~~ to ~~the number of additional~~ ~~time-based~~subsequent ~~license~~periods ~~purchases,~~or ~~the~~accelerate ~~timing~~recognition of ~~renewals of time-based licenses and maintenance and their respective payment terms. Additionally,~~ deferred revenue ~~may~~to ~~not increase if more customers~~current ~~prefer quarterly payments for time-based licenses and maintenance~~periods.

~~Product~~Allowance ~~Revenue. Product revenue decreased by 51.1%, or $1.6 million, to $1.6 million~~ for ~~the~~Doubtful three months ended March 31, 2004 from $3.2 million for the three months ended March 31, 2003, and decreased by 41.7%, or $3.3 million, to $4.6 million for the six months ended March 31, 2004 from $7.8 million for the six months ended March 31, 2003. These decreases were primarily due to more customers, particularly major accounts, purchasing time-based licenses as compared to perpetual licenses. As a percent of total revenue, product revenue decreased to 16.1% for the three months ended March 31, 2004 from 36.5% for the three months ended March 31, 2003, and decreased to 23.5% for the six months ended March 31, 2004 from 41.0% for the six months ended March 31, 2003, as the sales of perpetual licenses was outpaced by growth in the sales of time-based licenses.Accounts

~~Subscription~~We ~~Revenue. Subscription~~maintain ~~revenue~~an ~~increased~~allowance ~~by 67.2%, or $2.3 million, to $5.8 million~~ for ~~the three months ended March 31, 2004~~ ~~from~~doubtful ~~$3.4 million~~accounts ~~for~~based ~~the~~on ~~three~~management’s ~~months~~best ~~ended~~estimate ~~March 31,~~of ~~2003,~~probable ~~and~~losses ~~increased~~inherent byin ~~39.0%, or $2.8 million, to $10.0 million for~~ the ~~six months~~outstanding ~~ended~~accounts ~~March 31,~~receivable ~~2004 from $7~~balance.~~2 million~~ Management ~~for~~determines the ~~six~~allowance ~~months ended~~based ~~March 31, 2003. The~~on ~~increases~~known ~~were~~troubled ~~primarily due to new customers purchasing time-based licenses~~accounts, as ~~well~~historical asexperience ~~existing customers purchasing additional time-based licenses~~ and ~~renewing~~ ~~their~~other ~~expired~~currently ~~time-based licenses.~~ available ~~As a percent of total revenue, subscription revenue rose to 58~~evidence.8% If ~~for~~ the ~~three~~financial ~~months~~condition ~~ended March 31, 2004 from 39.1% for the three months~~of ~~ended~~our ~~March 31,~~customers ~~2003,~~were ~~and rose~~ to ~~51.2% for the six months ended March 31~~deteriorate, ~~2004~~resulting ~~from~~in ~~37.6%~~an ~~for~~impairment ~~the~~of ~~six~~their ~~months ended March 31,~~ability ~~2003. We expect time-based licenses~~ to ~~account~~ ~~for~~make anpayments, ~~increasing~~additional ~~proportion~~allowances ofmay ~~total~~be ~~revenue in the future~~required.

~~Maintenance~~Sales ~~Revenue. Maintenance~~Commission ~~revenue~~Accrual ~~increased by 14.7%, or $316,000, to $2.5 million for the three months ended March 31, 2004 from $2.1 million for the three months ended March 31, 2003,~~ and increased by 20.6%, or $843,000, to $4.9 million for the six months ended March 31, 2004 from $4.1 million for the six months ended March 31, 2003. The increases in maintenance revenue were due to the increase in the number of perpetual licenses in the installed base. As a percent of total revenue, maintenance revenue decreased to 25.1% for the three months ended March 31, 2004 from 24.4% for the three months ended March 31, 2003, and increased to 25.3% for the six months ended March 31, 2004 from 21.4% for the six months ended March 31, 2003. We expect maintenance revenue to vary as a percent of total revenue basedExpenses

23Sales commissions are earned and paid to our sales force for each order received, shipped and collected. Based on our policies, we pay a portion of the sales commissions based on both bookings and collections and the commission rate varies depending on each salesperson’s ability to attain his or her annual quota. Commission rates increase as the sales person achieves a certain percentage of his or her annual quota. We determine an estimated average annual commission rate during the first three fiscal quarters for purposes of accruing commissions. We adjust the balance of the commission accrual and the actual commission expense at the end of each fiscal year based on each sales person’s actual commission rates.

~~on the growth rate of product revenue relative to subscription revenue~~Contingent and the number of customers renewing annual maintenance. If maintenance revenue increases as a percent of total revenue, our gross profit as a percent of total revenue, or gross margin, may decrease because of lower margins on maintenance revenue than product revenue due to incremental maintenance support costs.Liabilities

~~Cost~~We are subject to several legal proceedings and claims, the outcomes of ~~Revenue~~which are subject to significant uncertainty. Statement of Financial Accounting Standards (“SFAS”) No. 5, Accounting for Contingencies, requires that an estimated loss from a loss contingency should be accrued by a charge to income if it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably evaluated, taking into account the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss, among other factors. Changes in these factors could materially impact our financial position or our results of operations. We regularly evaluate current information available to us to determine whether such accruals should be recorded.

~~Cost~~Upon ofthe ~~Product~~closing ~~Revenue. Cost~~ of ~~product revenue consists primarily~~the ofmerger, ~~royalties~~our ~~due~~officers, ~~from~~directors usand toemployees ~~third~~who ~~parties~~are ~~under~~defendants ~~original~~in ~~equipment~~the ~~manufacturer~~State ~~arrangements. We~~Court ~~incur~~Action ~~only~~will ~~minimal costs~~make tosettlement ~~deliver~~payments ~~our~~to ~~software~~Synopsys asin the ~~product~~aggregate ~~and documentation are primarily~~amount ~~sent~~of ~~electronically~~$61. ~~Our~~6 million ~~cost~~and ~~of product~~will ~~revenue~~not ~~increased~~exercise byoptions ~~17.5%, or $11,000,~~ to ~~$74,000~~purchase ~~for~~our ~~the three months~~common ~~ended~~stock ~~March 31,~~valued ~~2004~~at ~~from~~approximately $~~63,000 for the three months ended March~~5.9 ~~31,~~million ~~2003,~~(based ~~and~~on ~~increased~~a byvalue 27of $7.9%00 orper share ~~$36,000,~~of toour ~~$165,000~~common ~~for~~stock). Although the ~~six~~ ~~months~~settlement ~~ended~~payments ~~March 31,~~are ~~2004~~being ~~from~~made ~~$129,000~~by ~~for~~these ~~the~~individuals ~~six~~and ~~months~~they ~~ended March 31,~~will ~~2003,~~not ~~due~~be reimbursed toby anus, ~~increase in~~ the ~~sublicensing~~settlement ofis ~~third-party~~deemed ~~products. As~~to abe ~~percent~~an ofexpense ~~total~~in ~~revenue,~~accordance ~~the cost of~~with ~~product~~Staff ~~revenue~~Accounting ~~increased~~Bulletin ~~slightly~~Topic 5-T, to“Accounting for ~~0.8%~~Expenses ~~for~~or ~~the~~Liabilities ~~three~~Paid ~~and~~by ~~six~~Principal ~~months~~Stockholders,” ~~ended~~because ~~March 31,~~we ~~2004~~are ~~from~~a ~~0.7%~~defendant ~~for~~in the ~~three~~State ~~and~~Court ~~six months ended March~~Action. ~~31,~~ ~~2003. We~~As ~~expect~~a ~~the~~result, ~~cost~~we ofrecorded ~~product revenue~~a aslitigation asettlement ~~percent~~charge of ~~total~~approximately $67.5 million ~~revenue~~in tothe ~~continue~~three tomonths ~~vary~~and ~~based~~fiscal onyear ~~the~~ended ~~sales of third-party products.~~September 30,

Cost of Subscription Revenue. Cost of subscription revenue consists primarily of personnel and allocated overhead expenses for support of time-based licenses. Our cost of subscription revenue increased by 23.8%, or $20,000, to $104,000 for the three months ended March 31, 2004 from $84,000 for the three months ended March 31, 2003, and increased by 22.9% or $39,000, to $209,000 for the six months ended March 31, 2004 from $170,000 for the six months ended March 31, 2003. The increases in cost of subscription revenue were primarily due to the increase in personnel and other costs associated with the support of a larger number of time-based licenses. As a percent of total revenue, the cost of subscription revenue increased slightly to 1.1% for the three and six months ended March 31, 2004 from 1.0% for the three months ended March 31, 2003 and 0.9% for the six months ended March 31, 2003. We expect the absolute dollar amount of the cost of subscription revenue to increase over the next 12 months.24

Cost of Maintenance Revenue. Cost of maintenance revenue consists primarily of personnel and other expenses related to providing maintenance support to our customers who purchase perpetual licenses. Our cost of maintenance revenue increased by 31.5%, or $62,000, to $259,000 for the three months ended March 31, 2004 ~~from $197,000 for the three months ended March 31, 2003, and increased by 21~~.~~9%, or $87,000, to $485,000 for the six months ended March~~ ~~31, 2004~~ ~~from~~This ~~$398,000~~settlement ~~for~~charge ~~the~~excludes ~~six~~legal ~~months ended March 31~~fees, ~~2003. The~~which ~~increases~~are inrecorded ~~cost of maintenance revenue~~within ~~were~~general primarily due to increased hiring of dedicated support personnel to provide support to a growing installed user base. As a percent of total revenue, the cost of maintenance revenue increased to 2.6% for the three months ended March 31, 2004 from 2.2% for the three months ended March 31, 2003, and ~~increased~~administrative ~~to 2~~expenses.5% for the six months ended March 31, 2004 from 2.1% for the six months ended March 31, 2003. The increase in the cost of maintenance revenue as a percent of total revenue was primarily due to the additional resources required in supporting an increasing number of perpetual licensees. We expect that the absolute dollar amount of cost of maintenance revenue will grow in the next 12 months as we continue to increase support for our growing base of domestic and international customers.

~~Operating~~In ~~Expenses~~July 2004, we and certain of our officers and directors were named in a securities class action lawsuit filed in the United States District Court for the Northern District of California. The complaint asserts claims against our company, Sang S. Wang, An-Chang Deng, Tammy Shu-Hua Liu and Yen-Son Huang on behalf of a putative class of persons who purchased our stock between December 13, 2001 and June 11, 2004. A second class action was filed on September 9, 2004 in the United States District Court for the Northern District of California. On September 27, 2004, one plaintiff moved for lead plaintiff status in the first filed class action. These two cases were consolidated on October 7, 2004. On November 4, 2004, the judge granted the motion of NECA-IBEW Pension Fund for appointment as lead plaintiff. In late January 2005, we reached an agreement in principle to resolve the class action lawsuits filed against us and certain of our officers and directors in July and September of 2004 for a payment to the class of $9.0 million. The settlement is subject to preliminary and final approval of the Court. As a result of the proposed settlement, we recorded a litigation settlement charge of $9.0 million in the three months ended December 31, 2004.

~~Research~~Results ~~and Development. Research and development expenses consist~~ of ~~engineering~~ ~~costs to develop new products, enhance existing products and perform quality assurance activities. Our research and~~Operations

24The following table sets forth the results of our operations expressed as a percent of total revenue. Our historical operating results are not necessarily indicative of the results for any future period.

development expenses increased by 17.8%, or $304,000, to $2.0 million for the three months ended March 31, 2004 from $1.7 million for the three months ended March 31, 2003, and increased by 24.9%, or $807,000, to $4.0 million for the six months ended March 31, 2004 from $3.2 million for the six months ended March 31, 2003. The increases in research and development expenses were primarily due to the hiring of additional research and development personnel. Research and development headcount increased to 48 at March 31, 2004 from 43 at March 31, 2003. As a percent of total revenue, research and development expenses increased to 20.5% in the three months ended March 31, 2004 from 19.4% in the three months ended March 31, 2003, and increased to 20.7 % in the six months ended March 31, 2004 from 16.9% in the six months ended March 31, 2003. We anticipate that research and development expenses will continue to increase in absolute dollars in the future.

	Three Months Ended December 31,
	2004		2003

Revenue:
Product	19.6	%	30.9	%
Subscription	56.9		43.6
Maintenance	23.5		25.5
Total revenue	100.0		100.0
Cost of revenue:
Product	0.3		1.0
Subscription	1.5		1.1
Maintenance	3.3		2.3
Total cost of revenue	5.1		4.4
Gross profit	94.9		95.6
Operating expenses:
Research and development	19.1		20.9
Sales and marketing	25.0		27.5
General and administrative	36.0		38.8
Litigation settlement	79.9		—
Stock-based compensation	0.9		2.3
Total operating expenses	160.9		89.5
Income (loss) from operations	(66.0	)	6.1
Interest income	3.5		2.4
Other income (expense), net	(0.2	)	(0.1	)
Income (loss) before taxes	(62.7	)	8.4
Benefits (provision) for taxes	0.8		(2.5	)
Net income (loss)	(61.9%	)	5.9	%

Sales and Marketing. Sales and marketing expenses consist primarily of salaries, commissions, travel, promotional and advertising costs. Our sales and marketing expenses decreased by 7.3%, or $211,000, to $2.7 million for the three months ended March 31, 2004 from $2.9 million for the three months ended March 31, 2003, and decreased by 7.1%, or $409,000, to $5.3 million for the six months ended March 31, 2004 from $5.7 million for the six months ended March 31, 2003. As a percent of total revenue, sales and marketing expenses decreased to 27.2% in the three months ended March 31, 2004 from 32.7% in the three months ended March 31, 2003, and decreased to 27.4% in the six months ended March 31, 2004 from 30.0% in the six months ended March 31, 2003. The decreases were primarily due to lower professional, marketing and tradeshow related expenses. We expect that sales and marketing expenses will increase in absolute dollars in future periods as we further expand our global sales and support organization.25

General and Administrative. General and administrative expenses include corporate, finance, human resource, administrative, legal and consulting expenses. Our general and administrative expenses increased by 50.1%, or $1.2 million, to $3.6 million for the three months ended March 31, 2004 from $2.4 million for the three months ended March 31, 2003, and increased by 51.6%, or $2.5 million, to $7.4 million for the six months ended March 31, 2004 from $4.9 million for the six months ended March 31, 2003. As a percent of total revenue, general and administrative expenses increased to 37.0% for the three months ended March 31, 2004 from 27.4% for the three months ended March 31, 2003, and increased to 37.9% for the six months ended March 31, 2004 from 25.5% for the six months ended March 31, 2003. The increases in general and administrative expenses were primarily due to legal fees related to our litigation with Synopsys. Legal fees related to our litigation with Synopsys increased by 80.3%, or $1.2 million, to $2.8 million for the three months ended March 31, 2004 from $1.5 million for the three months ended March 31, 2003, and increased by 64.7%, or $2.2 million, to $5.7 million for the six months ended March 31, 2004 from $3.5 million for the six months ended March 31, 2004. General and administrative headcount increased to 13 at March 31, 2004 from 12 at March 31, 2003. We expect that general and administrative expenses will continue to increase in absolute dollars to support the growth of our future operations, as well as from increased legal fees, liability insurance and the costs of public company compliance reporting.Revenue

~~Stock-Based~~Total ~~Compensation~~Revenue. ~~Stock-based~~Our ~~compensation~~revenue ~~expense~~consists ~~decreased by~~of ~~12.1%~~product, subscription orand ~~$30,000,~~maintenance ~~to $218,000 for the three months ended March~~revenue. ~~31,~~ ~~2004~~Total ~~from~~revenue ~~$248,000~~increased ~~for the three months ended March 31, 2003, and decreased~~ by 1015.98%, or $541.5 million,~~000,~~ to $~~442,000~~11.3 million ~~for~~in the ~~six~~three months ended ~~March~~December 31, 2004 from $~~496,000~~9.7 million for the ~~six~~three months ended ~~March~~December 31, 2003. AsThis aincrease ~~percent~~was ofprimarily ~~total~~attributable ~~revenue, stock-based compensation expense decreased~~ to ~~2.2% for the three months ended~~ ~~March 31,~~an ~~2004~~increase ~~from~~in ~~2.8%~~our ~~for~~end ~~the~~user ~~three months ended March 31~~base, ~~2003, and~~resulting ~~decreased~~in tosubstantial ~~2.3%~~growth ~~for the six months ended March 31, 2004 from 2.6%~~in ~~for~~subscription ~~the~~and ~~six~~maintenance ~~months ended March 31~~revenue, ~~2003~~partially ~~due~~offset toby ~~increases~~decreases in perpetual ~~revenue~~license sales.

25Revenue from sales outside of North America accounted for 37.0% and 40.2% of total revenue for the three months ended December 31, 2004 and 2003, respectively. Revenue from Japan was 17.4% and 17.8% of our total revenue in the three months ended December 31, 2004 and 2003, respectively. No other country outside North America accounted for more than 10% of our total revenue in either of these periods.

~~Interest~~Marubeni ~~Income~~Solutions, our exclusive distributor for Japan, accounted for approximately 17.4% and 17.8% of our total revenue for the three months ended December 31, 2004 and 2003, respectively. Micron Technology, Inc. accounted for 12.0% of our total revenue for the three months ended December 31, 2003. No other direct customer or distributor accounted for more than 10% of our total revenue during either of these periods.

~~Interest~~Deferred ~~income~~revenue ~~decreased~~includes perpetual bylicense ~~5.5%,~~fees orfor ~~$14,000,~~which toall ~~$242,000~~of ~~for~~ the ~~three~~ ~~months~~revenue ~~ended~~recognition ~~March 31,~~criteria ~~2004~~has not ~~from~~been ~~$256~~met,~~000~~ ~~for~~time-based ~~the~~license ~~three~~fees ~~months~~that ~~ended March 31,~~have ~~2003,~~been invoiced and ~~decreased~~have bybeen either ~~8.8%,~~collected or ~~$46,000,~~are todue ~~$478,000~~ for ~~the~~which ~~six~~we generally recognize revenue ratably ~~months~~over ~~ended~~the ~~March 31,~~term ~~2004~~of ~~from~~the ~~$524~~license period,~~000~~ ~~for~~and ~~the~~maintenance ~~six~~fees ~~months~~on ~~ended~~perpetual ~~March 31,~~licenses ~~2003. As~~for awhich ~~percent~~we ofalso ~~total~~generally recognize revenue~~, interest~~ ~~income~~ratably ~~decreased~~over tothe ~~2.4%~~term ~~for~~of the maintenance ~~three~~period. Our ~~months~~deferred ~~ended March 31,~~revenue ~~2004~~increased ~~from~~slightly 2to $10.9%7 ~~for~~million ~~the~~as ~~three~~of ~~months ended March~~December 31, ~~2003,~~2004 ~~and decreased to~~from 2$10.4%6 million ~~for~~as ~~the~~of ~~six months ended March~~September 3130, 2004 and decreased from 2$11.7%3 million ~~for~~as ~~the~~of ~~six months ended March~~December 31, 2003. ~~Due~~ The decrease in deferred revenue was primarily attributable to ~~continued~~ decreases in ~~interest~~deferred ~~rates~~time-based license revenue, ~~interest~~partially ~~income~~offset ~~decreased~~by ~~slightly~~increases in ~~despite~~deferred ~~increased~~perpetual ~~cash~~license and ~~investment~~maintenance ~~balances~~revenue.

~~Other~~Product ~~Expense~~Revenue. Product revenue decreased by 26.5%, ~~Net~~or $796,000, to $2.2 million for the three months ended December 31, 2004 from $3.0 million for the three months ended December 31, 2003. The decrease was primarily due to more customers, particularly major accounts, purchasing time-based licenses as compared to perpetual licenses and lower customer demand due to tighter budgets in a prolonged economic downturn. As a result, product revenue as a percent of total revenue decreased to 19.6% for the three months ended December 31, 2004 from 30.9% for the three months ended December 31, 2003.

~~Our~~Subscription ~~other~~Revenue. Subscription ~~expense,~~revenue ~~net~~increased by ~~remained~~51.2%, ~~relatively~~or ~~small~~$2.2 ~~and~~million, ~~was~~to ~~immaterial~~$6.5 million for the three months ended December 31, 2004 from $4.2 million for the three months ended December 31, 2003. This increase was primarily due to new customers purchasing time-based licenses, as well as existing customers purchasing additional time-based licenses and ~~six~~renewing their expired time-based licenses. As a percent of total revenue, subscription revenue rose to 56.9% for the three months ended ~~March~~December 31, 2004 ~~and~~from 43.6% for the three months ended December 31, 2003.

~~Income~~Maintenance ~~Taxes~~Revenue. Maintenance revenue increased by 6.4%, or $160,000, to $2.6 million for the three months ended December 31, 2004 from $2.5 million for the three months ended December 31, 2003. The increase in maintenance revenue was due to the increase in the number of perpetual licenses in the installed base. As a percent of total revenue, maintenance revenue decreased to 23.5% for the three months ended December 31, 2004 from 25.5% for the three months ended December 31, 2003. If maintenance revenue increases as a percent of total revenue, our gross profit as a percent of total revenue, or gross margin,

~~The effective tax rate for the three and six months ended March 31, 2004 remained the same as fiscal 2003 at 30%.~~26

~~Liquidity~~may ~~and~~decrease ~~Capital~~because ~~Resources~~of lower margins on maintenance revenue due to incremental maintenance support costs.

AsCost of ~~March 31, 2004, we had cash, cash equivalents and short-term investments of $96.2 million and working capital of $84.9 million.~~Revenue

~~Net~~Cost ~~cash~~of ~~provided~~Product byRevenue. Cost ~~operating~~of ~~activities~~product ~~was~~revenue ~~$2.7~~consists ~~million~~primarily ~~for~~of royalties ~~the~~due ~~six months~~from ~~ended~~us ~~March 31,~~to ~~2004~~third-parties ~~and~~under $5original equipment manufacturer arrangements.~~6 million~~ We ~~for~~incur only minimal costs to deliver our software as the ~~six~~product ~~months~~and ~~ended~~documentation are primarily ~~March 31,~~sent ~~2003~~electronically. ~~Net~~Our ~~cash~~cost ~~provided~~of product revenue decreased by ~~operating~~63.7%, ~~activities~~or $58,000, to $33,000 for the ~~six~~three months ended ~~March~~ December 31, 2004 ~~resulted primarily~~ from ~~net~~$91,000 ~~income~~for ~~and~~the anthree ~~increase~~months ~~in accounts payable~~ended December 31, ~~partially~~2003 ~~offset by~~due to a decrease in ~~accrued~~the ~~liabilities~~sublicensing of third-party products. As a percent of total revenue, ~~Net~~the ~~cash~~cost ~~provided~~of byproduct ~~operating~~revenue ~~activities~~decreased to 0.3% for the ~~six~~three months ended ~~March~~ December 31, ~~2003~~ ~~resulted~~2004 ~~primarily~~ from ~~net~~1.0% ~~income~~for ~~and~~the ~~increases~~three inmonths ~~deferred~~ended ~~revenue and~~December 31, ~~accrued~~2003. We ~~liabilities~~expect ~~and~~the acost ~~decrease~~of inproduct revenue ~~accounts~~as ~~receivable,~~a ~~partially~~percent ~~offset~~of ~~by increases~~total inrevenue ~~prepaid~~to ~~expenses~~vary ~~and~~based ~~other~~on ~~current~~the ~~assets~~level ~~and~~of asales ~~decrease in~~of ~~accounts~~third-party ~~payable~~products.

~~Net~~Cost ~~cash~~of ~~provided~~Subscription byRevenue. Cost ~~investing~~of ~~activities~~subscription ~~was~~revenue ~~$1.6~~consists primarily ~~million~~of personnel and allocated overhead expenses for ~~the~~support ~~six~~of ~~months~~time-based ~~ended~~licenses ~~March 31,~~and ~~2004~~royalties ~~due~~related to the ~~increase~~sublicensing ~~in maturity~~ of ~~short~~third-~~term~~party ~~investments~~software in time-based licenses. Our cost ~~Net~~of ~~cash~~subscription ~~used~~revenue inincreased ~~investing~~by ~~activities~~60.0%, ~~was~~or $~~2.7 million~~63,000, to $168,000 for the ~~six~~three months ended December 31, 2004 from $105,000 for the three months ended December 31, 2003. The increase in cost of subscription revenue was primarily due to the increase in personnel and other costs associated with the ~~purchase~~support of a larger number of time-based licenses. As a percent of ~~investment~~total ~~securities~~revenue, ~~with~~the ~~maturities~~cost of ~~91 days~~subscription torevenue ~~one~~increased ~~year~~slightly ~~and~~to 1.5% ~~purchases~~for ofthe ~~property~~three ~~and~~months ~~equipment~~ended December 31, 2004 from 1.1% for the three months ended December 31, 2003.

~~Net~~Cost ~~cash~~of ~~provided~~Maintenance byRevenue. Cost ~~financing~~of ~~activities~~maintenance ~~was~~revenue $1consists primarily of personnel and other expenses related to providing maintenance support to our customers who purchase perpetual licenses.3 Our ~~million~~cost of maintenance revenue increased by 66.8%, or $151,000, to $377,000 for the ~~six~~ three months ended ~~March~~December 31, 2004 ~~and~~from ~~2003~~$226,000 ~~consisting~~for the three months ended December 31, 2003. The increase in cost of maintenance revenue was primarily due to increased costs of ~~proceeds~~dedicated support personnel to provide ~~generated~~support byto ~~stock~~a ~~option~~growing ~~exercises~~installed ~~and~~user base. As a percent of total revenue, the ~~employees~~cost ~~stock~~of ~~purchase~~maintenance ~~plan~~revenue increased ~~during~~to ~~both~~3.3% ~~periods~~for the three months ended December 31, 2004 from 2.3% for the three months ended December 31, 2003.

~~Capital~~Operating expenditures were approximately $80,000 for the six months ended March 31, 2004 and $382,000 for the six months ended March 31, 2003. Our capital expenditures consisted of purchases of computer equipment, software and office furniture and fixtures. We expect to invest approximately $500,000 in the remainder of fiscal 2004 for similar assets.Expenses

AsResearch and Development. Research and development expenses consist of engineering ~~March~~costs to develop new products, such as LEXSIM, CRITIC and HANEX, enhance existing products, such as the release of HSIMplus platform in April 2004, and perform quality assurance activities. Our research and development expenses increased by 5.9%, or $119,000, to $2.2 million for the three months ended December 31, 2004 from $2.0 million for the three months ended December 31, we2003. As ~~had~~a nopercent ~~borrowings~~of total revenue, ~~lines~~research and development expenses decreased to 19.1% in the three months ended December 31, 2004 from 20.9% in the three months ended December 31, 2003. The increases in research and development expenses were primarily due to the hiring of additional ~~credit~~research and development personnel. Research and development headcount increased to 53 at December 31, ~~outstanding~~2004 ~~equipment~~from ~~leases~~46 orat ~~lease~~December 31, ~~lines~~2003.

26Sales and Marketing. Sales and marketing expenses consist primarily of salaries, commissions, travel, promotional and advertising costs. Our sales and marketing expenses increased by 5.1%, or $136,000, to $2.8 million for the three months ended December 31, 2004 from $2.7 million for the three months ended December 31, 2003. The increase in sales and marketing expenses in absolute dollars was primarily due to

We intend to continue to invest heavily in the development of new products and enhancements to existing products. We also intend to increase our sales and marketing operations. Our future liquidity and capital requirements will depend on numerous factors, including:27

~~• the~~increase ~~amount~~in ~~and~~sales ~~timing~~commissions. As a percent of ~~orders~~total revenue, sales and ~~their~~marketing ~~respective~~expenses ~~payment~~decreased ~~terms;~~to 25.0% in the three months ended December 31, 2004 from 27.5% in the three months ended December 31, 2003. Sales and marketing headcount increased from 48 at December 31, 2003 to 49 at December 31, 2004.

• General and Administrative. General and administrative expenses represent corporate, finance, human resource, administrative, legal and consulting expenses. Our general and administrative expenses increased by 7.6%, or $285,000, to $4.1 million for the ~~extent~~three months ended December 31, 2004 from $3.8 million for the three months ended December 31, 2003. As a percent of total revenue, general and administrative expenses decreased to 36.0% ~~which~~for the three months ended December 31, 2004 from 38.8% for the three months ended December 31, 2003. The increase in general and administrative expenses was primarily due to legal fees related our ~~existing~~litigation with Synopsys. Legal fees related to our litigation with Synopsys increased by 5.7%, or $166,000, to $3.1 million for the three months ended December 31, 2004 from $2.9 million for the three months ended December 31, 2003. General and ~~new~~administrative ~~products~~headcount ~~gain~~increased ~~market~~to 13 at December 31, 2004 from 12 ~~acceptance;~~at December 31, 2003. In addition, in the event the merger with Synopsys is not consummated, we expect the cost of the State Court Action and Federal Court Actions to increase as we continue to defend ourselves vigorously and the lawsuits move toward trial.

• Litigation Settlement. Litigation settlement was $9.0 million for the ~~extent~~three tomonths ~~which~~ended ~~customers~~December ~~continue~~31, to2004 ~~renew~~as ~~time-based~~a result ~~licenses~~of ~~and~~a proposed settlement of a class action lawsuit discussed in the ~~maintenance;~~section captioned Contingent Liabilities above. There was no litigation settlement recorded for the three months ended December 31, 2003.

~~• the~~Stock-Based ~~cost~~Compensation. Stock-based ~~and~~compensation ~~timing~~expense ofdecreased ~~expansion~~by 55.8%, ofor ~~product~~$125,000, ~~research~~to ~~and~~$99,000 ~~development~~for the three months ended December 31, ~~efforts~~2004 as compared to $224,000 ~~including~~for ~~such~~the ~~efforts~~three ~~outside~~months ~~North~~ended ~~America~~December 31, 2003. As ~~and~~a percent of total revenue, stock-based compensation expense decreased to 0.9% for the ~~success~~three ofmonths ~~these~~ended ~~development~~December 31, ~~efforts;~~2004 from 2.3% for the three months ended December 31, 2003.

~~• the~~Interest ~~cost and timing of expansion of sales and marketing activities, including such activities outside North America;~~Income

• Interest income increased by 67.4%, or $159,000, to $395,000 for the ~~cost~~three ofmonths ~~litigation~~ended December 31, 2004 from $236,000 for the three months ended December 31, 2003. Due to profitability and ~~damages~~positive ~~when~~cash flow, cash and ifinvestment ~~awarded;~~balances increased in the 12 month period ended December 31, 2004, and with an increase in interest rates, resulted in increased interest income. As a percent of total revenue, interest income increased to 3.5% for the three months ended December 31, 2004 from 2.4% for the three months ended December 31, 2003.

~~• available~~Other ~~borrowings under future credit arrangements~~Expense, ~~if any.~~Net

WeOur ~~believe~~other ~~that our current cash and investment balances and any cash generated from operations~~expense, ~~will be sufficient to meet our operating and capital~~net ~~requirements~~remained ~~for~~relatively atsmall ~~least the next 12 months. However, it is possible that we may require additional financing within this period. We have no current plans,~~ and wewas ~~are~~immaterial ~~not~~for ~~currently negotiating to obtain additional financing. The factors described above will affect our future capital requirements and~~ the ~~adequacy~~three ~~of our available funds. In addition, even if we raise sufficient funds to meet our anticipated cash needs during the next 12~~ months~~, we~~ ~~may~~ended ~~need to raise additional funds beyond this time. We may be required to raise those funds through public or private financings~~December 31, ~~strategic relationships or other~~ ~~arrangements. We~~2004 ~~cannot assure you that such funding, if needed, will be available on terms attractive to us, or at all. Furthermore, any additional equity financing may be dilutive to stockholders,~~ and ~~debt financing, if available, may involve restrictive covenants~~2003. ~~If we fail to raise capital as and when needed, our failure could have a negative impact on our ability to pursue our business strategy and maintain profitability.~~

~~Lease~~Liquidity ~~Commitments~~and Capital Resources

WeAs ~~lease~~of ~~our facilities under various noncancelable operating leases. In~~ December ~~2002~~31, 2004, we ~~entered~~ ~~into~~had ~~a three-year operating lease for our current headquarters located in Santa Clara~~cash, ~~California,~~cash ~~which~~equivalents ~~began in February 2003~~ and ~~will~~short-term ~~expire in~~investments ~~March 2006. These noncancelable~~of ~~operating leases began expiring in October 2003~~$101. ~~Rent~~0 million ~~expense was $600,000 in fiscal 2002~~ and ~~$784,000~~working incapital ~~fiscal 2003. As~~ of ~~September~~$13.7 ~~30, 2003, the aggregate future noncancelable minimum rentals or operating leases are as follows (in thousands):~~million.

Year Ending September 30,
2004	$	585
2005	529
2006	252
	$	1,366

Net cash used in operating activities was $1.3 million for the three months ended December 31, 2004, which resulted primarily from net loss and increases in deferred income taxes and accounts receivable, partially offset by an accrual for litigation settlement. Net cash provided by operating activities was

2728

~~Recent~~$2.2 million ~~Accounting~~for ~~Pronouncements~~the three months ended December 31, 2003, which resulted primarily from net income and increases in accounts payable and deferred revenue, partially offset by a decrease in accrued liabilities.

~~The~~Net ~~Financial~~cash ~~Accounting~~used ~~Standards~~in ~~Board (“FASB”) issued FASB~~investing ~~Interpretation~~activities 46was ~~(“FIN 46”), Consolidation of Variable Interest Entities in January 2003, and a revised interpretation of FIN 46 (“FIN46-R”)~~$1. ~~FIN~~9 46million ~~requires~~for ~~certain variable interest entities (“VIEs”) to be consolidated by~~ the ~~primary~~three ~~beneficiary~~months ofended ~~the~~December ~~entity~~31, if2004, ~~the equity investors~~due into the ~~entity~~purchase doof ~~not~~investment ~~have~~securities ~~the~~with ~~characteristics~~maturities of a91 days ~~controlling financial interest or sufficient equity at risk for the entity~~ to ~~finance its activities~~one ~~without~~year, ~~additional~~offset ~~subordinated~~partially ~~financial~~by ~~support~~proceeds from ~~other~~maturity ~~parties. The provisions~~ of ~~FIN 46 are effective immediately for all arrangements entered into after January 31, 2003~~investments. Net Wecash ~~have~~provided ~~not~~by ~~invested~~investing inactivities ~~any entities that we believe are variable~~was ~~interest~~$149,000 ~~entities~~ for ~~which we are~~ the ~~primary~~three ~~beneficiary. The~~months ~~adoption~~ended ~~of FIN46-R had no impact on our financial position~~December 31, ~~results of operations or cash flows~~2003.

InNet ~~May~~cash ~~2003,~~provided ~~the~~by financing ~~FASB~~activities ~~issued~~was ~~SFAS No. 150~~$921,000 ~~Accounting~~ for ~~Certain~~the ~~Financial~~three ~~Instruments~~months ~~with~~ended ~~Characteristics of~~December 31, ~~both Liabilities and Equity~~2004, ~~which requires that certain financial instruments be presented as liabilities that were previously presented as equity or as temporary equity. Such instruments include mandatory redeemable preferred~~ and ~~common stock~~$759,000 ~~and certain options and warrants. SFAS No. 150 is effective~~ for ~~financial instruments entered into or modified after May 31, 2003 and was effective at~~ the ~~beginning~~three ofmonths ~~the~~ended ~~first interim period beginning after June~~December 1531, 2003~~. In November 2003~~, ~~the FASB issued FASB~~consisting ~~Staff~~primarily ~~Position~~of ~~(“FSP”)~~proceeds ~~No.~~generated ~~150-3,~~by ~~Effective~~stock ~~Date,~~option ~~Disclosures,~~exercises and ~~Transition~~the ~~for~~employee ~~Mandatorily~~stock ~~Redeemable~~purchase ~~Financial~~plan ~~Instruments~~during ~~of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests under SFAS No. 150, which defers~~ the ~~effective~~ ~~date for various provisions of SFAS No~~periods. 150. The Company believes that it has properly classified and measured in its balance sheets and disclosed in its interim consolidated financial statements certain financial instruments with characteristics of both liabilities and equity.

~~Non-Audit~~Capital ~~Services~~expenditures were approximately $44,000 for the three months ended December 31, 2004 and $38,000 for the three months ended December 31, 2003. Our capital expenditures consisted of ~~Independent~~purchases ~~Auditors~~of computer equipment, software and office furniture and fixtures.

~~Our~~As ~~Audit Committee~~ of ~~the Board of Directors approved during the three months ended March~~December 31, 2004, ~~non-audit~~we ~~services~~had tono ~~be performed by our independent auditors~~borrowings, ~~Deloitte &~~lines ~~Touche~~of ~~LLP~~credit, inoutstanding ~~fiscal~~equipment ~~2004~~leases inor ~~connection~~lease ~~with consulting services concerning GAAP and Sarbanes-Oxley requirements in an amount not to exceed $30,000 in the aggregate~~lines.

~~Factors~~To ~~Affecting~~the ~~Future~~extent ~~Results~~the merger does not occur and we remain a stand-alone company, we intend to continue to invest heavily in the development of new products and enhancements to existing products. We also intend to increase our sales and marketing operations. Our future liquidity and capital requirements will depend on numerous factors, including:

We• the ~~have~~amount ~~relied~~ and ~~expect~~timing ~~to continue to rely on HSIM for a substantial majority~~ of ~~our~~orders ~~revenue,~~ and atheir ~~decline~~respective inpayment ~~sales of licenses for HSIM could cause our revenue to decline.~~terms;

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

28• the extent to which customers continue to renew time-based licenses and maintenance;

~~continue to account for substantially all of our revenue for at least~~ • the ~~remainder~~cost ofand ~~fiscal~~timing ~~2004, any factors adversely affecting the pricing~~ of ~~our~~ ~~licenses~~expansion of orproduct ~~demand~~research ~~for~~and ~~HSIM~~development efforts, including ~~competition~~such orefforts ~~technological change,~~outside ~~could~~North ~~cause~~America, ~~our revenue to decline materially~~ and ~~our~~the ~~business~~success toof these ~~suffer.~~development efforts;

~~Our~~• the ~~revenue~~cost ~~would~~and ~~decline~~timing ~~substantially~~of ifexpansion ~~our existing~~of ~~customers~~sales doand ~~not~~marketing ~~purchase additional licenses or renew existing~~activities, ~~time-based~~including ~~licenses~~such ~~and~~activities ~~maintenance~~outside ~~from~~North ~~us.~~America;

We rely on additional perpetual and time-based license revenue from our existing customers, as well as annual maintenance renewals for our perpetual licenses and renewals of our time-based licenses when they expire. Even if we are successful in generating revenue from our software to new customers, if our existing customers do not purchase additional licenses of our software or renew their expired time-based licenses or annual maintenance for perpetual licenses, we would experience a decline in revenue. In fiscal 2002, 2003 and • the ~~first~~ ~~half~~cost of ~~fiscal~~litigation ~~2004, our revenue from perpetual licenses as a percent of total revenue decreased as a result of more customers’ preference to purchase time-based licenses~~ and ~~lower~~damages ~~demand~~when ~~due to much tighter budgets. Revenue from time-based licenses~~ and maintenance has increased steadily over the last 18 months and we expect it to continue to increase. For instance, for the six months ended March 31, 2004, 76.5% of our total revenue was derived from time-based licenses and maintenance as compared to 59.0% for the six months ended March 31, 2003. As more of our revenue is attributable to time-based licenses, our revenue could decline materially if ~~our~~awarded; ~~customers do not renew their existing time-based licenses or purchase additional time-based licenses.~~and

If• available ~~semiconductor~~borrowings ~~design~~under ~~and~~future ~~manufacturing~~credit ~~companies continue to experience recession or other conditions which impact their operating budgets~~arrangements, ~~they~~if ~~may delay or cancel purchases of our software, which would reduce our revenues and cause our business to suffer~~any.

~~The~~In ~~primary~~the ~~customers~~event ~~for~~the ~~our~~merger ~~software are semiconductor design and~~were ~~manufacturing~~not ~~companies. Any significant~~to ~~downturn~~occur in ~~our customers’ markets, or domestic and global conditions, which result in~~ the ~~reduction~~next of12 months ~~research and development budgets~~ or ~~the~~at ~~delay of software purchases~~all, ~~would~~we ~~likely~~believe ~~result~~that inour ~~a decline in demand~~current ~~for~~cash ~~our software~~ and ~~services~~investment balances and ~~could~~any ~~harm~~cash ~~our~~generated ~~business. Since~~from ~~early 2000~~operations, ~~the~~will ~~semiconductor industry~~be ~~had~~sufficient ~~experienced~~to ameet ~~substantial~~our ~~decline~~operating ~~in order volume~~ and ~~revenue~~capital ~~and~~requirements ~~that downturn~~for ~~had~~at ~~continued~~least ~~until~~ the ~~second~~next 12 months. However, ~~half~~it ofis ~~2003 when semiconductor~~possible ~~companies~~that ~~experienced~~we ~~some~~may ~~slow~~require ~~recovery~~additional infinancing ~~orders~~within ~~and~~this ~~end-users market demand~~period. ~~Even~~We ~~though semiconductor companies’ revenue and profitability~~ have ~~increased~~no ~~over~~current ~~the last several quarters~~plans, and we ~~have~~are not currently ~~seen~~negotiating ~~and do not expect~~ to ~~see~~obtain inadditional ~~the near future any material changes in our customers’ purchasing behavior or increased budgets~~financing. ~~This~~The ~~could~~factors ~~result~~described inabove ~~our customers~~will ~~delaying~~affect ~~or canceling the purchase of~~ our ~~software. Any of these occurrences could have a~~ ~~significant~~future ~~impact~~capital onrequirements ~~our operating results, revenues~~ and ~~costs and may cause~~ the ~~market~~adequacy ~~price~~ of our ~~common~~available ~~stock to decline or become more volatile~~funds. ~~For~~In ~~example~~addition, weeven ~~experienced~~if awe ~~substantial change~~raise ~~in customers’ purchasing behavior during the three months ended~~sufficient ~~March 31,~~funds ~~2003 due~~ to ~~the~~meet ~~prolonged~~our ~~economic~~anticipated ~~downturn~~cash ~~and~~needs ~~concerns~~during ~~for their~~the ~~own~~next ~~financial stability.~~12 ~~Consequently~~months, aswe ~~a cost-cutting measure, customers either suspended or~~may ~~reduced~~need ~~their~~to ~~capital~~raise ~~budgets~~additional ~~dramatically,~~funds ~~which~~beyond ~~adversely~~this ~~affected our revenue~~time. InWe ~~addition,~~may webe ~~were~~required ~~unable~~ to ~~meet~~ ~~revenue~~raise ~~and~~those ~~earnings expectations for the quarter ended March 31,~~funds ~~2003~~through ~~and~~public ~~had~~or toprivate ~~lower our revenue and earnings guidance for the quarter ended June 30~~financings, ~~2003~~strategic ~~and~~relationships ~~fiscal~~or ~~2003. As a result, the market price of our common stock was negatively impacted.~~other

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 semiconductor design29

29arrangements. We cannot assure you that such funding, if needed, will be available on terms attractive to us, or at all. Furthermore, any additional equity financing may be dilutive to stockholders, and debt financing, if available, may involve restrictive covenants. If we fail to raise capital as and when needed, our failure could have a negative impact on our ability to pursue our business strategy and regain profitability.

~~tools,~~Lease which, in turn, has negatively impacted us. We cannot predict what impact the recent prolonged economic slowdown or the slow recovery, and in particular, the semiconductor industry, will have on our business, but it may result in fewer purchases of licenses of our software, substitution to our lower priced configurations by customers who previously licensed our higher priced configurations or nonrenewal of time-based licenses or maintenance. If our customers’ budgets do not increase with the slow recovery, the current slow recovery does not continue or the economic slowdown returns, we may not meet our revenue expectations for upcoming quarters in fiscal 2004.Commitments

We ~~are~~lease ~~currently~~our afacilities under ~~defendant~~various innoncancelable operating leases. In December 2002, we entered into a three-year operating lease for our ~~lawsuits~~current ~~brought~~headquarters bylocated ~~Synopsys. The~~in Santa Clara, California, which began in February ~~prosecution~~2003 ofand ~~these~~will ~~lawsuits~~expire ~~could~~in ~~have~~March a2006. These ~~substantial~~noncancelable ~~negative~~operating ~~impact~~leases onbegan ~~our~~expiring in October ~~business~~2003. ~~Should~~Rent ~~Synopsys~~expense ~~prevail~~was $784,000 wein ~~may~~fiscal be2003 ~~required~~and to$742,000 ~~pay~~in ~~substantial~~fiscal ~~monetary~~2004. As ~~damages~~of orSeptember 30, be2004, ~~prevented~~the ~~from~~aggregate future noncancelable ~~selling~~minimum ~~our~~rentals ~~software.~~or operating leases are as follows (in thousands):

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

Year Ending September 30,
2005	$	603
2006	252
	$	855

InRecent ~~February 2000,~~Accounting Synopsys filed a complaint in the Superior Court of the State of California in the County of Santa Clara (Case No. CV787950) against us and Dr. Deng, our President. The complaint alleged breach of contract, breach of fiduciary trust, diversion of corporate opportunity and constructive trust. In September 2001, Synopsys filed its second amended complaint, which added claims of inducing/aiding and abetting breach of fiduciary duty, including/aiding and abetting diversion of corporate opportunity, misappropriation of trade secrets, civil conspiracy, breach of confidence and unfair competition, and added as individual defendants Dr. Wang and our four other founders. In September 2002, Synopsys filed a supplemental second amended complaint that contained supplemental allegations but added no new claims or parties. In January 2003, the discovery referee issued orders creating rebuttable presumptions in favor of Synopsys on certain evidentiary issues to sanction us for erasure of certain computer files requested in discovery by Synopsys. These rulings mean that we must prove at trial that we did not take or use Synopsys’ source code or other confidential information, rather than the usual requirement that Synopsys provide such proof in the first instance. However, none of these rulings resolves any of the claims made by Synopsys in the case and the trial judge or jury can reach their own conclusions based upon the evidence presented at trial. We filed a motion for reconsideration of this order and in March 2003, the court denied our motion, concluding that it was barred on procedural grounds. In January 2003, Synopsys filed a third amended complaint, which contained supplemental allegations but added no new claims or parties. We have filed an answer denying Synopsys’ allegations. In August 2003, Synopsys filed several motions for terminating sanctions against us, which were heard in January 2004 and the discovery referee has not yet ruled. We oppose each of these motions and intend to file oppositions within the time permitted by law. Synopsys has requested unspecified damages of at least $25 million, an injunction, a constructive trust on unspecified intellectual property belonging to us and other relief. Further, in September 2003, Synopsys notified us that it reserves the right to seek up to $80 million in punitive damages with respect to claims for which punitive damages are allowed under California Civil Code Section 3294, and up to $50 million in punitive damagesPronouncements

30The Financial Accounting Standards Board (“FASB”) issued FASB Interpretation 46 (“FIN 46”), Consolidation of Variable Interest Entities in January 2003, and a revised interpretation of FIN 46 (“FIN46-R”). FIN 46 requires certain variable interest entities (“VIEs”) to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The provisions of FIN 46 are effective immediately for all arrangements entered into after January 31, 2003. We have not invested in any entities that we believe are variable interest entities for which we are the primary beneficiary. The adoption of FIN46-R had no impact on our financial position, results of operations or cash flows.

~~with~~In ~~respect~~November to2003, the Emerging ~~trade~~Issues ~~secret~~Task ~~claims~~Force ~~under~~(“EITF”) ~~California~~reached ~~Civil~~an ~~Code~~interim consensus on ~~Section~~Issue ~~3426~~03-01, “The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investment” to require additional disclosure requirements for securities classified as available-for-sale or held-to-maturity for fiscal years ending after December 15, 2003.~~3(c).~~ ~~This~~In ~~action~~March is2004, the EITF reached a ~~currently~~final consensus on this Issue and provided additional guidance in ~~discovery~~determining whether investment securities have an impairment which should be considered other-than-temporary in reporting periods after June 15, 2004. AThe ~~trial~~adoption ~~date~~of this Issue had no ~~has~~impact ~~not~~on ~~yet~~our ~~been~~financial ~~set~~position, results of operations or cash flows.

WeOn ~~believe~~December ~~that we have meritorious defenses to Synopsys’ allegations and claims and we intend to continue to defend ourselves vigorously. However~~16, ~~because of the inherent uncertainty of litigation in general~~2004, ~~and~~ the ~~fact that the discovery related to this~~ ~~litigation~~Financial isAccounting ~~ongoing,~~Standards weBoard ~~cannot~~issued ~~assure~~SFAS ~~you that we will ultimately prevail~~No. ~~Should~~ ~~Synopsys~~123 ~~ultimately succeed~~(revised in ~~the prosecution of its claims~~2004), weShare-Based ~~could~~Payment be(“SFAS ~~permanently enjoined from selling our software and deriving related maintenance revenue~~123R”). InSFAS ~~addition,~~123R weeliminates ~~could be required to pay substantial monetary damages to Synopsys. Further, we could be enjoined preliminarily from selling our software during~~ the ~~course~~alternative of ~~the litigation.~~ ~~Litigation~~applying ~~such as~~ the ~~suit~~intrinsic ~~Synopsys~~value ~~has~~measurement ~~brought~~provisions ~~against~~of usOpinion ~~can~~25 ~~take years~~ to ~~resolve~~stock compensation ~~and~~awards ~~can~~issued ~~be expensive~~ to ~~defend~~employees. ~~Although the final outcome of the litigation may not occur for~~ ~~some time~~Rather, the ~~parties~~new ~~periodically~~standard ~~conduct~~requires ~~evidence~~enterprises ~~gathering, meet~~ to ~~discuss the~~measure ~~status of~~ the ~~litigation~~cost ~~and file motions and other requests for the court to act. The results~~ of ~~these periodic~~ ~~activities,~~employee ~~particularly~~services ~~the~~received ~~court’s~~in ~~decisions~~exchange onfor ~~current~~an ~~pending~~award ~~and future motions, could have the effect~~ of ~~determining~~equity ~~the~~instruments ~~ultimate outcome of the~~based ~~litigation, either for or against us, prior to a trial~~ on the ~~merits,~~grant-date ~~or strengthen~~fair orvalue weaken our ability to assert claims and defenses. For example, in November 2001, the court denied a motion brought by Synopsys for injunctive relief that, if granted, could have prevented us from selling our products. If any of ~~Synopsys’ motions ultimately prevail, our ability to defend ourselves against~~ the ~~claims brought against us in this litigation could be severely limited~~award. ItThat iscost ~~possible that our relationships with our customers~~ will be ~~seriously~~ ~~harmed~~recognized inover the ~~future~~period asduring awhich ~~result of the Synopsys litigation. Accordingly,~~ an ~~adverse~~employee ~~judgment, if entered~~is inrequired ~~favor of any Synopsys claim, could seriously harm our business, financial position and results of operations and cause our stock price~~ to ~~decline substantially. In~~provide ~~addition,~~services ~~the Synopsys allegations and claims, even if ultimately determined to be without merit, could be time consuming to defend, result~~ in ~~costly~~exchange ~~litigation,~~for ~~divert our~~the ~~management’s attention and resources~~award, ~~cause~~known ~~product~~as ~~shipment~~the ~~delays or~~requisite ~~require~~service usperiod to(usually ~~enter into royalty or license agreements. These royalty or license agreements may not be available on terms acceptable to us, if at all, and~~ the ~~prosecution~~vesting ~~of the Synopsys allegations and claims could significantly harm our business, financial position and results of operations and cause our stock price to decline substantially~~period).

InWe ~~May~~have ~~2001,~~not ~~Synopsys~~yet ~~filed a complaint in~~ quantified the ~~United~~effects ~~States District Court, Northern District~~ of ~~California,~~the ~~San~~adoption Jose division (Case No. CO1-20423 PVT) against us, alleging that our HSIM software infringes U.S. Patent No. 5,878,053 entitled “Hierarchical Power Network Simulation and Analysis tool for reliability testing of ~~Deep~~SFAS ~~Submicron IC Designs” (the “053 patent”)~~123R, ~~which~~but ~~is purportedly~~we ~~assigned~~expect ~~to Synopsys. Since the case began, Synopsys has also alleged~~ that ~~our subsequently released HSIM 2.0 and LEXSIM products, infringe~~ the ~~053~~new ~~patent. Synopsys has requested relief including damages from $4.1 million~~standard tomay ~~$13.7~~result ~~million~~in ~~and~~significant anstock-based ~~injunction. Synopsys~~compensation ~~has also requested that any damage award be trebled for alleged willful infringement~~expense. ~~In June 2001,~~The wepro ~~filed~~forma aneffects ~~answer~~on tonet the complaint denying infringement of a valid, enforceable patent and asserting counterclaims. We have since amended our counterclaims. Our current counterclaims allege that, among other things, the 053 patent is invalid, unenforceable and not infringed and that Synopsys has violated federal antitrust and state unfair competition laws.income

From time to time, the court has ruled on summary judgment motions in the case. In May 2002, the court granted summary judgment in favor of Synopsys on our invalidity defenses and counterclaims, concluding that they were barred by the doctrine of assignor estoppel. The court denied Synopsys’ motion with respect to our unenforceability defense and counterclaim. In November 2002, the court issued an order granting summary judgment in favor of Synopsys on certain antitrust counterclaims based on the doctrine of assignor estoppel. However, the court declined to rule on Synopsys’ motion with respect to our other antitrust30

31and earnings per share if we had applied the fair value recognition provisions of original SFAS 123 on stock compensation awards (rather than applying the intrinsic value measurement provisions of Opinion 25) are disclosed on page 10. Although such pro forma effects of applying original SFAS 123 may be indicative of the effects of adopting SFAS 123R, the provisions of these two statements differ in some important respects. The actual effects of adopting SFAS 123R will be dependent on numerous factors including, but not limited to, the valuation model chosen by us to value stock-based awards; the assumed award forfeiture rate; the accounting policies adopted concerning the method of recognizing the fair value of awards over the requisite service period; and the transition method (as described below) chosen for adopting SFAS 123R.

SFAS 123R will be effective for our fiscal quarter beginning July 1, 2005, and ~~unfair~~requires ~~competition~~the ~~counterclaims~~use of the modified prospective application method. Under this method SFAS 123R is applied to new awards and to awards modified, repurchased or cancelled after the effective date. Additionally, compensation cost for the portion of awards for which the requisite service has not been rendered (such as unvested options) that are outstanding as of the date of adoption will be recognized as the remaining requisite services are rendered. The compensation cost relating to unvested awards at the date of adoption will be based on the grant-date fair value of those awards as calculated for pro forma disclosures under the original SFAS123. In addition, companies may use the ~~court~~modified ~~issued~~retrospective aapplication ~~ruling~~method. This ~~construing~~method may be applied to all prior years for which the ~~claims~~original SFAS 123 was effective or only to prior interim periods in the year of initial adoption. If the ~~053~~modified retrospective ~~patent~~application inmethod ~~August 2002~~is applied, financial statements for prior periods will be adjusted to give effect to the fair-value-based method of accounting for awards on a consistent basis with the pro forma disclosures required for those periods under the original SFAS 123.

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

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

InThe ~~June 2003,~~announcement ~~Synopsys filed a second complaint in the United States District Court, Northern District~~ of ~~California, San Francisco Division (Case No. C03-2664 RS) against us, alleging that the~~ our ~~products,~~merger ~~including but~~with ~~not limited to HSIM and HANEX software products, infringe~~ Synopsys ~~U.S. Patent~~may ~~No. 6,249,898 entitled “Methods and Systems for Reliability Analysis of~~have CMOS VLSI Circuits Based on Stage Partitioning and Node Activities” (the “898 Patent”). In July 2003, we filed an answer denying that we infringe the 898 Patent and asserting as defenses that the 898 Patent is invalid and unenforceable. We also brought a ~~declaratory~~negative ~~judgment~~impact counterclaim seeking judgment that the 898 Patent is not infringed by us and that the 898 Patent is invalid and unenforceable. In August 2003, Synopsys filed a motion to dismiss these defenses and counterclaims on ~~the ground that we are barred from contesting the validity and enforceability of the 898 Patent based on the doctrine of assignor estoppel. Synopsys’ motion also sought to strike~~ our ~~defenses of laches, patent misuse and unclean hands on the ground that we had not pleaded them with sufficient particularity~~business. We opposed Synopsys’ motions. In October 2003, the court denied Synopsys’ motion to dismiss and strike the invalidity and unenforceability defenses and counterclaims and granted Synopsys’ motion to strike the laches, patent misuse and unclean hands defenses with leave to amend the pleadings. In March 2004, Synopsys filed a motion for partial summary judgment on the ground that we are barred from contesting the validity and enforceability of the 898 Patent based on the doctrine of assignor estoppel. In April 2004, the Court ruled that we are barred under the doctrine of assignor estoppel from asserting the 898 Patent is invalid or unenforceable by virtue of pre-assignment inequitable conduct. The court has set the case for trial beginning on April 25, 2005.

We ~~believe~~executed ~~that~~an weagreement of ~~have~~merger ~~meritorious~~dated ~~defenses~~as toof ~~Synopsys’~~November 30, ~~claims~~2004 ~~and~~providing ~~intend~~for our acquisition by Synopsys subject to ~~defend~~the ~~ourselves~~satisfaction or waiver of the conditions set forth ~~vigorously~~therein. ~~However,~~Under ~~because~~the terms of the ~~high~~agreement, ~~degree~~upon the completion of ~~complexity~~the merger, each outstanding share of our common stock will be converted into the ~~intellectual~~right ~~property~~to atreceive ~~issue,~~$7.00 in cash. The announcement and pendency of the ~~inherent~~merger ~~uncertainties~~may ofhave ~~litigation~~a innegative ~~general~~impact on our ability to sell our products and attract new customers and may impact our future revenue. Uncertainty created by the ~~preliminary~~announcement ~~nature~~of the merger may cause some customers to delay their purchase decisions until the closing of ~~this~~the merger or ~~litigation~~alter their purchase decisions, wewhich ~~cannot~~could ~~assure~~cause ~~you~~our ~~that~~financial weresults ~~will~~to ~~ultimately~~be significantly ~~prevail~~below the expectations of market analysts. ~~Should~~Our ~~Synopsys~~results ~~ultimately~~of ~~succeed~~operations inhave been negatively affected by a $67.5 million non-cash expense reflecting the settlement payments to be made by the individual defendants upon closing of ~~prosecution~~the merger. Our results of ~~its~~operations have ~~claims,~~been weand ~~could~~will continue to be ~~permanently~~adversely ~~enjoined~~affected ~~from~~by ~~selling~~increased legal and professional fees related to the merger. The merger may also have a negative impact on our ability to retain ~~software~~employees and ~~deriving~~existing ~~related~~customers ~~maintenance~~and ~~revenue~~maintain strategic relationships. In

32The merger is subject to approval by various regulatory agencies, and there can be no assurance that the merger will be successfully completed. The Federal Trade Commission has requested additional information and documentary material in connection with its review of the proposed merger, which will result in an extension of the waiting period under the HSR Act. In the event that the merger is not successfully completed, our results of operations and common stock price would be materially adversely affected.

addition, we may be required to pay substantial monetary damages to Synopsys. Further, we could be enjoined preliminarily from selling our software during the course of the litigation. Litigation such as the suit Synopsys has brought against us can take years to resolve and can be expensive to defend. The court’s decisions on current pending and future motions could have the effect of determining the ultimate outcome of the litigation prior to a trial on the merits, or strengthen or weaken our ability to assert claims and defenses. It is possible that our relationships with our customers will be seriously harmed in the future as a result of the Synopsys litigation. Accordingly, an adverse judgment, if entered on any Synopsys claim, could seriously harm our business, financial position and results of operations and cause our stock price to decline substantially. In addition, the Synopsys allegations and claims, even if ultimately determined to be without merit, could be time consuming to defend, result in costly litigation, divert our management’s attention and resources, cause product shipment delays or require us to enter into royalty or license agreements. These royalty or license agreements may not be available on terms acceptable to us, if at all, and the prosecution of the Synopsys allegations and claims could significantly harm our business, financial position and results of operations and cause our stock price to decline substantially.31

~~Because~~If ~~many~~the ofmerger ~~our current~~is ~~competitors~~not ~~have~~completed, ~~greater~~our ~~resources~~share ~~than~~price ~~we do~~ and ~~pre-existing~~ ~~relationships~~future ~~with~~business ~~our~~and ~~potential~~operations ~~customers,~~could ~~we might not~~ be ~~able to achieve sufficient market penetration to sustain profitability or gain additional market share~~harmed.

WeIf ~~face significant competition from larger companies that market suites of electronic design automation products that address all or almost all steps in~~ the ~~semiconductor~~merger ~~design~~is ~~process.~~ not ~~Many of these competitors have substantially greater financial~~completed, ~~customer support,~~we ~~technical~~will ~~and~~be ~~marketing~~subject ~~resources,~~to ~~larger~~a ~~customer~~number ~~bases,~~of ~~longer operating~~material ~~histories~~risks, ~~greater~~including ~~name~~but ~~recognition and more established~~not ~~relationships~~limited ~~in the industry than we do. We cannot be sure that we will have the resources or expertise~~ to ~~compete~~ ~~successfully in~~ the ~~future. If we are unable to gain additional market share due to their pre-existing relationships with our potential customers, our operating results could be harmed.~~following:

Our software is used to simulate and analyze complex nanometer-scale semiconductor designs. Our competitors in the electronics design automation industry who offer products that are used for other segments of the semiconductor design process often bundle their products together to offer discounts on products competitive with those we offer, making those products extremely attractive for • our customers or potential customers to use. In addition, based on our experience, these competitors may not support our effort to integrate our software into their existing software. These competitors include such companies as Cadence Design Systems, Inc., Synopsys and Mentor Graphics Corporation. Since these competitors offer a more comprehensive range of products than we do, they are often able to respond more quickly or price more effectively to take advantage of new orcustomer ~~changing opportunities~~pipeline and ~~respond~~ability to ~~new~~close ~~technologies~~sales ~~and~~may ~~customer requirements. We cannot assure you that we will~~ be ~~able to~~adversely ~~compete successfully in such environments. If we lose such opportunities to our competitors, our results of operations could be harmed significantly.~~affected;

~~Our~~• costs ~~business~~related ~~depends~~to onthe merger (including litigation filed in connection ~~continued~~with ~~demand~~the ~~for~~merger), ~~complex~~such ~~nanometer-scale~~as ~~semiconductors~~legal, accounting and other professional fees, must be paid even if the ~~electronic~~merger is not completed and we have incurred and will ~~equipment~~continue ~~that~~to ~~incorporate~~incur ~~them.~~significant merger-related costs;

~~Our~~• our ~~software~~relationships iswith ~~used~~some ~~to design complex nanometer-scale semiconductors that are an integral part~~ of portable consumer electronics, networking equipment, wireless communications equipment, multimedia devices and personal computers. As a result, if the demand for these devices and businesses of the manufacturers of these products do not continue to grow, our ~~revenue~~customers ~~and business will suffer. Demand for portable consumer electronics~~ may ~~decrease~~ ifbe ~~mobile~~adversely ~~phone, electronic mail or Internet use declines, the cost of~~affected ~~those~~as ~~services~~they ~~increases or consumers fail to adopt latest generation portable electronics. Potential consumers of portable consumer electronics~~ may ~~use~~delay or ~~modify~~defer ~~existing~~purchasing ~~equipment and never adopt next~~decisions;

33• our ability to attract and retain employees may be adversely affected;

~~generation~~• we ~~portable~~may ~~consumer~~be ~~electronics. Demand~~required ~~for~~to ~~other~~pay ~~complex~~Synopsys ~~electronic~~a ~~equipment,~~termination ~~such~~fee asof ~~networking equipment,~~up ~~may decrease if service providers do not experience subscriber~~to ~~growth~~$6 million orunder ~~defer~~certain ~~network build outs or other capital spending.~~circumstances;

~~Purchases~~• we ofmay ~~licenses~~be ofrequired ~~our~~to ~~software~~pay ~~are~~Synopsys largely dependent upon the commencement of new design projects by semiconductor manufacturers and their customers, the number of design engineers and the increasing complexity of designs. Since late 2000, the semiconductor industry has experienced a ~~sharp~~termination ~~decline~~fee ~~in orders and revenue and many companies have reduced the number~~ of ~~design~~up ~~engineers and/or design~~to ~~projects. The~~$1 million ~~outlook~~under ~~for~~certain the electronics industry is uncertain and we cannot predict whether the current slow recovery will continue or the downturn will return. Many semiconductor manufacturers and vendors of products incorporating semiconductors had announced earnings shortfalls and employee layoffs and we have not seen meaningful recovery in the job market.circumstances;

~~Budget cuts have impacted~~ • the ~~number~~price of ~~orders we receive from~~ our ~~customers~~ ~~and~~common ~~our~~stock ~~customers~~may indecline general have been seeking larger discounts and extended payment terms or purchasing time-based licenses in lieu of more costly perpetual licenses. We believe our customers’ and potential customers’ internal budgets have been and will continue to ~~be subject to heightened scrutiny and~~ the ~~time~~extent ~~required~~that ~~to receive~~the ~~budgetary~~current ~~approvals~~market ~~has~~price ~~lengthened. We cannot~~for ~~predict whether purchases of licenses of~~ our ~~software~~common ~~will~~stock bereflects ~~further deferred~~a ~~due~~market toassumption ~~budget~~that ~~constraints or whether~~ the ~~number of complex~~ ~~nanometer-scale~~merger ~~semiconductor design starts by our customers~~ will be ~~slower or decline even further.~~completed;

If• internal decisions we ~~lose~~may ~~any~~make ofin ~~our~~response ~~key personnel, our ability~~ to ~~manage~~the ~~our~~effects ~~business~~the ~~and~~merger may ~~continue~~have on our ~~growth~~operations; ~~would be negatively impacted.~~and

~~Our~~• we ~~future~~will ~~success~~be ~~depends~~required ~~in part on our ability~~ to ~~enhance~~incur ~~our existing~~additional ~~products~~legal ~~and~~expenses ~~achieve~~as ~~market~~we ~~acceptance~~resume ~~of new, innovative products and~~our ~~technologies. Our~~efforts ~~software and technologies are complex and~~ to ~~successfully~~defend ~~implement~~ourselves ~~our business strategy and manage our business, an~~ in ~~depth understanding of circuit design and~~ the ~~physical~~ ~~behavior~~State ofCourt ~~complex~~Action ~~nanometer-scale semiconductors is required. We depend substantially on the expertise of Sang S. Wang, our Chairman~~ and ~~Chief~~Federal ~~Executive Officer, and our existing~~Court ~~engineering personnel, especially An-Chang Deng, our President, and our other founders~~Actions. We do not have long-term employment agreements with our founders and the loss of the services of any of our key employees could adversely affect our business and slow our product development process. We do not maintain key person life insurance on any of our employees.

IfProvisions weof dothe ~~not~~merger ~~continue~~agreement tomay discourage ~~expand~~other ~~our~~companies ~~sales~~from ~~force~~entering ~~and~~into ~~customer~~a ~~service~~merger ~~and~~or ~~support~~other ~~organization,~~business ~~our~~combination with ~~revenue~~us ~~may~~which ~~not~~might ~~grow~~otherwise benefit our stockholders.

~~Approximately~~We ~~71.2%~~have ~~and~~agreed ~~74.6%~~we ofwill ~~our~~not solicit ~~total~~or ~~revenue~~encourage ~~for~~ the ~~six~~initiation ~~months ended~~of ~~March 31,~~inquiries ~~2004~~regarding ~~and~~any ~~2003,~~acquisition proposals ~~respectively~~by third parties, ~~was~~or ~~from~~take ~~our~~other ~~direct~~actions ~~sales efforts. Our~~with ~~software~~respect ~~requires~~to such ~~sophisticated~~proposals ~~sales~~that ~~efforts~~are prohibited by ~~experienced~~the ~~and~~merger ~~knowledgeable personnel~~agreement. ~~Competition~~Under ~~for~~specified ~~these~~circumstances, ~~individuals~~we ismay ~~intense~~be ~~due~~required to ~~the~~pay ~~limited~~Synopsys ~~number~~a termination fee of ~~people~~up ~~available~~to ~~with~~$6 million. These ~~the~~restrictions ~~necessary~~may ~~sales~~discourage other ~~experience~~companies ~~and~~from ~~technical~~entering ~~understanding~~into ofa ~~electronic~~merger ~~design~~or ~~automation~~other ~~products. Hiring~~business ~~customer~~combination ~~service~~with ~~and support~~us ~~personnel~~which ismight ~~also~~otherwise ~~very~~benefit ~~competitive~~our instockholders. Further, ~~our~~if ~~industry~~the ~~due~~merger tois ~~the~~terminated ~~limited~~and ~~number~~our board of directors ~~people~~determines ~~available~~to ~~with~~seek ~~the~~another ~~necessary~~merger ~~technical~~or ~~skills. Our~~business ~~sales~~combination, ~~and~~we ~~support~~may ~~staff~~not ~~consisted~~be ofable to 45find ~~persons~~a asmerger ~~of March 31, 2004~~partner. IfAny ~~we are unable~~other tomerger ~~successfully~~partner ~~train~~may ~~and~~not ~~integrate~~be ~~sales~~willing ~~and~~to ~~support~~pay ~~personnel~~an ~~and~~equivalent, ~~continue~~higher toor more ~~identify,~~attractive ~~hire,~~merger ~~train~~consideration ~~and~~than ~~retain~~that ~~new~~which ~~qualified~~is ~~individuals,~~proposed ~~our~~to ~~revenue~~be ~~may~~paid ~~not~~by ~~grow~~Synopsys in the merger.

3432

IfWe we are ~~unable~~currently toa defendant in two lawsuits filed in ~~attract~~connection ~~and~~with ~~retain~~the ~~qualified~~announcement ~~research~~of ~~and~~our ~~development~~proposed ~~personnel,~~merger with Synopsys. The prosecution of these lawsuits could have a substantial negative impact on our business. ~~will~~Should ~~suffer~~we not prevail, the proposed merger may be enjoined.

~~There~~On isDecember a1, ~~limited~~2004, ~~number~~we and certain of ~~qualified~~our ~~software~~officers ~~engineer~~ and ~~research and~~directors ~~development~~were ~~personnel~~named ~~with~~in ~~the~~a ~~necessary~~class ~~experience~~action complaint filed against us and ~~understanding~~certain of ~~complex~~ ~~nanometer-scale~~our ~~semiconductor~~officers ~~design~~and ~~products~~directors in the ~~San~~Court ~~Francisco~~of Chancery ~~Bay~~of the State of Delaware. This ~~Area~~complaint, ~~where~~brought ~~our~~by ~~primary~~Robert ~~facility~~Israel, isalleges ~~located.~~ that defendants entered into the merger agreement with Synopsys for inadequate consideration. The ~~scarcity~~complaint ofalso ~~qualified~~alleges ~~persons~~that ~~may~~the ~~cause~~merger agreement uswas an unlawful plan to ~~incur~~shield ~~higher~~our ~~salary~~board of directors and certain ~~costs~~members orof ~~require~~our usmanagement from liability to ~~provide~~Synopsys ~~larger~~in ~~stock~~the ~~option~~State ~~grants. We~~Court ~~have~~Action and aFederal ~~small~~Court ~~research~~Actions, and ~~development~~to shield them from liability to our company for ~~facility~~claims asserted by the plaintiff in ~~Taiwan~~the pending derivative action. Plaintiff seeks to enjoin the proposed merger, ~~out~~or ofalternatively ~~which~~seeks ~~five~~damages ofif ~~our~~the ~~engineers~~proposed ~~currently~~merger ~~operate,~~is consummated. The parties stipulated to ~~broaden~~stay this case, and therefore any response by defendants to the ~~pool~~complaint will now be due upon plaintiff’s counsel giving two weeks notice to defendants of plaintiff’s ~~software~~request ~~engineers~~that ~~from~~defendants ~~which~~respond weto ~~can~~the ~~recruit~~complaint. WeOn ~~cannot~~January ~~assure~~6, ~~you~~2005, ~~that~~the ~~this~~Judge ~~strategy~~signed ~~will~~the ~~help~~order usstaying ~~satisfy~~the ~~our~~case, ~~need~~subject ~~for~~to ~~qualified~~the ~~personnel~~same reporting obligations in the pending derivative case. ~~Further~~The case is still in the preliminary stages, weand ~~may~~it ~~encounter~~is ~~other~~not ~~difficulties~~possible ~~with~~for ~~managing~~us to quantify the ~~geographically~~impact, ~~separate~~if ~~research~~any, ~~and~~on ~~development~~our ~~activities~~company. IfAn unfavorable weoutcome ~~fail~~in tothis ~~attract,~~case ~~motivate~~could ~~and~~have ~~retain engineers~~a ~~and~~material ~~research~~adverse ~~and~~effect ~~development~~on ~~personnel~~our business, wefinancial ~~may~~condition, beresults ~~unable~~of tooperations ~~develop or~~and ~~enhance~~cash flow and our ability ~~software,~~to ~~meet~~complete the ~~demands~~proposed merger. In addition, the expense of ~~our~~defending ~~customers~~any inlitigation amay ~~timely~~be ~~manner~~costly and ordivert ~~remain~~management’s ~~competitive~~attention ~~and~~from ~~our~~the ~~business~~day ~~would~~to ~~suffer~~day operations of our business.

~~Because~~On December 3, 2004, we ~~rely~~and certain onof our officers and directors were named in a complaint filed in the ~~distributors~~Superior ~~for~~Court of California, Santa Clara County. The complaint is a ~~large~~purported ~~portion~~stockholder class action brought by Frank A. Lettieri arising out of ~~our~~defendants’ ~~revenue,~~conduct in selling our ~~revenue~~company to Synopsys at an allegedly inadequate and unfair price. The plaintiffs allege that the defendants arrived at an unfair price so that at least two of its directors could ~~decline~~avoid ifor significantly reduce their exposure in a pending lawsuit. The plaintiffs allege that as a result of ~~our~~this ~~existing~~conduct, ~~distributors~~defendants dobreached ~~not~~fiduciary ~~continue~~duties. The plaintiffs allege that the defendants structured the terms of the proposed merger to ~~purchase~~fit ~~software~~the ~~licenses~~needs ~~from~~of Synopsys, instead of seeking to obtain the highest price reasonably available to us. The complaint seeks an injunction of the oracquisition, ~~represent~~and the implementation of a procedure to ensure the highest possible price for stockholders. The complaint also seeks to direct the individual defendants to exercise their fiduciary duties to obtain a transaction in the best interest of the stockholders at the highest price. The complaint seeks to rescind the merger agreement and to impose a constructive trust upon any benefits improperly received by defendants as a result of improper conduct. The parties filed a stipulation on January 20, 2005 extending the time for defendants to respond to the complaint until March 4, 2005. The case is in the preliminary stages, and it is not possible for us to quantify the impact, if any, on our company. An unfavorable outcome in ~~those~~this ~~markets~~case could have a material adverse effect on our business, financial condition, results of operations and cash flow and our ability to complete the proposed merger. In addition, the expense of defending any litigation may be costly and divert our attention from the day to day operations of our business.

ARisks majority of our sales outside North America and Europe are conducted through distributors. Sales by our distributors accounted for approximately 28.8% and 25.4% of our total revenue in the six months ended March 31, 2004 and 2003, respectively. We ~~rely~~May onFace ~~Marubeni Solutions as the exclusive distributor of our software~~ in ~~Japan. Sales to Marubeni Solutions accounted for 18.9% and 14.5% of our total revenue in~~ the ~~six~~Event months ended March 31, 2004 and 2003, respectively. We cannot be certain that we will be able to attract distributors that market our software effectively or provide timely and cost effective user support and service. Further, our agreements with our distributors do not obligate the ~~distributor~~ toMerger ~~purchase~~is ~~any amount of licenses of our software or sell licenses~~Not of our software. Consequently, one or more of our distributors may not continue to represent our software or devote a sufficient amount of effort and resources to selling our licenses of software in their territories. We may from time to time be forced to terminate relationships with distributors who do not maintain an appropriate level of sales. We may also decide to sell our software in a particular territory directly and terminate relationships with a particular distributor. As a result, our sales in a given territory may decrease substantially or cease until a suitable replacement distributor can be found or we are able to establish or provide adequate sales and support efforts for that territory. Even if we are successful in selling licenses of our software through new distributors, the rate of growth of our total revenue could be harmed if our existing distributors do not continue to sell licenses of our software.Completed

IfWe wehave ~~fail~~relied toand, ~~adequately~~in the event the merger is not ~~match~~completed, ~~our~~expect ~~expenses~~to continue to ~~anticipated~~rely ~~revenue~~on inHSIM ~~any~~for ~~given~~a ~~quarter,~~substantial ~~our~~majority ~~operating~~of our ~~results~~revenue, ~~could~~and ~~fall~~a ~~below~~decline ~~market~~in ~~expectations~~sales ~~and~~of ~~cause~~licenses ~~the~~for ~~price~~HSIM ofcould cause our ~~stock to~~revenue to decline.

~~Because of the prolonged economic downturn~~Historically, ~~extended~~we ~~sales cycle,~~have ~~seasonal~~derived ~~fluctuations~~substantially inall ~~our business, cyclicality~~ of ~~the semiconductor industry and the rapidly evolving market for complex nanometer-scale semiconductors,~~ our ~~ability to accurately forecast our quarterly~~ revenue ~~is limited~~from HSIM. AsWe abelieve ~~result,~~HSIM it is ~~difficult to~~the ~~predict~~first ~~the~~hierarchical simulator ~~revenue~~that wemeets ~~will~~the ~~recognize~~circuit inverification ~~any~~challenges ~~given~~of ~~quarter.~~complex nanometer

~~We expect to experience seasonal fluctuations in our revenue due to:~~33

~~• financial~~semiconductors. In ~~stability~~the ~~and~~event ~~outlook~~the merger is not completed, we expect that the revenue from this product will continue to account for a substantial majority of our revenue for fiscal 2005. The electronic design automation software market, including the market for hierarchical simulator software, is characterized by rapid technological change, frequent new product introductions, uncertain product life cycles and evolving industry standards. If our competitors introduce new products and/or offer aggressive pricing that compete with HSIM, our revenue could decline materially and our results of operations could be harmed. For instance, in fiscal 2003 and fiscal 2004, certain competitors were offering extremely competitive prices either by substantial discounting or bundling their products which resulted in a longer sales cycle for HSIM or delays by prospective customers; in making their purchasing decisions. Any factors adversely affecting the pricing of our licenses of or demand for HSIM, including competition or technological change, could cause our revenue to decline materially and our business to suffer.

~~• capital~~Our ~~budgeting~~revenue ~~and~~would ~~purchasing~~decline ~~cycles~~substantially ofif our existing customers; do not purchase additional licenses or renew existing time-based licenses and maintenance from us.

35We rely on additional perpetual and time-based license revenue from our existing customers, as well as annual maintenance renewals for our perpetual licenses and renewals of our time-based licenses when they expire. Even if we are successful in generating revenue from our software to new customers, we would experience a substantial decline in revenue if our existing customers do not purchase additional licenses of our software or renew their expired time-based licenses or annual maintenance for perpetual licenses. Since fiscal 2002, our revenue from perpetual licenses as a percent of total revenue has continued to decrease as a result of more customers’ preference to purchase time-based licenses and lower demand and average selling prices due to much tighter budgets. Revenue from time-based licenses and maintenance has increased steadily over the last three fiscal years and, in the event the merger is not completed, we expect it to continue to increase. For instance, for the three months ended December 31, 2004, 80.4% of our total revenue was derived from time-based licenses and maintenance as compared to 69.1% for the three months ended December 31, 2003. As more of our revenue is attributable to time-based licenses, our revenue could decline materially if our customers do not renew their existing time-based licenses or purchase additional time-based licenses.

~~• economic~~We ~~incentives~~are ~~for~~currently a defendant in three lawsuits brought by Synopsys and two other lawsuits brought by shareholders. The prosecution of these lawsuits could have a substantial negative impact on our ~~sales~~business. Should ~~force;~~Synopsys prevail, we may be required to pay substantial monetary damages or be prevented from selling our software. We may also be required to pay substantial damages to settle the two shareholders’ lawsuits.

~~• lengthening~~Synopsys ofhas filed the ~~sales~~State Court ~~cycle~~Action ~~due~~and Federal Court Actions against us. These claims are based on the alleged facts and circumstances relating to ~~limited~~the ~~resources~~departure asof aour ~~result~~five founders from their employment at Synopsys, the founding of our company and the development and ~~layoffs~~sale byof HSIM and our ~~customers~~other products. Each of our founders and Dr. Wang, ~~longer~~our ~~approval~~Chief ~~process~~Executive Officer, ~~summer~~became an ~~holidays~~employee of Synopsys when Synopsys acquired EPIC Design Technology in February 1997. Dr. Wang resigned from Synopsys in March 1998 and served as a consultant to Synopsys until June 1998. Dr. Deng, our President, and ~~particularly~~our four other founders resigned from Synopsys at approximately the same time in ~~Europe~~August 1998 and ~~Japan~~became ~~(which~~employees isof ~~also~~our ~~affected~~company byimmediately ~~budgeting~~thereafter. Dr. Wang ~~cycles);~~became an employee of our company in April 1999. None of Drs. Wang or Deng or our four other founders was subject to a noncompetition agreement with Synopsys at any time.

~~• the number of orders received for perpetual licenses versus time-based licenses; and~~34

• In February 2000, Synopsys filed a complaint in the ~~special~~Superior ~~terms~~Court of the State of California in the County of Santa Clara (Case No. CV787950) against us and ~~conditions~~Dr. Deng, our President. The State Court Action complaint alleged breach of contract, breach of fiduciary trust, diversion of corporate opportunity and constructive trust. In September 2001, Synopsys filed its second amended complaint, which added claims of inducing/aiding and abetting breach of fiduciary duty, including/aiding and abetting diversion of corporate opportunity, misappropriation of trade secrets, civil conspiracy, breach of confidence and unfair competition, and added as individual defendants Dr. Wang and our four other founders. In September 2002, Synopsys filed a supplemental second amended complaint that contained supplemental allegations but added no new claims or parties. In January 2003, the discovery referee issued orders creating rebuttable presumptions in favor of Synopsys on certain evidentiary issues to sanction us for erasure of certain computer files requested in discovery by Synopsys. These rulings meant that we must prove at trial that we did not take or use Synopsys’ source code or other confidential information, rather than the usual requirement that Synopsys provide such proof in the first instance. We filed a motion for reconsideration of this order and in March 2003, the court denied our motion, concluding that it was barred on procedural grounds. In January 2003, Synopsys filed a third amended complaint, which contained supplemental allegations but added no new claims or parties. We have filed an answer denying Synopsys’ allegations. In August 2003, Synopsys filed several motions for terminating sanctions against us, which were heard in January 2004. In June 2004, the Court ruled on Synopsys’ motions for terminating sanctions. The Discovery Referee vacated the orders ~~received~~of January 2003 that created the rebuttable presumptions in favor of Synopsys, but issued new orders. These orders limit our defenses regarding the timing and the development of the initial HSIM source code and the evidence that we and the remaining individual defendants can present at trial. For purposes of trial, among other things, the orders established as facts that: (i) the first 60,000 lines of source code of HSIM and all the ideas and concepts reflected therein, to the extent they were not publicly known, were copied or derived from Synopsys’ source code or other Synopsys’ materials while the individual defendants were employed by Synopsys and (ii) we and the individual defendants acted in concert to intentionally alter, destroy, lose or misplace items requested in discovery and conceal evidence. These orders also struck the answer of one individual defendant, Jeh-Fu Tuan. The Discovery Referee denied Synopsys’ request to strike our answers and the answers of the remaining individual defendants. In August 2004, we filed a writ petition in the California Court of Appeal, Sixth Appellate District in San Jose, seeking to overturn these orders. In October 2004, the Superior Court vacated the previously set January 2005 trial date and stayed all trial proceedings pending final determination of the writ proceedings. Synopsys has requested unspecified damages of at least $25 million, an injunction, a constructive trust on unspecified intellectual property belonging to us and other relief. Further, in September 2003, Synopsys notified us that it reserves the right to seek up to $80 million in punitive damages with respect to claims for which ~~may~~punitive ~~cause~~damages are allowed under ~~revenue~~California ~~deferral~~Civil Code Section 3294, and up to $50 million in punitive damages with respect to the trade secret claims under ~~our~~California ~~revenue~~Civil ~~recognition~~Code Section 3426.3(c). On ~~policies~~December 14, 2004, the Court of Appeal stayed the case in its entirety pending approval of the proposed merger discussed below.

~~Commissions~~In ~~represent~~May 2001, Synopsys filed a ~~significant~~complaint ~~portion~~in the United States District Court, Northern District of California, ~~our~~San ~~sales~~Jose ~~force~~division (Case No. CO1-20423 PVT) against us, ~~compensation~~alleging that our HSIM software infringes U.S. Patent No. 5,878,053 entitled ~~which~~“Hierarchical isPower ~~structured~~Network toSimulation ~~encourage~~and ~~sales~~Analysis ~~closures~~tool ~~prior~~for reliability totesting ~~fiscal~~of Deep Submicron IC Designs” (the “053 Patent”), which is ~~year~~purportedly ~~end~~assigned to Synopsys. AsSince the acase ~~result~~began, weSynopsys ~~expect~~has also alleged that our subsequently released ~~sales~~HSIM 2.0 ~~efforts~~and ~~will~~LEXSIM ~~intensify~~products, ininfringe the ~~fourth~~053 ~~fiscal~~Patent. Synopsys ~~quarter,~~has ~~which~~requested ~~could~~relief ~~result~~including indamages ~~our~~from ~~order~~$4.1 million ~~receipts~~to $13.7 million and ~~revenue~~an ~~being~~injunction. Synopsys ~~flat~~has oralso ~~slightly~~requested ~~lower~~that inany damage award be trebled for alleged willful infringement. In June 2001, we filed an answer to the ~~first~~complaint denying infringement of a valid, enforceable patent and asserting counterclaims. We ~~second~~have ~~quarters~~since ofamended our counterclaims. Our current counterclaims allege that, among other things, the ~~subsequent~~053 Patent ~~fiscal~~is ~~year.~~invalid,

It is difficult for us to evaluate the degree to which these factors may reduce our sales because our revenue growth historically had masked the impact of these factors. In addition, most of our costs are relatively fixed in the short term and our business may not grow rapidly enough to absorb the costs of our personnel and facilities. As a result, we may be unable to reduce our expenses to avoid or minimize the negative impact on our quarterly operating results if anticipated revenue is not realized. For example, for the three months ended March 31, 2003, our revenue and earnings fell short of our previous guidance and market expectation and we revised our guidance for the quarter ended June 30, 2003 and fiscal 2003 to project much lower revenue and earnings than previously given, which negatively impacted the trading price of our common stock. Although we were able to achieve revenue and earnings results that met the revised guidance for the remaining quarters of fiscal 2003 and the first two quarters of fiscal 2004, we did not see any meaningful improvements in our customers’ spending pattern with the slow recovery and our outlook continues to be cautious. These trends could materially affect our quarter to quarter operating results, which could negatively impact our stock price.35

Weunenforceable ~~may~~and not ~~succeed~~infringed inand that ~~creating~~Synopsys ~~market~~has ~~acceptance~~violated ~~for~~federal ~~LEXSIM,~~antitrust ~~CRITIC~~ and ~~HANEX,~~state ~~and~~unfair ~~our~~competition ~~operating results may decline as a result~~laws.

WeFrom ~~released~~time ~~our~~to ~~second major product~~time, ~~LEXSIM,~~the incourt has ~~May~~ruled ~~2002,~~on ~~our~~summary ~~third product,~~judgment ~~CRITIC,~~motions in ~~December 2002~~the ~~and~~case. In ~~our~~May ~~fourth product~~2002, ~~HANEX,~~the incourt ~~May~~granted summary ~~2003. To~~judgment ~~date,~~in ~~LEXSIM,~~favor ~~CRITIC~~of Synopsys on our invalidity defenses and ~~HANEX~~counterclaims, ~~have~~concluding ~~accounted~~that ~~for~~they ~~only~~were anbarred ~~immaterial~~by ~~portion~~the doctrine of ~~our~~assignor ~~revenues~~estoppel. ~~Even~~The ~~though~~court wedenied doSynopsys’ ~~not~~motion ~~expect LEXSIM, CRITIC~~with orrespect ~~HANEX~~ to ~~account~~our ~~for~~unenforceability adefense ~~meaningful~~and ~~percentage~~counterclaim. In ofNovember ~~our~~2002, ~~total~~the ~~revenue~~court ~~until fiscal~~issued ~~2005,~~an ~~our~~order granting ~~future~~summary ~~growth~~judgment ~~and~~in ~~profitability~~favor ~~could~~of beSynopsys ~~affected~~on bycertain ~~our~~antitrust ~~ability~~counterclaims tobased ~~increase~~on ~~sales~~the doctrine of ~~these~~assignor ~~new products~~estoppel. ~~Furthermore~~However, ~~marketing~~the ~~new~~court ~~products~~declined ~~requires~~to ~~significant~~rule on ~~additional~~Synopsys’ ~~expenses~~motion with respect to our other antitrust and ~~resources~~unfair competition counterclaims. IfIn addition, the court weissued ~~fail~~a toruling ~~market~~construing ~~them~~the ~~successfully,~~claims ~~our~~of ~~profitability~~the ~~may~~053 ~~decline~~Patent in August 2002.

IfIn weSeptember ~~fail~~2002, tothe ~~enhance our~~U.S. ~~circuit~~Patent ~~simulation~~ and ~~analysis~~Trademark ~~software~~Office ~~and~~granted ~~develop~~our ~~and~~request ~~introduce~~for ~~new~~ex ~~circuit~~parte reexamination of ~~simulation~~the ~~and~~053 ~~analysis~~Patent ~~software~~based on aprior ~~timely~~art ~~basis,~~not wepreviously ~~may~~considered ~~not~~by bethe ~~able~~Patent Office. We moved to stay the federal ~~address~~litigation pending the ~~needs~~outcome of ~~our~~the ~~customers,~~reexamination and the court granted our motion ~~technology~~in ~~may~~December ~~become~~2002. In ~~obsolete~~August 2004, the U.S. Patent and ~~our~~Trademark Office issued a final rejection of all of the ~~results~~claims of ~~operations~~the ~~may~~053 bePatent. Synopsys ~~harmed~~has appealed the final rejection to the U.S. Patent and Trademark Office Board of Patent Appeals and Interferences.

Activity on several other summary judgment motions has been suspended because the court stayed the federal litigation. In November 2002, Synopsys filed three motions for summary judgment. The ~~electronic~~first ~~design~~motion ~~automation~~asked ~~software~~the ~~market~~court to enter judgment before trial that our products infringe the 053 Patent. The second motion asked the court to rule before trial against us on our defense that the 053 Patent is ~~characterized~~unenforceable because bySynopsys committed inequitable conduct in obtaining the patent. We submitted oppositions to both of these ~~rapid~~motions. Synopsys’ ~~technological~~third ~~change,~~motion ~~frequent~~asked the ~~new~~court ~~product~~to ~~introductions~~rule ~~and~~before trial against us on our remaining antitrust ~~enhancements~~counterclaims. Because of the court’s prior rulings against us on our other antitrust counterclaims, ~~uncertain~~we ~~product~~did ~~life~~not oppose ~~cycles~~this motion. In November 2002, ~~changes~~we also infiled ~~user~~a ~~demands~~summary ~~and~~judgment motion, which asked the court to enter judgment ~~evolving~~before ~~industry~~trial ~~standards~~that our products do not infringe the 053 Patent. Synopsys opposed this motion. The court issued its order staying the ~~introduction~~federal oflitigation ~~software~~before ~~embodying~~the ~~new~~parties’ ~~technologies~~reply ~~and~~briefs were due. On December 7, 2004, the court stayed the case in its entirety pending approval of the proposed merger discussed below.

36In June 2003, Synopsys filed a second complaint in the United States District Court, Northern District of California, San Francisco Division (Case No. C03-2664 RS) against us, alleging that our products, including but not limited to HSIM and HANEX software products, infringe Synopsys U.S. Patent No. 6,249,898 entitled “Methods and Systems for Reliability Analysis of CMOS VLSI Circuits Based on Stage Partitioning and Node Activities” (the “898 Patent”). In July 2003, we filed an answer denying that we infringe the 898 Patent and asserting as defenses that the 898 Patent is invalid and unenforceable. We also brought a declaratory judgment counterclaim seeking judgment that the 898 Patent is not infringed by us and that the 898 Patent is invalid and unenforceable. In August 2003, Synopsys filed a motion to dismiss these defenses and counterclaims on the ground that we are barred from contesting the validity and enforceability of the 898 Patent based on the doctrine of assignor estoppel. Synopsys’ motion also sought to strike our defenses of laches, patent misuse and unclean hands on the ground that we had not pleaded them with sufficient particularity. We opposed Synopsys’ motions. In October 2003, the court denied Synopsys’ motion to dismiss and strike the invalidity and unenforceability defenses and counterclaims and granted Synopsys’ motion to strike the laches, patent misuse and unclean hands defenses with leave to amend the pleadings. In March 2004, Synopsys filed a motion for partial summary judgment on the ground that we are barred from contesting the validity and enforceability of the 898 Patent based on the doctrine of assignor estoppel. In

emergence of new industry standards can render existing software in the semiconductor design industry obsolete and unmarketable. For instance, if customers widely adopt new engineering languages to describe their semiconductor designs and our software fails to support those languages adequately, demand for our software will suffer. To be successful, we must devote a substantial amount of our resources to enhance our software, keep pace with changes within our industry and develop and market new technologies. If our enhanced products or our future products and technologies do not achieve market acceptance, we may not be able to maintain our market share or recoup our development costs. As a result, our operating results would be harmed.36

~~Our~~April ~~sales~~2004, ~~cycle~~the court ruled that we are barred under the doctrine of assignor estoppel from asserting the 898 Patent is ~~unpredictable~~invalid ~~and~~or ~~may~~unenforceable beby ~~more~~virtue ~~than~~of ~~six~~pre-assignment ~~months,~~inequitable soconduct. The wecourt ~~may~~issued ~~fail~~a toruling ~~adequately~~construing the ~~match~~claims ~~our~~of ~~expenses~~the to898 ~~anticipated~~Patent ~~revenue~~in July 2004. The court has set the case for trial beginning on April 25, 2005. On December 7, 2004, the court stayed the case in ~~any~~its ~~given~~entirety ~~period~~pending orapproval ~~meet~~of ~~market~~the proposed merger discussed ~~expectations~~below.

~~Our~~We ~~sales~~entered ~~cycle~~into an agreement of merger dated as of November 30, 2004 with Synopsys and North Acquisition Sub, Inc., a Delaware corporation and wholly owned subsidiary of Synopsys (“Merger Sub”), pursuant to which, subject to satisfaction or waiver of the ~~period~~conditions ~~between~~therein, ~~our~~Merger ~~initial~~Sub ~~contact~~will merge with ~~a potential~~and ~~customer~~into our company and we ~~the~~will ~~customer’s~~become ~~purchase~~a wholly owned subsidiary of aSynopsys. Subject ~~license~~to the consummation of the merger, Synopsys, our ~~software~~company and certain employees, officers and directors of our ~~generally~~company, ~~ranges~~as ~~from~~applicable, ~~three~~have agreed to ~~six~~settle ~~months~~the ~~but~~State ~~may~~Court beAction ~~longer~~and Federal Court Actions. In connection with the merger agreement, ~~particularly~~the parties have submitted stipulations in the State Court Action and Federal Court Actions to toll the ~~current~~proceedings ~~challenging~~pending ~~economic~~the consummation ~~condition~~of the merger. Pursuant to Wethe ~~cannot~~tolling ~~predict~~agreements, we, Synopsys and the ~~exact~~individual ~~length~~defendants have agreed not to take further action with respect to the State Court Action and the Federal Court Actions during the period prior to the closing of ~~our~~the ~~sales~~proposed merger. In ~~cycle~~the event that the proposed merger did not occur and the merger agreements were terminated, ~~which~~we, atSynopsys and ~~times~~the individual defendants would no longer have any obligation to settle the ~~has~~State ~~exceeded~~Court ~~six~~Action ~~months~~or the Federal Court Actions. ~~The~~We expect that if the merger did not occur ~~unpredictability~~and the merger agreement was terminated, that a period of ~~our~~time ~~sales~~would ~~cycle~~be necessary ~~makes~~for itthe ~~difficult~~applicable Courts to ~~plan~~reschedule ~~our~~various ~~expenses~~hearings and trials ~~forecast~~and ~~our~~that ~~results~~there ofwould ~~operations~~be ~~for~~a ~~any~~substantial ~~given~~delay ~~period~~from the original trial dates. IfAlthough we docontinue ~~not~~to ~~correctly~~believe ~~predict~~that we have meritorious defenses if the ~~timing~~parties ofwere to proceed with the State Court Action ~~our~~and ~~customers’~~the ~~purchases~~Federal Court Actions, ~~the~~we ~~amount~~cannot ofprovide ~~revenue~~any assurance that we ~~recognize~~will prevail inor that our defenses or our ability to achieve a ~~given~~desirable ~~quarter~~outcome will ~~could~~not be ~~negatively~~affected ~~impacted,~~by ~~which~~the ~~could~~proposed ~~harm~~merger and related events. See Note 9 of the notes to our ~~operating~~condensed consolidated ~~results~~financial statements. ~~Our~~On December ~~sales~~7, ~~cycle~~2004, ~~may~~the ~~lengthen~~court ~~because~~stayed the case in its entirety pending approval of ~~several~~the ~~factors~~proposed merger discussed below. As noted above, ~~including:~~the State Court Action and Federal Court Actions have now been stayed in their entirety pending approval of the proposed merger.

~~• long~~In ~~technical~~July ~~evaluation~~2004, ~~periods~~we and ~~validation~~certain of ~~periods~~our officers and directors were named in a securities class action lawsuit filed in the United States District Court for the Northern District of ~~integration~~California. The complaint asserts claims against our company, Sang S. Wang, An-Chang Deng, Tammy Shu-Hua Liu and Yen-Son Huang on behalf of a putative class of persons who purchased our ~~software~~stock between December 13, 2001 and June 11, 2004. The class action alleges that the named defendants violated certain provisions of the Securities Exchange Act of 1934 by making materially false and misleading representations in press releases and financial statements filed with the SEC relating to our ~~potential~~financial ~~customers~~results. The complaint’s ~~existing~~allegations derive largely from allegations contained in the State ~~semiconductor~~Court ~~design~~Action, ~~flow;~~and derive from allegations contained in the complaint concerning the 053 Patent. A second class action was filed on September 9, 2004 in the United States District Court for the Northern District of California. On September 27, 2004, one plaintiff moved for lead plaintiff status in the first filed class action. These two cases were consolidated on October 7, 2004. On November 4, 2004, the judge granted the motion of NECA-IBEW Pension Fund for appointment as lead plaintiff. In late January 2005, the parties reached an agreement in principle to resolve this matter for a payment to the class in the amount of $9.0 million. The settlement is subject to preliminary and final approval by the court. See also Note 7 of our condensed consolidated financial statements.

• On August 16, 2004, a purported derivative complaint was filed against us and our directors in the Court ~~significant~~of ~~investment~~Chancery of ~~resources~~the ~~required~~State of Delaware. This complaint alleged that the board of directors breached its fiduciary duty by ~~customers~~failing to appoint a special committee to investigate the ~~purchase~~claims ~~and~~asserted ~~integrate~~in ~~our~~the ~~software~~Synopsys ~~into~~litigation ~~their~~and ~~design~~by ~~flow,~~allowing ~~particularly~~two directors to ~~customers~~destroy ~~with~~evidence ~~large~~in ~~semiconductor~~the ~~design~~State ~~organizations;~~Court Action. The complaint also

~~• competition from other electronic design automation software vendors;~~37

~~• limited~~alleges that the board of directors breached its fiduciary duty by allowing our company to go public with the knowledge of the alleged trade secret misappropriation and ~~decreased~~by ~~capital~~causing ~~spending~~the ~~due~~issuance of allegedly false public statements regarding our financial condition on account of this alleged misappropriation. The complaint seeks equitable relief and an unspecified amount of damages on behalf of our company. On October 15, 2004, the defendants filed a motion to ~~weakness~~Dismiss or Stay on the grounds that the case is not ripe for adjudication and also filed a Motion for Protective Order Staying Discovery. On December 3, 2004, plaintiff filed oppositions to these motions. On January 5, 2005, the parties stipulated to stay this matter until such time as plaintiff’s counsel provides two weeks notice to defendants that the stay will be lifted. The Judge signed the order staying the case on January 5, 2005 and conditioned the stay on the parties providing status reports to the court on a quarterly basis. The case is still in the preliminary stages, ~~semiconductor~~and ~~industry~~it is not possible for us to quantify the impact, if any, on our company. An unfavorable outcome in this case could have a material adverse effect on our business, financial condition, results of operations and ~~customers~~cash flow. In addition, the expense of defending any litigation may be costly and divert management’s ~~uncertainty~~attention ~~about~~from ~~economic~~the ~~recovery;~~day to day operations of our business.

~~• limited~~If ~~access~~semiconductor todesign ~~key~~and ~~decision~~manufacturing ~~makers~~companies experience ofrecession ~~potential~~or ~~customers~~other toconditions which impact their operating budgets, ~~authorize~~they ~~the~~may ~~adoption~~delay or cancel purchases of our software;, which would reduce our revenues and cause our business to suffer.

~~• budget~~The ~~cycles~~primary ofcustomers for our software are semiconductor design and manufacturing companies. Any significant downturn in our customers’ markets, or domestic and global conditions, which ~~affect~~result in the ~~timing~~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. From early 2000 until 2004, the semiconductor industry experienced a substantial decline in order volume and revenue. Even though the semiconductor industry had good sales growth in 2004, there are concerns about excessive inventories, eroded market demands and decreasing average selling prices which may result in a flat or negative growth for the semiconductor sales in 2005. This could result in our customers delaying or canceling the purchase of our software. Any of these occurrences could have a significant impact on our operating results, revenues and costs and may cause the market price of our common stock to decline or become more volatile. For example, we experienced a substantial change in customers’ purchasing behavior during the three months ended March 31, 2003 due to the prolonged economic downturn and concerns for their own financial stability. Consequently, as a cost-cutting measure, customers either suspended or reduced their capital budgets dramatically, which adversely affected our revenue. In addition, we were unable to meet revenue and earnings expectations for the quarter ended March 31, 2003 and had to lower our revenue and earnings guidance for the quarter ended June 30, 2003 and fiscal 2003. As a result, the market price of our common stock was negatively impacted.

~~• delay~~In addition, the markets for semiconductor products are cyclical. For example, in recent years certain Asian countries have experienced significant economic difficulties, including currency devaluation and instability, business failures and a depressed business environment. More recently, certain Asian countries have also experience difficulties from concerns about and the impact of ~~purchases~~closures due to ~~product~~SARS. These ~~combination~~difficulties ~~announcements~~have ortriggered ~~planned~~a ~~introductions~~significant downturn in the semiconductor market, resulting in reduced budgets for semiconductor design tools, which, in turn, has negatively impacted us. We cannot predict what impact the recent prolonged economic slowdown and in particular, the semiconductor industry will have on our business, but it may result in fewer purchases of licenses ~~new~~of ~~products~~our software, substitution to our lower priced configurations by customers who previously licensed our ~~competitors~~higher priced configurations or nonrenewal usof time-based licenses or maintenance.

If we were to experience a delay in our orders, it could harm our ability to meet our forecasts or investors’ expectations for a given quarter and ultimately result in the decrease of our stock price. Further, if our sales cycle unexpectedly lengthens in general, it would adversely affect the timing of our revenue recognition, which could cause us not to meet market expectations and cause our stock price to suffer. For instance, for the three months ended March 31, 2003 and June 30, 2003, our revenue decreased as compared to the previous quarters because we experienced substantially reduced capital budgets and longer sales cycles, which negatively impacted our ability to receive orders and recognize revenue.38

37Because many of our current competitors have greater resources than we do and pre-existing relationships with our potential customers, we might not be able to achieve sufficient market penetration to sustain profitability or gain additional market share.

~~Our~~We ~~expansion~~face ~~into~~significant ~~international~~competition ~~markets~~from ~~will~~larger ~~result~~companies inthat ~~higher~~market ~~personnel~~suites ~~costs~~of electronic design automation products that address all or ~~distributor~~almost all steps in the semiconductor design ~~commissions~~process. Many of these competitors have substantially greater financial, customer support, technical and ~~could~~marketing resources, ~~reduce~~larger customer bases, longer operating histories, greater name recognition and more established relationships in the industry than we do. We cannot be sure that we will have the resources or expertise to compete successfully in the future. If we are unable to gain additional market share due to their pre-existing relationships with our potential customers, our operating ~~margins~~results could be harmed.

InOur ~~order~~software is used to simulate ~~penetrate~~and ~~international~~analyze ~~markets~~complex ~~further,~~nanometer-scale wesemiconductor ~~must~~designs. Our ~~either expand~~competitors in the ~~number~~electronics ofdesign automation ~~distributors~~industry who ~~sell~~offer ~~licenses~~products ofthat ~~our~~are ~~software~~used orfor ~~increase our~~other ~~direct~~segments ~~international~~of ~~sales presence.~~ the Assemiconductor wedesign ~~increase~~process ~~our~~often ~~direct~~bundle ~~international~~their ~~sales~~products ~~presence,~~together ~~our~~to ~~sales~~offer ~~efforts~~discounts ~~may~~on beproducts ~~delayed~~competitive aswith those we ~~begin~~offer, ~~our~~making ~~local~~those ~~sales activities and we may incur~~products ~~higher~~extremely ~~personnel~~attractive ~~costs~~for ~~that~~our ~~may~~customers ~~not~~or ~~result~~potential incustomers ~~additional~~to ~~revenue~~use. ~~These~~In ~~costs~~addition, ~~and~~these ~~the~~competitors ~~time~~may ~~to establish a~~not ~~local~~support ~~sales~~our ~~presence~~effort ~~could~~to ~~harm~~integrate our ~~operating~~software ~~results~~into their existing software. WeThese ~~may~~competitors ~~not~~include ~~realize~~such ~~corresponding~~companies ~~growth in~~as ~~operating~~Cadence, ~~margins~~Synopsys ~~from~~and ~~growth~~Mentor inGraphics. Since ~~international~~these ~~sales~~competitors ~~due~~offer toa ~~the~~more ~~higher~~comprehensive ~~costs~~range of ~~these~~ ~~sales. We have increased our~~products ~~sales~~than ~~and~~we ~~support~~do, ~~resources~~they inare ~~Europe~~often ~~over~~able ~~the~~to ~~last~~respond ~~two~~more ~~years~~quickly ~~and~~or ~~have~~price ~~established~~more ~~offices~~effectively into ~~England,~~take ~~France,~~advantage ~~Germany,~~of ~~India,~~new ~~Israel~~or ~~and~~changing ~~Singapore. However,~~opportunities ~~the~~and ~~expected~~respond ~~returns on those investments have not been realized, primarily due~~ to ~~the economic~~ ~~slowdown. To~~new ~~date,~~technologies weand ~~have~~customer ~~relied~~requirements. ~~primarily~~We oncannot ~~international~~assure ~~distributors~~you inthat ~~Asia~~we ~~and~~will ~~have~~be ~~only~~able ato ~~very~~compete ~~small direct~~successfully ~~sales force~~ in such ~~Taiwan, Singapore and India~~environments. ~~Even~~If if we ~~expand~~lose ~~our~~such opportunities ~~direct~~to ~~and~~our ~~indirect international selling efforts~~competitors, our ~~efforts~~results ~~may~~of ~~not~~operations ~~create~~could orbe ~~increase international market demand for~~harmed ~~our software or generate revenue sufficient to recoup the cost of this expansion~~significantly.

IfOur webusiness ~~experience~~depends ~~losses in~~on ~~the~~continued ~~future,~~demand ~~the~~for ~~market~~complex nanometer-scale ~~price~~semiconductors ofand ~~our~~the ~~common~~electronic ~~stock~~equipment ~~could~~that ~~decline~~incorporate them.

~~Although~~Our wesoftware ~~had~~is ~~net~~used ~~income~~to ~~for~~design complex ~~the~~nanometer-scale ~~past~~semiconductors ~~four~~that ~~fiscal~~are ~~years,~~an weintegral ~~may~~part ~~incur~~of portable ~~losses~~consumer inelectronics, ~~the~~networking ~~future. In~~equipment, ~~order~~wireless tocommunications ~~fund~~equipment, ~~our~~multimedia ~~growth~~devices and ~~implement~~personal ~~our~~computers. As ~~strategies~~a result, weif ~~must~~the ~~continue~~demand tofor ~~increase~~these ~~our~~devices and businesses of the ~~investment~~manufacturers inof ~~research~~these ~~and~~products ~~development,~~do ~~sales~~not ~~and~~continue ~~marketing~~to ~~and~~grow, ~~other~~our revenue and ~~operations~~business will suffer. AsDemand afor portable ~~result~~consumer electronics may decrease if mobile phone, weelectronic ~~will~~mail ~~need~~or toInternet ~~generate~~use ~~significant~~declines, ~~revenue~~the cost of those services increases or consumers fail to ~~maintain~~adopt ~~profitability~~latest generation portable electronics. IfPotential weconsumers doof ~~not~~portable ~~maintain~~consumer electronics ~~profitability,~~may ~~the~~use or modify existing equipment and never adopt next ~~market~~generation ~~price~~portable ofconsumer ~~our~~electronics. Demand ~~common~~for ~~stock~~other ~~may~~complex ~~decline~~electronic equipment, ~~perhaps~~such ~~substantially~~as networking equipment, may decrease if service providers do not experience subscriber growth or defer network build outs or other capital spending.

WePurchases ~~anticipate~~of ~~that~~licenses of our software ~~expenses~~are ~~will~~largely ~~increase~~dependent ~~substantially~~upon the commencement of new design projects by semiconductor manufacturers and their customers, the number of design engineers and the increasing complexity of designs. Since late 2000, the semiconductor industry has experienced a sharp decline in orders and revenue and many companies have reduced the ~~next~~number of 12design ~~months~~engineers asand/or design projects. The outlook for the electronics industry is uncertain and we: cannot predict whether the current slow recovery will continue or the downturn will return. Many semiconductor manufacturers and vendors of products incorporating semiconductors had announced earnings shortfalls and employee layoffs.

~~• increase~~Budget cuts have impacted the number of orders we receive from our ~~sales~~customers and ~~marketing~~our ~~activities,~~customers ~~particularly~~in ~~by expanding~~general ~~our~~have ~~direct~~been ~~sales~~seeking ~~force;~~larger discounts and extended payment terms or purchasing time-based licenses in

~~• continue to increase the size and number of locations of our support organization;~~39

• lieu of more costly perpetual licenses. We believe our customers’ and potential customers’ internal budgets have been and will continue to ~~invest~~be insubject ~~research~~to heightened scrutiny and ~~development~~the time required to ~~enhance~~receive budgetary approvals has lengthened. We cannot predict whether purchases of licenses of our ~~existing~~software will be further deferred due to budget constraints ~~products~~or ~~and~~whether ~~technologies~~the ~~and~~number ~~develop~~of ~~new~~complex ~~circuit~~nanometer-scale ~~simulation~~semiconductor ~~and~~design ~~analysis~~starts by ~~products;~~our ~~and~~customers will be slower or decline even further.

~~• implement~~If ~~additional~~we ~~internal~~lose ~~systems,~~any ~~develop~~of ~~additional infrastructure~~our ~~and~~key ~~hire~~personnel, ~~additional~~our ~~management~~ability to manage ~~keep~~our ~~pace~~business ~~with~~and continue our growth would be negatively impacted.

~~• continue~~Our future success depends in part on our ability to ~~defend~~enhance ~~ourselves~~our ~~vigorously~~existing ~~against~~products and achieve market acceptance of new, innovative products and technologies. Our software and technologies are complex and to successfully implement our business strategy and manage our business, an in depth understanding of circuit design and the ~~three~~physical ~~lawsuits~~behavior of complex ~~brought~~nanometer-scale semiconductors is required. Furthermore, uncertainty created by ~~Synopsys~~the announcement of the merger may adversely impact our ability to retain employees in spite of the employee retention bonus plan we implemented in connection with the merger agreement. We do not have long-term employment agreements with any officers or employees and the loss of the services of any of our key employees could adversely affect our business and slow our product development process. We do not maintain key person life insurance on any of our employees.

~~Any~~If ~~failure to significantly increase our revenue as~~ we ~~implement~~do ~~our strategies~~not ~~would~~continue ~~also~~to ~~harm~~expand our ~~ability~~sales toforce ~~maintain profitability~~ and ~~could~~ ~~negatively~~customer ~~impact~~service ~~the~~and ~~market~~support ~~price~~organization, of our ~~common~~revenue ~~stock~~may not grow.

IfApproximately we76.4% ~~are~~and 69.6% ~~not~~of ~~able~~our total revenue for the three months ended December 31, 2004 and 2003, respectively, was from our direct sales efforts. Our software requires sophisticated sales efforts by experienced and knowledgeable personnel. Competition for these individuals is intense due to the limited number of people available with the necessary sales ~~preserve~~experience and technical understanding of electronic design automation products. Hiring customer service and support personnel is also very competitive in our industry due to the ~~value~~limited number of people available with the necessary technical skills. Furthermore, uncertainty created by the announcement of the merger may adversely impact our ~~software’s~~ability ~~intellectual~~to ~~property~~retain employees in spite of the employee retention bonus plan we implemented in connection with the merger agreement. Our sales and support staff consisted of 46 persons as of December 31, 2004. If we are unable to successfully train and integrate sales and support personnel and continue to identify, hire, train and retain new qualified individuals, our ~~business~~revenue ~~will~~may ~~suffer~~not grow.

~~Our software is differentiated from that of our competitors by our internally developed technology.~~ If we ~~fail~~ toare ~~protect~~unable ~~our~~to ~~intellectual~~attract ~~property,~~and ~~other~~retain ~~vendors could sell circuit~~qualified ~~simulation~~research and ~~analysis~~development ~~software with capabilities similar to ours~~personnel, ~~and this could reduce demand for~~ our ~~software. We~~business ~~protect~~will ~~our intellectual property through a combination of copyright, patent, trade secret and trademark laws~~suffer. ~~We have a patent~~

38There are a limited number of qualified software engineer and research and development personnel with the necessary experience and understanding of complex nanometer-scale semiconductor design products in the San Francisco Bay Area, where our primary facility is located. The scarcity of qualified persons may cause us to incur higher salary costs or require us to provide larger stock option grants. We have a small research and development facility in Taiwan, out of which five of our engineers currently operate, to broaden the pool of software engineers from which we can recruit. We cannot assure you that this strategy will help us satisfy our need for qualified personnel. In addition, uncertainty created by the announcement of the merger may adversely impact our ability to retain our research and development personnel. Further, we may encounter other difficulties with managing geographically separate research and development activities. If we fail to attract, motivate and retain engineers and research and development personnel, we may be unable to

program and to date have filed two patent applications, one of which was issued by the U.S. Patent and Trademark Office in June 2003. We generally enter into confidentiality or license agreements with our employees, consultants, customers, corporate partners and prospective customers and partners, and generally seek to control access to our intellectual property and the distribution of our software, documentation and other proprietary information. However, we believe that these measures afford only limited protection. Others may develop technologies that are similar or superior to our technology or design around the copyrights and trade secrets we own. Unauthorized parties may attempt to copy or otherwise obtain and use our software or technology. Policing unauthorized use of our software is difficult and expensive, and we cannot be certain that the steps we have taken will prevent misappropriation of our technology, particularly in foreign countries where the laws may not protect our proprietary rights as fully as those in the United States. If our means of protecting our proprietary rights is inadequate or ineffective, our business may be severely harmed.40

Adevelop ~~protracted~~or ~~infringement~~enhance our software, meet the ~~claim~~demands orof our customers in a ~~significant~~timely ~~damage~~manner ~~award~~or ~~would~~remain ~~adversely~~competitive ~~impact~~and our ~~operating~~ ~~results~~business would suffer.

~~Substantial~~Because ~~litigation~~we ~~and~~rely ~~threats~~on ofdistributors ~~litigation~~for ~~regarding~~a ~~intellectual property~~large ~~rights~~portion ~~exist in our industry. We expect that circuit simulation and analysis design software may be increasingly subject to third-party infringement claims as the number~~ of ~~competitors~~our inrevenue, our ~~industry~~revenue ~~segment~~could ~~grows~~decline ~~and~~if ~~the~~our ~~functionality~~existing ofdistributors ~~products~~do innot ~~different~~continue ~~industry~~to ~~segments~~purchase ~~overlaps. We~~software ~~are~~licenses ~~not~~from ~~aware~~us ofor ~~any~~represent ~~valid~~us ~~proprietary rights of third parties that our software infringes. We are currently a defendant~~ in ~~three lawsuits brought by Synopsys. Additional third parties other than Synopsys~~those ~~may claim that we infringe their intellectual property rights~~markets. ~~Any claims, with or without merit, could:~~

• A majority of our sales outside North America and Europe are conducted through distributors. Sales by our distributors accounted for approximately 23.6% and 30.4% of our total revenue in the three months ended December 31, 2004 and 2003, respectively. We rely on Marubeni Solutions as the exclusive distributor of our software in Japan. Sales to Marubeni Solutions accounted for 17.4% and 17.8% of our total revenue in the three months ended December 31, 2004 and 2003, respectively. We cannot be certain that we will be able to attract distributors that market our software effectively or provide timely and cost effective user support and service. Further, our agreements with our distributors do not obligate the distributor to purchase any amount of licenses of our software or sell licenses of our software. Consequently, one or more of our distributors may not continue to represent our software or devote a sufficient amount of effort and resources to selling our licenses of software in their territories. We may from time to ~~consuming~~time be forced to ~~defend;~~terminate relationships with distributors who do not maintain an appropriate level of sales. We may also decide to sell our software in a particular territory directly and terminate relationships with a particular distributor. As a result, our sales in a given territory may decrease substantially or cease until a suitable replacement distributor can be found or we are able to establish or provide adequate sales and support efforts for that territory. Even if we are successful in selling licenses of our software through new distributors, the rate of growth of our total revenue could be harmed if our existing distributors do not continue to sell licenses of our software. In addition, uncertainty created by the announcement of the merger may adversely impact our relationships with existing distributors.

~~• result~~If we fail to adequately match our expenses to anticipated revenue in ~~costly~~any ~~litigation~~given quarter, our operating results could fall below market expectations and~~/or~~ ~~damage~~cause ~~awards;~~the price of our stock to decline.

~~• divert~~Because of the extended sales cycle, seasonal fluctuations in our ~~management’s~~business, ~~attention~~cyclicality of the semiconductor industry and ~~resources;~~the rapidly evolving market for complex nanometer-scale semiconductors, our ability to accurately forecast our quarterly revenue is limited. As a result, it is difficult to predict the revenue we will recognize in any given quarter.

~~• cause~~We ~~customers~~expect to ~~cancel~~experience seasonal orfluctuations ~~delay~~in ~~orders;~~our revenue due to:

• ~~cause~~financial ~~product~~stability ~~shipment~~and ~~delays;~~outlook orof our customers;

• ~~require~~capital usbudgeting toand ~~seek~~purchasing tocycles ~~enter~~of ~~into~~our ~~royalty or licensing agreements.~~customers;

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

39• lengthening of the sales cycle due to limited resources as a result of layoffs by our customers, longer approval process, summer holidays, particularly in Europe and Japan; and

~~Any~~• the ~~potential~~number ~~dispute involving~~of ~~our~~orders ~~intellectual~~received ~~property~~for ~~could~~perpetual ~~include~~licenses ~~our~~versus ~~customers and strategic~~time-based ~~partners, which could trigger our indemnification obligations with them and result in substantial expense~~licenses.

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, result in potential claims for damages and cause licenses for our software to decrease substantially.41

~~Significant~~Commissions ~~errors~~represent ina significant portion of our ~~software~~ sales force compensation, ~~our~~which ~~inability~~is structured to encourage ~~correct~~sales ~~errors~~closures orprior ~~the~~to ~~failure~~fiscal ofyear ~~our~~end. As ~~software~~a toresult, we expect that sales efforts ~~conform~~will tointensify ~~specifications~~in the fourth fiscal quarter, which could result in our ~~customers~~revenue being ~~demanding~~flat ~~refunds~~or ~~from us~~slightly orlower ~~asserting~~in ~~claims~~the ~~for~~first ~~damages~~and ~~against~~second usquarters of the subsequent fiscal year.

~~Because~~It is difficult for us to evaluate the degree to which these factors may reduce our ~~circuit~~sales ~~simulation~~because ~~and~~our revenue ~~analysis~~growth ~~software~~historically ishad ~~complex~~masked the impact of these factors. In addition, most of our costs are relatively ~~software~~fixed ~~could~~in ~~fail~~the short term and our business may not grow rapidly enough to ~~perform~~absorb the ascosts of our personnel and facilities. As a result, we may be unable to reduce our expenses to avoid or minimize the negative impact on our quarterly operating results if anticipated revenue is not realized. For example, for the three months ended March 31, 2003, our revenue and earnings fell ~~Further~~short of our previous guidance and market expectation and we revised our guidance for the quarter ended June 30, ~~significant~~2003 ~~errors~~and infiscal 2003 to project much lower revenue and earnings than previously given, which negatively impacted the trading price of our ~~software~~common ~~may~~stock. Although bewe ~~found~~were able to achieve revenue and earnings results that met the revised guidance for each of the following five quarters, we again revised our earnings target in July 2004 for the ~~future~~quarter ended September 30, 2004 orprimarily ~~errors~~due ~~may~~to the expected increase in litigation related costs. We did not besee ~~corrected~~any ~~satisfactorily~~meaningful ~~for~~improvements in our customers’ spending pattern and our outlook continues to be cautious. ~~The~~These ~~detection~~trends ofcould ~~any~~materially ~~significant~~affect ~~errors may~~our ~~result~~quarter ~~in:~~to quarter operating results, which could negatively impact our stock price.

~~• product~~We ~~liability~~may ~~claims~~not orsucceed ~~damage~~in ~~awards;~~creating market acceptance for HSIMplus post-layout options, CRITIC and HANEX, and our operating results may decline as a result.

• We released our second major product, LEXSIM, in May 2002, our third product, CRITIC, in December 2002, our fourth product, HANEX, in May 2003 and reconfigured LEXSIM into post-layout options for the ~~loss~~new HSIMplus platform in May 2004. To date, these products and options other than HSIM have accounted for only an immaterial portion of our revenues. Even though we expect products or ~~delay~~options other than HSIM to account for a small percentage of our total revenue in fiscal ~~market~~2005, ~~acceptance~~our future growth and profitability could be affected by our ability to increase sales of our ~~software;~~other products and options. Furthermore, marketing new products requires significant additional expenses and resources. If we fail to market them successfully, our profitability may decline.

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

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

~~• costs of corrective actions or returns of defective software;~~42

~~• reduction~~Our insales ~~maintenance~~cycle oris ~~time-based~~unpredictable ~~license~~and ~~renewal~~may ~~rates;~~be more than six months, so we may fail to adequately match our expenses to anticipated revenue in any given period or meet market expectations.

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

We• limited ~~have~~and ~~warranted~~decreased ~~that~~capital ~~our~~spending ~~software~~due ~~will~~to ~~operate~~weakness in ~~accordance with our~~the ~~user~~semiconductor ~~documentation. If~~industry ~~our~~and ~~software fails to conform to these specifications,~~ customers’ ~~could~~uncertainty ~~demand~~about aeconomic ~~refund for the purchase price or assert and collect on claims for damages.~~recovery;

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

40• long technical evaluation periods and validation periods for the integration of our software with our potential customers’ existing semiconductor design flow;

~~Because~~• the ~~our~~significant ~~strategy~~investment ~~to expand~~of ~~our~~resources ~~international~~required ~~operations~~by iscustomers ~~subject~~ to ~~uncertainties, we may not be~~ ~~able~~purchase toand ~~enter~~integrate ~~new~~our ~~markets~~software ~~outside~~into ~~North~~their ~~America~~design orflow, ~~generate a significant level~~particularly ofcustomers ~~revenue~~with orlarge ~~profit~~semiconductor ~~margins~~design ~~from those markets.~~organizations;

~~Customers~~• limited ~~outside~~access ~~North~~to ~~America~~key ~~accounted~~decision ~~for~~makers ~~39.7% and 38.8%~~ of ~~our total~~potential ~~revenue~~customers ~~in the six months ended March 31, 2004 and 2003, respectively. We plan~~ to ~~increase our~~ ~~international~~authorize ~~sales~~the ~~activities,~~adoption ~~but~~of ~~we have limited experience marketing and directly licensing~~ our software ~~internationally.~~;

We• budget ~~have~~cycles ~~direct~~of ~~sales offices in France, Germany, India, Israel, Singapore and Taiwan, and rely primarily on indirect sales in Asia. Although~~ our ~~sales~~customers ~~contracts~~which ~~provide~~affect ~~for payment for our software licenses in United States dollars, our expenses incurred in foreign locations are generally denominated in~~ the ~~applicable~~timing ~~local currency. To~~of ~~date we have not~~purchases; ~~undertaken any foreign currency hedging transactions,~~ and ~~as a result, our future expense levels from international operations may be unpredictable due to exchange rate fluctuations. Our international operations are subject to other risks, including:~~

• ~~the~~delay ~~impact~~of purchases due to product combination announcements or planned introductions of ~~recessions~~new inproducts ~~economies~~by ~~outside~~our ~~North~~competitors ~~America;~~or us.

~~• difficulties~~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 ~~costs~~ultimately result in the decrease of ~~staffing~~our stock price. Further, if our sales cycle unexpectedly lengthens in general, it would adversely affect the timing of our revenue recognition, which could cause us not to meet market expectations and ~~managing~~cause ~~foreign~~our ~~operations;~~stock price to suffer. For instance, for the three months ended March 31, 2003 and June 30, 2003, our revenue decreased as compared to the previous quarters because we experienced longer sales cycles, which negatively impacted our ability to receive orders and recognize revenue.

~~• foreign~~Our ~~currency~~expansion ~~fluctuations;~~into international markets will result in higher personnel costs or distributor commissions and could reduce our operating margins.

~~• reduced~~In ~~protection~~order ~~for~~to ~~intellectual~~penetrate international ~~property~~markets ~~rights~~further, we must either expand the number of distributors who sell licenses of our software or increase our direct international sales presence. As we increase our direct international sales presence, our sales efforts may be delayed as we begin our local sales activities and we may incur higher personnel costs that may not result in ~~some~~additional ~~countries;~~revenue. These costs and the time to establish a local sales presence could harm our operating results. We may not realize corresponding growth in operating margins from growth in international sales due to the higher costs of these sales. We have

~~• changes in import or export duties, quotas or controls, which could prevent us from shipping our software into markets outside North America;~~43

~~• greater~~increased ~~difficulty~~our sales and support resources in Europe ~~accounts~~over ~~receivable~~the ~~collection~~last two years and ~~longer~~have established offices in France, Germany, ~~collection~~India, ~~periods;~~Israel and Singapore. However, the expected returns on those investments have not been realized, primarily due to the economic slowdown. To date, we have relied primarily on international distributors in Asia and have only recently begun to employ direct sales personnel in Singapore and India. Even if we expand our direct and indirect international selling efforts, our efforts may not create or increase international market demand for our software or generate revenue sufficient to recoup the cost of this expansion.

~~• unexpected~~We ~~changes~~expect to incur losses in ~~regulatory~~the ~~requirements;~~future, and the market price of our common stock could decline.

~~• proper~~Although ~~maintenance~~we ofhad ~~corporate~~net ~~formalities~~income for bythe four years ended September 30, 2003 and the quarter ended December 31, 2004, we incurred losses for the quarter and year ended September 30, 2004, and we may incur losses in the future. In order to fund our ~~foreign~~growth and implement our strategies, we must ~~subsidiaries;~~continue to increase our investment in research and development, sales and marketing and other operations. Our litigation related costs also increased substantially in fiscal 2004 as compared to fiscal 2003 and, in the event the proposed merger with Synopsys is not consummated, we expect these costs to increase in fiscal 2005 totaling an estimated $18.0 million to $20.0 million. As a result, we expect to incur substantial losses and the market price of our common stock may decline, perhaps substantially.

~~• potentially~~To ~~adverse~~the ~~tax~~extent ~~consequences~~we remain a stand-alone company, ~~including~~we ~~the~~anticipate ~~impact~~that ofour ~~expiry~~expenses ofwill increase ~~tax~~substantially ~~holidays;~~in ~~and~~the next 12 months as we:

• ~~political~~increase our sales and ~~economic~~marketing ~~instability.~~activities, particularly by expanding our direct sales force;

We• continue ~~intend~~ to ~~pursue strategic~~increase ~~relationships~~the ~~but~~size ~~these~~and ~~efforts~~number ~~could~~of ~~substantially~~locations ~~divert~~of ~~management attention~~our ~~and resources.~~support organization;

In• continue ~~order~~ to ~~establish~~invest ~~strategic~~in ~~relationships~~research ~~with semiconductor technology leaders~~ and ~~leading~~development ~~electronic~~to ~~design~~enhance ~~automation~~our ~~tool providers, we~~existing ~~may~~products ~~need~~and totechnologies ~~expend significant resources~~ and ~~will~~develop ~~need~~new tocircuit ~~commit~~simulation ~~a significant amount of management time~~ and ~~attention, with no guarantee of success. We may be unable to establish key industry~~analysis ~~strategic~~products; ~~relationships if any of the following occur:~~and

• ~~potential~~implement ~~industry~~additional ~~partners~~internal ~~become~~systems, ~~concerned~~develop ~~about~~additional infrastructure ~~our~~and ~~ability~~hire additional management to ~~protect~~ ~~their~~keep ~~intellectual~~pace ~~property;~~with our growth.

• ~~potential~~continue ~~industry~~to ~~partners~~defend ~~develop~~ourselves ~~their~~vigorously ~~own~~the ~~solutions~~State toCourt ~~address circuit~~Action ~~simulation~~ and Federal ~~analysis~~Court ~~of complex nanometer-scale semiconductors;~~Actions.

41Any failure to significantly increase our revenue as we implement our strategies would also harm our ability to maintain profitability and could negatively impact the market price of our common stock.

~~• our~~If ~~competitors~~we ~~establish~~are ~~relationships~~not ~~with~~able ~~industry~~to ~~partners~~preserve ~~with~~the value of our ~~which~~software’s weintellectual ~~seek~~property, toour ~~establish~~business awill ~~relationship;~~suffer.

~~• potential~~Our ~~industry~~software ~~partners~~is differentiated ~~attempt~~from that of our competitors by our internally developed technology. If we fail to ~~restrict~~protect our intellectual ~~ability~~property, other vendors could sell circuit simulation and analysis software with capabilities similar to ~~enter~~ours, and this could reduce demand for our software. We protect our intellectual property through a combination of copyright, patent, trade secret and trademark laws. We have a patent program and to date have two patents issued by the U.S. Patent and Trademark Office. We generally enter into confidentiality ~~relationships~~or license agreements with ~~their~~our ~~competitors;~~employees, consultants and corporate partners, and generally seek to control access to our intellectual property and the distribution of our software, documentation and other proprietary information. However, we believe that these measures afford only limited protection. Others may develop technologies that are similar or superior to our technology or design

~~• potential leading electronic design automation tool provider partners develop or acquire competitive products.~~44

Wearound ~~have~~the ~~only~~copyrights ~~recently~~and ~~entered~~trade ~~into~~secrets ~~our current strategic~~we ~~relationships~~own. ~~These~~Unauthorized ~~relationships~~parties may attempt to ~~not~~copy ~~continue~~or otherwise obtain and use our software or technology. Policing unauthorized use of our software is difficult and expensive, and we cannot be ~~successful~~certain that the steps we have taken will prevent misappropriation of our technology, particularly in foreign countries where the laws may not protect our proprietary rights as fully as those in the United States. WeIf ~~also~~our means ~~may~~of beprotecting ~~unable~~our toproprietary ~~find~~rights ~~additional~~is ~~industry~~inadequate ~~partners~~or ~~that~~ineffective, ~~are~~our ~~suitable~~business may be severely harmed.

WeA ~~may~~protracted ~~not~~infringement beclaim ~~able~~or ~~to expand~~a ~~our proprietary technologies if we do not make acquisitions or~~significant ~~investments~~damage oraward ~~fail~~would toadversely ~~successfully~~impact ~~integrate~~our ~~the~~operating ~~acquired companies with our business~~results.

ToSubstantial ~~expand~~litigation ~~our~~and threats ~~proprietary~~of ~~technologies,~~litigation weregarding ~~may~~intellectual ~~acquire~~property orrights ~~make investments~~exist in ~~complementary~~our ~~businesses,~~industry. We ~~technologies~~expect orthat ~~products~~circuit ifsimulation and ~~appropriate~~analysis ~~opportunities~~design ~~arise. We~~software may be ~~unable~~increasingly subject to ~~identify suitable acquisition or investment candidates at~~third-party ~~reasonable~~infringement ~~prices~~claims oras onthe ~~reasonable~~number ~~terms,~~of orcompetitors ~~complete~~in ~~future~~our ~~acquisitions~~industry orsegment grows ~~investments,~~and ~~any~~the functionality of ~~which~~products ~~could~~in ~~slow~~different ~~our~~industry ~~growth~~segments ~~strategy~~overlaps. We ~~may~~are ~~have~~not ~~difficulty~~aware ~~integrating the products, personnel, culture, ideologies or technologies~~ of any ~~acquisitions~~valid weproprietary ~~might~~rights ~~make. These~~of ~~difficulties~~third ~~could disrupt~~parties ~~our~~that ~~ongoing business, distract~~ our ~~management~~software ~~and employees and increase our expenses~~infringes. InWe ~~addition, the key personnel of the acquired company may decide not to work for us and if our customers~~ are ~~uncertain~~currently ~~about our ability to operate on~~ a ~~combined~~defendant ~~basis,~~in ~~they~~the State ~~could~~Court ~~delay~~Action orand ~~cancel~~Federal ~~orders~~Court ~~for our software~~Actions. ~~Furthermore,~~Additional wethird ~~may~~parties ~~have~~other tothan ~~incur~~Synopsys ~~debt~~may orclaim ~~issue~~that ~~equity~~we ~~securities to pay~~infringe ~~for~~their ~~any~~intellectual ~~future~~property ~~acquisition, the issuance of which would be dilutive to our existing stockholders~~rights. ~~We also could~~Any ~~have~~claims, ~~difficulty~~with ~~in assimilating the acquired company’s~~ or ~~division’s~~without ~~personnel and operations~~merit, ~~which~~ could ~~negatively affect our operating results.~~:

~~The~~• be ~~markets~~time ~~for~~consuming ~~complex nanometer-scale~~to ~~semiconductors are evolving rapidly and if these markets do not develop and expand as we anticipate, the demand for our software and our revenue would decline.~~defend;

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

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

42• cause customers to cancel or delay orders;

• ~~educate~~cause ~~potential~~product ~~customers~~shipment ~~about the benefits of complex nanometer-scale semiconductors and the use of our software to design them~~delays; or

• ~~establish~~require ~~and~~us ~~maintain~~to ~~relationships~~seek ~~with~~to ~~leading~~enter ~~semiconductor manufacturers,~~into ~~electronic~~royalty ~~equipment~~or ~~designers,~~licensing ~~portable consumer electronic manufacturers, networking equipment and other electronics companies;~~agreements.

~~• utilize~~These royalty or licensing agreements may not be available on terms acceptable to us, if at all. A successful claim of product infringement against us or our ~~research~~failure ~~and~~to ~~development~~license ~~efforts~~the infringed or similar technology could adversely affect our business. We would not be able to ~~anticipate~~sell licenses of the impacted software without exposing ourselves to litigation risk and ~~adapt~~damages or we may be required to ~~evolving~~redevelop ~~markets;~~the software and incur significant additional expense. Because we expect to derive substantially all of our revenue from HSIM in fiscal 2005, to the extent we remain a stand-alone company, anything that would limit our ability to license HSIM would harm our business.

~~• predict~~Any ~~and~~potential ~~base~~dispute involving our ~~software~~intellectual property oncould ~~technology~~include ~~that~~our ~~ultimately~~customers ~~becomes~~and strategic partners, which could ~~industry~~trigger ~~standard~~our indemnification obligations with them and result in substantial expense.

WeIn ~~face~~any ~~competition~~potential ~~from~~dispute ~~internally~~involving ~~developed~~our ~~semiconductor~~intellectual ~~design~~property, ~~software~~our customers and ifstrategic partners could also become the target of litigation. This could trigger our ~~customers~~technical ~~elect~~support and indemnification obligations in our license agreements, which could result in substantial expense to us. In ~~continue~~addition to ~~use~~the ~~internally~~time ~~designed~~and ~~tools,~~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 ~~may~~of ~~suffer.~~our customers and strategic partners, which in

We face significant competition from internal design software groups of semiconductor manufacturers. These internal groups compete with us for access to potential customers’ circuit simulation and analysis software budgets and may eventually compete with us to supply circuit simulation and analysis software to other semiconductor manufacturers. We cannot assure you that internal groups will not expand their internally designed tools to compete directly with ours or actively sell their internally designed tools to other semiconductor manufacturers or, if they do, that we will be able to compete against them successfully.45

~~Our~~turn ~~revenue~~ could ~~be reduced~~hurt ifour ~~large~~relations ~~electronic~~with ~~design~~our customers ~~automation~~and ~~companies~~strategic ~~make~~partners, ~~acquisitions~~result in ~~order~~ topotential ~~utilize~~claims ~~their~~for ~~extensive~~damages ~~distribution~~and cause ~~capabilities~~licenses ~~with~~for our ~~competitors’~~ ~~products~~software to decrease substantially.

~~Large~~Significant ~~electronic~~errors ~~design~~in ~~automation vendors, such as Cadence, Mentor Graphics or Synopsys, may acquire or establish cooperative relationships with~~ our ~~other current competitors~~software, including private companies. For example, Synopsys acquired Numerical Technologies, Inc., a provider of sub-wavelength lithography-enabling technology, in February 2003, and InnoLogic Systems, Inc., a provider of memory and full-custom equivalence checking technology, in June 2003. Because large electronic design automation vendors have significant financial and organizational resources, they may be able to further penetrate our ~~markets~~inability ~~by leveraging the technology and~~to ~~expertise~~correct oferrors ~~smaller~~or ~~companies and utilizing their own extensive distribution channels. We expect that~~ the ~~electronic design~~failure ~~automation product industry will continue to consolidate. For example, Cadence completed its acquisition~~ of ~~Celestry~~our Design Technologies, Inc., a provider of silicon modeling and circuit simulation tools, in January 2003, Get2Chip, Inc., a provider of advanced nanometer-scale synthesis technology, in April 2003, Verplex Systems, Inc., a provider of formal verification electronic design software, into ~~August 2003~~conform ~~and~~to ~~Q Design Automation, Inc., a provider of~~specifications ~~solutions~~could ~~for~~result ~~migrating and optimizing IC layout,~~ in ~~January 2004. It~~our iscustomers ~~possible~~demanding ~~that~~refunds ~~new~~from ~~competitors~~us or ~~alliances~~ ~~among~~asserting ~~competitors~~claims ~~may emerge and rapidly acquire significant market~~for ~~share,~~damages ~~which~~against ~~would harm our business and financial prospects~~us.

WeBecause ~~may~~our ~~not~~circuit simulation beand ~~able~~analysis software is complex, our software could fail to perform ~~compete~~as ~~effectively~~anticipated. Further, ifsignificant errors in our software ismay ~~delayed~~be found in the future or ~~does~~errors may not ~~incorporate new~~be ~~required~~corrected ~~features~~satisfactorily for our customers. The detection of any significant errors may result in:

Our future success depends on our ability to enhance existing software, develop and introduce new products, satisfy user requirements, meet industry standards and achieve market acceptance. We may not successfully identify new • product ~~opportunities~~liability orclaims ~~develop and bring new products to market in a timely and cost effective manner. Significant delays in our new software releases~~ or ~~significant~~damage ~~problems or delays in enhancing existing products to keep pace with new design techniques for complex nanometer-scale~~awards;

43• the loss of or delay in market acceptance and sales of our software;

~~semiconductors~~• injury ~~could seriously damage our business. We have, from time~~ to time, experienced delays in the scheduled introduction of new and enhanced software and we may experience similar delays in the future. For example, in early 2001 we experienced delays in the development of a new product, which caused us to revise our ~~expected~~reputation ~~release date for this product by several months. More recently, we have also delayed the release of another product in order to allow for an extended beta testing period~~ and ~~experienced~~hindered ~~much slower~~ market acceptance of our ~~new products than expected.~~ ~~We cannot assure you that we will not experience additional difficulties that could delay or prevent the successful development, introduction and marketing of this~~ software or that our new software and product enhancements will achieve market acceptance. If we are unable to develop, introduce and successfully market new or enhanced software in a timely manner in response to changing market conditions or customer requirements, our business, operating results and financial condition may be harmed.;

We• diversion ~~may sell fewer licenses~~ of ~~our~~development ~~products~~resources iffrom ~~other~~new ~~vendors’~~software ~~products~~to ~~are~~fix noerrors ~~longer compatible~~in ~~with~~existing ~~ours.~~software;

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

We• reduction doin ~~not~~maintenance ~~have~~or ~~a consulting~~time-based ~~staff,~~license ~~and~~renewal ~~our~~rates; ~~revenue may suffer if customers demand extensive consulting~~ or ~~other support services.~~

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

~~Our~~We ~~common~~have ~~stock~~warranted isthat our ~~subject~~software towill ~~substantial~~operate ~~price~~in ~~and~~accordance ~~volume~~with ~~fluctuations~~our ~~due~~user todocumentation. If aour ~~number~~software ~~of factors,~~fails ~~many~~to ofconform ~~which~~to ~~are beyond our control~~these specifications, ~~and~~customers ~~those~~could ~~fluctuations~~demand ~~and limited~~a ~~trading~~refund ~~volumes~~for ~~may~~the ~~prevent~~purchase ~~our~~price ~~stockholders~~or assert ~~from~~and ~~reselling~~collect ~~our~~on ~~common stock~~claims atfor ~~a profit~~damages.

~~The~~Moreover, ~~securities~~because ~~markets have experienced extreme price and volume~~our ~~fluctuations~~software ~~recently~~is ~~and~~used ~~the~~in ~~market~~connection ~~prices~~with ofother ~~the~~vendors’ ~~securities~~products ofthat ~~technology companies~~are ~~have~~used ~~been especially volatile.~~ to ~~This~~design ~~market~~complex ~~volatility~~nanometer-scale semiconductors, assignificant ~~well~~liability asclaims ~~general economic or political~~may ~~conditions,~~be ~~could~~asserted ~~reduce~~against ~~the~~us ~~market~~if ~~price~~our ofsoftware ~~our~~does ~~common~~not ~~stock~~work ~~regardless~~properly ofindividually ~~our~~or ~~operating~~with ~~performance. In~~other ~~addition,~~vendors’ ~~our~~products. Our ~~operating~~agreements ~~results~~with ~~could~~customers betypically ~~below~~contain ~~the~~provisions ~~expectations~~intended ofto ~~investment~~limit ~~analysts and~~our ~~investors~~exposure ~~and,~~to inliability ~~response~~claims. However, these ~~the~~limitations ~~market~~may ~~price~~not ofpreclude ~~our~~all ~~common~~potential ~~stock~~claims ~~may decrease significantly~~ and ~~prevent~~we ~~investors~~have ~~from~~only minimal ~~reselling~~insurance ~~their~~against ~~shares~~such ~~of our common~~liabilities. ~~stock~~Regardless atof ortheir ~~above~~merit, ~~the~~liability ~~price~~claims atcould ~~which~~require ~~they~~us ~~purchased the shares. Due~~ to ~~a majority of the outstanding common~~spend ~~stock~~significant ~~being~~time ~~owned~~and byexpense ~~our~~in ~~founders~~litigation and ~~employees,~~divert wemanagement’s ~~have~~attention from ~~limited~~other ~~day-to-day trading~~business ~~volumes~~pursuits. If successful, ~~which~~a ~~may~~product ~~also~~liability ~~cause~~claim ~~our~~could ~~stock~~require ~~prices~~us to ~~experience~~pay ~~higher~~significant ~~volatility and prevent our stockholders from selling our common stock at a profit~~damages. ~~For~~Any ~~example~~claims, inwhether ~~April 2003 we~~or ~~reported our financial results for the three months ended March 31,~~not ~~2003~~successful, ~~which~~could ~~were~~seriously ~~below~~damage ~~previous~~our ~~guidance~~reputation and ~~market expectations. As a result, the stock price of~~ our ~~common stock was adversely impacted~~business.

44Because our strategy to expand our international operations is subject to uncertainties, we may not be able to enter new markets outside North America or generate a significant level of revenue or profit margins from those markets.

~~Our~~Customers ~~growth~~outside ~~could~~North America ~~place~~accounted ~~a significant~~for ~~strain~~37.0% onand 40.2% of our ~~management~~total ~~systems~~revenue ~~and~~in ~~resources~~the ~~and~~three wemonths ended ~~may~~December 31, be2004 ~~unable to~~and ~~effectively~~2003, ~~control~~respectively. We ~~our~~have ~~costs~~limited experience marketing and directly ~~implement~~licensing our ~~business~~software ~~strategies as a result~~internationally.

Our total number of employees was 108 as of March 31, 2004, and we expect our headcount to double over the next 24 months. Our productivity and the quality of our software may be adversely affected if we do not integrate, train and motivate our new employees quickly and effectively and manage our resources efficiently. We also cannot be sure that our revenue will continue to grow at a sufficient rate to absorb the costs associated with the increased personnel.46

We ~~expect~~have ~~that~~direct ~~any~~sales ~~future~~offices in ~~growth~~France, weGermany, ~~experience~~India, ~~will~~Israel, ~~continue~~Singapore toand ~~place~~Taiwan, ~~a significant~~and ~~strain~~rely primarily on indirect sales in Asia. Although our sales ~~management~~contracts provide for payment for our software licenses in United States dollars, ~~systems~~our ~~and~~expenses ~~resources~~incurred in foreign locations are generally denominated in the applicable local currency. To date ~~manage~~we ~~the~~have ~~anticipated~~not ~~growth~~undertaken ofany ~~our~~foreign currency hedging transactions, and as a ~~operations~~result, weour ~~will~~future expense levels from international operations may be unpredictable ~~required~~due to exchange rate fluctuations. Our international operations are subject to other risks, including:

• ~~hire,~~the ~~train,~~impact ~~manage~~of ~~and~~recessions ~~retain~~in ~~additional~~economies ~~qualified~~outside ~~personnel, especially~~North ~~software engineers and sales staff~~America;

• ~~improve~~difficulties ~~existing~~ and ~~implement~~costs ~~new~~of ~~operational,~~staffing ~~financial~~ and ~~management~~ ~~information~~managing ~~controls,~~foreign ~~reporting systems and procedures~~operations;

• ~~maintain~~foreign acurrency ~~high level of customer service and support~~fluctuations; ~~and~~

• ~~establish~~reduced ~~relationships~~protection ~~with~~for ~~additional~~intellectual ~~corporate~~property ~~partners~~rights ~~and~~in ~~maintain our~~some ~~existing relationships.~~countries;

~~ITEM~~• changes ~~3. QUANTITATIVE~~in ~~AND~~import ~~QUALITATIVE~~or ~~DISCLOSURES~~export duties, quotas or controls, which could ~~ABOUT~~prevent ~~MARKET~~us ~~RISK~~from shipping our software into markets outside North America;

We• greater ~~develop~~difficulty ~~products primarily~~ in ~~the~~accounts ~~United~~receivable ~~States~~collection and ~~sell those~~longer ~~products~~collection primarily in North America, Europe and Japan. Our revenue for sales outside of North America was approximately 39.8% in the three months ended March 31, 2004, 37.9% in the three months ended March 31, 2003, 39.7% in the six months ended March 31, 2004 and 38.8% in the six months ended March 31, 2003. As a result, our financial results could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets. As all of our sales are currently made in United States dollars, a strengthening of the United States dollar could make our software less competitive in foreign markets.periods;

~~Our~~• unexpected ~~interest income is sensitive to~~ changes in ~~the~~regulatory general level of United States interest rates, particularly since the majority of our investments are in short-term instruments. The fair value of fixed rate securities may be adversely impacted because of changes in short-term interest rates and credit ratings. Therefore, our future interest income may be negatively affected by changes in interest rates or we may suffer principal losses if we were to sell securities that have declined in value because of changes in interest rates or issuer credit ratings. A sensitivity analysis assuming a hypothetical 10% movement in interest rates applied to our cash equivalent and short-term investments balances at March 31, 2004 would change interest income by approximately $91,000 on an annual basis. However, due to the nature of our short-term investments, we have concluded that we do not have material market risk exposure. We do not hold or issue derivatives, derivative commodity instruments or other financial instruments for trading or speculative purposes.requirements;

We• proper ~~invest~~maintenance ~~funds in excess~~ of ~~current~~corporate ~~operating~~formalities ~~requirements~~by ~~in:~~our foreign subsidiaries;

• ~~obligations~~potentially ofadverse ~~the~~tax ~~United~~consequences, ~~States~~including ~~government~~the ~~and~~impact ~~its~~of ~~agencies~~expiry of tax holidays; and

45• political and economic instability.

~~• investment~~We ~~grade~~intend ~~state~~to ~~and~~pursue ~~local~~strategic ~~government~~relationships ~~obligations;~~but these efforts could substantially divert management attention and resources.

~~• securities~~In oforder ~~United~~to ~~States~~establish strategic ~~corporations~~relationships ~~rated~~with A1semiconductor ortechnology P1leaders byand leading ~~Standard &~~electronic ~~Poors’~~design orautomation ~~Moody’s~~tool ~~equivalents;~~providers, to the extent we remain a stand-alone company, we may need to expend significant resources and~~/or~~ will need to commit a significant amount of management time and attention, with no guarantee of success. We may be unable to establish key industry strategic relationships if any of the following occur:

• ~~money~~potential ~~market~~industry ~~funds,~~partners ~~deposits~~become orconcerned ~~notes~~about ~~issued~~our orability ~~guaranteed by United~~to ~~States~~protect ~~and~~their ~~non-United~~intellectual ~~States commercial banks meeting certain credit rating and net worth requirements with maturities of less than one year.~~property;

As• potential ofindustry ~~March 31,~~partners ~~2004,~~develop ~~our~~their ~~cash,~~own ~~cash~~solutions ~~equivalents~~to ~~and short-term~~address ~~investments~~circuit ~~consisted~~simulation ~~primarily of demand deposits, money market funds~~ and ~~corporate~~ ~~notes~~analysis ~~held by large institutions in the United States and agency securities~~ of ~~the~~complex ~~United~~nanometer-scale ~~States government and state municipalities.~~semiconductors;

~~ITEM~~• our ~~4. CONTROLS~~competitors ~~AND~~establish ~~PROCEDURES~~relationships with industry partners with which we seek to establish a relationship; or

~~(a)~~• potential ~~Evaluation~~industry ofpartners attempt to restrict our ability to enter ~~disclosure~~into ~~controls~~relationships ~~and~~with ~~procedures~~their competitors.

We have carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report. Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that material information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms.47

~~(b)~~We ~~Changes~~have inonly ~~internal~~recently ~~controls~~entered into our current strategic relationships. These relationships may not continue or be successful. We also may be unable to find additional industry partners that are suitable.

~~There~~We ~~were~~may nonot ~~significant~~be ~~changes~~able into expand our ~~internal control over~~proprietary ~~financial~~technologies ~~reporting~~if ~~during~~we ~~the~~do ~~period~~not ~~covered~~make byacquisitions ~~this~~or ~~Quarterly~~investments ~~Report~~or ~~that~~fail ~~had~~to ~~materially~~successfully ~~affected~~integrate ~~our~~the ~~internal~~acquired ~~control~~companies ~~over~~with ~~financial~~our ~~reporting~~business.

46To expand our proprietary technologies, we may acquire or make investments in complementary businesses, technologies or products if appropriate opportunities arise, to the extent we remain a stand-alone company. We may be unable to identify suitable acquisition or investment candidates at reasonable prices or on reasonable terms, or complete future acquisitions or investments, any of which could slow our growth strategy. We may have difficulty integrating the products, personnel, culture, ideologies or technologies of any acquisitions we might make. These difficulties could disrupt our ongoing business, distract our management and employees and increase our expenses. In addition, the key personnel of the acquired company may decide not to work for us and if our customers are uncertain about our ability to operate on a combined basis, they could delay or cancel orders for our software. Furthermore, we may have to incur debt or issue equity securities to pay for any future acquisition, the issuance of which would be dilutive to our existing stockholders. We also could have difficulty in assimilating the acquired company’s or division’s personnel and operations, which could negatively affect our operating results.

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

~~ITEM~~We 1depend on the growing use of circuit simulation and analysis software to design complex nanometer-scale semiconductors for use in portable consumer electronics, networking equipment and other applications. ~~Legal~~The market for ~~Proceedings~~complex nanometer-scale semiconductors may not grow if customers choose to use other types of semiconductors that might be more affordable or available with shorter time-to-market schedules. This could cause electronic equipment manufacturers to limit the number of new complex nanometer-scale semiconductors they design and would reduce their need for our software. If demand for our software were to decline, we may choose to lower the prices of our software or we may sell fewer licenses and have lower maintenance renewal rates. In addition, if equipment manufacturers do not widely adopt the use of complex nanometer-scale semiconductors or if there is a wide acceptance of alternative semiconductors that provide enhanced capabilities, the market price of our stock could decline due to our lower operating results or investors’ assessment that the growth potential for licenses of our software is limited.

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

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

In• establish ~~February 2000, Synopsys filed a complaint in the Superior Court of the State of California in the County of Santa Clara (Case No. CV787950) against us~~ and ~~Dr.~~maintain ~~Deng,~~relationships ~~our~~with ~~President. The~~leading ~~complaint alleged breach of contract, breach of fiduciary trust,~~semiconductor ~~diversion of corporate opportunity and constructive trust. In September 2001~~manufacturers, ~~Synopsys~~electronic ~~filed~~equipment ~~its second amended complaint~~designers, ~~which~~portable ~~added~~consumer ~~claims of inducing/aiding and abetting~~electronic ~~breach of fiduciary duty~~manufacturers, ~~including/aiding~~networking ~~and~~equipment ~~abetting diversion of corporate opportunity, misappropriation of trade secrets, civil conspiracy, breach of confidence~~ and ~~unfair competition, and added as individual defendants Dr. Wang and our four~~ other ~~founders. In September 2002,~~electronics Synopsys filed a supplemental second amended complaint that contained supplemental allegations but added no new claims or parties. In January 2003, the discovery referee issued orders creating rebuttable presumptions in favor of Synopsys on certain evidentiary issues to sanction us for erasure of certain computer files requested in discovery by Synopsys. These rulings mean that we must prove at trial that we did not take or use Synopsys’ source code or other confidential information, rather than the usual requirement that Synopsys provide such proof in the first instance. However, none of these rulings resolves any of the claims made by Synopsys in the case and the trial judge or jury can reach their own conclusions based upon the evidence presented at trial. We filed a motion for reconsideration of this order and in March 2003, the court denied our motion, concluding that it was barred on procedural grounds. In January 2003, Synopsys filed a third amended complaint, which contained supplemental allegations but added no new claims or parties. We have filed an answer denying Synopsys’ allegations. In August 2003, Synopsys filed several motions for terminating sanctions against us, which were heard in January 2004 and the discovery referee has not yet ruled. We oppose each of these motions and intend to file oppositions within the time permitted by law. Synopsys has requested unspecified damages of at least $25 million, an injunction, a constructive trust on unspecified intellectual property belonging to us and other relief. Further, in September 2003, Synopsys notified us that it reserves the right to seek up to $80 million in punitive damages with respect to claims for which punitive damages are allowed under California Civil Code Section 3294, and up to $50 million in punitive damages with respect to the trade secret claims under California Civil Code Section 3426.3(c). This action is currently in discovery. A trial date has not yet been set.companies;

We• utilize ~~believe~~our ~~that~~research ~~we have meritorious defenses to Synopsys’ allegations~~ and ~~claims~~development ~~and~~efforts ~~we intend~~ to ~~continue~~anticipate ~~to defend ourselves vigorously. However, because of the inherent uncertainty of litigation in general,~~ and ~~the~~adapt ~~fact that the discovery related~~ to ~~this~~ ~~litigation~~evolving ismarkets; ~~ongoing, we cannot assure you that we will~~and

47• predict and base our software on technology that ultimately becomes industry standard.

ultimately prevail. Should Synopsys ultimately succeed in the prosecution of its claims, we could be permanently enjoined from selling our software and deriving related maintenance revenue. In addition, we could be required to pay substantial monetary damages to Synopsys. Further, we could be enjoined preliminarily from selling our software during the course of the litigation. Litigation such as the suit Synopsys has brought against us can take years to resolve and can be expensive to defend. Although the final outcome of the litigation may not occur for some time, the parties periodically conduct evidence gathering, meet to discuss the status of the litigation and file motions and other requests for the court to act. The results of these periodic activities, particularly the court’s decisions on current pending and future motions, could have the effect of determining the ultimate outcome of the litigation, either for or against us, prior to a trial on the merits, or strengthen or weaken our ability to assert claims and defenses. For example, in November 2001, the court denied a motion brought by Synopsys for injunctive relief that, if granted, could have prevented us from selling our products. If any of Synopsys’ motions ultimately prevail, our ability to defend ourselves against the claims brought against us in this litigation could be severely limited. It is possible that our relationships with our customers will be seriously harmed in the future as a result of the Synopsys litigation. Accordingly, an adverse judgment, if entered in favor of any Synopsys claim, could seriously harm our business, financial position and results of operations and cause our stock price to decline substantially. In addition, the Synopsys allegations and claims, even if ultimately determined to be without merit, could be time consuming to defend, result in costly litigation, divert our management’s attention and resources, cause product shipment delays or require us to enter into royalty or license agreements. These royalty or license agreements may not be available on terms acceptable to us, if at all, and the prosecution of the Synopsys allegations and claims could significantly harm our business, financial position and results of operations and cause our stock price to decline substantially.48

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

~~From~~We ~~time~~face tosignificant competition ~~time,~~from ~~the~~internal ~~court~~design ~~has~~software ~~ruled~~groups onof ~~summary judgment motions in~~semiconductor ~~the case~~manufacturers. InThese ~~May~~internal ~~2002, the court~~groups ~~granted~~compete ~~summary~~with ~~judgment~~us infor ~~favor~~access ofto ~~Synopsys~~potential oncustomers’ ~~our~~circuit ~~invalidity~~simulation ~~defenses~~ and ~~counterclaims,~~analysis ~~concluding~~software ~~that~~budgets ~~they~~and ~~were~~may ~~barred~~eventually bycompete ~~the~~with ~~doctrine~~us ofto ~~assignor estoppel. The~~supply ~~court denied Synopsys’~~circuit ~~motion~~simulation ~~with~~and ~~respect~~analysis software to ~~our~~other ~~unenforceability~~semiconductor ~~defense and counterclaim~~manufacturers. InWe ~~November 2002,~~cannot ~~the~~assure ~~court~~you ~~issued~~that aninternal groups ~~order~~will ~~granting~~not ~~summary~~expand ~~judgment~~their ininternally ~~favor~~designed oftools ~~Synopsys~~to oncompete ~~certain~~directly ~~antitrust~~with ours ~~counterclaims~~or ~~based~~actively onsell ~~the~~their ~~doctrine~~internally ofdesigned ~~assignor~~tools ~~estoppel. However, the court declined~~ to ~~rule on Synopsys’ motion with respect to our~~ other ~~antitrust and unfair competition~~semiconductor ~~counterclaims. In~~manufacturers ~~addition~~or, ~~the~~if ~~court issued~~they ado, ~~ruling~~that ~~construing~~we ~~the~~will ~~claims~~be ofable ~~the~~to ~~053~~compete ~~patent~~against ~~in August 2002~~them successfully.

InWe ~~September 2002,~~may ~~the U.S. Patent and Trademark Office granted our request for ex parte reexamination of the 053 patent based on prior art~~ not ~~previously~~ ~~considered~~be byable ~~the Patent Office. We have moved~~ to ~~stay~~compete ~~the~~effectively ~~federal~~if ~~litigation pending the outcome of the~~our ~~reexamination~~software ~~and~~is ~~the~~delayed ~~court~~or ~~granted~~does ~~our~~not ~~motion~~incorporate innew ~~December 2002. During~~required ~~the reexamination of the 053 patent, the Patent Office may determine that~~features.

48Our future success depends on our ability to enhance existing software, develop and introduce new products, satisfy user requirements, meet industry standards and achieve market acceptance. We may not successfully identify new product opportunities or develop and bring new products to market in a timely and cost effective manner. Significant delays in our new software releases or significant problems or delays in enhancing existing products to keep pace with new design techniques for complex nanometer-scale semiconductors could seriously damage our business. We have, from time to time, experienced delays in the scheduled introduction of new and enhanced software and we may experience similar delays in the future. For example, in early 2001 we experienced delays in the development of a new product, which caused us to revise our expected release date for this product by several months. More recently, we have also delayed the release of another product in order to allow for an extended beta testing period. We cannot assure you that we will not experience additional difficulties that could delay or prevent the successful development, introduction and marketing of this software or that our new software and product enhancements will achieve market acceptance. If we are unable to develop, introduce and successfully market new or enhanced software in a timely manner in response to changing market conditions or customer requirements, our business, operating results and financial condition may be harmed.

~~the~~We ~~subject~~may ~~matter~~sell infewer ~~the~~licenses ~~patent~~of isour ~~patentable~~products asif ~~originally claimed,~~other ~~that~~vendors’ ~~the~~products ~~subject matter is patentable if the claims~~ are ~~modified~~no orlonger ~~that~~compatible ~~the subject~~with ~~matter is not patentable~~ours. ~~We cannot predict what the result of the reexamination procedure will be or how long it will take to complete.~~

~~Activity~~Our onability ~~several~~to ~~other~~sell ~~summary judgment motions has been suspended~~licenses ~~because~~of ~~the~~our ~~court~~software ~~stayed~~depends ~~the~~in ~~federal~~part ~~litigation. In~~on ~~November 2002, Synopsys filed three motions for summary judgment. The first motion asked~~ the ~~court~~ tocompatibility ~~enter~~of ~~judgment~~our ~~before~~software ~~trial~~with ~~that Nassda~~other vendors’s ~~products~~software ~~infringe~~and ~~the~~hardware ~~053 patent~~products. ~~The second motion asked the court to rule~~ ~~before~~These ~~trial~~vendors ~~against~~may uschange ontheir ~~our~~products ~~defense~~so that ~~the~~they ~~053~~will ~~patent~~no islonger ~~unenforceable~~be ~~because~~compatible ~~Synopsys~~with ~~committed~~our ~~inequitable conduct in obtaining the patent~~software. WeIf ~~submitted oppositions to both of these~~that ~~motions. Synopsys’~~were ~~third motion asked the court~~ to ~~rule~~happen, ~~before trial against us on~~ our ~~remaining~~business ~~antitrust counterclaims. Because~~and offuture ~~the~~operating ~~court’s prior~~results ~~rulings~~would ~~against~~suffer usif ~~on our other antitrust counterclaims,~~ we ~~did not~~ ~~oppose~~were ~~this~~no ~~motion. In November 2002,~~longer weable ~~also filed a summary judgment motion, which asked the court~~ to ~~enter~~offer ~~judgment~~commercially ~~before~~viable ~~trial~~or ~~that~~competitive ~~our~~ products ~~do not infringe the 053 patent~~. ~~Synopsys opposed this motion. The court issued its order staying the federal litigation before the parties’ reply briefs were due.~~

InWe ~~June 2003,~~do Synopsys filed a second complaint in the United States District Court, Northern District of California, San Francisco Division (Case No. C03-2664 RS) against us, alleging that the our products, including but not ~~limited~~have to HSIM and HANEX software products, infringe Synopsys U.S. Patent No. 6,249,898 entitled “Methods and Systems for Reliability Analysis of CMOS VLSI Circuits Based on Stage Partitioning and Node Activities” (the “898 Patent”). In July 2003, we filed an answer denying that we infringe the 898 Patent and asserting as defenses that the 898 Patent is invalid and unenforceable. We also brought a ~~declaratory~~consulting ~~judgment counterclaim seeking judgment that the 898 Patent is not infringed by us and that the 898 Patent is invalid and unenforceable. In August 2003~~staff, ~~Synopsys filed a motion to dismiss these defenses~~ and ~~counterclaims~~ ~~on the ground that we are barred from contesting the validity and enforceability of the 898 Patent based on the doctrine of assignor estoppel. Synopsys’ motion also sought to strike~~ our ~~defenses~~revenue ~~of laches, patent misuse and unclean hands on the ground~~may ~~that~~suffer weif ~~had~~customers ~~not~~demand ~~pleaded~~extensive ~~them~~consulting with sufficient particularity. We opposed Synopsys’ motions. In October 2003, the court denied Synopsys’ motion to dismiss and strike the invalidity and unenforceability defenses and counterclaims and granted Synopsys’ motion to strike the laches, patent misuse and unclean hands defenses with leave to amend the pleadings. In March 2004, Synopsys filed a motion for partial summary judgment on the ground that we are barred from contesting the validity and enforceability of the 898 Patent based on the doctrine of assignor estoppel. In April 2004, the Court ruled that we are barred under the doctrine of assignor estoppel from asserting the 898 Patent is invalid or ~~unenforceable~~other bysupport ~~virtue of pre-assignment inequitable conduct~~services. ~~The court has set the case for trial beginning on April 25, 2005.~~

WeOur ~~believe~~software ~~that~~is ~~we have~~designed ~~meritorious defenses~~ to be ~~Synopsys’~~deployed ~~claims~~quickly and ~~intend~~easily toby ~~defend~~our ~~ourselves vigorously. However,~~customers ~~because~~and ofto ~~the high~~require ~~degree~~limited ofsupport from ~~complexity~~us. Many of ~~the~~our ~~intellectual~~competitors ~~property at issue, the inherent~~offer ~~uncertainties~~extensive ofconsulting ~~litigation~~services in ~~general~~addition ~~and~~to ~~the~~circuit ~~preliminary~~simulation ~~nature~~and ~~of this~~analysis ~~litigation,~~products. If we ~~cannot~~introduce ~~assure~~software ~~you~~ that requires weextensive ~~will~~consulting ~~ultimately~~services ~~prevail. Should~~for ~~Synopsys~~specific ~~ultimately~~designs, ~~succeed~~or inif ~~the~~our ~~prosecution~~customers ofwish ~~its~~to ~~claims,~~purchase wea ~~could~~broad bespectrum ~~permanently~~of ~~enjoined~~software ~~from~~and ~~selling~~services ~~our~~that ~~software~~includes ~~and~~extensive ~~deriving~~consulting ~~related~~services ~~maintenance~~from ~~revenue. In~~a ~~addition~~single vendor, we ~~may~~would be required to ~~pay~~change ~~substantial~~our ~~monetary damages~~business tomodel ~~Synopsys. Further,~~and wecost ~~could be~~structure ~~enjoined~~to ~~preliminarily~~provide ~~from selling our software during the course of the~~consulting ~~litigation~~services. ~~Litigation~~Specifically, ~~such~~we aswould ~~the suit Synopsys has brought against us can take years to resolve and can~~ be ~~expensive~~required to ~~defend. The~~hire ~~court’s decisions on current pending~~ and ~~future~~train ~~motions~~consultants ~~could~~or ~~have~~outsource the ~~effect~~required ~~of determining the ultimate~~consulting ~~outcome~~services. If ofthese ~~the~~events ~~litigation~~were ~~prior~~ to ~~a trial on the merits~~occur, ~~or strengthen or~~ ~~weaken~~ our ~~ability~~future togross ~~assert~~margin ~~claims~~would ~~and~~likely ~~defenses. It~~suffer isbecause ~~possible that our relationships with our customers will be seriously harmed in the future as a result~~ of the ~~Synopsys~~added ~~litigation. Accordingly,~~expense ~~an adverse judgment, if entered~~of onhiring ~~any~~and ~~Synopsys~~retaining ~~claim,~~consulting ~~could seriously~~personnel.

~~harm~~Our ~~our~~common ~~business,~~stock ~~financial~~is ~~position~~subject ~~and~~to ~~results~~substantial ~~of operations and cause our stock~~ price ~~to decline substantially. In addition, the Synopsys allegations~~ and ~~claims, even if~~ ~~ultimately~~volume ~~determined~~fluctuations todue ~~be without merit, could be time consuming~~ to ~~defend, result~~a innumber ~~costly~~of ~~litigation~~factors, ~~divert~~many ~~our~~of ~~management’s~~which ~~attention~~are ~~and~~beyond ~~resources,~~our ~~cause product shipment delays or require us to enter into royalty or license agreements. These royalty or license agreements may not be available on terms acceptable to us~~control, ~~if at all,~~ and ~~the prosecution~~those offluctuations ~~the Synopsys allegations~~ and ~~claims~~limited ~~could~~trading ~~significantly~~volumes ~~harm~~may prevent our ~~business,~~stockholders ~~financial~~from ~~position~~reselling ~~and results of operations and cause~~ our common stock ~~price~~ toat ~~decline~~a ~~substantially~~profit.

~~ITEM~~The 4securities markets have experienced extreme price and volume fluctuations recently and the market prices of the securities of technology companies have been especially volatile. ~~SUBMISSION~~This OFmarket ~~MATTERS~~volatility, TOas well Aas ~~VOTE~~general OFeconomic ~~SECURITY~~or political conditions, could reduce the market price ~~HOLDERS~~of our common stock regardless of our operating performance. In addition, our operating results could be below the expectations of investment analysts and investors and, in response, the market price of our common stock may decrease significantly and prevent investors from reselling their shares of our common stock at or above the price at which they purchased the shares. For example, in April 2003 we reported our financial results for the three months ended March 31, 2003, which were below previous guidance and market expectations and in June 2004, material negative rulings were issued by the Discovery Referee against us, as a result of which the stock prices of our common stock were adversely impacted.

AtOur ~~the~~growth ~~Annual~~could ~~Meeting~~place ofa ~~Stockholders~~significant ~~held~~strain on ~~February 12, 2004,~~our ofmanagement ~~the~~systems ~~26,292,421~~and ~~shares~~resources ofand ~~our~~we ~~capital~~may ~~stock~~be ~~entitled~~unable to ~~vote~~effectively ~~at the meeting,~~control ~~23,099,507~~our ~~were~~costs ~~present~~and inimplement ~~person~~our orbusiness bystrategies ~~proxy. Our~~as ~~stockholders~~a ~~approved the following matters:~~result.

~~1. A proposal~~We tohad ~~elect~~115 employees ~~two~~as of ~~Class~~December II31, ~~directors~~2004 ofand ~~the~~expect ~~Company~~our headcount to ~~serve~~double ~~until~~over the next two ~~Annual~~fiscal ~~Meeting~~years to the extent we remain a stand-alone company. Our productivity and the quality of ~~Stockholders~~our software inmay ~~2007,~~be ~~until~~adversely ~~their~~affected ~~successors~~if ~~are~~we ~~duly~~do ~~elected~~not integrate, train and motivate our new employees quickly and ~~qualified~~effectively orand ~~until~~manage ~~their~~our ~~earlier~~resources efficiently. We ~~resignation~~also orcannot ~~removal~~be sure that our revenue will continue to grow at a sufficient rate to absorb the costs associated with the increased personnel.

Nominee	Shares voted in favor	Shares voted against	Shares Withheld
Bernard Aronson	22,996,333	—	103,174
An-Chang Deng	23,042,173	—	57,334

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

~~The~~• hire, ~~Class I directors~~train, ~~Yen-Son~~manage ~~Huang~~ and ~~Sang S.~~retain ~~Wang,~~additional ~~and~~qualified ~~the Class III director~~personnel, ~~Edward C.V. Winn, will serve until the Annual Meeting of~~ ~~Stockholders~~especially insoftware ~~2006~~engineers and ~~2005,~~sales ~~respectively, until their respective successors are duly elected and qualified or until their earlier resignation or removal.~~staff;

~~2. A proposal~~• improve ~~for~~existing ~~the~~and ~~ratification~~implement ofnew ~~the~~operational, ~~appointment~~financial ~~of Deloitte & Touche~~and ~~LLP~~management asinformation ~~independent public accountants of the Company for the fiscal year ending September 30~~controls, ~~2004~~reporting ~~was~~systems ~~approved by a vote of 23,009,367 for, 89,090 votes opposed~~ and ~~1,050 votes withheld.~~procedures;

~~ITEM~~• maintain ~~6. EXHIBITS~~a ~~AND~~high ~~REPORTS~~level ONof ~~FORM 8-K~~customer service and support; and

~~(a) Exhibits~~• establish relationships with additional corporate partners and maintain our existing relationships.

~~Exhibit~~If ~~31 Certifications~~we ofaccount ~~Chief~~for ~~Executive~~employee ~~Officer and~~stock ~~Chief~~options ~~Financial~~using ~~Officer~~the fair ~~pursuant~~value tomethod, ~~Section 302~~it ~~of the~~could ~~Sarbanes-Oxley~~significantly ~~Act~~increase ofoperating ~~2002~~expenses.

~~Exhibit~~There ~~32 Certifications~~has ofbeen ~~Chief~~ongoing public ~~Executive~~debate ~~Officer~~whether stock options granted to employees should be treated as a compensation expense and, ~~Chief~~if so, how to properly value such charges. On December 16, 2004, the Financial ~~Officer~~Accounting ~~pursuant~~Standards Board issued SFAS No. 123R. SFAS 123R eliminates the alternative of applying the intrinsic value measurement provisions of Opinion 25 to ~~Section 906~~stock compensation awards issued to employees. Rather, the new standard requires enterprises to measure the cost of employee services received in exchange for an award of equity instruments based on the ~~Sarbanes~~grant-~~Oxley~~date ~~Act~~fair value of ~~2002~~the award. That cost will

~~(b) Reports on Form 8-K~~50

Webe ~~furnished~~recognized ~~(not~~over ~~filed)~~the aperiod ~~current~~during ~~report~~which onan ~~Form~~employee ~~8-K~~is onrequired to ~~January 14,~~provide ~~2004~~services in ~~connection~~exchange ~~with~~for ~~our~~the ~~earnings~~award, ~~release~~known as the requisite service period (usually the vesting period).

50We have not yet quantified the effects of the adoption of SFAS 123R, but it we expect that the new standard may result in significant stock-based compensation expense. The pro forma effects on net income and earnings per share if we had applied the fair value recognition provisions of original SFAS 123 on stock compensation awards (rather than applying the intrinsic value measurement provisions of Opinion 25) are disclosed on page 10. Although such pro forma effects of applying original SFAS 123 may be indicative of the effects of adopting SFAS 123R, the provisions of these two statements differ in some important respects. The actual effects of adopting SFAS 123R will be dependent on numerous factors including, but not limited to, the valuation model chosen by us to value stock-based awards; the assumed award forfeiture rate; the accounting policies adopted concerning the method of recognizing the fair value of awards over the requisite service period; and the transition method (as described below) chosen for adopting SFAS 123R. SFAS 123R will be effective for our fiscal quarter beginning July 1, 2005, and requires the use of the modified prospective application method which would significantly increase our non-cash operating expenses and result in operating losses which may adversely impact our stock prices.

~~SIGNATURES~~We are subject to corporate governance and public disclosure regulations that have increased both our costs and the risk of noncompliance, which could have an adverse effect on our stock price.

~~Pursuant~~We are subject to rules and regulations promulgated by the ~~requirements~~SEC ofand Nasdaq, among other governmental organizations, which monitor the ~~Securities~~accounting and ~~Exchange~~disclosure ~~Act~~practices of public ~~1934~~companies. Many of these regulations have only recently been enacted and continue to evolve, ~~the~~making ~~registrant~~compliance ~~has~~more difficult ~~duly~~and ~~caused~~uncertain. ~~this~~In ~~report~~addition, our efforts to becomply ~~signed~~with onthese ~~its~~new regulations ~~behalf~~have byresulted in, and are likely to continue to result in, increased general and administrative expenses and a diversion of management time and attention from the ~~undersigned~~day ~~thereunto~~to ~~duly~~day ~~authorized~~operations to compliance activities.

	NASSDA CORPORATION
April 30, 2004
	By:	/s/ Sang S. Wang
		Sang S. Wang
		Chief Executive Officer and Chairman (Principal Executive Officer)
	By:	/s/ Tammy S. Liu
		Tammy S. Liu
		Vice President of Finance and Administration and Chief Financial Officer (Principal Financial and Accounting Officer)

In particular, Section 404 of Sarbanes-Oxley Act of 2002 and related regulations require us to include a management assessment of our internal controls over financial reporting and auditor attestation of that assessment in our annual report for our fiscal year ending September 30, 2005. This effort has required, and continues to require, the commitment of significant financial and managerial resources. Although we believe that our ongoing review of our internal controls will enable us to provide a favorable assessment of our internal controls and for our external auditors to provide their attestation as required by Section 404, we can give no assurance that these efforts will be completed on a timely and successful basis. Any failure to complete a favorable assessment and obtain our auditors’ attestation could have a material adverse effect on our stock price.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We develop products primarily in the United States and sell those products primarily in North America, Europe and Japan. Our revenue for sales outside of North America was approximately 37.0% in the three months ended December 31, 2004 and 40.2% in the three months ended December 31, 2003. As a result, our financial results could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets. As all of our sales are currently made in United States dollars, a strengthening of the United States dollar could make our software less competitive in foreign markets.

Our interest income is sensitive to changes in the general level of United States interest rates, particularly since the majority of our investments are in short-term instruments. The fair value of fixed rate

securities may be adversely impacted because of changes in short-term interest rates and credit ratings. Therefore, our future interest income may be negatively affected by changes in interest rates or we may suffer principal losses if we were to sell securities that have declined in value because of changes in interest rates or issuer credit ratings. A sensitivity analysis assuming a hypothetical 10% movement in interest rates applied to our cash equivalent and short-term investments balances at December 31, 2004 would change interest income by approximately $160,000 on an annual basis. However, due to the nature of our short-term investments, we have concluded that we do not have material market risk exposure. We do not hold or issue derivatives, derivative commodity instruments or other financial instruments for trading or speculative purposes.

We invest funds in excess of current operating requirements in:

• obligations of the United States government and its agencies;

• investment grade state and local government obligations;

• securities of United States corporations rated A1 or P1 by Standard & Poors’ or Moody’s equivalents; and/or

• money market funds, deposits or notes issued or guaranteed by United States and non-United States commercial banks meeting certain credit rating and net worth requirements with maturities of less than one year.

As of December 31, 2004, our cash, cash equivalents and short-term investments consisted primarily of demand deposits, money market funds and corporate notes held by large institutions in the United States and agency securities of the United States government and state municipalities.

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures.

(b) Changes in internal controls.

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

PART II - OTHER INFORMATION

ITEM 1. Legal Proceedings

Litigation

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

In February 2000, Synopsys filed a complaint in the Superior Court of the State of California in the County of Santa Clara (Case No. CV787950) against us and Dr. Deng, our President. The State Court Action complaint alleged breach of contract, breach of fiduciary trust, diversion of corporate opportunity and constructive trust. In September 2001, Synopsys filed its second amended complaint, which added claims of inducing/aiding and abetting breach of fiduciary duty, including/aiding and abetting diversion of corporate opportunity, misappropriation of trade secrets, civil conspiracy, breach of confidence and unfair competition, and added as individual defendants Dr. Wang and our four other founders. In September 2002, Synopsys filed a supplemental second amended complaint that contained supplemental allegations but added no new claims or parties. In January 2003, the discovery referee issued orders creating rebuttable presumptions in favor of Synopsys on certain evidentiary issues to sanction us for erasure of certain computer files requested in discovery by Synopsys. These rulings meant that we must prove at trial that we did not take or use Synopsys’ source code or other confidential information, rather than the usual requirement that Synopsys provide such proof in the first instance. We filed a motion for reconsideration of this order and in March 2003, the court denied our motion, concluding that it was barred on procedural grounds. In January 2003, Synopsys filed a third amended complaint, which contained supplemental allegations but added no new claims or parties. We have filed an answer denying Synopsys’ allegations. In August 2003, Synopsys filed several motions for terminating sanctions against us, which were heard in January 2004. In June 2004, the Court ruled on Synopsys’ motions for terminating sanctions. The Discovery Referee vacated the orders of January 2003 that created the rebuttable presumptions in favor of Synopsys, but issued new orders. These orders limit our defenses regarding the timing and the development of the initial HSIM source code and the evidence that we and the remaining individual defendants can present at trial. For purposes of trial, among other things, the orders established as facts that: (i) the first 60,000 lines of source code of HSIM and all the ideas and concepts reflected therein, to the extent they were not publicly known, were copied or derived from Synopsys’ source code or other Synopsys’ materials while the individual defendants were employed by Synopsys and (ii) we and the individual defendants acted in concert to intentionally alter, destroy, lose or misplace items requested in discovery and conceal evidence. These orders also struck the answer of one individual defendant, Jeh-Fu Tuan. The Discovery Referee denied Synopsys’ request to strike our answers and the answers of the remaining individual defendants. In August 2004, we filed a writ petition in the California Court of Appeal, Sixth Appellate District in San Jose, seeking to overturn these orders. In October 2004, the Court of Appeal requested that Synopsys file opposition to the petition and provided us with the opportunity to file a reply to Synopsys’ opposition. In October 2004, the Superior Court vacated the

previously set January 2005 trial date and stayed all trial proceedings pending final determination of the writ proceedings. Synopsys has requested unspecified damages of at least $25 million, an injunction, a constructive trust on unspecified intellectual property belonging to us and other relief. Further, in September 2003, Synopsys notified us that it reserves the right to seek up to $80 million in punitive damages with respect to claims for which punitive damages are allowed under California Civil Code Section 3294, and up to $50 million in punitive damages with respect to the trade secret claims under California Civil Code Section 3426.3(c). On December 14, 2004, the Court of Appeal stayed the case in its entirety pending approval of the proposed merger discussed below.

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

In September 2002, the U.S. Patent and Trademark Office granted our request for ex parte reexamination of the 053 Patent based on prior art not previously considered by the Patent Office. We moved to stay the federal litigation pending the outcome of the reexamination and the court granted our motion in December 2002. In August 2004, the U.S. Patent and Trademark Office issued a final rejection of all of the claims of the 053 Patent. Synopsys has appealed the final rejection to the U.S. Patent and Trademark Office Board of Patent Appeals and Interferences.

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

On December 7, 2004, the court stayed the case in its entirety pending approval of the proposed merger discussed below.

In June 2003, Synopsys filed a second complaint in the United States District Court, Northern District of California, San Francisco Division (Case No. C03-2664 RS) against us, alleging that our products, including but not limited to HSIM and HANEX software products, infringe Synopsys U.S. Patent No. 6,249,898 entitled “Methods and Systems for Reliability Analysis of CMOS VLSI Circuits Based on Stage Partitioning and Node Activities” (the “898 Patent”). In July 2003, we filed an answer denying that we infringe the 898 Patent and asserting as defenses that the 898 Patent is invalid and unenforceable. We also brought a declaratory judgment counterclaim seeking judgment that the 898 Patent is not infringed by us and that the 898 Patent is invalid and unenforceable. In August 2003, Synopsys filed a motion to dismiss these defenses and counterclaims on the ground that we are barred from contesting the validity and enforceability of the 898 Patent based on the doctrine of assignor estoppel. Synopsys’ motion also sought to strike our defenses of laches, patent misuse and unclean hands on the ground that we had not pleaded them with sufficient particularity. We opposed Synopsys’ motions. In October 2003, the court denied Synopsys’ motion to dismiss and strike the invalidity and unenforceability defenses and counterclaims and granted Synopsys’ motion to strike the laches, patent misuse and unclean hands defenses with leave to amend the pleadings. In March 2004, Synopsys filed a motion for partial summary judgment on the ground that we are barred from contesting the validity and enforceability of the 898 Patent based on the doctrine of assignor estoppel. In April 2004, the court ruled that we are barred under the doctrine of assignor estoppel from asserting the 898 Patent is invalid or unenforceable by virtue of pre-assignment inequitable conduct. The court issued a ruling construing the claims of the 898 Patent in July 2004. The court has set the case for trial beginning on April 25, 2005. On December 7, 2004, the court stayed the case in its entirety pending approval of the proposed merger discussed below.

We entered into an agreement of merger dated as of November 30, 2004 with Synopsys and North Acquisition Sub, Inc., a Delaware corporation and wholly owned subsidiary of Synopsys (“Merger Sub”), pursuant to which, subject to satisfaction or waiver of the conditions therein, Merger Sub will merge with and into our company and we will become a wholly owned subsidiary of Synopsys. Subject to the consummation of the merger, Synopsys, our company and certain employees, officers and directors of our company, as applicable, have agreed to settle the State Court Action and the Federal Court Actions. In connection with the merger agreement, the parties have submitted stipulations in the State Court Action and Federal Court Actions to toll the proceedings pending the consummation of the merger. Pursuant to the tolling agreements, we, Synopsys and the individual defendants have agreed not to take further action with respect to the State Court Action and the Federal Court Actions during the period prior to the closing of the proposed merger. In the event that the proposed merger did not occur and the merger agreement were terminated, we, Synopsys and the individual defendants would no longer have any obligation to settle the State Court Action or the Federal Court Actions. We expect that if the merger did not occur and the merger agreement was terminated, that a period of time would be necessary for the applicable Courts to reschedule various hearings and trials and that there would be a substantial delay from the original trial dates. Although we continue to believe that we would have meritorious defenses if the parties were to proceed with the State Court Action and the Federal Court Actions, we cannot provide any assurance that we will prevail or that our defenses or our ability to achieve a desirable outcome will not be affected by the proposed merger and related events. See also Note 9 of the notes to our condensed consolidated financial statements. As noted above, the State Court Action and the Federal Court Actions have now been stayed in their entirety pending approval of the proposed merger.

In July 2004, we and certain of our officers and directors were named in a securities class action lawsuit filed in the United States District Court for the Northern District of California. The complaint asserts

claims against our company, Sang S. Wang, An-Chang Deng, Tammy Shu-Hua Liu and Yen-Son Huang on behalf of a putative class of persons who purchased our stock between December 13, 2001 and June 11, 2004. The class action alleges that the named defendants violated certain provisions of the Securities Exchange Act of 1934 by making materially false and misleading representations in press releases and financial statements filed with the SEC relating to our financial results. The complaint’s allegations derive largely from allegations contained in the State Court Action, and derive from allegations contained in the complaint concerning the 053 Patent. A second class action was filed on September 9, 2004 in the United States District Court for the Northern District of California. On September 27, 2004, one plaintiff moved for lead plaintiff status in the first filed class action. These two cases were consolidated on October 7, 2004. On November 4, 2004, the judge granted the motion of NECA-IBEW Pension Fund for appointment as lead plaintiff. In late January 2005, the parties reached an agreement in principle to resolve this matter for a payment to the class in the amount of $9.0 million. The settlement is subject to preliminary and final approval by the court. See also Note 7 of our condensed consolidated financial statements.

On August 16, 2004, a purported derivative complaint was filed against us and our directors in the Court of Chancery of the State of Delaware. This complaint alleged that the board of directors breached its fiduciary duty by failing to appoint a special committee to investigate the claims asserted in the Synopsys litigation and by allowing two directors to destroy evidence in the State Court Action. The complaint also alleges that the board of directors breached its fiduciary duty by allowing our company to go public with the knowledge of the alleged trade secret misappropriation and by causing the issuance of allegedly false public statements regarding our financial condition on account of this alleged misappropriation. The complaint seeks equitable relief and an unspecified amount of damages on behalf of our company. On October 15, 2004, the defendants filed a motion to Dismiss or Stay on the grounds that the case is not ripe for adjudication and also filed a Motion for Protective Order Staying Discovery. On December 3, 2004, plaintiff filed oppositions to these motions. On January 5, 2005, the parties stipulated to stay this matter until such time as plaintiff’s counsel provides two weeks notice to defendants that the stay will be lifted. The Judge signed the order staying the case on January 5, 2005, and conditioned the stay on the parties providing status reports to the court on a quarterly basis. The case is still in the preliminary stages, and it is not possible for us to quantify the impact, if any, on our company. An unfavorable outcome in this case could have a material adverse effect on our business, financial condition, results of operations and cash flow. In addition, the expense of defending any litigation may be costly and divert management’s attention from the day to day operations of our business.

On December 1, 2004, we and certain of our officers and directors were named in a class action complaint filed against us and certain of our officers and directors in the Court of Chancery of the State of Delaware. This complaint, brought by Robert Israel, alleges that defendants entered into the merger agreement with Synopsys for inadequate consideration. The complaint also alleges that the merger agreement was an unlawful plan to shield our board of directors and certain members of our management from liability to Synopsys in the State Court Action and Federal Court Actions, and to shield them from liability to our company for claims asserted by the plaintiff in the pending derivative action. Plaintiff seeks to enjoin the proposed merger, or alternatively seeks damages if the proposed merger is consummated. The parties stipulated to stay this case, and therefore any response by defendants to the complaint will now be due upon plaintiff’s counsel giving two weeks notice to defendants of plaintiff’s request that defendants respond to the complaint. On January 6, 2005, the Judge signed the order staying the case, subject to the same reporting obligations in the pending derivative case. The case is still in the preliminary stages, and it is not possible for us to quantify the impact, if any, on our company. An unfavorable outcome in this case could have a material adverse effect on our business, financial condition, results of operations and cash flow and our ability to

complete the proposed merger. In addition, the expense of defending any litigation may be costly and divert management’s attention from the day to day operations of our business.

On December 3, 2004, we and certain of our officers and directors were named in a complaint filed in the Superior Court of California, Santa Clara County. The complaint is a purported stockholder class action brought by Frank A. Lettieri arising out of defendants’ conduct in selling our company to Synopsys at an allegedly inadequate and unfair price. The plaintiffs allege that the defendants arrived at an unfair price so that at least two of its directors could avoid or significantly reduce their exposure in a pending lawsuit. The plaintiffs allege that as a result of this conduct, defendants breached fiduciary duties. The plaintiffs allege that the defendants structured the terms of the proposed merger to fit the needs of Synopsys, instead of seeking to obtain the highest price reasonably available to us. The complaint seeks an injunction of the acquisition, and the implementation of a procedure to ensure the highest possible price for stockholders. The complaint also seeks to direct the individual defendants to exercise their fiduciary duties to obtain a transaction in the best interest of the stockholders at the highest price. The complaint seeks to rescind the merger agreement and to impose a constructive trust upon any benefits improperly received by defendants as a result of improper conduct. The parties filed a stipulation on January 20, 2005, extending the time for defendants to respond to the complaint until March 4, 2005. The case is in the preliminary stages, and it is not possible for us to quantify the impact, if any, on our company. An unfavorable outcome in this case could have a material adverse effect on our business, financial condition, results of operations and cash flow and our ability to complete the proposed merger. In addition, the expense of defending any litigation may be costly and divert our attention from the day to day operations of our business.

ITEM 6. Exhibits

Exhibit 31

Certifications of Chief Executive Officer and Chief Financial Officer pursuant to

Section 302 of the Sarbanes-Oxley Act of 2002

Exhibit 32

Certifications of Chief Executive Officer and Chief Financial Officer pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002

SIGNATURES

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

NASSDA CORPORATION
Date: February 9, 2005
	By:	/s/ Sang S. Wang
		Sang S. Wang
		Chief Executive Officer and Chairman
		(Principal Executive Officer)

	By:	/s/ Tammy S. Liu
		Tammy S. Liu
		Vice President of Finance and Administration and Chief Financial Officer
		(Principal Financial and Accounting Officer)

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