QUANTUM EFFECT DEVICES INC, S-1/A, 1999-10-13

QUANTUM EFFECT DEVICES INC
S-1/A, 1999-10-13
SEMICONDUCTORS & RELATED DEVICES

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<PAGE>

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 13, 1999

REGISTRATION NO. 333-86901

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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

AMENDMENT NO. 1
TO
FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

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

QUANTUM EFFECT DEVICES, INC.

(Exact name of Registrant as specified in its charter)

<TABLE>
<S> <C> <C>
DELAWARE 3674 77-0290544
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification
Number)
</TABLE>

3255-3 SCOTT BOULEVARD, SUITE 200
SANTA CLARA, CALIFORNIA 95054
(408) 565-0300

(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)

THOMAS J. RIORDAN
PRESIDENT AND CHIEF EXECUTIVE OFFICER
QUANTUM EFFECT DEVICES, INC.
3255-3 SCOTT BOULEVARD, SUITE 200
SANTA CLARA, CALIFORNIA 95054
(408) 565-0300

(Name, address, including zip code, and telephone number, including area code,
of agent for service)

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

COPIES TO:

ALAN C. MENDELSON, ESQ. JEFFREY R. VETTER, ESQ.
MATTHEW W. SONSINI, ESQ. CRAIG A. MENDEN, ESQ.
Cooley Godward LLP Fenwick & West LLP
Five Palo Alto Square Two Palo Alto Square
3000 El Camino Real 3000 El Camino Real
Palo Alto, CA 94306-2155 Palo Alto, CA 94306-2155
(650) 843-5000 (650) 494-0600

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

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE REGISTRATION STATEMENT BECOMES EFFECTIVE.

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

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), check the following box. / /

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / / ______

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
number for the same offering. / / ______

If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. / / ______

If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /

ISSUED OCTOBER 13, 1999

The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and we are not soliciting offers to buy these
securities in any state where the offer or sale is not permitted.
<PAGE>
SHARES

[LOGO]

COMMON STOCK

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

QUANTUM EFFECT DEVICES, INC. IS OFFERING SHARES AND THE SELLING
STOCKHOLDER IS OFFERING SHARES. THIS IS OUR INITIAL PUBLIC OFFERING AND
NO PUBLIC MARKET CURRENTLY EXISTS FOR OUR SHARES. WE ANTICIPATE THAT THE INITIAL
PUBLIC OFFERING PRICE WILL BE BETWEEN $ AND $ PER SHARE.

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

WE HAVE FILED AN APPLICATION FOR OUR COMMON STOCK TO BE QUOTED ON THE NASDAQ
NATIONAL MARKET UNDER THE SYMBOL "QEDI."
-------------------

INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 7.

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

PRICE $ A SHARE

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

<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND SELLING
PUBLIC COMMISSIONS PROCEEDS TO QED STOCKHOLDERS
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
PER SHARE..................... $ $ $ $
TOTAL......................... $ $ $ $
</TABLE>

QED AND THE SELLING STOCKHOLDER HAVE GRANTED THE UNDERWRITERS THE RIGHT TO
PURCHASE UP TO AN ADDITIONAL SHARES TO COVER OVER-ALLOTMENTS.

THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE NOT
APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS IS
TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

MORGAN STANLEY & CO. INCORPORATED EXPECTS TO DELIVER THE SHARES TO PURCHASERS ON
, 1999.

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

MORGAN STANLEY DEAN WITTER

LEHMAN BROTHERS

ROBERTSON STEPHENS

, 1999
<PAGE>
[DESCRIPTION OF INSIDE FRONT COVER GRAPHICS:

- - Photograph of a portion of QED's RM7000 embedded microprocessor

- - Overlaying the photograph of the RM7000 are stylized renditions of:

- a television set, set top box and satellite;

- a lap-top computer connected to an image of the world; and

- a laser printer.

- - at the top of the graphic are the names and logos of the following
significant representative customers of QED: Cisco Systems, Hewlett-Packard
Company, Lexmark International Group, Echostar Communications Corporation,
Extreme Networks, Inc., EFI Electronics Corporation, Pairgain Technologies,
Inc., Aeroflex Inc., Cosign Communications and ConvergeNet.

- - at the bottom of the page are the phrase "Powering the Communications
Revolution" and QED's name and logo.]

[DESCRIPTION OF GATEFOLD GRAPHICS:

- - in the background, photograph of a portion of a semiconductor wafer
containing numerous individual semiconductors;

- - graphics depicting the evolution of each of QED's target markets:

- networking/communication infrastructure equipment: pictures of an
elderly woman listening to a gramophone, an early version of the
telephone, a more modern image of a telephone, a satellite dish and a
lap-top computer connected to an image of the world (with the captions
"telegraph", "telephone", "modem" and "world wide web").

- business network equipment: pictures of letters carved in stone, an
early printing press, a letter from a typewriter and a laser printer
(with the captions "printing press", "typewriter" and "networked
printer").

- consumer network products: pictures of a woman in old-fashioned dress,
an early movie camera, a black and white television set, a hand-held
video camera, a modern television set, together with pictures of a set
top box and a satellite (with the captions "black and white movies",
"color video", "cable television" and "internet access"), all of which
overlay a schematic diagram of connections among consumer products.

- - on the left-hand side of the gatefold, the following captions, representing
QED's three target markets, and associated text:

- "Networking/Communication Infrastructure Equipment," with the following
text, "QED designs its newest embedded microprocessor products to meet
the high-performance needs of the most complex network infrastructure
equipment."

- "Business Network Equipment," with the following text, "QED's embedded
microprocessors are used in business network equipment to print complex
images, send documents and connect to enterprise networks."

- "Consumer Network Products," with the following text, "QED's embedded
microprocessors power a new class of network products that enable
access to the Internet through the television."

- - in the top right-hand corner of the gatefold, the caption, "Focus on High
Performance," with the following text: "Network users today seek immediate
access to more information and entertainment content from their intranets
and the Internet. Manufacturers of high performance products connected to
the network, from network infrastructure equipment, to business network
equipment, to consumer
<PAGE>
network equipment, use our embedded microprocessors to deliver, access and
present this network content."

- - in the lower right-hand corner of the gatefold, the caption "Quantum Effect
Devices," with the following text: "QED is a leading developer of 64-bit
embedded microprocessors for use in information-intensive products requiring
high performance. Our embedded microprocessors use the standard MIPS
architecture to achieve high system performance at a reasonable cost. QED's
embedded microprocessors also include proprietary features designed
specifically for our target markets."

- - in the lower left-hand corner and the center of the gatefold, QED's name and
logo.]
<PAGE>
TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
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<S> <C>
Prospectus Summary............................. 4
Risk Factors................................... 7
Special Note Regarding Forward-Looking
Statements................................... 17
Use of Proceeds................................ 19
Dividend Policy................................ 19
Capitalization................................. 20
Dilution....................................... 21
Selected Financial Data........................ 22
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 23

<CAPTION>
PAGE
-----------
<S> <C>
Business....................................... 32
Management..................................... 45
Certain Transactions........................... 56
Principal and Selling Stockholders............. 58
Description of Capital Stock................... 61
Shares Eligible for Future Sale................ 65
Underwriters................................... 67
Legal Matters.................................. 69
Experts........................................ 69
Where You Can Find More Information............ 69
Index to Financial Statements.................. F-1
</TABLE>

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

You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We and the selling stockholder are offering to
sell, and seeking offers to buy, shares of common stock only in jurisdictions
where offers and sales are permitted. The information contained in this
prospectus is accurate only as of the date of this prospectus, regardless of the
time of delivery of the prospectus or of any sale of the common stock.

UNTIL , 1999 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING), ALL
DEALERS THAT BUY, SELL OR TRADE OUR COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.

For investors outside the United States: Neither we nor any of the
underwriters have done anything that would permit this offering or possession or
distribution of this prospectus in any jurisdiction where action for that
purpose is required, other than in the United States. You are required to inform
yourselves about and to observe any restrictions relating to this offering and
the distribution of this prospectus.

3
<PAGE>
PROSPECTUS SUMMARY
YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE ENTIRE PROSPECTUS,
INCLUDING THE MORE DETAILED INFORMATION IN OUR FINANCIAL STATEMENTS AND
ACCOMPANYING NOTES APPEARING ELSEWHERE IN THIS PROSPECTUS. YOU SHOULD CAREFULLY
CONSIDER, AMONG OTHER THINGS, THE MATTERS SET FORTH IN "RISK FACTORS."

QED is a leading developer of high-performance embedded microprocessors that
perform information processing in networking/communications infrastructure
equipment, such as routers and switches; business network equipment, such as
laser printers, network computers and data storage systems; and consumer network
products, such as set-top boxes and cable modems. Each of our target markets has
experienced rapid growth as a result of the widespread deployment of networks
such as intranets and the Internet. These networks have increased in number and
complexity as has the volume of traffic they carry. The network infrastructure
and devices used to access network content must be able to cost-effectively
process increasing amounts of information, which requires larger numbers of
increasingly high-performance embedded microprocessors. Dataquest, Inc.
estimates that approximately 106 million high-performance embedded
microprocessors were shipped in 1998, and that this number will grow to
approximately 228 million in 2002.

The key advantages of our embedded microprocessors include their high levels
of information processing performance, reduced time to market and
price-competitiveness. We believe that our newest generation product, the
RM7000, is the highest-performance 64-bit embedded microprocessor in commercial
production. This product is designed for demanding networking applications, such
as high-speed routers and switches. As the cost of manufacturing our products
declines, we broaden our target markets to include customers that demand a
balance of price and performance. We consider our ability to migrate our
products into new markets to be a key advantage for us.
Embedded microprocessors are often based on a high-efficiency design
approach known as reduced instruction set computing, or RISC, which is
fundamentally different from the design approach used in most desktop computer
microprocessors. The leading RISC architecture is known as MIPS, and we
incorporate this architecture into our products. We believe that we have
assembled one of the foremost MIPS architecture design teams, with engineers
averaging approximately 13 years of microprocessor design experience. We use
third parties to fabricate our microprocessors, and by doing so seek to take
advantage of the semiconductor process expertise of leading manufacturers. This
also allows us to work with those manufacturers offering the most advanced
manufacturing processes and competitive prices.
Our objective is to maintain a leadership position in designing and
developing high-performance embedded microprocessors. In addition, we intend to
continue to introduce our products into the high-performance segments of the
embedded microprocessor market, eventually migrating these products into more
price-sensitive segments within our target markets. Further, we intend to
continue establishing relationships with customers that are market leaders in
order to be on the leading edge of new technologies and market trends.
We generate revenue primarily from direct sales of our products to systems
manufacturers and to a lesser extent from royalties associated with our license
of microprocessor designs to third parties. We have customer relationships with
market leaders in each of our target markets, including Cisco Systems, Inc.,
Hewlett-Packard Company and WebTV Networks, Inc.

We have incurred net losses in each quarter since we began developing and
marketing our own products. As of September 30, 1999, we had an accumulated
deficit of $26.1 million, and we may not achieve or sustain profitability.

We were incorporated in California in August 1991 and intend to
reincorporate in Delaware prior to this offering. Our principal executive
offices are located at 3255-3 Scott Boulevard, Suite 200, Santa Clara,
California 95054, and our telephone number is (408) 565-0300. We maintain a
worldwide web site at www.qedinc.com. The information on our web site is not
incorporated by reference into this prospectus. All trademarks and trade names
appearing in this prospectus are the property of their respective holders.
Unless otherwise indicated, all information in this prospectus:
- gives effect to the conversion of each outstanding share of preferred
stock into one share of common stock effective upon the closing of the
offering;
- assumes no exercise of the underwriters' over-allotment option; and
- assumes our reincorporation from California into Delaware.

4
<PAGE>
THE OFFERING

<TABLE>
<S> <C>
Common stock to be offered by us............ shares
Common stock to be offered by the selling shares
stockholder...............................
Common stock to be outstanding after this shares
offering..................................
Use of proceeds to us....................... We intend to use the net proceeds from this
offering for general corporate purposes,
including capital expenditures and working
capital. See "Use of Proceeds."
Proposed Nasdaq National Market symbol...... QEDI
</TABLE>

The number of shares of our common stock to be outstanding immediately after
this offering is based on the number of shares outstanding at September 30,
1999. This number does not take into account:

- 4,652,200 shares of common stock issuable upon exercise of outstanding
options at an average exercise price of $1.78 per share;

- 177,750 shares of common stock issuable upon exercise of outstanding
warrants at an average exercise price of $2.03 per share; and

- 1,909,145 shares of common stock reserved for issuance under our stock
plans, which are not subject to outstanding options.

SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The pro forma basic and diluted share calculation below reflects the
conversion upon the closing of this offering of all outstanding shares of
preferred stock into 13,618,837 shares of common stock as if the conversion
occurred at the date of original issuance.

<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED JUNE 30, ENDED SEPTEMBER 30,
----------------------------------------------------- ------------------------
1995 1996 1997 1998 1999 1998 1999
--------- --------- --------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Product revenue........................ $ -- $ -- $ -- $ 1,428 $ 10,937 $ 1,383 $ 9,808
Total revenue.......................... 7,870 5,827 10,063 6,480 15,362 2,622 10,467
Gross profit........................... 7,870 5,827 10,063 2,766 6,849 777 4,053
Operating income (loss)................ 1,445 (2,041) (1,481) (9,915) (11,745) (3,435) (1,867)
Net income (loss)...................... 890 (1,041) (1,201) (9,883) (11,769) (3,394) (1,754)
Basic income (loss) per share.......... $ .19 $ (.20) $ (.21) $ (1.53) $ (1.45) $ (.43) $ (.20)
Diluted income (loss) per share........ $ .14 $ (.20) $ (.21) $ (1.53) $ (1.45) $ (.43) $ (.20)
Basic average common shares
outstanding.......................... 4,644 5,320 5,746 6,451 8,111 7,836 8,808
Diluted average common shares
outstanding.......................... 6,444 5,320 5,746 6,451 8,111 7,836 8,808
Pro forma basic and diluted net loss
per share............................ $ (.63) $ (.08)
Shares used in pro forma per share
calculation.......................... 18,717 22,427
</TABLE>

The "as adjusted" column below reflects the issuance and sale of
shares of our common stock, at an assumed initial public offering
price of $ per share, and the application of the net proceeds to us from the
offering, after deducting estimated underwriting discounts and commissions and
estimated offering expenses payable by us.

<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
----------------------
ACTUAL AS ADJUSTED
--------- -----------
<S> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents, short-term investments and restricted cash...... $ 13,346 $
Working capital......................................................... 16,969
Total assets............................................................ 28,970
Long-term liabilities, less current portion............................. 1,955
Total stockholders' equity.............................................. 16,971
</TABLE>

5
<PAGE>
RISK FACTORS

YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW, TOGETHER WITH ALL
OF THE OTHER INFORMATION INCLUDED IN THIS PROSPECTUS, BEFORE MAKING AN
INVESTMENT DECISION. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCURS, OUR
BUSINESS, FINANCIAL CONDITION OR OPERATING RESULTS COULD BE MATERIALLY ADVERSELY
AFFECTED. IN THIS CASE, THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE, AND
YOU MAY LOSE ALL OR PART OF YOUR INVESTMENT.

RISKS RELATED TO OUR BUSINESS

WE HAVE A LIMITED OPERATING HISTORY UNDER OUR CURRENT BUSINESS MODEL, WHICH
MAKES IT DIFFICULT TO PREDICT OUR FUTURE OPERATING RESULTS.

We were incorporated in 1991 and began business as a provider of proprietary
microprocessor designs to semiconductor companies. In 1996, we obtained a
license to design, manufacture and sell embedded microprocessors using
intellectual property developed by MIPS Computer Systems, Inc., currently known
as MIPS Technologies, Inc. Since obtaining this license, we have transitioned to
a company that develops and markets its own products. Therefore, we have
operated under our current business model for a short period of time. This
limited operating history makes it difficult to predict our future revenue and
expenses.

WE HAVE NOT BEEN PROFITABLE OPERATING UNDER OUR NEW BUSINESS MODEL, AND WE
MAY NOT ACHIEVE PROFITABILITY.

In 1997, we began transitioning from a provider of proprietary
microprocessor designs to a company that develops and markets its own products,
and since then we have lost money in each quarter. Although product revenue has
increased significantly in the year ended June 30, 1999, we still have not
achieved profitability. If our revenue does not increase, we may not achieve or
sustain profitability.

WE EXPERIENCE FLUCTUATIONS IN OUR OPERATING RESULTS DUE TO A NUMBER OF
FREQUENTLY CHANGING BUSINESS CONDITIONS, WHICH MAY CAUSE OUR STOCK PRICE TO
DECLINE.

We experience fluctuations in our operating results due to a variety of
factors, including:

- the timing and amount of orders from our customers, including
cancellations and reschedulings;

- the gain or loss of significant customers, including as a result of
industry consolidation;

- changes in the mix of products we sell;

- changes in demand by the end users of our customers' products;

- market acceptance of our current and future products;

- variability of our customers' product life cycles;

- changes in the average selling prices of embedded microprocessors or the
products that incorporate them due to our customers reaching volume
production, technological change, product obsolescence or otherwise; and

- cancellations, changes or delays of deliveries to us by our manufacturers,
including as a result of the availability and terms of manufacturing
capacity.

Revenue from the sale of our embedded microprocessors is dependent upon
companies designing our microprocessors into their products, which we refer to
as "design wins." Our gross margin is impacted by the mix of revenue among our
products. As a result of these factors and those listed above, our lengthy sales
cycle and our dependence on relatively few customers whose order cycles vary
significantly, our revenue and gross margin could fluctuate significantly.

We cannot accurately forecast all of the above factors. As a result, we
believe that period-to-period comparisons do not indicate future operating
results. Our operating results in a future quarter or quarters

7
<PAGE>
may fall below the expectations of public market analysts or investors. If this
were to occur, the price of our common stock could decline.

THE INABILITY OF OUR RM7000 EMBEDDED MICROPROCESSOR TO ACHIEVE CONTINUED
MARKET ACCEPTANCE COULD HARM OUR NEAR-TERM GROWTH.

We believe that our RM7000 embedded microprocessor, which we began shipping
in the second half of 1998, will form the basis for our next-generation family
of embedded microprocessors. Although we have achieved design wins for the
RM7000, some of them may not result in revenue to us. If the RM7000 does not
achieve continued market acceptance:

- revenue from our existing products could be inadequate to cover our
expenses, including the cost of selling, marketing, developing and
manufacturing the RM7000 and other new products;

- our brand and reputation could be damaged; and

- our competitors' products could achieve greater market share as our market
share declines.

OUR FAILURE TO DEVELOP AND INTRODUCE NEW PRODUCTS ON A TIMELY BASIS COULD
IMPAIR OUR ABILITY TO ATTRACT AND RETAIN CUSTOMERS.

The semiconductor industry is characterized by rapidly changing technology,
frequent product introductions and ongoing demands for greater speed and
functionality. Therefore, we must continually design, develop and introduce new
products with improved features to be competitive. To introduce these products
on a timely basis we must:

- design innovative and performance-improving features that differentiate
our products from those of our competitors;

- transition our products to new manufacturing process technologies;

- identify emerging technological trends in our target markets, including
new standards for our products;

- accurately define and design new products to meet market needs;

- anticipate changes in end-user preferences with respect to our customers'
products;

- bring products to market on a timely basis at competitive prices; and

- respond effectively to technological changes or product announcements by
others.

We cannot assure you that we will be able to meet the design and market
introduction schedules for our new products or enhancements to our existing
products or that these products will achieve market acceptance.

WE MUST ACHIEVE NEW DESIGN WINS, AND THESE DESIGN WINS MUST TRANSLATE INTO
CUSTOMER PURCHASES, FOR OUR PRODUCT REVENUE TO INCREASE.

Our success depends in large part upon achieving design wins for our
products with current and future customers. Design wins are indications by
existing and potential customers that they intend to incorporate our products
into new designs. To achieve design wins, we must continually increase the
performance levels of our embedded microprocessors, keep pace with evolving
industry standards and introduce new products in a timely manner. If we fail to
achieve design wins, we will lose potential sales opportunities.

8
<PAGE>
Design wins, however, do not necessarily result in purchase orders for our
products. Our design wins are solely an expression of interest by customers and
are not supported by binding contracts of any nature. Design wins also may not
result in future revenue for the following reasons:

- consolidation of our customer base or acquisitions of our customers;

- failure of our customers' products to compete in their respective markets;
and

- cancellation of development of a customer's product that incorporates our
embedded microprocessors.

WE FACE INTENSE COMPETITION IN THE MARKET FOR EMBEDDED MICROPROCESSORS.

Competition in the market for embedded microprocessors is intense, and we
expect it to increase in the future. We face competition from:

- other licensees of technology from MIPS Technologies, including NEC
Corporation, Toshiba Corporation and Integrated Device Technology, Inc.;

- companies utilizing alternative reduced instruction set computing, or
RISC, technologies, including ARM/Strong Arm, developed by ARM Holdings
plc and Intel; Hitachi SH, developed by Hitachi; and PowerPC, developed by
Motorola, Inc. and IBM Corporation; and

- companies utilizing technologies other than RISC.

Many of our existing competitors, as well as a number of potential new
competitors, have longer operating histories, greater brand recognition, larger
customer bases and greater financial and marketing resources than we do. They
may therefore be able to respond more quickly than we can to new or emerging
technologies and changes in customer requirements. They may also be able to
devote greater resources than we can to the development and promotion of their
technologies and products. We also face competition from several private
companies in various stages of development. In addition, our competitors that
are licensees of MIPS Technologies may obtain more favorable terms under their
current or future licenses, which would place us at a competitive disadvantage.

Furthermore, many of our existing and potential customers have the resources
to internally develop microprocessors and other devices that perform all or a
portion of the functions performed by our products. If these customers decided
to develop embedded microprocessors internally rather than purchasing our
products, we would lose sales opportunities.

IF OUR TARGET MARKETS REJECT THE MIPS MICROPROCESSOR ARCHITECTURE, SUPPORT
AND DEMAND FOR OUR PRODUCTS WILL DECLINE.

We have derived and expect to continue to derive substantially all of our
product revenue from products based on the MIPS microprocessor architecture.
Therefore, our success is dependent on continued acceptance of this architecture
within our target markets. Moreover, a large number of companies currently
develop semiconductor design tools, components and products that are compatible
with and optimized for the MIPS microprocessor architecture. If these companies
ceased to provide these tools for any reason, it could become more difficult or
less desirable for manufacturers and others to continue to support the MIPS
microprocessor architecture. If the markets for embedded microprocessors adopt
an alternative technology, we could lose the support of these MIPS
architecture-based tools, components and products and the demand for our
products would decline.

IF MIPS TECHNOLOGIES DEVELOPS FUTURE GENERATIONS OF ITS TECHNOLOGY, WE MAY
NOT BE ABLE TO OBTAIN A LICENSE ON REASONABLE TERMS.

MIPS Technologies has introduced, and will likely continue to introduce, new
generations of its microprocessor technology architecture containing
improvements that are not covered by the technology

9
<PAGE>
we are currently licensing from MIPS Technologies. Our success could depend on
our ability to develop products that incorporate those improvements. We may not
be able to license the technology for any new improvements from MIPS
Technologies on commercially reasonable terms or at all. If we cannot obtain
required licenses from MIPS Technologies, we could encounter delays in product
development while we attempt to develop similar technology, or we may not be
able to develop, manufacture and sell products incorporating this technology.

WE DEPEND UPON OUR LICENSE OF MICROPROCESSOR TECHNOLOGY FROM MIPS
TECHNOLOGIES AS THE BASIS FOR OUR PRODUCTS, AND WE WILL BE UNABLE TO MARKET
OUR PRODUCTS IF THIS LICENSE IS TERMINATED.

All of our current products and planned future products are based upon the
microprocessor technology we license from MIPS Technologies. Our failure to
comply with any of the terms of our license agreement could result in the
termination of our rights, preventing us from marketing our current and planned
products.

THE LOSS OF ANY OF OUR KEY PERSONNEL OR THE FAILURE TO HIRE AND RETAIN
ADDITIONAL QUALIFIED PERSONNEL COULD IMPAIR OUR ABILITY TO DEVELOP AND
MARKET OUR PRODUCTS.

Our success depends to a significant degree upon the continued contributions
of our key management, engineering and sales and marketing personnel, especially
our design engineers, who we believe are difficult to replace. We are
particularly dependent upon the continued services of Thomas J. Riordan, our
Chief Executive Officer, President and a director, and Raymond Kunita, our Chief
Operating Officer and Vice President of Engineering. Competition for highly
skilled managerial, engineering and sales and marketing personnel in the
semiconductor industry is intense, and we may not succeed in attracting and
retaining these personnel. Our inability to attract and retain qualified
personnel in the future or delays in hiring required personnel could impair our
ability to meet customer and technological demands or our ability to develop and
market our products. We do not have either employment contracts with, or key
person life insurance on, any of our key personnel.

OUR DEPENDENCE ON THIRD PARTIES TO FABRICATE OUR EMBEDDED MICROPROCESSORS
REDUCES OUR CONTROL OVER THE PRODUCTION, SUPPLY AND DELIVERY OF OUR
PRODUCTS.

We currently rely on third parties to fabricate our products. In the year
ended June 30, 1999, IBM and Taiwan Semiconductor Manufacturing Company Ltd., or
TSMC, performed all of our product fabrication. Our contract with IBM expires on
May 1, 2000, and we cannot assure you that we will be able to renew it.
Furthermore, IBM is not obligated under this contract to provide us with any
specified number of products, at any specified price. TSMC fabricates our
microprocessors on a purchase order basis, and we do not currently have a
long-term contract with TSMC.

There are significant risks associated with our reliance on third parties to
fabricate our products, including:

- manufacturing capacity may be unavailable to us, even though we may have
submitted a product order;

- we have limited control over product delivery schedules, and we may not
receive products within the time frames and in the volumes required by us
at a favorable cost or at all;

- we could face delays in obtaining, or we might not be able to obtain
access to, key fabrication process technologies; and

- we have limited control over quality assurance, manufacturing yields and
production costs.

Currently, our semiconductor manufacturers require approximately 13 to 15
weeks to deliver new orders, which often requires us to place orders in advance
of expected purchase orders from our

10
<PAGE>
customers. As a result, we have only a limited ability to react to fluctuations
in demand for our products, which could cause us to have an excess or a shortage
of inventory of a particular product.

If our manufacturers are unable or unwilling to continue to manufacture our
products in required volumes or at commercially acceptable costs, we may be
forced to seek other manufacturing sources for our products. Transferring to
another manufacturer would require a significant amount of time, and we cannot
assure you that we could make a smooth and timely transition.

In the past, we have experienced delays in the delivery of products by our
manufacturers, and we may experience delays in the future. As a result of the
September 21, 1999 earthquake in Taiwan, many semiconductor manufacturers,
including TSMC, experienced disruptions in their operations resulting in the
temporary cessation of semiconductor fabrication, the loss of some work in
process, delays in semiconductor shipments and limitations on manufacturing
capacity. We have been informed that some semiconductor manufacturers, including
TSMC, are still operating on a reduced schedule. To date, the earthquake has not
had a material impact on our operations. At this time, it is difficult to
predict whether the earthquake will have a material impact on our operations in
the future. The disruption in semiconductor manufacturing may result in product
shortages that exceed our current inventory reserves. Furthermore, even if we do
not experience product shortages, suppliers of other components incorporated
into our customers' products may experience shortages, which could affect the
demand for our products.

OUR DEPENDENCE UPON THIRD PARTIES TO ASSEMBLE AND TEST SUBSTANTIALLY ALL OF
OUR PRODUCTS REDUCES OUR CONTROL OF PRODUCT DELIVERY SCHEDULES AND QUALITY
ASSURANCE.

Because third parties assemble and test substantially all of our products,
we do not directly control our product delivery schedules and quality assurance.
This lack of control could result in product shortages, particularly in the case
of new products. Product shortages could increase our fabrication, assembly or
testing costs or delay delivery of our products. We do not have long-term
contracts with the companies that test and assemble our products, and we
typically procure services from them on a per order basis. Therefore, we may not
be able to continue to obtain assembly and testing services for our products on
acceptable terms, or at all. If we are required to find and qualify alternative
assemblers or testers for our products, we could experience delays in product
shipments or a decline in product quality.

WE MAY NOT ACHIEVE ACCEPTABLE PRODUCT YIELDS FROM OUR THIRD-PARTY
MANUFACTURERS, WHICH COULD INCREASE THE COST AND REDUCE THE SUPPLY OF OUR
PRODUCTS.

In the process of manufacturing embedded microprocessors, contaminants,
manufacturing errors and other factors can result in a substantial percentage of
nonfunctional products, and many semiconductor companies frequently encounter
difficulties in achieving acceptable product yields. The proportion of
functional products derived from a particular manufacturing process is referred
to as product "yield." If we do not achieve planned yields, our product costs
would increase and product availability would decrease. Yield problems may not
be identified and resolved, if ever, until a product has been manufactured and
can be analyzed and tested. As a result, yield problems are often difficult,
time consuming and expensive to correct. The risk of low yields is compounded by
the offshore location of some of our third-party manufacturing facilities,
increasing the effort and time required to identify, communicate and resolve
manufacturing yield problems.

In the past, we have experienced lower yields and related problems more
often with newer products than with mature products. For example, shipments to
customers have been delayed by as much as three weeks because of low-yielding
manufacturing processes on new products. Other companies have experienced poor
yields with respect to mature products, and we may also experience poor yields
on mature products. While we believe that our manufacturing yields have
generally been consistent with industry norms, we may experience yield problems
in the future that have a significant impact on our operating results and our
ability to deliver our products to our customers in a timely manner. If we do
not deliver our products to our customers in a timely manner, they may choose
other suppliers.

11
<PAGE>
WE RELY ON FOREIGN THIRD-PARTY MANUFACTURING OPERATIONS, WHICH EXPOSES US TO
RISKS INHERENT IN INTERNATIONAL OPERATIONS.

We are subject to risks associated with conducting business outside of the
United States because a large portion of our semiconductor fabrication and
substantially all of our assembly and testing operations occur in foreign
countries. These risks include:

- unexpected changes in U.S. or foreign regulatory requirements;

- additional costs and delays associated with tariffs, quotas and other
trade barriers and restrictions; and

- uncertainties relating to political, social and economic conditions.

In addition, all of our current arrangements with third-party manufacturers
provide for pricing and payment in U.S. dollars. Fluctuations in currency
exchange rates, therefore, could cause our third-party manufacturers to increase
their prices, which would reduce our gross margin.

OUR FAILURE TO PROTECT OUR PROPRIETARY RIGHTS, OR THE COSTS OF PROTECTING
THESE RIGHTS, MAY HARM OUR ABILITY TO COMPETE.

Third parties may be able to copy or reverse engineer aspects of our
products or obtain and use information that we regard as proprietary. Our
success and ability to compete is dependent in part upon continued protection of
our proprietary rights. Our failure to adequately protect our proprietary rights
could result in our competitors offering similar products, potentially resulting
in our loss of a competitive advantage and decreased revenue. In addition, as a
licensee of patent rights relating to the MIPS architecture, we rely upon MIPS
Technologies to enforce its patent rights against infringers. If MIPS
Technologies fails to enforce its patent rights, we might not be able to compete
successfully. We also seek to protect our trade secrets and proprietary
information through confidentiality agreements with our employees and
consultants and with other parties. However, we may not have an adequate remedy
in the event these agreements are breached or any remedy if our trade secrets
are independently developed by others. Despite our efforts to protect our
proprietary rights, existing intellectual property laws afford only limited
protection. In addition, the laws of some foreign countries provide only limited
proprietary rights protection.

Litigation may be necessary in the future to enforce our intellectual
property rights, to protect our trade secrets or to determine the validity and
scope of the proprietary rights of others. This litigation could result in
substantial costs and diversion of resources.

WE COULD BE SUBJECT TO CLAIMS OF INFRINGEMENT OF THIRD-PARTY INTELLECTUAL
PROPERTY, WHICH COULD RESULT IN SIGNIFICANT EXPENSE AND LOSS OF INTELLECTUAL
PROPERTY RIGHTS.

The semiconductor industry is characterized by uncertain and conflicting
intellectual property claims and frequent intellectual property litigation,
especially regarding patent rights. From time to time, third parties may assert
patent, copyright, trademark and other intellectual property rights to
technologies that are important to our business. We may receive notices of
claims that our products infringe or may infringe these rights. Any litigation
to determine the validity of these claims, including claims arising through our
contractual indemnification of our customers, regardless of their merit or
resolution, would likely be costly and divert the efforts and attention of our
management and technical personnel. We cannot assure you that we would prevail
in this litigation given the complex technical issues and inherent uncertainties
in intellectual property litigation. If this litigation resulted in an adverse
ruling, we could be required to:

- pay substantial damages;

- cease the manufacture, use or sale of infringing products;

12
<PAGE>
- discontinue the use of certain technology; or

- obtain a license under the intellectual property rights of the third party
claiming infringement, which license may not be available on reasonable
terms, or at all.

OUR LENGTHY SALES CYCLE MAKES IT DIFFICULT FOR US TO PREDICT IF OR WHEN A
SALE WILL BE MADE, WHICH INCREASES OUR RISKS RELATED TO CUSTOMER
CANCELLATIONS.

The timing of our sales revenue is difficult to predict because of the
length and variability of the sales cycle for our products. Our sales cycle
typically includes a three- to six-month period prior to our achieving a design
win and an additional 12- to 24-month period before a customer commences volume
production of products incorporating our embedded microprocessors. While
potential customers are evaluating our products and before they place an order
with us, we may incur sales and marketing expenses and expend significant
management effort. Therefore, we take risks related to product cancellations or
changed product plans, which could result in the loss of anticipated sales or
missed sales opportunities.

OUR REVENUE AND PROFITS MAY DECREASE IF WE LOSE ANY OF OUR SIGNIFICANT
CUSTOMERS.

Historically, a relatively small number of customers have accounted for a
significant portion of our total revenue in any particular period. The loss of
any significant customer could cause our revenue to decline. In the year ended
June 30, 1999, our four largest customers, including sales to their respective
manufacturing subcontractors, accounted for 23%, 20%, 15% and 12% of our total
revenue. We anticipate that sales of our products to relatively few customers
will continue to account for a significant portion of our total revenue. We have
no long-term purchase commitments with any of our significant customers.
Therefore, these customers could cease purchasing our products with limited
notice and with little or no penalty.

Our dependence on a small number of customers increases the risks associated
with our potential loss of customers resulting from business combinations or
consolidations. If a customer or potential customer were acquired or combined
with another company, the resulting company could cancel development efforts,
design wins or purchase orders as part of the integration process.

IF WE FAIL TO ESTABLISH AND MAINTAIN OUR RELATIONSHIPS WITH KEY PARTICIPANTS
IN OUR TARGET MARKETS, WE MAY HAVE DIFFICULTY MARKETING OUR PRODUCTS.

It is important to our success to establish and maintain relationships with
customers who are technology or market-share leaders in our target markets. We
believe that we need to work closely with these customers to gain valuable
insight into market demands for new products and in order to help us design new
embedded microprocessors. If we fail to establish and maintain these
relationships, it would be more difficult for us to develop and market products
offering features that address emerging market trends.

In addition, to help sell our products, we rely upon our relationships with
vendors of collateral products and tools, such as companion integrated circuits,
operating systems and a variety of system design tools. If we fail to maintain
current relationships and to develop new relationships with these vendors, our
products may not remain compatible with other products and tools. This lack of
compatibility could affect our ability to acquire greater market share.

MANY OF OUR SALES REPRESENTATIVES ARE NEW TO THE COMPANY, AND IF THEY FAIL
TO SUCCESSFULLY MARKET OUR PRODUCTS OR IF WE FAIL TO EXPAND THE NUMBER OF
OUR SALES REPRESENTATIVES, WE MAY NOT BE ABLE TO INCREASE SALES AND MARKET
AWARENESS OF OUR PRODUCTS.

We depend on sales representatives to sell a substantial portion of our
products. We have established relationships with many of our sales
representatives within the last year, and we are unable to predict how

13
<PAGE>
successful these sales representatives will be in marketing and selling our
products. In addition, we must expand the number of sales representatives both
domestically and internationally. Without this increase, we may not be able to
increase sales and market awareness of our products. Competition for qualified
sales representatives is intense. We may not be able to retain our existing
sales representatives or engage the type and number of sales representatives
that we require on a timely basis or at all. In addition, all of our sales
representatives' agreements may be terminated upon 30-days notice by either
party.

OUR RAPID GROWTH HAS STRAINED OUR RESOURCES, AND WE MAY NOT BE ABLE TO
MANAGE FUTURE GROWTH.

We have experienced a period of rapid growth and expansion, which has
placed, and continues to place, a significant strain on our resources. This
growth has required us to increase the number of our employees from 48 as of
September 30, 1997 to 91 as of September 30, 1999, and otherwise expand our
operations, which has resulted in increased responsibilities for our management.
If we continue to expand our operations, we may significantly strain our
management, manufacturing, financial, information systems and other resources.
Moreover, we cannot be certain that our systems, procedures, controls and
existing space will be adequate to support our operations. We are currently
implementing a new enterprise resource planning system to accommodate the growth
in our operations, and we may not be able to implement this system effectively
or on a timely basis.

IF OUR PRODUCTS CONTAIN DEFECTS OR FAIL TO ACHIEVE INDUSTRY RELIABILITY
STANDARDS, OUR BUSINESS REPUTATION WILL BE HARMED, AND WE MAY INCUR
SIGNIFICANT UNEXPECTED EXPENSES AND LOSE SALES OPPORTUNITIES.

Our products have in the past contained, and may in the future contain,
undetected errors. Errors are more common when products are introduced or as new
versions are released. We may find errors, defects or failures in our products
after commencement of commercial shipments. If this happens, we may experience:

- delay in or loss of market acceptance and sales;

- product returns;

- diversion of development resources;

- injury to our reputation; or

- increased service and warranty costs.

Moreover, because we design many of our embedded microprocessors for products
that provide critical communications services, we may be subject to significant
liability claims. Our agreements with customers typically contain provisions
intended to limit our exposure to liability claims. These limitations may not,
however, preclude all potential claims from being made. We do not currently have
product liability insurance, and our general liability insurance generally would
not cover any claims sought against us. Furthermore, our agreements with our
manufacturers contain limitations on their obligations to indemnify us if our
embedded microprocessors contain manufacturing defects. Liability claims could
require us to spend significant time and money in litigation or to pay
significant damages. As a result, any of these claims, whether or not
successful, could seriously damage our reputation and our business.

RISKS RELATED TO OUR INDUSTRY

THE GROWTH OF OUR TARGET MARKETS DEPENDS UPON THE CONTINUED GROWTH OF THE
INTERNET, AND, THEREFORE, OUR OPERATING RESULTS COULD BE HARMED IF THE
INTERNET AND, HENCE, OUR TARGET MARKETS FAIL TO GROW OR GROW MORE SLOWLY
THAN EXPECTED.

We derive our revenue from the sale of embedded microprocessors targeted at
the networking/communications infrastructure equipment, business network
equipment and consumer

14
<PAGE>
network products markets. In particular, we depend on the continued growth of
the Internet, which largely dictates the demand for the products incorporating
our embedded microprocessors. The continued growth of the Internet depends on
various factors, many of which are outside our control. These factors include:

- the Internet infrastructure may not be able to support the demands placed
on it;

- performance and reliability of the Internet may decline as usage grows;
and

- privacy, security and authentication concerns with respect to the
transmission over the Internet of confidential information.

Although our target markets have experienced significant growth in recent
years, they may not continue to grow as rapidly or at all. If they fail to grow,
or grow more slowly than expected, our operating results could be harmed.

THE CYCLICALITY OF THE SEMICONDUCTOR INDUSTRY MAY IMPACT OUR OPERATING
RESULTS.

The semiconductor industry is highly cyclical and subject to rapid
technological change. From time to time, the semiconductor industry has
experienced significant economic downturns, characterized by diminished product
demand, accelerated erosion of prices and excess production capacity. Our
industry also periodically experiences increased demand and production capacity
constraints. Accordingly, our operating results may vary significantly as a
result of general conditions in the semiconductor industry.

OUR FAILURE AND THE FAILURE OF OUR KEY MANUFACTURERS AND CUSTOMERS TO BE
YEAR 2000 COMPLIANT MAY HARM OUR BUSINESS AND RESULTS OF OPERATIONS.

The Year 2000 computer issue creates a significant risk for us in at least
three areas:

- systems we use to run our business;

- systems used by our manufacturers; and

- warranty or other claims arising from our products.

A failure in any of these areas to be Year 2000 compliant may seriously harm
our business and results of operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Year 2000 Computer
System Compliance."

RISKS RELATED TO THIS OFFERING

OUR STOCK PRICE MAY BE VOLATILE, AND YOU MAY NOT BE ABLE TO RESELL YOUR
SHARES AT OR ABOVE THE OFFERING PRICE.

The market for the securities of high technology companies in general, and
of companies in the semiconductor industries in particular, has been highly
volatile. It is likely that the price of our common stock will fluctuate widely
in the future. Factors that could affect the trading price of our common stock
include:

- quarterly variations in our operating results;

- changes in the general conditions of the embedded microprocessor or
semiconductor markets;

- changes in financial estimates or recommendations by stock market analysts
regarding us or our competitors;

- our sales of common stock or other securities in the future;

- the hiring or departure of our key personnel;

15
<PAGE>
- announcements by us or our competitors of significant contracts, new
products or product enhancements, acquisitions, distribution
relationships, joint ventures or capital commitments; and

- changes in market valuations of other embedded microprocessor companies.

PURCHASERS OF COMMON STOCK IN THIS OFFERING WILL SUFFER IMMEDIATE AND
SUBSTANTIAL DILUTION.

The initial public offering price is substantially higher than the book
value per share of our common stock. As a result, you will experience immediate
and substantial dilution of $ in the pro forma net tangible book value per
share, based on an assumed public offering price of $ per share. This dilution
is in large part because our earlier investors paid substantially less than the
initial public offering price in this offering when they purchased their shares
of common stock. You will experience additional dilution upon exercise of
outstanding stock options and warrants.

MANAGEMENT HAS BROAD DISCRETION ON HOW TO USE THE PROCEEDS FROM THIS
OFFERING AND MAY NOT APPLY THE PROCEEDS IN A MANNER THAT INCREASES THE VALUE
OF YOUR INVESTMENT.

Management will have broad discretion with respect to the expenditure of the
net proceeds from this offering. The proceeds have not been allocated for
specific purposes. You will be entrusting your funds to our management, upon
whose judgment you must depend, with limited information concerning the specific
working capital requirements and general corporate purposes to which the funds
will ultimately be applied. We may not be able to yield a significant return on
any investment of the proceeds.

WE MAY ENGAGE IN ACQUISITIONS THAT MAY HARM OUR OPERATING RESULTS, DILUTE
OUR STOCKHOLDERS AND CAUSE US TO INCUR DEBT OR ASSUME CONTINGENT
LIABILITIES.

As part of our business strategy, we may make investments in complementary
companies, products or technologies that we believe would be advantageous to the
development of our business. If we acquire a company, we could have difficulty
in assimilating that company's personnel and operations. In addition, the key
personnel of the acquired company may decide not to work for us. If we make
other types of acquisitions, we could have difficulty in assimilating the
acquired technology or products into our operations. These difficulties could
disrupt our ongoing business, distract our management and employees and increase
our expenses. Furthermore, we may issue equity securities to pay for any future
acquisitions, which could be dilutive to our existing stockholders. We may also
incur debt or assume contingent liabilities in connection with acquisitions,
which could harm our operating results.

PROVISIONS OF OUR CERTIFICATE OF INCORPORATION AND BYLAWS OR DELAWARE LAW
MAY DELAY OR PREVENT A CHANGE OF CONTROL TRANSACTION AND, THEREFORE, DEPRESS
THE MARKET PRICE OF OUR STOCK.

Delaware corporate law and our certificate of incorporation and bylaws
contain provisions that could delay, defer or prevent a change in control of our
company on terms which you may deem advantageous. These provisions could limit
the price that investors might be willing to pay in the future for shares of our
common stock. These provisions:

- authorize the issuance of "blank check" preferred stock, which is
preferred stock that our board of directors can create and issue without
prior stockholder approval, with rights senior to those of common stock;

- provide for a board of directors with staggered terms;

- prohibit stockholder action by written consent; and

- establish advance notice requirements for submitting nominations for
election to the board of directors and for proposing matters that can be
acted upon by stockholders at a meeting.

16
<PAGE>
A LIMITED NUMBER OF STOCKHOLDERS WILL HAVE THE ABILITY TO INFLUENCE THE
OUTCOME OF DIRECTOR ELECTIONS AND OTHER MATTERS REQUIRING STOCKHOLDER
APPROVAL.

After completion of this offering, our officers and directors and parties
affiliated with or related to these persons or to us will own approximately %
of the outstanding shares of our common stock. Accordingly, these stockholders
will likely determine the outcome of director elections and other matters
submitted to our stockholders for approval, including potential mergers or
acquisitions and amendments to our certificate of incorporation. Stockholders
other than these principal stockholders are therefore likely to have little or
no influence on decisions regarding these matters.

THE PRICE OF OUR STOCK COULD DECREASE AS A RESULT OF SHARES BEING SOLD IN
THE MARKET AFTER THE OFFERING.

Sales of substantial number of shares of our common stock in the public
market following this offering could cause the market price of our common stock
to decline. The number of shares of common stock available for sale in the
public market is limited by restrictions under federal securities law and under
lockup agreements that our stockholders have entered into with the underwriters,
and with us. Those lockup agreements restrict our stockholders from selling,
pledging or otherwise disposing of their shares for a period of 180 days after
the date of this prospectus without the prior written consent of Morgan Stanley
& Co. Incorporated. However, Morgan Stanley & Co. Incorporated may, in its sole
discretion, release all or any portion of the common stock from the restrictions
of the lockup agreements. The following table indicates approximately when the
22,894,992 shares of our common stock that are not being sold in the offering,
but which were outstanding as of September 30, 1999, assuming the conversion of
all outstanding preferred stock, will be eligible for sale into the public
market:

<TABLE>
<CAPTION>
ELIGIBILITY OF
RESTRICTED
SHARES FOR SALE IN
PUBLIC MARKET
---------------------
<S> <C>
On the date of this prospectus......................................... 0
180 days after the date of this prospectus............................. 12,456,322
180 days after the date of this prospectus, subject to volume
limitations.......................................................... 10,256,307
More than 180 days after the date of this prospectus................... 182,363
</TABLE>

Additionally, of the 4,829,950 shares issuable upon exercise of outstanding
options and warrants to purchase our common stock outstanding as of September
30, 1999, approximately 1,991,947 shares will be vested and eligible for sale
180 days after the date of this prospectus. For a further description of the
eligibility of share for sale into the public market following the offering. See
"Shares Eligible for Future Sale."

In addition, as soon as practicable after the date of this prospectus, we
intend to file a registration statement on Form S-8 with the Securities and
Exchange Commission covering the 11,000,000 shares of common stock reserved for
issuance under our 1999 Equity Incentive Plan, 1999 Non-Employee Directors'
Stock Option Plan and 1999 Employee Stock Purchase Plan and for options issued
under our previous plans.

17
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and elsewhere in this prospectus constitute
forward-looking statements. In some cases, you can identify forward-looking
statements by terms such as "may," "will," "should," "expect," "plan,"
"anticipate," "believe," "estimate," "predict," "potential," or "continue," or
the negative of such terms or other comparable technology. The forward-looking
statements contained in this prospectus involve known and unknown risks,
uncertainties and other factors that may cause our or our industry's actual
results, level of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or
achievements expressed or implied by these statements. These factors include
those listed under "Risk Factors" and elsewhere in this prospectus.

Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. You should not place undue reliance on
these forward-looking statements, which apply only as of the date of this
prospectus.

18
<PAGE>
USE OF PROCEEDS

We estimate that our net proceeds from the sale of shares of common
stock we are offering will be approximately $ million at an assumed initial
public offering price of $ per share, after deducting estimated underwriting
discounts and commissions and after deducting estimated offering expenses
payable by us. If the underwriters exercise their over-allotment option in full,
we estimate that our net proceeds will be approximately $ million. We will not
receive any proceeds from the sale of shares of common stock by the selling
stockholder. The primary purposes of this offering are to obtain additional
equity capital, create a public market for our common stock and facilitate
future access to public markets.

We intend to use the net proceeds we receive from this offering for general
corporate purposes, including capital expenditures and working capital. The
amounts that we expend for these purposes will depend on a number of factors,
including future revenue growth, if any, and the amount of cash we generate from
operations. As a result, we will retain broad discretion in the allocation of
the net proceeds of this offering. A portion of the net proceeds may also be
used to acquire or invest in complementary businesses, technologies, product
lines or products. We have no current agreements or commitments with respect to
any acquisition or investment, and we are not currently engaged in negotiations
with respect to any acquisition or investment. Pending these uses, we intend to
invest the net proceeds of this offering in investment grade, interest-bearing
securities.

DIVIDEND POLICY

We have never declared nor paid any cash dividends on our capital stock. We
currently intend to retain any future earnings to finance the growth and
development of our business and therefore do not anticipate paying any cash
dividends in the foreseeable future. Any future determination to pay cash
dividends will be at the discretion of our board of directors and will depend on
our financial condition, results of operations, capital requirements, general
business condition and other factors as our board of directors may deem
relevant.

19
<PAGE>
CAPITALIZATION

The following table sets forth QED's capitalization as of September 30, 1999
(1) on an actual basis, (2) on a pro forma basis to reflect the conversion of
all outstanding shares of preferred stock into an aggregate of 13,618,837 shares
of common stock upon consummation of this offering, and (3) on a pro forma as
adjusted basis to give effect to the sale of the shares of common stock by
QED in this offering at an assumed initial public offering price of $ per
share and after deducting estimated underwriting discounts and commissions and
estimated offering expenses payable by QED.

<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
---------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE DATA)
<S> <C> <C> <C>
Long-term debt and leases, less current portion............................. $ 1,955 $ 1,955 $ 1,955
---------- ----------- -----------
Stockholders' equity:
Preferred stock, $.001 par value, 13,897,750 shares authorized, 13,618,837
shares issued and outstanding, actual; 10,000,000 shares authorized, no
shares issued and outstanding pro forma and pro forma as adjusted....... 14 -- --
Common stock, $.001 par value, 29,000,000 shares authorized, 9,276,155
shares issued and outstanding, actual; 100,000,000 shares authorized,
pro forma; 22,894,992 shares issued and outstanding, pro forma; and
shares issued and outstanding, pro forma as adjusted.............. 9 23
Additional paid-in capital................................................ 44,471 44,471
Deferred stock-based compensation......................................... (1,405) (1,405) (1,405)
Accumulated deficit....................................................... (26,118) (26,118) (26,118)
---------- ----------- -----------
Total stockholders' equity.............................................. 16,971 16,971
---------- ----------- -----------
Total capitalization.................................................. $ 18,926 $ 18,926 $
---------- ----------- -----------
---------- ----------- -----------
</TABLE>

See Notes 4 and 9 of Notes to Financial Statements for a description of our
long-term debt and leases.

The share numbers in the table above exclude:

- 4,652,200 shares of common stock issuable upon exercise of options
outstanding at September 30, 1999 at a weighted average price of $1.78 per
share;

- outstanding warrants for the purchase of 177,750 shares of our common
stock at a weighted average exercise price of $2.03 per share; and

- an aggregate of 1,909,145 shares reserved for issuance under our 1999
Equity Incentive Plan, 1999 Non-Employee Directors' Stock Option Plan and
1999 Employee Stock Purchase Plan.

You should read this table in conjunction with "Management--Employee Benefit
Plans," "Description of Capital Stock" and Note 7 of Notes to Financial
Statements.

20
<PAGE>
DILUTION

Pro forma net tangible book value as of September 30, 1999 was $17.0
million, or $.74 per share, after giving effect to the conversion of all
outstanding shares of preferred stock into an aggregate of 13,618,837 shares of
common stock which will occur upon the closing of this offering. Pro forma net
tangible book value per share before the offering has been determined by
dividing pro forma net tangible book value, total tangible assets less total
liabilities by the pro forma number of shares of common stock outstanding at
September 30, 1999. After giving effect to the sale of the common stock by QED
in this offering at an assumed initial public offering price of $ per share,
and after deducting estimated underwriting discounts and commissions and
estimated expenses of the offering payable by QED, the pro forma net tangible
book value as of September 30, 1999, would have been $ million, or $ per
share. This represents an increase in pro forma net tangible book value per
share of $ to existing stockholders and dilution in pro forma net tangible
book value per share of $ to new investors who purchase shares in the
offering. The following table illustrates this per share dilution:

<TABLE>
<S> <C> <C>
Assumed initial public offering price per share......................... $
Pro forma net tangible book value per share as of September 30,
1999................................................................ $ .74
Increase in pro forma net tangible book value per share attributable
to new investors....................................................
---------
Pro forma net tangible book value per share after this offering.........
---------
Dilution per share to new investors..................................... $
---------
---------
</TABLE>

The following table sets forth, on the pro forma basis described above, as
of September 30, 1999 the difference between the number of shares of common
stock purchased from QED, the total consideration paid, and the average price
per share paid by the existing stockholders and by investors purchasing shares
in this offering, based upon an assumed initial public offering price of $
per share before deducting estimated underwriting discounts and commissions and
estimated offering expenses:

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
----------------------- ------------------------ PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
------------ --------- ------------- --------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders.............................. 22,894,992 % $ 41,508,175 % $ 1.81
New investors......................................
------------ --------- ------------- ---------
Totals........................................... 100.0% $ 100.0%
------------ --------- ------------- ---------
------------ --------- ------------- ---------
</TABLE>

The following table indicates the effect of sales by the selling stockholder
on existing and new stockholders:

<TABLE>
<CAPTION>
SHARES HELD ASSUMING
SHARES HELD BEFORE THE SHARES HELD AFTER THE EXERCISE OF OVER-
OFFERING OFFERING ALLOTMENT OPTIONS
----------------------- ----------------------- -----------------------
NUMBERS PERCENT NUMBER PERCENT NUMBER PERCENT
------------ --------- ------------ --------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Existing stockholders.................. 22,894,992 % % %
New investors.......................... % % %
------------ --------- ------------ --------- ------------ ---------
Total............................ % % %
------------ --------- ------------ --------- ------------ ---------
------------ --------- ------------ --------- ------------ ---------
</TABLE>

For a description of the stock owned by the selling stockholder, see
"Principal and Selling Stockholders."

The discussion and tables above exclude 4,652,200 shares of common stock
issuable upon exercise of outstanding stock options at a weighted average
exercise price of $1.78 per share and warrants to purchase 177,750 shares of
common stock at a weighted average exercise price of $2.03 per share. To the
extent that outstanding options are exercised in the future, investors in this
offering will experience further dilution.

21
<PAGE>
SELECTED FINANCIAL DATA

You should read the selected financial data set forth below in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and related notes included elsewhere in
this prospectus. The balance sheet data as of September 30, 1999 and the
statement of operations data for the three months ended September 30, 1999 and
1998 have been derived from the unaudited financial statements of QED included
elsewhere in this prospectus. The balance sheet data as of June 30, 1998 and
1999 and the statement of operations data for the years ended June 30, 1997,
1998 and 1999 have been derived from the audited financial statements of QED
included elsewhere in this prospectus. The balance sheet data as of June 30,
1995, 1996 and 1997 and the statement of operations data for the years ended
June 30, 1995 and 1996 have been derived from audited financial statements of
QED not included in this prospectus.

<TABLE>
<CAPTION>
THREE
MONTHS
ENDED
SEPTEMBER
YEAR ENDED JUNE 30, 30,
----------------------------------------------------- -----------
1995 1996 1997 1998 1999 1998
--------- --------- --------- --------- --------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Product revenue.................................... $ -- $ -- $ -- $ 1,428 $ 10,937 $ 1,383
Royalty revenue.................................... 2,363 2,712 8,850 5,052 4,425 1,239
Contract development revenue....................... 5,507 3,115 1,213 -- -- --
--------- --------- --------- --------- --------- -----------
Total revenue.................................... 7,870 5,827 10,063 6,480 15,362 2,622
--------- --------- --------- --------- --------- -----------
Cost of product revenue.............................. -- -- -- 3,714 8,513 1,845
--------- --------- --------- --------- --------- -----------
Gross profit......................................... 7,870 5,827 10,063 2,766 6,849 777
--------- --------- --------- --------- --------- -----------
Operating expenses:
Research and development........................... 5,605 6,733 9,421 9,552 12,381 2,933
Selling, general and administrative................ 820 1,135 2,123 2,979 5,436 1,147
Stock-based compensation........................... -- -- -- 150 777 132
--------- --------- --------- --------- --------- -----------
Total operating expenses......................... 6,425 7,868 11,544 12,681 18,594 4,212
--------- --------- --------- --------- --------- -----------
Income (loss) from operations........................ 1,445 (2,041) (1,481) (9,915) (11,745) (3,435)
Interest income (expense), net....................... 64 350 340 121 (24) 41
--------- --------- --------- --------- --------- -----------
Net income (loss) before taxes....................... 1,509 (1,691) (1,141) (9,794) (11,769) (3,394)
Provision (benefit) for income taxes................. 619 (650) 60 89 -- --
--------- --------- --------- --------- --------- -----------
Net income (loss).................................... $ 890 $ (1,041) $ (1,201) $ (9,883) $ (11,769) $ (3,394)
--------- --------- --------- --------- --------- -----------
--------- --------- --------- --------- --------- -----------
Basic income (loss) per share........................ $ .19 $ (.20) $ (.21) $ (1.53) $ (1.45) $ (.43)
--------- --------- --------- --------- --------- -----------
--------- --------- --------- --------- --------- -----------
Diluted income (loss) per share...................... $ .14 $ (.20) $ (.21) $ (1.53) $ (1.45) $ (.43)
--------- --------- --------- --------- --------- -----------
--------- --------- --------- --------- --------- -----------
Basic average common shares outstanding.............. 4,644 5,320 5,746 6,451 8,111 7,836
--------- --------- --------- --------- --------- -----------
--------- --------- --------- --------- --------- -----------
Diluted average common shares outstanding............ 6,444 5,320 5,746 6,451 8,111 7,836
--------- --------- --------- --------- --------- -----------
--------- --------- --------- --------- --------- -----------
Pro forma basic and diluted net loss per share....... $ (.63)
---------
---------
Shares used in pro forma per share calculation....... 18,717
---------
---------

1999
-----------

<S> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Product revenue.................................... $ 9,808
Royalty revenue.................................... 659
Contract development revenue....................... --
-----------
Total revenue.................................... 10,467
-----------
Cost of product revenue.............................. 6,414
-----------
Gross profit......................................... 4,053
-----------
Operating expenses:
Research and development........................... 3,141
Selling, general and administrative................ 2,125
Stock-based compensation........................... 654
-----------
Total operating expenses......................... 5,920
-----------
Income (loss) from operations........................ (1,867)
Interest income (expense), net....................... 113
-----------
Net income (loss) before taxes....................... (1,754)
Provision (benefit) for income taxes................. --
-----------
Net income (loss).................................... $ (1,754)
-----------
-----------
Basic income (loss) per share........................ $ (.20)
-----------
-----------
Diluted income (loss) per share...................... $ (.20)
-----------
-----------
Basic average common shares outstanding.............. 8,808
-----------
-----------
Diluted average common shares outstanding............ 8,808
-----------
-----------
Pro forma basic and diluted net loss per share....... $ (.08)
-----------
-----------
Shares used in pro forma per share calculation....... 22,427
-----------
-----------
</TABLE>

<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
----------------------------------------------------- -------------
1995 1996 1997 1998 1999 1999
--------- --------- --------- --------- --------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents, short-term investments and restricted
cash....................................................... $ 2,005 $ 8,215 $ 6,973 $ 9,756 $ 19,465 $ 13,346
Working capital surplus (deficit)............................ (498) 5,036 4,027 8,221 18,174 16,969
Total assets................................................. 5,791 12,243 10,657 15,856 27,879 28,970
Long-term liabilities, less current portion.................. -- -- -- 1,621 2,375 1,955
Total stockholders' equity................................... 2,061 7,156 5,995 8,509 17,606 16,971
</TABLE>

22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

YOU SHOULD READ THE FOLLOWING DISCUSSION OF OUR FINANCIAL CONDITION AND
RESULTS OF OPERATIONS WITH THE FINANCIAL STATEMENTS AND THE NOTES TO THE
FINANCIAL STATEMENTS INCLUDED ELSEWHERE IN THIS PROSPECTUS. THIS DISCUSSION AND
ANALYSIS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS, UNCERTAINTIES
AND ASSUMPTIONS. THE ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE ANTICIPATED
IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF MANY FACTORS, INCLUDING THOSE
SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS.

OVERVIEW

We are a leading developer of high-performance embedded microprocessors for
use in information-intensive products such as networking/communications
infrastructure equipment, business network equipment and consumer network
products. We began operations in 1991 as an intellectual property company,
developing and licensing microprocessor designs for third parties in exchange
for royalty payments. During the year ended June 30, 1997, we began
transitioning to a semiconductor company that designs, develops, markets and
sells its own high-performance microprocessors using the MIPS microprocessor
architecture. Volume shipments of our products began during the three months
ended March 31, 1998.

Continuous growth in our product revenue is dependent upon an increasing
number of customers incorporating our microprocessors into their end product
designs. During the year ended June 30, 1999, we achieved numerous design wins
with existing and new customers. There is generally a time lag ranging from 12
to 24 months between a design win and volume shipments of our products. Design
wins are only an expression of interest by potential customers and are not
binding contracts of any nature. We cannot assure you that design wins will
result in future revenue or that such revenue will be derived in a predictable
manner.

As a result of changes in our business model, we have not entered into any
third-party licensing agreements since June 1996 and currently have no plans to
do so. Consequently, royalty revenue relates primarily to products sold by our
licensees based on designs that are maturing and will become obsolete. We
believe that our royalty revenue will continue to decline both in absolute
dollars and as a percentage of total revenue.

We sell our products primarily to original equipment manufacturers and
recognize product revenue at the time of product shipment, net of accruals for
sales returns and allowances. We recognize royalty revenue when third parties
and related parties sell products we have designed.

We market and sell our products primarily through a direct sales force and
through sales representatives in the United States. Although we have sales
contracts with representatives in Europe and Asia, substantially all of our
product sales to date have been to U.S.-based original equipment manufacturers
and their manufacturing subcontractors. In the year ended June 30, 1999, product
sales to U.S.-based customers and their manufacturing subcontractors accounted
for 96% of our product revenue. Also in that year, sales to our four largest
customers, including sales to their respective manufacturing subcontractors,
accounted for 23%, 20%, 15% and 12% of total revenue.

Cost of revenue includes product costs, salaries and overhead costs
associated with employees engaged in activities related to the manufacturing of
our products. Research and development expense consists primarily of salaries
and related overhead costs associated with employees engaged in research, design
and development activities as well as the cost of mask sets, wafers and other
materials and related services used in the development process. Selling, general
and administrative expense consists of salaries, commissions paid to internal
and external sales representatives, third party certification and testing costs
and legal and accounting services. Stock-based compensation expense relates both
to stock-based employee and consultant compensation arrangements.
Employee-related stock-based compensation

23
<PAGE>
expense is based on the deemed fair value of our common stock and the exercise
price of options to purchase that stock on the date of grant and is being
recognized on an accelerated basis over the vesting periods of the related
options, usually four years. Consultant stock-based compensation expense is
based on the Black-Scholes option pricing model.

We currently use independent suppliers to manufacture, test and assemble all
of our products. This business model allows us to focus our resources on the
design, development and marketing of our products, rather than on building and
maintaining manufacturing facilities. Because we must often place orders for
products with our vendors prior to entering into sales contracts, we may be
exposed to the risks associated with holding obsolete or excess inventory.

Our gross margin is affected by the mix of products sold, the position of a
product in its life cycle and expenses in connection with the manufacturing
process. For example, newly-introduced products generally have higher average
selling prices, which typically decline over product life cycles due to
competitive pressures and technological advances.

From July 1, 1997 through September 30, 1999, we have incurred losses in
each quarter. Although product revenue increased significantly during the
quarter ended September 30, 1999, we still had not achieved profitability. If
our revenue does not increase, our operating results will be adversely affected,
and we may not be able to achieve profitability. At September 30, 1999, we had
an accumulated deficit of $26.1 million.

QUARTERLY RESULTS OF OPERATIONS

Because we have a limited operating history under our current business
model, we believe that year-to-year comparisons prior to 1999 are less
meaningful than an analysis of recent quarterly operating results. Accordingly,
we are providing a discussion and analysis of our results of operations for the
six quarters ended September 30, 1999.

The following tables present selected unaudited quarterly financial
information for each of the six quarters through September 30, 1999 and the
percentage of total revenue represented by each item in our statement of
operations. This information has been presented on the same basis as the audited
financial statements appearing elsewhere in this prospectus and, in the opinion
of management, reflects all adjustments necessary for a fair presentation of
this information under generally accepted accounting principles. These quarterly
results are not necessarily indicative of results for any future period.

24
<PAGE>

<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------
SEPT.
JUN. 30, SEPT. 30, DEC. 31, MAR. 31, JUN. 30, 30,
1998 1998 1998 1999 1999 1999
-------- --------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Product revenue.................. $ 1,100 $ 1,383 $ 1,427 $ 2,512 $ 5,615 $ 9,808
Royalty revenue.................. 462 507 255 246 380 50
Royalty revenue from related
parties........................ 871 732 823 837 645 609
-------- --------- -------- -------- -------- --------
Total revenue.................. 2,433 2,622 2,505 3,595 6,640 10,467

Cost of product revenue............ 2,114 1,845 1,275 1,951 3,442 6,414
-------- --------- -------- -------- -------- --------
Gross profit....................... 319 777 1,230 1,644 3,198 4,053
Operating expenses:
Research and development......... 3,008 2,933 3,404 2,917 3,127 3,141
Selling, general and
administrative................. 916 1,147 1,128 1,274 1,887 2,125
Stock-based compensation......... 125 132 148 238 259 654
-------- --------- -------- -------- -------- --------
Total operating expenses....... 4,049 4,212 4,680 4,429 5,273 5,920

Loss from operations............... (3,730) (3,435) (3,450) (2,785) (2,075) (1,867)
Interest income (expense), net..... 56 41 (21) (155) 111 113
-------- --------- -------- -------- -------- --------
Net loss before income taxes....... (3,674) (3,394) (3,471) (2,940) (1,964) (1,754)
Provision for income taxes......... 89 -- -- -- -- --
-------- --------- -------- -------- -------- --------
Net loss........................... $(3,763) $(3,394) $(3,471) $(2,940) $(1,964) $(1,754)
-------- --------- -------- -------- -------- --------
-------- --------- -------- -------- -------- --------
</TABLE>

<TABLE>
<CAPTION>
AS A PERCENTAGE OF TOTAL REVENUE
----------------------------------------------------------------
SEPT.
JUN. 30, SEPT. 30, DEC. 31, MAR. 31, JUN. 30, 30,
1998 1998 1998 1999 1999 1998
-------- --------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Product revenue.................. 45.2% 52.8% 57.0% 69.9% 84.6% 93.7%
Royalty revenue.................. 19.0 19.3 10.2 6.8 5.7 .5
Royalty revenue from related
parties........................ 35.8 27.9 32.8 23.3 9.7 5.8
-------- --------- -------- -------- -------- --------
Total revenue.................. 100.0 100.0 100.0 100.0 100.0 100.0

Cost of product revenue............ 86.9 70.4 50.9 54.3 51.8 61.3
-------- --------- -------- -------- -------- --------
Gross profit....................... 13.1 29.6 49.1 45.7 48.2 38.7
Operating expenses:
Research and development......... 123.6 111.9 135.9 81.1 47.2 30.0
Selling, general and
administrative................. 37.7 43.7 45.0 35.5 28.4 20.3
Stock-based compensation......... 5.1 5.0 5.9 6.6 3.9 6.2
-------- --------- -------- -------- -------- --------
Total operating expenses....... 166.4 160.6 186.8 123.2 79.5 56.5
-------- --------- -------- -------- -------- --------

Loss from operations............... (153.3) (131.0) (137.7) (77.5) (31.3) (17.8)
Interest income (expense), net..... 2.3 1.6 (.8) (4.3) 1.7 1.0
-------- --------- -------- -------- -------- --------
Net loss before income taxes....... (151.0) (129.4) (138.5) (81.8) (29.6) (16.8)
Provision for income taxes......... 3.7 -- -- -- -- --
-------- --------- -------- -------- -------- --------
Net loss........................... (154.7)% (129.4)% (138.5)% (81.8)% (29.6)% (16.8)%
-------- --------- -------- -------- -------- --------
-------- --------- -------- -------- -------- --------
</TABLE>

PRODUCT REVENUE. Product revenue has increased every quarter since we began
commercial volume shipments of products in the quarter ended March 31, 1998.
This is attributable to new product introductions and enhancements and an
increasing number of design wins for our products. In addition, the increase in
product revenue reflects growth in our overall number of customers, as well as
in the number of customers reaching volume production.

ROYALTY REVENUE AND ROYALTY REVENUE FROM RELATED PARTIES. Royalty revenue
has decreased as a percentage of total revenue as we continue to transition from
a license model to a product model. Royalty revenue is dependent upon shipments
of products by third parties and related third parties. We have no control over
the volume or timing of these shipments, which vary from quarter to quarter.
Therefore, royalty revenue for a particular quarter could fluctuate based on the
volume or timing of shipments.

25
<PAGE>

GROSS PROFIT. During the quarters ended June 30 and September 30, 1998,
when we first hired employees such as test engineers to support the
manufacturing process, the low volume of product sales negatively affected our
gross profit. Our product gross profit improved from the quarter ended December
31, 1998 as a result of our products maturing and sales volumes increasing. The
decrease in our gross profit during the quarter ended September 30, 1999 was due
to a decline in royalty revenue, changes in product mix, and higher than normal
yield losses. There are no direct costs associated with our royalty revenue,
which therefore has a high gross profit margin. During the quarter ended
September 30, 1999, a relatively high percentage of our revenue derived from the
sale of our lowest-margin consumer appliance products in conjunction with
Christmas production increases. Additionally, we experienced low wafer yields on
one of our high-margin products that further reduced our gross profit. We have
revised the mask set for this product, which we believe will increase wafer
yields in future quarters.

OPERATING EXPENSES

RESEARCH AND DEVELOPMENT. Research and development expenses have fluctuated
on a quarterly basis due to the timing of product development activities. Prior
to releasing new products, we incur one-time charges for test wafers and mask
set revisions. We have also incurred additional expenses related to hiring
contractors to assist in the development effort. In addition, the number of our
full-time employees has increased over the six quarters ended September 30,
1999, as have related overhead expenses. To maintain our competitiveness, we
expect to continue to increase our research and development expenses in absolute
dollars each fiscal year for the foreseeable future.

SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses have generally increased over the six quarters ended September 30, 1999
in response to the growth in product revenue and the overall growth of QED. The
number of our employees has increased on a quarterly basis during this period,
as have our related overhead expenses. In addition, some of the fluctuations in
quarterly selling, general and administrative expenses in the table above are
related to the timing of third party certification expenses, such as Microsoft
Windows CE certification. We expect selling, general and administrative expenses
to increase in absolute dollars as we add personnel, increase our sales and
marketing activities and incur additional costs related to being a public
company.

STOCK-BASED COMPENSATION. In connection with the granting of stock options
to our employees and consultants, we have recorded deferred stock-based
compensation totaling approximately $3.0 million through September 30, 1999, of
which $1.4 million remains to be amortized. This amount is included as a
component of stockholders' equity and is being amortized by charges to
operations over the vesting period of the related options, on an accelerated
basis. The amortization of the remaining deferred stock-based compensation at
September 30, 1999 will result in additional charges to operations through the
year ended June 30, 2003. Future compensation charges would be reduced if any
employee terminates employment prior to the expiration of the option vesting
periods. The amortization of stock-based compensation is classified as a
separate component of operating expenses in our statement of operations.

Our quarterly results of operations have fluctuated significantly in the
past and may continue to fluctuate in the future based on a number of factors,
not all of which are in our control. If revenue declines in a given quarter, our
operating results will be adversely affected because many of our expenses are
relatively fixed. As a result, we believe period-to-period comparisons are not
necessarily meaningful and should not be relied upon as indicative of future
results.

26
<PAGE>
RESULTS OF OPERATIONS

The following table sets forth certain operating data as a percentage of
total revenue for the periods indicated:

<TABLE>
<CAPTION>
THREE
MONTHS
ENDED
SEPTEMBER
YEAR ENDED JUNE 30, 30,
------------------------------- ---------
1997 1998 1999 1998
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
AS A PERCENTAGE OF TOTAL REVENUE:
Revenue:
Product revenue...................................................................... --% 22.0% 71.2% 52.8%
Royalty revenue...................................................................... 26.7 27.7 9.0 19.3
Royalty revenue from related parties................................................. 73.3 50.3 19.8 27.9
-------- --------- -------- ---------
Total revenue...................................................................... 100.0 100.0 100.0 100.0

Cost of product revenue................................................................ -- 57.3 55.4 70.4
-------- --------- -------- ---------
Gross profit....................................................................... 100.0 42.7 44.6 29.6

Operating expenses:
Research and development............................................................. 93.6 147.4 80.6 111.9
Selling, general and administrative.................................................. 21.1 46.0 35.4 43.7
Stock-based compensation............................................................. -- 2.3 5.1 5.0
-------- --------- -------- ---------
Total operating expenses........................................................... 114.7 195.7 121.1 160.6
-------- --------- -------- ---------
Loss from operations................................................................... (14.7) (153.0) (76.5) (131.0)

Interest income (expense), net......................................................... 3.4 1.9 (.2) 1.6
-------- --------- -------- ---------
Net loss before income taxes........................................................... (11.3) (151.1) (76.7) (129.4)
Provision for income taxes............................................................. .6 1.4 -- --
-------- --------- -------- ---------
Net loss............................................................................... (11.9)% (152.5)% (76.7)% (129.4)%
-------- --------- -------- ---------
-------- --------- -------- ---------

1999
--------
<S> <C>
AS A PERCENTAGE OF TOTAL REVENUE:
Revenue:
Product revenue...................................................................... 93.7%
Royalty revenue...................................................................... .5
Royalty revenue from related parties................................................. 5.8
--------
Total revenue...................................................................... 100.0
Cost of product revenue................................................................ 61.3
--------
Gross profit....................................................................... 38.7
Operating expenses:
Research and development............................................................. 30.0
Selling, general and administrative.................................................. 20.3
Stock-based compensation............................................................. 6.2
--------
Total operating expenses........................................................... 56.5
--------
Loss from operations................................................................... (17.8)
Interest income (expense), net......................................................... 1.0
--------
Net loss before income taxes........................................................... (16.8)
Provision for income taxes............................................................. --
--------
Net loss............................................................................... (16.8)%
--------
--------
</TABLE>

COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999

PRODUCT REVENUE. Product revenue increased from $1.4 million for the three
months ended September 30, 1998 to $9.8 million for the three months ended
September 30, 1999. The increase was due to a large increase in our number of
customers as well as an increase in the number of customers reaching volume
production and introduction in the second half of the year ended June 30, 1999
of our communications and networking products.

ROYALTY REVENUE AND ROYALTY REVENUE FROM RELATED PARTIES. Total royalty
revenue decreased from $1.2 million for the three months ended September 30,
1998 to $659,000 for the three months ended September 30, 1999. As previously
stated, we have not licensed any new integrated circuit designs and do not
intend to do so in the future.

GROSS PROFIT. Overall gross margin increased from 29.6% in the three months
ended September 30, 1998 to 38.7% in the three months ended September 30, 1999.
This increase largely reflects the absorption of fixed manufacturing costs over
higher revenues, which more than offset the decline in gross margin from royalty
revenue. Our September quarter is generally the quarter with the lowest product
gross margin due to product mix. In anticipation of the Christmas shopping
season, our consumer network products customers ramp up production and we sell a
larger volume of lower-margin products than during other times of the year. As
overall revenues grow, we expect our gross margin to remain more consistent from
quarter to quarter.

27
<PAGE>

RESEARCH AND DEVELOPMENT. Research and development expenses increased from
$2.9 million for the three months ended September 30, 1998 to $3.1 million for
the three months ended September 30, 1999, primarily due to an increase in the
number of engineers and consultants from 54 at September 30, 1998 to 57 at
September 30, 1999.

SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased from $1.1 million for the three months ended September 30,
1998 to $2.1 million for the three months ended September 30, 1999. This
increase is due to an increase in personnel and related expenses, as well as to
increases in commissions corresponding to the increases in our product revenue.
Over this period, headcount increased from 17 to 29 employees.

STOCK-BASED COMPENSATION. In connection with certain stock option grants,
we recorded total stock-based compensation expense in the three months ended
September 30, 1998 and 1999 of $132,000 and $654,000, respectively. The increase
was the result of an increase in the number of options granted to non-employee
consultants.

COMPARISON OF THE YEARS ENDED JUNE 30, 1997, 1998 AND 1999

PRODUCT REVENUE. We did not have any product revenue during the year ended
June 30, 1997. Product revenue increased from $1.4 million in the year ended
June 30, 1998 to $10.9 million in the year ended June 30, 1999. The increase in
product revenue in the year ended June 30, 1999 was due to the sale of products
based primarily upon design wins achieved during the year ended June 30, 1998.

ROYALTY REVENUE AND ROYALTY REVENUE FROM RELATED PARTIES. Combined royalty
revenue decreased from $10.1 million in the year ended June 30, 1997 to $5.1
million in the year ended June 30, 1998 to $4.4 million in the year ended June
30, 1999. In the year ended June 30, 1997, all of our total revenue was derived
from royalty agreements, including a one-time payment of $5.1 million from a
related party.

GROSS PROFIT. There were no product sales in the year ended June 30, 1997,
and, therefore, there were no direct product costs, resulting in an overall
gross margin of 100%. Overall gross margin increased from 42.7% in the year
ended June 30, 1998 to 44.6% in the year ended June 30, 1999. We incurred a
gross loss from product sales of $2.3 million in the year ended June 30, 1998
due to the low volumes of products initially introduced by us. Gross profit from
product sales improved to $2.4 million or 22.2% of product revenue in the year
ended June 30, 1999. This increase was due to the maturing of our products, an
increase in sales volume and the absorption of fixed costs, including overhead,
over a larger unit volume.

RESEARCH AND DEVELOPMENT. Research and development expenses increased from
$9.4 million in the year ended June 30, 1997 to $9.6 million in the year ended
June 30, 1998 and to $12.4 million in the year ended June 30, 1999. The majority
of the increase in spending on research and development during these periods
reflects the increase in hiring of engineers and consultants to develop new
microprocessor products, as well as to enhance the design of existing products.
From the year ended June 30, 1997 to the year ended June 30, 1998, spending on
salaries and consultants increased by $1.2 million, or 84%, and from the year
ended June 30, 1998 to the year ended June 30, 1999, this spending increased by
$1.9 million, or 85%. The increase also reflects our increasing investment in
hardware and software design tools used to develop and test new products.
Additionally, the cost of materials and related services grew significantly over
these periods.

SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased from $2.1 million in the year ended June 30, 1997 to $3.0
million in the year ended June 30, 1998 and to $5.4 million in the year ended
June 30, 1999. From the year ended June 30, 1997 to the year ended June 30,
1998, $390,000, or 30% of the increase was due to an increase in personnel and
related expenses. From the year ended June 30, 1998 to the year ended June 30,
1999, $1.4 million, or 53% of the increase was due to an increase in personnel
and related expenses. Additionally, over this period, commissions increased

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corresponding to the increase in product revenue, and marketing expenses,
professional services fees and occupancy costs increased due to our overall
growth.

STOCK-BASED COMPENSATION. We recorded deferred stock-based compensation
costs in the years ended June 30, 1998 and 1999 of $1.0 million and $1.4
million, in connection with certain stock option grants made during these
periods. This increase was primarily the result of increases in the number of
options granted due to the increased hiring of employees and an increase in the
utilization of the services of consultants. We recognized $150,000 and $777,000
of stock-based compensation expense in the years ended June 30, 1998 and 1999.

INTEREST INCOME (EXPENSE), NET. Interest income decreased from $340,000 in
the year ended June 30, 1997 to $325,000 in the year ended June 30, 1998, and
then increased to $472,000 in the year ended June 30, 1999. The fluctuations in
interest income resulted from changes in our average cash and investment
balances. In March 1999, we raised approximately $20.0 million from the sale of
our Series D preferred and common stock. We did not have any interest expense in
the year ended June 30, 1997. Interest expense increased from $204,000 in the
year ended June 30, 1998 to $496,000 in the year ended June 30, 1999. Interest
payments are related to our equipment lease lines and borrowings.

INCOME TAXES

Federal and state income taxes were minimal during the years ended June 30,
1997, 1998 and 1999 as a result of our net operating losses. As of June 30,
1999, we had available federal net operating loss carryforwards of approximately
$18.0 million and state net operating loss carryforwards of approximately $10.0
million. We also had research and development tax credit carryforwards of
approximately $1.0 million. The net operating loss and credit carryforwards will
expire at various times through 2019. As of June 30, 1999, we had deferred tax
assets of approximately $9.5 million, for which no benefit has been recorded in
our financial statements, and which consist primarily of net operating loss and
research and development tax credit carryforwards. This deferred tax asset will
be recognized in future periods as any taxable income is realized and consistent
profits are reported.

BACKLOG

At September 30, 1998, our backlog was $2.7 million compared to $9.5 million
at September 30, 1999. Our backlog consists of product orders for which a
customer purchase order has been received and accepted and which is scheduled
for shipment within 12 months. Orders that are scheduled for shipment beyond the
12-month window are not included in backlog until they fall within the 12-month
window. Orders are subject to rescheduling or cancellation by the customer,
usually without penalty. Because of possible changes in product delivery
schedules and cancellation of product orders and because our sales will
sometimes reflect orders shipped in the same quarter that they are received, our
backlog at any particular date is not necessarily indicative of actual sales for
any succeeding period.

LIQUIDITY AND CAPITAL RESOURCES

Since inception, we have financed our operations through a combination of
sales of equity securities,
cash generated by operations during our early years, and borrowings. As of
September 30, 1999, we had $11.3 million in cash, cash equivalents and
short-term investments and $2.0 million of restricted cash. Net cash used by
operating activities during the years ended June 30, 1997, 1998 and 1999 and the
three months ended September 30, 1999 was $96,000, $10.9 million, $11.0 million
and $5.8 million. During these periods, cash used by operating activities
consisted primarily of cash utilized to fund operating losses and for working
capital. During the year ended June 30, 1999 and the three months ended
September 30, 1999, the items that significantly impacted cash balances were
accounts receivable and inventories, both of which increased during the year as
the volume of product sales increased.

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<PAGE>

Net cash provided by (used in) investing activities for the years ended June
30, 1997, 1998 and 1999 and the three months ended September 30, 1999 was $2.0
million, $(76,000), $(18.5) million and $4.8 million. Net cash used in investing
activities was related to the acquisition of property and equipment and the
purchase of short-term investments. Capital expenditures in the years ended June
30, 1997, 1998 and 1999 and the three months ended September 30, 1999 were
$936,000, $76,000, $493,000 and $424,000. Additionally, equipment acquired under
capital lease arrangements was $825,000 in the year ended June 30, 1998 and
$367,000 in the year ended June 30, 1999. Overall capital spending during these
periods was the result of hiring additional employees and upgrading our design
tools. This transition required us to increase our investment in hardware
infrastructure, as well as in software tools, furniture and fixtures. As of June
30, 1999, we had no material outstanding commitments to purchase or lease
capital equipment. However, we expect to continue investing in software and
hardware design tools in future periods and do not expect capital spending to
decline in absolute dollars in any future period.

Net cash provided by (used in) financing activities in the years ended June
30, 1997, 1998 and 1999 and the three months ended September 30, 1999 was
$(210,000), $13.8 million, $21.2 million and $84,000, respectively. The net cash
provided by financing activities in the years ended June 30, 1998 and 1999
related to the sale of shares of our preferred stock. Net cash provided by
financing activities also related to proceeds from the issuance of common stock
and proceeds from borrowings. Net cash used in financing activities related to
principal payments under capital leases and repayment of borrowings.

In January 1999, we obtained a $6.0 million line of credit expiring on
December 31, 2000. Borrowings under this line of credit currently bear interest
at an annual rate of 8.5%. This line of credit is secured by substantially all
of our tangible assets and contains financial and other covenants that arise
after more than $2.0 million has been drawn down. As of September 30, 1999, $1.9
million was outstanding under this line.

We believe that cash and cash equivalents, cash generated from operations,
if any, and the net proceeds from this offering will be sufficient to satisfy
our working capital requirements for the next 18 months. After that time, we may
require additional funds for working capital and operating expenses or for other
purposes. Our future operating expenses and capital requirements are difficult
to predict with accuracy. We believe that success in our industry requires
substantial capital in order to maintain the flexibility to take advantage of
opportunities as they may arise. Therefore, we may, from time to time, invest in
or acquire complementary businesses, products or technologies. We may effect
additional equity or debt financing to fund such activities or to satisfy our
future capital requirements. The sale of additional equity or convertible debt
could result in additional dilution to our stockholders.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We do not use derivative financial instruments in our investment portfolio.
We only invest in instruments that meet high credit and quality standards, as
specified in our investment policy guidelines. As of June 30, 1999, we had an
investment portfolio of money market funds, commercial securities and U.S.
Government bonds including those classified as short-term investments and
restricted cash of $18.8 million. These instruments, like all fixed income
instruments, are subject to interest rate risk. The fixed income portfolio will
fall in value if there were an increase in interest rates. If market interest
rates were to increase immediately and uniformly by 10% from levels as of June
30, 1999, the decline of the fair value of the fixed income portfolio would not
be material. All of our revenue is denominated in U.S. dollars, and therefore,
we do not currently engage in any currency hedging transactions.

YEAR 2000 COMPUTER SYSTEM COMPLIANCE

BACKGROUND OF YEAR 2000 ISSUES. The Year 2000 Issue is the result of
computer programs being written using two digits rather than four to define the
applicable year. Any of our computer programs that have date-sensitive software
may recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing the disruptions of
operations, including

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among other things, a temporary inability to process transactions, send invoices
or engage in similar normal business activities.

We are in the process of addressing internal and external year 2000 issues
and have established a task force with this responsibility. Although we believe
that our products and internal systems are currently Year 2000 compliant, we
cannot guarantee that our suppliers, vendors or other enterprises with which we
interact are or will be Year 2000 compliant. Failure of these enterprises to
achieve Year 2000 compliance could have a material adverse effect on our
business.

OUR EXTERNAL VENDORS. We have identified and contacted our significant
suppliers and service providers to determine the extent to which our business is
vulnerable to those third parties' failure to remediate their own Year 2000
issues. All of our significant suppliers and service providers have indicated
that they are or are expecting to achieve Year 2000 compliance by December 31,
1999. We are continuing to monitor the progress of third parties critical to our
business. We cannot be certain that the representations of these third parties
are accurate or that they will reach Year 2000 compliance in a timely manner. If
we determine that the progress of specific suppliers and service providers
toward Year 2000 compliance is insufficient, we intend to change to other
suppliers and service providers that have demonstrated Year 2000 readiness.
However, we may not find alternative suppliers or service providers.

OUR INTERNAL BUSINESS SOFTWARE. During the year ended June 30, 1999, we
installed an internal business software package. The developer of this system
has represented to us that the system is Year 2000 compliant. As a result, we
believe our internal financial systems are Year 2000 compliant.

OUR INTERNAL NON-FINANCIAL SOFTWARE AND EQUIPMENT. We have taken an
inventory of all our non-financial software and equipment that may be affected
by the Year 2000 and have identified the non-financial software and equipment
that is critical to our operations. We believe that our non-financial software
and equipment will be Year 2000 compliant by the end of 1999. If we are unable
to achieve Year 2000 compliance for our major non-financial systems and
equipment, the year 2000 could have a material impact on our operations.

COSTS OF ADDRESSING YEAR 2000 COMPLIANCE. We have incurred less than
$100,000 in costs in our Year 2000 compliance efforts, excluding costs
associated with our adoption of a Year 2000 compliant enterprise software
system. Based on our preliminary evaluations, we do not believe that in the
future we will incur significant expenses or be required to invest heavily in
additional computer system improvements to be Year 2000 compliant. However,
significant uncertainty exists concerning the potential costs and effects
associated with Year 2000 compliance. Any Year 2000 compliance problem
experienced by us or our customers could decrease demand for our products, which
could harm our business.

CONTINGENCY PLANNING. We are developing contingency plans for critical
individual information technology systems and non-information technology systems
to address year 2000 risks not fully resolved by our Year 2000 program. We
anticipate that these plans will be completed in October 1999. We believe that
the Year 2000 risk will not present significant operational problems for us.

RECENT LEGISLATION. Legislation was recently passed by Congress that
purports to limit liability for failure to be Year 2000 compliant. We cannot
assure you that this legislation will limit our liability.

WORST CASE SCENARIO. We believe that the likely worst case scenario for our
business would be if IBM and TSMC, our semiconductor manufacturers, have
inadequate Year 2000 programs, and we are unable to obtain products from them on
a timely basis. This would cause us to miss shipments, and our revenue and
results of operations would be materially impacted.

If our Year 2000 program or any third-party Year 2000 programs are
inadequate, and our business operations are materially impacted, we could incur
additional costs to recover any lost information and replace affected systems.
We believe that our systems could be replaced without significant difficulty, as
replacement systems are generally available on commercially reasonable terms. We
also have regular data back-up procedures that would assist in our recovery of
lost business information.

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BUSINESS

OVERVIEW

QED is a leading developer of high-performance embedded microprocessors that
perform information processing in networking/communications infrastructure
equipment, business network equipment and consumer network products. We believe
that we have one of the industry's most experienced microprocessor development
teams. While we focus our development efforts on the high-performance segments
of the embedded microprocessor market, we also offer our mature products to the
more price sensitive segments of our target markets. We sell our products
directly to systems manufacturers, and we outsource the fabrication of our
microprocessors to third parties. We have customer relationships with market
leaders in each of our target markets, including Cisco Systems, Hewlett-Packard
and WebTV.

INDUSTRY BACKGROUND

EMBEDDED MICROPROCESSORS

Microprocessors are generally thought of as the integrated circuits that
perform sophisticated computations and control the flow of information within
desktop computers. The majority of microprocessors, however, are hidden, or
embedded, in products and systems where they perform specialized tasks. A
microprocessor is typically classified by the number of fundamental elements of
data, or bits, that it can process at one time. Low-performance 4- and 8-bit
embedded microprocessors perform simple tasks in products such as microwave
ovens and thermostats. Complex tasks, such as delivering e-mail messages over
the Internet or presenting web pages clearly on televisions and printers,
require a high level of computing power, which can only be delivered by
high-performance 32- and 64-bit embedded microprocessors.

High-performance embedded microprocessors are configured in a system much
like a small, general-purpose computer and must support advanced software
operating systems and high-level programming languages to enable complex
application software. Uses for high-performance embedded microprocessors include
networking/communications infrastructure equipment, such as routers and
switches; business network equipment, such as laser printers, network computers
and data storage systems; and consumer network products, such as
Internet-enabled televisions and cable modems.

While the desktop microprocessor market is dominated by Intel Corporation's
"x86" complex instruction set computing, or CISC, architecture, several
microprocessor architectures have emerged within the high-performance embedded
microprocessor market. A microprocessor's architecture refers to its fundamental
operations and organization, which enable it to perform computations and to
control the flow of information. The microprocessors in this market achieve high
performance and silicon-area efficiency because they are based on reduced
instruction set computing, or RISC, architectures. The leading RISC architecture
is known as MIPS. Microprocessors based on the MIPS architecture standard have
been developed for applications ranging from game consoles such as the Sony
Playstation, to routers and switches, to multiprocessor enterprise servers. The
MIPS architecture is widely supported by independent suppliers of software and
hardware.

MARKET OPPORTUNITY FOR HIGH-PERFORMANCE EMBEDDED MICROPROCESSORS

Dataquest, Inc. estimates that worldwide unit shipments of high-performance
32-bit and 64-bit embedded microprocessors will grow from approximately 106
million in 1998 to approximately 228 million in 2002. Demand from numerous
applications for the rapid transfer and processing of digital information and
the increasing need for more complex control functions is driving the growth in
shipments of high-performance 64-bit embedded microprocessors.

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One of the most powerful drivers of the need for increased embedded
microprocessor performance has been the rapid development of intranets and the
Internet, as businesses and consumers seek immediate access to more information
and entertainment in an increasingly networked society. International Data
Corporation, or IDC, estimates that between 1995 and 1998 the number of devices
worldwide with access to the Internet grew from approximately 14 million to 120
million and estimates that there will be approximately 515 million by the end of
2002. Similarly, the amount of content available on the Internet is increasing
rapidly. IDC estimates that the number of web pages worldwide grew from
approximately 18 million in 1995 to approximately 829 million in 1998, and will
increase to approximately 7.7 billion by 2002.

In addition to this increased volume of network traffic, the emergence of
multimedia and streaming audio and video content and transaction-intensive
e-commerce web sites have strained the ability of networks to process and
transmit information quickly. These factors have created the need for increased
network capacity, or bandwidth. Advances in communication technology are helping
to alleviate bandwidth constraints by providing higher transmission capacity. To
accommodate this increased bandwidth, intelligent devices within a network's
infrastructure, such as routers and switches, as well as those used to access
information at a network's interface, such as network printers and cable modems,
are increasingly required to quickly process greater amounts of more complex
information. All of these devices therefore need high levels of performance from
the microprocessors embedded within them.

As the bandwidth and information transmission capabilities of networks have
increased, so have users' expectations for their performance. Network service
providers have responded by broadening their product offerings, allowing users
to select between varied levels of information transmission service. To provide
different levels of service, networking equipment vendors are seeking ways to
cost-effectively incorporate more processing capability within their systems. In
addition, new data communication standards and protocols are frequently being
introduced into network infrastructures to support their expanded capabilities.
Hence, networks are now required to support many standards and protocols
simultaneously. This increase in complexity requires higher performance as well
as increased flexibility from the embedded microprocessors within the devices
that manage networks.

As the popularity of the Internet has increased, more powerful and
sophisticated products have emerged to provide additional connections to
Internet users. These devices require new generations of high-performance
microprocessors that must also meet strict power consumption and heat
dissipation requirements as well as the cost constraints of systems
manufacturers.

With growing demands on network capabilities and increasing business and
consumer expectations for performance, new generations of high-performance
embedded microprocessors are required to enable cost-effective deployment of
advanced communications products, both within network infrastructures and at
network interfaces.

THE QED ADVANTAGE

QED is a leading developer of 64-bit embedded microprocessors for use in
information-intensive products requiring the highest level of performance. Our
embedded microprocessors use a RISC architecture designed to achieve high system
performance cost-effectively. Our products are based on the MIPS architecture
standard and include proprietary features designed specifically for our target
markets. We believe that our newest generation product, the RM7000, is the
highest-performance 64-bit embedded microprocessor in commercial production.

We believe that we have one of the foremost MIPS architecture design teams.
From 1988 to 1991, Thomas Riordan, our Chief Executive Officer and a co-founder
of QED, was the Director of Research and Development at MIPS Computer Systems,
Inc., now known as MIPS Technologies, Inc., where he helped develop the original
MIPS architecture. At MIPS Computer Systems, Mr. Riordan was the principal logic
designer of the first commercial RISC-based embedded microprocessor. He also led
the development of

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the product that established the current 64-bit MIPS architecture standard.
Raymond Kunita, our Chief Operating Officer, Vice President of Engineering and
co-founder, as well as seven of our engineers, were also employees of MIPS
Computer Systems and contributed to the development of the MIPS architecture
standard.

Each generation of our products is built around successively more advanced
microprocessor cores that are designed to remain compatible with previous
generations. This approach enables us to design a range of products including
our high-performance standard products, our market-specific derivative products
and our microprocessors with integrated components. We believe that our embedded
microprocessors offer several distinct advantages to our customers over
competing products:

HIGH PERFORMANCE. Our products are designed to deliver high levels of
processing performance to all of our target applications. This processing
performance is primarily attributable to a combination of four key features:

- 64-bit processing, which gives our embedded microprocessors up to twice
the peak data transfer rate of competing 32-bit architectures;

- superscalar technology, which enables microprocessors to issue and execute
two or more instructions simultaneously;

- two-level cache memory, which allows for substantially more memory to be
integrated with the microprocessor core, minimizing the delay associated
with moving data between the microprocessor and external memory without
slowing the microprocessor's speed; and

- multi-stage pipeline technology, which allows the microprocessor to
process several different stages of instructions simultaneously.

REDUCED TIME TO MARKET. Our microprocessors are compatible with the most
robust operating systems and powerful software programming languages. By using
the MIPS architecture standard for our products, we leverage industry support of
a wide range of operating systems, such as WindowsCE, pSOS, QNX, Linux and
support from third-party proprietary tool vendors. These attributes enable
original equipment manufacturers to incorporate our products into their systems
more quickly and easily. In addition, we design our products to maintain a high
level of hardware and software compatibility between product generations, which
we believe enables our customers to easily upgrade to our new products.

PRICE-COMPETITIVENESS. All of our products are fabricated by established
manufacturing facilities using industry-standard semiconductor fabrication
processes. Our proprietary design methodology allows our designs to be
efficiently moved from one manufacturer to another and from one fabrication
process to another. By using leading fabrication processes, we believe we can
take advantage of new processes that allow microprocessors to be made smaller
and, therefore, at lower cost. We believe this approach also enables us to move
our products quickly from prototype into production, which can reduce
development costs. Finally, implementation of higher-density fabrication
processes allows us to integrate additional features into our products, which
reduces total solution costs for our customers.

THE QED STRATEGY

Our objective is to be the leading developer and supplier of
high-performance embedded microprocessors for information-intensive products.
Key elements of our strategy to achieve this objective include:

MAINTAINING TECHNICAL LEADERSHIP IN HIGH-PERFORMANCE EMBEDDED MICROPROCESSOR
MARKETS. We believe that maintaining a technical leadership position in
developing high-performance microprocessors is critical to our success. Our
product development efforts are focused on the high-performance segments of
information-intensive markets for embedded microprocessors. We believe that our
three target markets,

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networking/communications infrastructure equipment, business network equipment
and consumer network products, will continue to experience significant growth
and to demand increased microprocessor performance and functionality. We intend
to maintain a technical leadership position by continuing to invest
substantially in research and development resources.

LEVERAGING PERFORMANCE LEADERSHIP TO OFFER A BROAD RANGE OF
PRICE/PERFORMANCE OPTIONS. We believe that technological advances gradually
reduce the cost of a given product over time. Therefore, we seek to take
advantage of this technological evolution by focusing our design efforts on the
segments of our target markets that demand the highest performance. As our
products mature and their manufacturing costs decline, we believe that we will
be able to migrate our products to more price-sensitive segments within our
target markets. In this way, we focus our resources on developing the
highest-performance embedded microprocessors while offering products with a
broad range of price/performance options targeted at a wide variety of
applications.

CAPITALIZING ON RELATIONSHIPS WITH MARKET LEADERS TO DEFINE STANDARD
PRODUCTS. We have customer relationships with technology and market leaders in
each of our target markets, including Cisco Systems, Hewlett-Packard and WebTV.
We work closely with market leaders to define standard products and features
that meet their current and anticipated product needs. We believe that these
collaborations will enable us to remain on the leading edge of new technologies
and market trends for high-performance embedded microprocessors.

CONTINUING TO ESTABLISH MIPS ARCHITECTURE SUPPORT RELATIONSHIPS. We have
relationships with key industry participants such as vendors of companion
integrated circuits, operating systems and third-party support tools. Through
these relationships we seek to offer more complete product solutions to our
customers by offering our products with those of complementary vendors. We
intend to continue to establish and maintain these relationships to help ensure
that our products achieve widespread industry adoption.

LEVERAGING FABLESS SEMICONDUCTOR MODEL. We use third parties to manufacture
our microprocessors. This "fabless" model allows us to focus resources on our
design competencies, while reducing capital and operating infrastructure
requirements. We believe this approach reduces our product development risks,
and the time to market of our new products, relative to semiconductor companies
with manufacturing facilities. By using third-party manufacturers, we can
leverage the research and development efforts of leading manufacturers and
maintain flexibility in choosing those suppliers that meet our technology or
cost requirements.

USING ADVANCED STANDARD TECHNOLOGIES. We seek to use the most advanced
standard semiconductor fabrication, testing and packaging technologies. By using
these technologies, we believe that we can reduce our time to market,
development risk and costs, help ensure product supply and improve the
reliability of our products. Our use of standard technologies also provides
flexibility, allowing us to transfer our manufacturing operations to other
suppliers or facilities more quickly and reliably.

MARKETS AND APPLICATIONS

Each of the three markets into which we sell our products is an
information-intensive market which requires high bandwidth and increasing
computational performance.

NETWORKING/COMMUNICATIONS INFRASTRUCTURE EQUIPMENT

As greater numbers of devices access intranets and the Internet and the
speed of those devices increases, the capacity of network infrastructures must
grow to accommodate the increased traffic. In addition, network content is
increasingly data-intensive. Although primarily text and graphics-based today,

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information and services available on networks, particularly the Internet, are
increasingly incorporating video and audio. To meet this bandwidth demand:

- Internet backbone speeds are being upgraded to higher data rates;

- high speed Internet access is being deployed to the home through
technologies such as xDSL and ISDN;

- networks are being upgraded to higher-speed communications protocols; and

- data and voice communications are being unified in the same network
infrastructure.

Accordingly, we design our newest microprocessors to meet the high-performance
needs of the most complex network infrastructure equipment. Our products are
designed into the following network infrastructure applications:

- ROUTERS. Routers and switch routers direct data and information packets to
the correct destinations within a network. High-performance routers are
equipped with multiple embedded microprocessors to manage different
functions such as routing packets of information, translating between
communication protocols and adding higher levels of transmission services
to a network.

- LAN SWITCHES. Local area network, or LAN, switches are intranet network
devices that provide a direct connection from the sender of information to
the receiver within an intranet. Embedded microprocessors are used to
manage information flow through LAN switches. Multiple embedded
microprocessors may be used in each LAN switch to increase the data
movement capabilities of the switch.

- ACCESS SERVERS. The nearest server to a network user is the access server,
which uses embedded microprocessors to combine discrete data streams, such
as information from individual modem lines, into fewer streams of
high-speed data.

- NETWORK INTERFACE CARDS. Network interface cards provide the physical
connection between networking equipment and a user's access device.
Network interface cards are used at all levels in a network infrastructure
from the access server connecting modem, to xDSL or ISDN connections, to
high speed routers. Performance increases within network interface cards
have been driven by the requirement to make more physical connections in a
limited space. Consequently, network interface cards are incorporating
high-performance embedded microprocessors, with at least one
microprocessor embedded into each.

- STORAGE AREA NETWORKS. The growth in the amount of critical information
processed and stored by businesses has increased the need for more
sophisticated data storage systems. Storage area networks have been
developed to address this need by distributing data storage over a network
of storage devices. The complexity of managing information within storage
area networks requires high levels of embedded microprocessor performance.

BUSINESS NETWORK EQUIPMENT

Businesses are increasingly deploying LANs as their central communications
infrastructure to perform a range of important tasks such as sending documents,
accessing databases and other enterprise-wide information, connecting with
vendors and suppliers on-line and connecting to larger networks, including the
Internet. Highly sophisticated business network equipment has been developed to
manage these tasks at the network interface. Designers of business network
equipment generally require moderate to high processing performance, but must
balance this need against the power consumption and cost of the microprocessor
embedded into their products. Products within this market include:

- PRINTERS. We believe that printers will continue to require additional
embedded microprocessor performance to manage increases in print speed,
image complexity and the addition of color.

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Multifunction printers can combine the functions of copiers, scanners, fax
equipment and printers in one device. All of these devices incorporate
embedded microprocessors for processing the increasingly sophisticated
data comprising color images, web sites and other network content.

- NETWORK COMPUTERS. The primary purpose of a network computer is to serve
as an input/output device for accessing information stored on a network.
Network computers are designed to be less expensive than traditional
desktop computers. The processing capability of a network computer is
optimized by an embedded microprocessor's ability to move and format data
for presentation to the user.

- DISK ARRAYS. Disk arrays have been developed in response to the increasing
volume of data being stored by businesses. They consist of multiple hard
drives configured to operate like a single, large disk drive. Servers can
read data from drive arrays faster and achieve greater protection from
data loss relative to traditional hard drives. Microprocessors are used in
disk arrays to control the flow of data among their component hard drives
and the server.

CONSUMER NETWORK PRODUCTS

A new class of network products has been developed to provide consumers with
additional means of accessing the Internet beyond desktop computers. Because
these are retail products, most suppliers to this market are sensitive to the
price of the microprocessors that they incorporate into their products. They are
also concerned with the power consumption and heat dissipation of the
microprocessors because the devices into which they are installed are often
relatively small. There are two principal categories of products in this market:

- CONSUMER INTERNET APPLIANCES. Products such as set-top boxes provide an
alternative way to access the Internet through services such as WebTV and
are designed to be significantly easier to install and operate and less
expensive than a PC. These devices may offer a range of services such as
digital recording and customization for each user. The challenge in this
market is to offer full-speed multimedia performance at competitive
prices. We believe that as expectations for the performance of Internet
appliances rise and as multimedia information on the Internet becomes more
sophisticated, the need for increased performance provides a significant
opportunity for our products.

- DIGITAL NETWORK TRANSMISSION PRODUCTS. In order to access new digital data
services, two classes of products, the cable modem and the "x" digital
subscriber line, or xDSL, modem, have been developed. Cable modem and xDSL
modem technology offer significantly higher network speeds than analog
modems, therefore requiring higher microprocessor performance to manage
information flow. Some cable television operators are upgrading their
networks to enable two-way communications through the use of a cable
modem. High speed access services such as Excite@Home have also emerged to
provide network infrastructure and services to cable modem customers. In
addition, xDSL modem technology has been developed to provide high speed
digital communications through existing telephone lines to the home. This
service may be offered in areas where the local telephone switch network
has been upgraded to offer digital service.

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PRODUCTS

The following chart summarizes our line of microprocessor products:

<TABLE>
<CAPTION>
PRODUCT SYSTEM
PRODUCT INTRODUCTION PERFORMANCE MEMORY INTERFACE TARGET APPLICATION
<C> <C> <C> <C> <C> <S>
RM5230 Q3 1997 175MHz 16K/16K 32-bit Consumer
RM5260 Q3 1997 175MHz 16K/16K 64-bit Business
RM5270 Q4 1997 200MHz 16K/16K 64-bit Networking
RM5231 Q3 1998 250MHz 32K/32K 32-bit Business and Consumer
RM5261 Q3 1998 266MHz 32K/32K 64-bit Business
RM5271 Q3 1998 300MHz 32K/32K 64-bit Networking and Business
RM7000 Q4 1998 266MHz 16K/16K/256K 64-bit Networking and Business
</TABLE>

In the above table, Product Introduction refers to the calendar quarter in
which the product was first commercially shipped. Performance indicates maximum
available execution speed. Memory indicates the amount of memory contained in
the instruction cache and data cache, and for the RM7000, in the level-two
cache. System Interface indicates the width of the microprocessor's path to
external input/output and memory devices.

QED PRODUCTS

In 1997, we introduced the first microprocessors supplied directly by QED,
which we named RISCMark-TM-. As of August 31, 1999, we have introduced three
generations of our products, all of which are in production:

RM5230, RM5260 AND RM5270. Introduced in 1997, this series of products is
based on the same microprocessor core. The RM5230 is currently the largest
volume product we ship and is primarily used by manufacturers of consumer
Internet appliances. The RM5260 is a higher-performance, 64-bit version of the
RM5230. The 64-bit RM5270, the highest-performance product in the series,
supports an external secondary-cache memory interface for more demanding
computing applications.

RM5231, RM5261 AND RM5271. This series of products is an upgrade to the
RM52x0 series and provides higher execution speeds and additional performance
features. The RM52x1 is currently supplied in processing speeds up to 300MHz.
These devices are designed to be compatible with the prior generation RM52x0.

RM7000. The RM7000 is the highest-performance product in our product line,
and we believe it is the highest-performance 64-bit embedded microprocessor in
commercial production. We developed the RM7000 to be the microprocessor core for
our new generation of products. This product incorporates significant design and
performance enhancements while maintaining compatibility with prior product
generations. The RM7000 is incorporated primarily into networking infrastructure
products, such as routers and switches.

LICENSED PRODUCTS. Our initial business model was to develop and license
proprietary designs based on a microprocessor architecture developed by MIPS
Computer Systems. Under this business model, we developed five microprocessors
under contract with various manufacturers. Since beginning the transition to our
new business model in June 1996, we have not entered into any new third-party
licensing agreements and currently have no plans to do so.

38
<PAGE>
TECHNOLOGY

Our design efforts are focused on creating high-performance embedded
microprocessors based on the MIPS architecture.

PROPRIETARY MIPS ARCHITECTURE DESIGNS

Our microprocessor designs based on the MIPS architecture use proprietary
logic and circuit design techniques to achieve high performance:

LOGIC DESIGN. Our microprocessors use proprietary techniques similar to
those used in high-performance workstation and mainframe microprocessor designs,
including:

- superscalar, or parallel, instruction issue, which is a way to increase
processor performance by allowing multiple operations to occur
simultaneously;

- multistage pipelines, which are a way to allow operations to be broken
down into discrete steps that can then be overlapped;

- a two-level, integrated, cache memory hierarchy, which is a design that
allows instructions and data to be delivered to and processed by a
processor's operational units at an average rate substantially greater
than that achievable with single-level caches;

- flexible cache memory management that allows a processor's cache memory to
be optimized for a specific application; and

- dynamic power management that allows elements of the processor not used
for a particular operation to be shut down.

CIRCUIT DESIGN. Rather than using commercially available circuit libraries,
we have developed proprietary circuits that are designed for building
high-performance microprocessors. Commercially available circuits are generally
optimized for the development of specific purpose integrated circuits and are
usually a poor fit for high-performance designs. Our proprietary circuits that
increase speed and/or lower power consumption include:

- asynchronous circuits, which allow high-speed functional units of the
embedded microprocessor to be built in a small area on the integrated
circuit;

- charge/discharge circuits, which allow high-speed operation by minimizing
electrical inefficiencies;

- constant current source circuits, which high-speed performance for the
most critical operations; and

- reduced voltage swing circuits, which use low power for relatively
non-critical operations.

PROPRIETARY DESIGN AND VERIFICATION ENVIRONMENT

Our embedded microprocessor development environment uses a combination of
industry standard development tools augmented and integrated together by our
proprietary design tools. Some of our proprietary tools supplement the
capabilities of commercially available tools that are optimized for specific
purpose integrated circuit development. Examples of our proprietary tools
include:

- a MIPS architecture random-sequence generator/checker, which permits
billions of verification operations to be performed on our designs prior
to manufacture;

- an in-process design database consistency manager, which permits a full
design team to work on the same design simultaneously;

- a logic synthesizer, which offers more control to the designer than
commercially available synthesizers; and

39
<PAGE>
- semiconductor manufacturing process technology conversion programs, which
are designed to permit us to move our products efficiently from one
manufacturer or manufacturing process technology to another.

RESEARCH AND DEVELOPMENT

We have assembled a core team of experienced engineers averaging
approximately 13 years of microprocessor design experience. As of September 30,
1999, 29 of our 49 research and development employees had advanced degrees.

We have three design teams. One concentrates on new product development with
the objective of developing our next generation high performance microprocessor.
A second team works on integrating more functions with existing products. The
third team transfers products to new manufacturing technologies and modifies
existing products to adapt them to new applications. Because we rely upon third
parties to manufacture our products, we do not use research and development
resources on manufacturing process technology.

Our research and development expenses were $12.4 million for the year ended
June 30, 1999, $9.6 million for the year ended June 30, 1998, and $9.4 million
for the year ended June 30, 1997. These expenses consisted primarily of salaries
and related costs of employees engaged in ongoing research.

We are designing two new microprocessors for end markets requiring a balance
between price and performance. The RM7010 will be marketed as a lower-cost
version of the RM7000 for consumer Internet appliances. The RM5720 will
integrate industry-standard connections and is intended to lower the cost of a
high performance system by eliminating the need for an external input/output and
memory controller. It will be marketed to networking infrastructure and business
network equipment manufacturers.

CUSTOMERS

We have several key customers in each of our three target markets. Because
we leverage our technology across these markets, our products may be
incorporated into equipment that is sold in several markets. For example, our
products are used in WebTV's set top boxes, Echostar's satellite set top boxes
and Cisco Systems' network switching equipment. Based on our product revenue
after June 30, 1998, our 20 largest customers are:

<TABLE>
<S> <C>
Aeroflex Inc.
Assured Access
Cisco Systems
Cobalt Group Inc.
Cosine Communications
Echostar Communications Corporation
EFI Electronics Corporation
Extreme Networks, Inc.
Genicom Corporation
Hewlett-Packard Company
Lexmark International Group

Lucent Technologies Inc.
Midway Games, Inc.
Pairgain Technologies, Inc.
Plexus Corporation
Primary Image Visions Systems Ltd.
Silicon Graphics, Inc.
Thompson Consumer Electronics (a division of
Thompson Multimedia)
Transmedia Communications, Inc.
WebTV Networks, Inc.
</TABLE>

Historically, a small number of customers have accounted for a substantial
portion of our total revenue. Sales to WebTV, Integrated Device Technology, Inc.
(consisting only of royalty revenue), Cisco Systems and Echostar Communications,
including sales to their manufacturing subcontractors, accounted for
approximately 23%, 20%, 15% and 12%, of our total revenue for the year ended
June 30, 1999.

From January 1, 1998 through June 30, 1999, we achieved 112 design wins with
56 companies. Of these design wins, 38 are in production and 9 are considered
unlikely to go into production. We define a design win as a measurable
commitment from a customer to use our products. These measures include

40
<PAGE>
parts taken by the customer, a completed printed circuit board design or a
funded program that is targeted for production. A particular design win may not
result in significant product revenue to us.

SALES AND MARKETING

In North America, we sell our products through a direct sales force of five
people, with four based in our corporate headquarters in Santa Clara, California
and one based in a regional office in Research Triangle Park, North Carolina. We
also sell our products in North America through 12 sales representatives. We
sell our products in Europe through five sales representatives. We sell our
products in Korea through a sales representative, and we sell our products in
Japan through a distributor. Our sales effort is supported by a marketing staff
of four and four applications engineers who work directly with our customers on
technical issues.

MANUFACTURING

SEMICONDUCTOR FABRICATION. We use independent semiconductor manufacturers to
fabricate our microprocessors. By subcontracting our manufacturing, we focus our
resources on product design to eliminate the high cost of owning and operating a
semiconductor fabrication facility. This fabless business model also allows us
to take advantage of the research and development efforts of manufacturers,
permitting us to work with those manufacturers offering the most advanced
manufacturing processes and competitive prices.

Taiwan Semiconductor Manufacturing Corporation, or TSMC, at its
manufacturing plants in Taiwan and the United States, and IBM Corporation, at
its manufacturing plants in the states of Vermont and New York, have
manufactured all of our products to date. We currently use only these two
independent manufacturers, and few of our products have been manufactured at
both manufacturing companies at any given time. As a result, any inability of
TSMC or IBM to provide the necessary capacity or output could result in
significant production delays, which could seriously harm our business. In the
event either TSMC or IBM suffers any damage to their manufacturing facilities,
or in the event of any other disruption of manufacturing capacity, we may not be
able to qualify alternative manufacturing sources for our products in a timely
manner.

We have entered into a manufacturing agreement with IBM, which expires on
May 1, 2000 or upon completion of work orders after May 1, 2000. However, the
contract does not guarantee any level of production capacity or any particular
price. We operate with TSMC on a purchase order basis and do not have a
long-term agreement with TSMC.

Our designs are compatible with industry-standard manufacturing processes.
We believe this compatibility permits the use of multiple manufacturers,
mitigating the risk of using a single source for a product. Our products are
currently fabricated using .25 micron and .35 micron process technologies. We
continuously evaluate the benefits, on a product by product basis, of migrating
to a smaller geometry process technology in order to reduce costs and increase
the performance of our embedded microprocessors. For example, we are preparing
to transition our high-end products to a .18 micron process as soon as it is
available at one of our manufacturer's facilities.

TESTING AND ASSEMBLY. Initial testing of the silicon wafers containing our
microprocessors is primarily performed by a subcontractor located in Taiwan.
Following completion of initial testing, the silicon wafers are cut into
individual semiconductors and assembled into packages. All testing is performed
on standard test equipment using proprietary test programs developed by our test
engineering group. The test facilities are periodically audited to ensure that
their procedures remain consistent with those required for the production of
leading-edge devices. We use a subcontractor based in Korea to package all of
our products. We use standard, readily available packages for all of our
products. Following packaging, a subcontractor performs final testing. We rely
upon third parties to assemble and test substantially all of our products. While
we have not experienced significant problems in the past, this reliance upon
third parties could

41
<PAGE>

result in product shortages or delays in the future. If these shortages or
delays were significant, our customers might seek alternative sources of supply,
which could harm our operating results and reputation. Like many companies in
the semiconductor industry, we maintain excess levels of inventory to mitigate
the risk of product shortages or delays. Although our inventory has been
sufficient to cover periodic delays and shortages in the past, our inventory may
not be sufficient if a significant production shortage or delay occurs in the
future. We believe that our past experience with production shortages and delays
has been generally consistent with industry norms.

QUALITY ASSURANCE AND RELIABILITY. We prequalify each manufacturing plant.
We also participate in quality and reliability monitoring through each stage of
the production cycle by reviewing data from our wafer manufacturing plant and
assembly subcontractors. We closely monitor wafer manufacturing plant production
to enhance product quality and reliability and yield levels. We purchase wafers
on a fixed-cost basis and, therefore, any improvement in manufacturing yields
reduces our cost per product. Like many semiconductor companies, we have
experienced our most significant yield problems with our newer products. The
manufacture of new products often requires the implementation of new circuit
designs or new manufacturing processes, which generally require time and
experience to refine so that acceptable yields are achieved. Other companies
have experienced poor yields with respect to mature products, and we may also
experience poor yields on mature products. In general, yield fluctuations on
mature products may impact the cost of manufacturing but will not result in
product shortages or delays. We believe that our experience with poor yields has
been generally consistent with industry norms.

COMPETITION

The embedded microprocessor market is intensely competitive and
characterized by continual technological change and price erosion. We expect
competition to increase as our target markets continue to grow and to present
increasingly attractive business opportunities. Many of our direct and indirect
competitors are large corporations with substantially greater technical,
financial and marketing resources and name recognition than QED. In addition,
many of these competitors have a much larger installed customer base than we do.

Competition within our industry is based on a variety of factors, including:

- microprocessor performance;

- product functionality;

- product price;

- product reliability;

- software compatibility;

- financial strength;

- name recognition;

- marketing and distribution capability; and

- customer support.

We believe that we compete favorably with respect to each of these factors.

We face competition from the following sources:

OTHER MIPS LICENSEES. We license the MIPS instruction set architecture on a
non-exclusive basis. MIPS Technologies has licensed and, we believe, will
continue to license its technology to other companies that compete or may
compete with us. Other licensees of MIPS Technologies that currently compete
with

42
<PAGE>
us in our target markets include NEC Corporation, Toshiba Corporation and
Integrated Device Technology.

COMPANIES UTILIZING ALTERNATIVE RISC ARCHITECTURES. We face competition
from companies that use alternative RISC architectures. These architectures
include ARM/Strong Arm, developed by ARM Holdings plc and Intel; Hitachi SH,
developed by Hitachi; and PowerPC, developed by Motorola, Inc. and IBM. While
some of these companies have targeted the lower-end segments of the embedded
microprocessor market and, therefore, do not currently compete with us, these
companies may develop products for the high-end segments of the market.

COMPANIES UTILIZING NON-RISC TECHNOLOGIES. The embedded microprocessor
market is mostly comprised of companies utilizing RISC technology. Nonetheless,
CISC architectures, including the x86 architecture, have been introduced into
our target markets and represent a source of competition.

We believe that our high-end products generally exhibit higher performance,
as measured in terms of execution speed, than those of our competitors that
license the MIPS instruction set architecture. In addition, we believe that our
latest product, the RM7000, incorporate more memory, measured in terms of
kilobytes, than our competitors' current product offerings. Our competitors that
license the MIPS instruction set architecture offer products with a 64-bit
interface, as do all of our products other than the RM 5231. Our competitors
that do not license the MIPS instruction set architecture do not currently offer
products with a 64-bit interface.

MIPS LICENSE AND INTELLECTUAL PROPERTY

Our success and ability to compete is dependent in part upon our proprietary
technology. We rely upon a combination of patent, mask work, copyright,
trademark and trade secret laws and other means to protect our technology. We
have four issued patents that expire in 2014 through 2016. We also seek to
protect our trade secrets and proprietary technology through confidentiality
agreements with employees, consultants and other parties.

We currently derive and expect to continue to derive a substantial majority
of our revenue from the sale of products incorporating microprocessor technology
of MIPS Technologies. We have obtained the right to use this technology in our
products under a Technology License Agreement with MIPS Technologies. The
technology license granted under this agreement is perpetual and bears a royalty
based upon a percentage of our revenue derived from sales of products
incorporating the licensed technology. Our breach of this agreement could result
in our loss of these rights, which would harm our business. We also depend on
MIPS Technologies to enforce these patents against third-party infringement.
Because this license is non-exclusive, MIPS Technologies has licensed, and could
in the future license, its technologies to third parties, including our
competitors. If our competitors obtain a license from MIPS Technologies on more
favorable terms than ours, or if MIPS Technologies fails to enforce its patent
rights against infringers, we might not be able to compete successfully.

EMPLOYEES

As of September 30, 1999, we had a total of 91 employees, including 49 in
research and development, 18 in sales and marketing, 13 in manufacturing and 11
in general administration. As of September 30, 1999, we had eight contractors in
research and development. None of our employees is represented by a collective
bargaining agreement or an employment agreement. We have never experienced any
work stoppage. We consider our relations with our employees to be good.

FACILITIES

Our corporate headquarters, which serves as our principal sales, marketing,
research and development and administrative office, occupies 20,407 square feet
in two adjacent buildings in Santa Clara, California

43
<PAGE>
under a 15,218 square foot lease and a 5,189 square foot lease. The 15,218
square foot lease expires on June 30, 2001, and the 5,189 square foot lease will
be terminated on October 31, 1999. On August 16, 1999, we entered into a
five-year lease, to commence on November 1, 1999, for an additional 23,375
square feet of office space located next to our corporate headquarters.

We also have small sales offices in Raleigh, North Carolina and Burlington,
Massachusetts. The leases for these offices expire on March 15, 2000 and October
14, 2000.

We believe that our existing facilities are adequate to meet our current
needs.

44
<PAGE>
MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The following table sets forth certain information regarding our directors
and executive officers.

<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- ----------- -----------------------------------------------------
<S> <C> <C>
Thomas J. Riordan.................................... 42 Chief Executive Officer, President and Director
Barry L. Cox......................................... 57 Chairman of the Board of Directors
Raymond Kunita....................................... 43 Chief Operating Officer and Vice President of
Engineering
Howard M. Bailey..................................... 53 Chief Financial Officer, Vice President of Finance
and Secretary
William S. Thomas.................................... 47 Vice President of Sales
Andrew J. Keane...................................... 37 Vice President of Marketing
Bruce K. Graham...................................... 39 Director
Christopher J. Schaepe............................... 35 Director
</TABLE>

THOMAS J. RIORDAN, a co-founder of QED, has served as our Chief Executive
Officer, President and director since our inception in August 1991. From
February 1985 to June 1991, Mr. Riordan served in various design and managerial
roles most recently as director of research and development at MIPS Computer
Systems, Inc., a semiconductor design company. From March 1983 to January 1985,
Mr. Riordan served as a design engineer at Weitek Corporation, a semiconductor
company. From October 1979 to February 1983, Mr. Riordan was a design engineer
at Intel Corporation, a semiconductor company. Mr. Riordan holds B.S. and M.S.
degrees in Electrical Engineering as well as a B.A. degree in Government from
the University of Central Florida and has done post-graduate work in electrical
engineering at Stanford University.

BARRY L. COX joined QED in July 1998 and has served as our Chairman of the
Board of Directors since September 1999. From January 1996 to July 1998, Mr. Cox
served as a consultant for various companies. Currently, he is a member of the
board of directors of DynaChip Corporation, SUMMIT Microelectronics, Inc. and
Real 3D, each a privately-held company, and Photon Dynamics, Inc., a
publicly-held flat panel display equipment company. From October 1993 to
December 1995, Mr. Cox was President and Chief Executive Officer of Weitek
Corporation and from April 1992 to October 1993, Mr. Cox served as President and
Chief Operating Officer. In August 1984, Mr. Cox co-founded ATEQ Corp., a
semiconductor capital equipment manufacturing company, and from October 1987 to
December 1991, Mr. Cox served as its President, Chief Executive Officer and
director. From June 1980 to April 1983, he was President of Intel Europe. Mr.
Cox holds a B.S. degree in General Engineering from the U.S. Air Force Academy
and an M.B.A. degree from Boston University.

RAYMOND KUNITA, a co-founder of QED, has served as our Chief Operating
Officer and Vice President of Engineering, among other positions, since our
inception in August 1991. From February 1986 to July 1991, Mr. Kunita served in
various design and managerial roles at MIPS Computer Systems and most recently
as Director of Engineering. From August 1984 to January 1986, Mr. Kunita served
as a design engineer responsible for the development of a RISC microprocessor at
Weitek Corporation. From February 1983 to August 1984, Mr. Kunita served as a
design engineer responsible for the development of a graphics display processor
at Mindset Corporation, a computer systems company. From July 1977 to February
1983, Mr. Kunita served in various technology development roles at Intel
Corporation. Mr. Kunita holds a B.S. degree in Electrical Engineering from the
University of Illinois.

HOWARD M. BAILEY has served as our Chief Financial Officer, Vice President
of Finance and Secretary since June 1998. From August 1994 to June 1998, Mr.
Bailey served as Chief Financial Officer of Photon Dynamics. From August 1992 to
August 1994, Mr. Bailey was a partner in the Financial Services Division

45
<PAGE>
of David Powell, Inc., a financial services company, where he provided financial
consulting services. From 1989 to 1991, Mr. Bailey was the Chief Financial
Officer at Plus Logic Corporation, which was later acquired by Xilinx, Inc. From
1978 to 1983, Mr. Bailey served as a controller at Intel Corporation. Mr. Bailey
holds a B.S. degree in Economics from the University of Maryland and an M.B.A.
degree in Finance from the University of Utah.

WILLIAM S. THOMAS has served as QED's Vice President of Sales since October
1996. From October 1995 to October 1996, Mr. Thomas served as Director of
Strategic Sales at Power Trends, Inc., an integrated switching regulator
company. From November 1994 to October 1995, Mr. Thomas served as Director of
Semiconductor Sales at Celeritek, Inc., a semiconductor company. From August
1992 to November 1994, Mr. Thomas served as director of Communication Product
Marketing at Sierra Semiconductor Corp., and from October 1989 to August 1992,
as Western Area Sales Manager. Mr. Thomas holds a B.S. degree in Electrical
Engineering from the University of Florida.

ANDREW J. KEANE has served as QED's Vice President of Marketing since
February 1999. From August 1998 to February 1999, Mr. Keane worked as a
marketing consultant in various marketing positions. From March 1995 to April
1996, Mr. Keane served as Director of Product Marketing at 3dfx Interactive,
Inc., a 3D graphics company, and from April 1996 to August 1998 served as Vice
President, Marketing. From August 1994 to February 1995, Mr. Keane served as the
Product Line Manager at Xilinx, Inc. From June 1990 to August 1994, Mr. Keane
served as the Marketing Manager at MIPS Computer Systems, Inc. From August 1986
to August 1988, Mr. Keane served as an engineer at Intel Corporation. From June
1984 to August 1986, Mr. Keane was an engineer at Signetics Corporation, a
division of Philips Electronics. Mr. Keane holds a B.S. degree in Physics from
Rensselaer Polytechnic Institute and an M.B.A. degree from the University of
California, Berkeley.

BRUCE K. GRAHAM has served as a director of QED since May 1998. Mr. Graham
is a General Partner of Bessemer Venture Partners, a venture capital firm, which
he joined in December 1996. From September 1995 to November 1996, Mr. Graham was
a Vice President at Vertex Management, a venture capital firm. Mr. Graham is a
director of GenOA, HiQ Networks, LightLogic, Optical Micromachines and Summit
Microelectronics, Inc., each of which is a privately held company. Mr. Graham
holds a B.S. degree in Chemical Engineering from Princeton University and an
M.B.A. degree from Stanford Graduate School of Business.

CHRISTOPHER J. SCHAEPE has served as a director of QED since March 1997. Mr.
Schaepe is a General Partner of Weiss, Peck & Greer Venture Partners, a
technology-focused venture capital firm, which he joined in 1991. Previously,
Mr. Schaepe served in corporate finance and capital markets roles for three
years at Goldman, Sachs & Co. after his employment as a software engineer at IBM
Corporation. Mr. Schaepe is a director of Galileo Technology Ltd. and Terayon
Communication Systems, as well as several privately held companies. Mr. Schaepe
holds B.S. and M.S. degrees in Computer Science from the Massachusetts Institute
of Technology and an M.B.A. degree from Stanford Graduate School of Business.

Under a voting agreement dated April 16, 1998 that we entered into with a
number of our stockholders, the following stockholders or their affiliated
entities have appointed a member to our board of directors:

- Weiss, Peck & Greer Venture Partners, L.P., whose representative is Mr.
Schaepe;

- Bessemer Venture Partners, whose representative is Mr. Graham; and

- the common stockholders, whose representative is Mr. Riordan.

This voting agreement will terminate upon the closing of this offering.

46
<PAGE>
BOARD OF DIRECTORS

Upon completion of the offering, the terms of the board of directors will be
divided into three classes each with a term of three years: Class I, whose term
will expire at the annual meeting of stockholders to be held in 2000; Class II,
whose term will expire at the annual meeting of stockholders to be held in 2001;
and Class III, whose term will expire at the annual meeting of stockholders to
be held in 2002. The Class I directors are Messrs. Cox and Riordan, the Class II
directors are Messrs. Schaepe and Graham, and the Class III directors are
currently vacant. At each annual meeting of stockholders after the initial
classification, the successors to directors whose terms expire will be elected
to serve a term of three years. This classification of directors may have the
effect of delaying or preventing changes in our control.

BOARD COMMITTEES

AUDIT COMMITTEE. The board of directors has established an audit committee
consisting of Messrs. Graham and Schaepe. The audit committee reviews with our
independent accountants the scope and timing of their audit services and any
other services that they are asked to perform, the independent accountants'
report on our financial statements following completion of their audit, and our
policies and procedures with respect to internal accounting and financial
controls. In addition, the audit committee makes annual recommendations to our
board of directors for the appointment of independent accountants for the
upcoming year.

COMPENSATION COMMITTEE. The board of directors has established a
compensation committee consisting of Messrs. Graham and Schaepe. The
compensation committee makes recommendations to the board concerning salaries
and compensation for our officers and employees and administers our employee
benefit plans.

DIRECTOR COMPENSATION

Our directors do not currently receive any cash compensation for services on
the board of directors or any committee of our board, but directors may be
reimbursed for certain expenses in connection with attendance at board of
directors and committee meetings. All directors are eligible to participate in
our 1999 Equity Incentive Plan. Non-employee directors are eligible to
participate in our 1999 Non-Employee Directors' Stock Option Plan.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

None of our executive officers currently serves, or in the past has served,
as a member of the board of directors or compensation committee of any entity
that has one or more executive officers who serve as a member of our board or
compensation committee.

47
<PAGE>
EXECUTIVE COMPENSATION

The following table presents information regarding the compensation paid to
our chief executive officer and our four other most highly compensated executive
officers whose salary and bonus exceeded $100,000 for the fiscal year ended June
30, 1999:

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
---------------------
AWARDS
ANNUAL COMPENSATION ---------------------
--------------------- SECURITIES ALL OTHER
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) UNDERLYING OPTIONS(#) COMPENSATION($)
- -------------------------------------------------- ---------- --------- --------------------- -----------------
<S> <C> <C> <C> <C>
Thomas J. Riordan
President and Chief Executive Officer........... $ 152,442 $ 60,105 150,000 $ 432(1)
Barry L. Cox
Chairman of the Board of Directors.............. 238,414 61,706 650,000 694(1)
Raymond Kunita
Chief Operating Officer and
Vice President of Engineering................... 152,442 60,105 150,000 432(1)
Howard M. Bailey
Chief Financial Officer,
Vice President of Finance
and Secretary................................... 152,385 26,545 35,000 622(1)
William S. Thomas
Vice President of Sales......................... 124,961 51,891 60,000 6,644(2)
</TABLE>

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

(1) Represents term life insurance premiums paid on the officers' behalfs.

(2) Represents a $6,000 car allowance and $644 in term life insurance premiums
paid on Mr. Thomas' behalf.

OPTION GRANTS IN LAST FISCAL YEAR

The following table sets forth information regarding each grant of stock
options during the fiscal year ended June 30, 1999 to our chief executive
officer and our four other most highly compensated executive officers whose
salary and bonus exceeded $100,000 for the fiscal year ended June 30, 1999:

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
------------------------------------------------ VALUE AT ASSUMED
% OF TOTAL ANNUAL RATES OF
NUMBER OF OPTIONS STOCK PRICE
SECURITIES GRANTED TO APPRECIATION
UNDERLYING EMPLOYEES EXERCISE FOR OPTION TERM
OPTIONS IN FISCAL PRICE PER EXPIRATION ----------------------
NAME GRANTED 1999 SHARE DATE 5% 10%
- ----------------------------------------- ---------- ----------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Thomas J. Riordan........................ 50,000 1.9% $ 1.00 10/20/08 $ 31,445 $ 79,687
100,000 3.9 3.00 3/29/09 188,668 478,123
Barry L. Cox............................. 600,000 23.2 1.00 6/30/08 377,337 956,245
50,000 1.9 3.00 3/29/09 94,334 239,061
Raymond Kunita........................... 50,000 1.9 1.00 10/20/08 31,445 79,687
100,000 3.9 3.00 3/29/09 188,668 478,123
Howard M. Bailey......................... 35,000 1.4 3.00 3/29/09 66,034 167,343
William S. Thomas........................ 60,000 2.3 3.00 3/29/09 113,201 286,874
</TABLE>

In fiscal year 1999, we granted to our employees options to purchase an
aggregate of 2,589,300 shares. Options were granted at an exercise price equal
to the fair market value of our common stock, as

48
<PAGE>
determined by the board of directors on the date of grant. In making this
determination, the board considered a number of factors, including:

- our historical and prospective revenue and profitability;

- our cash balance and rate of cash consumption;

- the development and size of the market for our products;

- the status of our financing activities;

- the stability and tenure of our management team; and

- the breadth of our product offerings.

Potential realizable values are computed by (a) multiplying the number of
shares of common stock subject to a given option by the exercise price per
share, (b) assuming that the aggregate stock value derived from that calculation
compounds at the annual 5% or 10% rates shown in the table for the entire ten
year term of the option and (c) subtracting from that result the aggregate
option exercise price. The 5% and 10% assumed annual rates of compounded stock
price appreciation are mandated by rules of the Securities and Exchange
Commission, or SEC. We can provide no assurance to any executive officer or any
other holder of our securities that any stock price appreciation over the option
term will be at the assumed 5% and 10% levels or at any other defined level.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES

The following table sets forth the number and value of securities underlying
unexercised options held by our chief executive officer and our four other most
highly compensated executive officers whose salary and bonus exceeded $100,000
for the fiscal year ended June 30, 1999:

<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
SHARES AT JUNE 30, 1999 AT JUNE 30, 1999
ACQUIRED ON VALUE (#) ($)
EXERCISE REALIZED -------------------------- --------------------------
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------------------- ----------- ---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Thomas J. Riordan............... -- $ -- 145,833 304,167 $ 670,832 $ 1,399,168
Barry L. Cox.................... 20,000 75,000 -- 650,000 -- 2,990,000
Raymond Kunita.................. -- -- 145,833 304,167 670,832 1,399,168
Howard M. Bailey................ 25,000 100,000 25,000 185,000 100,000 740,000
William S. Thomas............... 48,334 153,336 3,750 127,916 15,750 391,914
</TABLE>

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

In the table above, the value of unexercised in-the-money options is based
on the fair market value of QED's common stock, determined by our board of
directors as discussed above to be $4.75 per share on or about June 30, 1999,
minus the per share exercise price multiplied by the number of shares.

EMPLOYEE STOCK PLANS

1999 EQUITY INCENTIVE PLAN

Our board of directors adopted and our stockholders approved the 1997 Stock
Option Plan in April 1997. We reserved an aggregate of 4,500,000 shares of our
common stock for issuance under the 1997 plan. Our board and stockholders
approved the 1992 Stock Option Plan in July 1992. We reserved an aggregate of
4,600,000 shares of our common stock for issuance under the 1992 plan. Our board
amended and restated both plans as the 1999 Equity Incentive Plan in September
1999, subject to stockholder approval, and increased the combined common stock
reserves of 9,100,000 shares by 1,400,000, to a total of 10,500,000 shares of
common stock.

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<PAGE>

SHARE RESERVE. We have reserved a total of 10,500,000 shares of our common
stock under the 1999 Equity Incentive Plan. On the last day of each fiscal year
for 10 years, starting with the fiscal year ending June 30, 2000, the share
reserve will automatically be increased by a number of shares equal to the
greater of:

- 5% of our outstanding shares on a fully-diluted basis, or

- that number of shares subject to awards granted under the incentive plan
during the prior 12-month period.

The automatic increase in the number of shares available for grants under
incentive stock options may not exceed 14,000,000 shares over the 10-year
period. If the recipient of a stock award does not purchase the shares subject
to a stock award before the stock award expires or otherwise terminates, the
shares that are not purchased again become available for issuance under the
incentive plan.

ADMINISTRATION. Our board administers the incentive plan unless it
delegates administration to a committee. Our board has the authority to
construe, interpret and amend the incentive plan as well as to determine:

- the grant recipients;

- the grant dates;

- the number of shares subject to the award;

- the exercisability of the award and vesting;

- the exercise price;

- the type of consideration; and

- the other terms of the award.

ELIGIBILITY. Our board may grant incentive stock options that qualify under
Section 422 of the Internal Revenue Code to our employees and to the employees
of our affiliates. Our board also may grant nonstatutory stock options, stock
bonuses and restricted stock purchase awards to our employees, directors and
consultants as well as to the employees, directors and consultants of our
affiliates.

- A stock option is a contractual right to purchase a specified number of
our shares at a specified price, or exercise price, for a specified period
of time.

- An incentive stock option is a stock option that has met the
requirements of Section 422 of the Internal Revenue Code. This type of
option is free from regular tax at both the date of grant and the date
of exercise. If two holding period tests are met--two years between
grant date and sale date and one year between exercise date and sale
date--the profit on the option is long-term capital gain income. If the
holding periods are not met, there has been a disqualifying
disposition, and generally the difference between the exercise price
and the fair market value of the shares on the exercise date will be
taxed at ordinary income rates. The difference between the fair market
value on date of exercise and the exercise price is an item of
alternative minimum tax unless there is a disqualifying disposition in
the year of exercise.

- A nonstatutory stock option is a stock option not meeting the Internal
Revenue Code criteria for qualifying incentive stock options and,
therefore, triggering a tax upon exercise. This type of option requires
payment of state and federal income tax and, if applicable, FICA/FUTA
on the difference between the exercise price and the fair market value
on the exercise date.

- A restricted stock purchase award is an offer to purchase shares at a
price either at or near the fair market value of the shares. A stock
bonus, on the other hand, is a grant of our shares at no cost to the
recipient in consideration for past services rendered. However, we may
reacquire the shares

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<PAGE>
under either type of award at the original purchase price, which is zero
in the case of a stock bonus, if the recipient's service to us and to our
affiliates terminates before the shares vest.

Our board may not grant an incentive stock option to any person who, at the
time of the grant, owns or is deemed to own stock possessing more than 10% of
our total combined voting power or the total combined voting power of an
affiliate of ours, unless the exercise price is at least 110% of the fair market
value of the stock on the grant date and the option term is five years or less.

LIMITS ON OPTION GRANTS. There are limits on the number of shares that our
board may grant under an option.

- Section 162(m) of the Internal Revenue Code, among other things, denies a
deduction to publicly held corporations for compensation paid to the chief
executive officer and the four other highest compensated officers in a
taxable year to the extent that the compensation for each such officer
exceeds $1.0 million. When we become subject to Section 162(m), in order
to prevent options granted under the incentive plan from being included in
such compensation, our board may not grant options under the incentive
plan to an employee covering an aggregate of more than 700,000 shares in
any calendar year; and

- An employee may not receive incentive stock options that exceed the
$100,000 per year limitation set forth in Section 422(d) of the Internal
Revenue Code. In calculating the $100,000 per year limitation, we
determine the aggregate number of shares under all incentive stock options
granted to that employee that will become exercisable for the first time
during a calendar year. For this purpose, we include incentive stock
options granted under the incentive plan as well as under any other stock
plans that we or our affiliates maintain. We then determine the aggregate
fair market value of such stock as of the grant date of the option. Taking
the options into account in the order in which they were granted, we treat
only the options covering the first $100,000 worth of stock as incentive
stock options. We treat any options covering stock in excess of $100,000
as nonstatutory stock options.

OPTION TERMS. The board may grant incentive stock options with an exercise
price of 100% or more of the fair market value of a share of our common stock on
the grant date. It may grant nonstatutory stock options with an exercise price
as low as 85% of the fair market value of a share on the grant date. If the
value of our shares declines after the grant date, the board may offer
optionholders the opportunity to replace such outstanding higher-priced options
with new lower-priced options. To the extent required by Section 162(m) of the
Internal Revenue Code, the old repriced option is deemed to be canceled and a
new option granted, but both options will be counted against the Section 162(m)
limit discussed above.

The maximum option term is 10 years. The board may provide for exercise
periods of any length in individual option grants. However, generally an option
terminates three months after the optionholder's service to us and to our
affiliate terminates. If this termination is due to the optionholder's
disability, the exercise period generally is extended to 12 months. If this
termination is due to the optionholder's death or if the optionholder dies
within three months after his or her service terminates, the exercise period
generally is extended to 18 months following death.

The board may provide for the transferability of nonstatutory stock options
but not incentive stock options. However, the optionholder may designate a
beneficiary to exercise either type of option following the optionholder's
death. If the optionholder does not designate a beneficiary, the optionholder's
option rights will pass by his or her will or by the laws of descent and
distribution.

TERMS OF OTHER STOCK AWARDS. The board determines the purchase price of
other stock awards, which may not be less than 85% of the fair market value of
our common stock on the grant date. However, the board may award stock bonuses
in consideration of past services without a purchase payment. Shares that we
sell or award under the incentive plan may, but need not be, restricted and
subject to a repurchase

51
<PAGE>
option in our favor in accordance with a vesting schedule that the board
determines. The board, however, may accelerate the vesting of such restricted
stock.

OTHER PROVISIONS. Transactions not involving our receipt of consideration,
such as a merger, consolidation, reorganization, stock dividend, or stock split,
may change the class and number of shares subject to the incentive plan and to
outstanding awards. In that event, the board will appropriately adjust the
incentive plan as to the class and the maximum number of shares subject to the
incentive plan, to the cap on the number of shares available for incentive stock
options, and to the Section 162(m) limit. It also will adjust outstanding awards
as to the class, number of shares and price per share subject to these awards.

If we dissolve or liquidate, then outstanding stock awards will terminate
immediately before this event. However, we treat outstanding stock awards
differently in the following situations:

- a sale, lease or other disposition of all or substantially all of our
assets;

- a sale of 50% or more of the combined voting power of our stock to another
corporation;

- a merger or consolidation in which we are not the surviving corporation;
or

- a merger in which we are the surviving corporation but the shares of our
common stock outstanding immediately before the merger are converted by
virtue of the merger into other property, such as securities or cash.

In these situations, the surviving entity will either assume or replace all
outstanding awards under the incentive plan. If it declines to do so, then
generally the vesting and exercisability of the awards will accelerate.

STOCK AWARDS GRANTED. As of September 30, 1999, we have issued 9,090,855
shares upon the exercise of options under the 1992 and 1997 plans, none of which
have been repurchased, 320,104 shares of which are subject to repurchase at the
original exercise price, and none of which are subject to repurchase at fair
market value; options to purchase 4,652,200 shares at a weighted average
exercise price of $1.78 were outstanding; and 9,145 shares remained available
for future grant under the 1992 and 1997 plans. As of August 31, 1999, the board
had not granted any stock bonuses or restricted stock under the incentive plan.

PLAN TERMINATION. The incentive plan will terminate in 2009 unless the
board terminates it sooner.

1999 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN

In September 1999, our board adopted the 1999 Non-Employee Directors' Stock
Option Plan, subject to stockholder approval. The directors' plan provides for
the automatic grant to our non-employee directors of options to purchase shares
of our common stock.

SHARE RESERVE. We have reserved a total of 200,000 shares of our common
stock for issuance under the directors' plan. On the last day of each fiscal
year for 10 years, starting with the fiscal year ending June 30, 2000, the share
reserve will automatically be increased by a number of shares equal to the
greater of:

- .5% of our outstanding shares on a fully-diluted basis; or

- that number of shares subject to options granted under the directors' plan
during the prior 12-month period.

If the optionholder does not purchase the shares subject to the option
before the option expires or otherwise terminates, the shares that are not
purchased again become available for issuance under the directors' plan.

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<PAGE>
ADMINISTRATION. The board administers the directors' plan unless it
delegates administration to a committee. The board has the authority to
construe, interpret and amend the directors' plan but the directors' plan
specifies the essential terms of the options, including:

- the option recipients;

- the grant dates;

- the number of shares subject to the option;

- the exercisability and vesting of the option;

- the exercise price; and

- the type of consideration.

ELIGIBILITY. We automatically will grant an option covering 30,000 shares
to each non-employee director on the day after each annual meeting of our
stockholders, starting in 2000, at which the director is elected or re-elected
to a full three-year term of office. For non-employee directors who are elected
or appointed mid-term, the number of shares subject to the option will be pro
rated for each remaining month of the term of office, rounded to the nearest
whole month. The options will vest monthly over the number of months remaining
in the non-employee director's term of office.

As long as a non-employee director who is an optionholder continues to serve
with us or with an affiliate of ours, whether in the capacity of a director, an
employee or a consultant, the optionholder may exercise the option.

OPTION TERMS. Options have an exercise price equal to 100% of fair market
value of our common stock on the grant date. The option term is 10 years but it
terminates three months after the optionholder's service terminates. If this
termination is due to the optionholder's disability, the exercise period is
extended to 12 months. If this termination is due to the optionholder's death or
if the optionholder dies within three months after his or her service
terminates, the exercise period is extended to 18 months following death.

The optionholder may transfer the option by gift to immediate family or for
estate-planning purposes. The optionholder also may designate a beneficiary to
exercise the option following the optionholder's death. Otherwise, the option
exercise rights will pass by the optionholder's will or by the laws of descent
and distribution.

OTHER PROVISIONS. Transactions not involving our receipt of consideration,
such as a merger, consolidation, reorganization, stock dividend, or stock split,
may change the class and number of shares subject to the directors' plan and to
outstanding options. In that event, the board will appropriately adjust the
directors' plan as to the class and the maximum number of shares subject to the
directors' plan. It also will adjust outstanding options as to the class, number
of shares and price per share subject to these options.

If we dissolve or liquidate, then the outstanding options will terminate
immediately before this event. However, we treat outstanding options differently
in the following situations:

- a sale, lease or other disposition of all or substantially all of our
assets;

- a sale of 50% or more of the combined voting power of our stock to another
corporation;

- a merger or consolidation in which we are not the surviving corporation;
or

In these situations, the surviving entity will either assume or replace all
outstanding options under the directors' plan. If it declines to do so, then
generally the vesting and exercisability of the options will accelerate.

53
<PAGE>
OPTIONS ISSUED. We have not issued any options under the directors' plan.

PLAN TERMINATION. The directors' plan will terminate in 2009 unless the
board terminates it sooner.

1999 EMPLOYEE STOCK PURCHASE PLAN

In September 1999, our board adopted the 1999 Employee Stock Purchase Plan,
subject to stockholder approval.

SHARE RESERVE. We have authorized the issuance of 300,000 shares of our
common stock pursuant to purchase rights granted to eligible employees under the
purchase plan. On November 1 of each year for 10 years, starting with the year
2000, the number of shares in the reserve will be increased by the greater of 1%
of our outstanding shares on a fully-diluted basis or that number of shares that
have been issued under the purchase plan during the prior 12-month period. The
automatic share reserve increase in the aggregate may not exceed 3,000,000
shares over the 10-year period.

ELIGIBILITY. The purchase plan is intended to qualify as an employee stock
purchase plan within the meaning of Section 423 of the Internal Revenue Code.
The purchase plan provides a means by which eligible employees may purchase our
common stock through payroll deductions. We implement the purchase plan by
offerings of purchase rights to eligible employees. Generally, all of our
full-time employees and full-time employees of our affiliates incorporated in
the United States who have been employed for at least five days may participate
in offerings under the purchase plan. However, no employee may participate in
the purchase plan if, immediately after we grant the employee a purchase right,
the employee has voting power over 5% or more of our outstanding capital stock.
Currently, no shares of common stock had been purchased under the purchase plan.

ADMINISTRATION. Under the purchase plan, the board may specify offerings of
up to 27 months. Unless the board otherwise determines, common stock is
purchased for accounts of participating employees at a price per share equal to
the lower of:

- 85% of the fair market value of a share on the first day of the offering;
or

- 85% of the fair market value of a share on the purchase date.

For the first offering period, which will begin on the effective date of
this initial public offering, we will offer shares registered on a Form S-8
registration statement. The fair market value of the shares on the first date of
this offering will be the price per share at which our shares are first sold to
the public as specified in the final prospectus with respect to our initial
public offering. Otherwise, fair market value generally means the closing sales
price, rounded up where necessary to the nearest whole cent for the shares, or
the closing bid, if no sales were reported as quoted on the Nasdaq National
Market on the trading day prior to the relevant determination date, as reported
in THE WALL STREET JOURNAL.

The board may provide that employees who become eligible to participate
after the offering period begins nevertheless may enroll in the offering. These
employees will purchase our stock at the lower of:

- 85% of the fair market value of a share on the day they began
participating in the purchase plan; or

- 85% of the fair market value of a share on the purchase date.

Generally, participating employees may authorize payroll deductions of up to
10% of their compensation for the purchase of stock under the purchase plan.
Generally, employees may end their participation in the offering at any time up
to 10 days before a offering period begins. Their participation ends
automatically on termination of their employment.

OTHER PROVISIONS. The board may grant eligible employees purchase rights
under the purchase plan only if the purchase rights together with any other
purchase rights granted under other employee stock purchase plans established by
us or by our affiliates, if any, do not permit the employee's rights to purchase
our stock to accrue at a rate which exceeds $25,000 of fair market value of our
stock for each calendar year in which the purchase rights are outstanding.

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<PAGE>
Upon a change in control, the board may provide that the successor
corporation will assume or substitute for outstanding purchase rights.
Alternatively, the board may shorten the offering period and provide that our
stock will be purchased for the participants immediately before the change in
control.

DESCRIPTION OF 401(K) PLAN

We maintain a 401(k) retirement savings plan for our U.S. employees. This
plan is intended to qualify as a tax-qualified plan under Section 401 of the
Internal Revenue Code and provides that each participant may contribute a
percentage of his or her pre-tax compensation. A participant's pre-tax savings
contributions may not be more than 20% of the participant's pay for the plan
year, up to a statutory limit, which is $10,000 in calendar year 1999. Under
this plan, each employee is fully vested in his or her deferred salary
contributions. Employee contributions are held and invested by the plan trustee.
This plan also permits us to make discretionary contributions, subject to
established limits. To date, we have not made any matching contributions to this
plan.

LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS

As permitted by the Delaware General Corporation Law, we have adopted
provisions in our certificate of incorporation and bylaws that limit or
eliminate the personal liability of our directors for a breach of their
fiduciary duty of care as a director. The duty of care generally requires that,
when acting on behalf of the corporation, directors exercise an informed
business judgment based on all material information reasonably available to
them. Consequently, a director will not be personally liable to us or our
stockholders for monetary damages or breach of fiduciary duty as a director,
except for liability for:

- any breach of the director's duty of loyalty to us or our stockholders;

- acts or omissions not in good faith or that involve intentional misconduct
or a knowing violation of law;

- unlawful payments of dividends or unlawful stock repurchases, redemptions
or other distributions; or

- any transaction from which the director derived an improper personal
benefit.

Our certificate of incorporation allows us to indemnify our officers,
directors and other agents to the fullest extent permitted by Delaware law. We
intend to enter into indemnification agreements with each of our directors and
officers that are, in some cases, broader than the specific indemnification
provisions permitted by Delaware law, and that may provide additional procedural
protection. The indemnification agreements require us, among other things, to:

- indemnify officers and directors against certain liabilities that may
arise because of their status as officers or directors; and

- advance expenses, as incurred, to officers and directors in connection
with a legal proceeding, subject to limited exceptions.

Additionally, we anticipate obtaining directors' and officers' liability
insurance.

Our bylaws also permit us to purchase insurance on behalf of any officer,
director, employee or other agent for any liability arising out of his or her
actions in such capacity, regardless of whether Delaware law would permit
indemnification, and to provide indemnification in circumstances in which
indemnification is otherwise discretionary under Delaware law.

At present, there is no pending litigation or proceeding involving any of
our directors, officers or employees in which indemnification is sought, nor are
we aware of any threatened litigation that may result in claims for
indemnification.

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<PAGE>
CERTAIN TRANSACTIONS

Other than compensation agreements and other arrangements, which are
described as required in "Management," and the transactions described below,
since July 1, 1996, there has not been, nor is there currently proposed, any
transaction or series of similar transactions to which we were or will be a
party:

- in which the amount involved exceeded or will exceed $60,000; and

- in which any director, executive officer, holder of more than 5% of our
common stock on an as-converted basis or any member of their immediate
family had or will have a direct or indirect material interest.

FINANCING TRANSACTIONS

Purchasers of our preferred and common stock include, among others, the
following of our executive officers, directors and holders of more than 5% of
our outstanding stock:

<TABLE>
<CAPTION>
SHARES OF PREFERRED STOCK
COMMON ------------------------------------------------------
PURCHASER STOCK SERIES A SERIES B SERIES C SERIES D
- ---------------------------------------------------- ---------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS
Thomas J. Riordan................................... 1,000,000 -- -- -- --
Barry L. Cox........................................ 20,000 -- -- -- --
Raymond Kunita...................................... 1,000,000 -- -- -- --
Howard M. Bailey.................................... 35,000 -- -- -- --
William S. Thomas................................... 75,000 -- -- -- --
Christopher J. Schaepe.............................. -- -- -- 28,000 --
ENTITIES AFFILIATED WITH DIRECTORS
Entities Affiliated with Bessemer Venture
Partners.......................................... -- -- -- 1,400,000 591,609
Entities Affiliated with Weiss, Peck & Greer Venture
Partners.......................................... -- -- 2,500,000 1,840,000 1,141,283
5% HOLDERS
Integrated Device Technology, Inc................... 2,200,000 1,440,000 -- -- --
Norwest Venture Partners VI, L.P.................... -- -- -- 1,200,000 507,094
Cisco Systems, Inc.................................. 237,500 -- -- -- 1,047,454
Price Per Share..................................... $0.001- $ 1.40 $ 2.40 $ 2.50 $ 4.32
$2.00
Date(s) of Purchase................................. 11/15/91- 1/24/92 3/5/97 4/16/98 3/1/99
8/31/99 and and
5/15/98 3/16/99
</TABLE>

The shares shown as held by Weiss, Peck & Greer in the above table include
shares held by Christopher J. Schaepe. Mr. Schaepe, one of our directors, is a
general partner of Weiss, Peck and Greer Venture Partners.

We have entered into an investors' rights agreement with each of the
purchasers of preferred stock set forth above and with Messrs. Riordan and
Kunita, as purchasers of the common stock set forth above. Under this agreement,
these and other stockholders are entitled to registration rights with respect to
their shares of common stock or common stock issuable upon conversion of their
preferred stock upon the closing of this offering.

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<PAGE>
AGREEMENTS WITH IDT

In January 1992, we entered into a development and license agreement with
Integrated Device Technology, or IDT, a 5% stockholder. Under this agreement, we
developed and delivered embedded microprocessor products in exchange for
milestone payments and continuing royalty payments by IDT to us. In June 1996,
we entered into a development agreement with IDT under which we agreed to modify
an embedded microprocessor for IDT and IDT agreed to make royalty payments to us
based on the product's net sales. We received aggregate royalty payments from
IDT under the two agreements of $2.3 million in the year ended June 30, 1997,
$3.3 million in the year ended June 30, 1998 and $3.0 million in the year ended
June 30, 1999. We received aggregate royalty payments from IDT of $609,000 in
the quarter ended September 30, 1999.

AGREEMENTS WITH CISCO

In connection with a purchase of QED capital stock on March 1, 1999, Cisco
Systems, a 5% stockholder, and QED entered into an agreement granting Cisco
Systems a right of first negotiation in the event of a proposed change in
control of QED. This agreement will terminate upon the closing of this offering.
In the fiscal year ended June 30, 1998, Cisco Systems purchased $5,685 worth of
our products. In the fiscal year ended June 30, 1999, Cisco Systems purchased
approximately $255,000 worth of our products. In the quarter ended September 30,
1999, Cisco Systems purchased approximately $33,000 worth of our products. These
amounts exclude product sales to Cisco Systems' manufacturing subcontractors,
which amounts are substantially larger than direct sales to Cisco Systems and
totalled approximately $2 million in fiscal year 1999 and $1.3 million in the
quarter ended September 30, 1999.

OTHER TRANSACTIONS WITH EXECUTIVE OFFICERS AND DIRECTORS

In November 1997, we entered into a consulting agreement with Barry L. Cox
under which we paid Mr. Cox an aggregate of $106,800 and granted him options to
purchase 20,000 shares of common stock. This agreement terminated in July 1998
when Mr. Cox became an employee of QED.

In June 1998, we granted Barry L. Cox an option to purchase 600,000 shares
of our common stock at an exercise price of $1.00 per share. The option vests
over five years, with 20% of the shares subject to the option vesting and
becoming exercisable upon the closing of this offering.

In May 1998, we granted Howard M. Bailey an option to purchase 200,000
shares of our common stock at an exercise price of $.75 per share. The option
vests over four years, with 50% of the shares subject to the option vesting and
becoming exercisable in the event of a change of control of QED.

In February 1999, we granted Andrew J. Keane an option to purchase 250,000
shares of our common stock at an exercise price of $2.00 per share. The option
vests over four years.

INDEMNIFICATION AGREEMENTS

We have entered into indemnification agreements with our directors and our
executive officers for the indemnification of and advancement of expenses to
these persons to the fullest extent permitted by law. We also intend to enter
into indemnification agreements with our future directors and officers.

We believe that all of the transactions set forth above were made on terms
no less favorable to us than could have been obtained from unaffiliated third
parties. All future transactions, including loans, between us and our officers,
directors, principal stockholders and their affiliates will be approved by a
majority of the board of directors, including a majority of the independent and
disinterested directors, and will be on terms no less favorable to us than could
be obtained from unaffiliated third parties.

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<PAGE>

PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth information regarding beneficial ownership of
our common stock as of September 30, 1999 and as adjusted to reflect our sale of
shares offered and conversion of all outstanding shares of preferred stock into
shares of common stock held by the following persons:

- each person who we know to own beneficially more than five percent of the
common stock;

- each of our directors;

- each executive officer listed in the summary compensation table; and

- all directors and executive officers as a group.

Unless indicated below, to our knowledge the persons named have sole voting
and investment power with respect to all shares shown as beneficially owned by
them, subject to community property laws where applicable. Percentage of
beneficial ownership is based on 22,894,992 shares of common stock outstanding
on an as-converted basis as of September 30, 1999. This assumes no exercise of
the underwriters' over-allotment option. If the underwriters' over-allotment
option is exercised in full, we will sell up to an aggregate of shares of
common stock and up to shares of common stock will be outstanding after
the completion of this offering.

The number of shares beneficially owned by each stockholder is determined
under rules promulgated by the SEC, and the information is not necessarily
indicative of beneficial ownership for any other purpose. Under these rules,
beneficial ownership includes any shares as to which the individual or entity
has sole or shared voting power or investment power and any shares as to which
the individual or entity has the right to acquire beneficial ownership within 60
days after September 30, 1999 through the exercise of any stock option or other
right. The inclusion of these shares in the table, however, does not constitute
an admission that the named stockholder is a direct or indirect beneficial owner
of, or receives the economic benefit from, these shares.

Unless indicated below, each person or entity named below has an address in
care of QED's principal executive offices located at 3255-3 Scott Boulevard,
Suite 200, Santa Clara, California 95054.

<TABLE>
<CAPTION>
SHARES
ISSUABLE UPON
SHARES EXERCISE OF PERCENTAGE BENEFICIALLY
SUBJECT TO A OPTIONS THAT
NUMBER OF RIGHT OF VEST WITHIN OWNED
SHARES REPURCHASE AS 60 DAYS OF SHARES ------------------------
BENEFICIALLY OF SEPTEMBER SEPTEMBER 30, BEING PRIOR TO AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED(1) 30, 1999 1999 OFFERED OFFERING OFFERING
- ----------------------------------------------- ------------ ------------- ------------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS
Christopher J. Schaepe(2).................... 5,509,283 -- -- -- 24.1%
Thomas J. Riordan............................ 1,207,291 -- 207,291 -- 5.2
Raymond Kunita............................... 1,207,291 -- 207,291 -- 5.2
Bruce K. Graham(3)........................... 1,991,609 -- -- -- 8.7
Barry L. Cox................................. 190,000 170,000 -- *
Howard M. Bailey............................. 70,833 -- 35,833 -- *
William S. Thomas............................ 83,749 21,667 8,749 -- *

OTHER 5% STOCKHOLDERS

Entities Affiliated with Weiss, Peck &
Greer(2)..................................... 5,481,283 -- -- -- 24.1
555 California Street, Suite 3130
San Francisco, CA 94104
</TABLE>

58
<PAGE>

Entities Affiliated with Bessemer Venture
Partners(3).................................. 1,991,609 -- -- -- 8.7
1400 Old Country Road, Suite 407
Westbury, NY 11590

Norwest Venture Partners VI, L.P............... 1,707,094 -- -- -- 7.5
245 Lytton Avenue, Suite 250
Palo Alto, CA 94301

Cisco Systems, Inc............................. 1,284,954 -- -- -- 5.6
255 West Tasman Drive, Bldg. J
San Jose, CA 95134

The Goldman Sachs Group, Inc................... 1,157,408 -- -- -- 5.1
85 Broad Street
New York, NY 10004

All officers and directors as a group (7
persons)..................................... 10,260,056 658,748 -- 44.2
</TABLE>

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

* Represents beneficial ownership of less than 1%.

(1) These numbers may include shares subject to a right of repurchase by QED as
of September 30, 1999 and shares issuable upon the exercise of options that
vest within 60 days of September 30, 1999.

(2) Includes:

- 2,029,216 shares held by WPG Enterprise Fund II, L.L.C.;

- 1,687,297 shares held by Weiss Peck & Greer Venture Associates III,
L.L.C.;

- 865,267 shares held by Weiss Peck & Greer Venture Associates VI,
L.L.C.;

- 756,733 shares held by WPG Enterprise Fund III, L.L.C.;

- 109,239 shares held by Weiss Peck & Greer Venture Associates IV Cayman,
L.P.; and

- 33,531 shares held by WPG Information Sciences Entrepreneur Fund, L.P.

WPG Venture Partners III, L.P. is the fund investment advisory member of WPG
Enterprise Fund II, L.L.C. and Weiss Peck & Greer Venture Associates III,
L.L.C. Christopher J. Schaepe, one of our directors, is the general partner
of WPG Venture Partners III, L.P., and, as such, may be deemed to share
voting and investment power with respect to the shares held by these
entities. WPG VC Fund Advisor L.L.C. is the fund investment advisory member
of Weiss, Peck & Greer Venture Associates IV, L.L.C. and WPG Enterprise Fund
III, L.L.C., and is the general partner of WPG Information Sciences
Entrepreneur Fund, L.P. Mr. Schaepe is the managing member of WPG VC Fund
Advisor, L.L.C., and, as such, may be deemed to share voting and investment
power with respect to the shares held by these entities. WPG Fund Advisor
L.L.C. is the administrative general partner of Weiss, Peck & Greer Venture
Associates IV Cayman, L.P. Mr. Schaepe is a non-managing member of

59
<PAGE>

WPG Fund Advisor, L.L.C. and, as such, may be deemed to share voting and
investment power with respect to the shares held by Weiss, Peck & Greer
Venture Associates IV Cayman, L.P. Mr. Schaepe disclaims beneficial
ownership of all shares with respect to which he may be deemed to share
voting and investment power except to the extent of his pecuniary interests
therein. Mr. Schaepe's shares also include 24,000 shares held by Mr.
Schaepe's family living trust of which he is a trustee and 4,000 shares held
by his son's revocable trust of which he is a trustee.

(3) Includes (1) 1,050,328 shares held by Bessemer Venture Partners IV L.P., (2)
199,160 shares held by Bessemer Venture Investors L.P., and (3) 742,121
shares held by Bessec Ventures IV L.P. Deer IV & Co. LLC is the general
partner of Bessemer Venture Partners IV L.P., Bessemer Venture Investors
L.P. and Bessec Ventures IV L.P. Bruce K. Graham, one of our directors, is a
general partner of Deer IV & Co. LLC, and may be deemed to share voting and
investment power with respect to these shares. He disclaims beneficial
ownership of such shares except to the extent of his pecuniary interests
therein.

If the underwriters over-allotment option is exercised, up to an additional
shares may be sold by the selling stockholder.

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<PAGE>
DESCRIPTION OF CAPITAL STOCK

GENERAL

Upon completion of this offering, our authorized capital stock will consist
of 100,000,000 shares of common stock, $.001 par value, and 10,000,000 shares of
undesignated preferred stock, $.001 par value. As of September 30, 1999, there
were 22,894,992 shares of common stock outstanding held of record by
approximately 134 stockholders assuming the conversion of all outstanding
preferred stock into common stock. There will be shares of common stock
outstanding after giving effect to the sale of the shares of common stock
offered under this prospectus.

COMMON STOCK

The holders of common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. Subject to
preferences that may be applicable to any outstanding shares of preferred stock,
the holders of common stock are entitled to receive ratably such dividends as
may be declared by the board of directors out of funds legally available at
times and in amounts as the board may determine from time to time. See "Dividend
Policy." Upon completion of this offering, the board representation rights of
currently outstanding preferred stock will terminate and the holders of common
stock will be the only voting class for board elections. In the event of our
liquidation, dissolution or winding up, holders of the common stock are entitled
to share ratably in all assets remaining after payment of liabilities and the
liquidation preferences of any outstanding shares of preferred stock. Holders of
common stock have no preemptive rights or conversion rights or other
subscription rights. There are no redemption or sinking fund provisions
applicable to the common stock. All outstanding shares of common stock are, and
all shares of common stock to be outstanding upon completion of this offering
will be, fully-paid and nonassessable.

PREFERRED STOCK

Upon completion of this offering, all currently outstanding shares of
preferred stock will be converted into common stock. The preferred stock
liquidation, dividend and voting rights described in Notes to Financial
Statements will be extinguished upon the conversion of preferred stock into
common stock.

We will have authorized 10,000,000 shares of undesignated preferred stock.
The board of directors will have the authority to issue the undesignated
preferred stock in one or more series and to determine the powers, preferences
and rights and the qualifications, limitations or restrictions granted to or
imposed upon any wholly unissued series of undesignated preferred stock and to
fix the number of shares constituting any series and the designation of such
series, without any further vote or action by the stockholders. The issuance of
preferred stock may have the effect of delaying, deferring or preventing any
change in control without further action by the stockholders and may adversely
affect the voting and other rights of holders of common stock, and the
likelihood that such holders will receive dividend payments and payments upon
liquidation could have the effect of delaying, deferring or preventing a change
in control. Currently, we have no plans to issue any shares of preferred stock.

OPTIONS

As of September 30, 1999, options to purchase a total of 4,652,200 shares of
common stock were outstanding and up to 1,609,145 additional shares of common
stock may be issued upon exercise of options granted in the future under the
1999 Equity Incentive Plan and the 1999 Non-Employee Directors' Stock Option
Plan. Recommendations for option grants under our stock plans are made by our
compensation committee, subject to ratification by the full board of directors.
Our compensation committee may issue options with varying vesting schedules, but
all options granted under our stock plans must be exercised within 10 years from
the date of grant.

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<PAGE>
WARRANTS

In September 1997, in conjunction with the execution of a secured promissory
note and a lease agreement, we issued two six-year warrants to purchase an
aggregate of 93,750 shares of Series B preferred stock at an exercise price of
$1.60 per share.

In July 1998, in conjunction with the execution of an amendment to the
equipment financing agreement, we issued a warrant to purchase 4,000 shares of
Series C preferred stock at an exercise price of $2.50 per share. The number and
price of such shares are subject to adjustment, including a right to purchase
additional stock. If our total cost of equipment leased pursuant to the lease
exceeds $1.2 million, the warrantholder has the right to purchase an additional
number of shares as determined by multiplying the amount by which the
warrantholder's total equipment cost exceeds $1.2 million by 5%, and dividing
the product thereof by the exercise price per share. At September 30, 1999,
borrowings under the line had not exceeded $1.2 million.

In January 1999, in conjunction with the execution of a line of credit
agreement, we issued a six-year warrant to purchase 80,000 shares of common
stock at an exercise price of $2.50 per share plus additional shares calculated
as follows: (1) 10% of the aggregate loan amounts made to us under the loan
agreement in excess of $2.0 million after the date thereof divided by (2) the
price per share of our preferred stock issued in the most recent round of
venture capital equity financing prior to the funding of the loan. At September
30, 1999, borrowings under the line had not exceeded $2.0 million.

All outstanding warrants are currently exercisable. Upon the closing of this
offering, all warrants described in this section will become exercisable for our
common stock at the rate of one share of common stock for each share of
preferred stock underlying the warrants.

REGISTRATION RIGHTS

After this offering, the holders of approximately 22,894,992 shares of
common stock and warrants to acquire 177,750 shares of common stock will be
entitled to rights with respect to the registration of those shares under the
Securities Act.

PIGGYBACK RIGHTS. Under the terms of the agreements between us and the
holders of these registrable securities, if we propose to register any of our
securities under the Securities Act, either for our own account or for the
account of other security holders exercising registration rights, these holders
are entitled to notice of registration and are entitled to include shares of
their common stock in the registration.

DEMAND RIGHTS. These holders are also entitled to certain demand
registration rights under which they may require us, on up to two occasions, to
file a registration statement under the Securities Act at our expense with
respect to our shares of common stock. We are required to use our best efforts
to effect a registration.

FORM S-3 RIGHTS. These holders may require us to file additional
registration statements on Form S-3 at our expense. All of these registration
rights are subject to conditions and limitations, among them the right of the
underwriters of an offering to limit the number of shares included in a
registration and our right not to effect a requested registration within six
months following an offering of our securities, including this offering.
Additionally, the holders of registration rights have agreed not to exercise
such rights for at least 180 days after the offering without the prior written
consent of Morgan Stanley & Co. Incorporated.

62
<PAGE>
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE CERTIFICATE OF INCORPORATION, BYLAWS
AND DELAWARE LAW

CERTIFICATE OF INCORPORATION AND BYLAWS

Our certificate of incorporation provides that, effective upon the closing
of this offering, all stockholder actions must be effected at a duly called
meeting and not by a consent in writing. The bylaws provide that our
stockholders may call a special meeting of stockholders only upon a request of
stockholders owning at least 50% of our capital stock. These provisions of the
certificate of incorporation and bylaws could discourage potential acquisition
proposals and could delay or prevent a change in control of QED. These
provisions are intended to enhance the likelihood of continuity and stability in
the composition of the board of directors and in the policies formulated by the
board of directors and to discourage transactions that may involve an actual or
threatened change of control of QED. These provisions are designed to reduce our
vulnerability to an unsolicited acquisition proposal. The provisions also are
intended to discourage tactics that may be used in proxy fights. However, these
provisions could have the effect of discouraging others from making tender
offers for our shares and, as a consequence, they also may inhibit fluctuations
in the market price of our shares that could result from actual or rumored
takeover attempts. These provisions also may have the effect of preventing
changes in our management. See "Risk Factors--Provisions of Our Certificate of
Incorporation and Bylaws or Delaware Law May Delay or Prevent a Change of
Control Transaction and, Therefore, Depress the Market Price of Our Stock."

DELAWARE TAKEOVER STATUTE

We are subject to Section 203 of the Delaware General Corporation Law.
Unless our stockholders adopt an amendment to the contrary, our stock is no
longer listed on a national securities exchange or our stockholders consent,
this section prohibits a Delaware corporation from engaging in any business
combination with any interested stockholder, unless:

- prior to becoming an interested stockholder, the board of directors of the
corporation approved either the business combination or the transaction
that resulted in the stockholder becoming an interested stockholder;

- upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding for purposes of determining the
number of shares outstanding those shares owned (x) by persons who are
directors and also officers and (y) by employee stock plans in which
employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or
exchange offer; or

- on or subsequent to becoming an interested stockholder, the business
combination is approved by the board of directors and authorized at an
annual or special meeting of stockholders, and not by written consent, by
the affirmative vote of at least 66 2/3% of the outstanding voting stock
that is not owned by the interested stockholder.

Section 203 defines a business combination to include:

- any merger or consolidation involving the corporation and the interested
stockholder;

- any sale, transfer, pledge or other disposition of 10% or more of the
assets of the corporation involving the interested stockholder;

- any transaction that results in the issuance or transfer by the
corporation of any stock of the corporation to the interested stockholder
except upon the exercise, exchange or conversion of securities exercisable
for, exchangeable for or convertible into stock of such composition, upon
a

63
<PAGE>
merger of a parent and a subsidiary, or upon an exchange offer by the
corporation to purchase stock made on the same terms to all holders of
said stock;

- any transaction involving the corporation that has the effect of
increasing the proportionate share of the stock of any class or series of
the corporation beneficially owned by the interested stockholder; or

- the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.

In general, Section 203 defines an interested stockholder as any entity or
person beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.

CALIFORNIA FOREIGN CORPORATION LAW

Section 2115 of the California Corporations Code provides that under some
circumstances several provisions of the California Corporations Code may be
applied to foreign corporations qualified to do business in California
notwithstanding the law of the jurisdiction where the corporation is
incorporated. These corporations are referred to in this prospectus as
"quasi-California" corporations. Section 2115 applies to foreign corporations
that have more than half of their voting stock held by stockholders residing in
California and more than half of their business deriving from California,
measured on or after the 135(th) day of the corporation's fiscal year. If we
were determined to be a quasi-California corporation, we would have to comply
with California law with respect to, among other things, elections of directors
and distributions to stockholders. Under the California Corporations Code, a
corporation is prohibited from paying dividends unless:

- the retained earnings of the corporation immediately prior to the
distribution equals or exceeds the amount of the proposed distribution; or

- (a) the assets of the corporation, exclusive of specific non-tangible
assets, equal or exceed 1 1/4 times its liabilities, exclusive of specific
liabilities; and

(b) the current assets of the corporation at least equal its current
liabilities. If the average pre-tax net earnings of the corporation before
interest expense for the two years preceding the distribution was less
than the average interest expense of the corporation for those year,
however, the current assets of the corporation must exceed 1 1/4 times its
current liabilities.

Following this offering, we will be exempt from the application of Section
2115 until July 1, 2000, and after that if our voting stock is held by more than
800 stockholders of record.

TRANSFER AGENT AND REGISTRAR

The Transfer Agent and Registrar for our common stock is Norwest Bank
Minnesota N.A., 161 North Concord Exchange, South St. Paul, MN 55075

64
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE

Prior to this offering, there has been no public market for our common
stock, and sales of substantial amounts of common stock including shares issued
upon exercise of outstanding warrants or options, in the public market after
this offering could adversely affect market prices prevailing from time to time
and could impair our ability to raise capital through sale of equity securities.
Furthermore, as described below, shares currently outstanding will be
available for sale after the expiration of contractual restrictions on resale
with us and/or the underwriters. Sales of substantial amounts of our common
stock in the public market after contractual restrictions lapse could adversely
affect the prevailing market price and our ability to raise equity capital in
the future.

SALES OF RESTRICTED SHARES

Of the shares of common stock outstanding upon the completion of
this offering (assuming no exercise of the underwriters' over-allotment option),
22,894,992 shares are deemed restricted shares under Rule 144 of the Securities
Act. The number of shares of common stock available for sale in the public
market is limited by restrictions under the Securities Act and lock-up
agreements under which the holders of these shares have agreed, subject to
limited exceptions, not to sell or otherwise dispose of any of their shares for
a period of 180 days after the date of this prospectus without the prior written
consent of Morgan Stanley & Co. Incorporated.

The remaining shares will become eligible for public sale as follows:

- on the date of this prospectus, no shares other than of the
shares offered under this prospectus will be eligible for sale;

- beginning 180 days after the date of this prospectus, or earlier with the
written consent of Morgan Stanley & Co. Incorporated, 22,712,629
restricted shares will become available for sale in the public market
subject to volume limitations of Rule 144 relating to manner of sale,
notice and the availability of current public information about us.

RULE 144. In general, under Rule 144 as currently in effect beginning 90
days after this offering, a person (or persons whose shares are aggregated) who
has beneficially owned restricted shares for at least one year, including a
person who may be deemed an affiliate, is entitled to sell within any
three-month period a number of shares of common stock that exceed the greater of
1% of the then-outstanding shares of our common stock (approximately
shares after giving effect to this offering) and the average weekly trading
volume of our common stock on the Nasdaq National Market during the four
calendar weeks preceding that sale. Sales under Rule 144 are subject to
restrictions relating to manner of sale, notice and the availability of current
public information about us.

RULE 144(K). Under Rule 144(k), a person who is not our affiliate at any
time during the 90 days preceding a sale, and who has beneficially owned shares
for at least two years, would be entitled to sell their shares immediately
following this offering without regard to the volume limitations, manner of sale
provisions or notice or other requirements of Rule 144. However, the transfer
agent may require an opinion of counsel that a proposed sale of shares comes
within the terms of Rule 144 prior to effecting a transfer of the subject
shares.

OPTIONS

Any of our employees or consultants who purchased his or her shares under a
written compensatory benefit plan or contract is entitled to rely on the resale
provisions of Rule 701 of the Securities Act, which permits nonaffiliates to
sell their Rule 701 shares without having to comply with the public information,
holding period, volume limitation or notice provisions of Rule 144 and permits
affiliates to sell their Rule 701 shares without having to comply with the Rule
144 holding period restrictions, in each case commencing 90 days after the date
of this prospectus. As of the date of this prospectus, the holders of

65
<PAGE>

options to purchase approximately 1,996,559 shares of common stock will be
eligible to sell their shares on the expiration of the 180-day lock-up period.

We intend to file a registration statement on Form S-8 under the Securities
Act to register shares of common stock issued or reserved for issuance under our
stock plans within 180 days after the date of this prospectus. This would permit
the resale of such shares by nonaffiliates in the public market without
restriction under the Securities Act.

LOCK-UP AGREEMENTS

The officers, directors and stockholders of QED have agreed, subject to
limited exceptions, not to sell, transfer or otherwise dispose of, directly or
indirectly, any of their shares of common stock or any securities convertible or
exchangeable for shares of common stock for a period of 180 days after the date
of the offering without the prior written consent of Morgan Stanley & Co.
Incorporated. Morgan Stanley & Co. Incorporated, however, may in its sole
discretion, at any time without notice, release all or any portion of the shares
subject to lock-up agreements.

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<PAGE>
UNDERWRITERS

Under the terms and subject to the conditions contained in an underwriting
agreement dated the date of this prospectus the underwriters named below, for
whom Morgan Stanley & Co. Incorporated, BancBoston Robertson Stephens Inc. and
Lehman Brothers Inc. are acting as representatives, have severally agreed to
purchase, and we and the selling stockholder have agreed to sell to them,
severally, the respective numbers of shares of common stock set forth opposite
the names of the underwriters below:

<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
- ---------------------------------------------------------------------------------- -----------
<S> <C>
Morgan Stanley & Co. Incorporated.................................................
BancBoston Robertson Stephens Inc.................................................
Lehman Brothers Inc...............................................................

-----------
Total.........................................................................
-----------
-----------
</TABLE>

The underwriters are offering the shares subject to their acceptance of the
shares from us and the selling stockholder and subject to prior sale. The
underwriting agreement provides that the obligations of the several underwriters
to pay for and accept delivery of the shares of common stock offered hereby are
subject to the approval of certain legal matters by their counsel and to other
conditions. The underwriters are obligated to take and pay for all of the shares
of common stock offered by this prospectus, other than those covered by the
over-allotment option described below, if any of the shares are taken.

The underwriters initially propose to offer part of the shares of common
stock directly to the public at the public offering price set forth on the cover
page of this prospectus and part to certain dealers at a price that represents a
concession not in excess of $ a share under the public offering price. Any
underwriters may allow, and such dealers may re-allow, a concession not in
excess of $ a share to other underwriters or to other dealers. After the
initial offering of the shares of common stock, the offering price and other
selling terms may from time to time be varied by the representatives of the
underwriters.

We and the selling stockholder have granted to the underwriters an option,
exercisable for 30 days from the date of this prospectus, to purchase from us
and the selling stockholder on a pro rata basis up to an aggregate of
additional shares of common stock at the public offering price set forth on the
cover page of this prospectus, less underwriting discounts and commissions. The
underwriters may exercise such option solely for the purpose of covering
over-allotments, if any, made in connection with this offering of the shares of
common stock. To the extent this option is exercised, each underwriter will
become obligated, subject to certain conditions, to purchase approximately the
same percentage of the additional shares of common stock as the number set forth
next to that underwriter's name in the preceding table bears to the total number
of shares of common stock set forth next to the names of all underwriters in the
preceding table.

At our request, the underwriters have reserved up to shares of common
stock to be sold in the offering for sale, at the public offering price, to
persons designated by us. We intend to offer and sell these shares to persons
with whom we have business relationships, but we have had no prior discussions
or arrangements with any person concerning the offer and sale of reserved
shares. The number of shares of common stock available for sale to the general
public will be reduced to the extent these persons purchase the reserved shares.
Any reserved shares that are not so purchased will be offered by the
underwriters to the general public on the same basis as the other shares offered
in this prospectus.

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<PAGE>

We, the selling stockholder, our directors, officers and all of our
stockholders, optionholders and warrantholders have each agreed that, without
the prior written consent of Morgan Stanley & Co. Incorporated on behalf of the
underwriters, or otherwise during the period ending 180 days after the date of
this prospectus, we will not:

- offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right
or warrant to purchase, lend or otherwise transfer or dispose of, directly
or indirectly, any shares of common stock or any securities convertible
into or exercisable or exchangeable for common stock, whether the shares
or any of those securities are then owned by that person or are later
acquired directly from us; or

- enter into any swap or similar arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of common
stock.

whether any such transaction described above is to be settled by delivery of
common stock or such other securities, in cash or otherwise.

The restrictions described in the previous paragraph do not apply to:

- the sale of any shares to the underwriters;

- the issuance by QED of shares of common stock upon the exercise of an
option or a warrant or the conversion of a security outstanding on the
date of this prospectus of which the underwriters have been advised in
writing;

- transactions by any person other than QED relating to shares of common
stock or other securities acquired in open market transactions after the
completion of the offering of the shares; or

- the issuance of shares of common stock or options by QED to purchase
shares of common stock under our employee benefit plans as in existence on
the date of this prospectus provided the shares and options are subject to
a lock-up period of at least 180 days after the date of this prospectus.

The underwriters have informed us that they do not intend sales to
discretionary accounts to exceed five percent of the total number of shares of
common stock offered by them.

We have submitted an application to have our common stock approved for
quotation on the Nasdaq National Market under the symbol "QEDI."

In order to facilitate the offering of the common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the common stock. Specifically, the underwriters may over-allot in
connection with the offering, creating a short position in the common stock for
their own account. In addition, to cover over-allotments or to stabilize the
price of the common stock, the underwriters may bid for, and purchase, shares of
common stock in the open market. Finally, the underwriting syndicate may reclaim
selling concessions allowed to an underwriter or a dealer for distributing the
common stock in the offering if the syndicate repurchases previously distributed
shares of common stock in transactions to cover syndicate short positions or in
stabilization transactions. Any of these activities may stabilize or maintain
the market price of the common stock above independent market levels. The
underwriters are not required to engage in these activities and may end any of
these activities at any time.

We, the selling stockholder and the underwriters have agreed to indemnify
each other against liabilities, including liabilities under the Securities Act.

PRICING OF THE OFFERING

Prior to this offering, there has been no public market for the shares of
common stock. Consequently, the public offering price for the shares of common
stock will be determined by negotiations between us

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<PAGE>
and the representatives of the underwriters. Among the factors to be considered
in determining the public offering price will be:

- our record of operations, current financial position and future prospects;

- the future prospects of our industry in general;

- the experience of our management;

- our sales, earnings and other financial operating information in recent
periods; and

- the price-earnings ratios, price-sales ratios, market prices of securities
and financial and operating information of companies engaged in activities
similar to ours.

The estimated initial public offering price range indicated on the cover
page of this prospectus is subject to change as a result of market conditions
and other factors.

LEGAL MATTERS

The validity of the common stock offered hereby will be passed upon for us
by Cooley Godward LLP, Palo Alto, California. Legal matters in connection with
this offering will be passed upon for the underwriters by Fenwick & West LLP,
Palo Alto, California.

EXPERTS

Our financial statements as of June 30, 1997, 1998 and 1999 and for each of
the three years in the period ended June 30, 1999, included in this prospectus
have been so included in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.

WHERE YOU CAN FIND MORE INFORMATION

We filed with the SEC a registration statement on Form S-1 under the
Securities Act with respect to the shares of common stock offered by this
prospectus. This prospectus does not contain all the information set forth in
the registration statement and related exhibits and schedules. For further
information with respect to QED and the common stock offered hereby, reference
is made to the registration statement and to the related exhibits and schedules.

Statements contained in this prospectus as to the contents of any contract
or other document referred to are not necessarily complete, and each of these
statements is qualified in all respects by reference to the full text of the
contract or other document filed as an exhibit to the registration statement. A
copy of the registration statement and the related exhibits and schedules may be
inspected without charge at the public reference facilities maintained by the
SEC in Room 1024, 450 Fifth Street, N.W. Washington, D.C. 20549, and at the
SEC's regional offices located at the Northwestern Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade
Center, 13th Floor, New York, New York 10048, and copies of all or any part of
the registration statement may be obtained from these offices upon payment of
the fees prescribed by the SEC. The SEC maintains a worldwide web site that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the SEC. The address of the
site is HTTP://WWW.SEC.GOV.

Upon completion of this offering, we will become subject to the information
and periodic reporting requirements of the Securities Exchange Act and will file
periodic reports, proxy statements and other information with the SEC. These
periodic reports, proxy statements and other information will be available for
inspection and copying at the regional offices, public reference facilities and
web site of the SEC referred to above.

69
<PAGE>
QUANTUM EFFECT DEVICES, 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>
REPORT OF INDEPENDENT ACCOUNTANTS

The Board of Directors and Stockholders of
Quantum Effect Devices, Inc.:

The reincorporation as described in note 11 to the financial statements has
not been consummated at October , 1999. When it has been consummated, we will
be in a position to furnish the following report:

"In our opinion, the accompanying balance sheets and the related statements
of operations, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Quantum Effect Devices, Inc. as of
June 30, 1998, and 1999 and the results of its operations and its cash flows for
the three years in the period ended June 30, 1999, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards, 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
August 11, 1999, except for note 11
which is as of October , 1999

F-2
<PAGE>
QUANTUM EFFECT DEVICES, INC.

BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
JUNE 30, SEPTEMBER 30, EQUITY AT
---------------------- ------------- SEPTEMBER 30,
1998 1999 1999 1999
---------- ---------- ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 9,756 $ 1,442 $ 540
Short-term investments.................................... -- 16,023 10,806
Restricted cash........................................... -- 2,000 2,000
Accounts receivable, net.................................. 1,387 3,065 5,531
Receivables from related parties.......................... 870 652 623
Inventories............................................... 852 2,122 6,669
Prepaid expenses and other current assets................. 1,082 768 844
---------- ---------- -------------
Total current assets.................................... 13,947 26,072 27,013
Property and equipment, net................................. 1,909 1,807 1,957
---------- ---------- -------------
Total assets.......................................... $ 15,856 $ 27,879 $ 28,970
---------- ---------- -------------
---------- ---------- -------------

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Borrowings, current portion............................... $ 489 $ 1,140 $ 1,171
Accounts payable.......................................... 2,090 3,066 4,765
Accrued expenses and other current liabilities............ 2,217 3,102 3,546
Deferred revenue.......................................... 710 248 212
Capital lease obligations, current portion................ 220 342 350
---------- ---------- -------------
Total current liabilities............................... 5,726 7,898 10,044
Borrowings, non-current portion............................. 1,143 1,949 1,618
Capital lease obligations, non-current portion.............. 478 426 337
---------- ---------- -------------
Total liabilities..................................... 7,347 10,273 11,999
---------- ---------- -------------
Commitments and contingencies (Note 9)
Stockholders' equity:
Preferred stock, $.001 par value, 13,897,750 shares
authorized, 9,100,000, 13,618,837 and 13,618,837
(unaudited) shares issued and outstanding actual;
10,000,000 shares authorized and none issued and
outstanding pro forma (unaudited)....................... 9 14 14 $ --
Common stock, $.001 par value, 29,000,000 shares
authorized, 7,789,966, 8,532,959 and 9,276,155
(unaudited) shares issued and outstanding actual;
100,000,000 shares authorized, 22,894,992 shares issued
and outstanding pro forma (unaudited)................... 8 9 9 23
Additional paid-in capital................................ 21,955 43,409 44,471 44,471
Deferred stock-based compensation......................... (868) (1,462) (1,405) (1,405)
Accumulated deficit....................................... (12,595) (24,364) (26,118) (26,118)
---------- ---------- ------------- -------------
Total stockholders' equity.............................. 8,509 17,606 16,971 $ 16,971
---------- ---------- ------------- -------------
-------------
Total liabilities and stockholders' equity............ $ 15,856 $ 27,879 $ 28,970
---------- ---------- -------------
---------- ---------- -------------
</TABLE>

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

F-3
<PAGE>
QUANTUM EFFECT DEVICES, INC.

STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED JUNE 30, ENDED SEPTEMBER 30,
-------------------------------- ---------------------------
1997 1998 1999 1998 1999
--------- --------- ---------- -------------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Product revenue................................... $ -- $ 1,428 $ 10,937 $ 1,383 $ 9,808
Royalty revenue................................... 2,687 1,798 1,388 507 50
Royalty revenue from related parties.............. 7,376 3,254 3,037 732 609
--------- --------- ---------- ------- -----------
Total revenue................................... 10,063 6,480 15,362 2,622 10,467
--------- --------- ---------- ------- -----------
Cost of revenue:
Product revenue................................... -- 3,714 8,513 1,845 6,414
--------- --------- ---------- ------- -----------
Gross profit.................................... 10,063 2,766 6,849 777 4,053
--------- --------- ---------- ------- -----------
Operating expenses:
Research and development.......................... 9,421 9,552 12,381 2,933 3,141
Selling, general and administrative............... 2,123 2,979 5,436 1,147 2,125
Stock-based compensation.......................... -- 150 777 132 654
--------- --------- ---------- ------- -----------
Total operating expenses........................ 11,544 12,681 18,594 4,212 5,920
--------- --------- ---------- ------- -----------
Loss from operations................................ (1,481) (9,915) (11,745) (3,435) (1,867)
Interest income..................................... 340 325 472 93 217
Interest expense.................................... -- (204) (496) (52) (104)
--------- --------- ---------- ------- -----------
Net loss before income taxes........................ (1,141) (9,794) (11,769) (3,394) (1,754)
Provision for income taxes.......................... 60 89 -- -- --
--------- --------- ---------- ------- -----------
Net loss............................................ $ (1,201) $ (9,883) $ (11,769) $ (3,394) $ (1,754)
--------- --------- ---------- ------- -----------
--------- --------- ---------- ------- -----------
Net loss per share:
Basic and diluted................................. $ (.21) $ (1.53) $ (1.45) $ (.43) $ (.20)
--------- --------- ---------- ------- -----------
--------- --------- ---------- ------- -----------
Weighted average shares........................... 5,746 6,451 8,111 7,836 8,808
--------- --------- ---------- ------- -----------
--------- --------- ---------- ------- -----------
Pro forma net loss per share:
Basic and diluted (unaudited)..................... $ (.63) $ (.08)
---------- -----------
---------- -----------
Weighted average shares (unaudited)............... 18,717 22,427
---------- -----------
---------- -----------
</TABLE>

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

F-4
<PAGE>
QUANTUM EFFECT DEVICES, INC.

STATEMENTS OF STOCKHOLDERS' EQUITY

(IN THOUSANDS)

<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL DEFERRED
--------------- ----------------- PAID-IN STOCK-BASED ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION DEFICIT TOTAL
------- ------ ------ -------- ---------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JUNE 30, 1996........... 4,300 $ 4 5,548 $ 6 $ 8,657 $ -- $ (1,511) $ 7,156
Exercise of stock options.......... -- -- 266 -- 40 -- -- 40
Net loss........................... -- -- -- -- -- (1,201) (1,201)
------- ------ ------ -------- ---------- ------------ ----------- --------
BALANCE AT JUNE 30, 1997........... 4,300 4 5,814 6 8,697 -- (2,712) 5,995
Issuance of Series C preferred
stock............................ 4,800 5 -- -- 11,946 -- -- 11,951
Exercise of stock options.......... -- -- 1,976 2 294 -- -- 296
Deferred stock-based compensation.. -- -- -- -- 1,018 (1,018) -- --
Amortization of deferred
stock-based compensation......... -- -- -- -- -- 150 -- 150
Net loss........................... -- -- -- -- -- -- (9,883) (9,883)
------- ------ ------ -------- ---------- ------------ ----------- --------
BALANCE AT JUNE 30, 1998........... 9,100 9 7,790 8 21,955 (868) (12,595) 8,509
Issuance of Series D preferred
stock............................ 4,519 5 -- -- 19,473 -- -- 19,478
Issuance of common stock for cash.. -- -- 238 -- 475 -- -- 475
Exercise of stock options.......... -- -- 505 1 135 -- -- 136
Deferred stock-based compensation.. -- -- -- -- 1,371 (1,371) -- --
Amortization of deferred
stock-based compensation......... -- -- -- -- -- 777 -- 777
Net loss........................... -- -- -- -- -- -- (11,769) (11,769)
------- ------ ------ -------- ---------- ------------ ----------- --------
BALANCE AT JUNE 30, 1999........... 13,619 14 8,533 9 43,409 (1,462) (24,364) 17,606
Exercise of stock options
(unaudited)...................... -- -- 743 -- 465 -- -- 465
Deferred stock-based compensation
(unaudited)...................... -- -- -- -- 597 (597) -- --
Amortization of deferred
stock-based compensation
(unaudited)...................... -- -- -- -- -- 654 -- 654
Net loss (unaudited)............... -- -- -- -- -- -- (1,754) (1,754)
------- ------ ------ -------- ---------- ------------ ----------- --------
BALANCE AT SEPTEMBER 30, 1999
(UNAUDITED)...................... 13,619 $ 14 9,276 $ 9 $44,471 $(1,405) $(26,118) $ 16,971
------- ------ ------ -------- ---------- ------------ ----------- --------
------- ------ ------ -------- ---------- ------------ ----------- --------
</TABLE>

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

F-5
<PAGE>
QUANTUM EFFECT DEVICES, INC.

STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED JUNE 30, SEPTEMBER 30,
------------------------------- --------------------
1997 1998 1999 1998 1999
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss....................................................... $ (1,201) $ (9,883) $ (11,769) $ (3,394) $ (1,754)
Adjustments to reconcile net loss to net cash used in operating
activities:
Allowance for doubtful accounts.............................. -- -- 300 --
Depreciation and amortization................................ 959 909 962 233 274
Amortization of deferred stock-based compensation............ -- 150 777 132 654
Deferred income taxes........................................ 580 89 -- -- --
Changes in assets and liabilities:
Accounts receivable........................................ 217 (1,271) (1,760) 434 (2,437)
Inventories................................................ -- (852) (1,270) (176) (4,547)
Prepaid expenses and other current assets.................. (476) (391) 314 344 (76)
Accounts payable........................................... 770 597 976 (434) 1,699
Accrued expenses and other current liabilities............. 1,148 210 885 252 444
Deferred revenue........................................... (2,093) (451) (462) (157) (36)
--------- --------- --------- --------- ---------
Net cash used in operating activities.................... (96) (10,893) (11,047) (2,766) (5,779)
--------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment.......................... (936) (76) (493) (45) (424)
Purchase of short term investments............................. -- -- (16,023) -- (10,504)
Maturities and sales of short term investments................. 2,974 -- -- -- 15,721
Restricted cash................................................ -- -- (2,000) -- --
--------- --------- --------- --------- ---------
Net cash provided by (used in) investing activities...... 2,038 (76) (18,516) (45) 4,793
--------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under capital leases........................ -- (127) (297) (66) (81)
Proceeds from issuance of preferred stock...................... -- 11,951 19,478 -- --
Proceeds from issuance of common stock......................... 40 296 611 27 465
Proceeds from borrowings....................................... -- 2,000 2,000 -- --
Repayments of borrowings....................................... (250) (368) (543) 115 (300)
--------- --------- --------- --------- ---------
Net cash provided by (used in) financing activities...... (210) 13,752 21,249 76 84
--------- --------- --------- --------- ---------
Net increase (decrease) in cash and cash equivalents............. 1,732 2,783 (8,314) (2,735) (902)
Cash and cash equivalents at beginning of period................. 5,241 6,973 9,756 9,756 1,442
--------- --------- --------- --------- ---------
Cash and cash equivalents at end of period....................... $ 6,973 $ 9,756 $ 1,442 $ 7,021 $ 540
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
SUPPLEMENTAL CASH FLOW INFORMATION:
Income tax paid (refunded), net................................ $ 470 $ (467) $ 55 $ -- $ (64)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Cash paid for interest......................................... $ -- $ 170 $ 405 $ 34 $ 70
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Acquisition of property and equipment through capital leases... $ -- $ 825 $ 367 $ 1 $ --
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>

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

F-6
<PAGE>
QUANTUM EFFECT DEVICES, INC.

NOTES TO FINANCIAL STATEMENTS

NOTE 1--THE COMPANY AND SUMMARY OF ITS SIGNIFICANT ACCOUNTING
POLICIES:

THE COMPANY

Quantum Effect Devices, Inc. (formerly Quantum Effect Design, Inc.) ("QED"
or the "Company") was incorporated in California in August 1991 and will be
reincorporated in Delaware prior to this offering (see note 11). The Company
changed its name from Quantum Effect Design, Inc. to Quantum Effect Devices,
Inc. in August 1999. The Company is a developer and supplier of high performance
embedded microprocessors for use in information-intensive applications such as
networking/communications infrastructure equipment, business network equipment
and consumer network products.

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
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates, and such
differences could affect the results of operations reported in future periods.

REVENUE RECOGNITION

Revenue from product sales is generally recognized upon shipment, net of
sales returns and allowances. Revenue generated by sales to distributors under
agreements allowing certain rights of return are deferred for financial
reporting purposes until the products are sold by the distributors.

Royalty revenue is recognized when third parties and related third parties
sell products that the Company has developed and licensed for production.
Royalty revenue received in advance of the sale of the licensed products is
recorded as deferred revenue and recognized when the products are sold by the
third parties.

RESEARCH AND DEVELOPMENT

Research and development expenditures are expensed as incurred.

CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

The Company considers all highly liquid investments with a maturity of three
months or less from the date of purchase to be cash equivalents. At June 30,
1999, cash and cash equivalents were held by three major U.S. financial
institutions. Cash and cash equivalents consist of cash on deposit with banks,
money market funds and commercial deposits, the fair value of which approximates
cost.

The Company classifies all short-term investments as available-for-sale.
Accordingly, these investments are carried at fair value. The fair value of such
securities approximates cost, and there were no material unrealized gains or
losses as of June 30, 1999. Short-term investments generally have maturities of

F-7
<PAGE>
QUANTUM EFFECT DEVICES, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 1--THE COMPANY AND SUMMARY OF ITS SIGNIFICANT ACCOUNTING
POLICIES: (CONTINUED)
less than one year from the date of purchase. The following table summarizes the
estimated fair value of the Company's cash, cash equivalents and short-term
investments (in thousands):

<TABLE>
<CAPTION>
JUNE 30,
--------------------
1998 1999
--------- ---------
<S> <C> <C>
Cash and cash equivalents:
Cash................................................................... $ 621 $ 654
Money market funds..................................................... 1,135 788
Commercial paper....................................................... 8,000 --
--------- ---------
$ 9,756 $ 1,442
--------- ---------
--------- ---------
Short-term investments:
U.S. Government bonds and notes........................................ $ -- $ 10,943
Commercial bonds and notes............................................. -- 5,080
--------- ---------
$ -- $ 16,023
--------- ---------
--------- ---------
</TABLE>

RESTRICTED CASH

At June 30, 1999, the Company had $2.0 million invested in a certificate of
deposit with a major U.S. financial institution as security for a letter of
credit with a major supplier for the same amount. This letter of credit expires
on May 30, 2000.

CONCENTRATIONS OF CREDIT RISK AND SIGNIFICANT CUSTOMERS

Financial instruments that potentially subject the Company to concentrations
of credit risk consist primarily of cash, cash equivalents, short-term
investments and accounts receivable. Substantially all of the Company's cash and
cash equivalents are invested in highly-liquid money market fundsand commercial
securities with major financial institutions. Short-term investments consist of
U.S. government and commercial bonds and notes. The Company sells its products
principally to original equipment manufacturers and their subcontract
manufacturers. The Company performs ongoing credit evaluations of its customers
and maintains an allowance for potential credit losses. Credit losses to date
have been consistent with management's estimates.

The following table sets forth customers comprising 10% or more of the
Company's total revenue for each of the periods indicated.

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------
CUSTOMER 1997 1998 1999
- -------------------------------------------------- ------- ------- -------
<S> <C> <C> <C>
A................................................. 23% 50% 20%
B................................................. 25 23 4
C................................................. -- 19 18
D................................................. 51 -- --
E................................................. -- -- 13
F................................................. -- -- 12
</TABLE>

F-8
<PAGE>
QUANTUM EFFECT DEVICES, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 1--THE COMPANY AND SUMMARY OF ITS SIGNIFICANT ACCOUNTING
POLICIES: (CONTINUED)
The Company's accounts receivable were concentrated with two customers at
June 30, 1998 (representing 39% and 53% of aggregate receivables) and four
customers at June 30, 1999 (representing 22%, 20%, 17% and 15% of aggregate
receivables).

FAIR VALUE OF FINANCIAL INSTRUMENTS

Carrying amounts of certain of the Company's financial instruments,
including cash and cash equivalents, restricted cash short-term investments,
accounts receivable, accounts payable, capital lease obligations and borrowings
approximate their fair value due to the relatively short maturities and based
upon comparable market information available at the respective balance sheet
dates. The carrying value of the Company's long-term financial instruments
approximates fair value because the interest rates approximate current market
rates of similar debt. The Company does not hold or issue financial instruments
for trading purposes.

INVENTORIES

Inventories are stated at the lower of cost or market, cost being determined
using the first-in, first-out ("FIFO") method. Appropriate consideration is
given to obsolescence, excessive levels, deterioration and other factors in
evaluating net realizable value.

PROPERTY AND EQUIPMENT

Property and equipment, including leasehold improvements, are stated at
historical cost, less accumulated depreciation and amortization. Depreciation is
computed using the straight-line method over the estimated useful lives of these
assets, ranging from three to five years, or, in the case of leasehold
improvements, over the lease period, whichever is shorter.

Upon disposal, the assets and related accumulated depreciation and
amortization are removed from the Company's accounts, and the resulting gains or
losses are reflected in the statements of operations.

Long-lived assets held and used by the Company are reviewed for impairment
whenever events or changes in circumstances indicate that their net book value
may not be recoverable. An impairment loss is recognized if the sum of the
expected future cash flows (undiscounted and before interest) from the use of
the asset is less than the net book value of the asset. The amount of the
impairment loss will generally be measured as the difference between net book
values of the assets and their estimated fair values. Based on its most recent
analysis, the Company believes that no long-lived assets were impaired at June
30, 1998 and 1999.

COMPREHENSIVE INCOME

The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No. 130 establishes
standards for reporting and displaying comprehensive income and its components
in a full set of general-purpose financial statements. There was no difference
between the Company's net loss and its total comprehensive loss for the years
ended June 30, 1997, 1998 and 1999.

F-9
<PAGE>
QUANTUM EFFECT DEVICES, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 1--THE COMPANY AND SUMMARY OF ITS SIGNIFICANT ACCOUNTING
POLICIES: (CONTINUED)
ACCOUNTING FOR STOCK-BASED COMPENSATION

The Company accounts for stock-based employee compensation arrangements
using the intrinsic value method as prescribed in Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25").
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the fair value of the Company's stock at the date of grant over the
stock option exercise price. Expense associated with stock-based compensation is
amortized on an accelerated basis over the vesting period of the individual
award consistent with the method described in Financial Accounting Standards
Board Interpretation No. 28 ("FIN 28"). Application of FIN 28 results in
amortization of approximately 53% of the compensation in the first 12 months of
vesting, 27% of the compensation in the second 12 months of vesting, 14% of the
compensation in the third 12 months of vesting and 6% of the compensation in the
fourth 12 months of vesting. The Company accounts for stock issued to
non-employees in accordance with the provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
No. 123") and Emerging Issues Task Force Consensus No. 96-18, "Accounting for
Equity Instruments that are offered to other than employees for acquiring of in
conjunction with selling goods or services" ("EITF 96-18"). Under SFAS 123 and
EITF 96-18 stock option awards issued to non-employees are accounted for at
their fair value using the Black-Scholes method. The fair value of each
non-employee stock awarded is remeasured at each period end until a commitment
date is reached, which is generally the vesting date.

SEGMENT INFORMATION

The Company has adopted the Financial Accounting Standards Board's Statement
of Financial Accounting Standards No. 131 "Disclosure about Segments of an
Enterprise and Related Information" ("SFAS No. 131"), effective for fiscal years
beginning after December 31, 1997.

The Company has determined that it has one reportable business segment: the
design, license, manufacture and marketing of integrated circuits. To date, all
of the Company's products and services have originated within the United States.

NET LOSS PER SHARE

Basic net loss per share is computed by dividing the net loss available to
common stockholders for the period by the weighted average number of common
shares outstanding during the period. Diluted net loss per share is computed
based on the weighted average number of common shares and dilutive potential
common shares outstanding. The calculation of diluted net loss per share
excludes potential common shares if the effect is anti-dilutive. Potential
common shares consist of incremental common shares issuable upon the exercise of
stock options, shares issuable upon conversion of convertible preferred stock
and common shares issuable upon the exercise of common and convertible preferred
stock warrants.

F-10
<PAGE>
QUANTUM EFFECT DEVICES, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 1--THE COMPANY AND SUMMARY OF ITS SIGNIFICANT ACCOUNTING
POLICIES: (CONTINUED)
The following table sets forth the computation of basic and diluted net loss
per share for the periods presented (in thousands, except per share amounts):

<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED JUNE 30, SEPTEMBER 30,
-------------------------------- ------------------------
1997 1998 1999 1998 1999
--------- --------- ---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Numerator:
Net loss............................ $ (1,201) $ (9,883) $ (11,769) $ (3,394) $ (1,754)
--------- --------- ---------- ----------- -----------
--------- --------- ---------- ----------- -----------
Denominator:
Weighted average common shares...... 5,746 6,451 8,111 7,836 8,808
--------- --------- ---------- ----------- -----------
--------- --------- ---------- ----------- -----------
Net loss per share:
Basic and diluted................... $ (.21) $ (1.53) $ (1.45) $ (.43) $ (.20)
--------- --------- ---------- ----------- -----------
--------- --------- ---------- ----------- -----------
</TABLE>

The following table sets forth potential shares of common stock that are not
included in the diluted net loss per share calculation above because to do so
would be anti-dilutive for the periods presented (in thousands):

<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
------------------------------- --------------------
1997 1998 1999 1998 1999
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Series A preferred stock........................... 1,800 1,800 1,800 1,800 1,800
Series B preferred stock........................... 2,500 2,500 2,500 2,500 2,500
Series C preferred stock........................... -- 4,800 4,800 4,800 4,800
Series D preferred stock........................... -- -- 4,519 -- 4,519
Series B and C preferred stock warrants............ -- 94 98 98 98
Common stock options............................... 3,880 3,208 5,200 3,851 4,652
Common stock warrants.............................. -- -- 80 -- 80
</TABLE>

PRO FORMA NET LOSS PER SHARE (UNAUDITED)

Pro forma net loss per share for the year ended June 30, 1999 and the three
months ended September 30, 1999 is computed using the weighted average number of
common shares outstanding, including the pro forma effects of the automatic
conversion of the Company's Series A, Series B, Series C and Series D preferred
stock into shares of the Company's common stock effective upon the closing of
the Company's initial public offering ("IPO") as if such conversion occurred on
July 1, 1998 and July 1, 1999 respectively or at the date of original issuance,
if later.

F-11
<PAGE>
QUANTUM EFFECT DEVICES, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 1--THE COMPANY AND SUMMARY OF ITS SIGNIFICANT ACCOUNTING
POLICIES: (CONTINUED)
The resulting pro forma net loss per share can be shown as follows (in
thousands, except per share data):

<TABLE>
<CAPTION>
THREE
MONTHS
ENDED
YEAR ENDED SEPTEMBER
JUNE 30, 30,
1999 1999
---------- ----------
<S> <C> <C>
Numerator:
Pro forma net loss.............................. $ (11,769) $ (1,754)
---------- ----------
---------- ----------
Denominator:
Weighted average shares......................... 8,111 8,808
Assumed conversion of Series A preferred
stock......................................... 1,800 1,800
Assumed conversion of Series B preferred
stock......................................... 2,500 2,500
Assumed conversion of Series C preferred
stock......................................... 4,800 4,800
Assumed conversion of Series D preferred
stock......................................... 1,506 4,519
---------- ----------
Denominator for pro forma basic and diluted
loss per share calculation.................. 18,717 22,427
---------- ----------
---------- ----------
Pro forma net loss per share:
Basic and diluted............................... $ (.63) $ (.08)
---------- ----------
---------- ----------
</TABLE>

The calculation of pro forma diluted net loss per share excludes potential
common shares as the effect would be anti-dilutive. Pro forma potential common
shares are composed of incremental common shares issuable upon the exercise of
stock options and common and preferred stock warrants.

PRO FORMA STOCKHOLDERS' EQUITY (UNAUDITED)

Effective upon the closing of the IPO, the outstanding shares of Series A,
Series B, Series C and Series D preferred stock will automatically convert into
an aggregate of 13,618,837 shares of common stock. The pro forma effects of
these transactions are unaudited and have been reflected in the accompanying pro
forma statement of stockholders' equity at September 30, 1999.

RECENT ACCOUNTING PRONOUNCEMENTS

In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants ("AICPA") issued Statement of Position
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" ("SOP 98-1"). SOP 98-1 requires all costs related to the
development stage to be expensed as incurred. Costs incurred during the
application development stage are required to be capitalized and amortized over
the estimated useful life of the software. The Company does not expect that the
adoption of SOP 98-1 will have a material effect on its financial statements.
SOP 98-1 is effective for the Company's fiscal year ending June 30, 2000.

In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
No. 133"), as amended by Statement of Financial Accounting Standards No. 137,
"Accounting for Derivative Instruments and Hedging Activities--Deferral of the
Effective Date of FASB Statement No. 133--an amendment of FASB Statement No.
133" ("SFAS

F-12
<PAGE>
QUANTUM EFFECT DEVICES, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 1--THE COMPANY AND SUMMARY OF ITS SIGNIFICANT ACCOUNTING
POLICIES: (CONTINUED)
No. 137"). SFAS No. 133 requires that all derivative instruments be recorded on
the balance sheet at their fair market value. Changes in the fair market value
of derivatives are recorded each period in current earnings or comprehensive
income, depending on whether a derivative is designed as part of a hedge
transaction, and if so, the type of hedge transaction. Substantially all of the
Company's revenue and costs are denominated in U.S. dollars, and to date the
Company has not entered into any material derivative contracts. The Company does
not expect that the adoption of SFAS No. 133 will have a material effect on its
financial statements. The effective date of SFAS No. 133 as amended by SFAS No.
137 will be for fiscal years beginning after June 15, 2000.

UNAUDITED INTERIM FINANCIAL INFORMATION

The accompanying balance sheet as of September 30, 1999, the statements of
operations and of cash flows for the three months ended September 30, 1998 and
1999 and the statement of stockholders equity for the three months ended
September 30, 1999 are unaudited. In the opinion of management, these statements
have been prepared on the same basis as the audited financial statements and
include all adjustments, consisting of only normal recurring adjustments,
necessary for the fair presentation of the results for the interim periods. The
data disclosed in the financial statements as of such dates and for such periods
are unaudited. Results of the three months ended September 30, 1999 are not
necessarily indicative of results of the entire year.

NOTE 2--RELATED PARTY TRANSACTIONS:

DEVELOPMENT AND LICENSE AGREEMENT WITH MOTOROLA

In August 1995, the Company issued to Motorola, Inc. ("Motorola") 2,500,000
shares of Series B convertible preferred stock under the Series B Preferred
Stock Purchase Agreement, at a price of $2.40 per share. In February 1997,
Motorola sold all of the 2,500,000 shares of Series B convertible preferred
stock to a third party.

In August 1995, the Company entered into a Development and License Agreement
with Motorola ("the Motorola Agreement"). Under the Motorola Agreement, the
Company obtained a license from Motorola to design certain microprocessors on
behalf of Motorola in exchange for up to $1.1 million in milestone payments. In
March 1997, Motorola indicated its final acceptance of all milestones set forth
in the Motorola Agreement. As a result, the Company granted Motorola an
exclusive, royalty-bearing license to manufacture and sell the licensed product.
The full amount of milestone payments and a one-time royalty payment of $4.0
million, totaling $5.1 million, received from Motorola was recognized upon final
acceptance of the milestones in the year ended June 30, 1997. This amount is
recorded in the statement of operations under "Royalty revenue from related
parties." The Company is not entitled to any other royalties under this
contract.

DEVELOPMENT AND LICENSE AGREEMENT WITH IDT

In January 1992, the Company entered into a Development and License
Agreement (the "IDT Agreement") with Integrated Device Technology, Inc. ("IDT").
At June 30, 1999, IDT owned approximately 16.4% of the Company's outstanding
common and preferred stock. Under the terms of the IDT Agreement, IDT agreed to
fund the development of three products, based on the achievement of certain
milestones. The IDT agreement stipulated that products developed under it become
the sole and

F-13
<PAGE>
QUANTUM EFFECT DEVICES, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 2--RELATED PARTY TRANSACTIONS: (CONTINUED)
exclusive property of IDT. IDT is required to pay to the Company royalties on
QED-developed products sold by IDT for a period of ten years from the initial
royalty payment. The Company recognized IDT royalty income of $2,276,000,
$3,254,000 and $3,037,000 in the years ended June 30, 1997, 1998 and 1999,
respectively. These amounts are recorded in the statement of operations under
"Royalty revenue from related parties."

SALE OF CAPITAL STOCK TO CISCO

In April 1999, in conjunction with the sale of Series D preferred stock to
other investors, the Company sold 1,047,454 shares of Series D preferred stock
and 237,500 shares of common stock to Cisco Systems, Inc. ("Cisco"). The Company
believes that these shares were sold on an arms-length basis.

Product revenue for the year ended June 30, 1999 includes sales of
approximately $255,000 made directly to Cisco. This excludes amounts sold to
Cisco's manufacturing subcontractors, which total approximately $2 million.

NOTE 3--BALANCE SHEET COMPONENTS

<TABLE>
<CAPTION>
JUNE 30,
-------------------- SEPTEMBER 30,
1998 1999 1999
--------- --------- -------------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C>
ACCOUNTS RECEIVABLE, NET:
Accounts receivable.................................... $ 1,387 $ 3,365 $ 5,831
Less: allowance for doubtful accounts.................. -- (300) (300)
--------- --------- -------------
$ 1,387 $ 3,065 $ 5,531
--------- --------- -------------
--------- --------- -------------
INVENTORIES:
Work-in-progress....................................... $ 815 $ 1,384 $ 5,848
Finished goods......................................... 37 738 821
--------- --------- -------------
$ 852 $ 2,122 $ 6,669
--------- --------- -------------
--------- --------- -------------
PROPERTY AND EQUIPMENT, NET:
Furniture and fixtures................................. $ 181 $ 257 $ 263
Computer hardware...................................... 3,252 3,918 3,570
Computer software...................................... 2,977 3,095 3,072
Leasehold improvements................................. 23 23 13
--------- --------- -------------
6,433 7,293 6,918
Less: Accumulated depreciation and amortization........ (4,524) (5,486) (4,961)
--------- --------- -------------
$ 1,909 $ 1,807 $ 1,957
--------- --------- -------------
--------- --------- -------------
</TABLE>

F-14
<PAGE>
QUANTUM EFFECT DEVICES, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 3--BALANCE SHEET COMPONENTS (CONTINUED)

Assets acquired under capital lease obligations are included in property and
equipment and totaled $825,000 and $1,192,000, with related accumulated
depreciation of $167,000, $530,000 and $624,000 at June 30, 1998 and 1999, and
September 30, 1999 (unaudited), respectively.

<TABLE>
<CAPTION>
JUNE 30,
-------------------- SEPTEMBER 30,
1998 1999 1999
--------- --------- -------------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C>
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES:
Accrued employee compensation............................ $ 1,126 $ 1,439 $ 1,516
Accrued warranty......................................... 531 929 1,049
Other.................................................... 560 734 981
--------- --------- ------
$ 2,217 $ 3,102 $ 3,546
--------- --------- ------
--------- --------- ------
</TABLE>

NOTE 4--BORROWINGS:

SECURED PROMISSORY NOTE

In September 1997, the Company borrowed $2,000,000 under a secured
promissory note (the "Note"). The Note is secured by certain fixed assets of the
Company and bears interest at 8.25% per annum. The Note balance is payable over
42 months commencing November 1, 1997, with a final balloon payment of $300,000.

LINE OF CREDIT

In January 1999, the Company entered into a loan and security agreement
("line of credit") with a lender, under which it may borrow up to $6,000,000.
The line of credit is collaterized by substantially all of the Company's
tangible assets and expires on December 31, 2000. Under the line of credit, the
Company borrowed $2,000,000 through June 30, 1999. Borrowings under the line of
credit are payable over 42 months commencing in July 1999, and bear interest at
12% for the first six months and 8.5% thereafter, with a final balloon payment
of $200,000.

Under the line of credit, no financial covenants are required to be met for
borrowings up to $2,000,000. For incremental borrowings up to $6,000,000, QED
must maintain certain financial ratios. The line of credit prohibits the Company
from paying dividends. At June 30, 1999, the Company was in compliance with
these covenants.

Aggregate principal payments remaining under the Note and the line of credit
at June 30, 1999 are as follows (in thousands):

<TABLE>
<S> <C>
YEAR ENDING JUNE 30,
2000............................................................. $ 1,140
2001............................................................. 1,289
2002............................................................. 660
---------
3,089
Less: current portion............................................ (1,140)
---------
Non-current portion.............................................. $ 1,949
---------
---------
</TABLE>

F-15
<PAGE>
QUANTUM EFFECT DEVICES, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 5--PREFERRED STOCK:

Preferred stock at June 30, 1999 consisted of the following (in thousands):

<TABLE>
<CAPTION>
SHARES PROCEEDS NET
------------------------ OF ISSUANCE
AUTHORIZED OUTSTANDING COSTS
----------- ----------- ------------
<S> <C> <C> <C>
Series A.............................................. 1,800 1,800 $ 2,520
Series B.............................................. 2,594 2,500 6,000
Series C.............................................. 4,804 4,800 11,951
Series D.............................................. 4,700 4,519 19,478
----------- ----------- ------------
13,898 13,619 $ 39,949
----------- ----------- ------------
----------- ----------- ------------
</TABLE>

The holders of preferred stock have various rights and preferences as
follows:

CONVERSION

Each share of Series A, B, C and D preferred stock outstanding is
convertible into common stock at any time at the option of the holder based on a
formula which currently results in a one-for-one exchange ratio of common for
preferred. This formula is subject to adjustments for stock splits, stock
dividends, recapitalizations, and other similar transactions. The shares of
preferred stock automatically convert into shares of common stock upon the
effectiveness of a registration statement under the Securities Act of 1933, as
amended, (the "Securities Act") if the offering results in gross proceeds of at
least $10,000,000, and the per share offering price is at least $6.48.

DIVIDENDS

Noncumulative dividends at the annual rate of $.11, $.19, $.20 and $.35 per
share for Series A, B, C and D preferred stock, respectively, as declared by the
Board of Directors, are payable to the holders of preferred stock in preference
to any dividends for common stock declared by the Board of Directors. Dividends
on shares of preferred stock may exceed the annual per share rate of $.11, $.19
and $.20 and $.35 for Series A, B, C and D preferred stock, respectively, in the
event that a higher dividend rate is paid on any other class of the Company's
stock. In such an event, the dividends on the shares of preferred stock will be
paid at the same rate, determined on an if-converted basis. No dividends have
been declared to date.

LIQUIDATION

In the event of liquidation, holders of preferred stock are entitled to a
per share distribution in preference to holders of common stock equal to $1.40,
$2.40, $2.50 and $4.32 for Series A, B, C and D preferred stock, respectively
(adjusted for stock splits, combinations or similar events), plus any declared
but unpaid dividends. In the event funds are sufficient to make a complete
distribution to the holders of preferred stock as described above, the remaining
assets will be distributed to the holders of common stock and Series A, B and C
preferred stock based upon the number of shares of common stock held by each,
assuming conversion of all shares of preferred stock into common stock; provided
that the holders of Series C preferred shall not be entitled to distributions in
excess of $10.00 per share.

F-16
<PAGE>
QUANTUM EFFECT DEVICES, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 5--PREFERRED STOCK: (CONTINUED)
VOTING

The holders of common stock are entitled to elect one of the Company's five
directors. The holders of Series A preferred stock are entitled to elect two of
the Company's five directors. The holders of Series B preferred stock are
entitled to elect one of the company's five directors. The holders of Series C
preferred stock are entitled to elect one of the company's five directors. The
holders of Series D preferred stock are not entitled to elect members of the
Company's Board of Directors. Each share of preferred stock is entitled to one
vote for each share of common stock into which the preferred stock is
convertible.

SERIES B PREFERRED STOCK WARRANTS

In connection with a secured promissory note (see note 4) and a secured
lease agreement signed in September 1997, the Company issued warrants to
purchase 93,750 shares of Series B preferred stock at an exercise price of $1.60
per share. The warrants expire in September 30, 2003 or three years from the
effective date of the Company's IPO, whichever is later. The warrants include
certain registration rights. They also include anti-dilution provisions similar
to those granted to holders of preferred stock and provide for exercise on a
"net exercise" basis. The Company has determined the value of the warrants to be
$158,000, based on the Black-Scholes option pricing model, and this amount is
being recognized as interest expense over the term of the related borrowing
agreements. Notwithstanding the above expiration dates, upon conversion of the
convertible preferred stock in connection with an IPO, the convertible preferred
stock warrants shall automatically become exercisable.

SERIES C PREFERRED STOCK WARRANTS

In July 1998, the Company issued warrants to purchase 4,000 shares of Series
C preferred stock at an exercise price of $2.50 per share in connection with an
increase of $200,000 to its existing lease line from $1,000,000 to $1,200,000.
The warrants expire in July 2004 or three years from the effective date of the
Company's initial public offering, whichever is later. The warrants include
registration rights and anti-dilution provisions similar to those granted to
holders of Series C preferred stock and provide for exercise on a "net exercise"
basis. The Company has determined the value of the warrants to be $6,000, based
on the Black-Scholes option pricing model, and this amount is being recognized
as interest expense over the term of the related borrowing agreement.
Notwithstanding the above expiration dates, upon conversion of the convertible
preferred stock in connection with an IPO, the preferred stock warrants shall
automatically become exercisable.

If the total amount of equipment purchased under the lease line exceeds
$1,200,000, the leasing company has the right to purchase an additional number
shares of Series C preferred stock determined by dividing (i) 5% of the dollar
amount of equipment leased exceeding the $1,200,000 by (ii) the adjusted
exercise price per share. At June 30, 1999, borrowings under the line did not
exceed $1,200,000.

F-17
<PAGE>
QUANTUM EFFECT DEVICES, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 6--COMMON STOCK:

The Company's Amended and Restated Articles of Incorporation authorize the
Company to issue 29,000,000 shares of $.001 par value common stock. At June 30,
1999, there were 8,532,959 shares of common stock issued and outstanding.

As of June 30, 1999, the Company has reserved the following number of shares
of common stock for future issuance (in thousands):

<TABLE>
<CAPTION>
JUNE 30, 1999
-------------
<S> <C>
Conversion of Series A preferred stock......................................... 1,800
Conversion of Series B preferred stock and warrants............................ 2,594
Conversion of Series C preferred stock and warrants............................ 4,804
Conversion of Series D preferred stock......................................... 4,700
Common stock warrant........................................................... 173
Options under stock option plans............................................... 5,405
------
Total........................................................................ 19,476
------
------
</TABLE>

COMMON STOCK WARRANT

In connection with the loan and security agreement signed in January 1999
(see note 4), the Company issued warrants to purchase 80,000 shares of common
stock at an exercise price of $2.50 per share. The warrants will become
exercisable for up to an additional 93,000 shares of common stock for 10% of the
aggregate borrowings made by the Company in excess of $2,000,000, up to a total
of $6,000,000 in borrowings. The warrants expire in December 2005 or upon a
reorganization, reclassification, consolidation, merger or sale of the Company,
as defined. The warrants include registration rights and anti-dilution
provisions similar to those granted to holders of Series C preferred stock and
provide for exercise on a "net exercise" basis. The Company determined the value
of the warrants relating to the 80,000 immediately vested shares to be $134,000,
based on the Black-Scholes option pricing model, and this amount is being
recognized as interest expense over the term of the related borrowing agreement.
At June 30, 1999, the borrowings under the line of credit had not exceeded
$2,000,000.

NOTE 7--EMPLOYEE BENEFIT PLANS:

1992 STOCK OPTION PLAN

In September 1992, the Company adopted a stock option plan (the "1992
Plan"), which authorizes the Board of Directors to grant incentive stock options
and nonstatutory stock options to employees, directors, and consultants for up
to 4,600,000 shares of common stock.

Under the 1992 Plan, incentive stock options are granted at a price that is
not to be less than 100% of the fair market value of the common stock on the
date of grant, as determined by the Board of Directors. Nonstatutory stock
options are granted at a price that is not less than 85% of the fair market
value of the common stock on the date of grant, as determined by the Board of
Directors. Options vest at 25% on the first anniversary of the date of grant and
vest in equal monthly installments over the remaining 36 months. Options granted
to stockholders who own more than 10% of the outstanding stock of the Company at
the time of grant must be issued at prices not less than 110% of the estimated
fair value of the stock on the date of grant.

F-18
<PAGE>
QUANTUM EFFECT DEVICES, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 7--EMPLOYEE BENEFIT PLANS: (CONTINUED)
1997 STOCK OPTION PLAN

In May 1997, the Company adopted a stock option plan (the "1997 Plan"),
which authorizes the Board of Directors to grant incentive stock options and
nonstatutory stock options to employees, directors and consultants for up to
2,000,000 shares of common stock. In March 1998, September 1998 and March 1999,
the 1997 Plan was amended to increase the number of authorized shares by a total
of 2,500,000 shares of common stock.

Under the 1997 Plan, all stock options are granted at a price that is not
less than 100% of the fair market value of the stock on the date of grant, as
determined by the Board of Directors. Options vest at 25% on the first
anniversary of the date of grant and vest in equal monthly installments over the
remaining 36 months. Options are exercisable for a term of ten years after the
date of grant. No options will be granted to any individual who owns more than
10% of total combined voting power of all classes of stock.

The following table summarizes stock option activity under the 1992 Plan and
1997 Plan (in thousands):

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------
OPTIONS WEIGHTED AVERAGE
AVAILABLE EXERCISE PRICE
FOR GRANT SHARES PER SHARE
----------- --------- -----------------
<S> <C> <C> <C>
Balance at June 30, 1996............................... 680 2,972 $ .15
Additional shares reserved........................... 2,000 -- --
Granted.............................................. (1,420) 1,420 .15
Canceled............................................. 246 (246) .15
Exercised............................................ -- (266) .15
----------- ---------
Balance at June 30, 1997............................... 1,506 3,880 .15
Additional shares reserved........................... 500 --
Granted.............................................. (1,332) 1,332 .59
Canceled............................................. 28 (28) .15
Exercised............................................ -- (1,976) .15
----------- ---------
Balance at June 30, 1998............................... 702 3,208 .33
Additional shares reserved........................... 2,000 -- --
Granted.............................................. (2,589) 2,589 2.31
Canceled............................................. 92 (92) .80
Exercised............................................ -- (505) .27
----------- ---------
Balance at June 30, 1999............................... 205 5,200 1.32
Granted (unaudited).................................. (230) 230 8.47
Canceled (unaudited)................................. 35 (35) 1.68
Exercised (unaudited)................................ -- (743) .62
----------- ---------
Balance at September 30, 1999 (unaudited).............. 10 4,652 1.78
----------- ---------
----------- ---------
</TABLE>

F-19
<PAGE>
QUANTUM EFFECT DEVICES, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 7--EMPLOYEE BENEFIT PLANS: (CONTINUED)
Significant option groups outstanding at June 30, 1999, and related weighted
average exercise prices and contractual life information are as follows (shares
in thousands):

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS VESTED
------------------------------------------------------- AND EXERCISABLE
WEIGHTED AVERAGE --------------------------------
RANGE OF REMAINING WEIGHTED AVERAGE WEIGHTED AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE PRICE NUMBER EXERCISE PRICE
PRICES OUTSTANDING LIFE (YEARS) PER SHARE OUTSTANDING PER SHARE
- -------------------------------- ------------- --------------------- ----------------- ------------- -----------------
<S> <C> <C> <C> <C> <C>
$.15............................ 1,763 7.1 $ .15 914 $ .15
.25 - 1.00..................... 1,704 8.9 .85 208 .74
1.50 - 3.00.................... 1,510 9.7 2.75 -- --
3.50 - 4.75.................... 223 9.9 4.44 -- --
----- -----
5,200 1,122
----- -----
----- -----
</TABLE>

DEFERRED STOCK-BASED COMPENSATION

In connection with certain employee stock option grants made since January
1998, the Company recognized deferred compensation, which is being amortized
over the vesting periods of the related options, usually four years, using an
appropriate accelerated basis. The fair value per share used to calculate
deferred compensation was derived by reference to the convertible preferred
stock values, reduced by an appropriate discount factor. Future compensation
charges are subject to reduction for any employee who terminates employment
prior to expiration of such employee's option vesting period.

The following table sets forth deferred compensation and the amortization of
deferred compensation (in thousands):

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Deferred stock-based compensation..................................... $ -- $ 773 $ 851
Amortization of deferred stock-based compensation..................... -- 111 598
</TABLE>

CONSULTANT OPTIONS

During the period from October 31, 1997 through June 30, 1999, the Company
granted options to purchase 163,100 shares of common stock to consultants in
exchange for services at exercise prices ranging from $.15 to $4.75 per share.

The Company determined the value of the options granted to consultants based
on the Black-Scholes option pricing model. The fair value of options granted to
consultants was determined using the following assumptions: expected lives of 10
years, risk free interest rates ranging from 4.45% to 5.93%, dividend yield

F-20
<PAGE>
QUANTUM EFFECT DEVICES, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 7--EMPLOYEE BENEFIT PLANS: (CONTINUED)
of .0% and volatility of 60%. The following table summarizes the fair values and
the related amortization recorded (in thousands, except per option data):

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Weighted average fair per share value of options granted to
consultants during the period...................................... $ -- $ 4.39 $ 4.84
Deferred stock-based compensation.................................... $ -- $ 245 $ 520
Amortization of deferred stock-based compensation.................... -- 39 179
</TABLE>

FAIR VALUE DISCLOSURES

Pro forma information regarding net loss and net loss per share is required
by SFAS No. 123, which also requires that the information be determined as if
the Company had accounted for its employee stock options granted under the fair
value method. The fair value for these options was estimated using the
Black-Scholes option pricing model.

The Black-Scholes option pricing model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option pricing models require the input of highly
subjective assumptions, including the expected stock price volatility. Because
the Company's options have characteristics significantly different from those of
options of publicly traded companies and because changes in the subjective input
assumptions can materially affect the fair value estimate, in the opinion of
management, the existing models do not necessarily provide a reliable single
measure of the fair value of options.

The fair value of options at the date of grant was estimated on the date of
grant based on the minimum value method as prescribed by SFAS No. 123. The
following table summarizes the estimated fair value of options and assumptions
used in the SFAS No. 123 calculations:

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Estimated fair value............................................... $ .15 $ 1.25 $ 3.17
Expected life (years).............................................. 4 4 4
Risk-free interest rate............................................ 6.66% 5.98% 5.16%
Dividend yield..................................................... -- -- --
Volatility......................................................... -- -- --
</TABLE>

F-21
<PAGE>
QUANTUM EFFECT DEVICES, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 7--EMPLOYEE BENEFIT PLANS: (CONTINUED)
Had compensation cost for the Company's stock options been determined based
on the fair value of the options at the date of grant using the minimum value
method as required by SFAS No. 123, the Company's pro forma net loss would have
been as follows:

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------
1997 1998 1999
--------- --------- ----------
<S> <C> <C> <C>
Net loss (in thousands):
As reported................................................ $ (1,201) $ (9,883) $ (11,769)
Pro forma.................................................. $ (1,217) $ (9,916) $ (12,392)

Basic and diluted net loss per share:
As reported................................................ $ (.21) $ (1.53) $ (1.45)
Pro forma.................................................. $ (.21) $ (1.54) $ (1.53)
</TABLE>

401(k) SAVINGS PLAN

Effective January 1, 1992, the Company adopted a salary savings plan (the
"Savings Plan") which conforms to Section 401(k) of the Internal Revenue Code of
1986, as amended (the "Code"), whereby eligible employees may contribute up to
20% of their earnings, not to exceed amounts allowed under the Code. Under the
terms of the Savings Plan, the Company may make contributions at the discretion
of the Board of Directors. As of June 30, 1999 the Company has not made any
contributions to the Savings Plan.

NOTE 8--INCOME TAXES:

The provision for income taxes is summarized as follows (in thousands):

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
CURRENT:
Federal............................................................. $ (503) $ -- $ --
State............................................................... (17) -- --
--------- --------- ---------
(520) -- --
--------- --------- ---------
DEFERRED:
Federal............................................................. 580 89 --
--------- --------- ---------
580 89 --
--------- --------- ---------
Provision for income taxes............................................ $ 60 $ 89 $ --
--------- --------- ---------
--------- --------- ---------
</TABLE>

F-22
<PAGE>
QUANTUM EFFECT DEVICES, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 8--INCOME TAXES: (CONTINUED)
Deferred tax assets are summarized as follows (in thousands):

<TABLE>
<CAPTION>
JUNE 30,
--------------------
1998 1999
--------- ---------
<S> <C> <C>
Net operating loss carryforwards........................................... $ 3,045 $ 6,705
Research and development tax credits....................................... 375 957
Nondeductible reserves..................................................... 746 968
Depreciation and amortization.............................................. 503 456
Contract revenue........................................................... 283 128
Other...................................................................... 106 330
--------- ---------
Gross deferred tax assets.................................................. 5,058 9,544
Valuation allowance........................................................ (5,058) (9,544)
--------- ---------
Net deferred tax assets.................................................... $ -- $ --
--------- ---------
--------- ---------
</TABLE>

The Company believes that, based on a number of factors, the available
objective evidence creates sufficient uncertainty regarding the realizability of
the deferred tax assets such that a full valuation allowance has been recorded.
These factors include the Company's history of losses, recent increases in
expense levels, the fact that the market in which the Company competes is
intensely competitive and characterized by rapidly changing technology, the lack
of carryback capacity to realize deferred tax assets and the uncertainty
regarding market acceptance of the Company's products. The Company will continue
to assess the realizability of the deferred tax assets based on actual and
forecasted operating results.

At June 30, 1999, the Company had net operating loss carryforwards for
federal and state income tax purposes of approximately $18,000,000 and
$10,000,000, respectively, which expire at various dates through 2019. In
addition, the Company has research and development credit carryforwards of
approximately $1,000,000 for federal and for state purposes. These carryforwards
expire in varying amounts through 2019. Under the Tax Reform Act of 1986, the
amounts of and benefits from net operating loss and tax carryforwards may be
impaired or limited in certain circumstances. Events which could cause
limitations in the amount of net operating losses that the Company may utilize
in any one year include, but are not limited to, a cumulative ownership change
of more than 50%, as defined, over a three year period. As a result of the IPO,
such a change in ownership is expected to occur.

NOTE 9--COMMITMENTS AND CONTINGENCIES

LEASES

The Company leases office space and equipment under non-cancelable operating
and capital leases with various expiration dates through 2002. Rent expense for
operating leases was as follows (in thousands):

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Rent expense.......................................................... $ 147 $ 173 $ 480
</TABLE>

F-23
<PAGE>
QUANTUM EFFECT DEVICES, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 9--COMMITMENTS AND CONTINGENCIES (CONTINUED)
Future minimum lease payments under non-cancelable operating and capital
leases are as follows (in thousands):

<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
----------- -----------
<S> <C> <C>
YEAR ENDING JUNE 30,
2000................................................................... $ 517 $ 393
2001................................................................... 535 349
2002................................................................... -- 102
----------- -----
Total minimum lease payments........................................... $ 1,052 844
-----------
-----------
Less: amount representing interest..................................... (76)
-----
Present value of capital lease obligations............................. 768
Less: current portion.................................................. (342)
-----
Capital lease obligations, non-current portion......................... $ 426
-----
-----
</TABLE>

CONTINGENCIES

From time to time, in the normal course of business, various claims are made
against the Company. In the opinion of the Company's management, there are no
pending claims, the outcome of which is expected to result in a material adverse
effect on the financial position or results of operations of the Company.

NOTE 10--SUBSEQUENT EVENTS

INITIAL PUBLIC OFFERING

On September 1, 1999, the Company's Board of Directors authorized management
of the Company to file a Registration Statement with the Securities and Exchange
Commission permitting the Company to sell its common stock to the public.

REINCORPORATION

On September 1, 1999, the Board of Directors authorized the reincorporation
of the Company in the State of Delaware, which is expected to be completed prior
to the IPO becoming effective. All share information included in these financial
statements has been adjusted to reflect this reincorporation.

EMPLOYEE BENEFIT PLANS

On September 1, 1999, the Board of Directors authorized, subject to
stockholders' approval, establishment of the 1999 Equity Incentive Plan with
1,400,000 shares authorized, the 1999 Non-Employee Directors' Stock Option Plan
with 100,000 shares authorized, and the 1999 Employee Stock Purchase Plan with
300,000 shares reserved for issuance. The 1999 Employee Stock Purchase Plan will
become effective upon the closing of the IPO.

FACILITIES LEASE

On August 16, 1999, the Company entered into an additional five-year
facilities lease to commence on November 1, 1999. The annual lease payments will
amount to approximately $630,000.

F-24
<PAGE>
[LOGO]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the registrant in connection
with the distribution of the common stock being registered. All amounts are
estimated, except the SEC Registration Fee, the NASD Filing Fee and the Nasdaq
National Market Filing Fee:

<TABLE>
<S> <C>
SEC Registration Fee.............................................. $ 11,510
NASD Filing Fee................................................... 4,640
Nasdaq National Market Initial Filing Fee......................... 90,000
Blue Sky Fees and Expenses........................................ 15,000
Accounting Fees................................................... 150,000
Legal Fees and Expenses........................................... 450,000
Transfer Agent and Registrar Fees................................. 10,000
Printing and Engraving............................................ 250,000
Miscellaneous..................................................... 850
---------
Total......................................................... $ 901,000
---------
---------
</TABLE>

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's Board of Directors to grant, indemnity to directors
and officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act of 1933, as amended (the "Act").
Article VI of the Registrant's Amended and Restated Certificate of Incorporation
provides for indemnification of its directors to the maximum extent permitted by
the Delaware General Corporation Law and Section 43 of Article XI of the
Registrant's Bylaws provides for indemnification of its directors, officers,
employees and other agents to the maximum extent permitted by the Delaware
General Corporation Law. In addition, the Registrant intends to enter into
Indemnification Agreements with each director and certain officers containing
provisions which are in some respects broader than the specific indemnification
provisions contained in the Delaware General Corporation Law. The
indemnification agreements may require the Company, among other things, to
indemnify its directors against certain liabilities that may arise by reason of
their status or service as directors (other than liabilities arising from
willful misconduct of culpable nature), to advance their expenses incurred as a
result of any proceeding against them as to which they could be indemnified, and
to obtain directors' insurance if available on reasonable terms. Reference is
also made to Sections 7 and 8 of the Underwriting Agreement contained in Exhibit
1.1 hereto, indemnifying officers and directors of the Company against certain
liabilities.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

Since inception, we have sold and issued the following unregistered
securities:

(1) From May 1, 1992 to September 1999, we granted stock options to purchase
an aggregate of 9,090,855 shares of common stock at exercise prices ranging from
$0.15 to $10.00 per share to employees, consultants, directors and other service
providers pursuant to our 1992 and 1997 Stock Option Plans.

(2) On November 15, 1991, we sold 800,000 shares of common stock to each of
our founders, Earl Killian, Raymond Kunita and Thomas J. Riordan. The price per
share of $0.001 for an aggregate purchase price of $2,400.

II-1
<PAGE>
(3) On November 15, 1991, we sold 2,200,000 shares of our common stock to
Integrated Device Technology, Inc. under a stock purchase agreement at a price
per share of $0.001 for an aggregate purchase price of $2,200.

(4) On March 1, 1999, we sold 237,500 shares of our common stock and
1,047,454 shares of our Series D preferred stock to Cisco Systems, Inc. for an
aggregate purchase price of $5,000,001.

(5) On January 24, 1992, we sold an aggregate of 1,800,000 shares of Series
A preferred stock to two purchasers at a price per share of $1.40 for an
aggregate purchase price of $2,520,000.

(6) On August 18, 1995, we sold an aggregate of 2,500,000 shares of Series B
preferred stock to two purchasers at a price per share of $2.40 for an aggregate
purchase price of $6,000,000.

(7) On April 16, 1998 and May 15, 1998, we sold an aggregate of 4,800,000
shares of Series C preferred stock to 37 purchasers at a price per share of
$2.50 for an aggregate purchase price of $12,000,000.

(8) On March 1, 1999 and March 16, 1999, we sold an aggregate of 4,518,837
shares of Series D preferred stock to 28 purchasers at a price per share of
$4.32 for an aggregate purchase price of $19,521,376.

The sales and issuances of securities described in paragraphs (1) and (2)
above were deemed to be exempt from registration under the Securities Act by
virtue of Rule 701 of the Securities Act in that they were offered and sold
either pursuant to a written compensatory benefit plan or pursuant to a written
contract relating to compensation, as provided by Rule 701.

The sales and issuances of securities described in paragraphs (3) through
(8) above were deemed to be exempt from registration under the Securities Act by
virtue of Rule 4(2) or Rule 506 under Regulation D promulgated thereunder.

Appropriate legends are affixed to the stock certificates issued in the
aforemention transactions. Similar legends were imposed in connection with any
subsequent sales of any such securities. All recipients either received adequate
information about us or had access, through employment or other relationships,
to such information.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Exhibits

<TABLE>
<C> <S>
1.1* Form of Underwriting Agreement
3.1+ Certificate of Incorporation of the Registrant
3.2+ Form of Amended and Restated Certificate of Incorporation of the Registrant to be
filed upon the closing of the offering made pursuant to this registration
statement
3.3+ Bylaws of the Registrant
4.1 Specimen Common Stock Certificate
4.2+ Warrant to purchase Series B Preferred Stock, issued by Quantum Effect Design, Inc.
to Comdisco, Inc., dated September 30, 1997
4.3+ Warrant to purchase Series B Preferred Stock, issued by Quantum Effect Design, Inc.
to Comdisco, Inc., dated September 30, 1997
4.4+ Warrant to purchase Series C Preferred Stock, issued by Quantum Effect Design, Inc.
to Comdisco, Inc., dated July 24, 1998
4.5+ Warrant to purchase Common Stock, issued by Quantum Effect Design, Inc. to Venture
Lending & Leasing II, Inc., dated January 11, 1999
4.6+ Amended and Restated Investors' Rights Agreement dated March 16, 1999
</TABLE>

II-2
<PAGE>

<TABLE>
<C> <S>
5.1* Opinion of Cooley Godward LLP
10.1+ Form of Indemnity Agreement between the Registrant and its directors and officers.
10.2* 1999 Equity Incentive Plan, Form of 1999 Equity Incentive Plan Stock Option
Agreement, and Form of 1999 Equity Incentive Grant Notice and Notice of Exercise
10.3* 1999 Employee Stock Purchase Plan and Form of Offering Document
10.4* 1999 Non-Employee Directors' Stock Option Plan and 1999 Form of Nonstatutory Stock
Option and Notice of Exercise
10.5+ Commercial Lease Agreement, by and between Peachtree Associates and Quantum Effect
Design, Inc., dated March 22, 1999
10.6+ Lease Agreement, by and among John Arrillaga, Richard Peery and Quantum Effect
Design, Inc., dated December 3, 1998; Amendment No. 1 to Lease Agreement dated
December 3, 1998, by and among John Arrillaga, Richard Perry and Quantum Effect
Design, Inc., dated August 16, 1999
10.7+ Lease Agreement, by and among John Arrillaga, Richard Peery and Quantum Effect
Design, Inc., dated September 14, 1994; Amendment No. 1 to Lease Agreement dated
September 14, 1994, by and among John Arrillaga, Richard Peery and Quantum Effect
Design, Inc., dated February 11, 1998; Amendment No. 2 to Lease Agreement dated
September 14, 1994, by and among John Arrillaga, Richard Peery and Quantum Effect
Design, Inc., dated December 3, 1998; Amendment No. 3 to Lease Agreement dated
September 14, 1994, by and among John Arrillaga, Richard Perry and Quantum Effect
Design, Inc., dated August 16, 1999
10.8+ Lease Agreement, by and among John Arrillaga, Richard Perry and Quantum Effect
Design, Inc., dated August 16, 1999
10.9** Technology License Agreement, by and between Weitek Corporation and MIPS Computer
Systems, Inc., dated June 29, 1990; Assignment Agreement, by and between Weitek
Corporation and Quantum Effect Design, Inc., dated June 19, 1996; Amendment No. 1
to the Technology License Agreement, by and between MIPS Technology, Inc. and
Quantum Effect Design, Inc., dated March 31, 1997
10.10** Agreement for Purchase and Sale of Custom Semiconductor Products, by and between
IBM Corporation and Quantum Effect Design, Inc., dated September 4, 1997
10.11** Development and License Agreement, by and between Integrated Device Technology,
Inc. and Quantum Effect Design, Inc., dated January 13, 1992
10.12** Development Agreement, by and between Integrated Device Technology, Inc. and
Quantum Effect Design, Inc., dated June 12, 1996
10.13+ 1997 Stock Option Agreement, by and between Barry L. Cox and Quantum Effect Design,
Inc.
10.14+ 1997 Stock Option Agreement, by and between Howard M. Bailey and Quantum Effect
Design, Inc.
23.1 Consent of PricewaterhouseCoopers LLP, independent accountants
23.2* Consent of Cooley Godward LLP (included in Exhibit 5.1)
24.1+ Power of Attorney (See signature pages)
27.1 Financial Data Schedule
</TABLE>

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

* To be filed by amendment.

** Confidential treatment has been requested with respect to portions of this
exhibit.

+ Previously filed.

(b) Financial Statement Schedules

II-3
<PAGE>
ITEM 17. UNDERTAKINGS

The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.

Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers, and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.

The undersigned Registrant hereby undertakes that:

(1) For purposes of determining any liability under the Act, the information
omitted from the form of prospectus filed as part of this Registration Statement
in reliance upon Rule 430A and contained in a form of prospectus filed by the
Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Act shall be
deemed to be a part of this Registration Statement as of the time it was
declared effective.

(2) For purposes of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.

II-4
<PAGE>
SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, Registrant has
duly caused this Amendment to the Registration Statement to be signed on its
behalf, by the undersigned, thereunto duly authorized, in the City of Santa
Clara, County of Santa Clara, State of California, on October 13, 1999.

QUANTUM EFFECT DEVICES, INC.

By: *
-----------------------------------------
Thomas J. Riordan
CHIEF EXECUTIVE OFFICER, PRESIDENT AND
DIRECTOR

POWER OF ATTORNEY

Pursuant to the requirements of the Securities Act of 1933, this Amendment
to the Registration Statement on Form S-1 has been signed by the following
persons in the capacities and on the dates indicated.

SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------

Chief Executive Officer,
* President and Director
- ------------------------------ (Principal Executive October 13, 1999
Thomas J. Riordan Officer)

/s/ HOWARD M. BAILEY Chief Financial Officer
- ------------------------------ (Principal Financial and October 13, 1999
Howard M. Bailey Accounting Officer)

*
- ------------------------------ Chairman of the Board of October 13, 1999
Barry L. Cox Directors

*
- ------------------------------ Director October 13, 1999
Bruce K. Graham

*
- ------------------------------ Director October 13, 1999
Christopher J. Schaepe

<TABLE>
<S> <C> <C> <C>
*By: /s/ HOWARD M. BAILEY
-------------------------
Howard M. Bailey
ATTORNEY-IN-FACT
</TABLE>

II-5
<PAGE>
INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
1.1* Form of Underwriting Agreement
3.1+ Certificate of Incorporation of the Registrant
3.2+ Form of Amended and Restated Certificate of Incorporation of the Registrant to be filed upon the
closing of the offering made pursuant to this registration statement
3.3+ Bylaws of the Registrant
4.1 Specimen Common Stock Certificate
4.2+ Warrant to purchase Series B Preferred Stock, issued by Quantum Effect Design, Inc. to Comdisco,
Inc., dated September 30, 1997
4.3+ Warrant to purchase Series B Preferred Stock, issued by Quantum Effect Design, Inc. to Comdisco,
Inc., dated September 30, 1997
4.4+ Warrant to purchase Series C Preferred Stock, issued by Quantum Effect Design, Inc. to Comdisco,
Inc., dated July 24, 1998
4.5+ Warrant to purchase Common Stock, issued by Quantum Effect Design, Inc. to Venture Lending & Leasing
II, Inc., dated January 11, 1999
4.6+ Amended and Restated Investors' Rights Agreement dated March 16, 1999
5.1* Opinion of Cooley Godward LLP
10.1+ Form of Indemnity Agreement between the Registrant and its directors and officers.
10.2* 1999 Equity Incentive Plan, Form of 1999 Equity Incentive Plan Stock Option Agreement, and Form of
1999 Equity Incentive Grant Notice and Notice of Exercise
10.3* 1999 Employee Stock Purchase Plan and Form of Offering Document
10.4* 1999 Non-Employee Directors' Stock Option Plan and 1999 Form of Nonstatutory Stock Option and Notice
of Exercise
10.5+ Commercial Lease Agreement, by and between Peachtree Associates and Quantum Effect Design, Inc.,
dated March 22, 1999
10.6+ Lease Agreement, by and among John Arrillaga, Richard Peery and Quantum Effect Design, Inc., dated
December 3, 1998; Amendment No. 1 to Lease Agreement dated December 3, 1998, by and among John
Arrillaga, Richard Perry and Quantum Effect Design, Inc., dated August 16, 1999
10.7+ Lease Agreement, by and among John Arrillaga, Richard Peery and Quantum Effect Design, Inc., dated
September 14, 1994; Amendment No. 1 to Lease Agreement dated September 14, 1994, by and among John
Arrillaga, Richard Peery and Quantum Effect Design, Inc., dated February 11, 1998; Amendment No. 2
to Lease Agreement dated September 14, 1994, by and among John Arrillaga, Richard Peery and Quantum
Effect Design, Inc., dated December 3, 1998; Amendment No. 3 to Lease Agreement dated September 14,
1994, by and among John Arrillaga, Richard Perry and Quantum Effect Design, Inc., dated August 16,
1999
10.8+ Lease Agreement, by and among John Arrillaga, Richard Perry and Quantum Effect Design, Inc., dated
August 16, 1999
10.9** Technology License Agreement, by and between Weitek Corporation and MIPS Computer Systems, Inc.,
dated June 29, 1990; Assignment Agreement, by and between Weitek Corporation and Quantum Effect
Design, Inc., dated June 19, 1996; Amendment No. 1 to the Technology License Agreement, by and
between MIPS Technology, Inc. and Quantum Effect Design, Inc., dated March 31, 1997
10.10** Agreement for Purchase and Sale of Custom Semiconductor Products, by and between IBM Corporation and
Quantum Effect Design, Inc., dated September 4, 1997
10.11** Development and License Agreement, by and between Integrated Device Technology, Inc. and Quantum
Effect Design, Inc., dated January 13, 1992
10.12** Development Agreement, by and between Integrated Device Technology, Inc. and Quantum Effect Design,
Inc., dated June 12, 1996
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
10.13+ 1997 Stock Option Agreement, by and between Barry L. Cox and Quantum Effect Design, Inc.
10.14+ 1997 Stock Option Agreement, by and between Howard M. Bailey and Quantum Effect Design, Inc.
23.1 Consent of PricewaterhouseCoopers LLP, independent accountants
23.2* Consent of Cooley Godward LLP (included in Exhibit 5.1)
24.1+ Power of Attorney (See signature pages)
27.1 Financial Data Schedule
</TABLE>

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

* To be filed by amendment.

** Confidential treatment has been requested with respect to portions of this
exhibit.

+ Previously filed.

<PAGE>
Exhibit 4.1

FRONT

COMMON STOCK COMMON STOCK

QED

INCORPORATED UNDER THE LAWS
OF THE STATE OF DELAWARE

SEE REVERSE FOR CERTAIN DEFINITIONS

CUSIP 74764T 10 7

THIS CERTIFIES THAT IS THE RECORD HOLDER OF

FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK, $.001 PAR VALUE PER
SHARE, OF QUANTUM EFFECT DEVICES, INC.
transferable on the books of the Corporation by the holder hereof in person
or by duly authorized attorney upon surrender of this Certificate properly
endorsed. This Certificate is not valid until countersigned by the Transfer
Agent and registered by the Registrar. WITNESS the facsimile seal of the
Corporation and the facsimile signatures of its duly authorized officers.
Dated:

CHIEF FINANCIAL OFFICER AND SECRETARY

CHIEF EXECUTIVE OFFICER AND PRESIDENT

COUNTERSIGNED AND REGISTERED:
NORWEST BANK MINNESOTA, N.A.
TRANSFER AGENT AND REGISTRAR

BY ________________________

AUTHORIZED SIGNATURE

Page 1
<PAGE>

BACK

QUANTUM EFFECT DEVICES, INC.

A statement of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or
series thereof and the qualifications, limitations or restrictions of such
preferences and/or rights as established, from time to time, by the
Certificate of Incorporation of the Corporation and by any certificate of
designation, the number of shares constituting each class and series, and the
designations thereof, may be obtained by the holder hereof upon request and
without charge from the Secretary of the Corporation at the principal office
of the Corporation.

The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:

TEN COM - as tenants in common
TEN ENT - as tenants by the entireties
JT TEN - as joint tenants with right of
survivorship and not as tenants
in common

UNIF GIFT MIN ACT -

......................... Custodian .........................
(Cust) (Minor)

under Uniform Gifts to Minors Act

..............................................................
(State)

UNIF TRF MIN ACT -

................. Custodian (until age ..........)............................
(Cust) (Minor)

under Uniform Transfers to Minors Act

..............................................................
(State)

Additional abbreviations may also be used though not in the above list.

FOR VALUE RECEIVED,
hereby sell, assign and transfer unto

PLEASE INSERT SOCIAL SECURITY OR OTHER

Page 2

<PAGE>

IDENTIFYING NUMBER OF ASSIGNEE

(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)

Shares of the common stock represented by the within Certificate, and do
hereby irrevocably constitute and appoint
Attorney to transfer the said stock on the books of
the within named Corporation with full power of substitution in the premises.

Dated ______________________

X___________________________

NOTICE:

THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME(S) AS
WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.

Signature(s) Guaranteed

Page 3

<PAGE>

By _________________________

THE SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO
S.E.C. RULE 17Ad-15.

<PAGE>
Exhibit 23.1

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated August 11, 1999, except
as to Note 10 which is as of October , 1999, relating to the financial
statements of Quantum Effect Devices, Inc., which appears in such Prospectus. We
also consent to the reference to us under the heading "Experts" in such
Prospectus.

PricewaterhouseCoopers, LLP

San Jose, California
October 12, 1999

<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 540
<SECURITIES> 10,806
<RECEIVABLES> 6,454
<ALLOWANCES> 300
<INVENTORY> 6,669
<CURRENT-ASSETS> 27,013
<PP&E> 6,918
<DEPRECIATION> 4,961
<TOTAL-ASSETS> 28,970
<CURRENT-LIABILITIES> 10,044
<BONDS> 0
0
14
<COMMON> 9
<OTHER-SE> 16,948
<TOTAL-LIABILITY-AND-EQUITY> 28,970
<SALES> 9,808
<TOTAL-REVENUES> 10,467
<CGS> 6,414
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 5,920
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 104
<INCOME-PRETAX> (1,754)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,754)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,754)
<EPS-BASIC> (0.20)
<EPS-DILUTED> (0.20)

</TABLE>