ARTISAN COMPONENTS INC
10-K, 1999-12-10
SEMICONDUCTORS & RELATED DEVICES
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                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                            ------------------------

                                   FORM 10-K
                            ------------------------

     [X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
           EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1999

     [ ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
           EXCHANGE ACT OF 1934

                         COMMISSION FILE NO. 000-23649

                            ARTISAN COMPONENTS, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S>                                            <C>
                  DELAWARE                                      77-0278185
       (STATE OR OTHER JURISDICTION OF                       (I.R.S. EMPLOYER
       INCORPORATION OR ORGANIZATION)                     IDENTIFICATION NUMBER)

             1195 BORDEAUX DRIVE                                   94089
            SUNNYVALE, CALIFORNIA                               (ZIP CODE)
  (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
</TABLE>

       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 734-5600

          SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
                                      None

          SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
                    Common Stock, $.001 par value per share

     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.  [ ]

     The aggregate market value of the Common Stock held by non-affiliates of
the registrant as of October 31, 1999 was $59,760,102. 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, 1999 was 13,932,863.

                      DOCUMENTS INCORPORATED BY REFERENCE

     The Registrant has incorporated by reference into Part III of this Annual
Report on Form 10-K portions of its Proxy Statement for the 2000 Annual Meeting
of Stockholders to be held February 17, 2000.

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                                     PART I

CERTAIN FORWARD-LOOKING INFORMATION

     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 (the "Securities Act") and
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and such forward looking statements involve risks and uncertainties. When
used in this Report, the words "expects," "anticipates" and "estimates" and
similar expressions are intended to identify forward looking statements. Such
statements are subject to risks and uncertainties that could cause actual
results to differ materially from those predicted. 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". Artisan Components, Inc. undertakes no
obligation to publicly release any revisions to these forward looking statements
to reflect events or circumstances after the date this Report is filed with the
Securities and Exchange Commission or to reflect the occurrence of unanticipated
events.

ITEM 1. BUSINESS

GENERAL

     Artisan Components, Inc. (the "Company" or "Artisan") is a leading
developer of high performance, high density and low power embedded memory,
standard cell and input/output ("I/O") intellectual property ("IP") components
for the design and manufacture of complex integrated circuits ("ICs"). The
Company offers highly differentiated memory, standard cell and I/O components
that meet the acute needs of complex single chip system ("System-on-a-Chip") ICs
for performance, power and density. Together, memory, standard cell and I/O
components constitute approximately 80% of the silicon area on a typical
System-on-a-Chip IC. The Company's products are optimized for each customer's
manufacturing process and are delivered ready for use with industry standard and
proprietary IC design tools. The Company licenses its products to semiconductor
manufacturers and fabless semiconductor companies for the design of ICs used in
complex, high volume applications, such as portable computing devices, cellular
phones, consumer multimedia products, automotive electronics, personal computers
and workstations.

     The Company primarily licenses its products on a nonexclusive, worldwide
basis to major semiconductor manufacturers and grants these manufacturers the
right to distribute its IP components to their internal design teams and to
fabless semiconductor companies that manufacture at the same facility. In cases
where the semiconductor manufacturer does not have the infrastructure necessary
to distribute and support the Company's IP components, the Company performs the
distribution function directly to the customers of the semiconductor
manufacturer. The Company believes that this licensing approach encourages
proliferation of the Company's products and provides a highly efficient
distribution channel for its IP components. Artisan has licensed its products to
many leading semiconductor manufacturers including Chartered Semiconductor
Manufacturing Ltd. ("Chartered"), Conexant Systems, Inc. ("Conexant"), Fujitsu
Microelectronics, Inc. ("Fujitsu"), Hitachi, Ltd. ("Hitachi"), Infineon
Technologies AG ("Infineon"; formerly known as Siemens Semiconductors), NEC
Corporation ("NEC"), Newport Wafer-Fab, Ltd. ("Newport"), Oki Electric Industry
Co., Ltd. ("OKI"), ST-Microelectronics Group ("ST"; formerly known as
SGS-THOMSON Microelectronics, S.r.l.), Taiwan Semiconductor Manufacturing
Company Ltd. ("TSMC"), Toshiba Corporation ("Toshiba"), UMC Group ("UMC") and
VLSI Technology, Inc. ("VLSI Technology").

     The Company was incorporated in California in April 1991 as VLSI Libraries
Incorporated and changed its name to Artisan Components, Inc. in March 1997. The
Company reincorporated in Delaware in January 1998. The Company's principal
executive offices are located at 1195 Bordeaux Drive, Sunnyvale, California
94089, and its telephone number is (408) 734-5600. Artisan, Process-Perfect,
SAGE, Integral and the Artisan logo are trademarks of the Company. This Annual
Report on Form 10-K also includes product names and other trade names and
trademarks of the Company and of other organizations.

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INDUSTRY BACKGROUND

     The development of the merchant IP component market has resulted from the
continuing trend toward horizontal specialization in the semiconductor industry,
a trend that has been driven by a growth in design complexity due to increases
in manufacturing capacity and an increasing focus on core competencies. In the
1970s, semiconductor companies were vertically integrated and responsible for
all aspects of IC production, including IC design, electronic design automation
("EDA") tool design, IP component design and IC manufacturing. In the 1980s,
application specific integrated circuit ("ASIC") companies developed a new
approach that allowed their customers to perform the logic design of an IC while
they performed the detailed physical implementation of the design and
manufactured the IC. In addition, standalone EDA tool vendors achieved success
by providing software design tools to complement those developed by internal
divisions of semiconductor companies. The early 1990s saw the emergence of a
number of fabless semiconductor companies that chose to focus on specific design
expertise, take advantage of the availability of excess semiconductor
manufacturing capacity and avoid the capital expenditures necessary to build
fabrication facilities. Throughout this period, semiconductor manufacturers
continued to focus on their core competencies: semiconductor design and
manufacturing processes. Today, with the emergence of System-on-a-Chip ICs,
semiconductor manufacturers are beginning to outsource the design of particular
IP components critical to the successful development of System-on-a-Chip ICs.

     Over the past three decades, advances in semiconductor manufacturing
processes have enabled the transistor density on ICs to double every 18 months.
Today, it is possible to place nearly 100 million transistors on a single IC.
State of the art fabrication facilities of the 1980s produced ICs using process
geometries of 1.0um (one millionth of a meter). Current state-of-the-art
fabrication facilities use 0.25um process geometries, and many semiconductor
manufacturers have begun the transition to facilities using 0.18um and 0.15um
processes. These advances enable the manufacture of highly complex
System-on-a-Chip ICs, resulting in substantial performance, power, cost and
reliability improvements over conventional multi-chip systems on printed circuit
boards ("PCB Systems"). System-on-a-Chip ICs combine all of the functionality of
PCB Systems onto a single IC and 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.

                     [Printed Circuit Board System Diagram]

     As shown above, in both a PCB System and in a System-on-a-Chip, the primary
building blocks may include memory, standard cell (logic), I/O, microprocessor,
digital signal processor ("DSP"), mixed-signal and analog components. However,
integration of these components into System-on-a-Chip ICs at deep submicron
process geometries is far more complex than the design of a traditional PCB
System. With continuing advances in manufacturing processes, an increasing
number of individual transistors must be designed and tested and, consequently,
the gap is increasing between what can be manufactured and what can

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be designed within the time to market requirements of the semiconductor
manufacturer. As a result, the full value of today's semiconductor manufacturing
processes is rarely realized, with designers settling for partial utilization of
the process in the interest of meeting cost and schedule requirements. Given
shorter product life cycles and the importance of reducing time to market, the
use of merchant IP components to leverage design and manufacturing capabilities
can be a significant competitive advantage to semiconductor manufacturers.

     Semiconductor manufacturers require solutions that fully utilize their
manufacturing processes in order to maximize performance, speed and density
while reducing time to market. Although the merchant EDA industry has
successfully developed partial solutions to increase design productivity, EDA
tools have not completely overcome the time constraints posed by the need to
create IP components for each IC design in a compressed time to market window.
Merchant suppliers of portable generic IP libraries have also improved design
productivity by offering products designed to work with many manufacturing
processes. However, these generic libraries do not fully utilize the depth and
strengths of a particular manufacturing process. Semiconductor manufacturers
have also tried to expand their design resources, but establishing and
maintaining a large internal design group may divert finite resources from a
semiconductor manufacturer's core competencies. Despite the development and use
of EDA tools and generic libraries and the expansion of internal design
resources, the rapid pace of manufacturing process improvements has continued to
outstrip design capabilities. As a result, the Company believes many
semiconductor manufacturers are using merchant IP components in order to
maximize the performance of their product offerings and improve their time to
market.

THE ARTISAN SOLUTION

     Artisan is a leading developer of high performance, high density and low
power memory, standard cell and I/O components for the design and manufacture of
complex ICs. The Company provides IP components that are optimized for each
customer's manufacturing process.

     The Company's IP components are designed to offer customers the following
benefits:

     Performance, Power and Reliability. Artisan delivers high performance, high
density and low power reliable IP components through a combination of design
expertise, proprietary technology and design tools. The Company's IP components,
which are customized, verified and tested for a particular manufacturing
process, require little or no integration by customers and have been proven by
use in over 50 different manufacturing processes. Many of the Company's products
are designed to achieve speeds in excess of 800 MHz.

     Significant Time to Market Advantages. The Company enables semiconductor
manufacturers to reduce the time required to bring new ICs to market by (i)
eliminating the customer's need to design IP components, (ii) delivering
products designed for a specific manufacturing process and (iii) delivering
products ready for use with industry standard and proprietary IC design tools.
The Company's products can be reused in multiple customer designs, which reduces
design time and decreases time to market for new ICs.

     Long Term Product Development Path. Artisan's IP component technology
provides semiconductor manufacturers with reliable building blocks for future
generations of their complex IC designs. Artisan's ability to adapt and
customize IP components used in one process and one design for use in additional
designs and processes provides each customer with a ready source of reliable IP
components for future designs and processes. This enables the Company's
customers to standardize on Artisan products, accelerate their product
development and focus internal engineering resources on core competencies,
including semiconductor design and manufacturing processes.

     Cost Effective Solutions. As semiconductor dies shrink and the complexity
of IC designs increases, the cost to design System-on-a-Chip ICs increases
significantly. By providing reliable products with significant time to market
benefits, Artisan enables customers to reduce design costs, minimize integration
costs and increase manufacturing yield. Moreover, by using the Company's
products, semiconductor manufacturers avoid the cost of recruiting and training
a significant group of engineers dedicated to IP component design.

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ARTISAN STRATEGY

     The Company's objective is to be the leading provider of high performance
IP components to the semiconductor industry. The Company's strategy is based
upon the following key elements:

     Focus on Key Components for High Volume System-on-a-Chip ICs. The Company
has targeted the rapidly growing System-on-a-Chip industry with high performance
memory, standard cell and I/O components. Together, these components constitute
approximately 80% of the silicon area on a typical System-on-a-Chip IC.
Improvements in the performance of these components, particularly memory, can
have a substantial impact on the overall performance of the IC.

     Target Leading Semiconductor Manufacturers. The Company focuses on
licensing its products to the world's leading semiconductor manufacturers. These
manufacturers represent the largest revenue potential for the Company because
they utilize the most advanced manufacturing processes, manufacture the largest
number of ICs, have the most pressing need for high performance IP components
and face the greatest time to market pressures. To date, the Company has
licensed its products to many leading semiconductor manufacturers including
Chartered, Conexant, Fujitsu, Hitachi, Infineon, NEC, Newport, OKI, ST, TSMC,
Toshiba, UMC and VLSI Technology.

     Generate Revenue through Innovative Business Model. The Company generates
revenue through a combination of license fees, maintenance and support contracts
and royalty payments. The Company charges manufacturers a license fee for the
right to manufacture semiconductors containing the Company's products. In
addition, manufacturers agree to pay the Company a royalty based on
manufacturing volumes. Once a manufacturer has licensed a product from the
Company and in order to maximize royalties, the manufacturer is encouraged to
distribute the product to teams designing integrated circuits for production at
the manufacturer's facility. In some cases, the manufacturer may not have the
infrastructure to distribute the Company's products to design teams. In these
cases, the Company performs the distribution function through its web site as
well as through an in-house telemarketing organization. As a result, the Company
believes its license agreements will facilitate the broad and rapid penetration
of the Company's products into multiple designs, and thereby increase potential
royalty revenue. Royalty payments are calculated based on per unit sales of ICs
or wafers containing the Company's IP components and generally vary in
proportion to the silicon area of an IC occupied by the Company's products. A
portion of these royalty payments is credited back to the customer's account to
use to pay license fees for future orders to be placed with the Company. The
remaining portion of the royalty is reported as net royalty revenue. In the
third quarter of fiscal 1999, the Company received its first royalty revenue as
some of the Company's customers that had entered into royalty-based license
agreements with the Company began the manufacture and sale of products
incorporating the company's IP components.

     Proliferate Artisan's IP Components throughout Customer Designs. The
Company intends to establish itself as the de facto supplier of key IP
components across multiple IC designs and new product generations for each
customer. By making its IP components easy to integrate into the customer's
design methodologies and supporting both industry standard and proprietary IC
design tools, Artisan facilitates the ready inclusion of its IP components in a
large number of designs.

     Leverage Product Development Process. Artisan has developed a large
portfolio of IP building blocks and design tools that allows the Company to
develop new products rapidly. As its customer relationships mature, the Company
believes that the development time for additional products for a customer will
decrease due to the Company's growing base of knowledge and understanding of the
customer's manufacturing processes. The Company intends to continue to improve
the efficiency of its product development process in order to decrease product
delivery time.

     Maintain Technological Leadership. The Company believes that its customers
evaluate IP components based on speed, density, power, quality, reliability and
price. Against these evaluation criteria, the Company believes that it currently
has a position of technological leadership. The Company intends to maintain its
technological leadership position by continuing to develop a significant
portfolio of IP building blocks upon which it can base new generations of
products and by making enhancements to existing products. The

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Company also intends to maintain its expertise in state of the art manufacturing
processes by working with customers during their new process development
efforts.

PRODUCTS

     Artisan's current family of IP components includes high performance, high
density and low power memory, standard cell and I/O components. Initial license
fees typically range from $250,000 to $700,000 per component, depending on the
amount of customization and the number of design views and models required.

     Artisan's products are developed and delivered using a proprietary
methodology that includes a set of design tools, techniques and specific design
expertise that the Company calls "Process-Perfect." This methodology ensures
that the IP components produced by Artisan are designed to achieve the best
combination of performance, density, power and yield for a given manufacturing
process. In addition, the Company has created a flexible portfolio of IP
building blocks. This portfolio, combined with the Process-Perfect methodology,
allows the Company to satisfy its customers' schedule and quality requirements
in a cost effective manner. Artisan's IP components are easily integrated into a
variety of customer design methodologies and support industry standard IC design
tools, including those from EDA tool vendors such as Cadence Design Systems,
Inc. ("Cadence"), Synopsys, Inc. ("Synopsys") and Avant! Corporation ("Avant!"),
as well as customers' proprietary IC design tools. To support these various IC
design tool environments, each of the Company's products includes a
comprehensive set of verified tool models.

     Memory Products. Artisan's embedded memory products include random access
memories ("RAMs"), read only memories ("ROMs") and register files. The Company's
high speed, high density and low power products include single- and dual-port
RAM and ROM products and single-, dual- and triple-port register files. The
Company's embedded memory products are configurable and vary in size to meet the
customer's specification. For example, the Company's RAM products will support
sizes from 2 to 128 bits wide and from 16 to 8,192 words. All of the Company's
memory products include features such as a power down mode, low voltage data
retention and fully static operation. In addition, the Company's memory products
may optionally include built-in test interfaces that support popular test
methodologies.

          High Speed Memory Family. The high speed products are designed to
     achieve speeds in excess of 800 MHz for 0.15mm manufacturing processes. The
     Company achieves the high performance of its memory products through a
     combination of proprietary design innovations that include latch based
     sense amplifiers, high speed row select technology, precise core cell
     balancing and rapid recovery bitlines.

          High Density Memory Family. The high density products are designed for
     applications where achieving the lowest possible manufacturing cost is
     critical. These are typically consumer applications with high manufacturing
     volumes. To achieve the lowest possible manufacturing cost for these
     products, the Company utilizes proprietary circuit and layout techniques to
     reduce the overall area of the memories. In addition, the Company uses
     specific design and analysis techniques to enhance production yield.

          Low Power Memory Family. The low power products are designed to
     operate at low power levels to prolong battery life when used in
     battery-powered electronic systems. The low power products achieve low
     power through a combination of proprietary design innovations that include
     latch based sense amplifiers, a power efficient banked memory architecture,
     precise core cell balancing and unique address decoder and driver
     circuitry.

     Standard Cell Product. Artisan's standard cell product includes over 500
cells optimized for each customer's manufacturing process and IC design tool
environment to result in greater density as compared to competitive standard
cell products. The Company offers standard cell products that are optimized with
high performance, high density and low power to meet the needs of different
markets. The Company has recently introduced its SAGE-X architecture that
includes several design improvements to produce smaller silicon area and better
performance. The Company's standard cell product utilizes each customer's
proprietary manufacturing process rules, including stacked contact-via,
silicided diffusion and local interconnect layers.

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All functions are available in at least four drive strengths, and the Company's
inverters, buffers and 3-state drivers are each available in nine drive
strengths.

     I/O Products. The Company's Integral I/O library includes over 600 standard
I/O functions. The Company also offers a wide variety of specialized I/O
products that are compatible with industry standard PCI, GTL and PECL interfaces
and many others. Every I/O product utilizes each customer's proprietary
manufacturing process rules, pad pitch and ESD requirements, resulting in
superior performance, reliability and manufacturability.

PRODUCT DEVELOPMENT

     The Company has targeted the rapidly growing System-on-a-Chip market with
high performance, high density and low power memory, standard cell and I/O
products. The ability of the Company to compete in the future will be
substantially dependent on its ability to continually create competitive
technologies to meet changing market needs. To this end, the Company's engineers
are involved in the development of more advanced versions of the Company's
products as well as in the development of new products. The Company has
assembled a team of highly skilled engineers whose activities are focused on the
development of IP components for current and anticipated manufacturing
processes. Because of the complexity of these activities, the design and
development process at Artisan is a multidisciplinary effort requiring expertise
in electronic circuit design, process technology, physical layout, design
software, model generation, data analysis and processing and general IC design.

     As of September 30, 1999, Artisan had 64 employees and full-time
equivalents in the engineering department. In fiscal 1997, 1998 and 1999, total
engineering costs were approximately $4.8 million, $8.5 million and $10.6
million, respectively. Engineering costs are allocated between cost of revenue
and product development expenses. Engineering efforts devoted to developing
products for specific customer projects are recognized as cost of revenue while
the balance of engineering costs, incurred for general development of Artisan's
technology, is charged to product development. The Company expects that it will
continue to invest substantial funds for engineering activities. There can be no
assurance that the Company can develop and introduce new technology in a timely
fashion or that such new technology will be accepted by the market. The
Company's customers compete in the semiconductor industry, which is subject to
rapid technological change, frequent introductions of new products, short
product life cycles, changes in customer demands and requirements and evolving
industry standards. The development of new manufacturing processes, the
introduction of products embodying new technologies and the emergence of new
industry standards can render existing products obsolete and unmarketable.
Accordingly, the Company's future success will depend on its ability to continue
to enhance its existing products and to develop and introduce new products that
satisfy increasingly sophisticated customer requirements and that keep pace with
new product introductions, emerging manufacturing process technologies and other
technological developments in the semiconductor industry. Any failure by the
Company to anticipate or respond adequately to changes in manufacturing
processes or customer requirements, or any significant delays in product
development or introduction, would have a material adverse effect on the
Company's business, operating results and financial condition. There can be no
assurance that the Company will not experience difficulties that could delay or
prevent the successful development, introduction and sale of new or enhanced
products or that such new or enhanced products will achieve market acceptance.
Any delay in release dates of new or enhanced products could materially
adversely affect the Company's business, operating results and financial
condition. The Company also could be exposed to litigation or claims from its
customers in the event that it does not satisfy its delivery commitments. There
can be no assurance that any such claim would not have a material adverse effect
on the Company's business, operating results and financial condition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Factors Affecting Future Operating Results -- New Product
Development and Technological Change."

CUSTOMERS

     The Company is focused on licensing its products to semiconductor
manufacturers and fabless semiconductor companies. Many of the world's leading
semiconductor manufacturers are among the
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Company's customers including: Analog Devices, Inc., Chartered, Conexant,
Fujitsu, GEC Plessey Semiconductors (acquired by Mitel Semiconductor), Hitachi,
Infineon, ITT INTERMETALL Semiconductor (acquired by Micronas Semiconductor
Holding AG), LSI Logic Corporation, NEC, OKI, Philips Semiconductors, ST,
Toshiba, TSMC and UMC.

     The Company's royalty-based business model enables aggressive product
distribution and licensing to semiconductor companies who are the customers of
the semiconductor manufacturers. To date, the Company has licensed its products
to hundreds of these semiconductor companies, many of whom are listed in the
table below.

                         ARTISAN'S END-USER LICENSEES*

<TABLE>
<S>                                <C>                                <C>
Acer Laboratories Inc.             Innovative Engineering             Seattle Silicon Corp. (Acquired
Acute Communications Corporation   Integrated Telecom Express, Inc.   by   ZiLOG, Inc.)
Adaptec, Inc.                      IP Semiconductors                  SiberCore Technologies
ADMtek Inc.                        Kawaski Steel Corporation          Sierra Research and Technology,
Advanced Communication Devices     Kendin Communications Inc.           Inc.
  Corp.                            Lara Technology Inc.               Sigtron Technologies, Inc.
Advanced Hardware Architectures,   Level One Communications, Inc.     Silicon Image, Inc.
  Inc.                             LinkUp Systems Corporation         Silicon Magic Corporation
Alantro Communications             Lucent Technologies                Silicon Motion, Inc.
Alcatel Bell                       LuxSonor Semiconductors, Inc.      Silicon Value, Ltd.
Allayer Technologies Corp.         Luxxon Corp.                       STMicroelectronics Group
Alliance Semiconductor             Macronix International, Co., Ltd.  Stream Machine Company
Corporation                        Malleable Technologies             Sundance Technology, Inc.
Advanced Micro Devices, Inc.       Marvell Semiconductor, Inc.        Switch On Networks
Analog Devices, Inc.               Matrox Graphics Inc.               S3, Incorporated
Ardent Technologies, Inc.          Mitel Corporation                  TaraCom
ARM Ltd.                           MMC Networks, Inc.                 TeraLogic, Inc.
Array Microsystems, Inc.           Motorola Inc.                      Theseus Logic, Inc.
Aspex Microsystems Ltd.            National Semiconductor             TOPIC Semiconductor Corp.
ATI Technologies Inc.              Corporation                        Trident Microsystems, Inc.
Aureal Semiconductor               NASA Goddard Space Flight Center   Tripath Technology Inc.
Bitbltz Communications, Inc.       NEC Corporation                    Trumpion Microelectronics
BroadLogic, Inc.                   NeoMagic Corporation               Tundra Semiconductor Corporation
Centerpoint Broadband              NeoParadigm Labs, Inc.             T-Span Corporation
Technologies                       Newport Communications Inc.        T-Square Design
Centillium Communications, Inc.    NVIDIA(TM) Corporation             UTMC Microelectronic Systems
Chameleon Systems, Inc.            Nexware Corporation                Inc.
Chip2Chip(TM), Inc.                NTT Science and Core Technology    Vertex Networks, Inc.
Cirrus Logic Inc.                  Laboratory Group                   VideoLogic Systems
Coast Logic, Inc.                  Oak Technology Inc.                Virata Corporation
ControlNet, Inc.                   Packet Networks, Inc.              Vision Group plc
Crest Microsystems Inc.            Packetcom, Inc.                    (Acquired by STMicroelectronics)
Cypress Semiconductor Corporation  Parallax, Inc.                     West Bay Semiconductors
Digital MediaCom, Inc.             Philips Semiconductors             XaQti Corporation (Acquired by
Digital Reflection, Inc.           PixelFusion Ltd.                     Vitesse Semiconductor
DSP Group, Inc.                    Pixelworks, Inc.                     Corporation)
Dynamia Technology, Inc.           Poseidon Technology                ZiLOG, Inc.
Entridia Corp.                     Prominent Communications, Inc.     3Com Corporation
ESS Technology, Inc.               Quantum Corporation                3dfx Interactive(R) Inc.
Genesis Computer Corporation       QuickLogic Corporation             3DSP Corporation
Hitachi Semiconductor (America)    Radiata Communications Pty Ltd     8x8, Inc.
  Inc.                             Rise Technology Company
iCompression Inc.                  RocketChips, Inc.
iGS Technologies, Inc.             SAGE, Inc.
Infineon Technologies
</TABLE>

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* Some of the Company's End-User Licensees are not listed in the table above as
  they have not granted the Company publicity rights.

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     In addition, Artisan has several industry partner programs whereby members
provide a wide variety of soft IP and microprocessor solutions, design services
and tool support to streamline the design process for Artisan library users.
Many of the Company's current industry partners are listed in the table below.

                               ARTISAN'S PARTNERS

<TABLE>
<S>                            <C>                                     <C>
ALTIUS Solutions, Inc.         IKOS Systems Inc.                       Simplex Solutions, Inc.
Arcadia Design Systems, Inc.   Integrated Silicon Systems, Ltd.        SIS Microelectronics, Inc.
Aristo Technology, Inc.        Lexra Inc.                              SmartSand, Inc.
ATMOS Corporation              LogicVision, Inc.                       SMT (SangHwa Micro Technology Inc.)
BOPS, Inc.                     MacroTech Research, Inc.                Snaketech, Inc.
Cadence Design Systems, Inc.   Magma Design Automation, Inc.           Sonics, Inc.
CreOsys Inc.                   Micro Devices Technology, Inc.          SSL -- Silicon Systems Ltd.
CynApps, Inc.                  Monterey Design Systems, Inc.           Stellar Semiconductor Inc.
Dai Nippon Printing Co., Ltd.  MOSAID Technologies Incorporated        Sycon Design, Inc.
Denali Software, Inc.          MOSIS                                   Synopsys, Inc.
Electric Editor, Inc.          Palmchip Corporation                    SynTest Technologies, Inc.
Enabling Technology, Inc.      picoTurbo, Inc.                         Toppan Printing Co., Ltd.
Escalade Corporation           QuArc, Inc.                             Transtechnic International, Inc.
FOCAM Technologies Inc.        Quadic Systems, Inc.                    Ultima Interconnect Technology,
Frequency Technology, Inc.     Quickturn Design Systems, Inc.          Inc.
Gambit Automated Design, Inc.  RealChip Inc. (formerly SiCore          VeraTest, Inc.
Genesys Testware, Inc.           Systems, Inc.)                        Verplex Systems, Inc.
Global UniChip Corporation     Sapphire Design Automation, Inc.        Voom, Inc.
Goya Technology                Sente Inc.                              White Eagle Systems Technology,
Greenforest Consulting, Inc.   Silicon Access Technology Inc.          Inc.
HDAC, Inc.                     Silicon Perspective Corporation         Xentec, Inc.
</TABLE>

     The Company has been dependent on a relatively small number of customers
for a substantial portion of its annual revenue, although the customers
comprising this group have changed from time to time. In fiscal 1997, ST,
Fujitsu, OKI and NEC accounted for 27%, 24%, 16% and 13% of revenue,
respectively. In fiscal 1998, TSMC, OKI and UMC accounted for 14%, 11% and 11%
of revenue, respectively. In fiscal 1999, NEC, TSMC, Conexant and UMC accounted
for 25%, 19%, 14% and 13% of revenue, respectively. The Company anticipates that
its revenue will continue to depend on a limited number of major customers for
the foreseeable future, although the companies considered to be major customers
and the percentage of revenue represented by each major customer may vary from
period to period depending on the addition of new contracts and the number of
designs utilizing the Company's products. None of the Company's customers has a
written agreement with the Company that obligates it to license future
generations of products or new products, and there can be no assurance that any
customer will license IP components from the Company in the future. In addition,
there can be no assurance that any of the Company's customers will ship products
incorporating the Company's technology or that, if such shipments occur, they
will generate significant revenue. The loss of one or more of the Company's
major customers, reduced orders by one or more of such customers, the failure of
one or more customers to pay license or royalty fees due to the Company or the
failure of a customer to ship products containing the Company's IP components
could materially adversely affect the Company's business, operating results and
financial condition. The Company's business, operating results and financial
condition may also be materially adversely affected if customers experience
project delays and/or new or existing customers delay new bookings or fail to
place anticipated orders. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Factors Affecting Future Operating
Results -- Customer Concentration; Limited Customer Base."

     There can be no assurance that the Company will be successful in continuing
to license its products to current customers or in entering into licenses with
additional semiconductor manufacturers. The Company faces numerous risks in
successfully obtaining orders from customers on terms consistent with the
Company's business model including, among others, the lengthy and expensive
process of building a relationship with a potential customer before reaching an
agreement with such party to license the Company's products; persuading large
semiconductor manufacturers to work with, disclose proprietary information to
and rely upon

                                        9
<PAGE>   10

a smaller company, such as the Company and persuading potential customers to
bear certain development costs associated with development of customized
components. In addition, there are a relatively limited number of semiconductor
manufacturers to which the Company can license its technology in a manner
consistent with its business model. The Company also faces significant
competition from internal design groups of semiconductor manufacturers as well
as other commercial suppliers of IP components. See "-- Competition" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Factors Affecting Future Operating Results -- Competition."

SALES, MARKETING AND DISTRIBUTION

     The Company primarily licenses its products on a nonexclusive, worldwide
basis to major semiconductor manufacturers and grants these manufacturers the
right to distribute its IP components to their internal design teams and to
fabless semiconductor companies that manufacture at the same facility. In cases
where the semiconductor manufacturer does not have the infrastructure necessary
to distribute and support the Company's IP components, the Company performs the
distribution function directly to the customers of the semiconductor
manufacturer, using the Company's web site as well as its in-house telemarketing
organization. The Company believes its sales, marketing and distribution
approach gives it an advantage over its competitors since the Company is able to
leverage its customers' sales and marketing organizations and avoid the costs
associated with hiring, training and compensating the large sales force
necessary to negotiate with each end user customer. As of September 30, 1999,
the Company's sales and marketing organization comprised 13 sales and 9
marketing employees and full-time equivalents. Additionally, the Company relies
in part on a consulting company in Japan to assist its sales efforts in that
market.

     Historically, a substantial portion of the Company's revenue has been
derived from customers outside the United States ("international revenue"). In
fiscal 1997, 1998 and 1999, international revenue, primarily in Asia and Europe,
represented 73%, 84% and 67%, respectively, of the Company's revenue. The
Company anticipates that international revenue will remain a substantial portion
of its revenue in the future. To date, all of the revenue from international
customers has been denominated in U.S. dollars. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Factors Affecting
Future Operating Results -- Risks Associated with International Customers."

COMPETITION

     The Company's strategy of targeting semiconductor manufacturers that
participate in, or may enter, the System-on-a-Chip market requires the Company
to compete in intensely competitive markets. Within the merchant segment of the
IP market, the Company competes primarily against Avant!, Mentor Graphics
Corporation ("Mentor Graphics"), the Silicon Architects division of Synopsys,
Virage Logic ("Virage") and Virtual Silicon Technologies ("Virtual Silicon"). In
addition, the Company may face competition from consulting firms and companies
that typically have operated in the generic library segment of the IP market and
that now seek to offer customized IP components as enhancements to their generic
solutions. The Company also faces significant competition from the internal
design groups of semiconductor manufacturers that are expanding their
manufacturing capabilities and portfolio of IP components to participate in the
System-on-a-Chip market. These internal design groups compete with the Company
for access to the parent's IP component requisitions and may eventually compete
with the Company to supply IP components to third parties on a merchant basis.
There can be no assurance that internal design groups will not expand their
product offerings to compete directly with those of the Company or will not
actively seek to participate as merchant vendors in the IP component market by
selling to third party semiconductor manufacturers or, if they do, that the
Company will be able to compete against them successfully. In addition to
competition from companies in the merchant IP component market, the Company
faces competition from vendors that supply EDA software tools, including certain
of those mentioned above, and there can be no assurance that the Company will be
able to compete successfully against them.

     The Company expects competition to increase in the future from existing
competitors and from new market entrants with products that may be less
expensive than the Company's IP components or that may provide better
performance or additional features not currently provided by the Company. Many
of the
                                       10
<PAGE>   11

Company's current and potential competitors have substantially greater
financial, technical, manufacturing, marketing, distribution and other
resources, greater name recognition and market presence, longer operating
histories, lower cost structures and larger customer bases than the Company. As
a result, they may be able to adapt more quickly to new or emerging technologies
and changes in customer requirements. In addition, certain of the Company's
principal competitors offer a single vendor solution, since, in the case of EDA
tool companies, they maintain their own EDA design tools and IP libraries or, in
the case of internal design groups, they provide IP components developed to
utilize the qualities of a given manufacturing process, and may therefore
benefit from certain capacity, cost and technical advantages. The Company's
ability to compete successfully in the emerging market for IP components will
depend upon certain factors, many of which are beyond the Company's control
including, but not limited to, success in designing new products; implementing
new designs at smaller process geometries; access to adequate EDA tools (many of
which are licensed from the Company's current or potential competitors); the
price, quality and timing of new product introductions by the Company and its
competitors; the emergence of new IP component interchangeability standards; the
widespread licensing of IP components by semiconductor manufacturers or their
design groups to third party manufacturers; the ability of the Company to
protect its intellectual property; market acceptance of the Company's IP
components; success of competitive products; market acceptance of products using
System-on-a-Chip ICs and industry and general economic conditions. There can be
no assurance that the Company will be able to compete successfully in the
emerging merchant IP component market. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Factors Affecting Future
Operating Results -- Competition."

PATENTS AND INTELLECTUAL PROPERTY PROTECTION

     The Company relies primarily on a combination of nondisclosure agreements
and other contractual provisions and patent, trademark, trade secret, and
copyright law to protect its proprietary rights. The Company has an active
program to protect its proprietary technology through the filing of patents. As
of September 30, 1999, the Company had applications for 17 patents on file with
the United States Patent and Trademark Office (the "USPTO"), and, of these
applications, six patents had been granted. As of September 30, 1999, the
Company had no filings for foreign patents, but the Company intends to file such
foreign patent applications as appropriate in the future. The Company has filed
eight applications under the Patent Cooperation Treaty relating to eight patent
applications previously filed with the USPTO. There can be no assurance that the
Company's pending patent applications will be approved, that any issued patents
will protect the Company's intellectual property or will not be challenged by
third parties or that the patents of others will not have an adverse effect on
the Company's ability to do business. Furthermore, there can be no assurance
that others will not independently develop similar or competing technology or
design around any patents that may be issued to the Company.

     The Company also relies on trademark and trade secret laws to protect its
intellectual property. The Company protects its trade secrets and other
proprietary information through confidentiality agreements with its employees
and customers in addition to other security measures. Despite these efforts,
there can be no assurance that others will not gain access to the Company's
trade secrets, that such trade secrets will not be independently discovered by
competitors or that the Company can meaningfully protect its intellectual
property. In addition, effective trade secret protection may be unavailable or
limited in certain foreign countries. Although the Company intends to protect
its rights vigorously, there can be no assurance that such measures will be
successful.

     Failure of the Company to enforce its patents, trademarks or copyrights or
to protect its trade secrets could have a material adverse effect on the
Company's business, operating results and financial condition. There can be no
assurance that such intellectual property rights can be successfully asserted in
the future or will not be invalidated, circumvented or challenged. From time to
time, third parties, including competitors of the Company, may assert patent,
copyright and other intellectual property rights to technologies that are
important to the Company. There can be no assurance that third parties will not
assert infringement claims against the Company in the future, that assertions by
third parties will not result in costly litigation or that the Company would
prevail in any such litigation or be able to license any valid and infringed
patents from third

                                       11
<PAGE>   12

parties on commercially reasonable terms. Litigation, regardless of the outcome,
could result in substantial cost and would divert resources of the Company. Any
infringement claim or other litigation against or by the Company could
materially adversely affect the Company's business, operating results and
financial condition.

     In addition, there can be no assurance that competitors of the Company,
many of which have substantial resources and have made substantial investments
in competing technologies, do not have, or will not seek to apply for and
obtain, patents that will prevent, limit or interfere with the Company's ability
to make, use or sell its products either in the United States or in
international markets. There can be no assurance that the Company will not in
the future become subject to patent infringement claims and litigation or
interference proceedings declared by the USPTO to determine the priority of
inventions. The defense and prosecution of intellectual property suits, USPTO
interference proceedings and related legal and administrative proceedings are
both costly and time consuming. Any such suit or proceeding involving the
Company could have a material adverse effect on the Company's business,
operating results and financial condition. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Factors Affecting
Future Operating Results -- Risks Associated with Protection of Intellectual
Property."

EMPLOYEES

     As of September 30, 1999, the Company had 97 employees and full-time
equivalents. Of this total, 64 were in engineering, 22 were in sales and
marketing and 11 were in finance and administration. None of the Company's
employees is represented by a labor union or is subject to a collective
bargaining agreement. The Company has never experienced a work stoppage and
believes that its relations with employees are good.

EXECUTIVE OFFICERS

     The executive officers of the Company, their positions and their ages (as
of September 30, 1999) are as follows:

<TABLE>
<CAPTION>
                      NAME                        AGE                      POSITION
                      ----                        ---                      --------
<S>                                               <C>   <C>
Mark R. Templeton...............................  40    President, Chief Executive Officer and
                                                        Director
Scott T. Becker.................................  39    Chief Technical Officer and Director
Dixie K. Lopes..................................  32    Acting Chief Financial Officer
Larry J. Fagg...................................  53    Vice President, Worldwide Sales
Dhrumil Gandhi..................................  42    Vice President, Engineering
Jeffrey A. Lewis................................  39    Vice President, Market and Business
                                                        Development
</TABLE>

     Mark R. Templeton has served as President, Chief Executive Officer and a
director of the Company since April 1991 when he co-founded the Company. From
April 1990 to March 1991, Mr. Templeton was director of the Custom IC Design
Group at Mentor Graphics, an EDA company. From October 1984 to March 1990, he
held various positions with Silicon Compilers Systems Corporation ("Silicon
Compilers"), an EDA company, with the last position being Director of the Custom
IC Design Group. Mr. Templeton received a B.S.E.E. from Boston University.

     Scott T. Becker has served as Chief Technical Officer and a director of the
Company since April 1991 when he co-founded the Company. From April 1990 to
April 1991, he was manager of the library development group at the IC Division
of Mentor Graphics. From May 1985 to April 1990, he was responsible for library
development at Silicon Compilers. Mr. Becker received a B.S.E.E. from the
University of Illinois and an M.S.E.E. from Santa Clara University.

     Dixie K. Lopes has served as Acting Chief Financial Officer of the Company
since June 1999. Ms. Lopes, Director of Finance, has held previous positions
with the Company as Corporate Controller and Manager of Financial Planning and
Analysis from October 1997 to June 1999. From January 1994 to October 1997, she
was Manager of Financial Planning and Analysis for NetFRAME Systems, Inc, a
network computer systems company. Ms. Lopes received a B.A. in Liberal Studies
from California Polytechnic State University, San Luis Obispo and an M.B.A. with
finance concentration from Santa Clara University.

                                       12
<PAGE>   13

     Larry J. Fagg has served as Vice President of Worldwide Sales of the
Company since August 1997. From May 1995 to August 1997, he served as Director,
North American Sales at the Silicon Architects Group of Synopsys, an EDA
company. From May 1994 to May 1995, he served as Vice President of North
American Sales at CrossCheck Technology, Inc., an EDA company. From December
1988 to May 1994, he served as Vice President, Strategic Alliances of Cadence,
an EDA company.

     Dhrumil Gandhi has served as Vice President of Engineering of the Company
since May 1993. From July 1983 to May 1993, he served as Senior Manager for
Advanced ASIC Design Systems at Mentor Graphics. He received a B.S.E.E. from the
Indian Institute of Technology and an M.S.E.E. from the California Institute of
Technology.

     Jeffrey A. Lewis has served as Vice President of Market and Business
Development of the Company since June 1999. From September 1996 to June 1999, he
served as Vice President of Marketing of the Company. From August 1994 to
September 1996, he served in several managerial positions at Compass Design
Automation, Inc, an EDA company, the most recent of which was Vice President of
Corporate Marketing. From April 1992 to August 1994, he served as Director of
Marketing at Redwood Design Automation, Inc., an EDA company. Mr. Lewis received
a B.S.E.E., a B.A. in Economics and an M.B.A., all from the University of
California, Berkeley.

ITEM 2. PROPERTIES

     The Company's executive, administrative and technical offices currently
occupy 32,660 square feet in Sunnyvale, California, under a lease that expires
in 2004. The Company sublets to a third party the 16,797 square foot space it
formerly occupied in San Jose, California. The lease on the San Jose space
expires in 2001. In addition, as of December 1999, the Company also leases sales
and support offices in North Andover, Massachusetts and Tokyo, Japan. The
Company believes that its existing facilities are adequate to meet its current
needs but that it may need to seek additional space in the future. The Company
believes that suitable additional space will be available on commercially
reasonable terms as needed.

ITEM 3. LEGAL PROCEEDINGS

     The Company is not currently a party to any legal proceedings.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     None.

                                       13
<PAGE>   14

                                    PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

PRICE RANGE OF COMMON STOCK

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

<TABLE>
<CAPTION>
                                                               HIGH        LOW
                                                              -------    -------
<S>                                                           <C>        <C>
Fiscal Year 1998
Second Quarter (from February 3, 1998)......................  $20.250    $15.250
  Third Quarter.............................................   23.375     11.875
  Fourth Quarter............................................   15.500      6.500
Fiscal Year 1999
  First Quarter.............................................   11.375      4.375
  Second Quarter............................................    7.688      5.000
  Third Quarter.............................................   12.250      4.219
  Fourth Quarter............................................   14.375      8.125
</TABLE>

     On December 8, 1999, the reported last sale price of the Common Stock on
the Nasdaq National Market was $17.50 per share. As of October 31, 1999, there
were approximately 141 stockholders of record of the Common Stock.

DIVIDEND POLICY

     Since March 1996, when the Company converted to a C corporation from a
subchapter S corporation, the Company has not declared or paid any cash
dividends on its Common Stock or other securities. The Company presently intends
to retain future earnings, if any, for use in the operation and expansion of its
business and does not anticipate paying cash dividends in the foreseeable
future.

ITEM 6. SELECTED FINANCIAL DATA

     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 Financial Statements and Notes thereto included elsewhere in
this Annual Report on Form 10-K. The balance sheet data as of September 30, 1998
and 1999 and the statement of operations data for the fiscal years ended
September 30, 1997, 1998 and 1999 are derived from the financial statements that
have been audited by PricewaterhouseCoopers LLP, independent accountants,
included elsewhere in this Annual Report on Form 10-K. The balance sheet data as
of September 30, 1995, 1996 and 1997 and the statement of operations data for
the fiscal years ended September 30, 1995 and 1996 are derived from the
financial statements that have been audited by

                                       14
<PAGE>   15

PricewaterhouseCoopers LLP, independent accountants, not included in this Annual
Report on Form 10-K. Historical results are not necessarily indicative of
results to be expected in the future.

<TABLE>
<CAPTION>
                                                      FISCAL YEAR ENDED SEPTEMBER 30,
                                              ------------------------------------------------
                                               1995      1996      1997      1998       1999
                                              ------    ------    ------    -------    -------
                                                   (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                           <C>       <C>       <C>       <C>        <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
  License...................................  $2,718    $4,147    $8,912    $16,568    $14,138
  Net royalty...............................      --        --        --         --        729
                                              ------    ------    ------    -------    -------
          Total revenue.....................   2,718     4,147     8,912     16,568     14,867
Costs and expenses:
  Cost of revenue...........................     984     1,280     2,855      4,962      5,957
  Product development.......................   1,044     1,080     1,955      3,580      4,631
  Sales and marketing.......................     272       603     2,019      4,030      5,105
  General and administrative................     415       611     1,340      1,922      2,599
                                              ------    ------    ------    -------    -------
          Total cost and expenses...........   2,715     3,574     8,169     14,494     18,292
                                              ------    ------    ------    -------    -------
Operating (loss) income.....................       3       573       743      2,074     (3,425)
Other income, net...........................      --        96       297      1,175      2,024
                                              ------    ------    ------    -------    -------
(Loss) income before provision for income
  taxes.....................................       3       669     1,040      3,249     (1,401)
(Benefit) provision for income taxes........      36       137       356        923       (858)
                                              ------    ------    ------    -------    -------
Net (loss) income...........................  $  (33)   $  532    $  684    $ 2,326    $  (543)
                                              ======    ======    ======    =======    =======
Basic net (loss) income per share
  (historical)(2)...........................  $(0.01)   $ 0.11    $ 0.13    $  0.22    $ (0.04)
                                              ======    ======    ======    =======    =======
Diluted net (loss) income per share
  (historical)(2)...........................  $(0.01)   $ 0.08    $ 0.07    $  0.18    $ (0.04)
                                              ======    ======    ======    =======    =======
Pro forma net income data (unaudited)(1):
  Pro forma net income......................  $   21    $  409
                                              ======    ======
  Diluted net income per share (pro
     forma)(2)..............................  $ 0.00    $ 0.06
                                              ======    ======
Shares used in computing:
  Basic net (loss) income per share.........   5,018     5,040     5,456     10,457     13,569
                                              ======    ======    ======    =======    =======
  Diluted net (loss) income per share.......   5,018     7,010     9,657     12,917     13,569
                                              ======    ======    ======    =======    =======
</TABLE>

<TABLE>
<CAPTION>
                                                             AT SEPTEMBER 30,
                                             -------------------------------------------------
                                              1995      1996      1997       1998       1999
                                             ------    ------    -------    -------    -------
                                                              (IN THOUSANDS)
<S>                                          <C>       <C>       <C>        <C>        <C>
BALANCE SHEET DATA:
Cash, cash equivalents and marketable
securities.................................  $    6    $2,958    $ 4,554    $47,204    $48,181
Working capital............................     141     2,268      4,352     49,874     50,612
Total assets...............................   1,261     5,172     12,011     59,489     64,344
Long term liabilities, net of current
  portion(3)...............................      --        15         49        218        174
Total stockholders' equity.................     410     4,292      9,348     55,539     57,120
</TABLE>

- ---------------
(1) Prior to March 1996, the Company was a subchapter S corporation and,
    therefore, was not subject to entity level taxation. Pro forma net income
    includes pro forma tax expense as if the Company were taxed as a C
    corporation in fiscal 1995 and 1996.

(2) For an explanation of net income (loss) per share and shares used in per
    share calculations, see Note 13 of the Notes to Financial Statements
    included elsewhere in this Annual Report on Form 10-K.

(3) Long term liabilities consist of deferred rent and deferred revenue. See
    Note 8 of the Notes to Financial Statements.

                                       15
<PAGE>   16

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

     The following discussion should be read in conjunction with the 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. For a more detailed discussion of these and other business risks,
see "-- Factors Affecting Future Operating Results."

OVERVIEW

     Artisan is a leading developer of high performance, high density and low
power embedded memory, standard cell and I/O components for the design and
manufacture of complex ICs. The Company licenses its products to semiconductor
manufacturers and fabless semiconductor companies for the design of ICs used in
complex, high volume applications, such as portable computing devices, cellular
phones, consumer multimedia products, automotive electronics, personal computers
and workstations.

     Beginning in late fiscal 1996, the Company implemented a royalty-based
business model that is intended to generate revenue from both license fees and
royalties. The Company generally licenses its products on a nonexclusive,
worldwide basis to major semiconductor manufacturers and grants these
manufacturers the right to distribute the Company's IP components to their
internal design teams and to distribute and sublicense to semiconductor design
companies that manufacture at the same facility. In cases where the
semiconductor manufacturer does not have the infrastructure necessary to
distribute and support the Company's IP components, the Company performs the
distribution function directly to the customers of the semiconductor
manufacturer. License fees and royalties are received under the terms of license
agreements with customers to provide the Company's IP component products.
Typically, a customer licenses one or more products that are accompanied by
layout databases, views to support a customer's IC design tool environment and
design methodology documentation. The license of the Company's products
typically involves a sales cycle of six to 12 months and often coincides with a
customer's migration to a new manufacturing process. The Company's contracts
generally require a customer to pay a license fee to Artisan ranging from
approximately $250,000 to $700,000 for each product delivered under a contract.
A contract typically calls for an initial payment of approximately one-third of
the license fee with the remainder due upon delivery, generally three to six
months later. Royalty payments are calculated based on per unit sales of ICs or
wafers containing the Company's IP components and generally vary in proportion
to the silicon area of an IC occupied by the Company's products. Given that the
Company provides its products early in the customer's IC design process, there
is a significant delay between the delivery of a product and the generation of
royalty revenue.

     To date, the substantial majority of the Company's license revenue has been
recognized on a percentage of completion method. Provisions for estimated losses
on uncompleted contracts are recognized in the period in which the likelihood of
such losses is determined. As the completion period for a project ranges from
three to six months, revenue in any quarter is dependent on the Company's
progress toward completion of the project. There can be no assurance that the
Company's estimates will be accurate, and, in the event they are not, the
Company's business, operating results and financial condition in subsequent
periods could be materially adversely affected.

     In the third quarter of fiscal 1999, the Company received its first royalty
reports from customers. As expected, these royalties were from a small number of
IC designs that were early in their product life-cycles. According to contract
terms, a portion of these royalty payments is credited back to the customer's
account to use to pay license fees for future orders to be placed with the
Company. The remaining portion of the royalty is reported as net royalty
revenue. The Company's success will depend on its ability to generate royalty
revenue from a substantially larger number of designs and on many of these
designs achieving large manufacturing volumes. There can be no assurance that
the Company will be successful in expanding the number of royalty bearing
contracts with customers, and there can be no assurance that the Company will
receive significant

                                       16
<PAGE>   17

royalty revenue in the future. See "-- Factors Affecting Future Operating
Results -- Fluctuations in Operating Results."

     The Company has been dependent on a relatively small number of customers
for a substantial portion of its revenue, although the customers comprising this
group have changed from time to time. In fiscal 1997, ST, Fujitsu, OKI and NEC
accounted for 27%, 24%, 16% and 13% of revenue, respectively. In fiscal 1998,
TSMC, OKI, and UMC accounted for 14%, 11% and 11% of revenue, respectively. In
fiscal 1999, NEC, TSMC, Conexant and UMC accounted for 25%, 19%, 14% and 13% of
revenue, respectively. The Company anticipates that its revenue will continue to
depend on a limited number of major customers for the foreseeable future,
although the companies considered to be major customers and the percentage of
revenue represented by each major customer may vary from period to period
depending on the addition of new contracts and the number of designs utilizing
the Company's products. See "-- Factors Affecting Future Operating Results --
Customer Concentration; Limited Customer Base."

     Historically, a substantial portion of the Company's revenue has been
international revenue. In fiscal 1997, 1998 and 1999, international revenue,
primarily from Asia and Europe, represented 73%, 84%, and 67%, respectively, of
the Company's revenue. The Company anticipates that international revenue will
remain a substantial portion of its revenue in the future. To date, all of the
revenue from international customers has been denominated in U.S. dollars. See
"-- Factors Affecting Future Operating Results -- Risks Associated with
International Customers."

     The Company derives substantially all of its revenue from sales of its
memory and standard cell products that together accounted for 94%, 94% and 80%
of revenue in fiscal 1997, 1998 and 1999, respectively. The Company expects that
memory products and standard cell products will continue to account for a
substantial portion of the Company's revenue for the foreseeable future. There
can be no assurance that the Company will continue to derive revenue from memory
or standard cell products and a decline in revenue from such products would have
a material adverse effect on the Company's business, operating results and
financial condition. The Company's future financial performance will depend in
significant part on the successful development, introduction and customer
acceptance of new products. See "-- Factors Affecting Future Operating
Results -- Product Concentration."

     Since the Company's inception in April 1991, each of the Company's cost and
expense categories has progressively increased as the Company has added
personnel and increased its activities in these areas. The Company intends to
continue making significant expenditures, particularly those associated with
engineering and sales and marketing, and expects that these costs and expenses
will continue to be a large percentage of revenue in future periods. Whether
such expenses increase or decrease as a percentage of revenue will be
substantially dependent upon the rate of change of the Company's revenue.

     The Company in the past has experienced delays in the progress of certain
projects, and there can be no assurance that such delays will not occur in the
future. Any delay or failure to achieve progress could result in damage to
customer relationships and the Company's reputation, under-utilization of
engineering resources or a delay in the market acceptance of the Company's
products, any of which could have a material adverse effect on the Company's
business, operating results and financial condition. In addition, the Company's
contracts with customers generally may be canceled without cause, and if a
customer cancels or delays performance under any such contracts, the Company's
business, operating results and financial condition could be materially
adversely affected. The Company's costs and expenses will be based in part on
the Company's expectations of future revenue. Accordingly, if the Company does
not realize its expected revenue, its business, operating results and financial
condition could be materially adversely affected. The Company has recently
experienced periods of negative growth as well as declines in the rate of growth
of its revenue as compared with prior periods, primarily due to deterioration in
the demand for semiconductors generally. There can be no assurance that the
Company will experience positive revenue growth in the future. See "-- Factors
Affecting Future Operating Results -- Fluctuations in Operating Results."

     In connection with the grant of options for the purchase of 96,200 shares
of Common Stock to employees during the period from December 1996 through March
1997 and 15,000 shares of Common Stock to non-employees in January 1998, the
Company recorded aggregate deferred compensation of approximately
                                       17
<PAGE>   18

$281,000, representing the difference between the deemed fair value of the
Common Stock and the option exercise price at the date of grant. Such deferred
compensation is amortized over the vesting period relating to the options, of
which approximately $41,000, $80,000 and $87,000 have been amortized during
fiscal 1997, 1998 and 1999, respectively. In addition, the amortization will
result in charges in the first quarter of fiscal 2000 of approximately $21,000
and charges of $11,000 per quarter for the following five quarters.

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
                                                               YEAR ENDED SEPTEMBER 30,
                                                              --------------------------
                                                               1997      1998      1999
                                                              ------    ------    ------
<S>                                                           <C>       <C>       <C>
Total revenue...............................................  100.0%    100.0%    100.0%
Costs and expenses:
  Cost of revenue...........................................   32.0      30.0      40.1
  Product development.......................................   22.0      21.6      31.1
  Sales and marketing.......................................   22.7      24.3      34.3
  General and administrative................................   15.0      11.6      17.5
                                                              -----     -----     -----
          Total cost and expenses...........................   91.7      87.5     123.0
                                                              -----     -----     -----
Operating (loss) income.....................................    8.3      12.5     (23.0)
Other income, net...........................................    3.3       7.1      13.6
                                                              -----     -----     -----
(Loss) income before provision for income taxes.............   11.6      19.6      (9.4)
Provision for income taxes..................................    4.0       5.6      (5.7)
                                                              -----     -----     -----
Net (loss) income...........................................    7.6%     14.0%     (3.7)%
                                                              =====     =====     =====
</TABLE>

YEARS ENDED SEPTEMBER 30, 1998 AND 1999

  Revenue

     Revenue decreased by 10.3% from $16.6 million in fiscal 1998 to $14.9
million in fiscal 1999. The decline in revenue in fiscal 1999 as compared with
fiscal 1998 was primarily attributable to decreased licensing of the Company's
memory products in fiscal 1999 of $3.9 million due to reduced customer orders
for these products, partially offset by the addition of net royalty revenue of
$729,000 and by increases in revenue from support contracts and licensing of I/O
and standard cell products in fiscal 1999 of $1.5 million. The net royalty
revenue of $729,000 reflects the Company's first royalty revenue arising from
the business model adopted in late fiscal 1996. Gross royalty payments are
calculated based on per unit sales of ICs or wafers containing the Company's IP
components and generally vary in proportion to the silicon area of an IC
occupied by the Company's products. Total gross royalties for fiscal 1999 were
$1.1 million. From this amount, a portion was credited back to the customer's
account to use to pay license fees for future orders to be placed with the
Company. The remaining portion of the royalty, or $729,000 in fiscal 1999, was
reported as net royalty revenue.

  Cost and Expenses

     Engineering Costs. Engineering costs are allocated between cost of license
revenue and product development expense. Engineering efforts devoted to
developing products for specific customer projects are recognized as cost of
revenue. The balance of engineering costs, incurred for general development of
Artisan's technology, is charged to product development. Engineering costs
generally are charged as incurred and do not necessarily correspond to the
recognition of revenue under related contracts. Engineering costs increased by
24.0% from $8.5 million in fiscal 1998 to $10.6 million in fiscal 1999.
Engineering costs as a percentage of revenue increased from 51.6% in fiscal 1998
to 71.2% for fiscal 1999. The absolute dollar increase in engineering costs in
fiscal 1999, as compared with fiscal 1998, was primarily due to an increase in
headcount

                                       18
<PAGE>   19

and personnel expenses of $1.3 million and increased computer and networking
equipment maintenance and depreciation of $628,000.

          Cost of Revenue. Cost of license revenue increased by 20.1% from $5.0
     million in 1998 to $6.0 million in fiscal 1999. Cost of license revenue as
     a percentage of revenue was 30.0% and 40.1% for fiscal 1998 and fiscal
     1999, respectively. The absolute dollar increase in cost of revenue in
     fiscal 1999, as compared with fiscal 1998, was due to increases in
     headcount and costs associated with delivering product to, and supporting,
     a growing customer base.

          Product Development Expenses. Product development expenses increased
     by 29.4% from $3.6 million in fiscal 1998 to $4.6 million in fiscal 1999.
     Product development expenses as a percentage of revenue increased from
     21.6% to 31.1% for fiscal 1998 and fiscal 1999, respectively. The absolute
     dollar increase in product development expenses in fiscal 1999, as compared
     with fiscal 1998, was attributable to an increase in headcount and
     personnel expenses and increased computer and networking equipment
     maintenance and depreciation costs. The Company expects that product
     development expenses will continue to increase in absolute dollars. Whether
     such expenses increase or decrease as a percentage of revenue will be
     substantially dependent upon the rate of change of the Company's revenue.

     Sales and Marketing Expenses. Sales and marketing expenses include
salaries, commissions, travel expenses and costs associated with trade shows,
advertising and other marketing efforts. Costs of pre-sale customer support are
also charged to sales and marketing. Sales and marketing expenses increased by
26.7% from $4.0 million in fiscal 1998 to $5.1 million in fiscal 1999. Sales and
marketing expense as a percentage of revenue increased from 24.3% for fiscal
1998 to 34.3% for fiscal 1999. The increase in absolute dollars in sales and
marketing expenses in fiscal 1999, as compared with fiscal 1998, was
attributable to increased headcount and personnel-related expenses of
approximately $381,000, higher travel expenses of $350,000 and increased
advertising and trade show expenses plus investment in new marketing programs of
approximately $311,000. Advertising and trade show expenses increased because
the Company attended more small trade shows and allocated more resources to
enhance its profile with potential end-user customers at the Design Automation
Conference trade show in fiscal 1999. New marketing program expenditures
increased as a result of the Company's investment in telemarketing personnel and
collateral materials to support its growing end-user customer base. The Company
expects sales and marketing expenses to increase in absolute dollars in the
future as the Company increases headcount to expand account coverage and provide
increased customer support. The rate of increase of, and the percentage of
revenue represented by, sales and marketing expenses in the future will vary
from period to period based on the trade show, advertising, promotional and
other sales and marketing activities undertaken, the change in sales and
marketing headcount in any given period and the rate of change in the Company's
revenue.

     General and Administrative Expenses. General and administrative expenses
increased by 35.2% from $1.9 million in fiscal 1998 to $2.6 million in fiscal
1999. As a percentage of revenue, general and administrative expenses increased
from 11.6% to 17.5% in fiscal 1998 and fiscal 1999, respectively. The absolute
dollar increase in general and administrative expenses in fiscal 1999, as
compared with fiscal 1998, was due to bad debt expense related to deterioration
in the financial and/or business condition of two of the Company's customers and
an increase the general reserve for doubtful accounts totaling $369,000,
headcount additions in late fiscal 1998 which increased 1999 expenses by
approximately $160,000 and increased costs of public reporting, additional
accounting and legal fees, increased insurance costs and professional recruiting
fees totaling $173,000, primarily due to the Company's status as a publicly-held
company for only part of fiscal 1998 but for all of fiscal 1999. The Company
expects general and administrative expenses to grow in absolute dollars in
future periods as the Company expands its operations. The percentage of revenue
represented by general and administrative expenses in the future will primarily
depend on the rate of change of the Company's revenue.

  Other Income

     Other income increased by 72.3% from $1.2 million in fiscal 1998 to $2.0
million in fiscal 1999. Other income as a percentage of revenue increased from
7.1% to 13.6% in fiscal 1998 and fiscal 1999, respectively.

                                       19
<PAGE>   20

The growth in other income in fiscal 1999, as compared with fiscal 1998,
reflects a full year of interest income in fiscal 1999 as compared to a partial
year in fiscal 1998, since the Company completed an initial public offering and
follow-on public offering in February 1998 and April 1998, respectively. The
increased other income also reflects higher interest income earned as a result
of the Company's decision to move from tax-exempt investments in fiscal 1998 to
taxable investments early in fiscal 1999.

  Income Taxes

     The provision for income taxes was $923,000 in fiscal 1998 and for fiscal
1999, the tax benefit was $858,000. The effective tax rate increased to 61.2% in
fiscal 1999, as compared with 28.4% in fiscal 1998. The increase in effective
tax rate for the respective periods was due primarily to the fully-taxable
operating losses recorded by the Company in fiscal 1999 and the Company's
tax-free interest income generated in the first two quarters of fiscal 1999. The
difference between the statutory and effective rates of income tax is due to the
impact of state taxes and tax-free interest income and tax credits.

YEARS ENDED SEPTEMBER 30, 1997 AND 1998

  Revenue

     Revenue increased by 85.9% from $8.9 million in fiscal 1997 to $16.6
million in fiscal 1998. The growth in revenue in fiscal 1998 as compared with
fiscal 1997 was primarily attributable to increased licensing of the Company's
memory, standard cell and I/O products.

  Cost and Expenses

     Engineering Costs. Engineering costs increased by 77.6% from $4.8 million
in fiscal 1997 to $8.5 million in fiscal 1998. Engineering costs as a percentage
of revenue declined from 54.0% in fiscal 1997 to 51.6% for fiscal 1998. The
absolute dollar increase in engineering costs in fiscal 1998, as compared with
fiscal 1997, was due primarily to an increase in engineering personnel and, to a
lesser extent, purchases of computer equipment, software tools and networking
infrastructure and equipment.

          Cost of Revenue. Cost of license revenue increased by 73.8% from $2.9
     million in 1997 to $5.0 million in fiscal 1998. Cost of license revenue as
     a percentage of revenue was 32.0% and 30.0% for fiscal 1997 and fiscal
     1998, respectively. The absolute dollar increase in cost of revenue in
     fiscal 1998, as compared with fiscal 1997, was due to increases in
     headcount and costs associated with delivering product to, and supporting,
     a growing customer base.

          Product Development Expenses. Product development expenses increased
     by 83.1% from $2.0 million in fiscal 1997 to $3.6 million in fiscal 1998.
     Product development expenses as a percentage of revenue declined from 22.0%
     to 21.6% for fiscal 1997 and fiscal 1998, respectively. The absolute dollar
     increase in product development expenses in fiscal 1998, as compared with
     fiscal 1997, was attributable to an increase in engineering personnel and,
     to a lesser extent, maintenance and depreciation related to purchases of
     computer equipment, software tools and networking infrastructure and
     equipment.

     Sales and Marketing Expenses. Sales and marketing expenses increased by
99.6% from $2.0 million in fiscal 1997 to $4.0 million in fiscal 1998. Sales and
marketing expense as a percentage of revenue increased from 22.7% for fiscal
1997 to 24.3% for fiscal 1998. The increase in absolute dollars in sales and
marketing expenses in fiscal 1998, as compared with fiscal 1997, was primarily
attributable to increases in sales and marketing headcount and commissions
expense to support an expanded customer coverage model.

     General and Administrative Expenses. General and administrative expenses
increased by 43.4% from $1.3 million in fiscal 1997 to $1.9 million in fiscal
1998. As a percentage of revenue, general and administrative expenses decreased
from 15.0% to 11.6% in fiscal 1997 and fiscal 1998, respectively. The absolute
dollar increases in general and administrative expenses in fiscal 1998, as
compared with fiscal 1997, were primarily due to increases in general and
administrative personnel and increases in fees for professional services.

                                       20
<PAGE>   21

  Other Income

     Other income increased by 295.6% from $297,000 in fiscal 1997 to $1.2
million in fiscal 1998. Other income as a percentage of revenue increased from
3.3% to 7.1% in fiscal 1997 and fiscal 1998, respectively. The growth in other
income in fiscal 1998, as compared with fiscal 1997, primarily reflects interest
income earned on the proceeds from the Company's initial public offering and
follow-on public offering which were completed in February 1998 and April 1998,
respectively.

  Income Taxes

     The provision for income taxes was $356,000 and $923,000 in fiscal 1997 and
fiscal 1998, respectively. The effective tax rate decreased to 28.4% in fiscal
1998, as compared with 34.2% in fiscal 1997. The change in effective tax rate
for the respective periods was primarily due to the Company investing the
proceeds from its initial public offering and follow-on public offering in
securities that were exempt from federal taxation.

LIQUIDITY AND CAPITAL RESOURCES

     The Company has funded its operations primarily from license revenue
received from inception to September 30, 1999, the net proceeds of $27.1 million
from its February 1998 initial public offering of Common Stock, the net proceeds
of $15.8 million from its April 1998 secondary offering of Common Stock and, to
a lesser extent, the proceeds of approximately $7.7 million from the sale of
Preferred Stock and a warrant.

     The Company's operating activities provided net cash of $757,000, $2.1
million and $2.3 million in fiscal, 1997, 1998 and 1999, respectively. Net cash
provided by operating activities in fiscal 1997 and 1998 was due primarily to
net income plus depreciation and amortization offset by contract receivables and
prepaid expenses and other assets. Net cash provided by operating activities in
fiscal 1999 was due to deferred revenue, depreciation and amortization and
accounts payable and other liabilities offset by contract receivables, deferred
taxes and the Company's net loss.

     Net cash used in investing activities was $4.6 million, $10.2 million and
$25.2 million in fiscal 1997, 1998 and 1999, respectively. Investing activities
have consisted primarily of net purchases of marketable securities and purchases
of property and equipment. See Notes 5 and 6 of the Notes to Financial
Statements.

     Net cash provided by financing activities was $4.2 million, $43.6 million
and $1.6 million in fiscal 1997, 1998 and 1999, respectively. In fiscal 1997,
financing activities consisted primarily of sales of Preferred Stock. In fiscal
1998, financing activities consisted primarily of sales of the Company's Common
Stock in its initial public offering and follow-on public offering. In fiscal
1999, financing activities consisted of proceeds from issuance of Common Stock.

     As of September 30, 1999, the Company had cash, cash equivalents and
current marketable securities of $48.2 million. As of September 30, 1999, the
Company had retained earnings of $2.7 million and working capital of $50.6
million that includes the current portion of deferred revenue of $3.8 million.
The Company anticipates spending at least $580,000 for office lease payments and
approximately $3.8 million for capital expenditures over the next 12 months.

     The Company intends to continue to invest heavily in the development of new
products and enhancements to its existing products. The Company's future
liquidity and capital requirements will depend upon numerous factors, including
the costs and timing of expansion of product development efforts and the success
of these development efforts, the costs and timing of expansion of sales and
marketing activities, the extent to which the Company's existing and new
products gain market acceptance, competing technological and market
developments, the costs involved in maintaining and enforcing patent claims and
other intellectual property rights, the level and timing of license revenue,
available borrowings under line of credit arrangements and other factors. The
Company believes that its current cash and investment balances and any cash
generated from operations and from available or future debt financing will be
sufficient to meet the Company's operating and capital requirements for at least
the next 12 months. However, from time to time, the Company may be required to
raise additional funds through public or private financing, strategic
relationships or other
                                       21
<PAGE>   22

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

NEW ACCOUNTING STANDARDS

     In March 1998, the Accounting Standards Executive Committee issued SOP
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," which is effective for fiscal years beginning after December 15,
1998. SOP 98-1 provides guidance on accounting for the costs of computer
software developed or obtained for internal use. The adoption of SOP 98-1 is not
expected to have a material impact on the Company.

     In April 1998, the American Institute of Certified Public Accountants
issued SOP 98-5, "Reporting on the Costs of Start-Up Activities." This standard
requires companies to expense the costs of start-up activities and organization
costs as incurred. In general, SOP 98-5 is effective for fiscal years beginning
after December 15, 1998. The Company does not expect SOP 98-5 to impact the
Company's results of operations.

     In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Investments and Hedging Activities." The statement
establishes accounting and reporting standards requiring that every derivative
instrument be recorded in the balance sheet as either an asset or liability
measured at its fair value. The statement also requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. To date, the Company has not entered into any
derivative financial instruments or hedging activities. SFAS No. 133, as
amended, is effective for fiscal years beginning after June 15, 2000.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     The Company is exposed to the impact of interest rate changes and changes
in the market values of its investments.

     Interest Rate Risk. The Company's exposure to market risk for changes in
interest rates relates primarily to the Company's investment portfolio. The
Company has not used derivative financial instruments in its investment
portfolio. The Company invests its excess cash in high-quality corporate issuers
and in debt instruments of the U.S. Government and, by policy, limits the amount
of credit exposure to any one issuer. As stated in its policy, the Company is
averse to principal loss and seeks to preserve its invested funds by limiting
default risk, market risk and reinvestment risk. The Company mitigates default
risk by investing in high credit quality securities and by positioning its
portfolio to respond appropriately to a significant reduction in a credit rating
of any investment issuer or guarantor. The portfolio includes only marketable
securities with active secondary or resale markets to ensure portfolio
liquidity.

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

                                       22
<PAGE>   23

     The table below presents the carrying value and related weighted average
interest rates for the Company's investment portfolio. The carrying values
approximate fair values at September 30, 1999 and 1998. All investments mature
in one year or less.

<TABLE>
<CAPTION>
                                                 CARRYING      AVERAGE RATE       CARRYING      AVERAGE RATE
                                                 VALUE AT      OF RETURN AT       VALUE AT      OF RETURN AT
                                              SEPTEMBER 30,    SEPTEMBER 30,   SEPTEMBER 30,    SEPTEMBER 30,
                                                   1999            1999             1998            1998
                                              --------------   -------------   --------------   -------------
                                              (IN THOUSANDS)   (ANNUALIZED)    (IN THOUSANDS)   (ANNUALIZED)
<S>                                           <C>              <C>             <C>              <C>
INVESTMENT SECURITIES:
Cash equivalents -- variable rate...........     $ 1,619            4.7%          $ 2,205            3.1%
Money market funds -- variable rate.........         678            5.2%              145            1.7%
Cash equivalents -- fixed rate..............      12,936            5.3%               --             --
Short-term investments -- fixed rate........      32,948            5.6%           44,854            3.8%
                                                 -------                          -------
     Total investment securities............     $48,181                          $47,204
                                                 =======                          =======
</TABLE>

YEAR 2000 READINESS

     Overview. The Year 2000 problem is best defined as a product or process
that, when executed on date data, produces an incorrect result. Further program
errors may occur as a result of incorrect usage of "9/9/99" or because the year
2000 was not properly recognized as a leap year.

     The Year 2000 issue does create risk for the Company, the extent of which
cannot be fully known. To address these risks, the Company has created a program
for dealing with its internal products and processes, internal information
technology systems and non-information technology systems. The Company has also
requested information regarding Year 2000 readiness from its major suppliers and
customers. The Company has received responses from 88% of its suppliers,
including all of its significant suppliers, and 40% of its customers. Responses
received to date indicate the majority of the Company's customers, suppliers,
service providers and contractors are or intend to be Year 2000 compliant. Where
any supplier's response is deemed unsatisfactory, the Company intends to change
suppliers, service providers or contractors to those that have demonstrated Year
2000 compliance. The Company cannot be assured of finding alternative suppliers,
service providers or contractors.

     In the event any of the Company's significant customers, suppliers, service
providers or contractors does not achieve Year 2000 compliance and the Company
is unable to replace those customers, suppliers, service providers or
contractors, business operations could be adversely affected. The effect of a
loss of customers, suppliers, services providers or contractors could include,
but is not limited to, losses in revenue, a loss of customers, suppliers,
service providers or contractors and the inability of the Company to deliver its
products and services.

     The cost of the Company's Year 2000 readiness program is not incremental to
the Company and it represents a re-allocation of existing resources. During the
normal course of business, the Company has made capital investments in certain
third party software and hardware to address its operational needs. These
systems, which were intended to improve efficiency and productivity, have been
certified as "Year 2000 Compliant" by the respective vendors and were installed
by October 31, 1999. To date these projects have been a part of the Company's
capital plan and were not accelerated as a result of the Year 2000 issue. Total
Year 2000 project expenditures are expected to total approximately $4.4 million,
of which $3.0 million were expended in the year ended September 30, 1999.

     The Company believes it has made significant progress in the remediation of
its Year 2000 issues. Additional testing is planned for the remainder of the
calendar year to reasonably ensure Year 2000 readiness. Regardless of the
outcome of this testing, the Company believes it will be able to conduct its
business, possibly at reduced volume, using its existing Year 2000 compliant
systems and software until remaining issues can be resolved. Although there can
be no assurance that all required modifications will be complete prior to the
year 2000, it is management's belief that the Company is taking adequate action
to ensure its Year 2000 readiness.

                                       23
<PAGE>   24

Management does not expect the financial impact of Year 2000 readiness to be
material to the Company's financial position, results of operations or cash
flows.

     Year 2000 Readiness Plan. Phases of the Company's readiness program
include: Inventory, Review and Assessment, Prioritization and Resolution.

     Inventory. The goal of this phase of the project is to identify products
and processes that may be impacted by the year 2000 date rollover. An accurate
inventory consists of product or process identification, specific version
information, importance and risk to the business, compliance status, action
required to make compliant, cost of the action, targeted fix dates and
verification information. Products and processes, regardless of their compliance
status, are listed on the inventory. The Company has completed an inventory of
all telephone and voice mail systems and associated software, computer systems
hardware, operating systems and applications software and security systems.

     Review and Assessment. The goal of the Review and Assessment phase is to
identify those items needing remediation and to determine the extent of impact
of any item on the Company's ability to conduct business. The Company has
conducted a review of its processes, products and items from the Year 2000
Inventory, including operating systems, application software, internally
developed software and non-information technology systems including, but not
limited to, environmental control systems, fire suppression systems, postage
meters, copy machines and other embedded microprocessor controlled systems. The
Company has also contacted its major suppliers and customers to determine their
Year 2000 readiness as it relates to the Company's business.

     Prioritization. The goal of the Prioritization phase is to produce an
ordered list of items needing remediation based upon their importance to the
Company's business. A general list of prioritized items includes, but is not
limited to, operating systems and software used to support the finance
organization, software used in the development of the Company's products and
services, networking equipment, telephone systems, data circuits associated with
the Company's Internet Service Provider, and hardware and software used to
secure the Company's facility.

     Resolution. The goal of the Resolution phase is to identify and apply
"fixes" to items needing remediation. The Company has developed plans to address
those items deemed to be non-compliant. No hardware systems need to be replaced
or upgraded as a result of non-compliance. However, the operating systems
software for almost all information technology systems will have "patches"
applied to achieve Year 2000 compliance. These upgrades are carried out as a
routine part of the Company's operations and are not expected to have a material
impact on the Company's expenses. As of November 30, 1999, the Company was 80%
through the upgrade process. Operating system and application upgrades were
completed by August 31, 1999 for systems used for administration and will be
complete by December 15, 1999 for those used in product development. The Company
is currently developing plans for final testing of compliance.

     Risks and Contingencies. The Company believes the most significant risks to
its business lie in two areas: the re-design or re-engineering of products and
services the Company has delivered using older versions of its EDA software and
the non-compliance of its suppliers and customers.

     During the product development process, specific versions of EDA tools and
processes are used to create products. If the Company were required to correct a
defect or re-design parts of a product produced with EDA tools that are not Year
2000 compliant, the Company would have to create a development environment in
which the date were rolled back to the original design dates. It is not known
how much effort would be required to re-create the design environment for a
given product. The Company relies heavily on the Internet for distribution of
its products. Failure of the Company's Internet Service Provider or its ISP's
Local Exchange Carrier due to Year 2000 non-compliance could have a material
impact on the Company's business, operating results and financial condition. The
Company has based its Year 2000 readiness program actions upon standard
operating environments and processes used in the conduct of its business.
However, if a product or process outside the standard is used and that product
or process is not Year 2000 compliant, the Company may experience an impact on
its ability to conduct business until the product or process in question can be
made compliant. Statements made by third parties regarding Year 2000 compliance
are used by the Company

                                       24
<PAGE>   25

to determine that party's Year 2000 readiness. The Company relies on a limited
number of customers for a significant portion of its revenue. Should any
customer experience difficulties as a result of Year 2000 non-compliance, the
Company's revenues could be significantly impacted. Many of the Company's
customers are headquartered outside of the United States. As a result, many of
the Company's customers may be subject to different Year 2000 disclosure
requirements, making it difficult to ascertain the true nature of Year 2000
compliance status. The Company's products work in combination with semiconductor
designs and planning tools in environments developed by other vendors and
interact with other operating environments. Commencing in the year 2000, the
functionality of certain operating environments will be adversely affected if
one or more component products of the environment is not Year 2000 compliant.
The Company cannot provide assurance that its products will function properly
with respect to Year 2000 compliance when integrated with other vendors' or
customers' non-compliant component products. The Year 2000 readiness project is
currently staffed with the Company's employees. Should key members of the Year
2000 readiness program leave the Company prior to completion of the project, the
project could suffer a significant setback. The Company plans to maintain
adequate documentation regarding all phases of the project and to hold regular
meetings to discuss the status of the project. Each of these risks, if realized
either independently or in combination, could have a material adverse affect on
the Company's business, operating results and financial condition.

     Worst-Case Scenarios. Worst-case scenarios of the Company's failure to
solve Year 2000 compliance issues could include substantial purchasing costs to
develop alternative methods of managing the business and to replace noncompliant
equipment, temporary slowdowns or cessation of certain revenue-producing
operations, delays in delivery or distribution of products, delays in the
receipt of supplies and invoice and collection errors or delays. The Company is
in the process of developing its contingency plans to address each of these
business risks.

FACTORS AFFECTING FUTURE OPERATING RESULTS

     Fluctuations in Operating Results. The Company's operating results have
fluctuated in the past as a result of a number of factors including the
relatively large size and small number of customer orders during a given period;
the timing of customer orders; delays in the design process due to changes by a
customer to its order after it is placed; the Company's ability to achieve
progress on percentage of completion contracts; the length of the Company's
sales cycle; the Company's ability to develop, introduce and market new products
and product enhancements; the timing of new product announcements and
introductions by the Company and its competitors; market acceptance of the
Company's products; the demand for semiconductors and end user products that
incorporate semiconductors and general economic conditions. The Company's future
operating results may fluctuate from quarter to quarter and on an annual basis
as a result of these and other factors, in particular the relatively large size
and small number of customer orders during a given period and the amount of
royalties recognized in a given period. Accordingly, it is likely that in some
future quarter the Company's operating results will be below the expectations of
public market analysts and investors. In that event, the price of the Company's
Common Stock would likely decline, perhaps substantially.

     The limited number of semiconductor manufacturers to which the Company can
license its products may also have a material adverse effect on the Company's
business, operating results and financial condition if any of the Company's
customers suffers a deterioration in financial condition or there is a decline
in the demand for the semiconductors produced by such manufacturers. The
Company's business, operating results and financial condition may also be
materially adversely affected if customers experience project delays and/or new
or existing customers delay new bookings or fail to place anticipated orders.

     Revenue in any quarter is dependent on a number of factors, and is not
predictable with any degree of certainty. Since the Company's expense levels are
based in part on management's expectations regarding future revenue, if revenue
is below expectations in any quarter, the adverse effect may be magnified by the
Company's inability to adjust spending in a timely manner to compensate for any
revenue shortfall. Accordingly, if the Company does not realize its expected
revenue, its business, operating results and financial condition could be
materially adversely affected.

                                       25
<PAGE>   26

     The Company's sales cycle can be lengthy and is subject to a number of
risks over which the Company has little or no control. As a result of the
significant dollar amounts represented by a single customer order, the timing of
the receipt of an order can have a significant impact on the Company's revenue
for a particular period. In addition, because the Company's revenue is
concentrated among a small number of customers, a decline or a delay in the
recognition of revenue from one customer in a period may cause the Company's
business, operating results and financial condition in such period to be
materially adversely affected and may lead to significant fluctuations from
quarter to quarter. Any significant or ongoing failure to obtain new orders from
customers or to collect outstanding accounts receivable would have a material
adverse effect on the Company's business, operating results and financial
condition. The Company has recently experienced periods of negative growth as
well as declines in the rate of growth of its revenue as compared with prior
periods, primarily due to deterioration in the demand for semiconductors
generally. There can be no assurance that the Company will experience positive
revenue growth in the future.

     To date, a substantial majority of the Company's revenue has been
recognized on a percentage of completion method. Provisions for estimated losses
on the uncompleted contracts are recognized in the period in which the
likelihood of such losses is determined. As the completion period ranges from
three to six months, revenue in any quarter is dependent on the Company's
progress toward completion of the project. There can be no assurance that the
Company's estimates will be accurate, and, in the event they are not, the
Company's business, operating results and financial condition in subsequent
periods could be materially adversely affected. From time to time, the Company
experiences delays in the progress of certain projects, and there can be no
assurance that such delays will not occur in the future. Any delay or failure to
achieve progress could result in damage to customer relationships and the
Company's reputation, under-utilization of engineering resources or a delay in
the market acceptance of the Company's products, any of which could have a
material adverse effect on the Company's business, operating results and
financial condition. In addition, the Company's contracts with customers
generally may be canceled without cause, and, if a customer cancels or delays
performance under any such contracts, the Company's business, operating results
and financial condition could be materially adversely affected. See "-- Results
of Operations."

     The Company has historically generated revenue from license fees only.
Beginning in late fiscal 1996, the Company implemented a royalty-based business
model that is intended to generate revenue from both license fees and royalties.
The Company generally licenses its products on a nonexclusive, worldwide basis
to major semiconductor manufacturers and grants these manufacturers the right to
distribute the Company's IP components to their internal design teams and to
distribute and sublicense to semiconductor design companies that manufacture at
the same facility. In cases where the semiconductor manufacturer does not have
the infrastructure necessary to distribute and support the Company's IP
components, the Company performs the distribution function directly to the
customers of the semiconductor manufacturer. Given that the Company provides its
products early in the customer's IC design process, there is a significant delay
between the delivery of a product and the generation of royalty revenue. Royalty
payments are calculated based on per unit sales of ICs or wafers containing the
Company's IP components and generally vary in proportion to the silicon area of
an IC occupied by the Company's products. A portion of these payments is
credited back to the customer's account to use to pay license fees for future
orders to be placed with the Company. The remaining portion of the royalty is
reported as net royalty revenue. In the third quarter of fiscal 1999, the
Company received its first royalty revenue. As expected, these royalties were
from a small number of IC designs that were early in their product life-cycles.
The Company's success will depend on its ability to generate royalty revenue
from a substantially larger number of designs and on many of these designs
achieving large manufacturing volumes. There can be no assurance that the
Company will be successful in expanding the number of royalty bearing contracts
with customers, and there can be no assurance that the Company will receive
significant royalty revenue in the future. See "-- Dependence on Semiconductor
Manufacturers; Dependence on Semiconductor and Electronics Industries" and
"-- Customer Concentration; Limited Customer Base."

     The Company believes that its long term success will be substantially
dependent on future royalties. In addition, the Company will face risks inherent
in a royalty-based business model. In particular, the Company's ability to
forecast royalty revenue will be limited by factors that are beyond the
Company's ability to control or assess in advance. Royalties will be recognized
in the quarter in which the Company receives a royalty report

                                       26
<PAGE>   27

from its customers and will be dependent upon fluctuating sales volumes. In
addition, under the royalty-based business model, the Company's revenue will be
dependent upon the sales by its customers of products that incorporate the
Company's technology. Even if the Company's technology is adopted, there can be
no assurance that it will be used in a product that is ultimately brought to
market, achieves commercial acceptance or results in significant royalties to
the Company. The Company will also face risks relating to the accuracy and
completeness of the royalty collection process. See "-- Results of Operations."

     Dependence on Emergence of Merchant IP Component Market and Broad Market
Acceptance of the Company's Products. The market for merchant IP components has
only recently emerged. The Company's ability to achieve sustained revenue growth
and profitability in the future will depend on the continued development of this
market and, to a large extent, on the demand for System-on-a-Chip ICs. There can
be no assurance that the merchant IP component and System-on-a-Chip markets will
continue to develop or grow at a rate sufficient to support the Company's
business. If either of these markets fails to grow or develops slower than
expected, the Company's business, operating results and financial condition
would be materially adversely affected. To date, the Company's IP products have
been licensed only by a limited number of customers. The vast majority of the
Company's existing and potential customers currently rely on components
developed internally and/or by other vendors. The Company's future growth, if
any, is dependent on the adoption of, and increased reliance on, merchant IP
components by both existing and potential customers. Moreover, if the Company's
products do not achieve broad market acceptance, the Company's business,
operating results and financial condition would be materially adversely
affected.

     Competition. The Company's strategy of targeting semiconductor
manufacturers that participate in, or may enter, the System-on-a-Chip market
requires the Company to compete in intensely competitive markets. Within the
merchant segment of the IP component market, the Company competes primarily
against Avant!, Mentor Graphics, the Silicon Architects division of Synopsys,
Virage and Virtual Silicon. In addition, the Company may face competition from
consulting firms and companies that typically have operated in the generic
library segment of the IP market and that now seek to offer customized IP
components as enhancements to their generic solutions. The Company also faces
significant competition from the internal design groups of semiconductor
manufacturers that are expanding their manufacturing capabilities and portfolio
of IP components to participate in the System-on-a-Chip market. These internal
design groups compete with the Company for access to the parent's IP component
requisitions and may eventually compete with the Company to supply IP components
to third parties on a merchant basis. There can be no assurance that internal
design groups will not expand their product offerings to compete directly with
those of the Company or will not actively seek to participate as merchant
vendors in the IP component market by selling to third party semiconductor
manufacturers or, if they do, that the Company will be able to compete against
them successfully. In addition to competition from companies in the merchant IP
component market, the Company faces competition from vendors that supply EDA
software tools, including certain of those mentioned above, and there can be no
assurance that the Company will be able to compete successfully against them.

     The Company expects competition to increase in the future from existing
competitors and from new market entrants with products that may be less
expensive than the Company's IP components or that may provide better
performance or additional features not currently provided by the Company. Many
of the Company's current and potential competitors have substantially greater
financial, technical, manufacturing, marketing, distribution and other
resources, greater name recognition and market presence, longer operating
histories, lower cost structures and larger customer bases than the Company. As
a result, they may be able to adapt more quickly to new or emerging technologies
and changes in customer requirements. In addition, certain of the Company's
principal competitors offer a single vendor solution, since, in the case of EDA
tool companies, they maintain their own EDA design tools and IP libraries or, in
the case of internal design groups, they provide IP components developed to
utilize the qualities of a given manufacturing process, and may therefore
benefit from certain capacity, cost and technical advantages. The Company's
ability to compete successfully in the emerging market for IP components will
depend upon certain factors, many of which are beyond the Company's control
including, but not limited to, success in designing new products; implementing
new designs at smaller process geometries; access to adequate EDA tools (many of
which are licensed from

                                       27
<PAGE>   28

the Company's current or potential competitors); the price, quality and timing
of new product introductions by the Company and its competitors; the emergence
of new IP component interchangeability standards; the widespread licensing of IP
components by semiconductor manufacturers or their design groups to third party
manufacturers; the ability of the Company to protect its intellectual property;
market acceptance of the Company's IP components; success of competitive
products; market acceptance of products using System-on-a-Chip ICs and industry
and general economic conditions. There can be no assurance that the Company will
be able to compete successfully in the emerging merchant IP component market.
See "Business -- Competition."

     Dependence on Semiconductor Manufacturers; Dependence on Semiconductor and
Electronics Industries. The Company's success is substantially dependent both on
the adoption of the Company's technology by semiconductor manufacturers and on
an increasing demand for products requiring complex System-on-a-Chip ICs, such
as portable computing devices, cellular phones, consumer multimedia products,
automotive electronics, personal computers and workstations. The Company is
subject to many risks beyond its control that influence the success of its
customers, including, among others, competition faced by each customer in its
particular industry, market acceptance of the customer's products that
incorporate the Company's technology, the engineering, sales and marketing
capabilities of the customer, and the financial and other resources of the
customer.

     The semiconductor and electronics products industries are characterized by
rapid technological change, frequent introductions of new products, short
product life cycles, fluctuations in manufacturing capacity and pricing and
gross margin pressures. Each of these industries is highly cyclical and has
periodically experienced significant downturns, often in connection with or in
anticipation of declines in general economic conditions during which the number
of new IC design projects often decreases. Revenue from licenses of the
Company's products is influenced by the level of design efforts by its
customers, and factors negatively affecting these industries could have a
material adverse effect on the Company's business, operating results and
financial condition. The Company's business, operating results and financial
condition may fluctuate in the future from period to period as a consequence of
general economic conditions in the semiconductor and electronics industries.

     Customer Concentration; Limited Customer Base. The Company has been
dependent on a relatively small number of customers for a substantial portion of
its annual revenue, although the customers comprising this group have changed
from time to time. In fiscal 1997, ST, Fujitsu, OKI and NEC accounted for 27%,
24%, 16% and 13% of revenue, respectively. In fiscal 1998, TSMC, OKI and UMC
accounted for 14%, 11% and 11% of revenue, respectively. In fiscal 1999, NEC,
TSMC, Conexant and UMC accounted for 25%, 19%, 14% and 13% of revenue,
respectively. The Company anticipates that its revenue will continue to depend
on a limited number of major customers for the foreseeable future, although the
companies considered to be major customers and the percentage of revenue
represented by each major customer may vary from period to period depending on
the addition of new contracts and the number of designs utilizing the Company's
products. None of the Company's customers has a written agreement with the
Company that obligates it to license future generations of products or new
products, and there can be no assurance that any customer will license IP
components from the Company in the future. In addition, there can be no
assurance that any of the Company's customers will ship products incorporating
the Company's technology or that, if such shipments occur, they will generate
significant revenue. The loss of one or more of the Company's major customers,
reduced orders by one or more of such customers, the failure of one or more
customers to pay license or royalty fees due to the Company or the failure of a
customer to ship products containing the Company's IP components could
materially adversely affect the Company's business, operating results and
financial condition. The Company's business, operating results and financial
condition may also be materially adversely affected if customers experience
project delays and/or new or existing customers delay new bookings or fail to
place anticipated orders. The Company faces numerous risks in successfully
obtaining orders from customers on terms consistent with the Company's business
model, including, among others, the lengthy and expensive process of building a
relationship with a potential customer before reaching an agreement with such
party to license the Company's products; persuading large semiconductor
manufacturers to work with, to rely for critical technology on, and to disclose
proprietary information to, a smaller company, such as the Company

                                       28
<PAGE>   29

and persuading potential customers to bear certain development costs associated
with development of customized components. There are a relatively limited number
of semiconductor manufacturers to which the Company can license its technology
in a manner consistent with its business model and there can be no assurance
that such manufacturers will rely on merchant IP components or adopt the
Company's products. See "-- Competition" and "Business -- Customers."

     Product Concentration. The Company derives substantially all of its revenue
from sales of its memory and standard cell products that, together, accounted
for 94%, 94% and 80% of revenue in fiscal 1997, 1998 and 1999, respectively. The
Company expects that memory products and standard cell products will continue to
account for a substantial portion of the Company's revenue for the foreseeable
future. There can be no assurance that the Company will continue to derive
revenue from memory or standard cell products and a decline in revenue from such
products would have a material adverse effect on the Company's business,
operating results and financial condition. The Company's future financial
performance will depend in significant part on the successful development,
introduction and customer acceptance of new products. See "-- New Product
Development and Technological Change."

     Lengthy Sales Cycle and Design Process. The license of the Company's
products typically involves a significant commitment of capital by the customer
and a purchase will often be timed to coincide with a customer's migration to a
new manufacturing process. Potential customers generally commit significant
resources to an evaluation of available IP solutions and require the Company to
expend substantial time, effort and resources to educate them about the value of
the Company's products. A variety of factors, including factors over which the
Company has little or no control, may cause potential customers to favor an
alternate solution or to delay or forego a license of the Company's products. As
a result of these and other factors, the sales cycle for the Company's products
is long, typically ranging from six to 12 months. The Company's ability to
forecast the timing and scope of specific sales is limited, and delay of or
failure to complete one or more large contracts could have a material adverse
effect on the Company's business, operating results and financial condition and
could cause the Company's operating results to fluctuate significantly from
quarter to quarter.

     Once the Company receives and accepts an order from a customer, the Company
must commit significant resources to customizing its products for the customer's
manufacturing process. This customization is complex and time consuming and is
subject to a number of risks over which the Company has little or no control,
including the customer's adjustments and alterations of its manufacturing
process or the timing of migration to a new process. Typically, this
customization takes from three to six months to complete. Delays in product
customization could have a material adverse effect on the Company's business,
operating results and financial condition and could cause the Company's
operating results to vary significantly from quarter to quarter.

     Risks Associated with International Customers. Historically, a substantial
portion of the Company's revenue has been international revenue. In fiscal 1997,
1998 and 1999, revenue derived from customers outside the United States,
primarily in Asia and Europe, represented 73%, 84% and 67%, respectively, of the
Company's revenue. The Company anticipates that international revenue will
remain a substantial portion of its revenue in the future. To date, all of the
revenue from international customers has been denominated in U.S. dollars. In
the event that the Company's competitors denominate their sales in a currency
that becomes relatively inexpensive in comparison to the U.S. dollar, the
Company may experience fewer orders from international customers whose business
is based primarily on the less expensive currency. There can be no assurance
that present or future dislocations with respect to international financial
markets will not have a material adverse effect on the Company's business,
operating results and financial condition. The Company intends to continue to
expand its sales and marketing activities in Asia and Europe. The Company's
expansion of its international business involves a number of risks including the
impact of possible recessionary environments in economies outside the United
States; political and economic instability; exchange rate fluctuations; longer
accounts receivable collection periods and greater difficulty in accounts
receivable collection; unexpected changes in regulatory requirements; reduced or
limited protection for intellectual property rights; export license
requirements; tariffs and other trade barriers and potentially adverse tax
consequences. There can be no assurance that the Company will be able to sustain
or increase revenue derived from international customers or that the foregoing
factors will not have a material adverse effect on the
                                       29
<PAGE>   30

Company's business, operating results and financial condition. See "-- Results
of Operations" and "Business -- Sales, Marketing and Distribution."

     New Product Development and Technological Change. The Company's customers
compete in the semiconductor industry, which is subject to rapid technological
change, frequent introductions of new products, short product life cycles,
changes in customer demands and requirements and evolving industry standards.
The development of new manufacturing processes, the introduction of products
embodying new technologies and the emergence of new industry standards can
render existing products obsolete and unmarketable. Accordingly, the Company's
future success will depend on its ability to continue to enhance its existing
products and to develop and introduce new products that satisfy increasingly
sophisticated customer requirements and that keep pace with new product
introductions, emerging manufacturing process technologies and other
technological developments in the semiconductor industry. Any failure by the
Company to anticipate or respond adequately to changes in manufacturing
processes or customer requirements, or any significant delays in product
development or introduction, would have a material adverse effect on the
Company's business, operating results and financial condition. There can be no
assurance that the Company will not experience difficulties that could delay or
prevent the successful development, introduction and sale of new or enhanced
products or that such new or enhanced products will achieve market acceptance.
Any delay in release dates of new or enhanced products could materially
adversely affect the Company's business, operating results and financial
condition. The Company could also be exposed to litigation or claims from its
customers in the event that it does not satisfy its delivery commitments. There
can be no assurance that any such claim would not have a material adverse effect
on the Company's business, operating results and financial condition. See
"Business -- Product Development."

     Dependence on Key Personnel. The Company's success depends in large part on
the continued contributions of its key management, engineering, sales and
marketing personnel, many of whom are highly skilled and would be difficult to
replace. None of the Company's senior management or key technical personnel is
bound by an employment contract. In addition, the Company does not currently
maintain key man life insurance covering its key personnel. The Company believes
that its success depends to a significant extent on the ability of its
management to operate effectively, both individually and as a group. The Company
must also attract and retain highly skilled managerial, engineering, sales,
marketing and finance personnel. Competition for such personnel is intense, and
there can be no assurance that the Company will be successful in attracting and
retaining such personnel. The loss of the services of any key personnel, the
inability to attract or retain qualified personnel in the future or delays in
hiring required personnel, particularly engineers, could have a material adverse
effect on the Company's business, operating results and financial condition. See
"Business -- Employees."

     Management of Growth. The ability of the Company to license its products
and manage its business successfully in a rapidly evolving market requires an
effective planning and management process. The Company's rapid growth has
placed, and is expected to continue to place, a significant strain on the
Company's managerial, operational and financial resources. From September 30,
1996 to September 30, 1999, the Company grew from 28 to 97 employees or
full-time equivalents. The Company's customers rely heavily on the Company's
technological expertise in designing, testing and manufacturing products
incorporating the Company's IP components. Relationships with new customers
generally require significant engineering support. As a result, any increase in
the demand for the Company's products will increase the strain on the Company's
personnel, particularly its engineers. The Company's financial and management
controls, reporting systems and procedures are also limited. Although some new
controls, systems and procedures have been implemented, the Company's future
growth, if any, will depend on its ability to continue to implement and improve
operational, financial and management information and control systems on a
timely basis, together with maintaining effective cost controls, and any failure
to do so would have a material adverse effect on the Company's business,
operating results and financial condition. Further, the Company will be required
to manage multiple relationships with various customers and other third parties
and must successfully implement its new business model. There can be no
assurance that the Company's systems, procedures or controls will be adequate to
support the Company's operations or that the Company's management will be able
to achieve the rapid execution necessary to offer its services and products
successfully and to implement its business plan.

                                       30
<PAGE>   31

The Company's inability to manage any future growth effectively would have a
material adverse effect on the Company's business, operating results and
financial condition. See "Business--Employees."

     Risks Associated with Protection of Intellectual Property. The Company
relies primarily on a combination of nondisclosure agreements and other
contractual provisions and patent, trademark, trade secret and copyright law to
protect its proprietary rights. Failure of the Company to enforce its patents,
trademarks or copyrights or to protect its trade secrets could have a material
adverse effect on the Company's business, operating results and financial
condition. There can be no assurance that such intellectual property rights can
be successfully asserted in the future or will not be invalidated, circumvented
or challenged. From time to time, third parties, including competitors of the
Company, may assert patent, copyright and other intellectual property rights to
technologies that are important to the Company. There can be no assurance that
third parties will not assert infringement claims against the Company in the
future, that assertions by third parties will not result in costly litigation or
that the Company would prevail in any such litigation or be able to license any
valid and infringed patents from third parties on commercially reasonable terms.
Litigation, regardless of the outcome, could result in substantial cost and
would divert resources of the Company. Any infringement claim or other
litigation against or by the Company could materially adversely affect the
Company's business, operating results and financial condition.

     In certain instances, the Company has elected to rely on trade secret law
rather than patent law to protect its proprietary technology. However, trade
secrets are difficult to protect. The Company protects its proprietary
technology and processes, in part, through confidentiality agreements with its
employees and customers. There can be no assurance that these contracts will not
be breached, that the Company will have adequate remedies for any breach, or
that the Company's trade secrets will not otherwise become known or be
independently discovered by competitors. In addition, effective trade secret
protection may be unavailable or limited in certain foreign countries.

     In addition, there can be no assurance that competitors of the Company,
many of which have substantial resources and have made substantial investments
in competing technologies, do not have, or will not seek to apply for and
obtain, patents that will prevent, limit or interfere with the Company's ability
to make, use or sell its products either in the United States or in
international markets. There can be no assurance that the Company will not in
the future become subject to patent infringement claims and litigation or
interference proceedings declared by the USPTO to determine the priority of
inventions. The defense and prosecution of intellectual property suits, USPTO
interference proceedings and related legal and administrative proceedings are
both costly and time consuming. Any such suit or proceeding involving the
Company could have a material adverse effect on the Company's business,
operating results and financial condition. See "Business -- Patents and
Intellectual Property Protection."

     Future Capital Needs; Uncertainty of Additional Funding. The Company
intends to continue to invest heavily in the development of new products and
enhancements to its existing products. The Company's future liquidity and
capital requirements will depend upon numerous factors, including the costs and
timing of expansion of product development efforts and the success of these
development efforts, the costs and timing of expansion of sales and marketing
activities, the extent to which the Company's existing and new products gain
market acceptance, competing technological and market developments, the costs
involved in maintaining and enforcing patent claims and other intellectual
property rights, the level and timing of license revenue, available borrowings
under line of credit arrangements and other factors. The Company believes that
its current cash and investment balances and any cash generated from operations
and from available or future debt financing will be sufficient to meet the
Company's operating and capital requirements for at least the next 12 months.
However, from time to time, the Company may be required to raise additional
funds through public or private financing, strategic relationships or other
arrangements. There can be no assurance that such funding, if needed, will be
available on terms attractive to the Company, or at all. Furthermore, any
additional equity financing may be dilutive to stockholders, and debt financing,
if available, may involve restrictive covenants. Strategic arrangements, if
necessary to raise additional funds, may require the Company to relinquish its
rights to certain of its technologies or products. The failure of the Company to
raise capital when needed could have a material adverse effect on the Company's
business, operating results and financial condition. See "-- Liquidity and
Capital Resources."
                                       31
<PAGE>   32

     Potential Volatility of Stock Price. The trading price of the Company's
Common Stock has in the past been and could in the future be subject to
significant fluctuations in response to quarterly variations in the Company's
results of operations; announcements regarding the Company's product
developments; announcements of technological innovations or new products by the
Company, its customers or competitors; release of reports by securities
analysts; changes in security analysts' recommendations; developments or
disputes concerning patents or proprietary rights or other events. Also, at some
future time, the Company's revenues and results of operations may be below the
expectations of public market securities analysts or investors, resulting in
significant fluctuations in the market price of the Company's Common Stock. In
addition, the securities markets have from time to time experienced significant
price and volume fluctuations which have particularly affected the market prices
for high technology companies and which often are unrelated and disproportionate
to the operating performance of particular companies. These broad market
fluctuations, as well as general economic, political and market conditions, may
adversely affect the market price of the Company's Common Stock. In the past,
following periods of volatility in the market price of a company's stock,
securities class action litigation has occurred against that company. Such
litigation could result in substantial costs and would at a minimum divert
management's attention and resources, which could have a material adverse effect
on the Company's business, financial condition and results of operations. Any
adverse determination in such litigation could also subject the Company to
significant liabilities. See "Market for Registrant's Common Equity and Related
Stockholder Matters -- Price Range of Common Stock."

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The Company's financial statements and the independent accountants' report
appear on pages F-1 through F-18 of this Report.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

     Not applicable.

                                       32
<PAGE>   33

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS

     The information required by this item concerning the Company's directors is
incorporated by reference to the sections captioned "Election of Directors" and
"Section 16(a) Beneficial Ownership Reporting Compliance" contained in the
Company's proxy statement relating to the Annual Meeting of Stockholders to be
held February 17, 2000 to be filed by the Company with the Securities and
Exchange Commission within 120 days of the end of the Company's fiscal year
pursuant to General Instruction G(3) of Form 10-K (the "Proxy Materials").
Certain information required by this item concerning executive officers is set
forth in Part I of this Report under the caption "Business -- Executive
Officers" and certain other information required by this item is incorporated by
reference from the section captioned "Section 16(a) Beneficial Ownership
Reporting Compliance" contained in the Proxy Materials.

ITEM 11. EXECUTIVE COMPENSATION

     The Information required by this item is incorporated by reference to the
section captioned "Executive Compensation and Other Matters" contained in the
Proxy Materials.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The information required by this item is incorporated by reference to the
sections captioned "Record Date and Principal Share Ownership" contained in the
Proxy Materials.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The information required by this item is incorporated by reference to the
sections captioned "Compensation Committee Interlocks and Insider Participation"
and "Certain Transactions" contained in the Proxy Materials.

                                       33
<PAGE>   34

                                    PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

     (a)(1) Financial Statements

     The following financial statements are incorporated by reference in Item 8
of this Report:

<TABLE>
<CAPTION>
                                DESCRIPTION                           PAGE
                                -----------                           ----
        <S>                                                           <C>
        Index to Financial Statements...............................  F-1
        Report of Independent Accountants...........................  F-2
        Balance Sheets at September 30, 1999 and 1998...............  F-3
        Statements of Operations for the years ended September 30,
          1999, 1998 and 1997.......................................  F-4
        Statements of Stockholders' Equity for the years ended
          September 30, 1999, 1998 and 1997.........................  F-5
        Statements of Cash Flows for the years ended September 30,
          1999, 1998 and 1997.......................................  F-6
        Notes to Financial Statements...............................  F-7
</TABLE>

     (a)(2) Financial Statement Schedules

<TABLE>
<CAPTION>
                                DESCRIPTION                           PAGE
                                -----------                           ----
        <S>                                                           <C>
        Schedule II -- Valuation and Qualifying Accounts and
        Reserves....................................................  S-1
</TABLE>

     Schedules not listed above 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 financial statements or notes thereto.

     (a)(3) Exhibits

<TABLE>
<CAPTION>
 NUMBER                      DESCRIPTION OF EXHIBIT
 ------                      ----------------------
<S>       <C>
 3.1*     Amended and Restated Certificate of Incorporation of the
          Registrant.
 3.3*     Bylaws of the Registrant.
 4.2*     First Amended and Restated Registration Rights Agreement
          dated December 17, 1996 by and among the Registrant and the
          Shareholders named therein.
10.1*     Form of Indemnification Agreement for directors and
          executive officers.
10.2*     1993 Stock Option Plan and form of agreement thereunder.
10.3*     1997 Employee Stock Purchase Plan.
10.4*     1997 Director Stock Option Plan.
10.5*     Lease Agreement dated December 13, 1995 between Registrant
          and Spieker Properties, L.P. for 2077 Gateway Place, San
          Jose, California office.
10.5.1*   Sublease dated October 10, 1997 between the Registrant and
          Unison Software, Inc.
10.5.2*   First Addendum to Sublease dated October 14, 1997 between
          the Registrant and Unison Software, Inc.
10.5.3*   Fixed Asset Purchase Agreement dated October 10, 1997
          between the Registrant and Unison Software, Inc.
10.6*     Series A Preferred Stock Purchase Agreement dated March 21,
          1996 by and among the Registrant and the Purchasers named
          therein.
10.7*+    Purchase and License Agreement dated April 9, 1996 between
          the Registrant and OKI Electric Industry Co., Ltd. And
          amendments thereto.
10.8*     Business Loan Agreement dated May 8, 1996 between the
          Registrant and Union Bank of California, N.A. and
          attachments thereto.
10.9*     Offer Letter dated August 29, 1996 between the Registrant
          and Jeffrey A. Lewis and letter amendment dated September 5,
          1996 thereto.
</TABLE>

                                       34
<PAGE>   35

<TABLE>
<CAPTION>
 NUMBER                      DESCRIPTION OF EXHIBIT
 ------                      ----------------------
<S>       <C>
10.10+*   Collaboration Agreement dated December 4, 1996 between the
          Registrant and SGS-THOMSON MICROELECTRONICS S.r.l.
10.11*    Series B Preferred Stock Purchase Agreement dated December
          17, 1996 by and among the Registrant and the Purchasers
          named therein.
10.12+*   OEM Agreement dated December 6, 1996 between the Registrant
          and Synopsys, Inc.
10.13+*   License Agreement dated June 16, 1997 between the Registrant
          and Fujitsu Microelectronics, Inc.
10.14*    Lease Agreement dated June 16, 1997 between Registrant,
          Richard Bowling and Katherine Bowling for 1195 Bordeaux
          Drive, Sunnyvale, California office.
10.15*    Severance Agreement dated June 20, 1997 between the
          Registrant and Robert D. Selvi.
10.16*    Offer Letter dated July 31, 1997 between the Registrant and
          Larry J. Fagg.
10.17**   Confidential Mutual Release and Settlement Agreement
          effective as of April 15, 1998 between the Registrant and
          Daniel I. Rubin.
10.18**   Form of License Agreement.
10.19+**  License Agreement dated as of November 30, 1997 between the
          Registrant and Taiwan Semiconductor Manufacturing
          Corporation, as amended.
10.20     Commercial Lease Agreement dated December 1, 1999 by and
          between the Registrant and The Dai-Tokyo Fire and Marine
          Insurance Co., Ltd.
10.21     Commercial Lease Agreement dated December 1, 1999 by and
          between the Registrant and Kenrick Investment Group.
21.1**    Subsidiaries of the Registrant.
23.1      Consent of PricewaterhouseCoopers LLP, independent
          accountants.
24.1      Power of Attorney (see page 36).
27.1      Financial Data Schedule.
</TABLE>

- ---------------
*  Incorporated by reference to exhibits filed with the Registrant's
   Registration Statement on Form S-1 (No. 333-41219) which was declared
   effective on February 2, 1998.

+  Certain information in these exhibits has been omitted and filed separately
   with the Securities and Exchange Commission pursuant to a confidential
   treatment request under 17 C.F.R. Sections 200.80(b)(4), 200.83 and 230.46.

** Incorporated by reference to exhibits filed with the Registrant's
   Registration Statement on Form S-1 (No. 333-50243) which was declared
   effective on April 29, 1998.

     (b) Reports on Form 8-K

     No reports on Form 8-K were filed by the registrant during the quarter
ended September 30, 1999.

                                       35
<PAGE>   36

                                   SIGNATURES

     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 and Chief Executive
                                                           Officer

Dated: December 10, 1999

                               POWER OF ATTORNEY

     Know All Men By These Presents, that each person whose signature appears
below constitutes and appoints Mark R. Templeton and Scott T. Becker, jointly
and severally, his 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
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.

<TABLE>
<CAPTION>
                       SIGNATURE                                    TITLE                   DATE
                       ---------                                    -----                   ----

<S>                                                       <C>                         <C>
                 /s/ MARK R. TEMPLETON                       President and Chief      December 10, 1999
- --------------------------------------------------------      Executive Officer
                  (Mark R. Templeton)                      (Principal Executive and
                                                           Financial and Accounting
                                                                   Officer

                   /s/ DIXIE K. LOPES                       Acting Chief Financial    December 10, 1999
- --------------------------------------------------------           Officer
                    (Dixie K. Lopes)

                  /s/ SCOTT T. BECKER                      Chief Technology Officer   December 10, 1999
- --------------------------------------------------------         and Director
                   (Scott T. Becker)

                   /s/ LUCIO L. LANZA                      Chairman of the Board of   December 10, 1999
- --------------------------------------------------------          Directors
                    (Lucio L. Lanza)

                   /s/ DR. ELI HARARI                              Director           December 10, 1999
- --------------------------------------------------------
                    (Dr. Eli Harari)
</TABLE>

                                       36
<PAGE>   37

                            ARTISAN COMPONENTS, INC.

                         INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Report of Independent Accountants...........................  F-2
Balance Sheets..............................................  F-3
Statements of Operations....................................  F-4
Statements of Stockholders' Equity..........................  F-5
Statements of Cash Flows....................................  F-6
Notes to Financial Statements...............................  F-7
</TABLE>

                                       F-1
<PAGE>   38

                       REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of
Artisan Components, Inc.

     In our opinion, the financial statements listed in the index appearing
under Item 14(a)(1) on page 34 present fairly, in all material respects, the
financial position of Artisan Components, Inc. at September 30, 1999 and 1998,
and the results of its operations and its cash flows for each of the three years
in the period ended September 30, 1999 in conformity with accounting principles
generally accepted in the United States. In addition, in our opinion, the
financial statement schedule listed in the index appearing under Item 14(a)(2)
on page 34 presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related 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 financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States, which 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 the opinion expressed
above.

                                          PRICEWATERHOUSECOOPERS LLP
San Jose, California
October 25, 1999

                                       F-2
<PAGE>   39

                            ARTISAN COMPONENTS, INC.

                                 BALANCE SHEETS
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

                                     ASSETS

<TABLE>
<CAPTION>
                                                                SEPTEMBER 30,
                                                              ------------------
                                                               1999       1998
                                                              -------    -------
<S>                                                           <C>        <C>
Current assets:
  Cash and cash equivalents.................................  $15,233    $36,516
  Contract receivables (net of allowance of $746 and $430 at
     September 30, 1999 and 1998, respectively).............    7,721      5,052
  Marketable securities.....................................   32,948     10,688
  Prepaid expenses and other current assets.................    1,514      1,350
  Deferred tax asset........................................      246         --
                                                              -------    -------
          Total current assets..............................   57,662     53,606
Property and equipment, net.................................    6,133      5,387
Deferred tax asset..........................................      361         82
Other assets................................................      188        414
                                                              -------    -------
          Total assets......................................  $64,344    $59,489
                                                              =======    =======

                      LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable and accrued expenses.....................  $ 3,255    $ 1,704
  Deferred tax liability....................................       --        976
  Deferred revenue..........................................    3,795      1,052
                                                              -------    -------
          Total current liabilities.........................    7,050      3,732
Deferred rent...............................................       98         53
Deferred revenue............................................       76        165
                                                              -------    -------
          Total liabilities.................................    7,224      3,950
                                                              -------    -------
Commitments (Note 8)
  Stockholders' Equity:
     Preferred Stock, $0.001 par value:
       Authorized: 5,000 shares;
       Issued and outstanding: None at September 30, 1999
      and 1998..............................................       --         --
     Common Stock, $0.001 par value:
       Authorized: 50,000 shares;
       Issued and outstanding: 13,909 and 13,368 shares at
      September 30, 1999 and 1998, respectively.............       14         13
  Additional paid in capital................................   54,358     52,235
  Retained earnings.........................................    2,748      3,291
                                                              -------    -------
          Total stockholders' equity........................   57,120     55,539
                                                              -------    -------
          Total liabilities and stockholders' equity........  $64,344    $59,489
                                                              =======    =======
</TABLE>

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

                                       F-3
<PAGE>   40

                            ARTISAN COMPONENTS, INC.

                            STATEMENTS OF OPERATIONS
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                YEAR ENDED SEPTEMBER 30,
                                                              ----------------------------
                                                               1999       1998       1997
                                                              -------    -------    ------
<S>                                                           <C>        <C>        <C>
Revenue:
License.....................................................  $14,138    $16,568    $8,912
  Net royalty...............................................      729         --        --
                                                              -------    -------    ------
          Total revenue.....................................   14,867     16,568     8,912
Cost and expenses:
  Cost of revenue...........................................    5,957      4,962     2,855
  Product development.......................................    4,631      3,580     1,955
  Sales and marketing.......................................    5,105      4,030     2,019
  General and administrative................................    2,599      1,922     1,340
                                                              -------    -------    ------
          Total cost and expenses...........................   18,292     14,494     8,169
                                                              -------    -------    ------
Operating (loss) income.....................................   (3,425)     2,074       743
Other income, net...........................................    2,024      1,175       297
                                                              -------    -------    ------
(Loss) income before provision for income taxes.............   (1,401)     3,249     1,040
(Benefit) provision for income taxes........................     (858)       923       356
                                                              -------    -------    ------
Net (loss) income...........................................  $  (543)   $ 2,326    $  684
                                                              =======    =======    ======
Basic net (loss) income per share...........................  $ (0.04)   $  0.22    $ 0.13
                                                              =======    =======    ======
Diluted net (loss) income per share.........................  $ (0.04)   $  0.18    $ 0.07
                                                              =======    =======    ======
Shares used in computing:
  Basic net (loss) income per share.........................   13,569     10,457     5,456
                                                              =======    =======    ======
  Diluted net (loss) income per share.......................   13,569     12,917     9,657
                                                              =======    =======    ======
</TABLE>

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

                                       F-4
<PAGE>   41

                            ARTISAN COMPONENTS, INC.

                       STATEMENTS OF STOCKHOLDERS' EQUITY
             FOR THE YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                     PREFERRED STOCK     COMMON STOCK               ADDITIONAL
                                     ----------------   ---------------              PAID IN     RETAINED
                                     SHARES   AMOUNT    SHARES   AMOUNT   WARRANT    CAPITAL     EARNINGS    TOTAL
                                     ------   -------   ------   ------   -------   ----------   --------   -------
<S>                                  <C>      <C>       <C>      <C>      <C>       <C>          <C>        <C>
Balance at September 30, 1996......   2,264   $ 3,478    5,114    $ 5         --     $   528      $  281    $ 4,292
Options exercised..................      --        --      510      1         --          16          --         17
  Issuance of Series B Preferred
    Stock, net of issuance costs of
    $19............................   1,122     4,086       --     --         --          --          --      4,086
  Issuance of Common Stock to
    employees as a stock bonus.....      --        --       20     --         --         103          --        103
  Compensation expense for options
    granted........................      --        --       --     --         --          41          --         41
  Issuance of Warrant..............      --        --       --     --      $ 125          --          --        125
  Net income.......................      --        --       --     --         --          --         684        684
                                     ------   -------   ------    ---      -----     -------      ------    -------
Balance at September 30, 1997......   3,386   $ 7,564    5,644    $ 6      $ 125     $   688      $  965    $ 9,348
  Common Stock issued upon
    conversion of Series A and
    Series B Preferred Stock.......  (3,386)   (7,564)   3,386      3         --       7,561          --         --
  Common Stock issued upon exercise
    of warrant.....................      --        --       50     --       (125)        313          --        188
  Common Stock issued upon initial
    public offering................      --        --    3,015      3         --      27,083          --     27,086
  Common Stock issued upon
    secondary offering.............      --        --      956      1         --      15,846          --     15,846
  Options exercised................      --        --      271     --         --          78          --         78
  Common Stock issued pursuant to
    employee stock purchase plan...      --        --       46     --         --         391          --        391
  Compensation expense for options
    granted........................      --        --       --     --         --          80          --         80
  Tax benefit for disqualifying
    dispositions...................      --        --       --     --         --         196          --        196
  Net income.......................      --        --       --     --         --          --       2,326      2,326
                                     ------   -------   ------    ---      -----     -------      ------    -------
Balance at September 30, 1998......      --   $    --   13,368    $13      $  --     $52,235      $3,291    $55,539
  Options exercised................      --        --      372      1         --         798          --        799
  Common Stock issued pursuant to
    employee stock purchase plan...      --        --      169     --         --         806          --        806
  Compensation expense for options
    granted........................      --        --       --     --         --          87          --         87
  Tax benefit for disqualifying
    dispositions...................      --        --       --     --         --         432          --        432
  Net loss.........................      --        --       --     --         --          --        (543)      (543)
                                     ------   -------   ------    ---      -----     -------      ------    -------
Balance at September 30, 1999......      --   $    --   13,909    $14      $  --     $54,358      $2,748    $57,120
                                     ======   =======   ======    ===      =====     =======      ======    =======
</TABLE>

   The accompanying notes are an integral part of these financial statements.
                                       F-5
<PAGE>   42

                            ARTISAN COMPONENTS, INC.

                            STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                 YEAR ENDED SEPTEMBER 30,
                                                              -------------------------------
                                                                1999        1998       1997
                                                              --------    --------    -------
<S>                                                           <C>         <C>         <C>
Cash flows from operating activities:
Net (loss) income...........................................  $   (543)   $  2,326    $   684
  Adjustments to reconcile net (loss) income to net cash
     provided by operating activities:
     Depreciation and amortization..........................     2,359       1,845        777
     Gain on sale/disposal of fixed assets..................       (78)        (82)        --
     Provision for doubtful accounts........................       316         155        275
     Issuance of Common Stock to employees as a stock
       bonus................................................        --          --        103
     Compensation expense for options granted...............        87          80         41
     Changes in assets and liabilities:
       Contract receivables.................................    (2,985)     (2,373)    (2,277)
       Deferred revenue.....................................     2,743        (217)     1,107
       Prepaid expenses and other assets....................       (58)     (1,116)      (267)
       Deferred rent........................................        45           4         34
       Deferred taxes.......................................    (1,183)        516        243
       Accounts payable and other liabilities...............     1,641         941         37
                                                              --------    --------    -------
          Net cash provided by operating activities.........     2,344       2,079        757
                                                              --------    --------    -------
Cash flows from investing activities:
     Acquisition of property and equipment..................    (3,092)     (3,128)    (3,389)
     Proceeds from sale of property and equipment...........       120         110         --
     Purchase of marketable securities......................   (49,443)    (11,498)    (5,692)
     Proceeds from sales of marketable securities...........    27,183       4,295      4,456
                                                              --------    --------    -------
          Net cash used in investing activities.............   (25,232)    (10,221)    (4,625)
                                                              --------    --------    -------
Cash flows from financing activities:
  Net proceeds from issuance of Series B Preferred Stock and
     Warrant................................................        --          --      4,211
  Proceeds from issuance of Common Stock....................     1,605      43,589         17
                                                              --------    --------    -------
          Net cash provided by financing activities.........     1,605      43,589      4,228
                                                              --------    --------    -------
Net (decrease)increase in cash and cash equivalents.........   (21,283)     35,447        360
Cash and cash equivalents, beginning of period..............    36,516       1,069        709
                                                              --------    --------    -------
Cash and cash equivalents, end of period....................  $ 15,233    $ 36,516    $ 1,069
                                                              ========    ========    =======
CASH PAID FOR:
  Income taxes..............................................  $      2    $    370    $     2
                                                              ========    ========    =======
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES:
     Fixed asset acquisitions in exchange for accounts
       payable..............................................  $     24    $    163    $   384
                                                              ========    ========    =======
     Issuance of Common Stock to employees as a stock
       bonus................................................  $     --    $     --    $   103
                                                              ========    ========    =======
     Compensation expense for options granted...............  $     87    $     80    $    41
                                                              ========    ========    =======
     Tax benefits from disqualifying dispositions of Common
       Stock................................................  $    432    $    196    $    --
                                                              ========    ========    =======
</TABLE>

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

                                       F-6
<PAGE>   43

                            ARTISAN COMPONENTS, INC.

                         NOTES TO FINANCIAL STATEMENTS

1. DESCRIPTION OF BUSINESS

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

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

USE OF ESTIMATES

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

REVENUE AND COST OF REVENUE

     Revenue consists of license fees and net royalties. License fees are
received under the terms of license agreements with customers to provide the
Company's IP component products which are customized to each customer's
manufacturing process. IP component products consist of data and/or software and
related documentation which enables a customer to design and manufacture complex
ICs. The software, if any, included in the Company's IP component products is
incidental. The purpose of the license is to permit the customer to use the
Company's IP in connection with the design and manufacture of the customers'
products. The customization of the IP component products generally takes up to
six months to complete and the customer obtains ownership rights to the
in-process customization as well as the completed customization. The license
period is typically twenty years. Under the terms of a typical license
agreement, a portion of the fees are paid on signing of the agreement with the
final payment due within 30 days of completion of customization. The Company
warrants that the licensed products shall be free from defects and conform to
customer's specifications. In addition, the Company generally provides
telephonic and e-mail support to its customers through the warranty period,
which is typically 90 days. In some instances, the Company has agreed to provide
limited support beyond the warranty period, although the Company believes its
products are not support intensive and the experience to date would indicate
such support requires a relatively minor resource commitment. Customers are also
able to purchase support contracts that provide for a continuation of the
telephonic and e-mail support mentioned above. No upgrades or modifications to
the licensed product are provided under these contracts. Other than warranty and
ongoing product support, the Company has no further obligations subsequent to
completion of the customization. Revenue from license fees is recognized based
on the percentage of completion method over the period that the Company
completes customization for the majority of the Company's contracts. Under
certain contracts where the costs cannot be estimated, the completed contract
method is utilized whereby revenue and costs are recognized when the Company
completes customization. Under the percentage of completion and completed
contract methods, provisions for estimated losses on uncompleted contracts are
recognized in the period in which the likelihood of such losses is determined.

     Royalties are calculated based on production volumes of silicon which
contain the Company's IP. License agreements dictate royalty reporting by each
customer on either a per-chip or per-wafer basis. Of the royalties reported, a
portion is recognized by the Company as net royalty revenue and a portion is
reserved for the customer to use toward future license purchases from the
Company.

                                       F-7
<PAGE>   44
                            ARTISAN COMPONENTS, INC.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

     Cost of license revenue is primarily comprised of salaries and benefits of
employees assigned to customization contracts, is allocated based on the amount
of time devoted to each contract by the employees and includes an accrual for
warranty and product support costs.

PRODUCT DEVELOPMENT

     Product development expenses are charged to operations as incurred.

EARNINGS PER SHARE ("EPS")

     Basic and diluted earnings per share are computed in accordance with
Statement of Financial Accounting Standards No. 128 ("SFAS 128"). Basic EPS is
computed by dividing income available to common stockholders by the weighted
average number of common shares outstanding for the period. Diluted EPS is
computed giving effect to all dilutive potential common shares that were
outstanding during the period. Dilutive potential common shares consist of the
incremental common shares issuable upon the conversion of convertible preferred
stock (using the "if converted" method) and exercise of stock options and
warrants for all periods. Dilutive potential common shares are not included
during periods in which the Company experienced a net loss as the impact would
be anti-dilutive.

CASH AND CASH EQUIVALENTS

     The Company considers all highly liquid investments with an original
maturity of three months or less at date of acquisition to be cash equivalents.
The Company maintains its cash and cash equivalents in accounts with three major
financial institutions.

MARKETABLE SECURITIES

     Marketable securities are classified as available-for-sale securities and
are carried at fair value, based on quoted market prices, with the unrealized
gains or losses, net of tax, reported in stockholders' equity. 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.
Realized gains and losses are recorded using the specific identification method.

PROPERTY AND EQUIPMENT

     Property and equipment are stated at cost, less accumulated depreciation.
Property and equipment are depreciated on a straight line basis over their
respective estimated useful lives of three to five years. Leasehold improvements
are amortized on a straight line basis over the shorter of their respective
estimated useful lives or the terms of their respective leases. Upon disposal,
assets and related accumulated depreciation are removed from the accounts and
the related gain or loss is included in results from operations.

INCOME TAXES

     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. Valuation allowances are established when necessary to
reduce deferred tax assets to the amounts expected to be realized.

COMPREHENSIVE INCOME

     In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income." This statement establishes requirements for
disclosure of comprehensive income and became effective for the Company for its
fiscal year 1999, with reclassification of earlier financial statements for

                                       F-8
<PAGE>   45
                            ARTISAN COMPONENTS, INC.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

comparative purposes. Comprehensive income generally represents all changes in
stockholders' equity except those resulting from investments of contributions by
stockholders. SFAS 130 requires unrealized gains or losses on the Company's
available-for-sale securities, which prior to adoption were reported separately
in stockholders' equity, to be included in other comprehensive income. The
Company has adopted SFAS 130; however, the effect of the adoption was immaterial
to all periods presented.

RECENT PRONOUNCEMENTS

     In March 1998, the Accounting Standards Executive Committee issued SOP
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," which is effective for fiscal years beginning after December 15,
1998. SOP 98-1 provides guidance on accounting for the costs of computer
software developed or obtained for internal use. The adoption of SOP 98-1 is not
expected to have a material impact on the Company.

     In April 1998, the American Institute of Certified Public Accountants
issued SOP 98-5, "Reporting on the Costs of Start-Up Activities." This standard
requires companies to expense the costs of start-up activities and organization
costs as incurred. In general, SOP 98-5 is effective for fiscal years beginning
after December 15, 1998. The Company does not expect SOP 98-5 to impact the
Company's results of operations.

     In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Investments and Hedging Activities." The statement
establishes accounting and reporting standards requiring that every derivative
instrument be recorded in the balance sheet as either an asset or liability
measured at its fair value. The statement also requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. To date, the Company has not entered into any
derivative financial instruments or hedging activities. SFAS No. 133, as
amended, is effective for fiscal years beginning after June 15, 2000.

3. BUSINESS RISKS AND CREDIT CONCENTRATION

     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, 1999, two customers
accounted for 36% and 24% of gross contract receivables. At September 30, 1998,
three customers accounted for 36%, 18% and 12%, respectively, of gross contract
receivables. As of September 30, 1999, the Company's cash and cash equivalents
were deposited with three major financial institutions in the form of demand
deposits, money market accounts, corporate 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 contract receivables. The Company invests its excess
cash primarily in high-quality corporate debt instruments that mature within one
year.

                                       F-9
<PAGE>   46
                            ARTISAN COMPONENTS, INC.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

4. CONTRACT RECEIVABLES

     Contract receivables were comprised of the following (in thousands):

<TABLE>
<CAPTION>
                                                              SEPTEMBER 30,
                                                             ----------------
                                                              1999      1998
                                                             ------    ------
<S>                                                          <C>       <C>
Accounts receivable........................................  $5,391    $3,379
Unbilled contract receivables..............................   3,076     2,103
                                                             ------    ------
                                                              8,467     5,482
Allowance for doubtful accounts............................    (746)     (430)
                                                             ------    ------
                                                             $7,721    $5,052
                                                             ======    ======
</TABLE>

5. PROPERTY AND EQUIPMENT

     Property and equipment were comprised of the following (in thousands):

<TABLE>
<CAPTION>
                                                             SEPTEMBER 30,
                                                           ------------------
                                                            1999       1998
                                                           -------    -------
<S>                                                        <C>        <C>
Computer equipment and software..........................  $ 8,036    $ 5,100
Office furniture.........................................      765        744
Leasehold improvements...................................    2,431      2,367
                                                           -------    -------
                                                            11,232      8,211
Accumulated depreciation and amortization................   (5,099)    (2,824)
                                                           -------    -------
                                                           $ 6,133    $ 5,387
                                                           =======    =======
</TABLE>

6. MARKETABLE SECURITIES

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

<TABLE>
<CAPTION>
                                                             SEPTEMBER 30,
                                                           ------------------
                                                            1999       1998
                                                           -------    -------
<S>                                                        <C>        <C>
Short term investments:
Municipal government obligations.........................       --    $10,686
                                                           =======    =======
  Corporate bonds, certificates of deposit and
     commercial paper....................................  $32,948         --
                                                           =======    =======
</TABLE>

     All short term investments have maturities of less than one year from the
respective balance sheet date. The cost of marketable securities approximates
fair value of the securities and there are no unrealized holding gains or
losses.

7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

     Accounts payable and accrued expenses were comprised of the following (in
thousands):

<TABLE>
<CAPTION>
                                                              SEPTEMBER 30,
                                                             ----------------
                                                              1999      1998
                                                             ------    ------
<S>                                                          <C>       <C>
Accounts payable...........................................  $1,227    $  368
Accrued expenses...........................................   1,015       689
Accrued compensation.......................................     831       596
Accrued warranty...........................................     182        51
                                                             ------    ------
                                                             $3,255    $1,704
                                                             ======    ======
</TABLE>

                                      F-10
<PAGE>   47
                            ARTISAN COMPONENTS, INC.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

8. COMMITMENTS

     The Company rents its office facility in Sunnyvale under a noncancelable
operating lease that expires in 2004. Under the terms of the lease, the Company
is responsible for its share of taxes, insurance and common area maintenance
costs.

     At September 30, 1999, future minimum annual lease payments under this
lease were as follows (in thousands):

<TABLE>
<S>                                                   <C>
Fiscal 2000.........................................  $  470
Fiscal 2001.........................................     490
Fiscal 2002.........................................     509
Fiscal 2003.........................................     529
and thereafter......................................     549
                                                      ------
                                                      $2,547
                                                      ======
</TABLE>

     The Company continues to lease its previous office facility in San Jose
under a non-cancelable lease that expires in 2001. In October 1997, the Company
entered into a sublease arrangement with respect to the San Jose office
facility. This sublease expires in 2001 and provides that the subtenant assumes
the lease obligation of the Company.

     Future minimum annual lease payments and future minimum annual rental
income with respect to the San Jose property are as follows (in thousands):

<TABLE>
<CAPTION>
                                              LEASE     RENTAL
                                             PAYMENT    INCOME
                                             -------    ------
<S>                                          <C>        <C>
Fiscal 2000................................   $347       $347
Fiscal 2001................................    148        148
                                              ----       ----
                                              $495       $495
                                              ====       ====
</TABLE>

     Net rent expense was $524,000 and $511,000 and $442,000 for the fiscal
years ended September 30, 1999, 1998 and 1997, respectively.

     On December 1, 1999, the Company entered into a non-cancelable operating
lease to lease a facility for its sales office in Tokyo, Japan. The lease term
is 24 months and future minimum lease payments (unaudited) under this agreement
are $94,160, $112,992 and $18,832 in fiscal years 2000, 2001 and 2002,
respectively.

     On December 1, 1999, the Company entered into a non-cancelable operating
lease to lease a facility for its sales office in North Andover, Massachusetts.
The lease term is 12 months and future minimum lease payments (unaudited) under
this agreement are $15,400 and $3,080 in fiscal years 2000 and 2001,
respectively.

9. STOCKHOLDERS' EQUITY

AUTHORIZED PREFERRED STOCK

     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, 1999 and 1998. 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.

                                      F-11
<PAGE>   48
                            ARTISAN COMPONENTS, INC.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

STOCK OPTION PLANS

     The Company had reserved 4,291,396 shares of its Common Stock under its
1993 Stock Option Plan, as amended (the "1993 Plan") for issuance upon the
exercise of incentive and nonstatutory stock options to employees, directors and
consultants as of September 30, 1999. The 1993 Plan expires in 2003. The 1993
Plan provides for an automatic annual increase in the number of shares reserved
for issuance thereunder commencing on October 1, 1999 in an amount equal to the
lesser of (i) 1,000,000 shares, (ii) 5% of the outstanding shares on such date
or (iii) such amount as determined by the Board of Directors. Pursuant to such
mechanism, on October 1, 1999, the number of shares reserved for issuance under
the 1993 Plan was increased by 1,000,000 shares to a total of 5,291,396.
Incentive stock options may be granted with exercise prices of no less than fair
market value, and non-statutory stock options may be 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 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 expire as determined by
the Board of Directors but not more than ten years after the date of grant. In
November 1997, the Company adopted the 1997 Director Option Plan (the "Director
Plan"). The Director Plan provides for the granting of options of up to 200,000
shares of Common Stock of the Company. 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 nonemployee director. In addition,
each nonemployee director will automatically be granted an option to purchase
5,000 shares of Common Stock annually. Options granted under the Director Plan
become exercisable over a four year period with the 25,000 share grants vesting
one-fourth on the first anniversary of the date of grant and then monthly
thereafter and the 5,000 share grants vesting monthly. At September 30, 1999,
options to purchase a total of 60,000 shares of Common Stock were outstanding
under the Director Plan. The Director Plan expires in November 2008.

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

<TABLE>
<CAPTION>
                                                                                            WEIGHTED
                                                             OPTIONS OUTSTANDING             AVERAGE
                                          SHARES     ------------------------------------   EXERCISE
                                         AVAILABLE    NUMBER       PRICE PER                  PRICE
                                         FOR GRANT   OF SHARES       SHARE         TOTAL    PER SHARE
                                         ---------   ---------   --------------   -------   ---------
<S>                                      <C>         <C>         <C>              <C>       <C>
Balance at September 30, 1996..........      592       1,086     $0.01 - $ 0.15        52    $0.0477
Additional shares reserved for
issuance...............................      400          --                 --        --         --
  Granted..............................     (831)        831     $0.15 - $ 5.00     2,165    $2.6052
  Exercised............................       --        (510)    $0.01 - $ 0.15       (17)   $ 0.034
                                          ------       -----                      -------
Balance at September 30, 1997..........      161       1,407     $0.01 - $ 5.00     2,200    $1.5635
  Additional shares reserved for
     issuance..........................    2,200          --                 --        --         --
  Granted..............................   (1,166)      1,166     $5.00 - $17.63     9,293    $7.9723
  Exercised............................       --        (271)    $0.01 - $ 7.00       (78)   $0.2892
  Canceled.............................      101        (101)    $0.15 - $17.63      (547)   $5.4375
                                          ------       -----                      -------
Balance at September 30, 1998..........    1,296       2,201                      $10,868    $4.9371
  Additional shares reserved for
     issuance..........................       --          --                 --        --         --
  Granted..............................     (771)        771     $5.00 - $12.50     5,096    $6.6162
  Exercised............................       --        (372)    $0.01 - $ 7.00      (799)   $2.1492
  Canceled.............................      216        (216)    $0.25 - $ 7.00    (1,120)   $5.1828
                                          ------       -----                      -------
Balance at September 30, 1999..........      741       2,384                      $14,045    $5.8925
                                          ======       =====                      =======    =======
</TABLE>

     At September 30, 1999, 1998 and 1997, options to purchase 801,309, 450,692,
and 291,011 shares of Common Stock, respectively, were exercisable pursuant to
the 1993 Plan and the Director Plan. The weighted

                                      F-12
<PAGE>   49
                            ARTISAN COMPONENTS, INC.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

average remaining contract life was 7.9, 8.2, and 8.9 years as of September 30,
1999, 1998 and 1997, respectively.

     The options outstanding and currently exercisable by exercise price at
September 30, 1999 are as follows (in thousands, except per share data):

<TABLE>
<CAPTION>
                               OPTIONS OUTSTANDING               OPTIONS EXERCISABLE
                       ------------------------------------    -----------------------
                                      WEIGHTED     WEIGHTED                   WEIGHTED
                                       AVERAGE     AVERAGE                    AVERAGE
                         NUMBER       REMAINING    EXERCISE      NUMBER       EXERCISE
   EXERCISE PRICE      OUTSTANDING      LIFE        PRICE      EXERCISABLE     PRICE
   --------------      -----------    ---------    --------    -----------    --------
<S>                    <C>            <C>          <C>         <C>            <C>
$0.01 - $0.25........       426         6.67        $ 0.13         302         $ 0.13
$2.00 - $5.00........       264         7.85        $ 4.59         141         $ 4.59
$5.06 - $7.00........     1,158         8.82        $ 6.25         224         $ 6.95
$7.70 - $8.44........       259         4.27        $ 7.81          82         $ 7.70
$9.06 - $17.13.......       277         9.13        $12.74          52         $13.94
                          -----                                    ---
                          2,384         7.87        $ 5.89         801         $ 4.49
                          =====                                    ===
</TABLE>

     The fair value of option grants related to the above plans is estimated on
the date of grant using the Black-Scholes pricing model with the following
assumptions for the years ended September 30, 1999, 1998 and 1997:

<TABLE>
<CAPTION>
                                                   1999       1998       1997
                                                  -------    -------    -------
<S>                                               <C>        <C>        <C>
Risk-free interest rate.........................   5.03%      5.37%      6.25%
Expected average life...........................  5 years    5 years    5 years
Expected dividends..............................    --         --         --
Expected volatility.............................    93%        79%        0%
</TABLE>

     The expected average life is based upon the assumption that the stock
options, on average, are exercised one year after they are fully vested. The
weighted average per share value of common stock options granted during fiscal
1999, 1998 and 1997 was $4.88, $5.20 and $0.92, respectively.

     In connection with the grant of options for the purchase of 96,200 shares
of Common Stock to employees during the period from December 1996 through March
1997 and 15,000 shares of Common Stock to non-employees in January 1998, the
Company recorded aggregate deferred compensation of approximately $281,000,
representing the difference between the deemed fair value of the Common Stock
and the option exercise price at the date of grant. Such deferred compensation
is amortized over the vesting period relating to the options, of which
approximately $41,000, $80,000 and $87,000 have been amortized during fiscal
1997, 1998 and 1999, respectively. In addition, the amortization will result in
charges in the first quarter of fiscal 2000 of approximately $21,000 and charges
of $11,000 per quarter for the following five quarters.

EMPLOYEE STOCK PURCHASE PLAN

     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. In November 1998, 133,810 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. The first offering
period commenced in February 1998 and ended on July 31, 1998. 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,
1999, 215,447 shares had been issued under the Purchase Plan at an average price
of $5.55 per share.

                                      F-13
<PAGE>   50
                            ARTISAN COMPONENTS, INC.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

     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 for the year ended September 30, 1998:

<TABLE>
<CAPTION>
                                                          1999          1998
                                                       ----------    ----------
<S>                                                    <C>           <C>
Risk-free interest rate..............................    4.94%         5.25%
Expected average life................................  0.62 years    0.74 years
Expected dividends...................................      --            --
Expected volatility..................................     89%           79%
</TABLE>

     The weighted average per share fair value of purchase rights under the
Purchase Plan during fiscal 1999 and 1998 was $3.37 and $4.23, respectively.

STOCK COMPENSATION

     The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for
Stock-Based Compensation." Accordingly, no compensation cost has been recognized
for the 1993 Plan or the Purchase Plan. Had compensation expense been determined
at the fair value on the grant dates for awards under the plans consistent with
the method of SFAS No. 123, the Company's net (loss) income in fiscal 1999, 1998
and 1997 would have been reduced to the pro forma amounts indicated below (in
thousands):

<TABLE>
<CAPTION>
                                                    YEAR ENDED SEPTEMBER 30,
                                                   --------------------------
                                                    1999       1998     1997
                                                   -------    ------    -----
<S>                                                <C>        <C>       <C>
Net (loss) income
As reported......................................  $  (543)   $2,326    $ 684
  Pro forma......................................  $(2,903)   $  831    $ 658
Net (loss) income per share
  As reported
     Basic (loss) income per share...............  $ (0.04)   $ 0.22    $0.13
     Diluted (loss) income per share.............  $ (0.04)   $ 0.18    $0.07
  Pro forma
     Basic (loss) income per share...............  $ (0.21)   $ 0.08    $0.12
     Diluted (loss) income per share.............  $ (0.21)   $ 0.06    $0.07
</TABLE>

     The effects of SFAS No. 123 on pro forma disclosures of net (loss) income
and net (loss) income per share for fiscal 1999, 1998 and 1997 are not likely to
be representative of the pro forma effects on net income and earnings per share
in future years.

                                      F-14
<PAGE>   51
                            ARTISAN COMPONENTS, INC.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

10. INCOME TAXES

     The (benefit) provision for income taxes comprised (in thousands):

<TABLE>
<CAPTION>
                                                       1999     1998    1997
                                                       -----    ----    ----
<S>                                                    <C>      <C>     <C>
Federal:
Current..............................................  $ 180    $126    $ --
  Deferred...........................................   (983)    403     181
                                                       -----    ----    ----
                                                        (803)    529     181
State:
  Current............................................      1      42      --
  Deferred...........................................   (200)    113      49
                                                       -----    ----    ----
                                                        (199)    155      49
Foreign:
  Current............................................    144     239     126
                                                       -----    ----    ----
          Total......................................  $(858)   $923    $356
                                                       =====    ====    ====
</TABLE>

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

<TABLE>
<CAPTION>
                                                    1999       1998      1997
                                                    -----      ----      ----
<S>                                                 <C>        <C>       <C>
Provision at U.S. federal statutory rate..........  (34.0)%    34.0%     34.0%
State tax net of federal benefit..................   (9.3)      4.3       4.2
Research and experimentation credits..............   (6.0)     (4.0)     (4.0)
Tax exempt interest...............................  (16.8)     (9.9)       --
Other.............................................    4.9       4.0        --
                                                    -----      ----      ----
Effective tax rate................................  (61.2)%    28.4%     34.2%
                                                    =====      ====      ====
</TABLE>

                                      F-15
<PAGE>   52
                            ARTISAN COMPONENTS, INC.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

     Temporary differences and carryforwards which gave rise to significant
portions of deferred tax assets and liabilities as of September 30 were as
follows (in thousands):

<TABLE>
<CAPTION>
                                                            1999       1998
                                                           -------    -------
<S>                                                        <C>        <C>
DEFERRED TAX ASSETS:
Current:
  Net operating losses...................................  $   374    $    67
  Research and experimentation credits...................       --        213
  Foreign tax credits....................................       --        239
  Other credits..........................................      275         --
                                                           -------    -------
                                                               649        519
Non current:
  Research and experimentation credits...................      473         --
  Accruals and Reserves..................................       40         --
  Foreign tax credits....................................      383         --
  Depreciation and amortization..........................      270         82
                                                           -------    -------
                                                             1,166         82
DEFERRED TAX LIABILITIES:
Current:
  Accrual to cash conversion.............................     (403)    (1,495)
Non current:
  Accrual to cash conversion.............................     (805)        --
                                                           -------    -------
                                                            (1,208)    (1,495)
                                                           -------    -------
Net deferred tax asset (liability).......................  $   607    $  (894)
                                                           =======    =======
</TABLE>

     As of September 30, 1999, the Company had federal and state net operating
loss carryforwards ("NOLs") of approximately $1,090,000 and $55,000,
respectively, available to offset future taxable income. The Company had federal
and state credits of $762,000 and $94,000, respectively. The net operating loss
and credit carryforwards expire between 2004 and 2019 if not utilized.

11. SEGMENT REPORTING

     The Company has adopted Statement of Financial Accounting Standards No. 131
("SFAS 131") "Disclosure about Segments of an Enterprise and Related
Information" effective for fiscal years beginning after December 31, 1997. The
Company operates in one industry segment. Management uses one measurement of
profitability for its business.

                                      F-16
<PAGE>   53
                            ARTISAN COMPONENTS, INC.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

     The distribution of revenues by geographic area was as follows (in
thousands):

<TABLE>
<CAPTION>
                                                   YEAR ENDED SEPTEMBER 30,
                                                 ----------------------------
                                                  1999       1998       1997
                                                 -------    -------    ------
<S>                                              <C>        <C>        <C>
REVENUE FROM UNAFFILIATED CUSTOMERS:
United States..................................  $ 4,940    $ 2,726    $2,376
Other North America............................      593      1,250       547
Europe.........................................    1,389      2,567       511
Italy..........................................       82      1,281     2,362
Japan..........................................    2,039      4,588     2,666
Taiwan.........................................    4,718      4,156       450
Asia...........................................    1,106         --        --
                                                 -------    -------    ------
                                                 $14,867    $16,568    $8,912
                                                 =======    =======    ======
</TABLE>

     Revenue from individual customers equal to 10% or more of revenue was as
follows (in thousands, except percent data):

<TABLE>
<CAPTION>
                                                 YEAR ENDED SEPTEMBER 30,
                                  ------------------------------------------------------
                                        1999               1998               1997
                                  ----------------   ----------------   ----------------
                                  PERCENT   AMOUNT   PERCENT   AMOUNT   PERCENT   AMOUNT
                                  -------   ------   -------   ------   -------   ------
<S>                               <C>       <C>      <C>       <C>      <C>       <C>
A. .............................    --          --     --          --     27%     $2,362
B. .............................    25%     $3,715     --          --     13       1,145
C. .............................    --          --     11%     $1,889     16       1,388
D. .............................    --          --     --          --     24       2,167
E. .............................    19       2,820     14       2,284     --          --
F. .............................    13       1,875     11       1,845     --          --
G. .............................    14       2,083     --          --     --          --
</TABLE>

12. BENEFIT PLAN

     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 1999,
1998 or 1997.

     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 $138,857, $136,664 and $74,017 for fiscal
1999, 1998 and 1997, respectively.

                                      F-17
<PAGE>   54
                            ARTISAN COMPONENTS, INC.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

13. EARNINGS PER SHARE

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

<TABLE>
<CAPTION>
                                                   YEAR ENDED SEPTEMBER 30,
                                                 ----------------------------
                                                  1999       1998       1997
                                                 -------    -------    ------
<S>                                              <C>        <C>        <C>
Numerator -- Basic and Diluted EPS
Net (loss) income..............................  $  (543)   $ 2,326    $  684
                                                 =======    =======    ======
Denominator -- Basic EPS
  Common stock outstanding.....................   13,569     10,457     5,456
                                                 -------    -------    ------
Basic (loss) income per share..................  $ (0.04)   $  0.22    $ 0.13
                                                 =======    =======    ======
Denominator -- Diluted EPS
  Denominator -- Basic EPS.....................   13,569     10,457     5,456
  Effect of Dilutive Securities:
     Common stock options......................       --      1,279     1,052
     Warrant...................................       --         12        --
     Convertible preferred stock...............       --      1,169     3,149
                                                 -------    -------    ------
                                                  13,569     12,917     9,657
                                                 -------    -------    ------
Diluted (loss) income per share................  $ (0.04)   $  0.18    $ 0.07
                                                 =======    =======    ======
</TABLE>

                                      F-18
<PAGE>   55

                            ARTISAN COMPONENTS, INC.

         SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

<TABLE>
<CAPTION>
                                                                ADDITIONS
                                                 BALANCE AT     CHARGED TO                  BALANCE AT
                                                BEGINNING OF    COSTS AND                     END OF
                 DESCRIPTION                       PERIOD        EXPENSES     DEDUCTIONS      PERIOD
                 -----------                    ------------    ----------    ----------    ----------
<S>                                             <C>             <C>           <C>           <C>
Allowance for Doubtful Accounts:
September 30, 1997............................      $ --           $275          $ --          $275
  September 30, 1998..........................       275            155            --           430
  September 30, 1999..........................       430            394           (78)          746
</TABLE>

                                       S-1
<PAGE>   56

                                 EXHIBIT INDEX

<TABLE>
<C>       <S>
 3.1*     Amended and Restated Certificate of Incorporation of the
          Registrant.
 3.3*     Bylaws of the Registrant.
 4.2*     First Amended and Restated Registration Rights Agreement
          dated December 17, 1996 by and among the Registrant and the
          Shareholders named therein.
10.1*     Form of Indemnification Agreement for directors and
          executive officers.
10.2*     1993 Stock Option Plan and form of agreement thereunder.
10.3*     1997 Employee Stock Purchase Plan.
10.4*     1997 Director Stock Option Plan.
10.5*     Lease Agreement dated December 13, 1995 between Registrant
          and Spieker Properties, L.P. for 2077 Gateway Place, San
          Jose, California office.
10.5.1*   Sublease dated October 10, 1997 between the Registrant and
          Unison Software, Inc.
10.5.2*   First Addendum to Sublease dated October 14, 1997 between
          the Registrant and Unison Software, Inc.
10.5.3*   Fixed Asset Purchase Agreement dated October 10, 1997
          between the Registrant and Unison Software, Inc.
10.6*     Series A Preferred Stock Purchase Agreement dated March 21,
          1996 by and among the Registrant and the Purchasers named
          therein.
10.7*+    Purchase and License Agreement dated April 9, 1996 between
          the Registrant and OKI Electric Industry Co., Ltd. And
          amendments thereto.
10.8*     Business Loan Agreement dated May 8, 1996 between the
          Registrant and Union Bank of California, N.A. and
          attachments thereto.
10.9*     Offer Letter dated August 29, 1996 between the Registrant
          and Jeffrey A. Lewis and letter amendment dated September 5,
          1996 thereto.
10.10+*   Collaboration Agreement dated December 4, 1996 between the
          Registrant and SGS-THOMSON MICROELECTRONICS S.r.l.
10.11*    Series B Preferred Stock Purchase Agreement dated December
          17, 1996 by and among the Registrant and the Purchasers
          named therein.
10.12+*   OEM Agreement dated December 6, 1996 between the Registrant
          and Synopsys, Inc.
10.13+*   License Agreement dated June 16, 1997 between the Registrant
          and Fujitsu Microelectronics, Inc.
10.14*    Lease Agreement dated June 16, 1997 between Registrant,
          Richard Bowling and Katherine Bowling for 1195 Bordeaux
          Drive, Sunnyvale, California office.
10.15*    Severance Agreement dated June 20, 1997 between the
          Registrant and Robert D. Selvi.
10.16*    Offer Letter dated July 31, 1997 between the Registrant and
          Larry J. Fagg.
10.17**   Confidential Mutual Release and Settlement Agreement
          effective as of April 15, 1998 between the Registrant and
          Daniel I. Rubin.
10.18**   Form of License Agreement.
10.19+**  License Agreement dated as of November 30, 1997 between the
          Registrant and Taiwan Semiconductor Manufacturing
          Corporation, as amended.
10.20     Commercial Lease Agreement dated December 1, 1999 by and
          between the Registrant and The Dai-Tokyo Fire and Marine
          Insurance Co., Ltd.
10.21     Commercial Lease Agreement dated December 1, 1999 by and
          between the Registrant and Kenrick Investment Group.
21.1**    Subsidiaries of the Registrant
</TABLE>
<PAGE>   57
<TABLE>
<C>       <S>
23.1      Consent of PricewaterhouseCoopers LLP, independent
          accountants.
24.1      Power of Attorney (see page 36).
27.1      Financial Data Schedule.
</TABLE>

- ---------------
 * Incorporated by reference to exhibits filed with the Registrant's
   Registration Statement on Form S-1 (No. 333-41219) which was declared
   effective on February 2, 1998.

 + Certain information in these exhibits has been omitted and filed separately
   with the Securities and Exchange Commission pursuant to a confidential
   treatment request under 17 C.F.R. Sections 200.80(b)(4), 200.83 and 230.46.

** Incorporated by reference to exhibits filed with the Registrant's
   Registration Statement on Form S-1 (No. 333-50243) which was declared
   effective on April 29, 1998.

<PAGE>   1
                                                                   EXHIBIT 10.20



Commercial Lease Agreement

(Table of Essential Points of Agreement)

<TABLE>
<S>              <C>
Lessor           The Dai-Tokyo Fire & Marine Insurance Co., Ltd.

Lessee           Artisan Components, Inc.

Building         Description of property          Yoyogi 3-25-3, Shibuya-ku, Tokyo

                 Name                             Dai-Tokyo Fire Shinjuku Building

                 Construction                     Steel frame steel-reinforced concrete 4
                                                  stories below ground and 24 stories above
                                                  ground

                 Total area                       48510.0 m(2) (14,674,27 tsubo)

Leased area      No. of floors                    14

                 Area                             50.32 tsubo

Rent             Unit price per tsubo             18,000 yen

                 Monthly amount                   905,760 yen

                 Consumption tax                  45,288 yen

                 Total amount                     951,048 yen

Fee for common   Unit price per tsubo             5,000 yen
services

                 Monthly amount                   251,600 yen

                 Consumption tax                  12,580 yen

                 Total amount                     264,180 yen

Total            Monthly amount                   1,157,360 yen

                 Consumption tax                  57,868 yen

                 Sum total                        1,215,228 yen

Deposit          Unit price per tsubo             216,000 yen

                 Sum total                        10,869,120 yen

Purpose of use   Place of business to achieve Lessee's business purposes

Term of lease    Two years from December 1, 1999 through the end of November, 2001
</TABLE>

<PAGE>   2

WHEREAS Lessor ("AA") and Lessee ("BB") have entered into an agreement
("Agreement") as set forth in the following provisions with respect to the
building stated in the above Essential Points of Agreement, each party shall
sign and place its seal on two copies of this agreement and each party shall
retain one copy in witness of the execution of this Agreement.



December 1, 1999

AA:

BB:

Agent:

<PAGE>   3

                              AGREEMENT PROVISIONS


(Description of Leased Area)

1       AA shall lease to BB, and BB shall lease from AA the leased area (the
        shaded portion of the attached drawing) in the building stated under the
        above heading entitled "Table of Essential Points of Agreement" ("Table
        of Essential Points").



(Purpose of Use)

2       BB shall use the leased area only for the purposes stated in the Table
        of Essential Points and may not use it for any other purpose.


(Term of Lease)


3       The term of the lease shall be as set forth in the Table of Essential
        Points.

 .       If neither party expresses to the other, on or before the date six
        months prior to expiration of this Agreement, the intent to terminate
        this Agreement upon its expiration, this Agreement shall automatically
        be renewed for a period of two years, and this same renewal procedure
        shall also apply thereafter.

 .       In the case of renewal as provided for in the preceding paragraph, AA
        may revise the rent upon discussion with BB.


(Termination During the Lease Term)

4       If, during the lease term, a party seeks to terminate all or part of
        this Agreement due to a compelling reason, said party must give written
        notice to that effect to the other party on or before the date six
        months prior to the termination date; provided that BB may immediately
        terminate this Agreement by paying AA the amount equivalent to six
        months' rent and fees for common services instead of giving AA prior
        notice.


(Termination Before the Start of the Lease Term)

<PAGE>   4

5       If BB terminates this Agreement before the start of the lease term, BB
        must pay to AA the amount equivalent to six months' rent. However, such
        payment shall not preclude AA from maintaining a claim against BB for
        damages.


(Payment of Rent, Etc.)


6       The rent and the fee for common services shall be as set forth in the
        Table of Essential Points. On or before the 25th day of every month
        (when the 25th is a bank holiday, on or before the banking business day
        preceding the 25th), BB shall pay the following month's rent and fee for
        common services by bank transfer to the following account. The receipt
        for the bank transfer that is issued by the bank shall serve as BB's
        receipt from AA. Further, all bank transfer charges shall be borne by
        BB.


<TABLE>
<S>                      <C>                    <C>                <C>
        Bank:            Tokai Bank             Branch Name:       Minami Shinjuku

        Account Name:    The Dai-Tokyo Fire & Marine Insurance Co., Ltd.
</TABLE>


(Revision of Rent and Fee for Common Services)


7       If there is a compelling reason such as a fluctuation of taxes or public
        charges, a change in the value of the land or the building,
        reconstruction of facilities, fluctuation of building maintenance costs,
        fluctuation of building management costs, fluctuation of other expenses
        or a change in economic conditions; or if AA finds there to be an
        inappropriate disparity in comparison with neighboring buildings, AA
        may, upon discussion with BB, revise the rent and fee for common
        services even during the term of this agreement.


(Payment of Costs)


8       BB shall pay the following various costs in addition to rent and the fee
        for common services:

(1).    lighting in the leased area and electrical costs for other equipment as
        well as costs necessary for the maintenance of the lighting;


<PAGE>   5

(2).    costs for heating and air conditioning;

(3).    costs for steam, cold water, coolant water usage, gas, water, etc. used
        in facilities that BB installs with the consent of AA;

(4).    the improvement and maintenance costs of facilities constructed upon the
        agreement of the parties;

(5).    other costs that should be paid by BB;

(6).    costs for cleaning and repair of the leased area (including BB's various
        fixtures and equipment); and

(7).    rodent and pest control costs for the leased area.

 .       Section 6 above shall be applied mutatis mutandis with respect to the
        method of payment for the various costs provided for in items (1)
        through (5) above.


(Consumption Tax)

9       BB shall separately pay the amounts of consumption tax associated with
        the following numbered items in compliance with the proper methods and
        times of payment for each item:

(1).    rent and fee for common services provided for in Section 6;

(2).    miscellaneous expenses provided for in Section 8;

(3).    among the items of overstay compensation provided for in Item 4 of
        Section 22 below, the amount equivalent to rent and the fee for common
        services as well as the various costs for electricity, heating, water,
        etc. used within the leased area; and

(4).    other items that are subject to taxation under the Consumption Tax Law.


(Late Fee)

10      If BB is late in paying rent or any other charge that it owes to AA
        under this Agreement, BB shall, in addition to paying said charge, pay
        to AA an amount calculated at a rate of 15% per annum on the late
        amount. This calculation

<PAGE>   6

        shall start from the day after the payment becomes overdue and continue
        until the date on which payment is complete.


(Prohibited Acts)


11      BB shall not:

(1).    assign or offer as security to any third party any right arising under
        this Agreement;

(2).    sublease the whole or any part of the leased area (including entering
        into an arrangement for shared use or other arrangement corresponding to
        a sublease);

(3).    cause, due to any fundamental change to BB's business, including a
        transfer of business or merger, any person other than BB to succeed to
        any right based on this Agreement;

(4).    bring onto the premises any article constituting a nuisance (including
        any article that poses a risk of fire, explosion, vibration, offensive
        odor, or noise, hazardous materials and heavy loads); or

(5).    engage in any conduct that constitutes a nuisance to another lessee or a
        third party or any conduct that would tend to harm the building,
        including the leased area.


(Matters Requiring Prior Consent)

12      Unless the prior written consent of AA is obtained, BB shall not:

(1).    change its business offerings or business category, or use the leased
        area for a purpose other than that specified in Section 2;

(2).    permit any third party to be domiciled in the leased area (however, BB
        shall be completely liable for the acts of any such third party);

(3).    place any lettering on the inside or outside of the building or leased
        area, or place any similar advertisement or equipment therefor on the
        outside of the building;

<PAGE>   7

(4).    display any name other than BB's true name on the leased area or use any
        name other than BB's true name in obtaining telephone, etc. services or
        in any written, postal or advertising materials; or

(5).    install any item that would have a substantial effect on the building's
        facilities such as electrical capacity.


(Notification of Changes)

13      BB shall immediately notify AA in writing of any change to BB's address,
        trade name, company name, seal or representative.


(Modification of Original Condition, Repairs, Etc.)

14      If BB seeks to modify the original condition of the leased area through
        the installation, removal, alteration, etc. of fixtures, equipment,
        etc., BB shall obtain the written consent of AA in advance and conduct
        such construction at BB's own responsibility and expense using the
        architect and construction company designated by AA. Further, if BB
        seeks to repair, etc. the leased area, BB shall obtain the written
        consent of AA in advance and conduct such construction at BB's own
        responsibility and expense in accordance with AA's instructions.

 .       All construction, maintenance and improvement costs, as well as taxes
        and public charges, etc. relating to the work described in the preceding
        paragraph shall be borne by BB. No nuisance shall be caused to another
        lessee or a third party by the work described in the preceding
        paragraph.

 .       If the need for repairs, etc. arises or becomes likely due to any damage
        to or malfunction of the leased area or any of its accompanying fixtures
        or equipment, BB shall immediately notify AA to that effect.

 .       BB shall cooperate with repair, etc. work that AA performs when such
        work affects BB.


(Liability for Repairs)

15      BB shall be liable for any replacement or repair of the leased area's
        fittings, blinds, window and door glass, lighting, switches, electrical
        outlets, etc. and any accessories thereto, regardless of the cause of
        the wear thereof.


<PAGE>   8

 .       BB shall be liable for all repairs (including painting and re-surfacing)
        of walls, ceilings, floors, etc. inside the leased area.

 .       Unless AA gives advance consent to the use of a construction company or
        materials that BB designates, BB shall use the construction company and
        materials that AA designates even where a repair provided for in the
        preceding two paragraphs is done at BB's expense.


(Compensation for Harm)

16      If AA, another lessee or a third party is harmed due to the intentional
        act or negligence of BB, its representative, employee or other related
        party, BB shall compensate for such harm.


(Release from Liability)


17      AA shall not be liable for any harm that BB suffers due to a ground for
        which AA is not responsible such as a natural disaster, storm and flood
        damage, fire or theft or due to the malfunction of any equipment.

 .       Regardless of the circumstances, AA shall not be liable for any harm
        that BB suffers in connection with another lessee.

 .       AA shall have no duty to indemnify BB for any loss BB sustains when, due
        to any repair, reconstruction, etc. to the building performed by AA, BB
        unavoidably suffers any suspension or restriction of the use of all or
        part of the leased area, common areas, etc. during the work.

 .       In case of work as provided for in the preceding paragraph, BB shall
        cooperate with the work, including vacating the leased area during said
        work.


(On-site Inspections)

18      When necessary for building maintenance, sanitation, crime prevention,
        fire prevention, relief or any other building management purpose, AA or
        its employee may, upon giving advance notice to BB, enter into and
        inspect the leased area and take appropriate measures. However, in case
        of an emergency such as a disaster, AA may enter into and take
        appropriate measures within the leased area without authorization and
        then report to BB immediately afterward.


<PAGE>   9

 .       In the cases set forth in the preceding paragraph, BB shall cooperate
        with the measures taken.


(Deposit)

19      In order to secure the performance of its obligations under this
        Agreement, BB shall, at the time this agreement is entered into, deliver
        to AA the sum of money specified in the Table of Essential Points as a
        deposit. No interest shall accrue to said deposit.

 .       If BB fails to perform its duty to pay timely rent, compensation for
        harm or any other obligation under this agreement , AA may, at its own
        option, appropriate the deposit to the payment of rent or any such
        obligation. In this case, BB shall supplement the deficiency in the
        deposit without delay. However, BB cannot claim that the deposit has
        been allotted to the payment of the rent or any other obligation.

 .       AA shall return the deposit to BB within one month of the time when this
        Agreement has ended, BB has completely vacated the leased area, and all
        of BB's obligations owing to AA are confirmed to be paid in full.

 .       BB may not assign or offer as security to any third party any credit
        with regard to the deposit.


(Destruction of Subject Matter of Agreement)

20      This agreement shall end if the building and its equipment are destroyed
        or damaged such that the use of the leased area becomes impossible due
        to force majeure such as a natural disaster or accident, or if it
        becomes necessary to construct a new building due to the superannuation
        of the building and its equipment with the passage of time.


(Cancellation of Agreement)

21      If any of the following numbered items applies to BB, AA may immediately
        cancel this Agreement without the need to give notice to BB:

(1).    failure to pay rent, the fee for common services or any cost provided
        for in the numbered items of Section 8 for two months or more;


<PAGE>   10

(2).    breach of any provision of Section 11 or any numbered item of Section
        12;

(3).    substantial damage to or the causing of fire in the leased area due to
        the intentional act or negligence of BB or BB's employee;

(4).    AA finds that circumstances exist in which it is difficult for BB to
        continue to perform the agreement because of a critical change to BB's
        structure, capitalization or credit status;

(5).    the dishonor of any promissory note or draft issued by BB;

(6).    BB becomes the subject of provisional disposition, provisional
        attachment, petition for forced sale, compulsory execution, etc., or BB
        files for bankruptcy, composition, company liquidation, company
        restructuring or special liquidation;

(7).    failure to use the leased area for two months or more without good
        cause;

(8).    the whereabouts of the person in charge of the use of the leased area
        become unknown for one month or more, and the leased area is not used
        under normal circumstances ; or

(9).    any other breach of a provision of this Agreement or any agreement
        supplemental hereto.

 .       Even in the event that AA cancels this Agreement based on a ground
        provided for in the preceding paragraph, BB shall, upon AA's demand,
        nevertheless compensate AA for any harm suffered.


(Restoration to Original Condition, Vacating, Etc.)

22      If this Agreement ends due to expiration of the term, termination,
        cancellation, etc., BB shall, in compliance with the following numbered
        items, vacate the leased area to AA without delay by the date of
        expiration provided for in Section 3, the termination date provided for
        in Section 4 or after cancellation as provided for in the preceding
        section:

(1).    In addition to removing any fixtures, equipment, etc. that BB added to
        the leased area, BB shall restore the leased area to its original
        condition. In such a case, BB shall conduct removal and restoration at
        BB's own expense using the construction company designated by AA. If BB
        fails to restore the leased area

<PAGE>   11

        to its original condition, BB waives ownership and all other rights with
        regard to any article left installed in the leased area or the building.
        AA may, at its own option, restore the leased area to its original
        condition. In such a case, AA may demand that BB pay all costs necessary
        to remove and dispose of any article left installed.

(2).    BB may not demand any relocation fee, compensation for eviction or any
        similar fee under any pretext whatsoever.

(3).    BB may not demand that AA reimburse BB for costs BB paid out in relation
        to the leased area, etc., or that AA purchase fixtures, equipment, etc.
        that BB installed in the leased area at BB's own expense.

(4).    If BB fails to vacate the leased area, BB shall pay to AA as overstay
        compensation twice the amount equivalent to the rent in addition to the
        fee for common services and the various costs for electricity, heating,
        water, etc. used within the leased area for the period starting the day
        after the contract ends and finishing when BB has completely vacated the
        leased area. Further, if restoration to the original condition is not
        complete after BB vacates, BB shall pay overstay compensation to AA
        until restoration is complete. However, the foregoing payment shall not
        preclude BB's obligation to pay AA compensation for any other harm AA
        suffers due to BB's failure to vacate.


(Duty of Care)

23      BB shall treat the building and the leased area (including all fixtures
        and equipment) with the ordinary due care of a manager.


(Detailed Building Regulations)

24      BB shall comply with the various regulations concerning the management
        and use of the building, including building bylaws, that AA may
        prescribe.


(Notices)

25      All notices concerning this Agreement shall be in writing.

 .       As a general rule, notices from AA to BB shall be addressed to BB's
        registered address; however, AA may send notices addressed to the leased
        area instead of BB's registered address.


<PAGE>   12

 .       If the notice provided for in the preceding paragraph is returned
        because the recipient is not at the address, said notice shall be deemed
        to have arrived at the address of the recipient as of the date on which
        the delivery person first proceeded to the address to make delivery.

(Court of Competent Jurisdiction)

26      The Tokyo District Court or the Tokyo Summary Court shall be the court
        of competent jurisdiction with respect to any lawsuit concerning this
        Agreement.


(Matters Not Determined Herein)

27      The parties shall discuss and resolve in good faith any matters not
        provided for in this Agreement and any doubts concerning the
        interpretation of a provision hereof.

<PAGE>   13
Amendment

AA
BB

AA and BB has entered into the commercial lease agreement ("Agreement") as of
December 1, 1999, but wish to modify a part of its provisions as set forth
below.

1. Both parties agree that the following acts included in Section 11 (1), (2),
(3) shall be construed as matters requiring AA's prior written consent as set
forth in Section 12.

     (1). assign to any third party any right arising under this Agreement;
     (2). sublease the whole or any part of the lease area (including entering
into an arrangement for shared use or other arrangement corresponding to a
sublease);
     (3). cause, due to any fundamental change to BB's business, including a
transfer of business or merger, any person other than BB to succeed to any
right based on this Agreement;

BB further acknowledges that BB may not offer as security to any third party
any right arising under the Agreement.

2. The consent AA gives BB pursuant to Section 12 depends on Lessor's
reasonable judgement whether BB proposal is arising out of its business
necessity, and based on the possible cost and/or responsibility which AA may
have to bear.

3. Both parties agree that except for the items in this separate agreement
stated above, the provisions of the Agreement will remain in full force and
effect.

Date: December 1, 1999
     -------------------

AA

BB

<PAGE>   1

                                                                   EXHIBIT 10.21

                                LEASE AGREEMENT
                                      FOR

                        OFFICE SUITES AT JEFFERSON PARK
                                  OPERATED BY
                            KENRICK INVESTMENT GROUP

                              --------------------

        1.      PARTIES. This lease, executed the 29 of November 1999 by and
between Kenrick Investment Group (hereinafter called Lessor) and Artisan
Components, Inc. (hereinafter called Lessee).

                For and in consideration of the payment of the rents and the
performance of the covenants contained herein on the part of Lessee, and in the
manner herein specified, Lessor and Lessee agree as follows:

        2.      PREMISES. Lessor does hereby demise to Lessee, and Lessee
leases from Lessor, the premises shown outlined in red on the attached plans
marked Exhibit A, known as Suites 37 and 38.

                Tenant shall have as appurtenance to the premises, rights to
use interior and exterior areas serving the premises in common with others.

        3.      TERM. The term of this lease shall commence on December 1, 1999
and shall expire on November 30, 2000.

        Upon the expiration of this original lease term, this lease shall
        henceforward automatically renew for periods of one year under the same
        terms and conditions as contained in this lease with the exception that
        rent may change at the commencement of a renewal period. Lessor must
        advise Lessee of any rent change a minimum of 60 days prior to the
        commencement of the new lease period. Lessee may terminate this lease at
        the end of any lease term by providing written notice to Lessor a
        minimum of 45 days prior to the end of the original lease term or any
        renewal lease term.

        4.      RENT. $1,540.00 per month due on the first of each month.

                Rent shall be paid without any deduction or offset and without
any notice or demand. All installments of rent, which shall not be paid after
the same, shall have come due and payable shall bear a penalty of five percent
(5%) whether or not demand be made therefore.

        5.      FURNITURE/UNITS.

                a.      The premises are furnished and include: 2 desks, 2 desk
                        chairs, 2 side chairs, 2 other pieces, 2 phones.

                b.      Secretarial units: There are 0 hours included in the
                        base rent.

<PAGE>   2

        6.      SECURITY DEPOSIT. Upon the execution of this lease, the Lessee
shall pay to the Lessor a security deposit representing one month's rent. This
deposit will be held as security for Lessee's performance as herein provided
and refunded to the Lessee at the end of this lease subject to the Lessee's
satisfactory compliance with the conditions hereof. Lessee shall not be
entitled to interest payment on security deposit and such deposit shall not be
used in lieu of payment and the last month's rent.

        7.      USE OF PREMISES. The Lessee shall use the leased premises only
for the purpose of professional offices.

        8.      COMPLIANCE WITH LAWS. In the event that Lessee shall be found to
be in violation of any applicable federal, state, or local laws and ordinances
or shall, in Lessor's reasonable opinion, not be consistent with the quality of
operation of the premises. Lessor shall have the right to notify the Lessee in
writing of such violation on inconsistency. Within three (3) days of receipt of
such notice, it being hereby understood and agreed that failure to do so shall
result in Lessor's right to terminate the lease upon ten (10) days advance
written notice.

        9.      USE VIOLATING FIRE LAWS. The Lessee shall not permit any use of
the leased premises which will make voidable any insurance on the property of
which the leased premises are a part, or on the contents of said property or
which shall be contrary to any law or regulation from time to time established
by the New England Fire Insurance Rating Association, or any similar body
succeeding to its powers. The Lessee shall on demand reimburse the Lessor, and
all other tenants all extra insurance premiums caused by the Lessee's use of
the said premises.

        10.     LESSOR FAILURE TO DELIVER. If Lessor is unable to deliver
possession of the premises at the time herein agreed, Lessor shall not be liable
for any damage caused thereby nor shall this lease to be void or voidable, but
Lessee shall not be liable for any rent until such time as Lessor can deliver
possession.

        11.     RULES AND REGULATIONS. The Rules and Regulations of the
building, attached hereto as Exhibit B, are expressly made a part of this lease
by reference, and Lessee hereby expressly covenants and agrees to abide by all
of said Rules and Regulations, as well as such modifications, additions and
deletions thereof as may be hereafter adopted and notice thereof given by
Lessor. Lessor shall have no responsibility to Lessee for the violation or
nonperformance by any other tenant of said building of any of said Rules and
Regulations.

        12.     UTILITIES SUPPLIED. Provided Lessee shall not be in default
hereunder, Lessor agrees to furnish in reasonable quantities and during
reasonable hours (to be determined by Lessor) of generally recognized business
days, and subject to the Rules and Regulations of the building in which the
demised premises are located, electric current for lighting and for office use
only, common restroom facilities with hot and cold water, and heating and/or
air conditioning. Lessor shall not be liable for any damages for failure to
furnish such services as specified above when such failure is caused by
breakage, repairs, strikes, lockouts, or by any other cause, similar or
dissimilar, beyond the reasonable control of Lessor, nor shall Lessor be
liable under any circumstances for loss of injury to persons or property or
for any other losses or


<PAGE>   3
expenses or damages (consequential or otherwise) to Lessee, however occurring,
through or in connection with or incidental to the furnishing of any of the
foregoing or any other service, nor shall any such failure relieve Lessee from
the duty to pay the full amount of rent herein reserved or constituted, or be
construed as constructive or other eviction of Lessee.

     13.  MAINTENANCE OF PREMISES.  The Lessee agrees to repair or replace, at
the Lessee's expense, any damage caused by the Lessee to the walls, ceilings,
doors, carpets, and furniture of the said premises, reasonable wear and tear
excepted.

     14.  ALTERATIONS/ADDITIONS.  Lessee shall not damage or deface the doors,
walls, floors or ceilings, nor drill holes, or apply tape or glue to the walls
or doors for the hanging of pictures, or other material or decorations except
as specifically allowed and prescribed by Lessor. No shall Lessee suffer to be
made any waste or unlawful, improper, or offensive use of the said premises,
obstruct hallways and other common areas, nor commit any act which may damage
the structural parts of the building or disturb the quiet enjoyment of any
other tenant in the building. Lessee further agrees to use the plastic chair
mat provided by Lessor under movable desk chairs at all times; any damage to
carpet resulting from failure to use said chair mat shall not be considered
normal wear and tear, and Lessee shall be responsible for such damages up to
and including the cost of replacement of the entire carpet in the demised
premises.

     15.  PROVIDED SERVICES AND HOURS OF OPERATION.  Lessor shall furnish
Lessee heating and air conditioning service during normal building operating
hours. Lessor shall furnish electric current consumed in leased premises,
shall install fluorescent tubes in ceiling light fixtures, shall furnish
janitorial services for the cleaning and care of the leased premises, shall pay
the water rates for water used on the leased premises, provided that cessation
of any of the foregoing services, when occasioned by accident, lock-out, strike
or for repairs or any causes beyond Lessor's reasonable control shall not be
deemed a breach of this lease.

          The hours of operation of Jefferson Park shall be 8:30 a.m. to 5:00
p.m., Monday through Friday, except holidays as indicated in Exhibit C. These
hours and holidays may be changed by the Lessor by giving the Lessee written
notice of any such change. Each Lessee shall have a key to his private suite.
In the event Lessee requires use of his office at other than normal building
operating hours, the Lessee will have the right to access the building on a 24
hour basis; however, Lessor reserves the right to rescind this right for due
cause and security of the premises.

          Lessor agrees to provide the following additional services:

          -  Receptionist service during hours of operation.

          -  Answering of telephone lines during operating hours and 24-hour
             voice mail.

          -  Use of conference room as scheduled through the receptionist.

          -  Receipt and sorting of mail. Lessor shall not be liable in any
             manner for mail delivered to Lessor by Lessee for deposit in
             United States Mail, nor shall it be liable for mail delivered
             to Lessor for distribution to Lessee.
<PAGE>   4
          Additional typing, copying, outbound mail handling, and other
services are available per published rate schedule.

          Lessee shall reimburse Lessor promptly on a monthly basis for charges
incurred for any additional services per Lessor's posted schedule of charges,
which may change from time to time. Payment of said expenses shall be due no
later than ten (10) days following the receipt of any invoice on account of
said expenses. A five percent (5%) late charge will be due on all balances not
paid when due.

          Lessor agrees to provide lessee with telephone lines installed to the
premises. Lessee agrees to use only Lessor's centrex lines and to pay monthly
telephone charges at the prevailing rate established by lessor and billed as
part of monthly service charges.

     16.  LIABILITY INSURANCE. Lessee shall provide public liability insurance
covering liability for damages or injuries arising from Lessee's use of the
premises.

     17.  FIRE, CASUALTY, EMINENT DOMAIN. If the building or suite referred to
herein shall be destroyed in whole or in part by fire, the elements, or other
casualty so as to render the leased premises wholly unfit for occupancy and if
they cannot be repaired within ninety (90) days from the happening of said
injury, this lease shall terminate on the expiration of said ninety (90) days
without further liability on either of the parties hereto. In the event of any
such termination, Lessee shall immediately surrender the possession of the
leased premises and all rights herein to Lessor or Lessor shall have the right
to immediately enter into and take possession of the leased premises and shall
not be liable for any loss, damage, or injury to the property or person of
Lessee or any occupant of, in or upon said leased premises. If the Lessor
repairs the leased premises within such ninety (90) days, this lease shall
continue in full force and effect. Lessee shall not be required, in any event,
to pay rent for any portion of said ninety (90) days during which the leased
premises are wholly unfit for occupancy.

     18.  INDEMNIFICATION. Lessor shall not be liable for any damage occasioned
by failure to keep said premises in repair and shall not be liable for any
damage done or occasioned from electric current, plumbing, gas, water, or
bursting, leaking, running, or failure of operation of any air conditioning or
other apparatus in, above, upon, or about said building or premises, nor for
damages occasioned by water, snow, or ice being upon any sidewalk or entrance
way or being upon or coming through the roof, skylight, or any other opening in
said leased premises nor for any damage arising from the action or negligence of
Lessee, co-tenant, or other occupants of adjacent or continuous property. Lessee
hereby releases, discharges, and agrees to indemnify, protect, and save harmless
Lessor of and from any and all claims, demands, or liability for any loss,
damage, injury or other casualty to property whether it be that of either of the
parties hereto or third persons whether they be third persons of Lessee or
agents or employees of Lessee, caused by, growing out of, or happening in
connection with Lessee's use of occupancy of the demised premises or Lessee's
use of any equipment, facilities, or property in or adjacent to the aforesaid
building.
<PAGE>   5
     19.  DEFAULT BY LESSEE. In the event that:

          a)   The lessee shall default in the payment of any installments of
               rent or other sums herein specified and such default shall
               continue for ten (10) days; or

          b)   The Lessee shall substantially default in the observance or
               performance of any other of the Lessee's covenants, agreements,
               or obligations hereunder and such substantial default shall not
               be corrected within thirty (30) days after written notice
               thereof; or

          c)   The Lessee shall be declared bankrupt or insolvent according to
               the law, or, in any assignment shall be made of Lessee's property
               for the benefit of creditors;

then the Lessor shall have the right thereafter, without application to the
courts for eviction through Summary Process, while such default continues, to
re-enter and take complete possession of the leased premises, to declare the
term of the Lease ended, and remove the Lessee's effects, without prejudice to
any remedies which might be otherwise used for arrears of rent payment or other
default. The Lessee shall indemnify the Lessor against all loss of rent and
other payments, which the Lessor may incur by reason of such termination during
the residue of the term. If the Lessee shall default, after reasonable notice
thereof, in the observance or performance of any conditions or covenants on
Lessee's part to be observed or performed under or by virtue of any of the
provisions in any article of this Lease, the Lessor, without being under any
obligation to do so and without thereby waiving such default, may remedy such
default for the account and at the expense of the Lessee. If the Lessor makes
any expenditures or incurs any obligations for the payment of money in
connection therewith, including but not limited to, reasonable attorneys fees
and instituting, prosecuting or defending any action or proceeding, such sums
made or obligations incurred, with interest at the rate of twelve percent (12%)
per annum and cost, shall be paid to the Lessor by the Lessee as additional
rent.

     20.  DEFAULT BY LESSOR. In the event that the Lessor shall substantially
default in the observance or performance of any of the Lessor's covenants,
agreements, or obligations hereunder, and such default shall not be corrected
within thirty (30) days after written notice thereof, then Lessee shall have
the right to terminate this Lease upon giving Lessor sixty (60) days prior
written notice of termination.

     21.  RIGHT TO ENTER. Lessor shall have the right at all times to enter the
premises to inspect the same and to make such repairs and alterations as Lessor
shall see fit, (or within thirty (30) days prior to termination of the Lease)
to show the leased premises to prospective tenants.

     22.  SUBLET/ASSIGNMENT. Neither Lessee nor anyone claiming by, through, or
under Lessee shall mortgage or assign this Lease or sublet the premises or any
part thereof or
<PAGE>   6
permit the use of the premises by any person other than Lessee without prior
written consent of Lessor.

          All terms, covenants, and conditions of this Lease shall inure to the
benefit of and be binding upon the successors and assigns of Lessor and
(subject to the restriction on assignment herein contained) the successors and
assigns of Lessee to the same extent as said terms, covenants, and conditions
inure to the benefit of and are binding upon Lessor and Lessee, respectively.

     23.  SUBORDINATION. This Lease shall be subject to and subordinate to any
and all mortgages, deeds of trust and other instruments in the nature of a
mortgage, now or at any time hereafter, a lien or liens of the property of
which the leased premises are a part and the Lessee shall, when requested,
promptly execute or deliver such written instruments as shall be necessary to
show the subordination of this Lease to said mortgages, deeds of trust or other
such instruments in the nature of a mortgage.

     24.  SURRENDER. The Lessee shall, at the expiration or other termination
of this Lease, remove all Lessee's goods and effects from the leased premises.
Lessee shall deliver to the Lessor the leased premises and all keys, locks
thereto, and other fixtures connected therewith and all alterations and
additions thereto or upon the leased premises, in the same condition as they
were at the commencement of the term, or as they were put in during the term
hereof, reasonable wear and tear and damage by fire or other casualty only
excepted. In the event of the Lessee's failure to remove any of the Lessee's
property from the premises, Lessor is hereby authorized, without liability to
Lessee for loss or damage thereto, and at the sole risk of Lessee, to remove
and store any of the property at Lessee's expense, or to retain same under
Lessor's control or to sell at public or private sale, without notice any or
all of the property not so removed and to apply the net proceeds of such sale
to the payment of any sum due hereunder, or to destroy such property.

     25.  FEE FOR HIRING EMPLOYEE. Lessee is hereby advised and Lessee hereby
acknowledges that all employees of Lessor who perform work for Lessee under
this Lease or other service agreements between Lessor and Lessee are in fact
employees of Lessor. Lessee agrees that during the term of this Lease and
during the twenty-four (24) months following the termination of this Lease,
neither Lessee nor any person or entity controlled by Lessee will hire any of
the employees of the Lessor. In the event that Lessee shall breach any
obligation on Lessee contained in this paragraph, Lessee shall be liable to
Lessor for, and shall pay to Lessor on demand, liquidated damages in the sum of
$5,000 for each employee with respect to whom such breach shall occur, it being
mutually agreed by the parties that the foregoing provision for liquidated
damages is reasonable and that the actual damage which would be sustained by
Lessor as the result of any such breach would be, from the nature of the case,
impracticable, or extremely difficult to fix.

     26.  NON-COMPETITION OF SERVICES. The Lessee shall be prohibited from
employing on the premises office services, for any other tenant, similar to
those provided by Lessor. The Lessee is further prohibited from making
provision on the premises for any form of business machine or office furniture,
other than for its own use, except with the written consent of Lessor.


<PAGE>   7
      27.   BROKERAGE RELATION. Lessee hereby recognizes lessor as their broker
representative in any future lease executed between lessee, its successors,
assigns, subsidiaries or any other entity in which lessee holds a majority
interest and the then existing landlord/owners of property located at 790, 800
and 820 Turnpike St., North Andover, MA, also known as the Jefferson Office
Park.

            This relationship exists solely for the purpose of securing
lessor's rights in qualifying for co-broker status with the landlord/owners
broker in any future lease executed directly between landlord/owner and lessee.

      28.   NOTICES. All notices by Lessor to Lessee, or by Lessee to Lessor,
shall be in writing. Notices to Lessee shall be deemed to be duly given if
delivered personally to the Lessee or the occupant of the demised premises or
if mailed by certified mail, postage prepaid, addressed to Lessee at the
demised premises. Notice to Lessor shall be deemed to be duly given if
delivered personally to an office of Lessor, or mailed by certified mail,
postage prepaid, to Lessor at its offices at 800 Turnpike Street, Suite 300,
North Andover, MA 01845.

      29.   AUTHORITY TO SIGN. It is expressly understood and agreed that the
Lessee is not the agent, servant nor employee of the Lessor in any manner
whatsoever. The person signing this agreement as Lessee expressly warrants and
represents that it is the actual Lessee or it is authorized to sign this Lease
Agreement on behalf of the actual Lessee.

            Each individual executing this Lease on behalf of a corporation,
represents and warrants that he has been authorized to do so by the Board of
Directors of such corporation or other delegated authority, otherwise such
individual shall be personally responsible for payment of the rental contained
herein. All parties executing this lease shall be jointly and severally liable.

            This Lease shall be deemed to be executed as a sealed instrument
and shall be governed by the laws of the Commonwealth of Massachusetts.


/s/ [SIGNATURE ILLEGIBLE]                 December 1, 1999
- ------------------------------            ------------------------------
Kenrick Investment Group                  Date

Artisan Components, Inc.                  12/1/99
- ------------------------------            ------------------------------
Lessee                                    Date


By: /s/ [SIGNATURE ILLEGIBLE]
    --------------------------

Title: Director, Finance
      ------------------------





<PAGE>   8
                                                                       EXHIBIT A





                  [OFFICE SUITES AT JEFFERSON PARK FLOOR PLAN]
<PAGE>   9
                                   EXHIBIT B

                        OFFICE SUITES AT JEFFERSON PARK

                             RULES AND REGULATIONS

     1.  The sidewalks, entrances, driveways, passages, courts, elevators,
vestibules, stairways, corridors or halls shall not be obstructed or encumbered
by any Lessee or used for any purpose other than for ingress to and egress from
the premises and for delivery of merchandise and equipment in a prompt and
efficient manner using elevators and passageways designated for such delivery
by Lessor. There shall not be used in any space, or in the public hall of the
building, either by a Lessee or by jobbers or others in the delivery or receipt
of merchandise, any hand trucks, except those equipped with rubber tires and
sideguards.

     2.  The water and wash closets and plumbing fixtures shall not be used for
any purpose other than those for which they were designed or constructed and no
sweepings, rubbish, rags, acids or other substances shall be deposited therein,
and the expense of any breakage, stoppage, or damage resulting from the
violation of this rule shall be borne by the Lessee who, or whose clerks,
agents, employees or visitors, shall have caused it.

     3.  No Lessee shall sweep or throw or permit to be swept or thrown from
the premises any dirt or other substances into any of the corridors or halls,
elevators, or out of the doors or windows or stairways of the building and
Lessee shall not use, keep or permit to be used or kept any foul or noxious gas
or substance in the premises or permit or suffer the premises to be occupied or
used in a manner offensive or objectionable to Lessor or other occupants of the
building by reason of noise, odors, and/or vibrations, or interfere in any way
with other Lessees or those having business therein, nor shall any animals or
birds be kept in or about the building. Smoking in the building is prohibited.

     4.  No awnings or other projections shall be attached to the outside walls
of the building without prior written consent of Lessor.

     5.  No sign, advertisement, notice or other lettering shall be exhibited,
inscribed, painted or affixed by any Lessee on any inside of the premises if
the same is visible from the outside of the premises without the prior written
consent of Lessor. In the event of the violation of the foregoing by any
Lessee, Lessor may remove same without any liability, and may charge the
expense incurred by such removal to Lessee or Lessees violating this rule.

     6.  Except with prior written consent of Lessor and as Lessor may direct,
no Lessee shall mark, paint, drill into, or in any way deface any part of the
premises or the building of which they form a part.

     7.  Except with the prior written consent of Lessor, no additional locks
or bolts of any kind shall be placed upon any of the doors or windows by any
Lessee, nor shall any changes

<PAGE>   10
be made in existing locks or mechanism thereof. Each Lessee shall, upon the
termination of his tenancy, restore to Lessor all keys either furnished to or
otherwise procured by, such Lessee. In the event of the loss of any keys
furnished to Lessee, Lessee shall pay to Lessor the cost.

     8.  Freight, furniture, business equipment, merchandise and bulky matter
of any description shall be delivered to and removed from the premises only in
a way approved by Lessor and only during hours and in a manner approved by
Lessor.

     9.  Canvassing, soliciting and peddling in the building is prohibited and
each Lessee shall cooperate to prevent the same.

     10.  Lessor shall have the right to prohibit any advertising by any Lessee
which, in Lessor's opinion, tends to impair the reputation of the building or
its desirability as a building for offices, and upon written notice form
Lessor, Lessee shall refrain from or discontinue such advertising.

     11.  Except for those items necessary for the cleaning and maintenance of
Lessee's business, including office supplies, which shall be properly stored to
minimize the risk of fire and explosion, Lessee shall not bring or permit to be
brought or kept in or on the premises, any inflammable, combustible or explosive
fluid material, chemical or substance, or cause to permit any odors to permeate
in or emanate from the premises.

<PAGE>   11

                                   EXHIBIT C

                        OFFICE SUITES AT JEFFERSON PARK

                            HOLIDAY SCHEDULE - 1999


<TABLE>
<S>                                     <C>                  <C>
New Year's Day                          Friday               January 1

Martin Luther King Day                  Monday               January 18

President's Day                         Monday               February 15

Memorial Day                            Monday               May 31

Independence Day                        Monday               July 5

Labor Day                               Monday               September 6

Columbus Day                            Monday               October 11

Veterans Day                            Thursday             November 11

Day Before Thanksgiving                 Wednesday            November 24
(Early Closing - 12:00 Noon)

Thanksgiving Day                        Thursday             November 25

Day After Thanksgiving                  Friday               November 26

Day Before Christmas                    Friday               December 25

New Year's Eve                          Friday               January 31
</TABLE>


<PAGE>   12
                        OFFICE SUITES AT JEFFERSON PARK

                        OTHER STARTUP FEES AND DEPOSITS



                             TELEPHONE INSTALLATION
<TABLE>
<S>                                                    <C>
ACCOUNT SETUP, ONE HANDSET, VOICE MAIL                 $100.00
ADDITIONAL HANDSETS                                     $75.00
TELEPHONE LINES (PER LINE)                              $50.00
SPEAKER PHONE CAPABILITY                                $50.00
</TABLE>


                                     OTHER

<TABLE>
<S>                                           <C>
KEYS                                                     $2.00
SECURITY CARDS                                          $15.00
DIRECTORY SIGN                                          $30.00
SECURITY DEPOSIT                              ONE MONTH'S RENT
</TABLE>


                           RECURRING MONTHLY CHARGES

<TABLE>
<S>                                                              <C>
TELEPHONE ANSWERING (IN EXCESS OF ONE TELEPHONE PER OFFICE).      $75.00
LINE CHARGES (IN EXCESS OF TWO LINES PER TELEPHONE).              $25.00
VOICE MAIL BOXES (IN EXCESS OF ONE PER TELEPHONE).                $15.00
</TABLE>
<PAGE>   13
                        OFFICE SUITES AT JEFFERSON PARK


WE PROVIDE PROFESSIONAL SECRETARIAL SERVICES, WITH STATE-OF-THE-ART EQUIPMENT
AND, MOST IMPORTANTLY, A COMMITMENT TO QUALITY SUPPORT SERVICES.


<TABLE>
=======================================================================================
<S>                                <C>
SECRETARIAL SERVICES               $25.00 per hour - PC and administrative
                                                     services

                                   (Billed in 6 minute increments)

- ---------------------------------------------------------------------------------------

COPIES                             Sorts, reduces, magnifies, collate, two-sided
                                   $.09 per copy

- ---------------------------------------------------------------------------------------

COLOR PRINTS                       $.25 - $1.00 for Color Originals

- ---------------------------------------------------------------------------------------

FAX                                Outgoing: $2.00/page, 1-10 pages
                                             $1.00/page, 11-100 pages
                                             $ .75/page, 100+ pages per month
                                             $2.00/page, International

                                   Incoming: $15.00 per month or $1.00 per page

- ---------------------------------------------------------------------------------------

POSTAGE                            Provide metered postage and delivery to the mailbox
                                   Cost, plus 20%

- ---------------------------------------------------------------------------------------

SUPPLIES                           Cost, plus 10%

=======================================================================================



                                     RENTAL OPTIONS

=======================================================================================

FURNITURE PACKAGE                  $50/month includes desk, desk chair, side chair &
                                   one other piece

- ---------------------------------------------------------------------------------------

SECRETARIAL PACKAGE                $75/month includes five hours of secretarial services

=======================================================================================
</TABLE>
<PAGE>   14

                        OFFICE SUITES AT JEFFERSON PARK
                               TELEPHONE CHARGES
                                      FOR
                                CALLING SERVICES


Local Calls:             Same as Bell Atlantic
                         2.8 cents per call; 1.6 cents per minute

Interstate:              Same as Bell Atlantic
(508/617/978/781)        1.0 cents per call; 8.5 cents per minute

Interstate:              25-71% Off AT&T

<TABLE>
<S>            <C>      <C>     <C>     <C>     <C>    <C>      <C>    <C>     <C>      <C>     <C>    <C>
Monthly Volume:

               Under    101     201     251     301     401     501     751     1001    2001    3001    Over
                100     to      to      to      to      to      to      to       to      to      to     4000
                        200     250     300     400     500     750    1000     2000    3000    4000

Discount        25%     36%     37%     42%     45%     47%     53%     55%      61%     63%     66%     71%

AT&T RATE
 38 cents      0.28    0.25    0.24    0.22    0.21    0.20    0.18    0.17     0.15    0.14     0.13   0.11

                        10%     15%     20%     25%     30%     35%     40%      45%     50%     55%     60%
</TABLE>

Monthly Line Charge:    28.35



                                                            Herrick/Phone Folder
                                                               Telephone Charges
                                                                Updated: 8/27/99



<PAGE>   1
                                                                    Exhibit 23.1



                       CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 333-60239 and 333-89515) of Artisan Components,
Inc. of our report dated October 25, 1999 relating to the financial statements
and financial statement schedule, which appear in this Form 10-K.


PricewaterhouseCoopers LLP
San Jose, California
December 9, 1999

<TABLE> <S> <C>

<ARTICLE> 5
<MULTIPLIER> 1,000

<S>                             <C>
<PERIOD-TYPE>                   YEAR
<FISCAL-YEAR-END>                          SEP-30-1999
<PERIOD-START>                             OCT-01-1998
<PERIOD-END>                               SEP-30-1999
<CASH>                                          15,233
<SECURITIES>                                    32,948
<RECEIVABLES>                                    8,467
<ALLOWANCES>                                     (746)
<INVENTORY>                                          0
<CURRENT-ASSETS>                                57,662
<PP&E>                                          11,232
<DEPRECIATION>                                 (5,099)
<TOTAL-ASSETS>                                  64,344
<CURRENT-LIABILITIES>                            7,050
<BONDS>                                              0
                                0
                                          0
<COMMON>                                            14
<OTHER-SE>                                      57,106
<TOTAL-LIABILITY-AND-EQUITY>                    64,344
<SALES>                                         14,867
<TOTAL-REVENUES>                                14,867
<CGS>                                            5,957
<TOTAL-COSTS>                                   18,292
<OTHER-EXPENSES>                                     0
<LOSS-PROVISION>                                     0
<INTEREST-EXPENSE>                             (2,024)
<INCOME-PRETAX>                                (1,401)
<INCOME-TAX>                                     (858)
<INCOME-CONTINUING>                              (543)
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                                     (543)
<EPS-BASIC>                                   (0.04)
<EPS-DILUTED>                                   (0.04)


</TABLE>



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