ARTISAN COMPONENTS INC - 10-K Annual Report

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001 par value per share (title of class)

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

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act). Yes x No ¨

The aggregate market value of Common Stock held by non-affiliates of the registrant as of March 31, 2004 was $292.1 million. Shares of Common Stock held by each executive officer, director and by each person who owns 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

The number of shares of the registrant’s Common Stock outstanding as of October 31, 2004 was 23,932,433.

This Annual Report on Form 10-K and the information incorporated by reference herein contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. When used in this Report, the words “expects,” “anticipates” and “estimates” and similar expressions are intended to identify forward-looking statements. Such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those we expect or anticipate. These risks and uncertainties include those discussed below and those discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors Affecting Future Operating Results.” We undertake no obligation to publicly update or correct these forward-looking statements to reflect events or circumstances that occur after the date this Report is filed with the Securities and Exchange Commission.

We are a leading provider of physical intellectual property components for the design and manufacture of integrated circuits, including those known as system-on-a-chip integrated circuits. Our products include embedded memory, standard cell, input/output components and analog and mixed-signal products, which are designed to achieve the best combination of performance, density, power and yield for a given manufacturing process. Our intellectual property components are pre-tested by producing them in silicon to ensure that they perform to specification. This enables designers to reduce the risk of design failure and gain valuable time to market. We license our products to customers for the design and manufacture of integrated circuits used in complex, high volume applications such as portable computing devices, communication systems, cellular phones, consumer multimedia products, automotive electronics, personal computers and workstations.

We derive a substantial majority of our revenue from integrated circuit manufacturers who pay license fees and royalties to us to use our intellectual property components in the products they manufacture. These integrated circuit manufacturing customers work with integrated circuit designers who incorporate our intellectual property components in their designs. Our customers include the following: foundries, which are independent manufacturing facilities; integrated circuit companies that design and manufacture their own integrated circuit products; system manufacturers which are integrated circuit companies that design and manufacture integrated circuits for use in their electronic products; integrated circuit companies that manufacture products for their customers; and fabless integrated circuit companies, which do not have their own manufacturing facilities, but use our intellectual property components in their integrated circuit designs.

Integrated circuit designers use our intellectual property components to help ensure that integrated circuits will work to specification before they are manufactured. These integrated circuit designers are customers of our integrated circuit manufacturing customers. We serve as an interface layer between integrated circuit designers and manufacturers. This manufacturing process interface layer is important since every integrated circuit design must be mapped into a given manufacturing process to achieve specified performance and desired yield. The use of our intellectual property components by integrated circuit designers encourages integrated circuit manufacturers to license our intellectual property components. We believe that integrated circuit designers view intellectual property components as an important link between the design of an integrated circuit and the manufacturing process.

We have licensed our intellectual property components to over two thousand companies involved in integrated circuit design. We make the core set of our products available to licensed integrated circuit designers at no charge. We also provide customized intellectual property components and services to our licensed customers on a separate fee basis.

We license our intellectual property components on a nonexclusive, worldwide basis to major integrated circuit manufacturers and integrated circuit design teams that are customers of such manufacturers. We charge manufacturers a license fee that gives them the right to manufacture integrated circuits containing intellectual property components we have developed for their manufacturing process. With limited exceptions, manufacturers also agree to pay us royalties based on the selling prices of integrated circuits or wafers that contain our intellectual property components. Generally, we credit a portion of the royalty payments to the manufacturer’s account to be applied against license fees for any future orders placed with us within a certain time period, if any, payable by the manufacturer. The portion of the royalty payment that is credited to a manufacturer’s account to be applied against future license fees, if any, is based on negotiations at the time the license arrangement is signed.

We incorporated in California in April 1991 as VLSI Libraries Incorporated, changed our name to Artisan Components, Inc. in March 1997 and reincorporated in Delaware in January 1998. Our principal executive offices are located at 141 Caspian Court, Sunnyvale, California 94089-1013, our telephone number is (408) 734-5600 and our website is www.artisan.com, which includes links to reports that we have filed with the Securities and Exchange Commission or SEC. However, the contents of our website are not incorporated by reference in this Annual Report on Form 10-K. Our trademarks include Artisan, Process-Perfect, SAGE and the Artisan logo. This Annual Report on Form 10-K also includes our and other organizations’ product names, trade names and trademarks.

On August 22, 2004, we entered into a merger agreement with ARM Holdings plc and Salt Acquisition Corporation, a wholly owned subsidiary of ARM. At the closing of the merger, we will be merged with and into Salt Acquisition Corporation. The merger is expected to be accounted for as a purchase transaction for accounting and financial reporting purposes and is intended to qualify as a tax-free reorganization within the meaning of Section 368(a) of the Internal Revenue Code for U.S. federal income tax purposes. After completion of the merger, Artisan stockholders who receive ARM American Depositary Shares, or ADSs, or ARM ordinary shares in exchange for their Artisan common shares will be shareholders of ARM. ARM’s and Artisan’s obligations to complete the merger are subject to certain conditions. These conditions must be satisfied or, in certain cases, waived, before the completion of the merger, and include the adoption of the merger agreement by the affirmative vote of the holders of a majority of the outstanding shares of Artisan common stock and the holders of 50% of the votes cast at the upcoming ARM extraordinary general meeting.

In the merger, assuming no dissenting shares, Artisan’s stockholders will receive, in the aggregate in exchange for their shares of Artisan common stock, merger consideration consisting of: $9.60 in cash multiplied by the number of shares of Artisan common stock outstanding at the effective time, plus 4.41 ARM ADSs (or 13.23 ARM ordinary shares) multiplied by the number of shares of Artisan common stock outstanding at the effective time. Based on the number of shares of Artisan common stock outstanding as of September 1, 2004, and assuming no dissenting shares, approximately $229 million in cash and 105 million ARM ADSs (or 316 million ARM ordinary shares) will be delivered to Artisan stockholders in the aggregate in respect of their Artisan shares in the merger. The cash and ARM ADSs (or ARM ordinary shares) will be apportioned so that Artisan stockholders will receive for each of their shares of Artisan common stock, merger consideration having a value of $9.60 in cash plus 4.41 ARM ADSs, subject to pro ration. The value of an ARM ADS at the time the merger is completed for purposes of the calculations described above will be determined by taking the volume weighted average of the trading prices of ARM ADSs on the Nasdaq National Market during 10 random trading days selected from the 20 trading days ending on and including the second trading day prior to the date the merger becomes effective, referred to as the average share price. However, the value of ARM ADSs or ARM ordinary shares upon and after the date of receipt by an Artisan stockholder of the merger consideration may differ from the average share price determined at the time the merger is completed.

We file annual, quarterly and special reports, proxy statements, and other information with the SEC, in accordance with the Exchange Act. You may read and copy any document we file with the SEC at the following public reference room:

Please call the SEC at 1-800-SEC-0330 for further information about the public reference room. Our reports, proxy statements and other information filed with the SEC are also available to the public over the Internet at the SEC’s World Wide Web site that at http://www.sec.gov.

The integrated circuit industry has undergone a drastic change over the past three decades that has led to the proliferation of intellectual property components used in complex integrated circuits including those known as system-on-a-chip integrated circuits. In its infancy, the industry was vertically integrated with integrated circuit manufacturers performing all aspects of production, including electronic design, manufacturing and marketing. The development of the commercial market for third party intellectual property components used in complex integrated circuits resulted from continuing specialization in the integrated circuit industry. This trend was driven by a growth in design complexity due to improvements in manufacturing technology and an increasing focus on core competencies. By the 1980s, integrated circuit manufacturers began purchasing software design tools from commercial suppliers in order to focus on their core competencies. One driver was the capability of personal computers and the resulting escalation of integrated circuit design complexity. During the 1980s, application specific integrated circuit manufacturers developed a new approach that allowed their customers to perform the logic design of an integrated circuit while the application specific integrated circuit manufacturers performed the detailed physical implementation of the design and manufactured the integrated circuit. The development of the application specific integrated circuit industry led to the emergence of a number of integrated circuit design companies in the early 1990s. The integrated circuit design companies chose to focus on specific design expertise, take advantage of the availability of excess integrated circuit manufacturing capacity and avoid the capital expenditures necessary to build manufacturing facilities. Throughout this period, integrated circuit manufacturers continued to focus on their core competencies in manufacturing processes. Due to the greatly increased complexity of integrating multiple functions on a single integrated circuit, integrated circuit manufacturers began to outsource the design of particular intellectual property components critical to the successful development of integrated circuits.

Today, it is possible to place tens of millions of transistors on a single integrated circuit. State of the art manufacturing facilities of the 1980s produced integrated circuits using process geometries of one millionth of a meter, or 1.0 micron. Current state of the art manufacturing facilities use 90 nanometer, or 0.09 micron, process geometries. The development of design tools has not kept pace with the development of manufacturing processes. Advances in integrated circuit manufacturing processes have enabled the transistor density on integrated circuits to double approximately every 18 months. The integrated circuit design industry has struggled to improve design productivity as fast as the increases in transistor density. The need to close this productivity gap has furthered the development of the market for commercial intellectual property components.

Independent manufacturing facilities and integrated circuit companies may invest billions of dollars designing and building semiconductor manufacturing facilities. In order to generate the high volume production required to realize a return on their investment, these manufacturers rely in large part on semiconductor products targeted to the consumer market. Today, the consumer electronics market is dominated by communications and computing applications and these applications are increasingly delivered via hand-held devices. These hand-held computing devices require the integration of digital computing and analog communications components in addition to analog power management. The market advantage created by analog and digital integration is a significant reduction in the number of components. However, integrating analog components together with digital components often presents difficult technical challenges for integrated circuit designers. If such integration is accomplished efficiently, it can lower material and test costs that in turn may help reduce overall costs of manufacturing, enhance performance and improve reliability.

The improvement in process technologies combined with the continuing trend to sub-micron feature sizes has enabled the integration of multiple functions into a single integrated circuit. These highly complex integrated circuits are known as system-on-a-chip integrated circuits that combine all of the functionality of printed circuit boards onto a single integrated circuit. System-on-a-chip integrated circuits improve overall system cost, speed, function and power consumption. These integrated circuits are optimal for use in complex, high volume applications such as portable computing devices, cellular phones, consumer multimedia products, automotive electronics, personal computers and workstations.

As shown above, in both a printed circuit board system and in a system-on-a-chip, the building blocks typically include memory, standard cell, input/output, microprocessor, digital signal processor, mixed-signal and analog components. However, integration of these components into system-on-a-chip integrated circuits at process geometries of 0.25-micron or below is far more complex and time consuming than the design of a traditional printed circuit board system. Integrated circuit manufacturers are finding it increasingly difficult to develop these components internally and integrate them due to reduced product development budgets and given shorter product life cycles and the importance of reducing time to market. We believe the use of commercial intellectual property components to leverage design and manufacturing capabilities can be a significant competitive advantage to integrated circuit manufacturers.

Commercial intellectual property components have enabled integrated circuit designers to reduce the risk of design failures; reduce design time for system-on-a-chip integrated circuits; decrease the overall cost of integrated circuit design; and more effectively address design and productivity issues associated with process geometries of 0.25-micron and below. Integrated circuit manufacturers require intellectual property components that are designed to achieve the best combination of performance, speed, density and yield for a given

manufacturing process while reducing time to market. Although the electronic design automation tool industry has successfully developed partial solutions to increase design productivity and performance, electronic design automation tools have not completely overcome the challenges of creating intellectual property components tailored to a particular manufacturing process within an increasingly compressed time to market window. In addition, integrated circuit manufacturers have increased their internal design resources to produce intellectual property components for themselves and for their customers. However, the use of intellectual property components supplied by a specific integrated circuit manufacturer does not allow integrated circuit designers the flexibility they desire to enable them to use an alternative manufacturer. Many of these same integrated circuit manufacturers use commercial intellectual property components in order to harness the strengths of their manufacturing processes, increase the performance of their manufactured products, accelerate time to market for themselves and their customers and gain access to integrated circuit designers that utilize commercial intellectual property components.

We provide physical intellectual property components for the design and manufacture of complex integrated circuits. Our intellectual property components are developed and delivered using a proprietary methodology that includes a set of commercial and proprietary electronic design automation tools and design expertise. This methodology enables us to automate our production process and deliver high quality intellectual property components in a short period of time. These components and our methodology are our core technology. Our intellectual property components are designed to optimize the combination of performance, density, power and yield for a given manufacturing process. Our intellectual property components offer customers the benefits described below.

We enable integrated circuit design companies to reduce the time required to bring new integrated circuits to market by:

Our ability to adapt, customize and build on our core technology for use in new processes and designs provides each integrated circuit design customer with a ready source of reliable intellectual property components for future processes and designs. This enables integrated circuit designers to standardize on our intellectual property components, accelerate their product development and focus internal engineering resources on their core competencies.

As integrated circuit manufacturing process geometries shrink and the complexity of integrated circuit designs increases, the cost to design system-on-a-chip integrated circuits increases significantly. By providing reliable intellectual property components with significant time to market benefits, we enable customers to reduce design costs, minimize integration costs and optimize manufacturing yield. Moreover, by using our intellectual property components, integrated circuit companies avoid the cost of recruiting and training and employing a significant group of engineers dedicated to intellectual property component design.

Our goals are to establish Artisan as a globally recognized brand for intellectual property components and methodology within the integrated circuit design and manufacturing industry and to further expand our customer base. Our customer base includes over two thousand companies involved in integrated circuit design and many of the leading manufacturers of integrated circuits around the world. We intend to achieve these goals by pursuing the following key elements of our strategy described below.

Broaden relationships with integrated device manufacturers and application-specific integrated circuit manufacturers

Building upon our strong base of integrated circuit manufacturing customers, we intend to strengthen and expand our relationships with integrated device manufacturers and application specific integrated circuit manufacturers, which often produce integrated circuits in high volume. We intend to continue our sales effort to address the specific service and support requirements of integrated device manufacturers and application specific integrated circuit manufacturers. We also plan to play a key role in facilitating the emerging relationships between integrated device manufacturers, application specific integrated circuit manufacturers and foundries by providing integrated device manufacturers and application specific integrated circuit manufacturers with intellectual property components for use in external manufacturing processes.

Our experience in working with many leading integrated circuit manufacturing customers during the development of new manufacturing processes has enabled us to develop intellectual property components optimized for performance, density, power and yield for a given manufacturing process. As manufacturing process technology continues to evolve to ever smaller process geometries, we believe that an in depth understanding of manufacturing process technology is essential to the development of intellectual property components optimized for such manufacturing processes. We intend to maintain our technological leadership position by enhancing our existing digital, analog and mixed-signal products and continuing to develop, internally or through possible acquisitions, new generations of products. To further maintain our technological leadership, we plan to continue to develop our internal expertise in digital, analog and mixed-signal manufacturing process technology. Such expertise is particularly important for designing analog components. We also intend to continue to work with our integrated circuit manufacturing customers as early as possible in the development of new manufacturing process technologies.

We intend to develop and acquire additional intellectual property components that are complementary to our existing portfolio. By expanding our product portfolio, we expect to offer a more comprehensive solution to integrated circuit design teams and integrated circuit manufacturers and further our position as a leader in the integrated circuit intellectual property industry.

We intend to attract, train and retain qualified employees for customer support. In addition, we will continue to refine and enhance our customer relationship management system. We plan to expand our operations geographically to maintain proximity to our expanding customer base and provide regional support to our customers. We have established an engineering service and support facility in Bangalore, India, and plan to increase our presence in China and Taiwan.

Our user community has grown as a result of the demand from design teams for our products. As our products have gained broad industry acceptance, licenses for our technology have helped manufacturers attract

new integrated circuit design customers. We believe that the Artisan user community is a key asset of our business. We plan to work closely with this user community in order to gain insight into new process developments and leading-edge integrated circuit designs, improve our products and further expand the Artisan user community.

Our current family of intellectual property components includes embedded memory, standard cell, input/output components and analog and mixed-signal products. Together these components constitute a substantial majority of the silicon area on a typical system-on-a-chip integrated circuit and have a substantial impact on the overall performance of the integrated circuit. Our contracts with integrated circuit manufacturers generally require them to pay a license fee to us ranging from approximately $250,000 to $650,000 for each product delivered under a contract. Generally, our license contracts involve multiple products. Throughout the production cycle, integrated circuit manufacturers may request our support for derivative processes that result in additional license revenue.

Our intellectual property components are developed and delivered using a proprietary methodology called “Process-Perfect™” that includes a set of commercial and proprietary electronic design automation tools and techniques. This methodology ensures that our intellectual property components are designed to achieve the best combination of performance, density, power and yield for a given manufacturing process. Our portfolio of products combined with the Process-Perfect methodology, allows us to satisfy our integrated circuit manufacturing customers’ timing and quality requirements in a cost effective manner. Our intellectual property components are easily integrated into a variety of customer design methodologies and support industry standard integrated circuit design tools, including those from electronic design automation tool vendors such as Cadence Design Systems, Inc., or Cadence, Mentor Graphics Corporation, or Mentor Graphics and Synopsys, Inc., or Synopsys, as well as customers’ proprietary integrated circuit design tools. To support these various integrated circuit design tool environments, each of our products includes a comprehensive set of verified tool models.

Our embedded memory components include random access memories, read only memories and register files. Our high-speed, high-density and low-power components include single- and dual-port random access memories, read only memories, and single-, two- and three-port register files. Our embedded memory components are configurable and vary in size to meet the customer’s specification. For example, our memory components will support sizes from 2 to 128 bits wide and from 8 to 16,384 words. All of our memory components include features such as a power down mode, low voltage data retention and fully static operation. In addition, our memory components may include built-in test interfaces that support popular test methodologies. We offer an additional feature for our memory components, known as Flex-Repair^™ that includes redundant storage elements which may help increase the manufacturing yield of integrated circuit designs containing large memories.

Standard cells map the logic functions of a design to the physical functions of the design, an essential function for all integrated circuits. Our SAGE-X™ standard cell products include between 475-650 cells optimized for each customer’s preferred manufacturing process and integrated circuit design tool environment that result in greater density as compared to competitive standard cell components. We offer standard cell components that are optimized for high performance, high density or low power to meet the needs of different markets.

Our input/output components include over 600 standard input/output functions. We also offer a wide variety of specialized input/output components that are compatible with industry standard PCI, GTL, AGP, USB, SSTL2 and LVDS interfaces. In addition, we offer input/output components for many additional industry standard interfaces. Every input/output component utilizes each integrated circuit manufacturer’s proprietary manufacturing process rules, pad pitch and electrostatic discharge requirements, resulting in superior performance, reliability and manufacturability.

Analog components are important elements in today’s system-on-a-chip designs because such designs often require, as part of their application, the ability to take real world inputs, such as sound and images, and process them in a digital format. Artisan offers a wide variety of analog components from analog timing functions to converter products. An example of our analog component offerings is our phase locked loops, which can be used in a variety of communications, consumer, computing and graphics applications.

Mixed-signal products are used to process analog signals digitally. Our mixed-signal product offering includes our serializer/de-serializers, which are used for high-speed switching; our PCI-Express™ PHY, which is used for high-speed bus interfaces, and our DDRI/DDRII/GDDRIII Interface, which is used for high-speed memory interfacing.

We target the rapidly growing system-on-a-chip market. Our products include embedded memory, standard cell, input/output components and analog and mixed-signal products. Because of the complexity of these intellectual property components, our design and development process is a multidisciplinary effort requiring expertise in electronic circuit design, process technology, physical layout, design software, model generation, data analysis and processing and general integrated circuit design. These activities involve the development of more advanced versions of our intellectual property components and the continued development of new intellectual property components for current and anticipated manufacturing processes. We have engaged in and intend to continue to engage in research and development activities to automate our design processes.

revenue in the same period that revenues are recognized. Engineering efforts devoted to the general development of our technology are charged to product development. Engineering costs related to product development are expensed as incurred. Product development expenses were $18.5 million in fiscal 2004, $18.4 million in fiscal 2003 and $11.9 million in fiscal 2002. We expect that we will continue to invest substantial funds for product development.

We license our intellectual property components on a nonexclusive, worldwide basis to major integrated circuit manufacturers. We have licensed and distributed our intellectual property components to over 15 companies involved in the manufacture of integrated circuits who have agreed to pay an upfront license fee and also agree to make royalty payments in the event that our intellectual property components are incorporated into designs ultimately manufactured. For most of our integrated circuit manufacturing customers, we distribute and license our intellectual property components to companies that design integrated circuits. While the basic elements of our memory, standard cell and input/output components are distributed to design companies at no charge, design companies pay us a direct license and support fee to receive analog, mixed-signal and other customized components and support from us. As part of the license agreement entered into by the design companies, the design companies agree to manufacture any integrated circuit design using any of our intellectual property components at the particular integrated circuit manufacturer for which we developed the intellectual property components. The integrated circuit manufacturer then generally pays us a royalty based on the selling prices of integrated circuits or wafers that contain our intellectual property components. We have licensed and distributed our intellectual property components at no charge to over two thousand companies involved in integrated circuit design, including companies involved in computing, communications, consumer products, graphics, networking and other applications. Over 100 of these design companies have paid us direct license or support fees in order to receive modified intellectual property components and/or support from us.

We have several industry partner programs whereby our partners provide a wide variety of intellectual property solutions, design services and tool support to streamline the design process for users of our intellectual property components. Through these programs, we provide intellectual property components and support to over 200 design support companies who use these intellectual property components in their work for our licensed users. Twenty of these design support companies have paid us direct license or support fees in order to receive modified products and support from us.

As of September 30, 2004, our direct sales force consisted of 33 employees who are paid on commission in addition to their base salaries. We believe that our sales, marketing and distribution approach enables us to leverage the integrated circuit manufacturers’ sales and marketing organizations and limit the costs we would otherwise have associated with hiring, training and compensating the large sales force necessary to negotiate with each end-user customer. In addition, our web-based intellectual property design platform enables integrated circuit designers to access our intellectual property components 24 hours per day. The platform assists us in gathering data about designers using our intellectual property components and the potential integrated circuit manufacturers the designers may elect of have manufacture their integrated circuits. We have sales offices in Sunnyvale, California; San Diego, California; Salem, New Hampshire; Tokyo, Japan; Singapore and Paris, France.

We license our intellectual property components on a nonexclusive, worldwide basis to major integrated circuit manufacturers. We charge manufacturers a license fee that gives them the right to manufacture integrated circuits containing intellectual property components we have developed for their manufacturing processes. Many of the world’s leading integrated circuit manufacturers are among our customers. Our top 20 customers in terms of total revenue for the three years ended September 30, 2004 were 1^st Silicon (Malaysia) Sdn. Bhd., 3Dlabs Inc., Advanced Micro Devices Corporation, or AMD, Chartered Semiconductor Manufacturing Ltd., or Chartered, Dongbu

Electronics Co., Ltd., International Business Machine Corporation, or IBM, Infineon Technologies AG, Jazz Semiconductor, Inc., Kawasaki Motors Ltd., National Semiconductor Corporation, Shanghai Hua Hong NEC Electronics Company, or HHNEC, NVIDIA Corporation, Sharp Electronics Corporation, Silterra Malaysia Sdn. Bhd., Semiconductor Manufacturing International Corporation, or SMIC, Sony Corporation, Semiconductor Technology Academic Research Center, or STARC, Tower Semiconductor Ltd., Taiwan Semiconductor Manufacturing Company, or TSMC, and United Microelectronics Corporation, or UMC.

Historically, NurLogic Design, Inc, or NurLogic, a company we acquired in February 2003, licensed its products directly to end users who agreed to pay license fees directly to NurLogic. Our acquisition of NurLogic has led to an increase in our interaction with integrated circuit designers. To date, we have generally licensed our analog and mixed-signal components directly to integrated circuit designers. This relationship has provided us with a more in-depth understanding of end user’s business needs. Over the course of such relationships, we have had the opportunity to review end user design requirements earlier in the design cycle, which may help us deliver optimized intellectual property components to market sooner. We market our analog and mixed-signal offerings to semiconductor manufacturers for purposes of distributing such products to designers who agree to manufacture their designs at the foundry for which such components were developed. We cannot be certain that semiconductor manufacturers will be willing to license and pay for analog and mixed-signal intellectual property components for the benefit of end users in the same way as such manufacturers have historically licensed digital intellectual property components from us. Such analog and mixed-signal intellectual property components tend to require a greater degree of customization for a particular use than do many of our other products.

We have been dependent on a relatively small number of integrated circuit manufacturing customers for a substantial portion of our annual revenue, although the integrated circuit manufacturers comprising this group have changed from time to time. In fiscal 2004, TSMC accounted for 26% of our total revenue and UMC accounted for 19% of our total revenue. In fiscal 2003, IBM accounted for 18% of our total revenue, TSMC accounted for 17% of our total revenue and Chartered accounted for 10% of our total revenue. In fiscal 2002, TSMC accounted for 39% of our total revenue. We anticipate that our revenue will continue to depend on a limited number of major integrated circuit manufacturing customers for the foreseeable future. However, the major integrated circuit manufacturing customers and the percentage of revenue they represent are likely to continue to vary from period to period depending on the addition of new contracts, the timing of work performed by us and the number of designs utilizing our intellectual property components.

Our strategy of targeting integrated circuit manufacturers and integrated circuit designers that participate in, or may enter, the system-on-a-chip market requires us to compete in intensely competitive markets. We face significant competition from third party intellectual property component providers, such as Barcelona Design, DOLPHIN Integration, SA, Faraday Technology Limited, Monolithic System Technology, Inc., Rambus, Inc., TriCN, Inc., VeriSilicon Microelectronics (Shanghai) Co. Ltd., Virage Logic and Virtual Silicon Technology, Inc. and from the internal design groups of integrated circuit manufacturers, such as TSMC. In the market for mixed-signal products, such as our PCI-Express PHY products, we face additional competition from companies such as Synopsys, Rambus and Cadence. In addition, we face competition from small consulting firms and design companies that operate in the intellectual property component segment of the market and offer a limited selection of specialized intellectual property components.

requisitions and, in some cases, compete with us to supply intellectual property components to third parties. Intellectual property components developed by internal design groups of integrated circuit manufacturers are designed to utilize the qualities of their own manufacturing process, and may therefore benefit from capacity, informational, cost and technical advantages. If internal design groups expand their intellectual property component offerings to compete directly with our intellectual property components or actively seek to participate as vendors in the intellectual property component market, our revenue and operating results could be negatively affected. We also expect competition to increase in the future from existing competitors and from new market entrants with intellectual property components that may be less expensive than ours or that may provide better performance or additional features not currently provided by our intellectual property components.

TSMC, one of our largest integrated circuit manufacturing customers, has historically produced intellectual property components for use by third parties in designs to be manufactured at TSMC’s foundry. These components are designed to serve the same purpose as components produced by us. The intellectual property components developed by TSMC have competed and are expected to continue to compete with our products. We believe that TSMC is more aggressively developing and distributing these products to encourage its customers to use TSMC to manufacture their current and future designs. TSMC has substantially greater financial, manufacturing and other resources, name recognition and market presence than we do and the internal design group at TSMC has greater access to technical information about TSMC’s manufacturing processes. Distribution partners selected by TSMC include Cadence, Magma and Virage Logic. Some of TSMC’s distribution partners, such as Cadence, may have greater resources, name recognition and distribution networks than we do. If TSMC is successful in supplying its own intellectual property components to third parties either directly or through distribution arrangements with other companies, our revenue from TSMC, our revenue from other customers and our operating results could be negatively affected.

Despite these competitive advantages, we also face numerous challenges associated with overcoming the following disadvantages:

We rely primarily on a combination of nondisclosure agreements, contractual provisions, patent, trademark, trade secret, and copyright law to protect our proprietary rights. We have an active program to protect our proprietary technology through the filing of patents. As of September 30, 2004, we had 50 issued US patents, 17 patent applications pending before the US Patent and Trademark Office, 11 issued foreign patents and 12 patent applications pending in foreign countries. Generally our patents expire between 2017 and 2020. ARTISAN, the ARTISAN COMPONENTS logo, and PROCESS-PERFECT are registered U.S. trademarks. Foreign trademark applications for these marks are pending.

We protect our trade secrets and other proprietary information through confidentiality agreements with our employees and customers. Despite these efforts, there can be no assurance that others will not gain access to our trade secrets, that our trade secrets will not be independently discovered by competitors or that we can meaningfully protect our intellectual property. Effective trade secret protection may be unavailable or limited in certain foreign jurisdictions, such as China, where we sell our intellectual property components. The risks associated with protection of our intellectual property rights in foreign countries are likely to increase as we expand our international operations. As a result, we may experience difficulty protecting our intellectual property from misuse or infringement by others.

Our typical license agreements contain indemnification provisions under which we may be required to defend or settle an infringement claim and pay settlement amounts or damages awarded with respect to such

claims. Such indemnification obligations are subject to a number of exceptions and generally limited to specific jurisdictions. In addition, the total amount of liability is generally capped at a specific dollar amount approximating the consideration received by us under the contract in question; however, such limits on our liability are generally not included in contracts we assumed in connection with our acquisition of NurLogic. As part of our indemnification obligations, we may also be required to provide substantial technical assistance to our customers regarding allegedly infringing products. If a product is, or in our opinion is likely to become, the subject of a claim alleging infringement, our indemnification obligations generally grant us the option to choose to procure a license for our customer, replace or modify the allegedly infringing product, or terminate the license to the allegedly infringing product and refund a portion of the license fees, the amount of which varies inversely with the length of time elapsed since the product was delivered.

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 support or indemnification to our customers and strategic partners, any litigation could severely disrupt or shut down the business of our customers and strategic partners, which in turn would hurt our relations with them and harm our operating results.

From time to time, we may be subject to claims by customers of the companies we acquire that our intellectual property components or products of acquired companies that have been incorporated into end user products infringe the intellectual property rights of others. We were notified by one of NurLogic’s customers that it was requesting indemnification from NurLogic (now one of our wholly owned subsidiaries) because of two complaints filed against that customer alleging that some of that customer’s products infringe third party patents. Since that initial notification, the matters underlying the complaints have been settled. The customer did not request Artisan’s participation in the settlement discussions or contribution to the final settlement.

We offer various intellectual property components and services to our customers; however, we do not manage our operations by these intellectual property components and services. Instead, we view our company as one operating segment when making business decisions. We use one measurement of profitability for our business. We currently operate principally in the United States, Taiwan, Japan and other countries in Asia and Europe.

Historically, a substantial portion of our total revenue has been derived from customers outside the United States, primarily from Asia and Europe. International revenue as a percentage of our total revenue was approximately 77% in fiscal 2004, 69% in fiscal 2003 and 75% in fiscal 2002. We anticipate that international revenue will remain a substantial portion of our total revenue in the future. To date, all of the revenue from international customers has been denominated in U.S. dollars.

As of September 30, 2004, we had 347 employees compared to 343 employees at September 30, 2003. Our success is highly dependent on our ability to attract, train and retain qualified employees. To date, we believe we have been successful in our efforts to recruit qualified employees and train and retain them, but there is no assurance that we will continue to be as successful in the future. Two of our employees in our Paris, France office have elected to be covered by the terms of the French metalworkers’ collective bargaining agreement. None of our other employees are subject to collective bargaining agreements. We believe that our relationship with our employees is good.

Our principal administrative and technical offices occupy 54,489 square feet in Sunnyvale, California pursuant to a lease that expires in August 2008. In addition, we lease administrative, technical and field support offices in seven cities throughout the world. The administrative, technical and field offices range from small executive offices to a 35,290 square foot facility. Lease terms range from month-to-month on certain executive offices to 3 years on certain direct leases. Our principal administrative, technical and field support facilities are in Sunnyvale, California; San Diego, California; Salem, New Hampshire; Cary, North Carolina; Bangalore, India; Tokyo, Japan; Paris, France and Singapore. We are continually evaluating the adequacy of existing facilities and additional facilities in new cities and we believe that suitable additional space will be available in the future on commercially reasonable terms as needed.

We were notified by Broadcom Corporation that it was requesting indemnification from NurLogic (the successor entity of NurLogic is now one of our wholly owned subsidiaries) because of a complaint filed by Agere Systems, Inc. against Broadcom, Inc. in August 2003 in the United States District Court for the Eastern District of Pennsylvania, alleging that some of Broadcom’s products infringe several patents owned by Agere. Agere was seeking both an injunction against Broadcom and monetary damages. In October 2004, the litigation between Agere and Broadcom was settled. Broadcom did not request our participation in the settlement discussions or our contribution to the settlement.

Our Common Stock has been quoted on the NASDAQ National Market under the symbol “ARTI” since our initial public offering on February 3, 1998. Prior to such time, there was no public market for our Common Stock. The following table sets forth for the periods indicated the high and low sale prices per share of our Common Stock as reported on the NASDAQ National Market.

Since March 1996, when we converted to a C corporation from a subchapter S corporation, we have not declared or paid any cash dividends on our Common Stock or other securities. We presently intend to retain future earnings, if any, for use in the operation and expansion of our business and do not anticipate paying cash dividends in the foreseeable future.

As of October 31, 2004, there were approximately 72 stockholders of record of our Common Stock, not including those stockholders holding shares in street or nominee name.

The selected financial data set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements and notes thereto included elsewhere in this Annual Report on Form 10-K. The consolidated balance sheet data as of September 30, 2004 and 2003 and the consolidated statement of operations data for the fiscal years ended September 30, 2004, 2003 and 2002 are derived from the financial statements that have been audited by PricewaterhouseCoopers LLP, independent registered public accounting firm, and which are included elsewhere in this Annual Report on Form 10-K. The consolidated balance sheet data as of September 30, 2002, 2001 and 2000 and the consolidated statement of operations data for the fiscal years ended September 30, 2001 and 2000 are derived from the financial statements that have been audited by PricewaterhouseCoopers LLP, independent registered public accounting firm, and which are not included in this Annual Report on Form 10-K. Historical results are not necessarily indicative of results to be expected in the future.

The acquisitions of NurLogic Design, Inc. in February 2003 and certain assets of Synopsys’ physical library business unit in January 2001 resulted in a significant increase in our costs and expenses primarily attributable to the increased headcount and amortization of goodwill and other intangibles associated with the acquisitions. The acquisitions have affected the comparability of the selected financial data set forth below.

The following discussion should be read in conjunction with the Consolidated Financial Statements and notes thereto included elsewhere in this Annual Report on Form 10-K. Certain statements in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are forward-looking statements. The forward-looking statements contained herein are based on current expectations and entail various risks and uncertainties that could cause actual results to differ materially from those expressed in such forward-looking statements. Forward-looking statements can often be identified by the use of forward-looking words such as “may,” “will,” “could,” “should,” “expect,” “believe,” “anticipate,” “estimate,” “continue,” “plan,” “intend,” “project,” or other similar words. Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those that expressed in any forward-looking statements. Readers are referred to risks and uncertainties identified below, and in the documents filed by us with the Securities and Exchange Commission, specifically the most recent reports on Form 10-K, 10-Q and 8-K, each as it may be amended from time to time. We undertake no obligation to revise or update publicly any forward-looking statements for any reason.

at no charge. We also provide customized intellectual property components and services to our licensed customers on a separate fee basis.

On August 22, 2004, Artisan entered into a merger agreement with ARM Holdings plc and Salt Acquisition Corporation, a wholly owned subsidiary of ARM, pursuant to which Artisan will be merged with and into Salt Acquisition Corporation. In the merger, assuming no dissenting shares, Artisan’s stockholders will receive, in the aggregate, merger consideration consisting of approximately $9.60 in cash multiplied by the number of shares of Artisan common stock outstanding at the effective time, plus 4.41 ARM American Depository Shares (or 13.23 Arm ordinary shares) multiplied by the number of shares of Artisan common stock outstanding at the effective time. At the closing of the merger, Artisan will be merged with and into Salt Acquisition Corporation. The merger is expected to be accounted for as a purchase transaction for accounting and financial reporting purposes and is intended to qualify as a tax-free reorganization within the meaning of Section 368(a) of the Internal Revenue Code for U.S. federal income tax purposes.

Each party has agreed to pay all expenses it incurs in connection with the merger, whether or not the transaction is completed. The parties have agreed to each pay 50% of any fees and expenses (other than attorney’s and accounting fees and expenses) incurred in connection with the printing, filing and mailing of any proxy statement, shareholders’ circular and the ARM listing particulars, as well as expenses incurred in connection with any applications or filings required under applicable law. We estimate that Artisan will incur direct transaction costs of approximately $14 million in connection with the merger, of which approximately $1.8 million had been incurred as of September 30, 2004. Our costs in connection with the merger are expensed in the periods in which they are incurred.

The license of our intellectual property components to an integrated circuit manufacturer typically involves a sales cycle of three to nine months and often coincides with an integrated circuit manufacturing customer’s migration to a new manufacturing process. Our contracts with integrated circuit manufacturers generally require them to pay a license fee for each product delivered under a contract. Generally, our license contracts involve multiple products. Throughout the production cycle, integrated circuit manufacturers often request additional products or modifications to existing products that result in additional license revenue. Our contracts generally require payment of a portion of the license fees upon signing of the contract with the final payment generally due within 30 to 90 days after delivery, which generally takes three to nine months from the contract signing date.

revenue. We anticipate that our revenue will continue to depend on a limited number of major customers for the foreseeable future, although the companies considered to be major customers and the percentage of revenue represented by each major customer may vary from period to period depending on the customer’s contributing to the addition of new contracts, the timing of work performed by us and the number of designs utilizing our products.

The license of our intellectual property components typically involves a significant commitment of capital by the integrated circuit manufacturer and a purchase from us will often be timed to coincide with a manufacturer’s migration to a new manufacturing process geometry. Manufacturers migrating to a new process geometry often view our intellectual property components as a means of attracting integrated circuit designers that use our components. Within a given process geometry, manufacturers may also choose to license additional intellectual property components from us in response to their customer’s requirements. Once an order is received, we must commit significant time and resources to the customization of products for such manufacturer. Because we often recognize revenue from such orders on a percentage-of-completion basis, the customers representing a significant portion of our revenue in a given quarter will depend upon the timing of our receipt of new orders and our progress on the customization of projects actually performed by us during such quarter.

We derive a substantial majority of our total revenue from fees associated with the sale of licenses, including maintenance and support fees. Of these components, maintenance and support fees have historically represented less than 10% of total revenue. Together, these license, maintenance and support fees accounted for 65% of total revenue in fiscal year 2004, 85% of total revenue in fiscal 2003 and 74% of total revenue in fiscal 2002. We expect that license revenue will continue to account for a substantial portion of our total revenue for the foreseeable future.

We calculate royalty revenue based on the selling price of integrated circuits or wafers containing our intellectual property components. License arrangements call for royalty reporting by each integrated circuit manufacturing customer on either a per-integrated circuit or per-wafer basis. Given that we provide our intellectual property components early in the customer’s integrated circuit design process, there is a delay of approximately one to four years between the time we deliver an intellectual property component and the time we receive royalty revenue, if at all, when the integrated circuits incorporating our intellectual property components are manufactured and sold. In recent periods, we have established uniform royalty rates, calculated on the basis of the wafer selling prices, applicable to all new licensees. Prior to that, royalty rates varied among integrated circuit manufacturers. In addition, our agreements with TSMC provide that royalty and credit rates decrease in accordance with a fixed schedule over the life of a given process geometry. Our success will depend, in part, on our ability to generate royalty revenue from a large number of designs and on many of these designs achieving substantial manufacturing volumes.

To date, a substantial portion of our net royalty revenue has been derived from two integrated circuit manufacturers, TSMC and UMC. TSMC and UMC accounted for 85% of our net royalty revenue in fiscal 2004, 83% in fiscal 2003 and 91% in fiscal 2002. Net royalty revenue as a percentage of total revenue was 35% in fiscal 2004, 15% in fiscal 2003 and 26% in fiscal 2002.

Historically, a large portion of our total revenue has been generated from outside of the United States. International revenue as a percentage of our total revenue was approximately 77% in fiscal 2004, 69% in fiscal 2003 and 75% in fiscal 2002. We anticipate that international revenue will remain a substantial portion of our total revenue for the foreseeable future. As all of our sales are currently denominated in US dollars, a strengthening of the US dollar could make our intellectual property components less competitive in foreign markets. We do not use derivative financial instruments for speculative or trading purposes. We have not engaged in any foreign currency hedging transactions.

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, assumptions and judgments including those related to revenue recognition, accounting for investments, allowance for doubtful accounts, impairment of long-lived assets, goodwill and purchased intangible assets, contingencies and other special charges and taxes. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. The results of these estimates form the basis for our judgments about the carrying values of assets and liabilities and our recognition of revenue that is not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Some of our most critical accounting policies are described in the following paragraphs.

We follow specific and detailed guidelines in recognizing revenue in accordance with the provisions of AICPA Statement of Position 97-2, “Software Revenue Recognition,” as amended by Statement of Position 98-4 and Statement of Position 98-9, as well as Accounting Research Bulletin No. 45, “Long-Term Construction-Type Contracts,” and Statement of Position 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts.” However, our judgments may affect the application of our revenue recognition policy. Revenue in any given period is difficult to predict, and any shortfall in revenue or delay in recognizing revenue could cause our operating results to vary significantly from quarter to quarter and could result in future operating losses.

We recognize and report revenue in two separate categories: license revenue and net royalty revenue. License revenue is comprised of license, maintenance and support fees. License fees are derived from the purchase of a license for our products. Maintenance fees are derived from maintenance contracts with our integrated circuit manufacturing customers, which are generally purchased at the same time as a license for the product. Support fees are derived from arrangements with integrated circuit designers to support the use of our intellectual property components in their designs. Royalty revenue is derived from fees based on the selling prices of integrated circuits or wafers containing our intellectual property components.

License revenue. For all licenses, we use both a binding purchase order and a signed license agreement as evidence of an arrangement. We assess cash collectibility based on a number of factors, including past collection history with the customer and the credit worthiness of the customer. In cases where we believe a customer’s credit worthiness is uncertain, we require prepayment or a letter of credit as assurance of payment. If we determine that collection of a fee is not probable, we defer the revenue and recognize it at the time collection becomes probable.

For licensed products which do not require significant customization of intellectual property components, we generally recognize license revenue when a signed contract or other persuasive evidence of an arrangement exists, the software has been shipped or electronically delivered, the license fee is fixed or determinable and collection of the resulting receivable is probable.

For licensed products requiring significant customization of our intellectual property components, we generally recognize license revenue using the percentage-of-completion method of accounting over the period that services are performed. For all license and service agreements accounted for under the percentage-of-completion method, we determine progress to completion based on actual direct labor hours incurred to date as a percentage of the estimated total direct labor hours required to complete the project. We periodically evaluate the actual status of each project to ensure that the estimates to complete each contract remain accurate. A provision

for estimated losses on contracts is made in the period in which the loss becomes probable and can be reasonably estimated. To date, these losses have not been significant. Costs incurred in advance of billings are recorded as costs in excess of related billings on uncompleted contracts. If the amount of revenue recognized exceeds the amounts billed to customers, the excess amount is recorded as unbilled accounts receivable. If the amount billed exceeds the amount of revenue recognized, the excess amount is recorded as deferred revenue. Revenue recognized in any period is dependent on our progress toward completion of projects in progress. Significant management judgment and discretion are used to estimate total direct labor hours. Any changes in or deviations from these estimates could have a material effect on the amount of revenue we recognize in any period.

For arrangements with multiple elements, such as product licenses and maintenance services, we allocate revenue to each element of a transaction based upon its fair value as determined in reliance on vendor specific objective evidence. Vendor specific objective evidence of fair value for all elements of an arrangement is based upon the normal pricing and discounting practices for those licensed products and services when sold separately and for maintenance is additionally measured by the renewal rate. If we cannot objectively determine the fair value of any undelivered element included in license arrangements, we defer revenue until all elements are delivered, all services have been performed or fair value can objectively be determined. When the fair value of a license element has not been established, we use the residual method to record license revenue if the fair value of all undelivered elements is determinable. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the fee is allocated to the delivered elements and is recognized as revenue.

We derive maintenance fees from maintenance contracts, which are generally purchased by integrated circuit manufacturers at the same time as a license for our intellectual property components. Maintenance includes telephone and email support and the right to receive unspecified upgrades on a when-and-if-available basis. Maintenance may generally be renewed on an annual basis. We recognize revenue for maintenance, based on vendor specific objective evidence of fair value, ratably over the term of the maintenance period. We generally determine vendor specific objective evidence of maintenance based on the stated fees for maintenance renewal set forth in the original license and first maintenance agreement.

We derive support fees from arrangements with integrated circuit designers to support the use of our intellectual property components in their designs. Support includes telephone and email support and the right to receive unspecified upgrades on a when-and-if-available basis. We recognize support fees ratably over the support period. Support arrangements generally have a term of 12 months and may be renewed for additional 12 month periods.

Royalty revenue. We recognize royalty revenue based on royalty reports received from integrated circuit manufacturers, generally on a one-quarter lag basis. In accordance with contract terms, we generally credit a portion of each royalty payment back to the integrated circuit manufacturer’s account to be applied against future license fees, if any, payable by the manufacturer. We report the remaining portion of the royalty as net royalty revenue. The amount of credits that can be earned by an integrated circuit manufacturer is generally limited to the cumulative amount of orders placed by that integrated circuit manufacturer for a given process technology. An integrated circuit manufacturer has a limited time to use the credits before they expire, generally twelve to eighteen months from the time credits are earned. As a result, we defer revenue associated with our credit program until the integrated circuit manufacturer licenses additional products or the credit expires, whichever is earlier. If the integrated circuit manufacturer does not use the credits within the stated period, we record the amount of the expired credits as net royalty revenue as we no longer have an obligation to provide any future products for the expired credits. Historically, integrated circuit manufacturing customers have utilized substantially all credits to purchase additional licensed products prior to expiration of the credits. When the integrated circuit manufacturing customers use credits, we recognize the credits as license revenue when our revenue recognition criteria have been met.

From time to time we exercise our right to conduct royalty audits pursuant to our contracts with customers. As a result of such audits we may recognize royalty revenue that relates to prior periods. Differences between

amounts initially recognized and amounts subsequently audited or reported as an adjustment to those amounts are recognized in the period the adjustment is determined.

We determine the appropriate classification of marketable securities at the time of purchase and evaluate such designation as of each balance sheet date. To date, all marketable securities have been classified as available-for-sale and are carried at fair value with unrealized gains and losses, if any, included as a component of accumulated other comprehensive income in stockholders’ equity. Marketable securities are presented as current or long-term assets based on their scheduled maturities. Realized gains and losses are recognized based on the specific identification method.

We review our investments on a regular basis to evaluate whether or not each security has experienced an other-than-temporary decline in fair value. If we believe that an other-than-temporary decline exists, we write down the investment to fair market value and record the related write-down as a loss on investments in our consolidated statements of operations.

We maintain an allowance for doubtful accounts for estimated losses resulting from the inability or unwillingness of customers to make required payments. The allowance for doubtful accounts is based on our assessment of the collectibility of specific customer accounts, the aging of the accounts receivable and our historical experience. If a major customer’s creditworthiness were to deteriorate, or actual defaults were higher than our historical experience, our allowance for doubtful accounts may be insufficient to cover the uncollectible receivables, which could have an adverse impact on our operating results in the period. The impact of any change in the allowance for doubtful accounts may be affected by our reliance on a relatively small number of integrated circuit manufacturers for a large portion of our total revenue.

We assess long-lived assets, goodwill and other intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable through the estimated undiscounted future cash flows resulting from the use of the assets. If we determine that the carrying value of long-lived, goodwill and other intangible assets may not be recoverable, we measure impairment by using the projected discounted cash flow method.

We are responsible for determining the fair value and for allocating the purchase price relating to purchase acquisitions. We considered a number of factors, including an independent valuation and appraisal. Goodwill is measured as the excess of the cost of acquisition over the sum of the amounts assigned to tangible and identifiable intangible assets acquired less liabilities assumed. We perform goodwill impairment tests on an annual basis and between annual tests in certain circumstances. The goodwill recorded in the Consolidated Balance Sheets as of September 30, 2004 and 2003 was $32.6 million and $36.0 million, respectively. In response to changes in industry and market conditions, we could be required to strategically realign our resources and consider restructuring, disposing of, or otherwise exiting businesses, which could result in an impairment of goodwill. Based on impairment tests performed, there was no impairment of goodwill in fiscal 2004, 2003 or 2002.

We are subject to the possibility of various loss contingencies arising in the ordinary course of business. We consider the likelihood of loss or impairment of an asset or the incurrence of a liability, as well as our ability to reasonably estimate the amount of loss in determining loss contingencies. We accrue an estimated loss

contingency when it is probable that an asset has been impaired or a liability has been incurred and the amount of loss can be reasonably estimated. We regularly evaluate current information available to us to determine whether such accruals should be adjusted and whether new accruals are required.

We are subject to income taxes in both the U.S. and numerous foreign jurisdictions. Significant judgment is required in evaluating our tax positions and determining our provision for income taxes. During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. We establish reserves for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes and interest will be due. These reserves are established when, despite our belief that our tax return positions are fully supportable, we believe that certain positions are likely to be challenged and may not be sustained on review by tax authorities. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit. The provision for income taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate, as well as the related net interest.

Our effective tax rates differ from the statutory rate primarily due to acquisition-related costs, research and experimentation tax credits, state taxes, the reversal of valuation allowance, and the tax impact of foreign operations. The effective tax rate was 16.1%, 13.2%, and 13.0% for fiscal 2004, 2003, and 2002, respectively. Our future effective tax rates could be adversely affected by earnings being lower than anticipated in countries where we have lower statutory rates and higher than anticipated in countries where we have higher statutory rates, by changes in the valuation of our deferred tax assets or liabilities, or by changes in tax laws or interpretations thereof. In addition, we are subject to the continuous examination of our income tax returns by the Internal Revenue Service and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes.

In February 2003, we acquired NurLogic Design, Inc. (“NurLogic”) for consideration consisting of approximately $5.0 million in cash, 745,000 shares of common stock valued at approximately $12.9 million, and assumed options to acquire 819,000 shares of common stock with a weighted average exercise price per share of $11.89 and a fair value of approximately $11.3 million. We accounted for the acquisition under the purchase method of accounting. NurLogic’s technology added complementary analog, mixed-signal and communication components to our product portfolio. Our acquisition of NurLogic has resulted in a significant increase in our costs and expenses relating primarily to the increased headcount and amortization of purchased intangible assets. This increase in our costs and expenses has affected and will continue to affect the comparability of our financial statements in future periods.

In January 2001, we acquired certain assets of the physical library business of Synopsys for approximately $27.4 million. We accounted for the acquisition under the purchase method of accounting. Upon consummation of our acquisition of certain assets of the Synopsys physical library business, we immediately charged to expense $2.4 million representing acquired in-process technology that had not yet reached technological feasibility and had no alternative future use. In fiscal 2001, our acquisition of such assets from Synopsys resulted in a significant increase in our costs and expenses relating primarily to the increased headcount and amortization of goodwill and other intangible assets associated with the acquisition.

In accordance with SFAS 142, we ceased amortizing goodwill in the first quarter of fiscal 2002.

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

Total revenue increased by $20.0 million, or 29%, to $88.5 million for the year ended September 30, 2004, compared to $68.5 million for the year ended September 30, 2003. The increase was primarily attributable to an increase in net royalty revenue of $20.5 million, but was partially offset by a decrease in license revenue of approximately $0.5 million related to a slight decrease in the licensing of our intellectual property components.

Total revenue increased by $31.3 million, or 84%, to $68.5 million for the year ended September 30, 2003, compared to $37.2 million for the year ended September 30, 2002. The increase was primarily attributable to an increase in net royalty revenue of $1.0 million and an increase in license revenue of approximately $30.2 million related to an increase in the licensing of our intellectual property components.

Gross royalties are related to the manufacture and sale of royalty bearing integrated circuits or wafers, which are reported to us by our integrated circuit manufacturing customers. Gross royalties are calculated based on the selling price of integrated circuits or wafers containing our intellectual property components. From these amounts, a percentage of the gross royalty payment is credited to our integrated circuit manufacturing customers’ accounts based on specific contract terms for use as payment of license fees for future orders to be placed with

us, if any, which we record as deferred revenue on our consolidated balance sheets. The remaining portion of gross royalty revenue is reported as net royalty revenue on our consolidated statements of operations.

Gross royalty revenue increased by $21.1 million, or 148%, to $35.3 million for the year ended September 30, 2004, compared to $14.2 million for the year ended September 30, 2003. From these amounts, $4.2 million was credited to integrated circuit manufacturing customers’ accounts for the year ended September 30, 2004, compared to $3.7 million which was credited to integrated circuit manufacturing customers’ for the year ended September 30, 2003 for use as payment of license fees for future orders to be placed with us, if any. The remaining portion of gross royalty revenue for fiscal 2004 of $31.1 million was reported as net royalty revenue for the year ended September 30, 2004, compared to $10.5 million which was reported as net royalty revenue for the year ended September 30, 2003. Net royalty revenue for the year ended September 30, 2004 was comprised of royalties of approximately $27.5 million related to the manufacture and sale of royalty bearing integrated circuits or wafers reported to us by our integrated circuit manufacturing customers and royalties of approximately $3.6 million primarily attributable to adjustments resulting from royalty audits related to the manufacture and sale of royalty bearing integrated circuits or wafers that had not been previously reported to us.

Gross royalty revenue increased by $0.9 million, or 7%, to $14.2 million for the year ended September 30, 2003, compared to $13.3 million for the year ended September 30, 2002. From these amounts, $3.7 million was credited to integrated circuit manufacturing customers’ accounts for the year ended September 30, 2003, compared to $3.8 million which was credited to integrated circuit manufacturing customers’ for the year ended September 30, 2002, in each case, for use as payment of license fees for future orders to be placed with us, if any. The remaining portion of gross royalty revenue of $10.5 million was reported as net royalty revenue for the year ended September 30, 2003, compared to $9.5 million which was reported as net royalty revenue for the year ended September 30, 2002.

Engineering costs are allocated between cost of revenue and product development. We track specific customer projects and product development efforts based on unique project codes that are assigned at the inception of each project. Individual engineers devoted to these projects record time to these project codes as actual hours are incurred. Engineering efforts devoted to specific customer projects are recognized as cost of revenue in the same period that revenues are recognized. Engineering efforts devoted to the general development of our technology are charged to product development. Engineering costs related to product development are expensed as incurred.

Cost of revenue increased by $2.9 million, or 17%, to $20.1 million for the year ended September 30, 2004, compared to $17.2 million for the year ended September 30, 2003. The increase in cost of revenue was primarily attributable to an increase in engineering hours allocated to revenue-generating projects of $4.0 million, but was partially offset by a decrease in outside services of $850,000. We expect that cost of revenue will continue to increase in absolute dollars in future periods.

Cost of revenue increased by $8.9 million, or 108%, to $17.2 million for the year ended September 30, 2003, compared to $8.3 million for the year ended September 30, 2002. The increase in cost of revenue was primarily attributable to an increase in engineering hours allocated to revenue-generating projects of $8.7 million.

Product development expenses increased by $81,000, or less than 1%, to $18.5 million for the year ended September 30, 2004, compared to $18.4 million for the year ended September 30, 2004. The increase in product development expenses was primarily attributable to an increase in headcount and personnel related costs of $2.9 million, increased facilities costs of $1.6 million, increased software and hardware maintenance of $781,000, and

increased supplies and materials costs of $267,000; partially offset by decreased outside services costs of $844,000, decreased travel and entertainment of $816,000 and increased engineering hours allocated to revenue-generating projects of $3.8 million. We expect that product development expenses will continue to increase in absolute dollars in future periods.

Product development expenses increased by $6.5 million, or 55%, to $18.4 million for the year ended September 30, 2003, compared to $11.9 million for the year ended September 30, 2002. The increase in product development expenses was primarily attributable to an increase in headcount and personnel related costs of $10.6 million, increased outside services costs of $1.9 million, increased depreciation and amortization costs of $1.9 million, increased facilities costs of $531,000 and increased supplies and materials costs of $216,000; partially offset by increased engineering hours allocated to revenue-generating projects of $8.7 million.

Sales and marketing expenses include personnel related costs including salaries and commissions, travel expenses and costs associated with trade shows, advertising and other marketing efforts. Sales and marketing expenses increased by $836,000, or 6%, to $15.4 million for the year ended September 30, 2004, compared to $14.5 million for the year ended September 30, 2003. The increase in sales and marketing expenses was primarily attributable to an increase in headcount and personnel related costs of $621,000, increased marketing and advertising program expenses of $112,000, increased facilities costs of $370,000; partially offset by decreased commissions of $79,000, decreased outside service costs of $152,000 and decreased supplies and materials of $36,000. We expect sales and marketing expenses will continue to increase in absolute dollars in future periods.

Sales and marketing expenses increased by $5.7 million, or 65%, to $14.5 million for the year ended September 30, 2003 compared to $8.8 million for the year ended September 30, 2002. The increase in sales and marketing expenses was primarily attributable to an increase in headcount and personnel related costs of $4.9 million, increased marketing and advertising program expenses of $317,000, increased depreciation and amortization costs of $380,000 and increased outside services costs of $111,000.

General and administrative expenses increased by $2.9 million, or 45%, to $9.3 million for the year ended September 30, 2004 compared to $6.4 million for the year ended September 30, 2003. The increase in general and administrative expenses was primarily attributable to $1.8 million in costs associated with the proposed merger with ARM Holdings plc, increased personnel related costs of $70,000, increased outside services costs of $600,000, increased bad debt expense of $244,000 due to a write-off in the WIP account and increased facility costs of $236,000; partially offset by decreased travel and entertainment expenses and supplies and materials expenses of $21,000. We expect general and administrative expenses will continue to increase in absolute dollars in future periods.

General and administrative expenses increased $2.9 million, or 83% to $6.4 million for the year ended September 30, 2003 compared to $3.5 million for the year ended September 30, 2002. The increase in general and administrative expenses was primarily attributable to an increase in personnel related costs of $1.9 million, increased outside services costs of $446,000, increased bad debt expense of $363,000, increased depreciation and amortization costs of $120,000 and increased facility costs of $64,000.

The provision for unused facility lease of $1.2 million in fiscal 2002 reflected an impairment charge for our unused leased facility for our former corporate office, which we vacated in fiscal 2001. As our original lease term expired in fiscal 2004, we made certain assumptions in determining the impairment, including our ability to sub-lease the facility for the remaining lease term in accordance with Emerging Issues Task Force, or EITF, 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” Due to the continued economic slowdown, we determined in fiscal 2002 that it was unlikely we would be able to sub-lease the facility and took an additional impairment charge for the full amount of the remaining lease liability.

In-process research and development expense of $520,000 in fiscal 2003 reflected certain research projects (primarily next generation core technology) from the NurLogic acquisition that had not yet reached technological feasibility or had no alternative future use at the time of acquisition. In order to achieve technological feasibility, we estimated the cost required to complete the projects at approximately $300,000. We estimated the fair value assigned to in-process research and development using the income approach, which discounts to present value the cash flows attributable to the technology once it had reached technological feasibility using a discount rate of 40%.

Amortization of purchased intangible assets decreased by $338,000, or 8%, to $4.0 million for the year ended September 30, 2004 compared to $4.4 million for the year ended September 30, 2003. The decrease in amortization of purchased intangible assets was primarily attributable to a $1.4 million decrease in the amortization related to the Synopsys asset acquisition which was fully amortized; offset by an increase of $1.0 million in the amortization related to the NurLogic acquisition.

Amortization of purchased intangible assets increased by $2.4 million, or 122%, to $4.4 million for the year ended September 30, 2003 compared to $2.0 million for the year ended September 30, 2003. The increase in amortization of purchased intangible assets was primarily attributable to a $2.5 million increase related to the NurLogic acquisition; offset by a decrease of $140,000 in the amortization related to the Synopsys asset acquisition.

Interest and other income increased by $304,000, or 23%, to $1.6 million for the year ended September 30, 2004 compared to $1.3 million for the year ended September 30, 2003. The increase in interest and other income was primarily attributable to an increase in interest income of $653,000 due to higher cash, cash equivalent and marketable securities balances, offset by a decrease of $166,000 in other income. Other income as of September 30, 2004 primarily consists of $224,000 related to collected balances that were previously written off.

Interest and other income increased by $495,000, or 59%, to $1.3 million for the year ended September 30, 2003 compared to $842,000 for the year ended September 30, 2002. The increase in interest and other income was primarily attributable to an increase in other income associated with certain contract expirations related to one of our acquisitions of $444,000 and an increase in interest income of $82,000 due to higher cash, cash equivalent and marketable securities balances.

The income tax provision in fiscal 2004 resulted from foreign withholding taxes, federal and state income taxes net of credits, less the reversal of valuation allowance. The income tax provisions in fiscal 2003 and fiscal 2002 were results of the alternative minimum tax and foreign withholding tax.

Net cash provided by operating activities in fiscal 2004 of $24.9 million was primarily attributable to net income of $19.2 million, an increase in accrued liabilities of $2.9 million, an increase in deferred revenue of $4.2 million, and non-cash related charges of $8.1 million; partially offset by an increase in accounts receivable of $6.0 million, an increase in prepaid and other current assets of $2.1 million, a decrease in accounts payable of $1.0 million and a decrease in other liabilities of $336,000. Net cash provided by operating activities in fiscal 2003 of $3.5 million was primarily attributable to net income of $7.3 million, a decrease in prepaid and other currents assets of $324,000, a decrease in other assets of $1.2 million, an increase in accounts payable of $667,000 and non-cash related charges of $8.0 million; partially offset by an increase in accounts receivable of $10.0 million, a decrease in accrued liabilities of $1.9 million and a decrease in other liabilities of $2.0 million. Net cash provided by operating activities in fiscal 2002 of $8.3 million was primarily attributable to net income of $2.1 million, an increase in accounts payable of $689,000, an increase in deferred revenue of $2.9 million, an increase in other liabilities of $1.1 million and non-cash related charges of $4.9 million; partially offset by an increase in accounts receivable of $1.8 million, an increase in prepaid and other currents assets of $800,000 and a decrease in accrued liabilities of $1.1 million.

Net cash used in investing activities in fiscal 2004 of $39.6 million was attributable to purchases of property and equipment of $1.2 million and a net increase in marketable securities of $38.4 million. Net cash provided by investing activities in fiscal 2003 of $469,000 was attributable to a net decrease in marketable securities of $7.8 million; offset by purchases of property and equipment of $4.5 million and cash used in our acquisition of NurLogic of $2.8 million, net of cash acquired. Net cash used in investing activities in fiscal 2002 of $13.8 million was attributable to purchases of property and equipment of $1.5 million and a net increase in marketable securities of $12.3 million.

Net cash provided by financing activities was $16.0 million in fiscal 2004, $65.7 million in fiscal 2003, and $3.1 million in fiscal 2002. Net cash provided by financing activities in fiscal 2004 was primarily attributed to proceeds of $16.0 million from the issuance of common stock to employees upon the exercise of stock options and purchases under our employee stock purchases plan. Net cash provided by financing activities in fiscal 2003 was primarily attributable to the net proceeds of approximately $53.5 million from our May 2003 secondary public offering of 3.0 million shares of newly issued common stock, proceeds of $11.9 million from the issuance of common stock to employees upon the exercise of stock options and purchases under our employee stock purchase plan and proceeds of $240,000 from the repayment of a stockholder note. Net cash provided by financing activities in fiscal 2002 consisted of proceeds from issuance of common stock to employees upon the exercise of stock options and our employee stock purchase plan.

We intend to continue to invest heavily in the development of new products and enhancements to our existing products. Our future liquidity and capital requirements will depend upon numerous factors, including the costs and timing of expansion of product development efforts and the success of these development efforts, the costs and timing of expansion of sales and marketing activities and our international operations, the extent to which our existing and new products gain market acceptance, the costs and timing of future acquisitions, if any, competing technological and market developments, the costs involved in maintaining and enforcing patent claims and other intellectual property rights, the level and timing of license and royalty revenue, available borrowings under line of credit arrangements, if any, our pending merger with ARM Holdings plc, and other factors. We do not currently have any borrowing facilities other than an unused equipment lease line of $296,000, which expires in December 2004. We believe that our current cash, cash equivalents and investment balances and any cash generated from operations will be sufficient to meet our operating and capital requirements for at least the next 12 months. However, from time to time, we may be required to raise additional funds through public or private

financing, strategic relationships or other arrangements. There can be no assurance that such funding, if needed, will be available on terms attractive to us, or at all. Furthermore, any additional debt or equity financing arrangements may be dilutive to stockholders, and debt financing, if available, may involve restrictive covenants. Strategic arrangements, if necessary to raise additional funds, may require us to relinquish our rights to certain of our technologies or products. Our failure to raise capital when needed could have a material adverse effect on our business, operating results and financial condition.

We do not have any off-balance sheet arrangements, investments in special purpose entities or undisclosed borrowings or debt, other than operating leases on our facilities. Additionally, we have not entered into any derivative contracts, nor do we have any synthetic leases. As of September 30, 2004, we had no foreign currency contracts outstanding.

The following table represents our future contractual obligations as of September 30, 2004 (in thousands):

Our principal administrative and technical offices occupy 54,489 square feet in Sunnyvale, California. We hold this building pursuant to a lease that expires in 2008. In addition, we lease administrative, technical and field support offices in seven cities around the world. The administrative, technical and field offices range from small executive offices to a 35,290 square foot facility. Lease terms range from month-to-month on certain executive offices to 3 years on certain direct leases. Our principal administrative, technical and field support facilities are in Sunnyvale, California; San Diego, California; Salem, New Hampshire; Cary, North Carolina; Bangalore, India; Tokyo, Japan; Singapore and Paris, France. We are continually evaluating the adequacy of existing facilities and additional facilities in new cities and we believe that suitable additional space will be available in the future on commercially reasonable terms as needed.

In October 2002, we announced a stock buyback plan of up to $5 million of our common stock with a term of one year. No shares were repurchased by us under such plan and the plan terminated.

In April 2004, we announced a stock buyback plan of up to $10 million of our common stock with a term of one year. As of September 30, 2004, no shares were repurchased by us under such plan.

In March 2004, the Financial Accounting Standards Board (FASB) issued an exposure draft entitled “Share-Based Payment” to amend Financial Accounting Standard (FAS) 123, “Accounting for Stock-Based Compensation” and FAS 95, “Statement of Cash Flows.” The proposed standard’s effective date will apply to awards that are granted, modified, or settled in cash in interim or annual periods beginning after June 15, 2005. This proposed standard would eliminate the ability to account for share-based compensation using the intrinsic value-based method under APB Opinion No. 25, “Accounting for Stock Issued to Employees.” This exposure draft would require us to calculate equity-based compensation expense for stock options and employee stock purchase plan rights granted to employees based on the fair value of the equity instrument at the time of grant. Currently, we disclose the pro forma net income (loss) and related pro forma income (loss) per share information in accordance with FAS 123 and FAS 148, “Accounting for Stock-Based Compensation Costs—Transition and Disclosure.” We will continue to evaluate the impact that the exposure draft will have on our financial position and results of operations.

In March 2004, the Emerging Issues Task Force (“EITF”) reached a consensus on recognition and measurement guidance previously discussed under EITF Issue No. 03-01, “The Meaning of Other-Than-

Temporary Impairment and Its Application to Certain Investments” (“EITF 03-01”). The consensus clarified the meaning of other-than-temporary impairment and its application to debt and equity investments accounted for under SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, and other investments accounted for under the cost method. The recognition and measurement guidance for which the consensus was reached in March 2004 is to be applied to other-than-temporary impairment evaluations in reporting periods beginning after June 15, 2004. In September 2004, the FASB issued a final FASB Staff Position that delays the effective date for the measurement and recognition guidance for all investments within the scope of EITF Issue No. 03-01. The consensus reached in March 2004 also provided for certain disclosure requirements associated with cost method investments that were effective for fiscal years ending after June 15, 2004. We will evaluate the effect of adopting the recognition and measurement guidance when the final consensus is reached.

In April 2004, the EITF issued Statement No. 03-06 “Participating Securities and the Two-Class Method Under FASB Statement No. 128, Earnings Per Share” (“EITF 03-06”). EITF 03-06 addresses a number of questions regarding the computation of earnings per share by companies that have issued securities other than common stock that contractually entitle the holder to participate in dividends and earnings of the company when, and if, it declares dividends on its common stock. The issue also provides further guidance in applying the two-class method of calculating earnings per share, clarifying what constitutes a participating security and how to apply the two-class method of computing earnings per share once it is determined that a security is participating, including how to allocate undistributed earnings to such a security. EITF 03-06 became effective during the quarter ended June 30, 2004, the adoption of which did not have an impact on the calculation of our earnings per share.

In July 2004, the EITF issued a draft abstract for EITF Issue No. 04-08, “The Effect of Contingently Convertible Debt on Diluted Earnings per Share” (“EITF 04-08”). EITF 04-08 reflects the Task Force’s tentative conclusion that contingently convertible debt should be included in diluted earnings per share computations regardless of whether the market price trigger has been met. If adopted, the consensus reached by the Task Force in this Issue will be effective for reporting periods ending after December 15, 2004. Prior period earnings per share amounts presented for comparative purposes would be required to be restated to conform to this consensus and we would be required to include the shares issuable upon the conversion of debt in the diluted earnings per share computation for all periods during which such debt is outstanding. We will evaluate the effect of adopting the recognition and measurement guidance when the final consensus is reached.

The following lists some, but not all, of the risks and uncertainties which may have a material and adverse effect on our business, financial condition or results of operations. The risks and uncertainties set out below are not the only risks and uncertainties we face. If any of the material risks or uncertainties we face were to occur, the trading price of our securities could decline.

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

Our operating results have fluctuated in the past, and may fluctuate in the future, as a result of a number of factors including:

Our future revenue may fluctuate from quarter to quarter and on an annual basis as a result of these and other factors. Our expense levels are based in part on our expectations regarding future revenue. If revenue is below our expectations in any quarter and we are not able to adjust spending in a timely manner, the negative effect of such shortfall may increase. We intend to continue to invest in product development, product marketing, licensing and support programs in an effort to maximize the growth of future revenue and net income. Accordingly, it is likely that in some future quarters our expenses will represent a greater than expected percentage of our revenue, causing our operating results to fall below the expectations of public market analysts and investors, which could cause our stock price to decline, perhaps substantially.

Our sales cycle is unpredictable and may be more than 12 months, so we may fail to adjust our resources and expenses adequately to meet anticipated or actual demand.

The license of our intellectual property components typically involves a significant commitment of capital by the integrated circuit manufacturer and a purchase will often be timed to coincide with an integrated circuit manufacturer’s migration to a new manufacturing process or process variation. Potential customers generally commit significant resources to an evaluation of available intellectual property components and require that we expend substantial time, effort and resources to educate them about the value of our intellectual property components. Despite these efforts, potential customers may select an alternate product or delay or forego a license of our intellectual property components. As a result, the sales cycle for our intellectual property components is long, typically ranging from three to nine months, and may in some cases be more than 12 months. Our ability to forecast the timing and scope of specific sales is limited. 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 a decrease in our stock price. For example, in recent months our customers have been slower than in the past at giving us the specifications we need to produce our libraries for their new processes. We believe the reason for the delay is diversion of resources to meet production requirements due to heavy volumes. Because we recognize license revenue on a percentage of completion basis, we recognized less license revenue than we expected.

Once we receive and accept an order for a customized product from an integrated circuit manufacturer, we must commit significant resources to customizing our products for the integrated circuit manufacturer’s manufacturing process. We generate a substantial majority of our license revenue from customized products. This customization is complex and time consuming and is subject to a number of risks over which we have little or no control. These risks include the integrated circuit manufacturer’s alterations of its manufacturing process and the timing of its migration to a new process. Typically, this customization, once started, takes from three to

nine months to complete and any delays may cause us to defer revenue recognition or potentially lose orders. If we fail to adequately adjust our resources and expenses to meet actual demand and actual revenue, our business may suffer. If anticipated orders fail to materialize, we may be unable to reduce our resources and expenses in time and our operating results could suffer. In addition, where integrated circuit manufacturer orders exceed our anticipated demand, we may be unable to deliver customized products in time to meet the integrated circuit manufacturer’s requirements. Any delays in product customization and delivery, such as those caused by technical or operational difficulties, give rise to the risk of alteration or potential cancellation of orders or may harm our relationships with our customers.

Because we rely on a relatively small number of integrated circuit manufacturers for a large portion of our revenue, our revenue could decline if our integrated circuit manufacturing customers do not continue to purchase and use our intellectual property components.

We have been dependent on a relatively small number of integrated circuit manufacturing customers for a substantial portion of our revenue, although the integrated circuit manufacturers comprising this group have changed from time to time. For fiscal 2004, TSMC accounted for 26% of total revenue and UMC accounted for 19% of total revenue. For fiscal 2003, IBM accounted for 18% of total revenue, TSMC accounted for 17% of total revenue and Chartered accounted for 10% of total revenue. For fiscal 2002, TSMC accounted for 39% of total revenue. We anticipate that our revenue will continue to depend on a limited number of major customers for the foreseeable future, although the companies considered to be major customers and the percentage of revenue represented by each major customer may vary from period to period depending on the addition of new contracts, the timing of work performed by us and the number of designs utilizing our products.

Our business is subject to many risks beyond our control that influence the success of these and other customers, including competition faced by these manufacturers, market acceptance of their products, and the engineering, sales and marketing capabilities of such customers. In addition, we believe that the licensing of our intellectual property components by integrated circuit manufacturers is driven in part by a desire on the part of such manufacturers to attract integrated circuit designers to their foundries. In the event that such manufacturers begin to operate at or near their manufacturing capacities, they may elect to reduce their marketing activities, including their purchase of our products for use by integrated circuit design teams.

We have incurred operating losses in the past periods and may be unable to maintain profitability.

Although we were profitable in recent years, we incurred net operating losses in the first nine months of fiscal 2002, fiscal 2001 and fiscal 1999. If our revenue in future periods increases more slowly than we expect, or not at all, we may not maintain profitability. In addition, most of our operating expenses are fixed in the short term, so any shortfall in anticipated revenue in a given period could significantly reduce our operating results below expectations. We expect to continue to incur significant expenses in connection with product development, operational and administrative activities and expansion of our sales and marketing efforts. As a result, we will need to increase revenue relative to increases in costs to maintain profitability. For example, if we increase our headcount in expectation of processing a substantial increase in orders and we do not receive those orders or are unable to recognize the related revenue in the short-term, we may incur losses. We may be unable to sustain or increase profitability on a quarterly or annual basis. If we fail to maintain profitability, our business and financial condition would suffer, we could lose the benefit of tax credits and deferred tax assets and our stock price could decline.

TSMC, one of our largest customers, develops and distributes products that compete with ours.

use TSMC to manufacture their current and future designs. TSMC has substantially greater financial, manufacturing and other resources, name recognition and market presence than we do and the internal design group at TSMC has greater access to technical information about TSMC’s manufacturing processes. Distribution partners selected by TSMC include Cadence Design Systems, Inc., Magma Design Automation, Inc., Synopsys, Inc. and Virage Logic Corporation. Some of TSMC’s distribution partners, such as Cadence, may have greater resources, name recognition and distribution networks than we do. If TSMC is successful in supplying its own intellectual property components to third parties either directly or through distribution arrangements with other companies, our revenue from TSMC, our revenue from other customers and our operating results could be negatively affected.

Our customers are not obligated to purchase additional products from us or manufacture integrated circuits with our products, which may cause our operating results to suffer.

None of our customers has a written agreement with us that obligates them to license future generations of intellectual property components or additional intellectual property components from us, and we cannot be certain that any customer will license intellectual property components from us in the future. Our revenue from these customers may be comprised of license fees and royalties. In addition, we cannot be certain that any of the integrated circuit manufacturers will produce products incorporating our intellectual property components or that, if production occurs, they will generate significant royalty revenue for us. If one or more of our major integrated circuit manufacturing customers stops licensing our intellectual property components, reduces its orders, fails to pay license or royalty fees due or does not produce products containing our intellectual property components, our operating results could be materially and negatively affected.

We have relied and expect to continue to rely on royalties as a key component of our business model and if we fail to realize expected royalties our business will suffer.

Royalties are calculated based on the selling prices of integrated circuits or wafers containing our intellectual property components. We believe that our long-term success is substantially dependent on future royalties. We face risks inherent in a royalty-based business model, such as the rate of incorporation of our intellectual property components into integrated circuit designs, the rate of adoption of our intellectual property components by integrated circuit manufacturers and the demand for products incorporating these integrated circuits. Our royalty revenue is highly dependent upon the level of integrated circuit production and sales by our integrated circuit manufacturing customers. Fluctuations in orders placed with our integrated circuit manufacturing customers from their customers could significantly affect our royalty revenue and operating results. Additionally, our ability to forecast and realize royalty revenue is limited by factors that are beyond our control. These factors include the timing of the manufacture of royalty-bearing integrated circuits or wafers, the price charged by integrated circuit manufacturers to their customers for royalty-bearing integrated circuits or wafers, and the quantity of royalty-bearing integrated circuits or wafers ordered and actually manufactured. We believe that a significant portion of our royalty revenue in fiscal 2004 was derived from the manufacture and sale of integrated circuits for graphics applications. If the market for integrated circuits in graphics applications declines, our royalty revenue may be adversely affected. On a period-to-period basis, net royalty revenue may vary significantly. Net royalty revenue as a percentage of our total revenue was 35% in fiscal 2004, 15% in fiscal 2003 and 26% in fiscal 2002.

There is significant delay and uncertainty between the delivery of our intellectual property components and the generation of royalty revenue. In addition to the factors described above, this delay and uncertainty is due to the delivery and application of our intellectual property components early in the integrated circuit design process and delays in the reporting of the production and sale of royalty bearing integrated circuits or wafers. The time between the delivery of our intellectual property components to a customer and the manufacture in volume of integrated circuits containing our intellectual property components may be three years or longer. Thus, we cannot anticipate the impact of royalty payments on our financial results when we negotiate royalty agreements. We recognize royalty revenue in the quarter in which we receive a royalty report from an integrated circuit manufacturer, provided that other conditions to revenue recognition have been satisfied. As a result, our recognition of royalty revenue typically lags behind the quarter in which the related integrated circuit is manufactured or sold by the integrated circuit manufacturing customer by at least one quarter. We cannot be

certain that our business strategy will be successful in expanding the number of contracts with integrated circuit manufacturers, nor can we be certain that we will receive significant royalty revenue in the future.

TSMC accounted for 53% of our net royalty revenue in fiscal 2004, 75% in 2003 and 89% in 2002. Our agreements with TSMC provide that royalty rates decrease in accordance with a fixed schedule over the life of a given process. As a result, our net royalty revenue may decline if royalties from TSMC continue to represent a substantial portion of our net royalty revenue.

We also face risks relating to the accuracy and completeness of the royalty collection process. Our ability to generate royalty revenue depends, in part, on our ability to negotiate, structure, monitor and enforce agreements for the determination and payment of royalties. We have only limited experience and systems in place to conduct reviews of the accuracy of the royalty reports we receive from our licensees. We have the right to audit the records of integrated circuit manufacturers who license our intellectual property components to help ensure the integrity of their royalty reporting systems; however, these audits may only be conducted periodically and may be at our expense. We cannot be certain that the costs incurred by us in conducting these audits will not exceed the royalties that result from these efforts. As the number of Artisan licensed manufacturers and end users grows, our ability to monitor and enforce agreements for the determination and payment of royalties may be further constrained by increases in the volume of information to be processed and limitations on our available resources. Furthermore, the timing and findings of such royalty audits have resulted in and are expected to continue to result in significant fluctuations in the level and timing of our royalty revenue. Royalty audits may also trigger disagreements over contract terms with our licensees and such disagreements could impact customer relations, divert the efforts and attention of our management from normal operations and impact our business operations and financial condition.

If we fail to enhance our intellectual property components and develop and deliver intellectual property components on a timely basis, we may not be able to address the needs of our customers, our technology may become obsolete and our results of operations may be harmed.

Our customers compete in the integrated circuit industry, which is subject to rapid technological change, frequent introductions of new products, short product life cycles, changes in customer demands and requirements and evolving industry standards. The development of new manufacturing processes, the introduction of products embodying new technologies and the emergence of new industry standards can render existing products obsolete and unmarketable. Accordingly, our future success will depend on our ability to continue to enhance our existing intellectual property components and to develop and introduce new intellectual property components that satisfy increasingly sophisticated customer requirements and that keep pace with new product introductions, emerging manufacturing process technologies and other technological developments in the integrated circuit industry. We intend to continue to invest heavily in the development of new products and enhancements to our existing products. This investment of funds, time and other resources involves numerous risks, including risks of development obstacles and delays and risks of poor market reaction to such new products, which could cause our expenses to represent a greater than expected percentage of our revenue in any given quarter. If we fail to anticipate or adequately respond to changes in manufacturing processes or customer requirements, or if we experience significant delays in intellectual property component development, our business and operating results may be negatively affected. We cannot be certain that we will avoid difficulties that could delay or prevent the successful introduction, development and sale of new or enhanced intellectual property components or that the new or enhanced intellectual property components will achieve market acceptance. If we do not satisfy our delivery commitments, then we could also be exposed to litigation or claims from our customers. Any claim could have a material negative effect on our business, which could cause our stock price to decline.

From time to time, we have experienced delays in the progress of customization of new intellectual property components for a given customer, such as those caused by technical or operational difficulties, and we may continue to experience delays in the future. Any delay or failure to meet customers’ expectations could result in damage to customer relationships and our reputation, underutilization of engineering resources, delay in the market acceptance of our intellectual property components or a decline in revenue, any of which could negatively affect our business.

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

Historically, a large portion of our total revenue has been derived from integrated circuit manufacturers located outside of the United States. International revenue as a percentage of our total revenue was approximately 77% in fiscal 2004, 69% in fiscal 2003 and 75% in fiscal 2002. Revenue derived from customers in Taiwan as a percentage of our total revenue was approximately 46% in fiscal 2004, 21% in fiscal 2003 and 44% in fiscal 2002. We anticipate that international revenue will remain a substantial portion of our total revenue in the future. To date, all of our revenue from international customers has been denominated in US dollars. If our competitors denominate their sales in a currency that becomes relatively inexpensive in comparison to the US dollar, then we may experience fewer orders from international customers whose business is based primarily on the less expensive currency. In addition, future dislocations in international financial markets may materially affect our business.

We intend to expand our sales, marketing and design activities in Asia and Europe. We have established an engineering services and support facility in Bangalore, India and intend to increase our presence in China and Taiwan. International expansion will result in increased costs and may not be successful, which could harm our business. Our expansion of international activity and dependence on customers outside the United States involves a number of risks including:

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

International political instability may increase our cost of doing business and disrupt our business.

Increased international political instability, evidenced by the threat or occurrence of terrorist attacks, enhanced national security measures, continuing military action in Afghanistan and Iraq, kidnappings of foreigners in Malaysia, strained international relations with North Korea, tensions between Taiwan and China, tensions between India and Pakistan and other conflicts in the Middle East and Asia, may halt or hinder our ability to do business, may increase our costs and may adversely affect our stock price. This increased instability may, for example, negatively impact the reliability and cost of transportation, negatively affect the desire of our employees and customers to travel, lead to stricter export controls, adversely affect our ability to obtain adequate

insurance at reasonable rates or require us to take extra security precautions for our domestic and international operations. In addition, this international political instability has had and may continue to have negative effects on financial markets, including significant price and volume fluctuations in securities markets. If this international political instability continues or escalates, our business and results of operations could be harmed and the market price of our common stock could decline.

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

Our success depends in large part on the continued contributions of our key management, engineering, sales and marketing personnel, many of whom are highly skilled and would be difficult to replace. None of our senior management, key technical personnel or key sales personnel is bound by a written employment contract to remain with us for a specified period. In addition, we do not currently maintain key man life insurance covering our key personnel. Our success also depends on our ability to attract, train and retain highly skilled managerial, engineering, sales, marketing and finance personnel and on the abilities of new personnel to function effectively, both individually and as a group. If we are unable to effectively integrate and utilize newly hired engineering, management or sales personnel, the execution of our business strategy and our ability to react to changing market conditions may be impeded and our business could suffer. Competition for personnel is intense, and we cannot be certain that we will be successful in attracting and retaining qualified personnel. If we lose the services of any key personnel, are unable to attract or retain qualified personnel in the future or experience delays in the integration of new personnel in the United States and abroad, our business and operations may suffer. In addition, our pending merger with ARM could cause our key personnel and potential key hires to experience uncertainty regarding their future role within ARM, which could cause us to lose or fail to attract such personnel, which could adversely affect our business.

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

Our ability to license our intellectual property components and manage our business successfully in a rapidly evolving market requires an effective planning and management process. Our historical growth, international expansion, acquisitions, including our acquisition of NurLogic in February 2003, have placed, and are expected to continue to place, a significant strain on our managerial, operational and financial resources. We have established an engineering service and support facility in Bangalore, India and plan to increase our presence in China and Taiwan. Our international expansion has resulted and is expected to continue to result in increased costs.

Our customers rely heavily on our technological expertise in designing, testing and manufacturing products incorporating our intellectual property components. Relationships with new integrated circuit manufacturers generally require significant engineering support that may increase the strain on our personnel, particularly our engineers. We cannot be certain that our systems and resources will be adequate to support our operations or that our management will be able to achieve the rapid execution necessary to implement our business plan.

If we are not able to enhance and develop our analog and mixed signal business, our overall business may suffer.

We acquired NurLogic, a private provider of analog, mixed-signal and communication components, in February 2003. We have integrated the acquired workforce and operations and we are working towards the effective development of this business. We face various challenges and risks associated with our analog and mixed signal business, including, but not limited to:

We license our analog and mixed signal components to both semiconductor manufacturers and end users. Most providers of analog and mixed signal components license their products directly to end users who agreed to pay license fees directly to such providers. We cannot be sure that semiconductor manufacturers will be willing to license and pay for analog and mixed signal intellectual property components for the benefit of end users in the same way as such manufactures have historically licensed digital intellectual property components from us. To date, we have had only moderate success in expanding the customer base for these products beyond NurLogic’s historical customer base. Sales to end users typically involve lower dollar values, more frequent transactions and shorter delivery times and tend to require more sales, support and legal resources to process, all of which may strain our existing resources. In addition, analog and mixed signal intellectual property components tend to require a greater degree of customization for a particular use than do many of our other products. We have invested and continue to invest substantial resources in the acquisition and development of our analog and mixed signal business. If we are not able to successfully develop this business, our revenue from this business may not grow at a rate sufficient to recover our investment, our overall business may be negatively affected, and our stock price could decline.

The addition of our analog and mixed signal business has made planning and predicting our future growth rates and operating results more difficult.

The acquisition, operation and development of our analog and mixed signal business may reduce our revenue growth rate and make prediction of our future revenue, costs and expenses and operating results more difficult. We have invested and expect to continue to invest substantial resources in adapting, utilizing and developing our analog and mixed signal business. Since the acquisition, our results of operations have reflected an expanded workforce and product development effort and changed customer base, which may not be comparable to our results of operations prior to the acquisition.

We may make future acquisitions or enter into mergers, strategic transactions or other arrangements that could cause our business to suffer.

We may continue to make investments in complementary companies, products or technologies or enter into mergers, strategic transactions or other arrangements. If we buy a company or a division of a company, we may experience difficulty integrating that company or division’s personnel and operations, which could negatively affect our operating results. In addition:

In connection with future acquisitions or mergers, strategic transactions or other arrangements, we may incur substantial expenses regardless of whether the transaction occurs. We may also incur noncash charges in connection with a merger, acquisition, strategic transaction or other arrangements. In addition, we may be required to assume the liabilities of the companies we acquire. By assuming the liabilities, we may incur liabilities, including those related to intellectual property infringement or indemnification of customers of acquired businesses for similar claims that could materially and adversely affect our business. We may have to incur debt or issue equity securities to pay for any future acquisition, the issuance of which would involve restrictive covenants or be dilutive to our existing stockholders.

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

We intend to continue to invest heavily in the development of new intellectual property components and enhancements to our existing intellectual property components. Our future liquidity and capital requirements will depend upon numerous factors, including:

We may raise additional funds through public or private financing, strategic relationships or other arrangements. We cannot be certain that the funding, if needed, will be available on attractive terms, or at all. Furthermore, any additional equity financing may be dilutive to stockholders, and debt financing, if available, may involve restrictive covenants. Strategic arrangements, if necessary to raise additional funds, may require us to relinquish our rights to certain of our technologies or products. If we fail to raise capital when needed, our business will be negatively affected, which could cause our stock price to decline.

We continue to experience intense competition from other intellectual property component providers, integrated circuit manufacturers and electronic design automation companies, and this competition could negatively affect our business and our revenue.

We face significant competition from the internal design groups of integrated circuit manufacturers that have expanded their manufacturing capabilities and portfolio of intellectual property components to participate in the system-on-a-chip market. We also face competition from integrated circuit designers that have expanded their internal design capabilities and portfolio of intellectual property components to meet their internal design needs. Integrated circuit manufacturers and designers that license our intellectual property components have historically had their own internal intellectual property component design groups. These design groups continue to compete with us for access to the integrated circuit manufacturer’s or designer’s intellectual property component requisitions and, in some cases, compete with us to supply intellectual property components to third parties. Intellectual property components developed by internal design groups of integrated circuit manufacturers are designed to utilize the qualities of their own manufacturing process, and may therefore benefit from capacity, informational, cost and technical advantages. If internal design groups expand their intellectual property component offerings to compete directly with our intellectual property components or actively seek to participate as vendors in the intellectual property component market, our revenue and operating results could be negatively affected.

We expect competition to increase in the future from existing competitors and from new market entrants with intellectual property components that may be less expensive than ours or that may provide better performance or additional features not currently provided by our intellectual property components. Many of our current and potential competitors have substantially greater financial, technical, manufacturing, marketing, distribution and other resources, greater name recognition and market presence, longer operating histories, lower cost structures and larger customer bases than we do. As a result, they may be able to adapt more quickly to new or emerging technologies and changes in customer requirements. In addition, some of our principal competitors maintain their own electronic design automation tools and intellectual property component libraries which allow them to offer a single vendor solution.

Our ability to compete successfully in the market for intellectual property components will depend upon numerous factors, many of which are beyond our control including, but not limited to:

Our business depends on continued demand for integrated circuits and the electronic equipment that incorporate them.

Our business is substantially dependent on the adoption of our technology by integrated circuit manufacturers and on an increasing demand for products requiring integrated circuits, such as portable

computing devices, cellular phones, consumer multimedia products, automotive electronics, personal computers and workstations. Our business is subject to many risks beyond our control that influence the success of our customers including, among others, competition faced by each customer in its particular industry, market acceptance of the customers’ products that incorporate our technology, the engineering, sales and marketing capabilities of the customer and the financial and other resources of the customer. Demand for our intellectual property components may also be affected by consolidation in the integrated circuit and related industries, which may reduce the aggregate level of purchases of our intellectual property components and services by the combined companies.

The revenue we generate from licensing activities depends in large part on the rate at which integrated circuit manufacturers adopt new product generations, which, in turn, is affected by the level of demand for integrated circuits. With increasing complexity in each successive generation of integrated circuit products, we face the risk that the rate of adoption of smaller process geometries for integrated circuit manufacturing may slow. We also face the risk that our licensing revenue may suffer if our customers collaborate with each other regarding design standards for particular generations of integrated circuit products. Revenue generated from royalties depends on production and sale of integrated circuits or wafers that incorporate our technology. If the integrated circuit and electronics products industries experience a further downturn, our business could suffer.

The integrated circuit industry is cyclical in nature and a downturn may negatively affect the growth of our revenue.

The markets for integrated circuit products are cyclical. The integrated circuit industry suffered a sharp decline in orders and revenue in 2001 and 2002 and this weakness continued during much of 2003. Many integrated circuit manufacturers and vendors of products incorporating integrated circuits announced earnings shortfalls and employee layoffs during this period. The outlook for the integrated circuit industry is uncertain and it is very difficult to predict future economic events.

The primary customers for our intellectual property components are integrated circuit design and manufacturing companies. Any significant downturn in our customers’ markets, or domestic and global conditions is likely to adversely affect our royalty revenue. Such a downturn may also result in a decline in demand for our intellectual property components and services and could harm our business. Weakness in the integrated circuit and related industries, a reduced number of design starts, shifts in the types of integrated circuits manufactured, such as a shift to field programmable gate arrays, tightening of customers operating budgets or consolidation among our customers could cause our business to suffer.

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

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

Integrated circuit manufacturing facilities are subject to risk of natural disasters, which, if they were to occur, could harm our revenue and profitability.

Integrated circuit manufacturing facilities have in the past experienced major reductions in foundry capacity due to earthquakes in Taiwan, Japan and California. For example, Taiwan, where several of our largest customers are located, experienced several earthquakes in 1999 that impacted foundries through power outages, physical damage and employee dislocation. The license component of our revenue depends on manufacturers transitioning to new process geometries. The royalty component of our revenue is directly related to the manufacture and sale of integrated circuits containing our intellectual property components. As a result, our business could suffer if a major integrated circuit manufacturer’s transition to a new process geometry or manufacturing capacity was adversely affected by a natural disaster such as an earthquake, fire, tornado or flood.

If we are not able to preserve and expand the value of the intellectual property included in our intellectual property components, our business will suffer.

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

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

Effective intellectual property protection may be unavailable or limited in certain foreign jurisdictions, such as China, where we sell our intellectual property components. As a result, we may experience difficulty protecting our intellectual property from misuse or infringement by others in foreign countries. The risks associated with protection of our intellectual property rights in foreign countries are likely to increase as we expand our international operations.

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

Substantial litigation and threats of litigation regarding intellectual property rights exist in our industry and the integrated circuit industry. From time to time, third parties, including our competitors, may assert patent, copyright and other intellectual property rights to technologies that are important to our business. We cannot be certain that we would ultimately prevail in any dispute or be able to license any valid and infringed patents from third parties on commercially reasonable terms. Any infringement claim brought against us, regardless of the duration, outcome or size of damage award, could:

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

From time to time, we may be subject to claims by our customers or customers of the companies we acquire that our intellectual property components or products of acquired companies that have been incorporated into electronic products infringe the intellectual property rights of others. Our future acquisitions, if any, may increase the risk that customers of these companies bring claims of intellectual property infringement or indemnification for intellectual property infringement against us.

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

If the intellectual property components we provide to a customer contain defects that increase our customers’ cost of goods sold and time to market, the market acceptance of our intellectual property components would be harmed. Any actual or perceived defects in our intellectual property components may also hinder our ability to attract or retain industry partners or customers, leading to a decrease in our revenue. These defects are frequently found during the period following introduction of new proprietary technologies or enhancements to existing proprietary technologies. Our intellectual property components may contain errors or defects not discovered until after volume manufacture of integrated circuits containing our intellectual property components. If our intellectual property components contain errors or defects, we could be required to expend significant resources to alleviate these problems, which could result in the diversion of technical and other resources from our other development efforts. The defects or errors could also result in fewer wafers containing our intellectual property components reaching production, which would reduce our royalty revenue.

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

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

For example, during fiscal 2004, the trading price of our common stock on the Nasdaq National Market has ranged from a high of $29.74 to a low of $15.09. If our revenue and results of operations are below the expectations of public market securities analysts or investors, significant fluctuations in the market price of our common stock could occur. In addition, the securities markets have, from time to time, experienced significant price and volume fluctuations, which have particularly affected the marketprices for high technology companies and often are unrelated and disproportionate to the operating performance of particular companies. These broad market fluctuations, as well as general economic, political and market conditions, may negatively affect the market price of our common stock. In the past, following periods of volatility in the market price of a company’s stock, securities class action litigation has occurred against that company. The litigation could result in substantial costs and would at a minimum divert management’s attention and resources, which could have a material adverse effect on our business, which could further reduce our stock price. Any adverse decision in the litigation could also subject us to significant liabilities.

Changes in stock option accounting rules may adversely impact our reported operating results prepared in accordance with generally accepted accounting principles, our stock price and our competitiveness in the employee marketplace.

Technology companies in general and Artisan in particular have a history of depending upon and using broad based employee stock option programs to hire, incentivize and retain employees in a competitive marketplace. Any changes requiring that we record compensation expense in the statement of operations for employee stock options using the fair value method or changes in existing taxation rules related to stock options would have a significant negative effect on our reported results. On March 31, 2004, the Financial Accounting Standards Board (FASB) issued an Exposure Draft, Share-Based Payment: an amendment of FASB Statements No. 123 and 95, which would require a company to recognize, as an expense, the fair value of stock options and other stock-based compensation to employees beginning after June 15, 2005 and subsequent reporting periods. Currently, we do not recognize compensation expense for stock options, other than amortization of deferred compensation related to options assumed in purchase business combinations. Such a change would result in lower reported earnings per share which may negatively impact our future stock price. In addition, such a change could impact our ability to utilize broad based employee stock plans to reward employees and could result in a competitive disadvantage to us in the employee marketplace.

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

Our board of directors has the authority to issue up to 5,000,000 shares of preferred stock and to determine the rights, preferences, privileges and restrictions, including voting rights, of the shares without any further vote or action by our stockholders. If we issue any of these shares of preferred stock in the future, the rights of holders of our common stock may be negatively affected. If we issue preferred stock, a change of control of our company could be delayed, deferred or prevented. We have no current plans to issue shares of preferred stock.

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

In December 2001, our board of directors adopted a stockholder rights plan. Under this plan, we issued a dividend of one right for each share of our common stock. Each right initially entitles stockholders to purchase a

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

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

On August 22, 2004, the stockholder rights plan was amended to exclude the proposed merger with ARM Holdings plc and the transactions contemplated by the merger agreement with ARM from the definition of an event that would cause the separation and distribution of the rights. On August 23, 2004, we announced that we had entered into a definitive merger agreement with ARM Holdings plc and Salt Acquisition Corporation under which ARM will acquire us.

The value of the merger consideration that Artisan stockholders will receive in the proposed merger with ARM will depend on the value of ARM ADSs or ARM ordinary shares at the time the merger is completed and may therefore decrease in value.

Under the terms of the merger agreement between us, ARM and its wholly-owned subsidiary, upon completion of the merger, Artisan stockholders, other than stockholders who properly exercise appraisal rights under Delaware law, will receive for each share of Artisan common stock, on average, $9.60 in cash and 4.41 ARM ADSs, (or, in the alternative, 13.23 ARM ordinary shares). Because the value of the merger consideration depends in part on the value of an ARM American Depository Share, or ADS, or ARM ordinary share at the time the merger is completed, the value of the per share merger consideration that Artisan stockholders will receive in the merger cannot now be determined. Artisan stockholders will have the right to elect to receive consideration in cash or ARM ADSs (or ARM ordinary shares), or a combination thereof, subject to proration. The total aggregate consideration, assuming no dissenting shares, being paid for all shares of Artisan common stock, will be $9.60 in cash multiplied by the number of shares of Artisan common stock outstanding at the effective time of the merger, plus 4.41 ARM ADSs (or, in the alternative, 13.23 ARM ordinary shares), multiplied by the number of shares of Artisan common stock outstanding at the effective time of the merger. Using the number of shares of Artisan common stock outstanding as of September 1, 2004, and assuming no dissenting shares, a maximum of approximately $229 million in cash would be paid to Artisan stockholders.

As the average per share exchange ratio is fixed, the aggregate number of ARM ADSs or ARM ordinary shares that Artisan stockholders will receive in the merger will not change, even if the market prices of ARM ADSs or ARM ordinary shares changes. There will be no adjustment to the average per share exchange ratio or any right to terminate the merger agreement or the merger based solely on fluctuations in the prices of ARM ADSs or ARM ordinary shares. In addition, general market fluctuations may adversely affect the market prices of ARM ADSs or ARM ordinary shares. The market prices of ARM ADSs or ARM ordinary shares upon and after completion of the merger could be lower than the market prices on the date of the merger agreement, their current market prices or their respective prices on the date that any election to receive any particular form of merger consideration may be made.

The form or mix of merger consideration that an Artisan stockholder receives may be different from the form or mix of consideration that an Artisan stockholder has elected to receive. Artisan stockholders will not know the actual form or mix of consideration that they will receive at the time they vote on the merger.

The total amount of cash and the number of ARM ADSs (or ARM ordinary shares) that will be paid to all Artisan stockholders is fixed and will be allocated among stockholders according to formulas set forth in the merger agreement. The amount of cash, ARM ADSs (or ARM ordinary shares) or a combination thereof that an Artisan stockholder receives in the merger will depend on whether the stockholder has submitted an election form, what the stockholder has elected to receive and the elections made by all other stockholders. It will also depend on the volume weighted average of the trading prices of ARM ADSs on the Nasdaq National Market during 10 random trading days selected from the 20 trading days ending on and including the second trading day prior to the closing of the merger. Accordingly, the form or mix of merger consideration that an Artisan stockholder receives may be different from the form or mix that the Artisan stockholder elected to receive. A stockholder that elects to receive only cash could receive a combination of cash and ARM ADSs (or ARM ordinary shares), and a stockholder that elects to receive only ARM ADSs (or ARM ordinary shares) could receive a combination of ARM ADSs (or ARM ordinary shares) and cash.

The form or mix of merger consideration that an Artisan stockholder receives may impact the tax consequences for that Artisan stockholder.

Assuming the merger qualifies as a reorganization for U.S. federal income tax purposes, an Artisan stockholder that has elected to receive, and does in fact receive, only ARM ADSs (or ARM ordinary shares) generally will not recognize gain or loss in the merger for U.S. federal income tax purposes, other than with respect to cash received instead of fractional shares. An Artisan stockholder that has elected to receive, and does in fact receive, only cash generally will recognize any gain or loss in the merger for U.S. federal income tax purposes. If, however, a stockholder receives a combination of cash and ARM ADSs (or ARM ordinary shares) (regardless of whether such stockholder elected to receive only cash or only ARM ADSs (or ARM ordinary shares)), that stockholder generally will recognize gain for U.S. federal income tax purposes, if any, to the extent of the cash received, but will not be able to recognize loss, if any.

The allocation of the merger consideration cannot be determined until after the merger is completed. Therefore, Artisan stockholders will not know the actual form or mix of consideration they will each receive at the time they vote on the merger.

The value that all Artisan stockholders are entitled to receive will be the same based on a specified measurement period, regardless of whether they receive cash or stock. However, the value of the consideration received by stockholders may differ at the time the merger consideration is actually paid because of fluctuations in the price of ARM ADSs (or ARM ordinary shares).

The value of the merger consideration Artisan stockholders receive will be the same whether a stockholder receives cash, ARM ADSs (or ARM ordinary shares) or a combination thereof based upon a formula for determining the merger consideration which is derived from the volume weighted average of the trading prices of ARM ADSs on the Nasdaq National Market during 10 random trading days selected from the 20 trading days ending on and including the second trading day prior to the closing of the merger. However, the current market value of an ARM ADS (or ARM ordinary share) on the date the merger consideration is paid to an Artisan stockholder is likely to be different from the average price of an ARM ADS. Thus, the current value of the per share merger consideration, on the dates that Artisan stockholders actually receive the merger consideration, is likely to differ depending upon the mix of cash and/or ARM ADSs (or ARM ordinary shares) received by each stockholder and the share prices of the ARM ADSs (or ARM ordinary shares) on the date on which the individual stockholder receives the merger consideration to which that stockholder is entitled.

Our officers and directors have potential conflicts of interest that could have affected their decision to support the merger.

Our officers and directors have potential conflicts of interest that could have affected their decision to support the merger, including:

Because of these interests, our directors and officers may be inclined to support a transaction which other stockholders do not view favorably. In addition, the number of shares required to adopt the merger agreement is less than an absolute majority of Artisan’s outstanding common stock because directors and officers holding approximately 5% of Artisan’s outstanding common stock as of October 31, 2004 have agreed to vote their shares in favor of adoption of the merger agreement.

Uncertainty related to the merger could harm our customer and foundry relationships.

In response to the announcement of the proposed merger, our current and prospective customers may delay or defer purchasing decisions. If our customers delay or defer purchasing decisions, our revenues could materially decline or any anticipated increases in revenues could be lower than expected.

In addition, foundry partners may be concerned about continued development and support of certain of our current or announced products. These foundry partners may also be doubtful that the combined company will continue our licensing model including, but not limited to, royalty credits for future designs and free access to our intellectual property components for integrated circuit designers. As a result, foundry partners may be reluctant to continue negotiation of or to enter into new agreements with us. Foundry partners could also be reluctant to rely on a single vendor for a broad array of intellectual property components and could select another vendor to provide them with products formerly supplied by us. Foundry partners could also name another vendor as their vendor of choice to their customers.

We have contracts with suppliers, distributors, customers, licensors and other business partners. Various contracts require us to obtain consent from these other parties in connection with the merger. If these third party

consents cannot be obtained on favorable terms, the combined company may suffer a loss of potential future revenue and may lose rights to facilities, intellectual property or other rights that are material to the business of the combined company.

The rights of holders of ARM ADSs to be issued in the merger will not be the same as the rights of holders of ARM ordinary shares.

The rights and terms of the ARM ADSs are designed to replicate, to the extent reasonably practicable, the rights of ARM ordinary shares, for which there is no active trading market in the United States. However, because of aspects of U.K. law, ARM’s memorandum of association and ARM’s articles of association and the terms of the deposit agreement under which the ARM ADSs are issued, the rights of holders of ARM ADRs are not identical to, and, in some respects, are less favorable than, the rights of holders of ARM ordinary shares. At the ARM extraordinary general meeting to be held in connection with the merger, the shareholders of ARM will consider and vote on a proposal to amend ARM’s articles of association to, among other things, approve the expansion of rights of holders of ARM ADSs. Approval of the proposal to amend ARM’s articles of association will require the approval of 75% or more of the votes cast at the ARM extraordinary general meeting. The approval of this proposal is not a condition to completion of the merger.

We estimate that we will incur direct transaction costs of approximately $14 million in connection with the merger, of which approximately $1.8 million had been incurred as of September 30, 2004. Our costs in connection with the merger are expensed in the periods in which they are incurred. In addition, the merger with ARM has required and is expected to continue to require substantial management time, attention and resources. We believe the combined company may incur charges to operations, but cannot reasonably estimate those costs at this time, in the quarter in which the merger is completed, to reflect costs associated with integrating the two companies. There is no assurance that the combined company will not incur additional material charges in subsequent quarters to reflect additional costs associated with the merger.

If the merger is not completed, our share price and future business and operations could be harmed.

If the merger is not completed, our share price and future businesses and operations could be harmed and may be subject to certain material risks, such as:

Further, if the merger is terminated and our board of directors determines to seek another merger or business combination, we may not be able to find a merger partner. Any other merger partner may not be willing to pay an equivalent, higher or more attractive merger consideration than that which is proposed to be paid by ARM in the merger. While the merger agreement is in effect, subject to specified exceptions, we may not take any action to solicit, initiate or knowingly facilitate or encourage any takeover proposal or enter into or participate in negotiations or discussions with, disclose any information relating to Artisan or any of our subsidiaries to, or afford access to the business, properties, assets, books or records of Artisan or any of its subsidiaries, or otherwise cooperate in any way with any person that has made or is seeking to make, a takeover proposal.

Provisions of the merger agreement may discourage other companies from entering into a merger or other business combination with us which might otherwise benefit our stockholders.

The merger agreement prohibits us, subject to certain limited exceptions, from soliciting or encouraging any discussions regarding a proposal to enter into any business combination with any party other than ARM. Under

specified circumstances, we may be required to pay ARM a termination fee of $31 million or $18 million, as the case may be. The merger agreement also provides that subject to certain limited exceptions, ARM is prohibited from entering into certain business combinations that would delay the closing of the merger, result in a transaction that would be required to be reported by ARM as the acquisition of a significant subsidiary or would create a substantial risk that the merger would not receive antitrust approval. Under certain circumstances, ARM may be required to pay us an $18 million termination fee. These restrictions may discourage other companies from entering into a merger or other business combination with us which might otherwise benefit our stockholders.

The merger may be completed even though there has been a material adverse effect on us or ARM.

In general, each party can refuse to complete the merger if there is a material adverse effect affecting the other party between the date of the signing of the merger agreement, August 22, 2004, and the closing of the merger. However, certain types of changes will not prevent the merger from going forward, even if they would have a material adverse effect on ARM or Artisan, including:

If an adverse change occurs but ARM and Artisan must still complete the merger, ARM’s share price may suffer.

The combined company may not realize the anticipated benefits of the merger.

The merger involves the integration of two companies that have previously operated independently. There can be no assurance, however, regarding when or the extent to which the combined company will be able to realize the benefits anticipated to result from the merger, including increased revenues, cost savings or other benefits. The combined company must integrate numerous systems, including those involving management information, purchasing, accounting and finance, sales, billing, employee benefits, payroll and regulatory compliance. ARM and Artisan have a number of information systems that are dissimilar, which will have to be integrated, or, in some cases, replaced. Difficulties associated with integrating ARM and Artisan, which could be exacerbated because they are headquartered in different countries, could have a material adverse effect on the combined company and the value of ARM ADSs or ARM ordinary shares. In addition, under U.S. GAAP, ARM may not be able to record as revenue amounts classified as deferred revenue on our balance sheet at the effective time of the merger even though the combined company will be required to provide those products or services to which the deferred revenue relates. Accordingly, the amounts recorded as deferred revenue in our balance sheet at the merger date may not result in an equal amount of revenue being recognized by the combined business following completion of the merger.

The issuance of ARM ADSs and ARM ordinary shares pursuant to the merger and any future sale of substantial amounts of ARM ADSs or ARM ordinary shares could adversely affect ARM’s share price.

In connection with the merger, ARM expects to issue to our stockholders approximately 105 million ADSs (or 316 million ARM ordinary shares) or approximately 24% of the total number of the outstanding shares of ARM following the merger, based on ARM ordinary shares and shares of our common stock outstanding on September 1, 2004. In addition, ARM will assume all outstanding options to purchase shares of Artisan common stock, which as of September 1, 2004 was approximately 5.6 million, which would be converted into options to acquire approximately 110 million ARM ordinary shares at the closing of the merger assuming the value of an ARM ADS is the closing price on the Nasdaq National Market of an ARM ADS on September 22, 2004. Other than shares held by affiliates of Artisan or ARM, ARM ADSs or ARM ordinary shares, as the case may be, that are issued to Artisan stockholders, including upon the exercise of outstanding options will be freely tradable without restrictions or further registration under the Securities Act. Sales by Artisan stockholders acquiring ARM shares pursuant to the merger could adversely affect the market prices of ARM ADSs or ARM ordinary shares, as the case may be, by increasing the supply of shares available for sale compared to the demand. These sales may also make it more difficult for ARM to sell equity securities in the future at a time and price that ARM deems appropriate.

The merger could cause ARM or Artisan to lose key personnel, which could materially affect the combined company’s business and require the combined company to incur substantial costs to recruit replacements for lost personnel.

As a result of the announcement of the merger agreement, current and prospective ARM and Artisan employees could experience uncertainty about their future roles within ARM. This uncertainty may adversely affect the ability of the combined company to attract and retain key management, sales, marketing and technical personnel. ARM and Artisan employees may be concerned about the strategic focus and direction of the combined company, among other things, and seek to find employment elsewhere. Because ARM’s and Artisan’s boards of directors believe the combined company’s success will depend in part on whether it can enhance and introduce new generations of ARM and Artisan technology, ARM’s and Artisan’s boards of directors also believe the combined company will be particularly dependent on its ability to identify, attract, motivate and retain qualified engineers with the requisite educational background and industry experience. Competition for qualified personnel, particularly those with significant industry experience, is intense. Any failure to attract and retain key personnel prior to and after the consummation of the merger could have a material adverse effect on the business of the combined company.

The combined company’s business will be adversely affected if the combined company cannot manage the significant changes in the number of its employees and the size of its operations in the United States.

As a result of the merger, the combined company will significantly increase the number of its employees and the size of its operations in the United States. ARM will acquire approximately 339 employees of Artisan, a substantial number of whom are located in the United States. To date, most of ARM’s employees have been based in Cambridge, United Kingdom, Austin, Texas and Los Gatos, California. These significant changes in headcount may place a significant strain on the combined company’s management and other resources. The combined company will face challenges inherent in efficiently managing an increased number of employees over large geographic distances, including the need to implement appropriate systems, policies, benefits and compliance programs in different jurisdictions.

If the combined company is unable to manage its headcount, expenses, technological integration and the scope of its operations effectively, the cost and quality of the combined company’s products may suffer and the combined company may be unable to attract and retain key personnel and develop and market new products. Further, the inability to successfully manage the substantially larger and geographically more diverse organization, or any significant delay in that integration, could have a material adverse effect on the combined company after the merger and, as a result, on the market prices of ARM ADSs and ARM ordinary shares.

The combined company’s future capital needs may require that the combined company seek debt financing or additional equity funding which, if not available, could cause the business of the combined company to suffer.

From time to time, the combined company may be required to raise additional funds for its future capital needs through public or private financing, strategic relationships or other arrangements. There can be no assurance that the funding, if needed, will be available on attractive terms, or at all. Furthermore, any additional financing arrangements may be dilutive to shareholders, and debt financing, if available, may involve restrictive covenants. Strategic arrangements, if necessary to raise additional funds, may require the combined company to relinquish its rights to certain of its technologies or products. The combined company’s failure to raise capital when needed could have a material adverse effect on the business of the combined company.

The combined company’s business and future operating results may be adversely affected by events outside of its control and by the cyclical nature of the integrated circuit industry.

The combined company’s business and operating results will be vulnerable to interruption by events outside of its control, such as earthquakes, fire, power loss, telecommunications failures, political instability, military conflict and uncertainties arising out of terrorist attacks, including a global economic slowdown, the economic consequences of additional military action or additional terrorist activities and associated political instability, and the effect of heightened security concerns on domestic and international travel and commerce.

The integrated circuit markets are cyclical and suffered significant downturns in 2001, 2002 and 2003. The primary customers for the combined company’s products are integrated circuit design and manufacturing companies. Any significant downturn in such customers’ demand could adversely affect the business of the combined company.

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

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

The table below presents the carrying value and related weighted average interest rates for our cash, cash equivalents and marketable securities. The carrying values approximate fair values at September 30, 2004 and 2003. At September 30, 2004, marketable securities consisted of $35.7 million with a maturity date of less than one year and $17.8 million with a maturity date of greater than one year.

Historically, a large portion of our total revenue has been generated from outside of the United States. International revenue as a percentage of our total revenue was approximately 77% for fiscal 2004, 69% for fiscal 2003 and 75% for fiscal 2002. We anticipate that international revenue will remain a substantial portion of our total revenue in the future. As all of our sales are currently denominated in United States dollars, a strengthening of the United States dollar could make our products less competitive in foreign markets. We do not use derivative financial instruments for speculative or trading purposes. We have not historically engaged in any foreign currency hedging transactions.

Reference is made to the Index to Consolidated Financial Statements that appears on page F-1 of this report. The Report of PricewaterhouseCoopers LLP, independent registered public accounting firm, the Consolidated Financial Statements and the Notes to Consolidated Financial Statements listed in the Index to Consolidated Financial Statements, which appear beginning on page F-2 of this report, are incorporated by reference into this Item 8.

The following table presents certain unaudited consolidated statement of operations data for our eight most recent fiscal quarters. The information for each of these quarters is unaudited and has been prepared on the same basis as our audited Consolidated Financial Statements appearing elsewhere in this report on Form 10-K. In the opinion of our management, all necessary adjustments, consisting only of normal recurring adjustments, have been included to present fairly the unaudited quarterly results when read in conjunction with our Consolidated Financial Statements and related notes included elsewhere in this report on Form 10-K. We believe that results of operations for interim periods should not be relied upon as any indication of the results to be expected or achieved in any future period.

(a) Evaluation of disclosure controls and procedures: Our management evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the Exchange Act)) are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

(b) Changes in internal control over financial reporting: We continue to enhance our internal control over financial reporting by adding resources in key functional areas and bringing our operations up to the level of documentation, segregation of duties, systems security, and transactional control procedures required under the new Auditing Standard No. 2 issued by the Public Company Accounting Oversight Board. Our documentation and testing of our internal controls over financial reporting to date have identified certain gaps in the documentation and design of internal controls over financial reporting that we are in the process of remediating. We routinely discuss and disclose these matters to the audit committee of our board of directors.

During the period covered by this Annual Report on form 10-K there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

The following table lists our executive officers and directors as of October 1, 2004:

Mark R. Templeton has served as our president and chief executive officer since April 1991 when he co-founded our company. In addition, Mr. Templeton has served as a member of our board of directors since April 1991. From April 1990 to March 1991, Mr. Templeton was director of the Custom IC Design Group at Mentor Graphics Corporation, an electronic design automation company. From October 1984 to March 1990, he held various positions with Silicon Compilers Systems Corporation, an electronic design automation company, with the last position being director of the Custom IC Design Group.

Joy E. Leo has served as our vice president of finance and administration, chief financial officer and secretary since September 2000. From January 2000 to August 2000, she served as vice president of finance and administration and chief financial officer for IMP, Inc, an integrated circuit company. From August 1998 to January 2000, she was vice president of finance, operations and administration at Innomedia Incorporated, a telecommunications company. From June 1995 to January 1998, she was vice president and chief financial officer for Philips Components, a division of Royal Philips Electronics N.V.

Scott T. Becker has served as our chief technical officer since April 1991 when he co-founded Artisan Components. In addition, Mr. Becker has served as a member of our board of directors since April 1991. From April 1990 to April 1991, he was manager of the library development group of the IC division of Mentor Graphics. From May 1985 to April 1990, he was responsible for library development at Silicon Compilers.

Harry Dickinson has served as our chief operating officer since June 2001. From January 2000 to June 2001, Mr. Dickinson took time off from his business activities to pursue personal interests. From December 1998

to January 2000, Mr. Dickinson was vice president of worldwide sales for Cygnus Solutions, now known as Red Hat, Inc., a computer software distribution company. From October 1997 to October 1998, he was president and chief executive officer of Entridia Corporation, subsequently acquired by Stratigos Networks, LLC, a network controller company, of which he was also a founder. From January 1992 to October 1997, he was senior vice president of sales for S3 Incorporated, now known as SONICblue Incorporated, a fabless integrated circuit company specializing in graphics chips.

Dhrumil Gandhi has served as our senior vice president of product technology since May 2001. From May 1993 to May 2001, Mr. Gandhi served as our vice president of engineering. From July 1983 to May 1993, he served as senior manager for advanced application specific integrated circuit design systems at Mentor Graphics Corporation.

Brent Dichter has served as our vice president of engineering since May 2001. Mr. Dichter served as our vice president of product/program management from March 2000 to May 2001 and as our director of engineering from November 1998 to March 2000. From January 1997 to November 1998, he served as vice president of silicon technology at Multi Dimensional Computing, a computer company specializing in graphics chip design. From July 1995 to January 1997, he was director of strategic marketing for Xilinx, Inc., a field programmable gate array company.

Neal Carney has served as our vice president of marketing since August 2001. From June 2000 to August 2001, he was vice president of marketing for Tripath Technology, Inc., a fabless integrated circuit company. From January 1998 to June 2000, he was business unit manager of imaging products for Agilent Technologies, Inc., a technology company focusing on communications, electronics and life sciences. From January 1994 to January 1998, Mr. Carney was marketing manager of the integrated circuit division at Hewlett-Packard Company. From November 1982 to January of 1994, Mr. Carney held various marketing management positions at Hewlett-Packard including a three year international assignment from May 1987 to May 1990 as the Japan marketing center manager for Hewlett-Packard’s integrated circuit products group.

Edward M. Boule has served as our vice president, Asia Pacific sales since January 2003. Mr. Boule served as our vice president, foundry partnerships from August 2001 to January 2003, and as our director of Japan operations from August 1999 to August 2001. From October 1995 to April 1999, Mr. Boule was director and vice president of sales for AKM Semiconductor Inc., a subsidiary of Asahi Kasei Microsystems specializing in semiconductor manufacturing.

J. Callan Carpenter has served as our vice president and general manager, analog/mixed-signal business unit since March 2003. From March 1998 to March 2003, Mr. Carpenter served as president, CEO and Director of Silicon Metrics Corporation, a company specializing in semiconductor design and verification software. From December 1997 to March 1998, Mr. Carpenter served as vice president of marketing for Ventix Systems, Inc., an enterprise automation software company. From May 1997 to December 1997, Mr. Carpenter provided independent consulting services for several software companies. From January 1990 to April 1997, Mr. Carpenter held various marketing and managerial positions with Mentor Graphics Corporation, including the position of vice president of corporate marketing from January 1995 to April 1997.

R. Keith Hopkins has served as our vice president sales, North America and Europe since January 2004. From October 2000 to January 2004, Mr. Hopkins was vice president, worldwide sales at Denali Software, Inc., an electronic design automation company. From November 1999 to August 2000, he was vice president, sales and business development at ClickServices.com, Inc., a wireless software and infrastructure company. From October 1988 to November 1999, he held various sales and account management positions at Mentor Graphics Corporation, including the position of western area sales director from January 1998 to November 1999.

Lucio L. Lanza has served as one of our directors since March 1996 and was named Chairman of the Board of Directors in November 1997. He is currently Managing Director of Lanza techVentures, an early stage venture

capital and investment firm, which he founded in January 2001. Mr. Lanza joined U.S. Venture Partners, a venture capital firm, as a venture partner in 1990 and was a general partner of U.S. Venture Partners from November 1996 through December 2001. From 1990 to 1995, Mr. Lanza also served as an independent consultant to integrated circuit, communications and computer-aided design companies, including Cadence Design Systems, Inc., an EDA company. Prior to 1990, he served as an executive with several EDA and semiconductor companies, including EDA Systems, Inc., Daisy System Corp., Intel Corporation and Olivetti Corporation. Mr. Lanza also serves on the board of directors and as Chairman of PDF Solutions, Inc., a provider of technologies to improve integrated circuit manufacturing yields.

R. Stephen Heinrichs has served as one of our directors since January 22, 2003. Mr. Heinrichs is a member of the Board of Directors of Avistar Communications Corporation (“Avistar”), a video communications company he co-founded. From 1993 until his retirement in April 2001, Mr. Heinrichs was Chief Financial Officer and Corporate Secretary of Avistar and its subsidiaries. Mr. Heinrichs is a Certified Public Accountant.

Morio Kurosaki has served as one of our directors since March 7, 2001. Mr. Kurosaki has served as President and CEO of IT-Farm Corporation, a Japanese incubation fund management firm, since November 1999. In 1988, Mr. Kurosaki founded Aisys Corporation, a Japanese business development firm that supports the entry of non-Japanese companies into the Japanese market. Mr. Kurosaki served as a managing general partner of Aisys from 1988 through June 2002. Prior to 1988, Mr. Kurosaki held various sales and account management positions at Western Digital Japan, Daisy Systems Japan and then Intel Japan. Mr. Kurosaki serves on the board of directors of IT-Farm Corporation.

Robert P. Latta has served as one of our directors since March 6, 2003. Mr. Latta is a member of the law firm Wilson Sonsini Goodrich & Rosati, Professional Corporation (“WSGR”). Mr. Latta joined WSGR in 1979 and has been a member since 1984. Mr. Latta specializes in venture-backed start-ups, public offerings and mergers and acquisitions. Mr. Latta and WSGR have represented the Company and its predecessors as corporate counsel since 1997. Mr. Latta serves on the board of directors of Avistar.

Leon Malmed has served as one of our directors since April 2000. Mr. Malmed retired from the position of senior vice president of sales and marketing at SanDisk Corporation, a flash data storage company, in March 2000. Mr. Malmed joined SanDisk in December 1992. Prior to 1992, he served as an executive with several data storage companies including Maxtor Corp., Quantum Corp. and SyQuest Technology, Inc. Mr. Malmed serves on the board of directors of Socket Communications, Inc.

The Board of Directors of the Company held a total of eight (8) regularly scheduled meetings and one (1) special meeting during fiscal 2004 and acted by unanimous written consent two (2) times. All directors attended greater than 75% of the meetings of the Board of Directors and committees thereof, if any, upon which such director served either in person or telephonically, except that Morio Kurosaki attended five of the nine meetings of the Board of Directors in fiscal 2004. The Board of Directors has an Audit Committee, a Compensation Committee and a Nominating and Governance Committee.

The Audit Committee was established on January 9, 1998, at which time the Board of Directors adopted a written charter for the Audit Committee. The Audit Committee Charter was amended and restated by the Board of Directors on October 21, 2003.

The purpose of the Audit Committee is to oversee and monitor the accounting and financial reporting processes of the Company, the audits of the financial statements of the Company, the qualifications, independence and performance of our independent accountants and our internal accounting and financial

controls. Since January 29, 2003, the Audit Committee has consisted of Stephen Heinrichs, Lucio Lanza, and Leon Malmed, who continue to serve in such capacity as of October 1, 2004. Our Board of Directors has determined that R. Stephen Heinrichs is an “audit committee financial expert” as defined in the rules of the Securities and Exchange Commission. Mr. Heinrichs is “independent,” as that term is used in Item 7(d)(3)(iv) of Schedule 14A under the Securities Exchange Act of 1934, as amended. The Audit Committee met eight (8) times during fiscal 2004 and acted by unanimous written consent four (4) times during fiscal 2004. The members of the Audit Committee who served during fiscal 2004 are “independent” as defined under Rule 4200(a)(15) of the National Association of Securities Dealers listing standards.

The Compensation Committee was established on January 9, 1998, at which time the Board of Directors adopted a written Charter for the Compensation Committee. The Compensation Committee Charter was amended and restated by the Board of Directors on October 21, 2003. The Compensation Committee is responsible for determining salaries, incentives and other forms of compensation for executive officers and other employees of the Company and administers various incentive compensation and benefit plans. Since April 9, 2003, the Compensation Committee has consisted of Robert Latta, Leon Malmed and Stephen Heinrichs, who continue to serve in such capacity as of October 1, 2004. The Compensation Committee met nine (9) times during fiscal 2004. The Compensation Committee acted by unanimous written consent nine (9) times during fiscal 2004.

The Nominating and Governance Committee of the Board of Directors was established on November 21, 2002, at which time the Board of Directors adopted a Charter for the Committee. The Nominating and Governance Committee Charter was amended and restated by the Board of Directors on October 21, 2003. A copy of the amended and restated Nominating and Governance Committee Charter is available at our website (www.artisan.com) from the “Investors” pull down menu under “Company Information.” The Nominating and Governance Committee is expected to identify, evaluate and recommend nominees for the Board of Directors for purposes of each annual meeting of stockholders, evaluate the composition, organization and governance of the Board of Directors and its committees and develop and recommend corporate governance principles and policies applicable to the Company. Since April 9, 2003, the Nominating and Governance Committee has consisted of Lucio Lanza, Robert Latta and Stephen Heinrichs, who continue to serve in such capacity as of October 1, 2004. The Nominating and Governance Committee met eight (8) times and acted by written consent once during fiscal 2004.

It is the policy of the Nominating and Governance Committee to consider both recommendations and nominations for candidates to the Board of Directors from stockholders. Stockholder recommendations for candidates to the Board of Directors must be directed in writing to Artisan Components, Inc., Corporate Secretary, 141 Caspian Court, Sunnyvale, CA 94089, and must include: the candidate’s name, age, business address and residence address, the candidate’s principal occupation or employment, the number of shares of the Company which are beneficially owned by such candidate, a description of all arrangements or understandings between the stockholder making such nomination and each candidate and any other person or persons (naming such person or persons) pursuant to which the nominations are to be made by the stockholder, detailed biographical data and qualifications and information regarding any relationships between the candidate and the Company within the last three years, and any other information relating to such nominee that is required to be disclosed in solicitations of proxies for elections of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended. A stockholder’s recommendation to the Secretary must also set forth: the name and address, as they appear on our books, of the stockholder making such recommendation, the class and number of shares of the Company which are beneficially owned by the stockholder and the date such shares were acquired by the stockholder, any material interest of the stockholder in such nomination, any other information that is required to be provided by the stockholder pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended, in his capacity as a proponent to a stockholder

proposal, and a statement from the recommending stockholder in support of the candidate, references for the candidate, and an indication of the candidate’s willingness to serve, if elected.

Our bylaws establish an advance notice procedure with regard to certain matters, including stockholder proposals and director nominations, which are properly brought before an annual meeting of stockholders. To be timely, a stockholder’s notice must be delivered to or mailed and received at our principal executive offices not less than 120 calendar days prior to the date proxy statements were mailed to stockholders in connection with the previous year’s annual meeting of stockholders. In the event that no annual meeting was held in the previous year or the date of the annual meeting has been changed by more than thirty (30) days from the date contemplated at the time of the previous year’s proxy statement, notice by the stockholder to be timely must be so received a reasonable time before the solicitation is made.

Except as may be required by rules promulgated by Nasdaq or the SEC, there are currently no specific, minimum qualifications that must be met by each candidate for the Board of Directors, nor are there specific qualities or skills that are necessary for one or more of the members of the Board of Directors to possess.

In identifying and evaluating the individuals that it selects, or recommends that the Board of Directors select, as director nominees, the Nominating and Governance Committee utilizes the following process:

The members of the Nominating and Governance Committee are all “independent directors” as defined in Rule 4200(a)(15) of the Marketplace Rules of the Nasdaq Stock Market.

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our officers and directors, and persons who own more than ten percent of a registered class of our equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission and the National Association of Securities Dealers, Inc. Executive officers, directors and greater than ten percent stockholders are required by Securities and Exchange Commission regulations to furnish us with copies of all Section 16(a) forms they file. Based solely on our review of the copies of such forms that we have received, or written representations from reporting persons, we believe that during the fiscal year ending September 30, 2004 all executive officers, directors and greater than ten percent stockholders complied with all applicable filing requirements, except as follows: a Form 4 for Scott Becker, Chief Technical Officer and Director of the Company, was filed on

November 13, 2003 reporting a transaction that occurred on November 7, 2003; a Form 4 for Mr. Becker was filed on December 4, 2003 reporting a transaction that occurred on November 14, 2003; a Form 4 for Mr. Becker was filed on February 9, 2004 reporting a transaction that occurred on January 30, 2004; and a Form 4 for Mr. Becker was filed on October 17, 2004 reporting a transaction that occurred on October 9, 2004.

We have adopted a code of ethics that applies to our principal executive officer and all members of our finance department, including the principal financial officer and principal accounting officer. This code of ethics, which applies to employees generally, is posted on our Internet website. The Internet address for our website is http://www.artisan.com, and the code of ethics may be found as follows:

1. From our main Web page, from the “Company” pull-down menu click on “About Artisan.”

2. Next, click on “Code of Business Conduct and Ethics” link from the selections on the right side of the screen.

We intend to satisfy the disclosure requirement under Item 10 of Form 8-K regarding an amendment to, or waiver from, a provision of this code of ethics by posting such information on our website, at the address and location specified above.

The following table sets forth total compensation for the fiscal years ended September 30, 2004, 2003 and 2002 for the Chief Executive Officer and each of the next four most highly compensated executive officers (the “Named Executive Officers”):

The following table provides information concerning each grant of options to purchase our common stock made during the fiscal year ended September 30, 2004 to the Named Executive Officers.

The following table shows stock options exercised by Named Executive Officers during fiscal 2004, including the aggregate value of gains on the date of exercise. In addition, this table includes the number of shares covered by both exercisable and non-exercisable stock options as of fiscal year-end September 30, 2004. Also reported are the values for “in-the-money” options, which represent the positive spread between the exercise price of any such existing stock options and the year-end price of our common stock.

At a meeting of the Board of Directors on April 16, 2003, a compensation plan for non-employee directors of the Company was adopted that includes a cash retainer of $15,000 per year payable in quarterly installments at the end of each quarter, compensation of $1,000 for each board meeting attended, compensation of $1,000 for each committee meeting attended by a committee member, and reimbursement of travel expenses. The compensation plan further provides that the Chairman of the Board of Directors will receive an additional retainer of $30,000 per year, the Chairman of the Audit Committee will receive an additional retainer of $20,000 per year, the Chairman of the Compensation Committee will receive an additional retainer of $10,000 per year, and the Chairman of the Nominating and Governance Committee will receive an additional retainer of $10,000, with all these amounts being paid in quarterly installments at the end of each quarter. The compensation plan became effective as of October 1, 2002.

In fiscal 2004, Messrs. Lanza, Malmed Latta, Heinrichs and Kurosaki each were paid a retainer of $11,250 for their services as board members. In addition, Mr. Lanza was paid a retainer of $22,500 for his role as Chairman of the Board and a retainer of $7,500 for his role as Chair of the Nominating and Governance Committee. Mr. Heinrichs was paid an additional retainer of $15,000 for his role as Chair of the Audit Committee. Mr. Latta was paid an additional retainer of $7,500 for his services as Chair of the Compensation Committee. Mr. Lanza was also paid $23,000 for attendance at twenty-three board and committee meetings; Messrs. Malmed and Latta each were paid $20,000 for attendance at twenty board and committee meetings; Mr. Kurosaki was paid $5,000 for attendance at five board and committee meetings; and Mr. Heinrichs was paid $28,000 for attendance at twenty-eight board and committee meetings. Mr. Kurosaki was paid $3,591 for travel expenses to attend the board and committee meetings.

Messrs. Lanza and Malmed were party to consulting agreements with the Company during fiscal 2002. The agreements were terminated effective August 1, 2002 in response to the director independence requirements of the Sarbanes-Oxley Act of 2002. Mr. Lanza received no payments for consulting services during fiscal 2002. Mr. Malmed received $7,500 as payment for consulting services during fiscal 2002.

Our Director Plan provides for the non-discretionary automatic grant of options to each non-employee director of the Company (an “Outside Director”). Mr. Lanza was automatically granted an option to purchase 25,000 shares upon the effective date of our initial public offering which vests at the rate of 25% on the first anniversary of the date of grant and at the rate of 2.083% of the shares per month thereafter. Each new Outside Director who joins the Board of Directors is automatically granted an option to purchase 25,000 shares upon the date on which such person first becomes a director which vests at a rate of 25% on the first anniversary of the date of grant and at a rate of 2.083% of the shares per month thereafter. Mr. Malmed was granted an option to purchase 25,000 shares upon his election to the Board in April 2000 at an exercise price of $13.375 per share. Mr. Kurosaki was granted an option to purchase 25,000 shares upon his election to the Board in March 2000 at an exercise price of $10.00 per share. Mr. Heinrichs was granted an option to purchase 25,000 shares upon his election to the Board on January 22, 2003 at an exercise price of $15.42 per share. Mr. Latta was granted an option to purchase 25,000 shares upon his election to the Board on March 6, 2003, at an exercise price of $15.66 per share.

Subsequently, each Outside Director is granted an additional option to purchase 15,000 shares of common stock at the first meeting of the Board of Directors following the Annual Meeting of Stockholders if, on such date, he or she has served as a director for at least six months. Also at the first meeting of the Board of Directors following the Annual Meeting of Stockholders, the Chairman of the Board is granted an option to purchase 30,000 shares of common stock, the Chairman of the Audit Committee is granted an option to purchase 20,000 shares of common stock, the Chairman of the Compensation Committee is granted an option to purchase 10,000 shares of common stock and the Chairman of the Nominating and Governance Committee is granted an option to purchase 10,000 shares of common stock. Such options vest at a rate of 2.083% of the shares per month following the date of grant. The exercise price of options granted to Outside Directors must be 100% of the fair market value of our common stock on the date of grant. On April 9, 2003, Messrs. Heinrichs, Kurosaki, Lanza, Latta and Malmed were each granted an option to purchase 20,000, 15,000, 55,000, 10,000 and 15,000 shares, respectively, of our common stock at an exercise price of $17.03 per share. On March 11, 2004, Messrs. Heinrichs, Kurosaki, Lanza, Latta and Malmed were each granted an option to purchase 15,052, 6,021, 22,879, 10,236 and 6,021 shares, respectively, of our common stock at an exercise price of $18.80 per share. On April 9, 2004, Messrs. Heinrichs, Kurosaki, Lanza, Latta and Malmed were each granted an option to purchase 19,948, 8,979, 32,121, 14,764 and 8,979 shares, respectively, of our common stock at an exercise price of $22.46 per share. The April 9, 2004 option grants were made to supplement the grants made on March 11, 2004 to give effect to with the grant guidelines described above and in the 1997 Director Option Plan and such grants were made from the 2003 Stock Plan because the 1997 Director Option Plan, from which the March 11, 2004 grants were made, was exhausted.

Mr. Templeton, Ms. Leo, Mr. Dickinson, Mr. Becker, Mr. Gandhi, Mr. Dichter, Mr. Carney, Mr. Boule, Mr. Carpenter and Mr. Hopkins may be entitled to severance and other benefits in connection with the merger pursuant to their severance agreements with us.

The severance agreements with Mr. Templeton, Ms. Leo, Mr. Dickinson and Mr. Becker provide that the executives will be entitled to certain benefits if within 12 months following a change of control of us, which would include the merger, the executive is terminated without cause or resigns for good reason, including the following benefits:

The severance agreements with Mr. Gandhi, Mr. Dichter, Mr. Carney, Mr. Boule, Mr. Carpenter and Mr. Hopkins provide that the executives will be entitled to certain benefits if within 12 months following a change of control of us, which would include the merger, the executive is terminated without cause or resigns for good reason, including the following benefits:

Mr. Carpenter’s severance agreement also provides that in the event he is terminated without cause, whether before or after a change of control, he will be reimbursed for the expenses he incurs in relocating from San Diego, California to Austin, Texas.

For purposes of the severance agreements, good reason is defined as any of the following without the executive’s consent:

Ms. Leo, Mr. Dickinson, Mr. Hopkins and Mr. Carney have additional severance agreements with us. To the extent they are entitled to severance under these additional agreements, those benefits will be offset against any benefits they would be entitled to receive pursuant to the severance agreements described above.

Ms. Leo’s additional severance agreement with us provides that if within six months following a change of control, which would include the merger, Ms. Leo is terminated without cause or she is subject to constructive termination, Ms. Leo will be entitled to receive a severance payment equal to six months of her base salary then in effect plus any targeted bonus amount prorated for the six month period, and 220,000 of the Artisan stock options held by Ms. Leo would be accelerated and become fully vested. For purposes of the agreement with Ms. Leo, constructive termination is defined as a material reduction in salary or benefits, a material change in responsibilities from those of chief financial officer of us, a requirement to relocate Ms. Leo such that her one way commute distance would increase by more than 25 miles, or subjection of Ms. Leo to unreasonable working conditions.

Mr. Dickinson’s additional severance agreement with us provides that if within six months following a change of control, which would include the merger, Mr. Dickinson is terminated without cause or he is subject to constructive termination, Mr. Dickinson will be entitled to receive a severance payment equal to 90 days of his base salary then in effect for each full year of service to us up to a maximum of six months. In addition, Mr. Dickinson’s benefits would continue for the same period or until Mr. Dickinson is eligible for alternative health care benefits, and 120,000 of the Artisan stock options held by Mr. Dickinson would be accelerated and become fully vested. For purposes of the agreement with Mr. Dickinson, constructive termination is defined as a material reduction in salary or benefits, a material change in responsibilities from those of chief operating officer, strategy and business development, a requirement to relocate Mr. Dickinson such that his current one way commute distance would increase by more than 30 miles, or subjection of Mr. Dickinson to unreasonable working conditions.

Mr. Carney’s additional severance agreement with us (contained in his initial offer of employment) provides that if within six months following a change of control, which would include the merger, he is subject to “constructive termination,” 80,000 of the Artisan stock options held by Mr. Carney will accelerate and become fully vested. For purposes of the agreement with Mr. Carney, “constructive termination” is defined as a material reduction in salary or benefits, a material change in responsibilities from those of executive vice president, marketing, a requirement to relocate Mr. Carney such that his one way commute distance would increase by more than 30 miles, or subjection of Mr. Carney to unreasonable working conditions.

All options granted to our outside directors, including Messrs. Lanza, Heinrichs, Kurosaki, Malmed and Latta will, effective immediately prior to the closing of our merger with ARM, be accelerated and will vest in full.

Mr. Templeton and Mr. Dickinson are expected to enter into employment agreements with ARM that will become effective upon closing of the merger.

During fiscal 2004, none of our Compensation Committee members were an officer or employee of Artisan. During fiscal 2004, none of our Compensation Committee members or our executive officers served as a member of the board of directors or compensation committee of any entity that has an executive officer serving as a member of our Board of Directors or Compensation Committee.

Set forth below is a line graph comparing the annual percentage change in the cumulative return to the stockholders of our common stock with the cumulative return of the Nasdaq Electronic Components Stock Index and the Nasdaq Stock Market (U.S.) Index for the period commencing September 30, 1999 and ending on September 30, 2004. Note that historic stock price performance is not necessarily indicative of future stock price performance.

The information contained above under the caption “Performance Graph” shall not be deemed to be “soliciting material” or to be “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933, as amended or Securities Exchange Act of 1934, as amended, except to the extent that the Company specifically incorporates it by reference into such filing.

The following table sets forth certain information regarding the beneficial ownership of common stock of Artisan as of October 15, 2004 as to each person who is known by Artisan to own beneficially more than 5% of its outstanding shares of common stock, each director of Artisan, each of Artisan’s executive officers named in the summary compensation table above, each director of the Company and all directors and executive officers as a group. Beneficial ownership is determined in accordance with the rules of the SEC, and includes voting and investment power with respect to shares. Shares of common stock subject to options currently exercisable or exercisable within 60 days after October 15, 2004 are deemed outstanding for computing the percentage ownership of the person holding such options, but are not deemed outstanding for computing the percentage of any person. Except as indicated in the footnotes to the table below and pursuant to applicable community property laws, to Artisan’s knowledge, the persons named in the table have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them. Percentage of ownership is based on 23,910,284 shares of common stock outstanding as of October 15, 2004. Unless otherwise indicated in the table below, the address of each of the individuals named below is: c/o Artisan Components, Inc., 141 Caspian Court, Sunnyvale, CA 94089.

On August 22, 2004, Artisan entered into a merger agreement with ARM Holdings plc and Salt Acquisition Corporation, a wholly owned subsidiary of ARM. Pursuant to this merger agreement, Artisan is expected to be merged with and into Salt Acquisition Corporation. After completion of the merger, ARM will acquire all outstanding shares of Artisan common stock and ARM will assume outstanding options to purchase Artisan common stock. Artisan stockholders will receive ARM ADSs, ARM ordinary shares or cash, or a combination thereof in exchange for their Artisan common stock. Assuming the payment of the maximum amount of cash and assuming that no Artisan stock options are exercised prior to the completion of the merger, Artisan stockholders will be entitled to receive shares of ARM ADSs or ARM ordinary shares representing approximately 24% of the total number of the outstanding shares of ARM following the merger, based on ARM ordinary shares and shares of Artisan common stock outstanding on September 1, 2004.

Mr. Kurosaki is a founder and a principal shareholder of Aisys Corporation and Aisys USA Inc. (together “Aisys”) and served as a director and managing general partner of Aisys until June 2002. Aisys provides services to the Company in relation to its business activities in Asia consisting of sales representation, advisory and employee administrative services. During fiscal 2004, Artisan paid $42,000 in advisory fees to Aisys and no payments were made for sales representation or office services fees. During fiscal 2003, Artisan paid $6,000 for sales representation, $42,000 in advisory fees and $11,500 in office services fees to Aisys. During fiscal 2002, Artisan paid $24,000 for sales representation, $42,000 in advisory fees and $28,500 in office services fees to Aisys. In addition, Artisan paid Aisys commissions of $98,028, $242,156 and $116,141 on sales generated during fiscal 2004, 2003 and 2002, respectively. The Audit Committee of the Board of Directors, with Mr. Kurosaki abstaining, has approved these transactions between the Company and Aisys.

In August 2001, the Company signed a lease agreement for its new headquarters located at 141 Caspian Court, Sunnyvale, California. The Company used the services of Bristol Commercial Brokerage (“Bristol”) to identify suitable locations and facilitate the final lease agreement. Bristol is owned and operated by Mr. Rod Templeton, father of our president and CEO, Mark R. Templeton. In consideration for a reduced base rental lease rate, the Company agreed to pay the brokerage fees and/or commissions due in connection with the lease agreement. As a result, Bristol received $284,000 for its services and as a commission on the total lease amount. The Company made payments to Bristol of $142,000 in January 2002 and $142,000 in September 2001. For part of fiscal 2003, Bristol also acted as our agent in attempting to sublease the premises the Company previously occupied at 1195 Bordeaux Drive, Sunnyvale, California. However, the Company did not lease the property and, as a result, Bristol did not receive compensation from the Company for its services. These transactions between the Company and Bristol have been approved by the Board of Directors of the Company, with Mr. Templeton abstaining.

Wilson Sonsini Goodrich & Rosati, Professional Corporation (“WSGR”), is a law firm that has provided legal services to the Company and its predecessor entities since 1997. Mr. Latta, a director of the Company, is a member of WSGR. It is anticipated that WSGR will continue to provide legal services to the Company in the current year.

Mark Templeton, President, CEO and a director of the Company, provided limited advisory services to IT-Farm Corporation between January 2002 and January 2003. Such advisory services did not involve any compensation matters. Mr. Kurosaki, a director of the Company, serves as President and CEO of IT-Farm. Mr. Templeton did not receive any compensation for such services.

The Company believes that the transactions set forth above were made on terms no less favorable to the Company than could have been obtained from an unaffiliated third party.

Each of the Company’s executive officers has severance arrangements with us and each of the Company’s non-employee directors has arrangements for option acceleration. A detailed description of these arrangements are contained in Part III, Item 11 of this Report under the caption “Termination and Change of Control Benefits.”

Aggregate fees for professional services rendered for the Company by PricewaterhouseCoopers LLP and affiliated entities (collectively, “PricewaterhouseCoopers”) for the years ended September 30, 2004 and 2003 were:

The audit fees for the year ended September 30, 2004 primarily comprised of $260,000 ($42,000 was billed through September 30, 2004) for professional services rendered for the audits of the consolidated financial statements of the Company for fiscal year 2004, $91,000 for assistance with review of documents filed with the SEC and $24,000 for statutory audits. An aggregate amount of $42,000 was billed through September 30, 2004. The audit fees for the year ended September 30, 2003 primarily comprised of $210,000 ($110,000 was billed through September 30, 2003) for professional services rendered for the audits of the consolidated financial statements of the Company for fiscal year 2003, $283,000 related to the Company’s secondary public offering, $58,000 related to an acquisition audit and $24,000 for statutory audits.

The audit related fees for the year ended September 30, 2004 relate to due diligence fees in connection with proposed business combination and advisory services related to Section 404 Sarbanes-Oxley project. There were no audit related fees for the year ended September 30, 2003.

Tax fees for the year ended September 30, 2004 primarily comprised of $372,000 for tax compliance work and $66,000 related to proposed business combination. Tax fees for the year ended September 30, 2003 primarily related to tax compliance.

There were no other fees other than those described above for the years ended September 30, 2004 and 2003.

The Audit Committee considered whether the non-audit services rendered by PricewaterhouseCoopers LLP were compatible with maintaining PricewaterhouseCoopers LLP independence as accountants of our financial statements.

Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditors

The Audit Committee’s policy is to pre-approve all audit and permissible non-audit services provided by the independent auditors subject to limited discretionary authority granted to our chief financial officer. These services may include audit services, audit-related services, tax services and other services. Pre-approval is generally detailed as to the particular service or category of services and is generally subject to a specific budget. The independent auditors and management are required to periodically report to the Audit Committee regarding the extent of services provided by the independent auditors in accordance with this pre-approval, and the fees for the services performed to date. The Audit Committee may also pre-approve particular services on a case-by-case basis.

See the accompanying Index to Consolidated Financial Statements which appears on page F-1 of this report. The Report of Independent Registered Public Accounting Firm, the Consolidated Financial Statements and the Notes to the Consolidated Financial Statements listed in the Index to Consolidated Financial Statements, which appear beginning on page F-2 of this report are incorporated by reference in Item 8 of this report:

See the accompanying Index to Consolidated Financial Statements which appears on page F-1 of this report. Financial Statement Schedules not listed in the Index to Consolidated Financial Statements have been omitted because they are not applicable or are not required or the information required to be set forth therein is included in the Consolidated Financial Statements or notes thereto.

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


ARTISAN COMPONENTS, INC.

By:		/s/ MARK R. TEMPLETON
		Mark R. Templeton President, Chief Executive Officer and Director

By:		/s/ JOY E. LEO
		Joy E. Leo Vice President, Finance and Administration, Chief Financial Officer, and Secretary

Know All Men By These Presents, that each person whose signature appears below constitutes and appoints Mark R. Templeton and Joy E. Leo, jointly and severally, his or her attorney-in-fact, each with the power of substitution, for him in any and all capacities, to sign any amendments to this Report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his or her substitute or substitutes, may do or cause to be done by virtue hereof.

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

In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of Artisan Components, Inc. and its subsidiaries at September 30, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2004 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

The accompanying notes are an integral part of these Consolidated Financial Statements.

Artisan Components, Inc. (“Artisan” or the “Company”) is a leading provider of physical intellectual property components for the design and manufacture of integrated circuits including those known as system-on-a-chip integrated circuits. The Company’s products include embedded memory, standard cell, communication, input/output components and analog and mixed-signal products which are designed to achieve the best combination of performance, density, power and yield for a given manufacturing process. The Company’s intellectual property components are pre-tested by producing them in silicon to ensure that they perform to specification. This enables designers to reduce the risk of design failure and gain valuable time to market. The Company licenses its products to customers for the design and manufacture of integrated circuits used in complex, high volume applications such as portable computing devices, communication systems, cellular phones, consumer multimedia products, automotive electronics, personal computers and workstations.

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries after elimination of all significant inter-company balances and transactions. The Company’s fiscal year end is September 30.

The preparation of financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates including those related to revenue recognition, allowance for doubtful accounts, impairment of long-lived assets, goodwill and purchased intangible assets, contingencies, restructuring costs and other special charges and taxes. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates.

Certain reclassifications have been made to prior year balances in order to conform to the current year presentation.

The Company considers all highly liquid investments with original maturities or remaining maturities at the date of acquisition of three months or less to be cash equivalents. Cash and cash equivalents are maintained with four major financial institutions. Deposits held with banks may exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand.

The carrying amounts of certain of the Company’s financial instruments including cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate fair value due to their short-term maturities.

The Company’s investments are primarily comprised of U.S. government notes and bonds; corporate notes and bonds; and commercial paper. Investments with original maturities of greater than three months and less than one year are considered to be short-term. Investments are custodied with major financial institutions. Realized gains and losses are recorded using the specific identification method. At September 30, 2004 and 2003, all of the Company’s investments were classified as available-for-sale and were recorded on the consolidated balance sheets at fair value. Unrealized gains and losses on these investments are recorded in comprehensive income. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity, both of which are included in interest income. The Company recognizes an impairment charge when the decline in fair value of its investments below the cost basis is judged to be other-than-temporary.

In accordance with Statement of Financial Accounting Standards No. 86, “Accounting for Costs of Computer Software to be Sold, Leased or Otherwise Marketed,” costs incurred in the research and development of new software products and enhancements to existing software products are expensed as incurred until technological feasibility has been established. The Company believes its current process for developing software is essentially completed concurrently with the establishment of technological feasibility which is evidenced by a working model; accordingly, software costs incurred after the establishment of technological feasibility have not been significant and, therefore, no costs have been capitalized to date.

Costs related to software acquired, developed or modified solely to meet the Company’s internal requirements and for which there is no substantive plans to market the software are capitalized in accordance with the provisions of SOP 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.” Costs incurred after preliminary planning stage of the project and after management has authorized and committed funds to the project are capitalized. The Company had $293,000 and $194,000 of capitalized software costs included in property and equipment at September 30, 2004 and 2003, respectively.

Property and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets, generally three to five years. Depreciation and amortization of leasehold improvements are computed using the shorter of the estimated useful lives or the terms of their respective leases.

Statement of Financial Accounting Standards No. 142 (“SFAS 142”) requires goodwill to be tested on an annual basis and between annual tests in certain circumstances, and written down when impaired. Furthermore, SFAS 142 requires purchased intangible assets other than goodwill to be amortized over their expected useful lives unless these lives are determined to be indefinite (See Note 3). Purchased intangible assets are carried at cost less accumulated amortization. Amortization is computed over the estimated useful lives of the respective assets, generally six months to three years.

The adjustment to goodwill of $3.5 million was due to a reversal of the valuation allowance. For additional information regarding this valuation allowance reversal, see Note 12 to the Consolidated Financial Statements.

Purchased intangible assets, except for goodwill and other intangible assets with useful lives deemed indefinite, are subject to amortization over their estimated useful lives. Amortization expense of purchased intangible assets was $4.0 million, $4.4 million and $2.0 million for fiscal years ended September 30, 2004, 2003 and 2002, respectively.

Expected future estimated annual amortization expense as of September 30, 2004 of purchased intangible assets is as follows (in thousands):

As of September 30, 2004, the Company believes there are no impairment losses on its goodwill and purchased intangible assets. However, no assurances can be given that future evaluations of goodwill and purchased intangible assets will not result in charges as a result of future impairment.

The Company evaluates the recoverability of long-lived assets with finite lives in accordance with Statement of Financial Accounting Standards No. 144 (“SFAS 144”), “Accounting for the Impairment of Long-Lived Assets.” Finite-lived intangible assets are amortized on a straight-line basis over their estimated useful lives, generally three to five years. SFAS 144 requires recognition of impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment charge is recognized in the event the net book value of such assets exceeds the future undiscounted cash flows attributable to such assets.

The Company evaluates goodwill and intangible assets deemed to have indefinite lives in accordance with SFAS 142. The Company assesses these assets for impairment on an annual basis. On adoption of SFAS 142, the Company determined its operations represent a single reporting unit. To assess goodwill for impairment, the Company performs the following procedures:

Step 1: The Company compares its fair value to the carrying value, including goodwill. In determining fair value, the Company considers two components 1) the Company’s market capitalization during the reporting

period and 2) the expected present value of future cash flows and future operating trends. If the Company’s fair value exceeds the carrying value, no impairment charge is necessary. Where the carrying value, including goodwill, exceeds the unit’s fair value, the Company moves on to step two as described below.

Step 2: The Company performs an allocation of the fair value of its identifiable tangible and non-goodwill intangible assets and liabilities. From this allocation, the Company derives an implied fair value for its goodwill. The Company then compares the implied fair value of goodwill with the carrying amount of its goodwill. If the carrying amount of the goodwill is greater than the implied fair value of its goodwill, an impairment loss is recognized for the excess of such amount.

As required by the provisions of SFAS 142, the Company evaluates goodwill for impairment on an annual basis or more frequently whenever events or circumstances may indicate an impairment has occurred. A significant impairment could have a material adverse effect on the Company’s financial position and results of operations.

Comprehensive income generally represents all changes in stockholders’ equity except those resulting from investments of contributions by stockholders. Total comprehensive income is presented in the accompanying Consolidated Statement of Stockholders’ Equity. Total accumulated other comprehensive income is displayed as a separate component of stockholder’s equity in the accompanying Consolidated Balance Sheets. The unrealized gains and losses on marketable securities and foreign currency translation adjustments are comprehensive income items applicable to the Company.

The Company recognizes and reports revenue in two separate categories: license revenue and net royalty revenue. License revenue is comprised of license, maintenance and support fees. License fees are derived from the purchase of a license for the Company’s products. Maintenance fees are derived from maintenance contracts with the Company’s integrated circuit manufacturing customers which are generally purchased at the same time as a license for the product. Support fees are derived from arrangements with integrated circuit designers to support the use of the Company’s intellectual property components in their designs. Royalty revenue is derived from fees based on the selling prices of integrated circuits or wafers containing the Company’s intellectual property components.

License revenue. For all licenses, the Company uses both a binding purchase order and a signed license agreement as evidence of an arrangement. The Company assesses cash collectibility based on a number of factors, including past collection history with the customer and the credit worthiness of the customer. In cases where the Company believes a customer’s credit worthiness is uncertain, the Company requires prepayment or a letter of credit as assurance of payment. If the Company determines that collection of a fee is not probable, the Company defers the revenue and recognizes it at the time collection becomes probable.

For licensed products which do not require significant customization of intellectual property components, the Company generally recognizes license revenue when a signed contract or other persuasive evidence of an arrangement exists, the software has been shipped or electronically delivered, the license fee is fixed or determinable and collection of the resulting receivable is probable.

For licensed products requiring significant customization of the Company’s intellectual property components, the Company generally recognizes license revenue using the percentage-of-completion method of

accounting over the period that services are performed. For all license and service agreements accounted for under the percentage-of-completion method, the Company determines progress to completion based on actual direct labor hours incurred to date as a percentage of the estimated total direct labor hours required to complete the project. The Company periodically evaluates the actual status of each project to ensure that the estimates to complete each contract remain accurate. A provision for estimated losses on contracts is made in the period in which the loss becomes probable and can be reasonably estimated. To date, these losses have not been significant. Costs incurred in advance of billings are recorded as costs in excess of related billings on uncompleted contracts. If the amount of revenue recognized exceeds the amounts received from customers, the excess amount is recorded as unbilled accounts receivable. If the amount billed exceeds the amount of revenue recognized, the excess amount is recorded as deferred revenue. Revenue recognized in any period is dependent on the Company’s progress toward completion of projects in progress. Significant management judgment and discretion are used to estimate total direct labor hours. Any changes in or deviation from these estimates could have a material effect on the amount of revenue the Company recognizes in any period.

For arrangements with multiple elements, such as product licenses and maintenance services, the Company allocates revenue to each element of a transaction based upon its fair value as determined in reliance on vendor specific objective evidence. Vendor specific objective evidence of fair value for all elements of an arrangement is based upon the normal pricing and discounting practices for those licensed products and services when sold separately and for maintenance is additionally measured by the renewal rate. If the Company cannot objectively determine the fair value of any undelivered element included in license arrangements, the Company defers revenue until all elements are delivered, all services have been performed or fair value can objectively be determined. When the fair value of a license element has not been established, the Company uses the residual method to record license revenue if the fair value of all undelivered elements is determinable. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the fee is allocated to the delivered elements and is recognized as revenue.

The Company derives maintenance fees from maintenance contracts, which are generally purchased by integrated circuit manufacturers at the same time as a license for the Company’s intellectual property components. Maintenance includes telephone and email support and the right to receive unspecified upgrades on a when-and-if-available basis. Maintenance may generally be renewed on an annual basis. The Company recognizes revenue for maintenance, based on vendor specific objective evidence of fair value, ratably over the term of the maintenance period. The Company generally determines vendor specific objective evidence of maintenance based on the stated fees for maintenance renewal set forth in the original license and first maintenance agreement.

The Company derives support fees from arrangements with integrated circuit designers to support the use of the Company’s intellectual property components in their designs. Support includes telephone and email support and the right to receive unspecified upgrades on a when-and-if-available basis. The Company recognizes support fees ratably over the support period. Support arrangements generally have a term of 12 months and may be renewed for additional 12 month periods.

The Company recognizes royalty revenue based on royalty reports received from integrated circuit manufacturers, generally on a one-quarter lag basis. In accordance with contract terms, the Company generally credits a portion of each royalty payment back to the integrated circuit manufacturer’s account to be applied against future license fees, if any, payable by the manufacturer. The Company reports the remaining portion of the royalty as net royalty revenue. The amount of credits that can be earned by an integrated circuit manufacturer is generally limited to the cumulative amount of orders placed by that integrated circuit manufacturer for a given process technology. An integrated circuit manufacturer has a limited time to use the credits before they expire, generally 18 months from the time credits are earned. As a result, the Company defers revenue associated with

the credit program until the integrated circuit manufacturer licenses additional products or the credit expires, whichever is earlier. If the integrated circuit manufacturer does not use the credits within the stated period, the Company records the amount of the expired credits as net royalty revenue as the Company no longer has an obligation to provide any future products for the expired credits. Historically, integrated circuit manufacturing customers have utilized substantially all credits to purchase additional licensed products prior to expiration of the credits. When the integrated circuit manufacturing customers use credits, the Company recognizes the credits as license revenue when the Company’s revenue recognition criteria have been met.

When the company exercises its royalty audit rights pursuant to contracts with its integrated circuits manufacturers, the outcome of such royalty audits could result in an increase, as a result of a licensee’s underpayment, or a decrease, as a result of licensee’s overpayment, to previously reported royalty revenues. Such adjustments are recorded in the period they are determined based on the results of such royalty audits.

The Company expenses the cost of product development as incurred. Product development expenses principally consist of payroll and related costs and depreciation and amortization of equipment and software used in product development projects.

Expenses related to advertising and promotional activities are charged to sales and marketing expense as incurred. Advertising expense was $74,000 in fiscal 2004, $113,000 in fiscal 2003 and $28,000 in fiscal 2002.

Assets and liabilities of non-U.S. subsidiaries that operate in a local currency environment are translated to U.S. dollars at exchange rates in effect at the balance sheet date with resulting translation adjustments directly recorded as a separate component of accumulated other comprehensive income (loss), if material. Income and expense accounts are translated at average exchange rates during the year. Where the U.S. dollar is the functional currency, translation adjustments are recorded in interest and other income. Translation adjustments have been insignificant for all periods presented.

Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. A valuation allowance is established when necessary to reduce deferred tax assets to the amounts expected to be realized.

The Company accounts for stock-based employee compensation arrangements in accordance with the provisions of Accounting Principles Board Opinion No. 25 (“APB 25”), “Accounting for Stock Issued to Employees” and Financial Accounting Standards Board Interpretation No. 44, “Accounting for Certain Transactions Involving Stock Compensation an interpretation of APB Opinion No. 25,” and complies with the disclosure provisions of Statement of Financial Accounting Standards No. 123 (“SFAS 123”), “Accounting for Stock-Based Compensation.” Under APB 25, compensation expense is based on the difference, if any, on the date of the grant, between the fair value of the Company’s stock and the exercise price of the option.

In connection with the acquisition of NurLogic Design, Inc. (“NurLogic”) on February 19, 2003, the Company recorded a total of $696,000 in deferred compensation, representing the difference between the deemed fair value of its common stock at the date of option grant and the exercise price of such options. The stock-based compensation expenses consisted as follows (in thousands):

The Company accounts for stock issued to non-employees in accordance with the provisions of SFAS 123 and Emerging Issues Task Force No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.” The Company uses the Black-Scholes option pricing model to value options granted to non-employees.

In December 2002, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 148 (“SFAS 148”), “Accounting for Stock-based Compensation Transition and Disclosure, an Amendment of FASB 123.” Had compensation expense for the Company’s stock option plans and stock purchase plan been determined based on the fair value at the grant dates for awards under such plans consistent with SFAS 123, the Company’s net income (loss) would have been affected as follows (in thousands, except per share data):

The SFAS 123 adjusted impact of options on the net income (loss) for the years ended September 30, 2004, 2003 and 2002 is not representative of the effects on net income (loss) for future years.

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model, which was developed for use in estimating the value of traded options that have no vesting restrictions and are fully transferable. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the estimate, in management’s opinion, the existing valuation models do not necessarily provide a reliable measure of the fair value of the Company’s employee stock options. For additional information regarding this pro forma information, see Note 10 to the Consolidated Financial Statements.

Basic and diluted net income per share are computed in accordance with SFAS No. 128, “Earnings per share.” Basic net income per share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted net income per share is computed using the treasury stock method giving effect to all potentially dilutive common shares that were outstanding during the period. Potentially dilutive common shares consist of the exercise of stock options for all periods. Such potentially dilutive common shares are not included during periods in which the Company experiences a net loss, as the impact would be anti-dilutive.

In March 2004, the Financial Accounting Standards Board (FASB) issued an exposure draft entitled “Share-Based Payment” to amend Financial Accounting Standard (FAS) 123, “Accounting for Stock-Based Compensation” and FAS 95, “Statement of Cash Flows.” The proposed standard’s effective date will apply to awards that are granted, modified, or settled in cash in interim or annual periods beginning after June 15, 2005. This proposed standard would eliminate the ability to account for share-based compensation using the intrinsic value-based method under APB Opinion No. 25, “Accounting for Stock Issued to Employees.” This exposure draft would require the Company to calculate equity-based compensation expense for stock options and employee stock purchase plan rights granted to employees based on the fair value of the equity instrument at the time of grant. Currently, the Company discloses the pro forma net income (loss) and related pro forma income (loss) per share information in accordance with FAS 123 and FAS 148, “Accounting for Stock-Based Compensation Costs-Transition and Disclosure.” The Company will continue to evaluate the impact that the exposure draft will have on its financial position and results of operations.

In March 2004, the Emerging Issues Task Force (“EITF”) reached a consensus on recognition and measurement guidance previously discussed under EITF Issue No. 03-01, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (“EITF 03-01”). The consensus clarified the meaning of other-than-temporary impairment and its application to debt and equity investments accounted for under SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, and other investments accounted for under the cost method. The recognition and measurement guidance for which the consensus was reached in March 2004 is to be applied to other-than-temporary impairment evaluations in reporting periods beginning after June 15, 2004. In September 2004, the FASB issued a final FASB Staff Position that delays the effective date for the measurement and recognition guidance for all investments within the scope of EITF Issue No. 03-01. The consensus reached in March 2004 also provided for certain disclosure requirements associated with cost method investments that were effective for fiscal years ending after June 15, 2004. The Company will evaluate the effect of adopting the recognition and measurement guidance when the final consensus is reached.

common stock that contractually entitle the holder to participate in dividends and earnings of the company when, and if, it declares dividends on its common stock. The issue also provides further guidance in applying the two-class method of calculating earnings per share, clarifying what constitutes a participating security and how to apply the two-class method of computing earnings per share once it is determined that a security is participating, including how to allocate undistributed earnings to such a security. EITF 03-06 became effective during the quarter ended June 30, 2004, the adoption of which did not have an impact on the calculation of earnings per share of the Company.

In July 2004, the EITF issued a draft abstract for EITF Issue No. 04-08, “The Effect of Contingently Convertible Debt on Diluted Earnings per Share” (“EITF 04-08”). EITF 04-08 reflects the Task Force’s tentative conclusion that contingently convertible debt should be included in diluted earnings per share computations regardless of whether the market price trigger has been met. If adopted, the consensus reached by the Task Force in this Issue will be effective for reporting periods ending after December 15, 2004. Prior period earnings per share amounts presented for comparative purposes would be required to be restated to conform to this consensus and the Company would be required to include the shares issuable upon the conversion of debt in the diluted earnings per share computation for all periods during which such debt is outstanding. The Company will evaluate the effect of adopting the recognition and measurement guidance when the final consensus is reached.

On February 19, 2003, the Company acquired NurLogic, a private provider of integrated circuit intellectual property, whose technology added complementary analog, mixed-signal and communications components to the Company’s product portfolio. The Company acquired NurLogic for consideration consisting of approximately $5.0 million in cash, 745,000 shares of common stock, valued at approximately $12.9 million, and assumed options to acquire 819,000 shares of common stock with a weighted average exercise price per share of $11.89 and a fair value of approximately $11.3 million. The Company also incurred an estimated $1.6 million in transaction fees, including legal, valuation and accounting fees. The purchase price of approximately $30.8 million was allocated to the tangible and identifiable intangible assets acquired and liabilities assumed on the basis of their estimated fair values on the acquisition date.

The shares issued in the acquisition were valued in accordance with Emerging Issue Task Force Issue No. 99-12 (“EITF 99-12”), “Determination of the Measurement Date for the Market Price of Acquirer Securities Issued in a Purchase Business Combination.” In accordance with EITF 99-12, the Company established the first date on which the number of the Company shares and the amount of other consideration became fixed as of February 19, 2003. Accordingly, the Company valued the transaction using the average closing price of the Company’s common stock two days before and after February 19, 2003, or $17.32 per share. The assumed options to acquire common stock were valued using the Black-Scholes valuation model with a volatility factor of 97%, an average risk free interest rate of 1.91%, and estimated lives of two to six years.

The NurLogic acquisition was accounted for under SFAS 141 and SFAS 142. The results of operations of NurLogic were included in the Company’s Consolidated Statement of Operations from February 20, 2003.

The following table summarizes the fair values of the tangible assets acquired and the liabilities assumed at the date of acquisition (in thousands):

The intangible assets recognized, apart from goodwill, represented contractual or other legal rights of NurLogic and those intangible assets of NurLogic that could be clearly identified. These intangible assets were identified and valued through interviews and analysis of data provided by NurLogic concerning development projects, their stage of development, the time and resources needed to complete them and, if applicable, their expected income generating ability. There were no other contractual or other legal rights of NurLogic clearly identifiable by management, other than those identified below. The allocation of the purchase price to the tangible and identifiable intangible assets acquired and liabilities assumed was as follows (in thousands, except number of years):

Developed technology of approximately $9.2 million consisted of intellectual property components for use in system-on-a-chip integrated circuits and consisted of: intellectual property blocks of $5.3 million for analog and core products; existing technology of $3.5 million consisting of standard cells, standard input/output products and specialty input/output products; and core technology of $430,000 consisting of processes, patents, filed patent applications and trade secrets used in standard cell and input/output products that are the basis for existing, in-process and future technology.

At the date of acquisition, the developed technology was complete and had reached technological feasibility. Any costs to be incurred in the future will relate to the ongoing maintenance of the developed technology and will

be expensed as incurred. To estimate the fair value of the developed technology, an income approach was used with a discount rate of 18%, which included an analysis of future cash flows and the risks associated with achieving such cash flows. All developed technologies are being amortized over their estimated useful lives of two to four years.

The customer base of $910,000 and order backlog of $340,000 represented the fair value of the existing customer relationships and maintenance agreements. To estimate the fair value of the customer base and order backlog, a cost approach (replacement value) was used. The customer base and order backlog are being amortized over their estimated useful lives of two to three years for customer base and six months for order backlog.

Development projects that had reached technological feasibility were classified as developed technology and the value assigned to developed technology was capitalized. Expensed in-process research and development of approximately $520,000 reflected certain research projects (primarily next generation core technology) that had not yet reached technological feasibility or had no alternative future use at the time of the acquisition. In order to achieve technological feasibility, the Company estimated the hours required to complete the projects to cost approximately $300,000. The Company estimated the fair value assigned to in-process research and development using the income approach, which discounts to present value the cash flows attributable to the technology once it had reached technological feasibility using a discount rate of 40%.

The stages of completion were determined by estimating the costs and time incurred to date relative to the costs and time incurred to develop the in-process technology into a commercially viable technology or product, while considering the relative difficulty of completing the various tasks and overcoming the obstacles necessary to attain technological feasibility. The weighted average stage of completion for all projects, in the aggregate, was approximately 33% as of the acquisition date. Cash flows from sales of products incorporating those technologies commenced in fiscal 2003.

Goodwill of approximately $22.3 million represented the excess of the purchase price over the fair value of the net tangible and intangible assets acquired. NurLogic’s technology added complementary analog, mixed-signal and communications components to the Company’s existing product portfolio and allowed the Company to provide more comprehensive products and pursue an expanded market opportunity. These opportunities, along with the ability to hire the NurLogic workforce, were significant contributing factors to the establishment of the purchase price, resulting in the recognition of a significant amount of goodwill. In accordance with SFAS 142, the Company is not amortizing goodwill relating to the NurLogic acquisition. The Company is carrying the goodwill at cost and tests it for impairment annually and whenever events indicate that an impairment may have occurred.

The results of operations of NurLogic are included in the Company’s Consolidated Statement of Operations from the date of the acquisition. If the Company had acquired NurLogic at the beginning of fiscal 2003, the Company’s unaudited pro forma revenue, net income and net income per share would have been as follows (in thousands, except per share data):

On January 4, 2001, the Company completed its acquisition of certain assets of Synopsys’ physical library business (“Physical Library Business”) for $27.4 million including $14.5 million in cash, 1.5 million shares of the Company’s common stock valued at $11.5 million and the assumption of $1.4 million of liabilities.

The acquisition was accounted for using the purchase method of accounting, and the results of the Physical Library Business have been included in the Company’s Consolidated Financial Statements since the date of acquisition. Accordingly, the purchase price has been allocated to the assets acquired and liabilities assumed based on their estimated fair values on the date of the acquisition, based on management’s estimates and an independent valuation report. The excess of the purchase price over the amounts allocated to the assets acquired and liabilities assumed was recorded as goodwill.

Portions of the purchase price were allocated to certain intangible assets such as existing technology, acquired workforce and in-process research and development. The amount of the purchase price allocated to in-process research and development was determined by estimating the stage of completion of each in-process research project at the date of acquisition and the estimated net present value of cash flows based on incremental future cash flows from revenue expected to be generated by the technologies in the process of development, taking into account the characteristics and applications of the technologies, the size and growth rate of existing and future markets and an evaluation of past and anticipated technology and product life cycles. Estimated net future cash flows included allocations of operating expenses and income taxes, but excluded the expected completion costs of the in-process research projects. The discount rate applied to the net cash flows was 30%, which reflected the level of risk associated with the particular technologies and the current return on investment requirements of the market. At the date of acquisition, technological feasibility of these in-process research projects had not been reached and the technology had no alternative future uses without further development. Accordingly, the Company expensed the portion of the purchase price allocated to in-process research and development of $2.4 million at the date of acquisition.

The stages of completion were determined by estimating the costs and time incurred to date relative to the costs and time incurred to develop the in-process technology into a commercially viable technology or product, while considering the relative difficulty of completing the various tasks and overcoming the obstacles necessary to attain technological feasibility. The weighted average stage of completion for all projects, in the aggregate, was approximately 75% as of the acquisition date. Cash flows from sales of products incorporating those technologies commenced in fiscal 2001.

The purchase price was allocated as follows (in thousands, except number of years):

The Company operates in an intensely competitive industry that has been characterized by rapid technological change, short product life cycles, cyclical market patterns and heightened foreign and domestic competition. Significant technological changes in the industry could affect operating results adversely.

The Company markets and sells its technology to a narrow base of customers and generally does not require collateral. At September 30, 2004, two customers accounted for 21% and 13% of gross accounts receivable. At September 30, 2003, two customers accounted for 15% each of gross accounts receivable. Gross accounts receivable include unbilled receivables.

As of September 30, 2004, the Company’s cash and cash equivalents were deposited with four major financial institutions in the form of demand deposits, money market accounts, corporate and government bonds, certificates of deposit and commercial paper. Financial instruments that potentially subject the Company to concentrations of credit risk comprise principally cash and cash equivalents, marketable securities and accounts receivable. The Company invests its excess cash primarily in high-quality government and corporate debt instruments that mature within two years.

The Company is dependent on a relatively small number of customers for a large portion of its total revenue, although the customers comprising this group changed from time to time. Revenue from individual customers equal to 10% or more of the Company’s total revenue was as follows:

Marketable securities, classified as available-for-sale securities, included the following (in thousands):

All short-term investments have maturities of less than one year from the respective balance sheet dates.

Depreciation and amortization expense was $3.3 million, $2.3 million and $1.9 million for fiscal years ended September 30, 2004, 2003 and 2002, respectively.

The following table represents the future minimum annual lease payments of the Company as of September 30, 2004 (in thousands):

The Company’s principal administrative and technical offices occupy 54,489 square feet in Sunnyvale, California. The Company holds this building pursuant to a lease that expires in 2008. In addition, the Company leases administrative, technical and field support offices in seven cities throughout the world. The administrative, technical and field offices range from small executive offices to a 35,290 square foot facility. Lease terms range from month-to-month on certain executive offices to 3 years on certain direct leases. The Company’s principal administrative, technical and field support facilities are in Sunnyvale, California; San Diego, California; Salem, New Hampshire; Cary, North Carolina; Bangalore, India; Tokyo, Japan; Paris, France and Singapore. The Company continually evaluates the adequacy of existing facilities and additional facilities in new cities and the Company believes that suitable additional space will be available in the future on commercially reasonable terms as needed.

The Company recognizes rent expense on a straight-line basis over the lease period and has accrued for rent expense incurred but not paid. Rent expense was $3.4 million in fiscal 2004, $2.5 million in fiscal 2003 and $2.2 million in fiscal 2002. The deferred rent balance was $1.0 million and $1.1 million at September 30, 2004 and 2003, respectively.

FASB Interpretation No. 45 (“FIN 45”) requires that upon issuance of a guarantee, the guarantor must disclose and recognize a liability for the fair value of the obligation it assumes under that guarantee. The requirements of FIN 45 are applicable to the Company’s product warranty liability and certain guarantees. The Company’s guarantees subject to the recognition and disclosure requirements of FIN 45 as of September 30, 2004 and September 30, 2003 were not material. As of September 30, 2004 and September 30, 2003, the Company’s product warranty liability recorded was not material.

In the normal course of business to facilitate sales of its products, the Company indemnifies other parties, including customers and parties to other transactions with the Company, with respect to certain matters. The Company has agreed to hold the other party harmless against losses arising from a breach of representations or covenants, or out of intellectual property infringement or other claims made against certain parties. These agreements may limit the time within which an indemnification claim can be made and the amount of the claim. In addition, the Company has entered into indemnification agreements with its officers and directors, and the Company’s bylaws contain similar indemnification obligations to the Company’s agents.

It is not possible to determine the maximum potential amount under these indemnification agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement. To date, payments made by the Company under these agreements have not had a material impact on the Company’s operating results or financial position. No liability associated with such indemnifications has been recorded at September 30, 2004 and 2003.

The Company is authorized to issue 5,000,000 shares of undesignated preferred stock, $0.001 par value per share, of which no shares were issued and outstanding as of September 30, 2004 and 2003. Preferred stock may be issued from time to time in one or more series. The Board of Directors is authorized to determine the rights, preferences, privileges and restrictions granted to and imposed upon any wholly unissued series of preferred stock and to fix the number of shares of any series of preferred stock and the designation of any such series without any vote or action by the Company’s stockholders.

The Company adopted its 2003 Stock Plan (the “2003 Plan”) on March 6, 2003 and reserved 1,000,000 shares of its common stock for issuance thereunder. The 2003 Plan authorizes the Board of Directors to grant incentive and non-statutory stock options and stock purchase rights to eligible employees and directors of the Company. If an option granted under the 1993 Plan or the 2003 Plan expires or becomes unexercisable for any reason without having been exercised in full, or is surrendered pursuant to an option exchange program, the unissued shares subject to such option are again available for issuance under the 2003 Plan, and if shares sold under the 2003 Plan are forfeited to the Company or are repurchased by the Company at the issue price paid per share, the number of shares forfeited or repurchased are again available for issuance under the 2003 Plan. During fiscal 2003, the number of shares reserved for issuance under the 2003 plan increased by 462,000 shares resulting from shares returned pursuant to the 1993 Plan. The number of shares reserved for issuance under the 2003 Plan was further increased by 450,000 shares by resolution of the stockholders of the Company adopted on March 11, 2004. Incentive stock options are granted under the 2003 Plan with exercise prices of no less than fair market value, and non-statutory stock options are granted with exercise prices of no less than 85% of the fair market value of the common stock on the grant date, as determined by the Board of Directors. Options granted under the 2003 Plan become exercisable as determined by the Board of Directors but generally at a rate of 25% after the first year and 6.25% each quarter thereafter. Options granted under the 2003 Plan expire as determined by the Board of Directors but not more than ten years after the date of grant. At September 30, 2004, options to purchase a total of 1,982,000 shares of Common Stock were outstanding under the 2003 Plan and 82,000 shares were available for future grant under the 2003 Plan.

In February 2003, the Company assumed 819,000 options in connection with the acquisition of NurLogic. The assumed plans were terminated as to future grants upon acquisition, and no further option grants or share issuances will be made under the assumed plans. The outstanding options under the assumed plans will continue to be governed by the terms and conditions of their respective plans and existing option agreements for those grants. At September 30, 2004, options to purchase a total of 322,000 shares of Common Stock were outstanding under assumed option plans.

In December 2000, the Company adopted the 2000 Supplemental Stock Option Plan (the “2000 Plan”) for issuance upon the exercise of non-statutory stock options to employees and consultants, other than officers of the Company and members of the Board of Directors of the Company. The 2000 Plan provided for the grant of options for up to 1,000,000 shares of Common Stock of the Company. On October 1, 2002, the number of shares reserved for issuance under the 2000 Plan was increased by 208,000 to a total of 1,208,000. The 2000 Plan

expires in 2010. The 2000 Plan does not provide for automatic increases in the shares reserved for issuance thereunder. At September 30, 2004, options to purchase a total of 620,000 shares of Common Stock were outstanding under the 2000 Plan and 231,000 shares were available for future grant under the 2000 Plan.

In November 1997, the Company adopted the 1997 Director Option Plan (the “Director Plan”) and reserved 200,000 shares of its Common Stock for issuance thereunder. The Director Plan was amended to increase the shares reserved there under to a total of 350,000 shares on March 6, 2003. The option grants under the Director Plan are automatic and nondiscretionary, and the exercise price of the options is 100% of the fair market value of the Company’s Common Stock on the date of grant. The Director Plan provides for an initial grant of options to purchase 25,000 shares of Common Stock to each new non-employee director. In addition, each non-employee director will automatically be granted an option to purchase 15,000 shares of Common Stock annually. The Director Plan also provides for additional annual grants of 30,000 shares to the Chairman of the Board of Directors, 20,000 shares to the Chairman of the Audit Committee, 10,000 shares to the Chairman of the Compensation Committee and 10,000 shares to the Chairman of the Nominating and Governance Committee. Options granted under the Director Plan become exercisable over a four year period with the initial share grants vesting as to one-fourth of the shares on the first anniversary of the date of grant and then monthly thereafter and the subsequent annual share grants vesting monthly. At September 30, 2004, options to purchase a total of 306,000 shares of Common Stock were outstanding under the Director Plan and no additional shares were available for future grants under the plan. The Director Plan expires in February 2008.

The Company had previously reserved 7,393,000 shares of its Common Stock under its 1993 Stock Option Plan, as amended (the “1993 Plan”) for issuance upon the exercise of incentive and non-statutory stock options to employees, directors and consultants. The number of shares reserved for issuance under the 1993 Plan was increased in subsequent years. The 1993 Plan was terminated on March 6, 2003, and no further option grants or share issuances will be made under the 1993 Plan. However, all outstanding options under the 1993 Plan will continue to be governed by the terms and conditions of the 1993 Plan and existing option agreements for those grants. Incentive stock options granted under the 1993 Plan were granted with exercise prices of no less than fair market value, and non-statutory stock options were granted with exercise prices of no less than 85% of the fair market value of the common stock on the grant date, as determined by the Board of Directors. Options became exercisable as determined by the Board of Directors but generally at a rate of 25% after the first year and 6.25% each quarter thereafter. Options granted under the 1993 Plan expire as determined by the Board of Directors but not more than ten years after the date of grant. At September 30, 2004, options to purchase a total of 2,422,000 shares of Common Stock were outstanding under the 1993 Plan.

Activity under the 2003 Plan, 2000 Plan, Director Plan and 1993 Plan was as follows (in thousands except per share data):

The options outstanding and currently exercisable by exercise price at September 30, 2004 are as follows (in thousands, except per share data and number of years):

At September 30, 2004, 2003 and 2002, options to purchase 2,694,000, 2,510,000 and 2,182,000 shares of Common Stock, respectively, were exercisable pursuant to the 1993 Plan, the Director Plan, the 2000 Plan and the 2003 Plan, respectively with a weighted average cost of $10.35, $8.50 and $8.37, respectively.

The fair value of option grants related to the above plans is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:

The Black-Scholes option pricing model was developed for use in estimating the value of traded options that have no vesting restrictions and are fully transferable. In addition, option pricing models require the input of highly subjective assumptions, including the expected stock price volatility and expected life. The Company uses projected data for expected volatility and expected life of its stock options based upon historical and other economic data trended into future years. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the estimate, in management’s opinion, the existing valuation models do not provide a reliable measure of the fair value of the Company’s employee stock options. Under the Black-Scholes option pricing model, the weighted-average estimated values of employee stock options granted during fiscal 2004, 2003, and 2002 were $13.88, $14.16, and $8.82, respectively.

In November 1997, the Company adopted the 1997 Employee Stock Purchase Plan (the “Purchase Plan”) and reserved 600,000 shares of common stock for issuance under the Purchase Plan. The Purchase Plan provides for an automatic annual increase in the number of shares reserved for issuance under the Purchase Plan. On each anniversary date of the adoption of the Purchase Plan an amount equal to the lesser of (i) 200,000 shares, (ii) 1% of the outstanding shares on such date or (iii) a lesser amount as determined by the Board of Directors will be added to the shares available under the Purchase Plan. In November 2003, 200,000 incremental shares were reserved for issuance under the Purchase Plan. In November 2002, 169,000 incremental shares were reserved for issuance under the Purchase Plan. In November 2001, 165,000 incremental shares were reserved for issuance under the Purchase Plan. In November 2000, 148,000 incremental shares were reserved for issuance under the Purchase Plan. The Purchase Plan authorizes the granting of stock purchase rights to eligible employees during two-year offering periods with exercise dates approximately every six months. Shares are purchased through employee payroll deductions at purchase prices equal to 85% of the lesser of the fair market value of the Company’s Common Stock at either the first day of each offering period or the date of purchase. As of September 30, 2004, 1,299,000 shares had been issued under the Purchase Plan at an average price of $7.29 per share and 259,000 shares remained available for future issuance pursuant to the Purchase Plan.

The estimated fair value of purchase rights under the Company’s Purchase Plan is determined using the Black-Scholes pricing model with the following assumptions:

The weighted average per share fair value of purchase rights under the Purchase Plan was $5.87 during fiscal 2004, $4.97 during fiscal 2003 and $4.39 during fiscal 2002.

On June 17, 2004, an employee of the Company exercised stock options to purchase approximately 22,000 shares of the Company’s common stock at exercise prices between $5.06 and $16.75 per share. As consideration for the exercise of the stock options, the employee transferred approximately 10,000 shares of common stock of the Company to the Company at the then current market price of $24.16. The Company recorded $249,000 as treasury stock related to this transaction. These shares have not been retired as of September 30, 2004.

On January 11, 2003, two officers of the Company exercised stock options to purchase 150,000 shares of the Company’s common stock at an exercise price of $7.70 per share. As consideration for the exercise of the stock options and the related taxes, the officers transferred approximately 77,000 shares of common stock of the Company to the Company at the then current market price of $18.28. The Company recorded $1.4 million as treasury stock related to this transaction. These 77,000 shares of common stock were retired on July 19, 2004.

The Company’s effective tax rate on pretax income differed from the U.S. federal statutory regular tax rate as follows:

Income before provision for income taxes consisted of the following (in thousands):

Temporary differences and carryforwards that gave rise to significant portions of deferred tax assets and liabilities were as follows (in thousands):

Based on the recent history of profits and forecasted taxable income, management believes that it is more likely than not the Company’s net deferred tax assets at September 30, 2004 will be realizable. Accordingly, the Company reversed the valuation allowance as of June 30, 2004. Approximately $14.3 million of the valuation allowance that was reversed was attributable to certain carryforwards, resulting from the exercise of employee stock options, and was accounted for as a credit to additional paid-in-capital. In addition, $3.5 million of the valuation allowance that was reversed was attributable to federal and state loss carryforwards, research credits and other book tax differences from the acquisition of Nurlogic and was accounted for as an adjustment to goodwill as discussed in Note 2 to the Consolidated Financial Statements.

At September 30, 2004, the Company had federal and state net operating loss carryovers of approximately $8.4 million, and $1.5 million, respectively. The federal and state net operating losses will expire beginning in fiscal 2014 through fiscal 2024. Approximately $5.3 million of the federal net operating loss carryover and $1.5 million of the state net operating loss carryover relate to recent acquisitions and are subject to certain limitations under IRC 382. As of September 30, 2004, the Company had tax credits of approximately $11.7 million, which will expire beginning in fiscal year 2013.

In accordance with the disclosure requirements of SFAS 128, a reconciliation of the numerator and denominator of basic and diluted net income (loss) per share is provided as follows (in thousands, except per share amounts).

Employee stock options to purchase approximately 257,000 shares in fiscal 2004, 182,000 shares in fiscal 2003 and 820,000 shares in fiscal 2002 were outstanding, but were not included in the computation of diluted earnings per share because the exercise price of the stock options was greater than the average share price of the common shares and, therefore, the effect would have been anti-dilutive.

The Company has adopted SFAS No. 131, “Disclosure about Segments of an Enterprise and Related Information.” Although the Company offers various intellectual property components and services to its customers, the Company does not manage its operations by these intellectual property components and services, but instead views the Company as one operating segment when making business decisions. The Company does not manage its operations on a geographical basis. Revenue attributed to the United States and to all foreign countries is based on the geographical location of the customer. The Company uses one measurement of profitability for its business.

The distribution of revenue by geographic area are summarized as follows (in thousands):

The distribution of long-term assets by geographic region are summarized as follows (in thousands):

The long-term assets noted above are net of goodwill, purchased intangible assets and deferred tax assets at September 30, 2004 and September 30, 2003.

The Company sponsors a 401(k) profit sharing plan (the “401(k) Plan”) for substantially all employees. The 401(k) Plan provides for profit sharing contributions to be made at the discretion of the Company’s Board of Directors. The Company did not elect to make a profit sharing contribution for fiscal 2004, 2003 or 2002.

The 401(k) Plan also provides for elective employee salary reduction contributions and Company matching of employees’ contributions. Employees may contribute up to 20% of elective compensation. The Company’s matching contribution is at the discretion of the Company’s Board of Directors. The Company’s matching contributions were $610,000 in fiscal 2004, $427,000 in fiscal 2003 and $267,000 in fiscal 2002.

On August 22, 2004, the Company entered into a merger agreement with ARM Holdings plc (“ARM”) and Salt Acquisition Corporation, a wholly owned subsidiary of ARM, pursuant to which Artisan will be merged with and into Salt Acquisition Corporation. In the merger, assuming no dissenting shares, Artisan’s stockholders will receive, in the aggregate, merger consideration consisting of approximately $9.60 in cash multiplied by the number of shares of Artisan common stock outstanding at the effective time, plus 4.41 ARM American Depositary Shares (or 13.23 ARM ordinary shares) multiplied by the number of shares of Artisan common stock outstanding at the effective time. The merger is expected to be consummated in December 2004. At the closing of the merger, the Company will be merged with and into Salt Acquisition Corporation. The merger is expected to be accounted for as a purchase transaction for accounting and financial reporting purposes and is intended to qualify as a tax-free reorganization within the meaning of Section 368(a) of the Internal Revenue Code for U.S. federal income tax purposes.


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

141 Caspian Court Sunnyvale, California		94089
(Address of principal executive offices)		(Zip Code)


			PAGE
PART I			1

	Item 1.	Business	1
	Item 2.	Properties	14
	Item 3.	Legal Proceedings	14

PART II			15

	Item 5.	Market for Registrant’s Common Equity and Related Stockholder Matters	15
	Item 6.	Selected Financial Data	15
	Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
		Factors Affecting Future Operating Results	30
	Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	50
	Item 8.	Consolidated Financial Statements and Supplementary Data	51
	Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	53
	Item 9A.	Controls and Procedures	53

PART III			54

	Item 10.	Directors and Executive Officers of the Registrant	54
	Item 11.	Executive Compensation	60
	Item 12.	Security Ownership of Certain Beneficial Owners and Management	67
	Item 13.	Certain Relationships and Related Transactions	68
	Item 14.	Principal Accounting Fees and Services	69

PART IV			71

	Item 15.	Exhibits, Financial Statement Schedules	71
	Signatures		75
	Financial Statement Index		F-1

EXHIBIT INDEX


	Fiscal Year Ended September 30, 2004				Fiscal Year Ended September 30, 2003
	High		Low		High		Low
First Quarter	$	22.840	$	15.090	$	22.300	$	7.650
Second Quarter	$	23.880	$	17.460	$	19.890	$	13.880
Third Quarter	$	27.100	$	21.190	$	26.760	$	16.060
Fourth Quarter	$	29.740	$	21.410	$	25.410	$	16.750


	Fiscal Years Ended September 30,
	2004		2003		2002		2001			2000
	(In thousands, except per share data)
Consolidated Statement of Operations Data:
Revenue:
License	$	57,454	$	57,970	$	27,728	$	21,136		$	17,042
Net royalty		31,089		10,543		9,518		4,621			3,250

Total revenue		88,543		68,513		37,246		25,757			20,292

Total costs and expenses		67,252		61,401		35,633		38,128			21,622

Operating income (loss)		21,291		7,112		1,613		(12,371	)		(1,330	)
Interest and other income, net		1,641		1,337		842		2,567			2,945

Income (loss) before provision for income taxes		22,932		8,449		2,455		(9,804	)		1,615
Provision for income taxes		3,687		1,106		340		4,168			533

Net income (loss)	$	19,245	$	7,343	$	2,115	$	(13,972	)	$	1,082

Net income (loss) per share:
Basic (1)	$	0.84	$	0.38	$	0.13	$	(0.88	)	$	0.08

Diluted (1)	$	0.77	$	0.34	$	0.12	$	(0.88	)	$	0.07

Shares used in computing net income (loss) per share:
Basic		22,932		19,439		16,716		15,965			14,334

Diluted		25,105		21,690		17,991		15,965			15,456


	September 30,
	2004		2003		2002		2001			2000
	(In thousands)
Consolidated Balance Sheet Data:
Cash, cash equivalents and marketable securities	$	153,706	$	114,266	$	52,244	$	42,329		$	54,016
Working capital		144,918		113,576		50,955		41,214			56,571
Total assets		245,236		187,103		82,448		73,026			71,930
Long term liabilities, net of current portion		7,316		5,191		2,422		689			235
Total stockholders’ equity		216,064		166,131		69,160		63,385			63,454


	Fiscal Years Ended September 30,
	2004		2003		2002
Revenue:
License	64.9	%	84.6	%	74.4	%
Net royalty	35.1		15.4		25.6

Total revenue	100.0		100.0		100.0

Costs and expenses:
Cost of revenue	22.7		25.1		22.3
Product development	20.9		26.9		31.8
Sales and marketing	17.3		21.2		23.6
General and administrative	10.5		9.3		9.4
Provision for unused facility lease	—		—		3.3
In-process research and development	—		0.7		—
Amortization of purchased intangible assets	4.6		6.4		5.3

Total costs and expenses	76.0		89.6		95.7

Operating income	24.0		10.4		4.3
Interest and other income, net	1.9		1.9		2.3

Income before provision for income taxes	25.9		12.3		6.6
Provision for income taxes	4.2		1.6		0.9

Net income	21.7	%	10.7	%	5.7	%


*Total Revenue ($ In Thousands)*	Fiscal 2004		Percent Inc / (Dec)		Fiscal 2003		Percent Inc / (Dec)		Fiscal 2002
License revenue	$	57,454	(1	)%	$	57,970	109	%	$	27,728
Net royalty revenue		31,089	195	%		10,543	11	%		9,518

Total revenue	$	88,543	29	%	$	68,513	84	%	$	37,246


*Cost of Revenue*	Fiscal 2004		Percent Inc / (Dec)		Fiscal 2003		Percent Inc / (Dec)		Fiscal 2002
($ In Thousands)	$	20,126	17	%	$	17,229	108	%	$	8,297


*Product Development Expenses*	Fiscal 2004		Percent Inc / (Dec)		Fiscal 2003		Percent Inc / (Dec)		Fiscal 2002
($ In Thousands)	$	18,458	0	%	$	18,377	55	%	$	11,869


*Sales and Marketing Expenses*	Fiscal 2004		Percent Inc / (Dec)		Fiscal 2003		Percent Inc / (Dec)		Fiscal 2002
($ In Thousands)	$	15,358	6	%	$	14,522	65	%	$	8,782


*General and Administrative Expenses*	Fiscal 2004		Percent Inc / (Dec)		Fiscal 2003		Percent Inc / (Dec)		Fiscal 2002
($ In Thousands)	$	9,281	45	%	$	6,386	83	%	$	3,499


*Provision for Unused Facility Lease*	Fiscal 2004	Percent Inc / (Dec)		Fiscal 2003	Percent Inc / (Dec)		Fiscal 2002
($ In Thousands)	—	0	%	—	(100	)%	$	1,219


*Acquisition-Related Expenses*	Fiscal 2004		Percent Inc / (Dec)		Fiscal 2003		Percent Inc / (Dec)		Fiscal 2002
($ In Thousands)
In-process research and development	$	—	(100	)%	$	520	100	%	$	—
Amortization of purchased intangible assets		4,029	(8	)%		4,367	122	%		1,967

Acquisition-related expenses	$	4,029	(18	)%	$	4,887	148	%	$	1,967


*Interest and Other Income, net*	Fiscal 2004		Percent Inc / (Dec)		Fiscal 2003		Percent Inc / (Dec)		Fiscal 2002
($ In Thousands)	$	1,641	23	%	$	1,337	59	%	$	842


*Provision for Income Taxes*	Fiscal 2004		Percent Inc / (Dec)		Fiscal 2003		Percent Inc / (Dec)		Fiscal 2002
($ In Thousands)	$	3,687	233	%	$	1,106	225	%	$	340


	Payments due by period
Contractual obligations	Total		Less than 1 year		1-3 years		3-5 years		More than 6 years
Operating Lease Obligations	$	9,785	$	2,881	$	4,910	$	1,994	—

Total	$	9,785	$	2,881	$	4,910	$	1,994	—


Cash, cash equivalents and marketable securities:	Carrying Value at September 30, 2004 (In Thousands)		Average Rate of Return at September 30, 2004 (Annualized)		Carrying Value at September 30, 2003 (In Thousands)		Average Rate of Return at September 30, 2003 (Annualized)
Cash and cash equivalents—variable rate	$	59,745	0.8	%	$	71,093	0.8	%
Money market funds—variable rate		20,743	0.8	%		4,978	0.8	%
Cash and cash equivalents—fixed rate		19,709	1.6	%		22,770	1.1	%

Total cash and cash equivalents		100,197				98,841
Marketable securities—fixed rate		53,509	1.9	%		15,425	2.1	%

Total cash, cash equivalents and marketable securities	$	153,706			$	114,266


	Three Months Ended,
	Sep 30, 2004		June 30, 2004			Mar 31, 2004		Dec 31, 2003		Sep 30, 2003		June 30, 2003		Mar 31, 2003		Dec 31, 2002
	(Unaudited, in thousands except per share data)
Revenue:
License	$	15,650	$	14,162		$	15,254	$	12,388	$	16,450	$	15,606	$	13,945	$	11,969
Net Royalty		9,490		7,811			6,114		7,674		3,038		3,313		2,177		2,015

Total revenue		25,140		21,973			21,368		20,062		19,488		18,919		16,122		13,984

Costs and expenses
Cost of revenue		5,056		5,653			5,018		4,399		4,801		4,941		3,581		3,906
Product development		4,560		4,019			4,723		5,156		4,991		5,695		4,756		2,935
Sales and marketing		3,837		3,857			3,920		3,744		4,100		4,092		3,226		3,104
General and administrative (1)		3,838		1,894			1,886		1,663		1,567		1,586		1,838		1,395
In-process research and development		—		—			—		—		—		—		520		—
Amortization of purchased intangible assets		896		896			896		1,341		1,457		1,511		907		492

Total costs and expenses		18,187		16,319			16,443		16,303		16,916		17,825		14,828		11,832

Operating income		6,953		5,654			4,925		3,759		2,572		1,094		1,294		2,152
Interest and other income, net		514		445			357		325		345		614		175		203

Income before provision (benefit) for income taxes		7,467		6,099			5,282		4,084		2,917		1,708		1,469		2,355
Provision for (benefit from) income taxes		2,946		(130	)		496		375		379		274		263		190

Net income	$	4,521	$	6,229		$	4,786	$	3,709	$	2,538	$	1,434	$	1,206	$	2,165

Net income per share:
Basic	$	0.19	$	0.27		$	0.21	$	0.17	$	0.12	$	0.07	$	0.07	$	0.13
Diluted	$	0.18	$	0.25		$	0.19	$	0.15	$	0.10	$	0.06	$	0.06	$	0.11


Name	Age	Position
Mark R. Templeton	45	President, Chief Executive Officer and Director

Joy E. Leo	43	Vice President, Finance and Administration, Chief Financial Officer and Secretary

Scott T. Becker	44	Chief Technical Officer and Director

Harry Dickinson	56	Chief Operating Officer

Dhrumil Gandhi	47	Senior Vice President, Product Technology

Brent Dichter	43	Vice President, Engineering

Neal Carney	48	Vice President, Marketing

Edward Boule	62	Vice President, Asia and Japan Sales

J. Callan Carpenter	41	Vice President and General Manager, Analog/Mixed-Signal Business Unit

R. Keith Hopkins	46	Vice President Sales, North America and Europe

Lucio L. Lanza(1)(3)	60	Chairman of the Board

R. Stephen Heinrichs(1)(2)(3)	57	Director

Morio Kurosaki	47	Director

Robert P. Latta(2)(3)	50	Director

Leon Malmed(1)(2)	66	Director


	Fiscal Year	Annual Compensation (1)				Long-Term Compensation Awards	All Other Compensation (3)
		Annual Compensation (1)				Number of Securities Underlying Options (2)
Name and Principal Position		Salary		Bonus
Mark R. Templeton President and Chief Executive Officer	2004 2003 2002	$	278,128 275,000 232,858	$	200,000 200,000 208,103	34,500 — 60,000	$	2,940 1,105 2,713

Joy E. Leo Vice President, Finance and Administration, Chief Financial Officer and Secretary	2004 2003 2002		232,126 231,000 224,583		160,000 149,000 93,500	33,000 — 45,000		3,018 2,815 2,899

Harry Dickinson Chief Operating Officer	2004 2003 2002		213,252 212,217 208,007		140,000 157,783 106,500	22,000 — 13,806		3,250 3,000 3,240

Brent Dichter Vice President, Engineering	2004 2003 2002		201,126 200,001 191,250		140,000 105,000 61,000	19,000 — 16,438		3,395 2,250 2,435

Edward Boule Vice President, Asia Pacific Sales	2004 2003 2002		170,000 170,000 160,000		175,785 168,535 128,782	6,000 60,000 7,500		3,250 3,000 2,757


	Individual Grants					Potential Realizable Value Minus Exercise Price at Assumed Annual Rate of Stock Price Appreciation for Option Term (1)
	Number of Securities Underlying Options Granted (2)	Percent of Total Options Granted to Employees in Fiscal Year (3)	Exercise Price Per Share		Expiration Date
Name	Number of Securities Underlying Options Granted (2)		Exercise Price Per Share		Expiration Date	5%		10%
Mark R. Templeton	25,000	1.66	$	16.07	10/23/13	$	252,658	$	640,286
Mark R. Templeton	9,500	0.63		23.88	8/20/14		142,671		361,556
Joy E. Leo	15,000	1.00		16.07	10/23/13		151,595		384,172
Joy E. Leo	18,000	1.19		23.88	8/20/14		270,324		685,054
Harry Dickinson	14,000	0.93		16.07	10/23/13		141,489		358,560
Harry Dickinson	8,000	0.53		23.88	8/20/14		120,144		304,469
Brent Dichter	13,000	0.86		16.07	10/23/13		131,382		332,949
Brent Dichter	6,000	0.40		23.88	8/20/14		90,108		228,351
Edward Boule	6,000	0.40		23.88	8/20/14		90,108		228,351


Name	Number of Shares Acquired On Exercise	Value Realized (1)		Number of Securities Underlying Unexercised Options at September 30, 2004		Value of Unexercised In-the-Money Options at September 30, 2004 (2)
Name	Number of Shares Acquired On Exercise	Value Realized (1)		Exercisable	Unexercisable	Exercisable		Unexercisable
Mark R. Templeton	—		—	72,499	47,001	$	1,325,429	$	680,831
Joy E. Leo	—		—	254,687	43,313		4,891,021		530,819
Harry Dickinson	—		—	198,591	67,815		4,103,756		1,204,185
Brent Dichter	12,500	$	211,696	100,158	20,886		2,040,163		264,424
Edward Boule	—		—	103,363	65,219		1,920,466		754,222


	09/30/99	09/30/00	09/30/01	9/30/02	9/30/03	9/30/04
Artisan Components, Inc.	100	149	92	106	195	338
Nasdaq Electronic Components Index	100	165	51	32	62	50
Nasdaq Stock Market (U.S.) Index	100	160	56	49	58	65


Name of Beneficial Owner	Amount and Nature of Beneficial Ownership	Options Included in Beneficial Ownership	Percentage Owned
Wells Fargo & Company (1) 420 Montgomery Street, San Francisco CA 94104	2,373,640	—	9.9	%

Arbor Capital Management, LLC (2) One Financial Plaza, 120 South Sixth Street, Suite 1000 Minneapolis, Minnesota 55402	1,207,400	—	5.1	%

Mark R. Templeton	796,338	77,812	3.3	%

Scott T. Becker (3)	275,935	70,765	1.2	%

Joy E. Leo	263,697	258,437	1.1	%

Harry L. Dickinson (4)	231,399	215,329	*

Edward M. Boule	122,409	116,333	*

Brent N. Dichter (5)	114,574	101,998	*

Lucio L. Lanza	96,441	76,247	*

Leon Malmed	38,206	38,206	*

Morio Kurosaki	34,911	9,911	*

R. Stephen Heinrichs	28,872	28,872	*

Robert P. Latta	19,790	19,790	*

All directors and executive officers as group (15 persons)	2,598,332	1,330,963	7.2	%


	Year ended September 30,
	2004		2003
Audit fees	$	377,000	$	551,000
Audit related fees		130,000		—
Tax fees		438,000		195,000

Total	$	945,000	$	746,000


Number		Description of Exhibit
1.1(15)		Form of Underwriting Agreement.

2.1(18)		Agreement and Plan of Merger dated August 22, 2004 among ARM Holdings plc, Salt Acquisition Corporation and Artisan Components, Inc.

2.2(18)		Form of Stockholder Voting Agreement dated August 22, 2004 between ARM Holdings plc and certain officers and directors of Artisan Components, Inc.

2.3(18)		Form of Irrevocable Undertaking dated August 22, 2004 between Artisan Components, Inc. and certain officers and directors of ARM Holdings plc

2.4(18)*		Form of Deed of Indemnity dated August 22, 2004 between ARM Holdings plc and each of Lucio L. Lanza and Mark R. Templeton

2.5(18)		Form of Affiliate Agreement to be entered into among ARM Holdings plc and certain affiliates of Artisan Components, Inc.

3.1(1)		Amended and Restated Certificate of Incorporation of the Registrant.

3.1.1(12)		Certificate of Designation.

3.2(13)		Bylaws of the Registrant, as amended and restated January 2003.

4.1(5)		Securities Rights and Restrictions Agreement by and among Registrant and Synopsys, Inc., dated January 1, 2001.

4.2(9)		Preferred Stock Rights Agreement dated December 12, 2001 between the Registrant and EquiServe Trust Company, N.A.

4.2.1(18)		Amendment dated August 22, 2004 to Preferred Stock Rights Agreement, dated as of December 12, 2001 between Artisan Components, Inc. and EquiServe Trust Company, N.A.*

4.3(15)		Specimen Stock Certificate.

4.4(16)		Declaration of Registration Rights.

10.1(11)*		1993 Stock Option Plan, as amended.

10.1.1(1)*		Form of Agreement under 1993 Stock Option Plan, as amended.


Number		Description of Exhibit

10.2(1)*		1997 Employee Stock Purchase Plan.

10.3(14)*		1997 Director Stock Option Plan, as amended March 6, 2003.

10.4(11)*		2000 Supplemental Stock Option Plan and form of agreement thereunder, as amended.

10.5*		Form of Indemnification Agreement for directors and executive officers.

10.6(3)		Prior Form of Master License Agreement of the Registrant.

10.6.1		Revised Form of Master License Agreement of the Registrant.

10.7(2)(3)		License Agreement dated as of November 30, 1997 between the Registrant and Taiwan Semiconductor Manufacturing Corporation or TSMC, as amended.

10.7.1(2)(7)		Addendum dated September 30, 1999 to License Agreement dated as of November 30, 1997 between the Registrant and TSMC, as amended.

10.7.2(2)(7)		Amendment dated June 30, 2000 to License Agreement dated as of November 30, 1997 between the Registrant and TSMC, as amended.

10.7.3(2)(12)		Addendum dated September 10, 2002 to License Agreement dated as of November 30, 1997 between the Registrant and TSMC, as amended.

10.8(4)		Commercial Lease Agreement dated December 1, 1999 by and between the Registrant and The Dai-Tokyo Fire and Marine Insurance Co., Ltd., for Yoyogi 3-25-3, Shibuya-Ku, Tokyo, Japan.

10.9(7)*		Severance Agreement dated September 11, 2000 between the Registrant and Joy E. Leo.

10.10(6)*		Severance Agreement dated June 7, 2001 between the Registrant and Harry Dickinson.

10.11(8)		Sublease Agreement dated August 22, 2001 between the Registrant and Globalcenter Inc. and Global Crossing North America for 141 Caspian Ct., Sunnyvale, California office.

10.12(2)(10)		Master License Agreement dated April 26, 2002 between the Registrant and International Business Machines Corporation.

10.13(14)*		2003 Stock Plan and Form of Stock Option Agreement thereunder.

10.14(13)		Form of End-User License Agreement.

10.15(15)*		Employment Agreement dated as of July 18, 2001 between the Registrant and Neal J. Carney.

10.16(15)		International Sales Representative Agreement dated as of September 15, 1996 between the Registrant and Aisys Corporation.

10.17(15)		Sales Representative Agreement dated as of August 1, 2000 between the Registrant and Aisys USA, Inc.

10.18(17)*		Severance Agreement dated June 6, 2004 between the Registrant and R. Keith Hopkins

10.19*		Severance Agreement dated July 19, 2004 between the Registrant and Mark R. Templeton, as amended August 2, 2004.

10.20*		Severance Agreement dated July 19, 2004 between the Registrant and Joy E. Leo, as amended August 2, 2004.

10.21*		Severance Agreement dated July 19, 2004 between the Registrant and Harry L. Dickinson, as amended August 2, 2004.

10.22*		Severance Agreement dated July 19, 2004 between the Registrant and Scott T. Becker, as amended August 2, 2004.


Number		Description of Exhibit

10.23*		Severance Agreement dated July 19, 2004 between the Registrant and Dhrumil J. Gandhi, as amended August 2, 2004.

10.24*		Severance Agreement dated July 19, 2004 between the Registrant and Brent N. Dichter, as amended August 2, 2004.

10.25*		Severance Agreement dated July 19, 2004 between the Registrant and Neal J. Carney, as amended August 2, 2004.

10.26*		Severance Agreement dated July 19, 2004 between the Registrant and Edward M. Boule, as amended August 2, 2004.

10.27*		Severance Agreement dated July 19, 2004 between the Registrant and J. Callan Carpenter, as amended August 2, 2004.

10.28*		Severance Agreement dated July 19, 2004 between the Registrant and R. Keith Hopkins, as amended August 2, 2004.

21.1(14)		Subsidiaries of the Registrant.

23.1		Consent of PricewaterhouseCoopers LLP, independent registered public accounting firm.

24.1		Power of Attorney (see page 75).

31.1		Rule 13a-14(a)/15d-14(a) Certification by the Chief Executive Officer.

31.2		Rule 13a-14(a)/15d-14(a) Certification by the Chief Financial Officer.

32.1		Certification by the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


Signature	Title	Date

/s/ MARK R. TEMPLETON (Mark R. Templeton)	President and Chief Executive Officer, Director (Principal Executive Officer)	November 11, 2004

/s/ JOY E. LEO (Joy E. Leo)	Vice President, Finance and Administration, Chief Financial Officer, and Secretary (Principal Financial and Accounting Officer)	November 11, 2004

/s/ SCOTT T. BECKER (Scott T. Becker)	Chief Technology Officer and Director	November 11, 2004

/s/ LUCIO L. LANZA (Lucio L. Lanza)	Chairman of the Board of Directors	November 11, 2004

/s/ R. STEPHEN HEINRICHS (R. Stephen Heinrichs)	Director	November 11, 2004

/s/ MORIO KUROSAKI (Morio Kurosaki)	Director	November 11, 2004

/s/ ROBERT P. LATTA (Robert P. Latta)	Director	November 11, 2004

/s/ LEON MALMED (Leon Malmed)	Director	November 11, 2004


Report of Independent Registered Public Accounting Firm		F-2
Consolidated Balance Sheets at September 30, 2004 and 2003		F-3
Consolidated Statements of Operations for the years ended September 30, 2004, 2003 and 2002		F-4
Consolidated Statements of Stockholders’ Equity for the years ended September 30, 2004, 2003 and 2002		F-5
Consolidated Statements of Cash Flows for the years ended September 30, 2004, 2003 and 2002		F-6
Notes to Consolidated Financial Statements		F-7
Schedule II—Valuation and Qualifying Accounts and Reserves		F-31


	Years Ended September 30,
	2004		2003		2002
Revenue:
License	$	57,454	$	57,970	$	27,728
Net royalty		31,089		10,543		9,518

Total revenue		88,543		68,513		37,246

Costs and expenses:
Cost of revenue		20,126		17,229		8,297
Product development *		18,458		18,377		11,869
Sales and marketing *		15,358		14,522		8,782
General and administrative *		9,281		6,386		3,499
Provision for unused facility lease		—		—		1,219
In-process research and development		—		520		—
Amortization of purchased intangible assets		4,029		4,367		1,967

Total costs and expenses		67,252		61,401		35,633

Operating income		21,291		7,112		1,613
Interest and other income, net		1,641		1,337		842

Income before provision for income taxes		22,932		8,449		2,455
Provision for income taxes		3,687		1,106		340

Net income	$	19,245	$	7,343	$	2,115

Net income per share:
Basic	$	0.84	$	0.38	$	0.13

Diluted	$	0.77	$	0.34	$	0.12

Shares used in computing net income per share:
Basic		22,932		19,439		16,716

Diluted		25,105		21,690		17,991

* Includes stock-based compensation expense of:		50		328		—


	Common Stock				Additional Paid-In Capital			Treasury Stock			Deferred Stock-Based Compensation			Stockholder Note			Accumulated Other Comprehensive Income (loss)			Retained Earnings/ (Accumulated Deficit)			Total
	Shares		Amount		Additional Paid-In Capital			Treasury Stock			Deferred Stock-Based Compensation			Stockholder Note			Accumulated Other Comprehensive Income (loss)			Retained Earnings/ (Accumulated Deficit)			Total
Balance at September 30, 2001	16,487		$	16	$	73,511		$	—		$	—		$	—		$	—		$	(10,142	)	$	63,385

Net income	—			—		—			—			—			—			—			2,115			2,115
Exercise of stock options, net	238			1		1,784			—			—			—			—			—			1,785
Common Stock issued pursuant to employee stock purchase plan	173			—		1,320			—			—			—			—			—			1,320
Tax benefit arising from disqualifying dispositions of stock options	—			—		555			—			—			—			—			—			555

Balance at September 30, 2002	16,898			17		77,170			—			—			—			—			(8,027	)		69,160

Net income	—			—		—			—			—			—			—			7,343			7,343
Unrealized gain on marketable securities, net	—			—		—			—			—			—			118			—			118

Comprehensive Income																								7,461

Exercise of stock options, net	1,264			1		10,956			—			—			—			—			—			10,957
Issuance of Common Stock and a stockholder note in connection with the acquisition of NurLogic	745			1		24,232			—			(696	)		(240	)		—			—			23,297
Common stock issued pursuant to employee stock purchase plan	267			—		2,103			—			—			—			—			—			2,103
Common stock repurchase in connection with exercise of stock options	(77	)		—		—			(1,399	)		—			—			—			—			(1,399	)
Amortization of deferred stock-based compensation	—			—		—			—			328			—			—			—			328
Issuance of common stock in follow-on offering, net of issuance costs of $4,598	3,060			3		53,516			—			—			—			—			—			53,519
Repayment of employee note acquired in connection with the acquisition of NurLogic	—			—		—			—			—			240			—			—			240
Tax benefit arising from disqualifying dispositions of stock options	—			—		465			—			—			—			—			—			465

Balance at September 30, 2003	22,157			22		168,442			(1,399	)		(368	)		—			118			(684	)		166,131
Net income	—			—		—			—			—			—			—			19,245			19,245
Unrealized loss on marketable securities, net	—			—		—			—			—			—			(283	)		—			(283	)

Comprehensive Income																								18,962
Exercise of stock options, net	1,423			2		13,196			—			—			—			—			—			13,198
Common stock issued pursuant to employee stock purchase plan	326			—		3,046			—			—			—			—			—			3,046
Common stock repurchased in connection with exercise of stock options	(10	)		—		—			(249	)		—			—			—			—			(249	)
Amortization of deferred stock-based compensation	—			—		—			—			50			—			—			—			50
Reversal of unearned stock-based compensation associated with terminations	—			—		(266	)		—			266			—			—			—			—
Retirement of Treasury Stock	—			—		(1,399	)		1,399			—			—			—			—			—
Tax benefit arising from disqualifying dispositions of stock options	—			—		14,926			—			—			—			—			—			14,926
	—			—		—			—			—			—			—			—			—

Balance at September 30, 2004	23,896		$	24	$	197,945		$	(249	)	$	(52	)	$	—		$	(165	)	$	18,561		$	216,064


Balance at September 30, 2003	$	36,016
Adjustment to goodwill		(3,459	)

Balance at September 30, 2004	$	32,557


Cash	$	3,680
Accounts receivable		1,173
Other current assets		176
Property and equipment		1,662
Other non-current assets		535
Notes receivable from stockholder		240

Total assets acquired		7,466

Accounts payable and accrued liabilities		(4,682	)
Deferred revenue		(1,169	)
Other non-current liabilities		(628	)

Total liabilities assumed		(6,479	)

Net assets acquired	$	987


	Amount			Estimated Useful Life (in years)
Fair value of net tangible assets acquired	$	987		1 - 5
Intangible assets acquired:
Developed technology		9,240		2 - 4
Customer base		910		2 - 3
Order backlog		340		0.5
In-process research and development		520		N/A
Deferred stock-based compensation		696		N/A
Deferred tax liability		(4,196	)	N/A
Goodwill		22,275		N/A

Purchase price	$	30,772


	Years Ended September 30, 2003
	Years Ended September 30, 2003
Revenue	$	71,833

Net income	$	2,633

Net income per share—basic	$	0.13

Net income per share—diluted	$	0.12

Shares used in computing net income per share—basic		19,729

Shares used in computing net income per share—diluted		21,987