PARADIGM TECHNOLOGY INC /DE/, 10-K/A, 1998-06-03

PARADIGM TECHNOLOGY INC /DE/
10-K/A, 1998-06-03
SEMICONDUCTORS & RELATED DEVICES

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K
Amendment No. 1

(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)

For the Fiscal Year Ended.....................................December 31, 1997

/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)

For the Transition Period from ____________________ to ____________________

Commission File Number 0-26124
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PARADIGM TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)

Delaware 770140882-5
--------------------------------- ------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)

694 Tasman Drive, Milpitas, CA 95035
--------------------------------- ------------------------------------
(Address of principal executive offices) (Zip Code)

(408) 954-0500
-------------------------------
(Registrant's telephone number,
including area code)

Securities registered under Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 Par Value

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

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

Indicate by check whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. /X/

The aggregate market value of the voting stock held by nonaffiliates of
the registrant was approximately $3,901,907 on March 19, 1998 based on the last
sale price as reported by the NASDAQ/SmallCap Market.

The aggregate number of outstanding shares of Common Stock, $0.01 par
value, of the registrant was 1,604,511 shares as of March 19, 1998, after
giving effect to the 10-for-1 reverse stock split effected on May 1, 1998.
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TABLE OF CONTENTS
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Page
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PART I .................................................................. 1
ITEM 1. BUSINESS............................................... 1
ITEM 2. PROPERTIES............................................. 22
ITEM 3. LEGAL PROCEEDINGS...................................... 22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS................................................ 24

PART II .................................................................. 24
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND
RELATED STOCKHOLDER MATTERS............................ 24
ITEM 6. SELECTED FINANCIAL DATA................................ 25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION........... 27
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET........................................... 38
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............ 39
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE............................................. 60

PART III .................................................................. 61
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT............................................. 61
ITEM 11. EXECUTIVE COMPENSATION................................. 63
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT.................................. 68
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS........................................... 69

PART IV .................................................................. 71
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K.................................... 71

SIGNATURES................................................................. 77

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When used in this Form 10-K, the words "estimate," "project," "intend,"
"expect" and similar expressions are intended to identify forward-looking
statements. Such statements are subject to risks and uncertainties that could
cause actual results to differ materially, including factors relating to the
impact of competitive products and pricing, the timely development and market
acceptance of new products and upgrades to existing products, availability and
cost of products from Paradigm's suppliers and market conditions in the PC
industry. For discussion of certain such risk factors, see "Business--Factors
That May Affect Future Results." Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
hereof. The Company undertakes no obligation to publicly release updates or
revisions to these statements.

Share information for all periods has been retroactively adjusted to
reflect a ten-for-one reverse stock split of common stock effected on May 1,
1998.

PART I

ITEM 1. BUSINESS
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Paradigm Technology, Inc. ("Paradigm" or the "Company") designs and
markets high speed, high density static random access memory ("SRAM")
semiconductor devices to meet the needs of advanced telecommunications devices,
networks, workstations, high performance PCs, advanced modems and complex
military/aerospace applications. The Company focuses on high performance, 10
nanosecond ("ns") and faster SRAMs. For the year ended December 31, 1997, 10ns
and faster SRAMs accounted for approximately 49% of the Company's sales. Using a
combination of innovative process architecture and design know-how, the Company
was one of the first companies to introduce high speed CMOS SRAMs for three
successive generations of product densities: 256 kilobit ("K"), one megabit
("M"), and 4M. Paradigm's customers in 1997 included Iomega, IKOS, Samsung and
Motorola.

RECENT DEVELOPMENTS

The Company's operations for 1997 and 1996 have consumed substantial
amounts of cash and have generated net losses. During this period, the Company
has continued to experience a downward trend in product pricing which has
contributed to the poor operating results. The Company expects to incur a net
loss for the quarter ending March 31, 1998. The Company has been dependent on
equity financings to fund its operations in 1997. In January 1997, the Company
completed the private placement of 5% Series A Convertible Redeemable Preferred
Stock (the "Series A Preferred Stock") for net proceeds of approximately
$1,880,000. In July 1997, the Company completed the private placement of 5%
Series B Convertible Redeemable Preferred Stock (the "Series B Preferred Stock")
for net proceeds of approximately $1,870,000 and in November 1997, the Company
completed the private placement of 5% Series C Convertible Preferred Stock (the
"Series C Preferred Stock") for net proceeds of approximately $923,000.

Should continued product pricing pressures or delayed acceptance of the
Company's new products continue to adversely affect the Company's operating
results, the Company will have to pursue alternative financing opportunities.
Management has taken several steps to help ensure that adequate cash resources
will continue to be available to the Company. Among these steps are further
planned reductions in operating expenses and the potential sale of additional
equity

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securities. The Company believes it will acquire additional cash infusion from
private placements of equity or other sources of liquidity, such as asset sales,
to fund 1998 operations. If additional equity securities are issued, substantial
dilution to existing stockholders could occur. No assurances can be given that
such steps will be sufficient or that additional financing will be available on
attractive terms or at all.

As a result of these circumstances, the Company's independent
accountants' report on the Company's December 31, 1997 financial statements
includes an explanatory paragraph indicating that these matters raise a
substantial doubt about the Company's ability to continue as a going concern.

On March 6, 1998, the Company entered into a definitive merger
agreement providing for the acquisition of all of the outstanding capital stock
of IXYS Corporation ("IXYS") in exchange for Common Stock of the Company. The
exchange ratio in the Merger for the IXYS equity securities will be the greater
of two ratios. The first ratio provides that upon the Merger the holders of
equity securities of IXYS hold 95% of the fully diluted capitalization of the
combined company and that the holders of equity securities of the Company will
hold 5% of the fully diluted capitalization of the combined company. (As used
herein, fully diluted capitalization means the sum of the number of shares of
common stock outstanding and issuable upon exercise or conversion of all
outstanding preferred stock, warrants, options and other rights.) The second
ratio provides that the value associated with the fully diluted capitalization
of IXYS, at the time of consummation of the Merger, be at least $150
million, based upon an average of the closing prices of the Company's Common
Stock prior to the Company's stockholders meeting. Consummation of the merger
requires the approval of the Company's and IXYS' stockholders and various
regulatory approvals. If approved, the transaction is anticipated to be
accounted for as a purchase of the Company by IXYS for financial reporting
purposes.

SALE OF PREFERRED STOCK. On January 23, 1997, Paradigm sold a total of
200 shares of Series A Preferred Stock in a private placement to Vintage
Products, Inc. at a price of $10,000 per share, for total proceeds (net of
payments to third parties) of approximately $1,880,000. The Series A Preferred
Stock is convertible at the option of the holder into the number of fully paid
and nonassessable shares of Common Stock as is determined by dividing (A) the
sum of (1) $10,000 plus (2) the amount of all accrued but unpaid or accumulated
dividends on the shares of Series A Preferred Stock being converted by (B) the
Series A Conversion Price in effect at the time of conversion. The "Series A
Conversion Price" is equal to the lower of (i) $22.50 or (ii) eighty-two percent
(82%) of the average closing bid price of a share of Common Stock as quoted on
the Nasdaq SmallCap Market ("SCM") (or such other national or regional
securities exchange or automated quotations system upon which the Common Stock
is listed and principally traded) over the five (5) consecutive trading days
immediately preceding the date of notice of conversion of the Series A Preferred
Stock. As of March 6, 1998, the holders of the Series A Preferred Stock have
converted 170 shares of Series A Preferred Stock into 347,167 shares of the
Company's Common Stock. The remaining 30 shares of Series A Preferred Stock may
be converted into Common Stock in the future at the option of the holder or the
Company. The Common Stock issuable upon conversion of the Series A Preferred
Stock has been registered on Form S-3.

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On July 22, 1997, Paradigm sold a total of 200 shares of Series B
Preferred Stock in a private placement to Lyford Ltd. at a price of $10,000 per
share, for total proceeds (net of payments to third parties) of approximately
$1,870,000. The Series B Preferred Stock is convertible at the option of the
holder into the number of fully paid and non-assessable shares of Common Stock
as is determined by dividing (A) the sum of (1) $10,000 plus (2) the amount of
all accrued but unpaid or accumulated dividends on the shares of Series B
Preferred Stock being converted by (B) the Series B Conversion Price in effect
at the time of conversion. The "Series B Conversion Price" is equal to the lower
of (i) $13.75 or (ii) eighty-two percent (82%) of the average closing bid price
of a share of Common Stock as quoted on the SCM (or such other national or
regional securities exchange or automated quotations system upon which the
Common Stock is listed and principally traded) over the five (5) consecutive
trading days immediately preceding the date of notice of conversion of the
Series B Preferred Stock. As of March 6, 1998, 132 shares of Series B Preferred
Stock have been converted into 302,881 shares of the Company's Common Stock.
The remaining 68 shares of Series B Preferred Stock may be converted into Common
Stock in the future at the option of the holder or the Company. The Common Stock
issuable upon conversion of the Series B Preferred Stock have been registered on
Form S-3.

On November 26, 1997, Paradigm sold a total of 100 shares of Series C
Preferred Stock in a private placement to Vintage Products, Inc. at a price of
$10,000 per share, for total proceeds (net of payments to third parties) of
approximately $923,000. The Series C Preferred Stock is convertible at the
option of the holder into the number of fully paid and non-assessable shares of
Common Stock as is determined by dividing (A) the sum of (1) $10,000 plus (2)
the amount of all accrued but unpaid or accumulated dividends on the shares of
Series C Preferred Stock being converted by (B) the Series C Conversion Price in
effect at the time of conversion. The "Series C Conversion Price" is equal to
the lower of (i) $5.90 or (ii) eighty-two percent (82%) of the average closing
bid price of a share of common stock as quoted on the SCM (or such other
national or regional securities exchange or automated quotations system upon
which the Common Stock is listed and principally traded) over the five (5)
consecutive trading days immediately preceding the date of notice of conversion
of the Series C Preferred Stock. As of March 6, 1998, 15 shares of Series C
Preferred Stock have been converted into 52,700 shares of the Company's Common
Stock. The remaining 85 shares of Series C Preferred Stock may be converted into
Common Stock in the future at the option of the holder. The Common Stock
issuable upon conversion of the Series C Preferred Stock has been registered on
Form S-3.

CONVERSION OF DEBT TO EQUITY. In September 1997, vendors with an
aggregate trade accounts payable balance of $705,000 entered into agreements
with the Company to accept an aggregate of 42,448 shares of the Company's
Common Stock in lieu of payment of the trade payables. The agreement with one of
the vendors provided for issuance of additional shares of Common Stock in
certain circumstances. On October 1, 1997, an additional 8,092 shares of the
Company's Common Stock was issued to that vendor under such agreement.

LISTING OF THE COMPANY'S COMMON STOCK. Prior to August 22, 1997, the
Company's Common Stock was listed on the Nasdaq National Market (the "NNM"). In
order for continued listing on the NNM, however, the Company was required to,
maintain (1) $4,000,000 in net tangible assets because it has sustained losses
from continuing operations and/or net losses in

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three of its four most recent fiscal years, (2) a $2,000,000 market value of the
public float, (3) $1,000,000 in total capital and surplus, (4) a minimum bid
price of $1.00 per share and (5) two market-makers. As of June 30, 1997, the
Company was not in compliance with items (1) and (4) above.

On July 15, 1997, the Nasdaq Stock Market ("Nasdaq") staff notified the
Company of a bid price deficiency and provided a 90-day grace period within
which to regain compliance with this requirement. On August 8, 1997, Nasdaq,
based on a review of the Company's trading history from July 8 to August 8,
1997, indicated that the Company had regained compliance with the minimum
closing bid price requirement of $1.00. On August 20, 1997, Nasdaq informed the
Company that due to its failure to comply with the terms of the maintenance
qualifications exception granted to the Company, the Company's Common Stock
would be removed from the NNM and listed on the SCM effective August 22, 1997,
pursuant to a waiver to the initial inclusion bid price requirement.

On August 22, 1997, the Company announced that effective on such date
the Company's Common Stock, formerly listed on the NNM, would be listed on the
SCM, pursuant to a waiver to the initial inclusion bid price requirement. The
Company's continued listing on the SCM is contingent upon the Company meeting
the maintenance requirements.

Substantial changes in Nasdaq initial listing and maintenance
requirements became effective on February 23, 1998. These changes materially
enhance the quantitative threshold criteria necessary to qualify for initial
entry and continued listing on Nasdaq. In addition, corporate governance
requirements, formerly applicable to the NNM for the first time, have been
extended to the SCM. These changes require that companies listed on the SCM
maintain (i) $2,000,000 in net tangible assets (total assets less total
liabilities and goodwill), a market capitalization of $35,000,000, or $500,000
in net income for two of the last three years, (ii) a $1,000,000 market value
for the public float, (iii) two market-makers, and (iv) a minimum bid price of
$1.00 per share.

After the new maintenance requirements became effective, the Company
was notified that it was not in compliance with the new minimum bid price
requirement and that the Company would have 90-calendar days, which expire May
28, 1998, in order to regain compliance. The Company may regain compliance if
its securities trade at or above the minimum bid price requirement for at least
10-consecutive trade days. If after 90 days the Company has not regained
compliance, Nasdaq will issue a delisting letter and the Company may request a
hearing at that time, which will generally stay delisting until the hearing has
been completed. The Company's stockholders, at a Special Meeting of Stockholders
held on May 1, 1998, approved a ten-for-one reverse stock split of the Company's
Common Stock such that every ten shares were combined into one share of Common
Stock, par value $0.01 per share. The Company believes that the reverse stock
split will increase the price per share of the Company's Common Stock and
bring such price into compliance with the Nasdaq criteria. Although the
Company's Common Stock has traded above $1.00 per share since the reverse
stock split was effectuated, no assurances can be made that the reverse stock
split will cause the Company's stock price to be in compliance with the Nasdaq
listing requirements.

If the Company's securities are delisted from Nasdaq, trading, if any,
of the Company's securities would thereafter have to be conducted in the
non-Nasdaq over-the-counter market. In

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such event, an investor could find it more difficult to dispose of, or to obtain
accurate quotations as to the market value of, the Company's securities. In
addition, if the Common Stock were to become delisted from trading on Nasdaq and
the trading price of the Common Stock were to remain below $5.00 per share,
trading in the Company's Common Stock would also be subject to the requirements
of certain rules promulgated under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), which require additional disclosure by
broker-dealers in connection with any trades involving a stock defined as a
penny stock (generally, any non-Nasdaq equity security that has a market price
of less than $5.00 per share, subject to certain exceptions.) The additional
burdens imposed upon broker-dealers by such requirements could discourage
broker-dealers from effecting transactions in the Common Stock, which could
severely limit the market liquidity of the Common Stock and the ability of
investors to trade the Company's Common Stock. See "Risk Factors--Risks Relating
to Low-Priced Stock" and "Risk Factors--Risks Relating to Low-Priced Stock;
Possible Effect of 'Penny Stock' Rules on Liquidity for the Company's
Securities."

INDUSTRY BACKGROUND

Virtually all digital electronic systems, including cellular
telephones, workstations, PCs and modems, contain memory devices. Over the past
decade, the drive to reduce the size and increase the speed and functionality of
electronic systems has required concurrent increases in the density and speed of
memory devices used in these systems. The most widely used memory devices are
dynamic random access memories ("DRAMs") and SRAMs. DRAMs are commercially
available with higher densities than SRAMs, while SRAMs generally are capable of
significantly higher speeds than DRAMs of comparable density. SRAMs achieve this
speed advantage principally by incorporating more transistors in each memory
cell, rendering SRAMs larger and more costly to manufacture. Until recently,
DRAMs have produced acceptable performance levels at a lower cost and reduced
size compared to SRAMs. However, the increased computing speeds of digital
signal processors contained in advanced telecommunications equipment and
recently introduced processors, such as Intel's Pentium and the PowerPC, have
exceeded the ability of DRAMs to provide timely access to data. For example, to
take advantage of the significantly increased performance capabilities of these
new processors in high performance PCs, SRAMs are often used as cache memory
between the processor and the DRAM main memory. The cache memory stores the most
frequently or most recently used data from the DRAM main memory, enabling
quicker access by the processor. When SRAMs are used to provide access to a high
percentage of the information the processor requests, data access speeds can be
greatly enhanced.

The vast majority of SRAMs currently sold are industry standard
asynchronous SRAMs that have only relatively simple interface logic and are
required to operate only at normal commercial temperatures. Synchronous SRAMs,
which operate at the same clock speed as the processor, are more complex and
difficult to produce than asynchronous SRAMs because they combine SRAM memory
with additional logic. Synchronous burst mode SRAMs permit high-end processors,
such as the Pentium and PowerPC, to access data more quickly by allowing data
bits to be transferred in blocks rather than one bit at a time. Both synchronous
and asynchronous SRAMs vary in performance features, such as speed, density and
temperature tolerance, which enable them to support various high-end
applications. In addition, the demand for reduced power

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consumption in electronic products has resulted in an increasing demand for low
voltage SRAM devices.

Dataquest Incorporated, an information technology research firm,
estimates that the worldwide market for SRAM products will grow from $6.7
billion in 1996 to $8.9 billion in 1999, with the market for sub-20ns SRAMs
growing from $2.0 billion to $2.5 billion over the same period. In addition to
high performance PCs, SRAMs are used in a variety of other electronics products.
In commercial communications, SRAMs are used in both cellular base stations and
digital cellular telephones. SRAMs are also increasingly used in high speed
communication networks, such as Ethernet and FDDI-based networks. In military
and aerospace systems, SRAMs can also provide the high performance memory
required by fast military processors. For example, high speed military computers
utilize high performance SRAMs in pattern recognition and command, control and
communication applications embedded in today's advanced electronic weapons,
planes and satellites.

THE COMPANY'S PRODUCTS

Paradigm designs, manufactures and sells a broad range of SRAM products
with various density, speed, configuration, temperature range and packaging
options for a wide range of commercial, industrial and military applications.
The Company's products range in density from 256K to 4M. The Company's fastest
products currently achieve 7ns access times, and for the year ended December 31,
1997, 10ns and faster SRAMs accounted for 49% of the Company's sales. The
majority of Paradigm's products are available in two levels of power
consumption, standard and low, and three temperature ranges, commercial,
industrial and military. Paradigm also offers its products in a wide variety of
packaging options to accommodate various product features and cost
considerations. Paradigm designs its SRAM packages and pinouts to meet the
standards prescribed by the Joint Electron Device Engineering Council ("JEDEC").

ASYNCHRONOUS SRAMS. Paradigm's asynchronous SRAM products include high
speed 256K, 1M and 4M CMOS SRAMs. They are available in a variety of
configurations and commercial and industrial temperature range versions, as well
as military versions manufactured to comply with the most recent military
specifications.

SRAM MODULES. Paradigm offers SRAM modules in which multiple SRAMs are
connected and grouped on a printed circuit board and sold as a single unit.
Paradigm module offerings are designed to support the specific needs of the PC
cache market and the requirements for JEDEC standard SRAM modules. The Company's
PC cache module offerings include Intel COAST compliant modules and modules
which support PowerPC CHRP based designs. The JEDEC standard module product
offerings include modules ranging in size from 750K to 8M. These modules are
used in a variety of applications including networking, communications, digital
signal processing ("DSP") boards and memory testers.

PRODUCTS UNDER DEVELOPMENT. Timely development and introduction of new
products are essential to maintaining Paradigm's competitive position. Paradigm
works closely with leading electronics manufacturers in order to anticipate and
develop future generations of high performance SRAMs required by these
customers. The Company's current design development

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objectives include very fast SRAM products for the telecommunications,
networking and military/aerospace industries. Products currently under
development include: asynchronous, low voltage and high-speed SRAMs; and special
configuration SRAMs for cellular phone and modem applications. In addition, by
working closely with customers, Paradigm is developing a line of module
offerings. The Company believes that these modules will provide high quality,
high value SRAM-based industry standard products, as well as custom solutions.
In addition to new product development, the Company is focused on redesigning
existing products to reduce manufacturing costs, increase yields, and increase
the speeds of its products.

The SRAM business is highly cyclical and has been subject to
significant downturns at various times that have been characterized by
diminished product demand, production overcapacity and accelerated erosion of
average selling prices. During the latter part of 1996 and throughout 1997, the
market for certain SRAM devices experienced an excess supply relative to demand
which resulted in a significant downward trend in prices. The Company expects
such downward price trend to continue. See "Risk Factors--Semiconductor
Industry; SRAM Market."

The selling prices that the Company is able to command for its products
are highly dependent on industry-wide production capacity and demand. In this
regard, the Company did experience rapid erosion in product pricing during 1996
and 1997 which was not within the control of the Company. The Company could
continue to experience a downward trend in pricing which could adversely effect
the Company's operating results. See "Risk Factors--Semiconductor Industry;
SRAM Market."

The Company's future success will depend, in part, on its ability to
offset expected price erosion through manufacturing cost savings, yield
improvements and developing and introducing on a timely basis new products and
enhanced versions of existing products which incorporate advanced features and
command higher prices.

CUSTOMERS AND APPLICATIONS

Recent market trends, such as the rapid expansion of
telecommunications, graphics, multimedia and networking applications and the
proliferation of high-end workstations and PCs, have resulted in significant
demand for high performance SRAMs. Paradigm has targeted this higher performance
segment of the SRAM market, where it believes critical performance criteria such
as speed and temperature tolerance are more highly valued.

For the year ended December 31, 1997, Paradigm's sales of products to
Samsung, IKOS, All American and Iomega accounted for 16%, 16%, 15% and 10% of
sales, respectively.

SALES AND MARKETING

Paradigm sells its products in North America through a combination of a
direct sales force, independent sales representatives and distributors. Direct
sales personnel are responsible for calling on key accounts in North America and
coordinating the activities of the Company's sales representatives. The Company
has a sales manager in each of its regional sales offices in Dallas, Chicago and
Milpitas. The Company sells its products in Asia and Europe through a

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network of distributors and independent sales representatives. Paradigm intends
to expand the size of its direct sales force and the number of outside sales
representatives to provide additional customer service and broaden its customer
base.

The Company's sales representatives and distributors are not subject to
minimum purchase requirements and can discontinue marketing the Company's
products at any time. The Company's distributors are permitted to return to the
Company any or all of the products purchased by them and are offered price
protection. As is standard in the semiconductor industry, distributors are
granted a credit for the difference, at the time of a price reduction, between
the price they were originally charged for the products in inventory and the
reduced price which the Company subsequently charges distributors. From time to
time, distributors are also granted credit on an individual basis for
Company-approved price reductions on specific transactions, usually to meet
competitive prices. The Company believes that its relations with it sales
representatives and distributors are good.

The Company believes that customer service and technical support are
important competitive factors in selling to key customers. Paradigm emphasizes
on-time delivery and quick responses to the demand changes of its customers.
Paradigm has trained employees of its sales representatives and distributors to
provide technical support, with Paradigm technical support engineers available
to provide assistance with more difficult questions.

BACKLOG

The Company's backlog includes all purchase orders that have been
received, accepted and scheduled for delivery. The Company counts in its
backlog only those orders which it believes will be shipped within the next six
months. Most orders in backlog are subject to delivery rescheduling, price
renegotiations and cancellation at the option of the purchaser, usually without
penalty. As a result, although backlog may be useful for scheduling production,
it may not be a reliable measure of sales for future periods. As of December 31,
1997, the Company's backlog was approximately $2.7 million.

MANUFACTURING

On November 15, 1996, the Company sold its Wafer Fab to Orbit. The
Company has supply agreements with two offshore wafer foundries and conducts
business with those foundries by delivering written purchase orders specifying
the particular product ordered, quantity, price, delivery date and shipping
terms and, therefore, such foundries are not obligated to supply products to the
Company for any specific period, in any specific quantity or at any specified
price, except as may be provided in a particular purchase order. Reliance on
outside foundries involves several risks, including constraints or delays in
timely delivery of the Company's products, reduced control over delivery
schedules, quality assurance, potential costs and loss of production due to
seismic activity, weather conditions and other factors. To the extent a foundry
terminates its relationship with the Company, or should the Company's supply
from a foundry be interrupted or terminated for any other reason, the Company
may not have a sufficient amount of time to replace the supply of products
manufactured by the foundry. Should the Company be unable to obtain a sufficient
supply of products to enable it to meet demand, it could be required

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to allocate available supply of its products among its customers. Currently,
there is no shortage of supply, however, until late 1995, there had been a
worldwide shortage of advanced process technology foundry capacity and there can
be no assurance that there will not be such a shortage in the future. If such a
shortage occurs, there can be no assurance that the Company will be able to
obtain sufficient foundry capacity to meet customer demand in the future. The
Company is continuously evaluating potential new sources of supply. However, the
qualification process and the production ramp-up for additional foundries could
take longer than anticipated, and there can be no assurance that such sources
will be able or willing to satisfy the Company's requirements on a timely basis
or at acceptable quality or per unit prices.

Constraints or delays in the supply of the Company's products, whether
because of capacity constraints, unexpected disruptions at the current or future
foundries or assembly houses, delays in obtaining additional production at the
existing foundry or in obtaining production from new foundries, shortages of raw
materials, or other reasons, could result in the loss of customers and other
material adverse effects on the Company's operating results, including effects
that may result should the Company be forced to purchase products from higher
cost foundries or pay expediting charges to obtain additional supply.

STRATEGIC RELATIONSHIPS

NKK CORPORATION. Under several technology license and development
agreements, the first two of which were executed in December 1990, Paradigm and
NKK Corporation ("NKK") entered into various product development and technology
licensing relationships, resulting in Paradigm's successful transfer of its 0.6
micron process technology to NKK's wafer fabrication facility in Japan. These
relationships were modified on April 13, 1995 by an agreement (the "NKK
Agreement") which significantly simplified the relationship between the parties
and substantially ended each party's obligation to disclose or deliver
technological improvements to the other. Under the NKK Agreement, NKK has agreed
to supply Paradigm with a significant quantity of 1M SRAMs of Paradigm's design
each month for a three year period in exchange for additional and expanded
license rights with respect to certain proprietary technology. However, Paradigm
is under no obligation to purchase the 1M SRAMs under the NKK Agreement. In
effect, the NKK Agreement provides Paradigm with an important, discretionary
ability to increase capacity on an as-needed basis. Therefore, Paradigm's rights
under the NKK Agreement will not be affected if it does not purchase the 1M
SRAMs contemplated by the NKK Agreement. The Company began shipping SRAMs
produced by NKK during the fourth quarter of 1995. The NKK Agreement also
rescinded NKK's right to restrict Paradigm from entering into other foundry
relationships or granting additional licenses for the Company's products. The
NKK Agreement will automatically terminate upon completion of the joint
development work contemplated by the Agreement and may be terminated upon
default by either party. The Company believes that if the NKK Agreement were
terminated it would not have a material adverse effect on the Company's results,
operations or financial condition. See "--Factors That May Affect Future
Results" and "--Strategic Relationships; Potential Competition."

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COMPETITION

The semiconductor industry is intensely competitive and is
characterized by rapidly changing technology, short product life cycles,
cyclical oversupply and rapid price erosion. The Company competes with large
domestic and international semiconductor companies, most of which have
substantially greater financial, technical, marketing, distribution and other
resources than the Company. The Company's principal competitors in the high
performance SRAM market include Motorola and Samsung. Other competitors in the
SRAM market include Alliance Semiconductor, Cypress Semiconductor, Integrated
Device Technology, Integrated Silicon Solution and numerous other large and
emerging semiconductor companies. In addition, other manufacturers can be
expected to enter the high speed, high density SRAM market. In 1995, NKK
commenced production of products using the Company's design and process
technologies, and therefore may become a more significant competitor of the
Company. Paradigm has also licensed to Atmel Corporation ("Atmel") the right to
produce certain of its SRAM products, and as a result may compete with Atmel
with respect to such products. Because both NKK and Atmel have greater resources
than the Company and have foundry capacity, any such competition could adversely
affect the Company. To the extent that the Company enters into similar
arrangements with other companies, it may compete with such companies as well.
See "--Strategic Relationships; Potential Competition."

The ability of the Company to compete successfully depends on elements
outside its control, including the rate at which customers incorporate the
Company's products into their systems, the success of such customers in selling
those systems, the Company's protection of its intellectual property, the
number, nature and success of its competitors and their product introductions
and general market and economic conditions. In addition, the Company's success
will depend in large part on its ability to develop, introduce and manufacture
in a timely manner products that compete effectively on the basis of product
features (including speed, density, die size, and packaging), availability,
quality, reliability and price, together with other factors including the
availability of sufficient manufacturing capacity and the adequacy of production
yields. There can be no assurance that the Company will be able to compete
successfully in the future.

PATENTS AND LICENSED TECHNOLOGY

The Company seeks to protect its proprietary technology by filing
applications to obtain patents in the United States and foreign countries and by
registering its circuit designs pursuant to the U.S. Semiconductor Chip
Protection Act of 1984. The Company also relies on trade secrets and
confidential technological know-how in the conduct of its business. As of
December 31, 1997, the Company held 17 U.S. patents and one Canadian patent, and
had four U.S. and 15 foreign patent applications pending. The Company believes
that its patent portfolio strengthens its negotiating position with respect to
technology ownership disputes that may occur in the future.

The Company intends to continue to pursue patent, trade secret, and
mask work protection for its semiconductor process technologies and designs. To
that end, the Company has obtained certain patents and patent licenses and
intends to continue to seek patents on its inventions, as appropriate. The
process of seeking patent protection can be long and expensive, and there is

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no assurance that patents will be issued from currently pending or future
applications or that, if patents are issued, they will be of sufficient scope or
strength to provide meaningful protection or any commercial advantage to the
Company. In particular, there can be no assurance that any patents held by the
Company will not be challenged, invalidated or circumvented, or that the rights
granted thereunder will provide competitive advantage to the Company. The
Company also relies on trade secret protection for its technology, in part
through confidentiality agreements with its employees, consultants and third
parties. There can be no assurance that these agreements will be fully effective
or will not be breached, that the Company will have adequate remedies for any
breach, or that the Company's trade secrets will not otherwise become known to
or independently developed by others. In addition, the laws of certain countries
in which the Company's products are or may be developed, manufactured or sold
may not protect the Company's products and intellectual property rights to the
same extent as the laws of the United States.

There has been substantial litigation regarding patent and other
intellectual property rights in the semiconductor industry. In the future,
litigation may be necessary to enforce patents issued to the Company, to protect
trade secrets or know-how owned by the Company, or to defend the Company against
claimed infringement of the rights of others and to determine the scope and
validity of the proprietary rights of others. The Company has from time to time
received, and may in the future receive, communications alleging possible
infringement of patents or other intellectual property rights of others. Any
such litigation could result in substantial cost to and diversion of effort by
the Company, which could have a material adverse effect on the Company. Further,
adverse determinations in such litigation could result in the Company's loss of
proprietary rights, subject the Company to significant liabilities to third
parties, require the Company to seek licenses from third parties or prevent the
Company from manufacturing or selling its products, any of which could have a
material adverse effect on the Company.

In December 1990, as part of an agreement terminating a strategic
relationship with AT&T, the Company entered into a nonexclusive license
agreement with AT&T giving the Company a license to use all AT&T-owned,
semiconductor-related patents over a period of eight years. Under the agreement,
the Company agreed to pay AT&T a royalty of 0.75% of revenue for each product
produced by the Company. Under the same agreement, the Company licensed to AT&T
its poly-iso structure for a similar royalty.

The Company has also entered into certain license agreements with Atmel
and NKK. See "--Strategic Relationships."

ENVIRONMENTAL MATTERS

The Company believes that compliance with federal, state and local
provisions regulating the discharge of materials into the environment or
otherwise relating to the protection of the environment will not have a material
effect upon its capital expenditures, operations or competitive position.

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EMPLOYEES

As of December 31, 1997, the Company had 21 employees, of whom 2 were
engaged in research and development and engineering, 5 in marketing, sales and
customer support, 6 in manufacturing, 4 in finance and 4 in administration. The
Company's employees are not represented by a collective bargaining organization
and the Company has never experienced a work stoppage. The Company believes that
its employee relations are good. See "Factors That May Affect Future
Results--Employees; Management of Growth."

FACTORS THAT MAY AFFECT FUTURE RESULTS

THE OPERATIONS AND BUSINESS PROSPECTS OF THE COMPANY ARE SUBJECT TO
CERTAIN QUALIFICATIONS BASED ON POTENTIAL BUSINESS RISKS FACED BY THE COMPANY.
THIS FORM 10-K SHOULD BE REVIEWED IN LIGHT OF THE POTENTIAL EFFECTS OF EVENTS
THAT MAY OCCUR AS OUTLINED IN THE FOLLOWING RISK FACTORS. READERS OF THIS REPORT
SHOULD CONSIDER CAREFULLY THE FOLLOWING RISK FACTORS IN ADDITION TO THE OTHER
INFORMATION PRESENTED IN THIS FORM 10-K.

UNCERTAINTY OF FUTURE PROFITABILITY; NEED FOR ADDITIONAL FUNDS. The
Company's recent operations have consumed substantial amounts of cash and have
generated net losses. The Company believes that it will require additional cash
infusions from private placements or other equity financings to meet the
Company's projected working capital and other cash requirements in 1998. The
sale or issuance of additional equity or convertible debt securities could
result in additional dilution to the Company's stockholders. There can be no
assurance that additional financing, if required, will be available when needed
or, if available, will be on terms acceptable to the Company.

CONTINUING LOSSES AND DOUBTFUL ABILITY TO CONTINUE AS A GOING CONCERN.
As a result of the Company's net losses, and the Company's dependance on
additional financing, the Company's independent accountants' report on the
Company's December 31, 1997 financial statements includes an explanatory
paragraph indicating that these matters raise a substantial doubt about the
Company's ability to continue as a going concern. The Company is seeking to
raise additional equity. However, there can be no assurance that the Company's
efforts will be successful.

DILUTION OF COMMON STOCK. The issuance of additional shares of Common
Stock upon conversion of the Series A Preferred Stock, Series B Preferred Stock
and Series C Preferred Stock (collectively, the "Preferred Stock") will have a
dilutive effect on the Common Stock outstanding prior to such issuances.

FLUCTUATIONS IN QUARTERLY RESULTS. The Company has experienced
significant quarterly fluctuations in operating results and anticipates that
these fluctuations will continue. These fluctuations have been caused by a
number of factors, including changes in manufacturing yields by contracted
manufacturers, changes in the mix of products sold, the timing of new product
introductions by the Company or its competitors, cancellation or delays of
purchases of the Company's products, the gain or loss of significant customers,
the cyclical nature of the semiconductor industry and the consequent
fluctuations in customer demand for the Company's

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<PAGE>

devices and the products into which they are incorporated, and competitive
pressures on prices. A decline in demand in the markets served by the Company,
lack of success in developing new markets or new products, or increased research
and development expenses relating to new product introductions could have a
material adverse effect on the Company. Moreover, because the Company sets
spending levels in advance of each quarter based, in part, on expectations of
product orders and shipments during that quarter, a shortfall in revenue in any
particular quarter as compared to the Company's plan could have a material
adverse effect on the Company.

DECLINING SRAM PRICES. Beginning in late 1995 and continuing into 1996
and 1997, the market for certain SRAM devices experienced a significant excess
supply relative to demand, which resulted in a significant downward trend in
prices. The market for the Company's products could continue to experience a
downward trend in pricing which could adversely affect the Company's operating
results. The Company's ability to maintain or increase revenues in light of the
current downward trend in product prices will be highly dependent upon its
ability to increase unit sales volumes of existing products and to introduce and
sell new products in quantities sufficient to compensate for the anticipated
declines in average selling prices of existing products. Declining average
selling prices will also adversely affect the Company's gross margins unless the
Company is able to reduce its costs per unit to offset such declines. There can
be no assurance that the Company will be able to increase unit sales volumes,
introduce and sell new products or reduce its costs per unit.

The semiconductor industry is highly cyclical and has been subject to
significant economic downturns at various times, characterized by diminished
product demand, production overcapacity and accelerated erosion of average
selling prices. During 1996 and throughout 1997, the market for certain SRAM
devices experienced an excess supply relative to demand which resulted in a
significant downward trend in prices. The Company expects to continue to
experience a downward trend in pricing which could adversely affect the
Company's operating margins. The selling prices that the Company is able to
command for its products are highly dependent on industry-wide production
capacity and demand, and as a consequence the Company could experience rapid
erosion in product pricing which is not within the control of the Company and
which could adversely effect the Company's operating results. The Company
expects that additional SRAM production capacity will become increasingly
available in the foreseeable future, and such additional capacity may adversely
affect the Company's margins and competitive position. In addition, the Company
may experience period-to-period fluctuations in operating results because of
general semiconductor industry conditions, overall economic conditions, or other
factors. The Company's business is also subject to the risks associated with the
imposition of legislation and regulations relating to the import or export of
semiconductor products.

RISKS RELATING TO LOW-PRICED STOCKS. Prior to August 22, 1997, the
Company's Common Stock was listed on the Nasdaq National Market (the "NNM"). In
order for continued listing on the NNM, however, the Company was required to,
maintain (1) $4,000,000 in net tangible assets because it has sustained losses
from continuing operations and/or net losses in three of its four most recent
fiscal years, (2) a $2,000,000 market value of the public float, (3) $1,000,000
in total capital and surplus, (4) a minimum bid price of $1.00 per share and (5)
two market-makers. As of June 30, 1997, the Company was not in compliance with
items (1) and (4) above.

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<PAGE>

On July 15, 1997, the Nasdaq Stock Market ("Nasdaq") staff notified the
Company of a bid price deficiency and provided a 90-day grace period within
which to regain compliance with this requirement. On August 8, 1997, Nasdaq,
based on a review of the Company's trading history from July 8 to August 8,
1997, indicated that the Company had regained compliance with the minimum
closing bid price requirement of $1.00. On August 20, 1997, Nasdaq informed the
Company that due to its failure to comply with the terms of the maintenance
qualifications exception granted to the Company, the Company's Common Stock
would be removed from the NNM and listed on the SmallCap Market ("SCM")
effective August 22, 1997, pursuant to a waiver to the initial inclusion bid
price requirement.

After the new maintenance requirements became effective, the Company
was notified that it was not in compliance with the new minimum bid price
requirement and that the Company would have 90-calendar days, which expire May
28, 1998, in order to regain compliance. The Company may regain compliance if
its securities trade at or above the minimum bid price requirement for at least
10-consecutive trade days. If after 90 days the Company has not regained
compliance, Nasdaq will issue a delisting letter and the Company may request a
hearing at that time, which will generally stay delisting until the hearing has
been completed. The Company's stockholders, at a Special Meeting of Stockholders
held on May 1, 1998, approved a ten-for-one reverse stock split of the Company's
Common Stock such that every ten shares were combined into one share of Common
stock, par value $0.01 per share. The Company believes that the stock split will
increase the price per share of the Company's Common Stock and bring such price
into compliance with the Nasdaq criteria. Although the Company's Common Stock
has traded above $1.00 per share since the reverse stock split was effectuated,
no assurances can be made that the stock split will cause the Company's stock
price to be in compliance with the Nasdaq listing requirements.

If the Company's securities are delisted from Nasdaq, trading, if any,
of the Company's securities would thereafter have to be conducted in the
non-Nasdaq over-the-counter market. In such event, an investor could find it
more difficult to dispose of, or to obtain accurate quotations as to the market
value of, the Company's securities. In addition, if the Common Stock were to
become delisted from trading on Nasdaq and the trading price of the Common Stock
were to remain below $5.00 per share, trading in the Company's Common Stock
would also be subject to the requirements of certain rules promulgated under the
Securities Exchange Act of 1934, as

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amended (the "Exchange Act"), which require additional disclosure by
broker-dealers in connection with any trades involving a stock defined as a
penny stock (generally, any nonNasdaq equity security that has a market price of
less than $5.00 per share, subject to certain exceptions.) The additional
burdens imposed upon broker-dealers by such requirements could discourage
broker-dealers from effecting transactions in the Common Stock, which could
severely limit the market liquidity of the Common Stock and the ability of
investors to trade the Company's Common Stock. See "--Risks Relating to
Low-Priced Stock; Possible Effect of "Penny Stock" Rules on Liquidity for the
Company's Securities." The Company's Common Stock continues to be below the
$1.00 minimum bid price requirement. If the Company's securities remain below
the minimum bid price requirement, it could result in the Company's securities
being delisted from Nasdaq. There can be no assurances that the Company's
securities will meet the minimum bid price requirements or any of the other
continued listing requirements in the future.

RISKS RELATING TO LOW-PRICED STOCK; POSSIBLE EFFECT OF "PENNY STOCK"
RULES ON LIQUIDITY FOR THE COMPANY'S SECURITIES. If the Company's securities
were not listed on a national securities exchange nor listed on a qualified
automated quotation system, they may become subject to Rule 15g-9 under the
Exchange Act, which imposes additional sales practice requirements on
broker-dealers that sell such securities to persons other than established
customers and "accredited investors" (generally, individuals with a net worth in
excess of $1,000,000 or annual incomes exceeding $200,000 or $300,000 together
with their spouse). For transactions covered by Rule 15g-9, a broker-dealer must
make a special suitability determination for the purchaser and have received the
purchaser's written consent to the transaction prior to sale. Consequently, such
Rule may affect the ability of broker-dealers to sell the Company's securities
and may affect the ability of purchasers to sell any of the Company's securities
in the secondary market.

The Securities and Exchange Commission (the "Commission") has adopted
regulations that define a "penny stock" to be any equity security that has a
market price (as therein defined) of less than $5.00 per share or with an
exercise price of less than $5.00 per share, subject to certain exceptions. For
any transaction involving a penny stock, unless exempt, the rules require
delivery, prior to any transaction in a penny stock, of a disclosure schedule
prepared by the Commission relating to the penny stock market. Disclosure is
also required to be made about sales commissions payable to both the
broker-dealer and the registered representative and current quotations for the
securities. Finally, monthly statements are required to be sent disclosing
recent price information for the penny stock held in the account and information
on the limited market in penny stock.

The foregoing required penny stock restrictions will not apply to the
Company's securities if the Company meets certain minimum net tangible assets or
average revenue criteria. If applicable, there can be no assurance that the
Company's securities will qualify for exemption from the penny stock
restrictions. In any event, even if the Company's securities were exempt from
such restrictions, the Company would remain subject to Section 15(b)(6) of the
Exchange Act, which gives the Commission the authority to restrict any person
from participating in a distribution of penny stock, if the Commission finds
that such a restriction would be in the public interest.

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<PAGE>

If the Company's securities were subject to the rules on penny stocks,
the market liquidity for the Company's securities could be materially adversely
affected.

DEPENDENCE ON NEW PRODUCTS AND TECHNOLOGIES. The market for the
Company's products is characterized by rapidly changing technology, short
product life cycles, cyclical oversupply and rapid price erosion. Average
selling prices for many of the Company's products have generally decreased over
the products' life cycles in the past and are expected to decrease in the
future. Accordingly, the Company's future success will depend, in part, on its
ability to develop and introduce on a timely basis new products and enhanced
versions of its existing products which incorporate advanced features and
command higher prices. The success of new product introductions and enhancements
to existing products depends on several factors, including the Company's ability
to develop and implement new product designs, achievement of acceptable
production yields and market acceptance of customers' end products. In the
past, the Company has experienced delays in the development of certain new and
enhanced products. Based upon the increasing complexity of both modified
versions of existing products and planned new products, such delays could occur
again in the future. Further, the cost of development can be significant and is
difficult to forecast. In addition, there can be no assurance that any new or
enhanced products will achieve or maintain market acceptance. If the Company is
unable to design, develop and introduce competitive products or to develop new
or modified designs on a timely basis, the Company's operating results will be
materially adversely affected.

DEPENDENCE ON FOUNDRIES AND OTHER THIRD PARTIES. The Company is in the
process of seeking wafer supply from other offshore foundries, and anticipates
that it will conduct business with other foundries by delivering written
purchase orders specifying the particular product ordered, quantity, price,
delivery date and shipping terms and, therefore, such foundries will not be
obligated to supply products to the Company for any specific period, in any
specific quantity or at any specified price, except as may be provided in a
particular purchase order. Reliance on outside foundries involves several risks,
including constraints or delays in timely delivery of the Company's products,
reduced control over delivery schedules, quality assurance, potential costs and
loss of production due to seismic activity, weather conditions and other
factors. To the extent a foundry terminates its relationship with the Company,
or should the Company's supply from a foundry be interrupted or terminated for
any other reason, the Company may not have a sufficient amount of time to
replace the supply of products manufactured by the foundry. Should the Company
be unable to obtain a sufficient supply of products to enable it to meet demand,
it could be required to allocate available supply of its products among its
customers. Until recently, there has been a worldwide shortage of advanced
process technology foundry capacity and there can be no assurance that the
Company will obtain sufficient foundry capacity to meet customer demand in the
future, particularly if that demand should increase. The Company is continuously
evaluating potential new sources of supply. However, the qualification process
and the production ramp-up for additional foundries could take longer than
anticipated, and there can be no assurance that such sources will be able or
willing to satisfy the Company's requirements on a timely basis or at acceptable
quality or per unit prices.

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new foundries, shortages of raw materials or other reasons, could result in the
loss of customers and other material adverse effects on the Company's operating
results, including effects that may result should the Company be forced to
purchase products from higher cost foundries or pay expediting charges to obtain
additional supply.

LITIGATION. On August 12, 1996, a securities class action lawsuit was
filed in Santa Clara County Superior Court against the Company and Michael
Gulett, Robert McClelland, Richard A. Veldhouse and Chiang Lam (the "Paradigm
Defendants") and PaineWebber, Inc. The class alleged by plaintiffs consisted of
purchasers of the Company's Common Stock from November 20, 1995 to March 22,
1996, inclusive (the "Class Period"). The complaint alleges negligent
misrepresentation, fraud and deceit, breach of fiduciary duty and violations of
certain provisions of the California Corporate Securities Law and Civil Code.
The plaintiffs seek an unspecified amount of compensatory and punitive damages.
Plaintiffs allege, among other things, that the Paradigm Defendants wrongfully
represented that the Company would have protection against adverse market
conditions in the semiconductor market based on the Company's focus on high
speed, high performance semiconductor products. Plaintiffs allege that the
Paradigm Defendants made these alleged misrepresntations to enable: (1) insiders
to sell their shares at a profit, (ii) the Company's stock price to be
positioned for a secondary offering of 243,250 shares of stock (which was later
withdrawn) and (iii) the Company to acquire NewLogic (which acquisition was
later accomplished in exchange for 31,440 shares of the Company's Common Stock
and cash). Plaintiffs allege defendants McClelland, McDonald and Veldhouse
respectively acquired 55, 54 and 63 shares of the Company's stock on January 2,
1996 at a price of $114.80 per share sold all of the stock on the same day at a
price of $135.00 per share. Plaintiffs further allege (i) defendant McClelland
sold 700 shares of the Company's stock on or about February 22, 1996 at a price
of $145.00 per share, (ii) defendant Lam sold 313 shares of the Company's stock
on or about February 23, 1996 at a price of $150.00 per share, which Shares were
acquired by exercise of options on January 2, 1996 at a price of $5.00 per share
and (iii) defendant McClelland sold 100 shares of the Company's stock on
February 26, 1996 at a price of $165.00. The Paradigm Defendants intend to
vigorously defend the action. On September 30, 1996, the Paradigm Defendants
filed a demurrer seeking to have plaintiffs' entire complaint dismissed with
prejudice. On December 12, 1996, the Court sustained the demurrer as to all of
the causes of action against Michael Gulett and as to all causes of actions,
except for violation of certain provisions of the California Corporate
Securities Law, against the remaining Paradigm Defendants. The Court, however,
granted plaintiffs leave to amend the complaint to attempt to cure the defects
which caused the Court to sustain the demurrer. Plaintiffs failed to amend
within the allotted time. On January 8, 1997, the Paradigm Defendants filed an
answer to the complaint denying any liability for the acts and damages alleged
by the plaintiffs. Plaintiffs have since served the Paradigm Defendants with
discovery requests for production of documents and interrogatories, to which the
Paradigm Defendants have responded. Plaintiffs have also subpoenaed documents
from various third parties. The Paradigm Defendants have served the plaintiffs
with an initial set of discovery requests, to which plaintiffs have responded.
The Paradigm Defendants also took the depositions of the named plaintiffs on
April 9, 1997. On January 15, 1997, plaintiffs filed a motion to certify the
matter as a class action. Plaintiffs sought by their motion to certify a
nationwide class of those who purchased the Company's stock during the Class
Period. After several hearings and continuances, on February 9, 1998 the Court
certified a class consisting only of California purchasers of the Company's
stock during the Class Period. Plaintiffs have set a hearing date of April 9,
1998 for a motion to amend their complaint to incorporate factual allegations
derived from the February 21, 1997 action described below. There can be no
assurance that the Company will be successful in the defense of this action.
Even if the Company is successful in such defense, it may incur substantial
legal fees and other expenses related to this claim. If unsuccessful in the
defense of any such claim, the Company's business, operating results and cash
flows could be materially adversely affected.

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from the May 19, 1997 lawsuit described below. The Paradigm Defendants filed a
demurrer to the amended complaint, which was heard on September 9, 1997. On
September 10, 1997, the Court issued an order sustaining the Paradigm
Defendants' demurrer as to all causes of action without leave to amend. A
judgment in favor of the Paradigm Defendants dismissing the entire complaint was
entered by the Court on September 23, 1997. Plaintiffs have appealed the
decision and filed a brief in support of its appeal. The Paradigm Defendants'
responsive brief is due to be filed March 30, 1998. There can be no assurances
that the Company will be successful in defeating the appeal. Even if Paradigm is
successful in defeating the appeal, it may incur substantial legal fees and
other expenses related to this appeal. If unsuccessful in defeating the appeal,
the Company's business operating results and cash flows could be materially
adversely affected.

On May 19, 1997, former employees of the Company, Thomas Campbell,
James Zulliger and Mark Wagenhals, filed an action in Santa Clara County
Superior Court. The complaint names as defendants the Company, Michael Gulett,
Richard Veldhouse, Dennis McDonald and Chiang Lam. Plaintiffs filed with the
complaint a notice that they consider their case related legally and factually
to the August 12, 1996 class action lawsuit described above. The Complaint
alleges fraud, breach of fiduciary duty and violations of certain provisions of
the California Corporate Securities Law and Civil Code. Plaintiffs allege that
they purchased the Company's stock at allegedly inflated prices and were damaged
thereby. The plaintiffs seek an unspecified amount of compensatory, rescissory
and/or punitive damages. Defendants responded to the complaint on September 12,
1997 by filing a demurrer as to all causes of action. Prior to the hearing on
the demurrer, Plaintiffs amended their complaint to identify two allegedly
fraudulent sale transactions. In particular, Plaintiffs allege that the Company
reported a sale of $1,650,000 worth of products to NexGen, Inc., one of the
Company's customers, that was not a legitimate sale. Plaintiffs allege that the
order was sent to the shipping floor during the evening shift on December 31,
1995, to be out before midnight, was included in year-end sales and was
returned, apparently untouched, in April 1996. In addition, plaintiffs allege
that on March 31, 1996, the Company shipped $1,440,080 worth of products to
Arco, one of the Company's distributors, that was not a legitimate order.
Plaintiffs allege this shipment was later returned untouched for full credit. On
February 20, 1998, defendants filed a demurrer as to all causes of action in the
amended complaint, which is set to be heard April 2, 1998. Plaintiffs have
served the Company and two of the individual defendants with requests for
production of documents, to which the Company and the individual defendants have
responded. The Company has served plaintiff with form interrogatories, to which
they have responded. There can be no assurance that the Company will be
successful in such defense. Even if Paradigm is successful in such defense, it
may incur substantial legal fees and other expenses related to this claim. If
unsuccessful in the defense of any such claim, the Company's business, operating
results and cash flows could be materially adversely affected.

The Company is involved in various other litigation and potential
claims. Due to the inherent uncertainty of litigation, management is not able to
reasonably estimate losses that may be incurred in relation to this litigation.
However, based on the facts presently known, management believes that the
resolution of these matters will not have a material adverse impact on the
results of operations or the financial position of the Company.

PRODUCT AND CUSTOMER CONCENTRATION; DEPENDENCE ON TELECOMMUNICATIONS
AND COMPUTER INDUSTRIES. Currently, substantially all of the Company's sales are
derived from the sale of SRAM products. Substantially all of the Company's
products are incorporated into telecommunications and computer-related products.
The telecommunications and computer industries have recently experienced strong
unit sales growth, which has increased demand for integrated circuits, including
the memory products offered Paradigm. However, industries have from time to time
experienced cyclical, depressed business conditions. Such industry downturns
have historically resulted in reduced product demand and declining average
selling prices. The Company's business and operating results could be materially
and adversely affected by a downturn in the telecommunications or computer
industries in the future.

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COMPETITION. The semiconductor industry is intensely competitive and is
characterized by rapidly changing technology, short product life cycles,
cyclical oversupply and rapid price erosion. The Company competes with large
domestic and international semiconductor companies, most of which have
substantially greater financial, technical, marketing, distribution and other
resources than the Company. The Company's principal competitors in the high
performance SRAM market include Motorola and Micron Technology. Other
competitors in the SRAM market include Alliance Semiconductor, Cypress
Semiconductor, Integrated Device Technology, Integrated Silicon Solution,
Samsung and numerous other large and emerging semiconductor companies. In
addition, other manufacturers can be expected to enter the high speed, high
density SRAM market.

The ability of the Company to compete successfully depends on many
elements outside its control, including the rate at which customers incorporate
the Company's products into their systems, the success of such customers in
selling those systems, the Company's protection of its intellectual property,
the number, nature and success of its competitors and their product
introductions, and general market and economic conditions. In addition, the
Company's success will depend in large part on its ability to develop,
introduce and manufacture in a timely manner products that compete effectively
on the basis of product features (including speed, density, die size and
packaging), availability, quality, reliability and price, together with other
factors including the availability of sufficient manufacturing capacity and the
adequacy of production yields. There is no assurance that the Company will be
able to compete successfully in the future.

STRATEGIC RELATIONSHIPS; POTENTIAL COMPETITION. The Company, pursuant
to certain licenses of its technology, has entered into strategic relationships
with NKK and Atmel. The Company has had a long-standing business relationship
with NKK which began in October 1992. The Company, NKK and affiliates of NKK
entered into several equity and debt transactions which provided start-up and
development funding to the Company. Given the long-standing relationship, the
Company and NKK entered into three technology license and development agreements
which provide for NKK to supply the Company a specified number of 1M SRAMs for
three years. These Agreements provided funding to the Company.

The Company's business relationship with Atmel began in April 1995 when
pursuant to certain agreements, Atmel purchased a substantial number of shares
of the Company's capital stock from the Company, certain stockholders of the
Company who had been unsecured creditors of the Company as of the reorganization
and from the Company's equipment lessors. Atmel also acquired certain warrants
to purchase shares of the Company's Common Stock. In 1995, the Company and Atmel
entered into a five-year License and Manufacturing Agreement pursuant to which
Atmel would provide the capacity to manufacture wafers at its wafer
manufacturing facility. The Company entered into such agreement with Atmel
because Atmel provided the Company with significant wafer manufacturing capacity
when such capacity was in short supply.

The Company previously licensed the design and process technology for
substantially all of its products at such time, including certain of its 256K,
1M and 4M products, to NKK as a source of revenue. The Company has not licensed
any of its current products to NKK. In the future, the Company may compete with
NKK with respect to all of such products in certain

-19-
<PAGE>

Pacific Rim countries, North America and Europe and, as to certain of its 256K
and 1M products, in the rest of the world. In 1995, NKK commenced production of
products using the Company's design and process technologies, and therefore may
become a more significant competitor of the Company. Any such competition with
NKK could adversely affect the Company. Paradigm has also licensed to Atmel the
right to produce certain of its SRAM products which provided significant wafer
manufacturing capacity. As a result, the Company is likely to compete with Atmel
with respect to such products. Because Atmel has greater resources than the
Company and has foundry capacity, any such competition could adversely affect
the Company. To the extent that the Company enters into similar arrangements
with other companies, it may compete with such companies as well.

DEPENDENCE ON PATENTS, LICENSES AND INTELLECTUAL PROPERTY; POTENTIAL
LITIGATION. The Company intends to continue to pursue patent, trade secret, and
mask work protection for its semiconductor process technologies and designs. To
that end, the Company has obtained certain patents and patent licenses and
intends to continue to seek patents on its inventions and manufacturing
processes, as appropriate. The process of seeking patent protection can be long
and expensive, and there is no assurance that patents will be issued from
currently pending or future applications or that, if patents are issued, they
will be of sufficient scope or strength to provide meaningful protection or any
commercial advantage to the Company. In particular, there can be no assurance
that any patents held by the Company will not be challenged, invalidated or
circumvented, or that the rights granted thereunder will provide competitive
advantage to the Company. The Company also relies on trade secret protection for
its technology, in part through confidentiality agreements with its employees,
consultants and third parties. There can be no assurance that these agreements
will not be breached, that the Company will have adequate remedies for any
breach, or that the Company's trade secrets will not otherwise become known to
or independently developed by others. In addition, the laws of certain
territories in which the Company's products are or may be developed,
manufactured or sold may not protect the Company's products and intellectual
property rights to the same extent as the laws of the United States.

INTERNATIONAL OPERATIONS; CURRENCY FLUCTUATIONS. A significant portion
of the Company's sales are attributable to sales outside the United States,
primarily in Asia and Europe. In fiscal 1997, Asia and Europe accounted for
approximately 7% and 5%, respectively, of the Company's revenues. The Company
expects that international sales will continue to represent a significant
portion of its sales. The Company currently conducts business in Singapore,
Japan, Taiwan, Hong Kong, United Kingdom, Belgium, Sweden, France, Germany and
Israel.

-20-
<PAGE>

In addition, the Company expects that a significant portion of its products will
be manufactured by independent third parties in Asia. Therefore, the Company is
subject to the risks of conducting business internationally, and both
manufacturing and sales of the Company's products may be adversely affected by
political and economic conditions abroad. Protectionist trade legislation in
either the United States or foreign countries, such as a change in the current
tariff structures, export compliance laws or other trade policies, could
adversely affect the Company's ability to have products manufactured or sell
products in foreign markets. The Company cannot predict whether quotas, duties,
taxes or other charges or restrictions will be imposed by the United States,
Hong Kong, Japan, Taiwan or other countries upon the importation or exportation
of the Company's products in the future, or what effect any such actions would
have on its relationship with NKK or other manufacturing sources, or its general
business, financial condition and results of operations. In addition, there can
be no assurance that the Company will not be adversely affected by currency
fluctuations in the future. The prices for the Company's products are
denominated in U.S. dollars and all of Paradigm's business transactions are in
U.S. dollars. Accordingly, any increase in the value of the dollar as compared
to currencies in the Company's principal overseas markets would increase the
foreign currency-denominated sales prices of the Company's products, which may
negatively affect the Company's sales in those markets. The Company has not
entered into any agreements or instruments to hedge the risk of foreign currency
fluctuations. Currency fluctuations in the future may also increase the
manufacturing costs of the Company's products. Although the Company has not to
date experienced any material adverse effect on its operations as a result of
such international risks, there can be no assurance that such factors will not
adversely impact the Company's general business, financial condition and results
of operations.

EMPLOYEES. The Company's future success will be heavily dependent upon
its ability to attract and retain qualified technical, managerial, marketing and
financial personnel. The Company has experienced a high degree of turnover in
personnel, including at the senior and middle management levels. The competition
for such personnel is intense and includes companies with substantially greater
financial and other resources to offer such personnel. Recently, the Company has
had to significantly reduce its work staff. There can be no assurance that the
Company will be able to attract and retain the necessary personnel, and any
failure to do so could have a material adverse effect on the Company.

POTENTIAL VOLATILITY OF STOCK PRICE. The trading price of the Company's
Common Stock is subject to wide fluctuations in response to variations in
operating results of the Company and other semiconductor companies, actual or
anticipated announcements of technical innovations or new products by the
Company or its competitors, general conditions in the semiconductor industry and
the worldwide economy, and other events or factors. The Company's stock traded
from a high of $372.50 in August 1995 to a low of $1.25 in December 1997 (after
giving effect to the ten-for-one reverse stock split). In addition, the stock
market has in the past experienced extreme price and volume fluctuations,
particularly affecting the market prices for many high technology companies, and
these fluctuations have often been unrelated to the operating performance of the
specific companies. These market fluctuations may adversely affect the market
price of the Company's Common Stock.

ANTITAKEOVER EFFECT OF CERTAIN CHARTER PROVISIONS. Certain provisions
of the Company's Certificate of Incorporation and Bylaws and of Delaware law
could discourage potential acquisition proposals and could delay or prevent a
change in control of the Company. Such provisions

-21-
<PAGE>

could diminish the opportunities for a stockholder to participate in tender
offers, including tender offers at a price above the then current market value
of the Common Stock. Such provisions may also inhibit fluctuations in the market
price of the Common Stock that could result from takeover attempts. In addition,
the Board of Directors, without further stockholder approval, may issue
Preferred Stock that could have the effect of delaying or preventing a change in
control of the Company. The issuance of Preferred Stock could also adversely
affect the voting power of the holders of Common Stock, including the loss of
voting control to others.

YEAR 2000. The Year 2000 issue arises because most computer hardware
and software was developed without considering the impact of the upcoming change
in the century. The hardware and software were originally designed to accept
two-digit entries rather than four-digit entries in the date code field. As a
result, certain computer systems and software packages will not be able to
correctly interpret dates beyond December 31, 1999 and thus, will interpret
dates beginning January 1, 2000 to represent January 1, 1900. This could
potentially result in computer failure or miscalculations, causing operating
disruptions, including among other things, a temporary inability to process
transactions, send invoices or engage in other ordinary activities.

The Company has evaluated all of its computer software and database
software to identify modifications, if any, that may be required to address Year
2000 issues. The Company does not believe there is significant risk associated
with the Year 2000 problem. The Company primarily uses third-party software
programs written and updated by outside firms, each of whom has indicated that
its software is Year 2000 compliant. The Company intends to test all of its
software programs during the first two quarters of 1998 to ensure that each will
work in conjunction with the other after December 31, 1999. If unforeseeable
problems arise during the testing phase, the Company intends to have them
corrected prior to the end of the 1998 calendar year. The Company does not
expect the financial cost associated with any required modifications to have a
material adverse impact on the Company's results, operations or financial
condition. The Company also relies on third parties to ship its products. The
Company is currently investigating whether such parties are Year 2000 compliant.
The Company does not expect that failure on the part of any third party to be
Year 2000 compliant will have a material adverse impact on its business, results
of operations or financial condition.

ITEM 2. PROPERTIES
----------

The Company leases its 20,000 square foot principal facility in
Milpitas, California pursuant to a lease that expires in January 2002. The
Company also has domestic sales offices in the Boston, Chicago, Los Angeles and
San Jose metropolitan areas. The Company believes that the size of its existing
facility is adequate to meet its current needs.

ITEM 3. LEGAL PROCEEDINGS
-----------------

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<PAGE>

semiconductor market based on the Company's focus on high speed, high
performance semiconductor products. Plaintiffs allege that the Paradigm
Defendants made these alleged misrepresntations to enable: (1) insiders to sell
their shares at a profit, (ii) the Company's stock price to be positioned for a
secondary offering of 243,250 shares of stock (which was later withdrawn) and
(iii) the Company to acquire NewLogic (which acquisition was later accomplished
in exchange for 31,440 shares of the Company's Common Stock and cash).
Plaintiffs allege defendants McClelland, McDonald and Veldhouse respectively
acquired 55, 54 and 63 shares of the Company's stock on January 2, 1996 at a
price of $114.80 per share sold all of the stock on the same day at a price of
$135.00 per share. Plaintiffs further allege (i) defendant McClelland sold 700
shares of the Company's stock on or about February 22, 1996 at a price of
$145.00 per share, (ii) defendant Lam sold 313 shares of the Company's stock on
or about February 23, 1996 at a price of $150.00 per share, which Shares were
acquired by exercise of options on January 2, 1996 at a price of $5.00 per share
and (iii) defendant McClelland sold 100 shares of the Company's stock on
February 26, 1996 at a price of $165.00. The Paradigm Defendants intend to
vigorously defend the action. On September 30, 1996, the Paradigm Defendants
filed a demurrer seeking to have plaintiffs' entire complaint dismissed with
prejudice. On December 12, 1996, the Court sustained the demurrer as to all of
the causes of action against Michael Gulett and as to all causes of actions,
except for violation of certain provisions of the California Corporate
Securities Law, against the remaining Paradigm Defendants. The Court, however,
granted plaintiffs leave to amend the complaint to attempt to cure the defects
which caused the Court to sustain the demurrer. Plaintiffs failed to amend
within the allotted time. On January 8, 1997, the Paradigm Defendants filed an
answer to the complaint denying any liability for the acts and damages alleged
by the plaintiffs. Plaintiffs have since served the Paradigm Defendants with
discovery requests for production of documents and interrogatories, to which the
Paradigm Defendants have responded. Plaintiffs have also subpoenaed documents
from various third parties. The Paradigm Defendants have served the plaintiffs
with an initial set of discovery requests, to which plaintiffs have responded.
The Paradigm Defendants also took the depositions of the named plaintiffs on
April 9, 1997. On January 15, 1997, plaintiffs filed a motion to certify the
matter as a class action. Plaintiffs sought by their motion to certify a
nationwide class of those who purchased the Company's stock during the Class
Period. After several hearings and continuances, on February 9, 1998 the Court
certified a class consisting only of California purchasers of the Company's
stock during the Class Period. Plaintiffs have set a hearing date of April 9,
1998 for a motion to amend their complaint to incorporate factual allegations
derived from the February 21, 1997 action described below. There can be no
assurance that the Company will be successful in the defense of this action.
Even if the Company is successful in such defense, it may incur substantial
legal fees and other expenses related to this claim. If unsuccessful in the
defense of any such claim, the Company's business, operating results and cash
flows could be materially adversely affected.

On February 21, 1997, an additional purported class action lawsuit was
filed in Santa Clara County Superior Court against the Company and Michael
Gulett, Robert McClelland, Richard A. Veldhouse, Chiang Lam, Paine Webber, Inc.
and Smith Barney (the "Paradigm Defendants"), with causes of action and
factual allegations essentially identical to those of the August 12, 1996
class action lawsuit. This second class action is asserted against the same
Paradigm Defendants, PaineWebber, Inc. and Smith Barney. Prior to the hearing
on the Paradigm Defendants' demurrer to the initial complaint, plaintiff
amended his complaint to incorporate factual allegations derived from the May
19, 1997 lawsuit described below. The Paradigm Defendants filed a demurrer to
the amended complaint, which was heard on September 9, 1997. On September 10,
1997, the Court issued an order sustaining the Paradigm Defendants' demurrer
as to all causes of action without leave to amend. A judgment in favor of the
Paradigm Defendants dismissing the entire complaint was entered by the Court
on September 23, 1997. Plaintiffs have appealed the decision and filed a brief
in support of its appeal. The Paradigm Defendants' responsive brief is due to
be filed March 30, 1998. There can be no assurances that the Company will be
successful in defeating the appeal. Even if Paradigm is successful in
defeating the appeal, it may incur substantial legal fees and other expenses
related to this appeal. If unsuccessful in defeating the appeal, the Company's
business operating results and cash flows could be materially adversely
affected.

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<PAGE>

Richard Veldhouse, Dennis McDonald and Chiang Lam. Plaintiffs filed with the
complaint a notice that they consider their case related legally and factually
to the August 12, 1996 class action lawsuit described above. The Complaint
alleges fraud, breach of fiduciary duty and violations of certain provisions of
the California Corporate Securities Law and Civil Code. Plaintiffs allege that
they purchased the Company's stock at allegedly inflated prices and were damaged
thereby. The plaintiffs seek an unspecified amount of compensatory, rescissory
and/or punitive damages. Defendants responded to the complaint on September 12,
1997 by filing a demurrer as to all causes of action. Prior to the hearing on
the demurrer, Plaintiffs amended their complaint to identify two allegedly
fraudulent sale transactions. In particular, Plaintiffs allege that the Company
reported a sale of $1,650,000 worth of products to NexGen, Inc., one of the
Company's customers, that was not a legitimate sale. Plaintiffs allege that the
order was sent to the shipping floor during the evening shift on December 31,
1995, to be out before midnight, was included in year-end sales and was
returned, apparently untouched, in April 1996. In addition, plaintiffs allege
that on March 31, 1996, the Company shipped $1,440,080 worth of products to
Arco, one of the Company's distributors, that was not a legitimate order.
Plaintiffs allege this shipment was later returned untouched for full credit. On
February 20, 1998, defendants filed a demurrer as to all causes of action in the
amended complaint, which is set to be heard April 2, 1998. Plaintiffs have
served the Company and two of the individual defendants with requests for
production of documents, to which the Company and the individual defendants have
responded. The Company has served plaintiff with form interrogatories, to which
they have responded. There can be no assurance that the Company will be
successful in such defense. Even if Paradigm is successful in such defense, it
may incur substantial legal fees and other expenses related to this claim. If
unsuccessful in the defense of any such claim, the Company's business, operating
results and cash flows could be materially adversely affected.

Other than as set forth above, there are no material pending legal
proceedings against the Company or as to which any of its property is the
subject.

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

None.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCK-
-------------------------------------------------------
HOLDER MATTERS
--------------

(a) Common Stock Price Range. The Common Stock of the Company began
------------------------
trading publicly on the NNM on June 28, 1995 under the symbol PRDM. As of August
22, 1997, the Company's stock has been trading publicly on the SCM. Prior to
June 28, 1995, there was no public market for the Common Stock. The Company has
not paid cash dividends and has no present plans to do so. It is the present
policy of the Company to reinvest earnings of the Company, if any, to finance
expansion of the Company's operations, and the Company does not expect to pay
dividends in the foreseeable future. The following table sets forth for the
periods indicated the high and low sale prices of the Common Stock of the
Company on the NNM prior to August 22, 1997 and the SCM subsequent to August 22,
1997.

-24-
<PAGE>

<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
Fiscal Year ended December 31, 1995
Second Quarter (from June 28, 1995) $232.50 $172.50
Third Quarter 372.50 222.50
Fourth Quarter 302.50 120.00
Fiscal Year ended December 31, 1996
First Quarter 190.00 82.50
Second Quarter 120.00 62.50
Third Quarter 73.80 38.80
Fourth Quarter 55.00 20.60
Fiscal Year ended December 31, 1997
First Quarter 31.30 11.30
Second Quarter 18.80 6.90
Third Quarter 22.20 6.90
Fourth Quarter 15.00 1.25
</TABLE>

(b) As of December 31, 1997, there were approximately 243 stockholders
of record. The Company has never paid a dividend and has no current plans to do
so.

ITEM 6. SELECTED FINANCIAL DATA
-----------------------

The following selected financial data should be read in conjunction
with the Company's financial statements and related notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Annual Report on Form 10-K.

-25-
<PAGE>

<TABLE>
SELECTED FINANCIAL DATA
(in thousands, except per share amounts)

<CAPTION>
Post-Reorganizatio(1)
Pre-Reorganization(1) Year Ended
Year Ended March 31, April 1 June 21 Dec. 31,
--------------------- to to --------------------------------
June 20, Dec. 31,
1993 1994 1994 1994(2) 1995 1996(6) 1997
---------- ---------- ---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales, net.................................. $ 24,827 $ 31,844 $ 6,033 $ 19,690 $ 51,923 $ 23,202 $ 12,449
Cost of goods sold.......................... 28,465 26,283 5,895 12,881 31,033 36,364 11,946
--------- --------- --------- --------- --------- --------- ---------

Gross profit (loss)......................... (3,638) 5,561 138 6,809 20,890 (13,162) 503
--------- --------- --------- --------- --------- --------- ---------

Operating expenses:
Research and development(3)................. 1,980 1,148 1,192 1,920 4,621 6,243 3,406
Selling, general and administrative......... 6,007 5,555 1,191 3,004 8,107 9,497 4,920
Write-off of in-process technology acquired (6) -- -- -- -- -- 3,841 --
Loss on sale of wafer fab(6)................ -- -- -- -- -- 4,632 --
--------- --------- --------- --------- --------- --------- ---------
Total operating expenses.................... 7,987 6,703 2,383 4,924 12,728 24,213 8,326
--------- --------- --------- --------- --------- --------- ---------
Operating income (loss)..................... (11,625) (1,142) (2,245) 1,885 8,162 (37,375) (7,823)
Interest expense............................ 3,824 3,286 518 721 1,369 1,121 370
Other (income) expense, net(4).............. 2,417 (218) (17) (44) (615) (946) 718
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before extraordinary gain and
provision (benefit) for income taxes..... (17,866) (4,210) (2,746) 1,208 7,408 (37,550) (8,911)
Extraordinary gain(5)....................... -- -- 12,990 -- -- -- --
Provision (benefit) for income taxes........ -- -- -- -- 2,145 (1,125) --
--------- --------- --------- --------- --------- --------- ---------
Net income (loss)........................... $ (17,866) $ (4,210) $ 10,244 $ 1,208 $ 5,263 $ (36,425) $ (8,911)
========= ========= ========= ========= ========= ========= =========
Accretion related to Preferred Stock........ (1,307)
=========
Net loss attributable to common shareholders $ (10,218)
=========
Basic income (loss) per share(7)............ 11.73 13.92 (51.59) (11.87)
Diluted income (loss) per share(7).......... 2.25 9.14 (51.59) (11.87)
Weighted average shares - basic(7).......... 103 378 706 861
Weighted average shares - diluted(7)........ 536 576 706 861

<CAPTION>
Pre-Reorganization(1) Post-Reorganization(1)
---------------------------------------- -------------------------------------
March 31, December 31,
---------------------------------------- -------------------------------------
1993 1994 1994 1995 1996 1997
------------ ------------ ------------ ------------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments $ 311 $ 52 $ 135 $ 21,213 $ 587 $ 461
Working capital (deficit)................... (28,226) (26,324) (2,243) 26,624 (392) 415
Total assets................................ 24,238 18,591 19,421 56,732 17,742 9,290
Total debt and obligations under capital leases 26,471 25,847 12,620 7,636 374 534
Retained earnings (accumulated deficit)..... (50,654) (54,864) 1,208 6,471 (29,954) (40,172)
Total stockholders' equity (deficit)........ (45,292) (49,488) 2,345 39,349 6,344 3,009
Mandatorily redeemable preferred stock...... 32,821 33,753 -- -- -- --

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

(1) On June 21, 1994, the Company consummated a plan of reorganization (the
"Reorganization") which established a new accounting basis. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for a discussion of the lack of comparability of periods before
and after the Reorganization. Net income/loss per share for the periods
prior to the Reorganization has not been presented as they are not
considered to be meaningful.
(2) The period ended December 31, 1994 had ten more days than the normal six
month period.
(3) Net of co-development funding from a stockholder of $5,177 and $4,283 for
the years ended March 31, 1993 and 1994, respectively.
(4) The year ended March 31, 1993 includes a penalty payment of $2,000 related
to a lease consolidation agreement.
(5) The period ended June 20, 1994 includes a $12,990 extraordinary gain
resulting from the cancellation of liabilities in the Reorganization.
(6) The year ended December 31, 1996 includes charges of $4,632 resulting from
the sale of the Company's wafer fabrication facility and $3,841 related to
the Company's acquisition of NewLogic. See Note 11 and Note 6,
respectively, of Notes to Financial Statements.
(7) As restated for the 10-for-1 reverse stock split effective May 1, 1998.
</TABLE>

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<PAGE>

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

THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS
THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER
MATERIALLY FROM THE RESULTS DISCUSSED IN SUCH FORWARD-LOOKING STATEMENTS.
FACTORS THAT MAY CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE
DISCUSSED IN "BUSINESS--FACTORS THAT MAY AFFECT FUTURE RESULTS."

OVERVIEW

Paradigm was founded in January 1987 and focused its initial
development efforts primarily on high speed 256K and 1M SRAMs, producing its
first prototype product in 1988. In July 1989, the Company began operating its
wafer fabrication facility in San Jose, California and in April 1990 shipped its
first commercial products, high speed 256K SRAMs. In July 1990 and October 1993,
respectively, Paradigm began shipping 1M SRAMs and limited quantities of 4M
SRAMs. On November 15, 1996, the Company sold its Fab to Orbit. See "Sale of
Wafer Fabrication Facility."

From its inception through its Reorganization in June 1994, the Company
incurred substantial operating losses as it developed its technology and
manufacturing processes. During this period, the Company incurred significant
indebtedness to fund its operations, including capital expenditures associated
with its wafer fabrication facility. This increasing indebtedness resulted in a
significant increase in interest expense, which negatively impacted cash flow.
In addition, the Company incurred operating losses due to manufacturing
inefficiencies and a less than optimal sales mix that was comprised primarily of
customers in lower margin markets. Specifically, prior to the Reorganization,
many of the Company's suppliers temporarily suspended shipments or demanded
payment in cash prior to delivery of products. In addition, due to the Company's
urgent cash needs, it sold the majority of its high performance SRAM products
into lower margin commodity markets, resulting in reduced sales and lower
margins than would otherwise have been achievable. In January 1994, the Company
concluded that it could not meet its debt obligations and began to develop a
plan for restructuring its debt and capital structure.
See "Chapter 11 Reorganization."

Prior to the Reorganization, Paradigm's new management team adopted a
strategy of focusing on emerging markets for higher performance asynchronous and
synchronous SRAMs and specialty products. This emphasis on the higher end of the
SRAM market was facilitated by the Reorganization, which gave the Company the
financial flexibility and time to target highend markets for its high
performance products. As a result of Paradigm's change in marketing strategy,
the Company made a transition from a customer base composed largely of contract
manufacturers to one increasingly represented by market leading product
developers, resulting in increased sales to the Company's targeted markets in
the telecommunications, networking, workstation, high performance PC and
military/aerospace industries.

Beginning in late 1995 and continuing through 1997, the Company has
experienced significant decreases in average selling prices for certain
products. Such price decreases have

-27-
<PAGE>

had an adverse effect on the Company's operating results. Accordingly, the
Company's ability to maintain or increase revenues will be highly dependent upon
its ability to increase unit sales volumes of existing products and to introduce
and sell new products in quantities sufficient to compensate for the anticipated
declines in average selling prices of existing products. Declining average
selling prices will also adversely affect the Company's gross margins unless the
Company is able to reduce its costs per unit to offset such declines.

CHAPTER 11 REORGANIZATION

On February 23, 1994, the Company entered into a letter of intent with
ACMA Limited ("ACMA") and a letter of intent with National Semiconductor
Corporation ("NSC") to restructure its obligations and provide additional
capital to the Company. On March 30, 1994 and pursuant to the ACMA letter of
intent, the Company filed in the United States Bankruptcy Court for the Northern
District of California (the "Court") a voluntary petition for reorganization
under Chapter 11 of the U.S. Bankruptcy Code. On April 7, 1994, the Company
filed its initial Plan of Reorganization with the Court. On May 24, 1994, after
further negotiations between the Company and the Official Committee of Unsecured
Creditors in its bankruptcy proceeding, the Company filed its Third Amended
Joint Plan of Reorganization (the "Plan"). On June 7, 1994, the Court confirmed
the Plan, which became effective on June 21, 1994.

The Plan provided for the elimination of a significant portion of the
Company's indebtedness and a significant reduction in its interest expense. At
the time of filing of the Company's Chapter 11 proceeding, the Company's
indebtedness, consisting of bank and other borrowings, capital lease obligations
and trade payables, amounted to $33.9 million, and the Company had an
accumulated deficit of $52.7 million. The Plan provided for a substantial
restructuring of this indebtedness through reduction or elimination of certain
amounts owed, based on the order of priority of claims in the Reorganization.
Accordingly, bank borrowings and secured borrowings were repaid in full, capital
lease obligations were restructured, and holders of trade payables and other
unsecured borrowings received cash in the amount of 5% of allowed claims,
promissory notes in the amount of 25% of allowed claims, and shares of Common
Stock of the Company equal to 8.5% of the capital stock of the Company on a
fully diluted basis. Under the Plan, the rights and interests of the Company's
equity holders at that time were terminated. In addition, pursuant to letters of
intent with the Company, ACMA and NSC purchased shares of preferred stock of the
Company for an aggregate purchase price of $6.0 million.

In connection with the Reorganization, the Company's basis of
accounting for financial reporting purposes changed, effective June 21, 1994, as
follows: (i) the Company's assets and liabilities reflect a reorganization value
generally approximating the fair value of the Company as a going concern on an
unleveraged basis, (ii) the Company's accumulated deficit was eliminated, and
(iii) the Company's capital structure was adjusted to reflect consummation of
the Plan. Accordingly, the Company's results of operations after June 20, 1994
are not comparable to the results of operations prior to that date, and the
results of operations for the periods from April 1, 1994 to June 20, 1994 and
from June 21, 1994 to December 31, 1994 have not been aggregated. Further, the
financial position of the Company on or after June 21, 1994 is not comparable to
its financial position at any date prior thereto.

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<PAGE>

SALE OF WAFER FABRICATION FACILITY

In fiscal 1996, the Company adopted a strategy of having its products
manufactured at outside foundries to provide greater flexibility and lower fixed
costs. In that respect, on November 15, 1996, the Company sold its Fab to Orbit.
Following the sale of the Fab, the Company and Orbit entered into a Wafer
Manufacturing Agreement whereby Orbit supplied a quantity of wafers to the
Company over a specified period of time.

Orbit paid to the Company aggregate consideration of $20,000,000
consisting of $6.7 million in cash, assumption of $7.5 million of indebtedness
associated with and secured by the Fab, and promissory notes in the aggregate
principal amounts of $5.8 million. The Company recorded a loss of $4.6 million
in the quarter ended December 31, 1996 as a result of the sale of its wafer
fabrication facility. This charge included the excess of the net book value of
leasehold improvements, wafer fabrication equipment, fabrication work in process
inventory and other assets sold to Orbit over the proceeds received from Orbit,
an accrual for professional fees, a reserve for an adverse purchase commitment
related to the wafer manufacturing agreement and accruals for other costs. See
Note 11 of Notes to Financial Statements.

In connection with the sale of the Fab, substantially all of the 109
employees associated with the Fab were terminated and became employees of Orbit.
No severance payments were made to employees transferred to Orbit.

The Company also implemented a reduction in the work force of
approximately 35 employees and took a charge of approximately $150,000 in the
fourth quarter of 1997 associated with severance payments and other related
costs.

COMPARISON OF RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997 TO THE
YEAR ENDED DECEMBER 31, 1996.

SALES

Sales decreased by 46% to $12.4 million in the year ended December 31,
1997, from $23.2 million in the year ended December 31, 1996. The Company
experienced a significant downward trend in pricing during 1997 and 1996, caused
by an excess supply relative to demand for certain SRAM products. The Company
expects the downward price trend in the industry to continue. The decrease in
unit prices was offset by a higher volume of units shipped in 1997 compared to
1996. Unit shipments increased by 33% from 1996 to 1997.

The SRAM business is highly cyclical and has been subject to
significant downturns at various times. These downturns have been characterized
by diminished product demand, production overcapacity, intense competition and
accelerated erosion of average selling prices.

GROSS PROFIT

Gross profit increased to a profit of $503,000 in the year ended
December 31, 1997, from a loss of $(13.2) million in the year ended December 31,
1996. As a percentage of sales, gross

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<PAGE>

profit in the year ended December 31, 1997 was 4%, compared to (57%) for the
year ended December 31, 1996. The increase in gross profit resulted primarily
from the implementation of a strict company-wide cost reduction program which
enabled the company to reduce its external wafer fabrication subcontract costs
and internal test and assembly costs. During the year ended December 31, 1997,
in response to the continuing erosion of average selling prices, the Company
made lower of cost or market provisions of $650,000. During the year ended
December 31, 1996, the Company provided lower of cost or market provisions of
$2,475,000 and write-offs of $3,325,000 related to older generation SRAM
products to reflect reduced product demand and current industry pricing trends.

RESEARCH AND DEVELOPMENT

Research and development expenses decreased by 45% to $3.4 million in
the year ended December 31, 1997, from $6.2 million in the year ended December
31, 1996. The decrease in expenses in 1997 resulted from headcount reductions,
the decision in early 1997 to shut down product development associated with the
NewLogic acquisition made in 1996, and a more direct focus on core SRAM products
and markets. As a percent of sales, research and development expenses were
approximately 27% in 1997 and 1996.

SELLING AND ADMINISTRATIVE

Selling, General and Administrative expenses decreased by 48% to $4.9
million in the year ended December 31, 1997, from $9.5 million in the year ended
December 31, 1996. The decrease resulted from headcount reductions and the
Company's cost reduction program implemented in mid-1997.

OTHER OPERATING EXPENSES

The Company recorded a loss of $4.6 million in the year ended December
31, 1996 as a result of the sale of its wafer fabrication facility. This charge
included the excess of the net book value of leasehold improvements, wafer
fabrication equipment, fabrication work in process inventory and other assets
sold to Orbit over the proceeds received from Orbit, an accrual for professional
fees incurred to complete the transaction, a reserve for an adverse purchase
commitment related to the wafer manufacturing agreement and accruals for other
estimated costs to be incurred.

In June 1996, the Company acquired, through a stock purchase and merger
transaction, NewLogic, a company which developed and manufactured logic designs
with large memory arrays. In exchange for its purchase of the NewLogic capital
stock, the Company issued 31,439 shares of the Company's common stock, with a
market value of approximately $2,656,000, and approximately $825,000 in cash. In
addition, the Company incurred transaction costs of approximately $237,000. The
fair value of NewLogic's tangible net assets at the date of acquisition was a
deficit of $373,000. Approximately $3,841,000 of the purchase price in excess of
the fair market value of the net tangible assets was allocated to in-process
technology which the Company wrote off in the quarter ended June 30, 1996.
Approximately $250,000 was allocated

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<PAGE>

to other intangibles. The unamortized balance of these other intangibles was
written off in connection of the shutdown of NewLogic in early 1997.

INTEREST EXPENSE

Interest expense decreased to $370,000 in the year ended December 31,
1997, from $1.1 million in the year ended December 31, 1996. The decrease
reflects the reduced level of debt in 1997 following the repayment of certain
outstanding debt in 1996, and the Company's efforts to reduce its operating
expenses and capital equipment spending in 1997.

OTHER (INCOME) EXPENSE, NET

For the year ended December 31, 1997, other expenses, net, mainly
consisted of losses on sales of, and write offs of, equipment. For the year
ended December 31, 1996, other income, net, reflected interest income earned on
the remaining portion of net proceeds of the Company's 1995 public offering and
a gain on the sale of certain fixed assets.

TAXES

The Company has a tax year that ends in March. In 1997 and 1996, the
Company's effective tax rates were 0% and (3%), respectively. The 1996 tax
benefit reflects the benefit at the statutory rate of the operating losses
reduced by valuation allowances on tax losses not recognized due to the
uncertainty of realizing the benefit of these losses. No net benefit was
recognized in 1997.

COMPARISON OF RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 TO THE
YEAR ENDED DECEMBER 31, 1995

SALES

Sales decreased by 55% to $23.2 million in the year ended December 31,
1996 from $51.9 million in the year ended December 31, 1995. The Company
experienced a significant downward trend in pricing during 1996 that was caused
by an excess supply relative to demand for certain SRAM devices. The Company
expects this downward price trend to continue. In addition, the Company shipped
lower volumes of units in 1996 compared to 1995. Unit shipments declined 48%
from 1995 to 1996.

GROSS PROFIT

Gross profit decreased from $20.9 million in the year ended December
31, 1995 to a loss of ($13.2) million in the year ended December 31, 1996 and,
as a percentage of sales, from 40% to (57%), respectively. The decrease in gross
profit resulted principally from industry-wide

-31-
<PAGE>

pricing pressures experienced by the Company in 1996 caused by an oversupply in
the SRAM marketplace. These pricing pressures directly impacted profits as
average selling prices for the Company's products declined during the year ended
December 31, 1996 when compared to 1995. In addition, during 1996 the Company
provided lower of cost or market provisions of $2,475,000 and write-offs of
$3,325,000 related to older generation SRAM products to reflect reduced product
demand and current industry pricing trends.

The Company's conversion of its internal fabrication facility from
five-inch to six-inch wafer manufacturing was completed in 1996 and caused
temporary declines in output and reductions in yield. This facility was sold in
November 1996 to provide the Company increased flexibility and lower fixed
costs.

RESEARCH AND DEVELOPMENT

Research and development expenses increased by 35% to $6.2 million in
the year ended December 31, 1996, from $4.6 million in the year ended December
31, 1995. As a percentage of sales, research and development expenses have
increased from 9% in 1995 to 27% in 1996. Increased expenses result primarily
from increased headcount required to support the Company's co-development
activities with Atmel, new product development and other development activities.
In addition, research and development expenses increased in 1996 as a result of
the Company's acquisition of NewLogic in June 1996. Research and development
expenses, as a percentage of revenue, have also increased as a result of the
decline in revenue in 1996 compared to 1995.

In June 1996, the Company acquired NewLogic with the strategy to expand
Paradigm's product line beyond SRAMs. In early 1997, the Company believed that
it was in Paradigm's best interest to shut down the NewLogic operation and focus
on Paradigm's core SRAM products and markets.

SELLING, GENERAL AND ADMINISTRATIVE

Selling, general and administrative expenses increased by 17% to $9.5
million in the year ended December 31, 1996 from $8.1 million in the year ended
December 31, 1995. Selling, general and administrative expenses include
approximately $1.4 million in bad debt expense in 1996 compared to $.1 million
in 1995 due to financial problems at several of the Company's customers.

INTEREST EXPENSE

Interest expense decreased to $1.1 million in the year ended December
31, 1996, from $1.4 million in the year ended December 31, 1995. This decrease
in interest expense reflects repayment of certain outstanding debt by the
Company from the proceeds of its initial public offering, which was subsequently
replaced in 1996 with new debt at lower interest rates. See "Liquidity and
Capital Resources."

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<PAGE>

OTHER INCOME, NET

For the years ended December 31, 1996 and December 31, 1995, other
income, net, reflects interest income earned on the investment of the net
proceeds to the Company from its initial public offering. In addition, other
income in 1996 includes a gain on the sale of fixed assets.

TAXES

The Company has a tax year that ends in March. The Company's tax
provision for the resultant nine month tax period ended December 31, 1995
reflected the statutory rate reduced by net operating loss benefits and other
credits. The amount of net operating loss the Company may utilize in any year is
limited due to the change of ownership which occurred as a result of the
Reorganization. The Company incurred a net loss for its tax year ended March 31,
1995 and thus no provision has been reflected in the quarters in the period from
the reorganization through March 31, 1995. In 1996 the Company's effective tax
rate was (3%) which reflects the benefit of the statutory rate of the operating
loss reduced by tax losses not recognized due to the uncertainty of realizing
the benefit of these losses.

LIQUIDITY AND CAPITAL RESOURCES

During the year ended December 31, 1997, the Company's operating,
investing and financing activities used $126,000 of cash, compared to using cash
of $3.4 million during the year ended December 31, 1996, and generating cash of
$3.9 million during the year ended December 31, 1995.

During the year ended December 31, 1997, $5.3 million of cash was used
in operations, compared to the use of $15.6 million of cash during the year
ended December 31, 1996 and $8.1 million in cash generated from operations in
1995. The $5.3 million of cash used by operations during the year ended December
31, 1997, was mainly attributed to the net loss for the year of $8.9 million and
a reduction of accounts payable and other liabilities of $4.2 million, offset by
non-cash charges of $1.7 million for depreciation and amortization, a loss of
$1.7 million on the sale of and write off of fixed assets, a reduction in other
assets of $4.3 million, including $3.1 million related to the sale of the wafer
fabrication facility in 1996 and proceeds from a refund of Federal income taxes
of $1.2 million. The $15.6 million of cash used by operations during the year
ended December 31, 1996, was mainly attributable to the net loss for the year of
$36.4 million and a reduction in other liabilities of $3.7 million, offset by
non-cash charges of $5.7 million for depreciation and amortization, the
write-off of in-process technology associated with the New Logic acquisition of
$3.8 million, a loss of $4.6 million on the sale of the Company's wafer
fabrication facility and a reduction of $6.1 million in accounts receivable that
reflects the lower sales volume in 1996 compared to 1995. The $8.1 million of
cash generated from operations during the year ended December 31, 1995, was
mainly attributable to the net profit for the year of $5.3 million and an
increase in accounts payable of $3.5 million as the Company re-established its
relationship with suppliers subsequent to the 1994 Reorganization, and other
liabilities (primarily income taxes payable) of $3.0 million. In addition, an
increase of $5.7

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<PAGE>

million in accounts receivable was offset by non-cash charges of $5.1 million
for depreciation and amortization.

Investing activities generated $504,000 in 1997, compared to $9.7
million generated in 1996, and $30.8 million used in 1995. Funds generated in
1997 are primarily attributable to proceeds from the sale of fixed assets. In
1996, the sale of $19.9 million of short-term investments funded the Company's
conversion of its wafer fabrication facility to 6" wafers ($14 million). In
1995, $18.7 million of short-term investments were purchased from the net
proceeds of the Company's initial public offering in June of 1995. In addition,
$13.7 million was used to convert the wafer fabrication facility to 6" wafers
and expand the Company's test floor.

Cash generated from financing activities amounted to $4.6 million
during the year ended December 31, 1997, and resulted primarily from the
issuance of Series A, B, and C Convertible Preferred Stock. Cash generated from
financing activities in the amount of $2.5 million in 1996 resulted primarily
from an increase of $2.0 million in borrowings from the Company's line of credit
and the issuance of $11.3 million of notes payable, offset by $11.6 million of
payments made on notes payable. Cash provided from financing activities in 1995
amounted to $26.8 million and is mainly attributable to the Company's initial
public offering on June 28, 1995, which provided net proceeds to the Company of
approximately $28.3 million, and issuance of notes payable ($9.3 million),
partially offset by payments on capital leases ($7.7 million) and the decrease
in a line of credit ($4.6 million). In addition, in April 1995 the Company sold
a total of 42,500 shares of Common Stock to Atmel for an equity investment of
$3.4 million.

In November 1996, the Company replaced an existing line of credit with
a new line of credit from Greyrock Business Credit with a borrowing limit of $6
million of which $513,000 was available at December 31, 1996. Borrowings under
this line of credit were limited to up to 80% of eligible receivables and
interest is at the greater of LIBOR plus 5.25% or 9%. At December 31, 1996, the
outstanding balance under this line of credit was $2.0 million.

In October 1997, the Company renewed its line of credit with Greyrock
Business Credit, with some modifications. Borrowing is limited to the lesser of
$5 million or the sum of (a) 80% of the amount of eligible receivables owing
from original equipment manufacturers; plus (b) 70% of the amount of eligible
receivables owing from distributors. The interest rate remained unchanged from
the November 1996 agreement. The line of credit is subject to renewal again in
October 1998, unless prior notice is given by either party to terminate the
agreement. The line of credit is secured by the Company's trade receivables,
inventory, equipment and general intangibles. At December 31, 1997, the
outstanding balance under the line of credit was $1.7 million.

In November 1996, the Company sold its wafer fabrication operations to
Orbit. Orbit assumed $7.5 million of outstanding borrowings with the CIT Group
that were secured by wafer fabrication equipment that was purchased. The Company
used approximately $2.2 million of the cash proceeds from the sale of the wafer
fabrication facility to pay off existing borrowings under lines of credit.

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<PAGE>

The Company's recent operations have consumed substantial amounts of
cash. During 1997, the Company completed the private placement of Series A
Preferred Stock, Series B Preferred Stock and Series C Preferred Stock for
aggregate net proceeds of approximately $4,673,000. (See Note 7 of Notes to
Financial Statements.) The Company believes that it will require additional cash
infusion from similar private placements of equity or other sources of
liquidity, such as asset sales and equipment financing to meet the Company's
projected working capital and other cash requirements. The sale of additional
equity or other securities could result in additional dilution to the Company's
stockholders. There can be no assurance that such additional financing, if
required, can be obtained on acceptable terms, if at all.

On March 6, 1998, the Company entered into a definitive merger
agreement providing for the acquisition of all of the outstanding capital stock
of IXYS Corporation ("IXYS") in exchange for Common Stock of the Company. The
exchange ratio in the Merger for the IXYS equity securities will be the greater
of two ratios. The first ratio provides that upon the Merger the holders of
equity securities of IXYS hold 95% of the fully diluted capitalization of the
combined company and that the holders of equity securities of the Company will
hold 5% of the fully diluted capitalization of the combined company. (As used
herein, fully diluted capitalization means the sum of the number of shares of
common stock outstanding and issuable upon exercise or conversion of all
outstanding preferred stock, warrants, options and other rights.) The second
ratio provides that the value associated with the fully diluted capitalization
of IXYS, at the time of the consummation of the Merger, be at least $150
million, based upon an average of the closing prices of the Company's Common
Stock prior to the Company's stockholders meeting. Consummation of the merger
requires the approval of the Company's and IXYS' stockholders and various
regulatory approvals. If approved, the transaction is anticipated to be
accounted for as a purchase of the Company by IXYS for financial reporting
purposes.

LITIGATION

On August 12, 1996, a securities class action lawsuit was filed in
Santa Clara County Superior Court against the Company and Michael Gulett, Robert
McClelland, Richard A. Veldhouse and Chiang Lam (the "Paradigm Defendants") and
PaineWebber, Inc. The class alleged by plaintiffs consisted of purchasers of the
Company's Common Stock from November 20, 1995 to March 22, 1996, inclusive (the
"Class Period"). The complaint alleges negligent misrepresentation, fraud and
deceit, breach of fiduciary duty and violations of certain provisions of the
California Corporate Securities Law and Civil Code. The plaintiffs seek an
unspecified amount of compensatory and punitive damages. Plaintiffs allege,
among other things, that the Paradigm Defendants wrongfully represented that the
Company would have protection against adverse market conditions in the
semiconductor market based on the Company's focus on high speed, high
performance semiconductor products. Plaintiffs allege that the Paradigm
Defendants made these alleged misrepresntations to enable: (1) insiders to sell
their shares at a profit, (ii) the Company's stock price to be positioned for a
secondary offering of 243,250 shares of stock (which was later withdrawn) and
(iii) the Company to acquire NewLogic (which acquisition was later accomplished
in exchange for 31,440 shares of the Company's Common Stock and cash).
Plaintiffs allege defendants McClelland, McDonald and Veldhouse respectively
acquired 55, 54 and 63 shares of the Company's stock on January 2, 1996 at a
price of $114.80 per share sold all of the stock on the same day at a price of
$135.00 per share. Plaintiffs further allege (i) defendant McClelland sold 700
shares of the Company's stock on or about February 22, 1996 at a price of
$145.00 per share, (ii) defendant Lam sold 313 shares of the Company's stock on
or about February 23, 1996 at a price of $150.00 per share, which Shares were
acquired by exercise of options on January 2, 1996 at a price of $5.00 per share
and (iii) defendant McClelland sold 100 shares of the Company's stock on
February 26, 1996 at a price of $165.00. The Paradigm Defendants intend to
vigorously defend the action. On September 30, 1996, the Paradigm Defendants
filed a demurrer seeking to have plaintiffs' entire complaint dismissed with
prejudice. On December 12, 1996, the Court sustained the demurrer as to all of
the causes of action against Michael Gulett and as to all causes of actions,
except for violation of certain provisions of the California Corporate
Securities Law, against the remaining Paradigm Defendants. The Court, however,
granted plaintiffs leave to amend the complaint to attempt to cure the defects
which caused the Court to sustain the demurrer. Plaintiffs failed to amend
within the allotted time. On January 8, 1997, the Paradigm Defendants filed an
answer

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<PAGE>

to the complaint denying any liability for the acts and damages alleged by the
plaintiffs. Plaintiffs have since served the Paradigm Defendants with discovery
requests for production of documents and interrogatories, to which the Paradigm
Defendants have responded. Plaintiffs have also subpoenaed documents from
various third parties. The Paradigm Defendants have served the plaintiffs with
an initial set of discovery requests, to which plaintiffs have responded. The
Paradigm Defendants also took the depositions of the named plaintiffs on April
9, 1997. On January 15, 1997, plaintiffs filed a motion to certify the matter as
a class action. Plaintiffs sought by their motion to certify a nationwide class
of those who purchased the Company's stock during the Class Period. After
several hearings and continuances, on February 9, 1998 the Court certified a
class consisting only of California purchasers of the Company's stock during the
Class Period. Plaintiffs have set a hearing date of April 9, 1998 for a motion
to amend their complaint to incorporate factual allegations derived from the
February 21, 1997 action described below. There can be no assurance that the
Company will be successful in the defense of this action. Even if the Company is
successful in such defense, it may incur substantial legal fees and other
expenses related to this claim. If unsuccessful in the defense of any such
claim, the Company's business, operating results and cash flows could be
materially adversely affected.

On February 21, 1997, an additional purported class action lawsuit was
filed in Santa Clara County Superior Court against the Company and Michael
Gulett, Robert McClelland, Richard A. Veldhouse, Chiang Lam, PaineWebber, Inc.
and Smith Barney (the "Paradigm Defendants") with causes of action and factual
allegations essentially identical to those of the August 12, 1996 class action
lawsuit. This second class action is asserted against the same Paradigm
Defendants, PaineWebber, Inc. and Smith Barney. Prior to the hearing on the
Paradigm Defendants' demurrer to the initial complaint, plaintiff amended his
complaint to incorporate factual allegations derived from the May 19, 1997
lawsuit described below. The Paradigm Defendants filed a demurrer to the amended
complaint, which was heard on September 9, 1997. On September 10, 1997, the
Court issued an order sustaining the Paradigm Defendants' demurrer as to all
causes of action without leave to amend. A judgment in favor of the Paradigm
Defendants dismissing the entire complaint was entered by the Court on September
23, 1997. Plaintiffs have appealed the decision and filed a brief in support of
its appeal. The Paradigm Defendants' responsive brief is due to be filed March
30, 1998. There can be no assurances that the Company will be successful in
defeating the appeal. Even if Paradigm is successful in defeating the appeal, it
may incur substantial legal fees and other expenses related to this appeal. If
unsuccessful in defeating the appeal, the Company's business operating results
and cash flows could be materially adversely affected.

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<PAGE>

defendants filed a demurrer as to all causes of action in the amended complaint,
which is set to be heard April 2, 1998. Plaintiffs have served the Company and
two of the individual defendants with requests for production of documents, to
which the Company and the individual defendants have responded. The Company has
served plaintiff with form interrogatories, to which they have responded. There
can be no assurance that the Company will be successful in such defense. Even if
Paradigm is successful in such defense, it may incur substantial legal fees and
other expenses related to this claim. If unsuccessful in the defense of any such
claim, the Company's business, operating results and cash flows could be
materially adversely affected.

The Company is involved in various other litigation and potential
claims which management believes, based on facts presently known, will not have
a material adverse effect on the results of operations, existing sources of
liquidity or the financial position of the Company.

FACTORS AFFECTING FUTURE RESULTS

The Company's operating results have been, and in the future may be,
subject to fluctuations due to a wide variety of factors, including the timing
of new product and process technology, announcements and introductions by the
Company or its competitors, competitive pricing pressures, fluctuations in
manufacturing yields, changes in the mix of products sold, availability and
costs of raw materials, industry-wide shifts in the supply of and demand for
SRAMs, intellectual property disputes and litigation, and other risks, including
risks disclosed in this Annual Report on Form 10-K and other filings with the
Commission. There can be no assurance that the Company will be able to
effectively compete in the future against existing or potential competitors or
that the Company's operating results or financial condition will not continue to
be adversely affected by increased price competition.

The semiconductor industry is highly cyclical and has been subject to
significant downturns at various times and by diminished product demand,
production overcapacity and accelerated erosion of average selling prices.
During 1996 and 1997, the Company experienced, and expects it will continue to
experience, significant decreases in selling prices for its SRAM products. Such
price decreases could have a material adverse effect on the Company's operating
results.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive
Income." SFAS 130 establishes standards for reporting comprehensive income and
its components in a financial statement. Comprehensive income as defined
includes all changes in equity (net assets) during a period from non-owner
sources. Examples of items to be included in comprehensive income, which are
excluded from net income, include foreign currency translation adjustment and
unrealized gain/loss on available for sale securities. The disclosure prescribed
by SFAS must be made beginning with the first quarter of fiscal 1998 and will
have no impact on the Company's financial position or results of operations.

In June 1997, the FASB issued SFAS 131, "Disclosure about Segments of
an Enterprise and Related Information." This statement establishes standards for
the way companies report

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<PAGE>

information about operating segments in annual financial statements. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. The disclosures prescribed by SFAS 131
are effective in fiscal 1998.

YEAR 2000

The Year 2000 issue arises because most computer hardware and software
was developed without considering the impact of the upcoming change in the
century. The hardware and software were originally designed to accept two-digit
entries rather than four-digit entries in the date code field. As a result,
certain computer systems and software packages will not be able to interpret
dates beyond December 31, 1999 and thus, will interpret dates beginning January
1, 2000 to represent January 1, 1900. This could potentially result in computer
failure or miscalculations, causing operating disruptions, including among other
things, a temporary inability to process transactions, send invoices or engage
in other ordinary activities.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
-----------------------------------------------------
RISK
----

Pursuant to the General Instructions to Rule 305 of Regulation S-K, the
quantitative and qualitative disclosures called for by this Item 7A and by Rule
305 of Regulation S-K are inapplicable to the Company at this time.

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<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------

REPORT OF INDEPENDENT ACCOUNTANTS

TO THE BOARD OF DIRECTORS AND STOCKHOLDERS
OF PARADIGM TECHNOLOGY, INC.

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 Paradigm Technology,
Inc. at December 31, 1996 and 1997, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1997, 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.

The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations
and will require additional cash to fund 1998 operations. These matters raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are described in Note 1. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.

Price Waterhouse LLP

San Jose, California
February 21, 1998, except as to
Note 13, which is as of March 9, 1998,
and except as to the first paragraph
of Note 2, which is as of May 1, 1998.

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<PAGE>

<TABLE>
BALANCE SHEETS
(in thousands except per share amounts)

<CAPTION>
December 31,
---------------------------
1996 1997
------------ -----------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents............................................. $ 587 $ 461
Accounts receivable, net of allowances of $1,569 and $65.............. 2,800 2,705
Accounts receivable, related party.................................... 137 --
Inventory............................................................. 2,472 2,580
Prepaid expenses and other............................................ 4,918 544
------------ -----------
Total current assets.............................................. 10,914 6,290
Property and equipment, net........................................... 6,638 2,737
Other assets.......................................................... 190 263
------------ -----------
$ 17,742 $ 9,290
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Line of credit........................................................ $ 2,015 $ 1,719
Accounts payable...................................................... 6,103 2,177
Accounts payable, related party....................................... 140 --
Accrued expenses and other liabilities................................ 2,766 1,787
Current portion of debt obligations................................... 282 192
------------ -----------
Total current liabilities......................................... 11,306 5,875
Debt obligations, net of current portion.............................. 92 342
Deferred rent......................................................... -- 64
------------ -----------
Total liabilities................................................. 11,398 6,281
------------ -----------
Commitments and contingencies (Notes 10 and 12)
Stockholders' equity:
Preferred stock, $0.01 par value; 5,000 shares authorized, -0- and
257 shares issued and outstanding................................. -- --
Common stock, $0.01 par value; 25,000,000 shares authorized;
722,500 and 1,160,100 shares issued and outstanding............... 7 12
Additional paid-in capital............................................ 36,291 43,169
Accumulated deficit................................................... (29,954) (40,172)
------------ -----------
Total stockholders' equity........................................ 6,344 3,009
------------ -----------
$ 17,742 $ 9,290
============ ===========

The accompanying notes are an integral part of these financial statements.
</TABLE>

-40-
<PAGE>

<TABLE>
STATEMENTS OF OPERATIONS
(in thousands except per share amounts)

<CAPTION>
Year Ended December 31,
---------------------------------------
1995 1996 1997
---------- ---------- -----------

<S> <C> <C> <C>
Sales, net..................................................... $ 51,923 $ 23,202 $ 12,449
Cost of goods sold............................................. 31,033 36,364 11,946
---------- ---------- -----------
Gross profit (loss)............................................ 20,890 (13,162) 503
---------- ---------- -----------
Operating expenses:
Research and development..................................... 4,621 6,243 3,406
Selling, general and administrative.......................... 8,107 9,497 4,920
Loss on sale of wafer fabrication facility................... -- 4,632 --
Write-off of in-process technology acquired.................. -- 3,841 --
---------- ---------- -----------
Total operating expenses................................. 12,728 24,213 8,326
---------- ---------- -----------
Operating income (loss)........................................ 8,162 (37,375) (7,823)
Interest expense............................................... 1,369 1,121 370
Other (income) expense, net.................................... (615) (946) 718
---------- ---------- -----------
7,408 (37,550) (8,911)

Provision (benefit) for income taxes........................... 2,145 (1,125) --
---------- ---------- -----------
Net income (loss).............................................. 5,263 (36,425) (8,911)

Accretion related to Preferred Stock........................... -- -- (1,307)
---------- ---------- -----------
Net income (loss) attributable to common shareholders.......... $ 5,263 $ (36,425) $ (10,218)
---------- ---------- ============
Net income (loss) per share:
Basic........................................................ $ 13.92 $ (51.59) $ (11.87)
---------- ---------- -----------
Diluted...................................................... $ 9.14 $ (51.59) $ (11.87)
---------- ---------- -----------
Weighted average common shares outstanding:
Basic........................................................ 378 706 861
---------- ---------- -----------
Diluted...................................................... 576 706 861
---------- ---------- -----------

The accompanying notes are an integral part of these financial statements.
</TABLE>

-41-
<PAGE>

<TABLE>
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands, except Preferred Stock shares)

<CAPTION>
Retained
Preferred Stock Common Stock Additional Earnings
----------------------- ------------------- Paid In (Accumulated
Shares Amount Shares Amount Capital Deficit) Total
------------ ---------- --------- -------- ----------- --------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994.......... 6,400,000 $ 960 59 $ 18 $ 159 $ 1,208 $ 2,345
Reincorporation in Delaware ........ -- -- -- (16) 16 -- --
Initial public offering of common
stock, net of costs............... -- -- 230 2 28,302 -- 28,304
Conversion of preferred stock to
common stock...................... (6,400,000) (960) 320 3 957 -- --
Issuance of stock pursuant to Atmel
agreement......................... -- -- 43 -- 3,400 -- 3,400
Stock options exercised............. -- -- 8 -- 37 -- 37
Net income.......................... -- -- -- -- -- 5,263 5,263
----------- -------- -------- ------- ----------- ------------- ---------
Balance, December 31, 1995.......... -- -- 660 7 32,871 6,471 39,349
Issuance of common stock to
acquire New Logic................. -- -- 31 -- 2,656 -- 2,656
Issuance of common stock under
employee stock plans.............. -- -- 31 -- 764 -- 764
Net loss............................ -- -- -- -- -- (36,425) (36,425)
----------- -------- -------- ------- ----------- ------------- ---------
Balance, December 31, 1996.......... -- -- 722 7 36,291 (29,954) 6,344
Issuance of convertible preferred
stock, net of offering costs...... 500 -- -- -- 4,673 -- 4,673
Issuance of common stock upon
conversion of preferred........... (243) -- 376 4 (4) -- --
Issuance of common stock in
payment of accounts payable....... -- -- 51 1 803 -- 804
Issuance of common stock under
employee stock plans.............. -- -- 6 -- 49 -- 49
Issuance of common stock upon
exercise of warrants.............. -- -- 5 -- 50 -- 50
Accretion related to preferred stock -- -- -- -- 1,307 (1,307) --

Net loss............................ -- -- -- -- -- (8,911) (8,911)
----------- -------- -------- ------- ----------- ------------- ---------

Balance, December 31, 1997.......... 257 $ -- 1,160 $ 12 $ 43,169 $ (40,172) $ 3,009
=========== ======== ======== ======= =========== ============= =========

The accompanying notes are an integral part of these financial statements.
</TABLE>

-42-
<PAGE>

<TABLE>
STATEMENTS OF CASH FLOWS
(in thousands)

<CAPTION>
Year Ended December 31,
-----------------------------------------
1995 1996 1997
------------ ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................................. $ 5,263 $ (36,425) $ (8,911)
Adjustments to reconcile net income (loss) to net cash from
operating activities:
Depreciation and amortization................................. 5,141 5,716 1,668
Provision for doubtful accounts............................... 90 1,372 92
Loss on sale of wafer fabrication facility.................... -- 4,632 --
Write off in-process technology............................... -- 3,841 --
Loss (gain) on sale of and write-off of fixed assets.......... -- (532) 1,727
Changes in operating assets and liabilities:
Accounts receivable........................................... (5,680) 6,115 140
Inventory..................................................... (814) 1,430 (108)
Other assets.................................................. (1,361) (48) 4,301
Accounts payable.............................................. 3,475 2,023 (3,262)
Pre-1994 reorganization liabilities paid...................... (1,007) (34) --
Other liabilities............................................. 3,012 (3,723) (915)
----------- ---------- ----------
Net cash provided by (used in) operating activities before
reorganization items paid..................................... 8,119 (15,633) (5,268)
Reorganization items paid..................................... (189) -- --
----------- ---------- ----------
Net cash provided by (used in) operating activities........ 7,930 (15,633) (5,268)
----------- ---------- ----------
Cash flows from investing activities:
Purchases of property and equipment............................... (13,609) (13,985) (430)
Purchase of short-term investments................................ (18,689) (2,672) --
Sale of short-term investments.................................... 1,491 19,870 --
Sale of fixed assets.............................................. -- 549 936
Proceeds from sale of wafer fabrication facility.................. -- 6,665 --
Acquisition of NewLogic, net of cash acquired..................... -- (723) --
----------- ---------- ----------
Net cash provided by (used) by investing activities........... (30,807) 9,704 506
----------- ---------- ----------
Cash flows from financing activities:
Line of credit increase (decrease)................................ (4,623) 2,015 (296)
Payments on capital leases........................................ (7,747) -- (147)
Issuance of notes payable......................................... 9,300 11,339 442
Principal payments on notes payable............................... (1,914) (11,601) (135)
Issuance of common stock.......................................... 31,741 748 99
Issuance of preferred stock....................................... -- -- 4,673
----------- ---------- ----------
Net cash provided by financing activities..................... 26,757 2,501 4,636
----------- ---------- ----------
Net increase (decrease) in cash and cash equivalents.......... 3,880 (3,428) (126)
Cash and cash equivalents:
Beginning of period............................................... 135 4,015 587
----------- ---------- ----------
End of period..................................................... $ 4,015 $ 587 $ 461
=========== ---------- ----------
Supplemental information:
Interest paid..................................................... $ 1,335 $ 1,291 $ 370
----------- ---------- ----------
Income taxes paid................................................. $ 348 $ 1,067 $ --
----------- ---------- ----------
Supplemental disclosure of non-cash items:
Issuance of warrant in connection with sale of
Convertible Preferred Stock................................... $ 67
----------
Accretion related to Convertible Preferred Stock.................. $ 1,307
----------
Conversion of accounts payable to common stock.................... $ 804
----------

The accompanying notes are an integral part of these financial statements.
</TABLE>

-43-
<PAGE>

NOTES TO FINANCIAL STATEMENTS

NOTE 1 -- THE COMPANY AND ITS BUSINESS:

Paradigm Technology, Inc. ("Paradigm" or the "Company") was originally
incorporated in California in January 1987. Pursuant to the May 24, 1994, Third
Amended Joint Plan of Reorganization (the "Plan") under Chapter 11 of the United
States Bankruptcy Code, amended Articles of Incorporation were filed. On June 7,
1994, the Court confirmed the Plan, which became effective on June 21, 1994. The
Company reincorporated in Delaware effective June 22, 1995, which involved the
exchange of the Company's post-Reorganization common and preferred stock into
shares of the Delaware Company stock. Pursuant to the reincorporation, the
Company has authorized 25,000,000 shares of $0.01 par value common stock and
5,000,000 shares of $0.01 par value preferred stock.

The Company markets high speed, high density Static Random Access
Memory ("SRAM") products for uses in telecommunication devices, workstations and
high performance PCs to OEMs and distributors in the United States, Europe and
the Far East.

The SRAM business is highly cyclical and has been subject to
significant downturns at various times that have been characterized by
diminished product demand, production overcapacity, and accelerated erosion of
average selling prices. From the latter part of 1995 through 1997, the market
for certain SRAM devices experienced an excess supply relative to demand which
resulted in a significant downward trend in prices.

The selling price that the Company is able to command for its products
is highly dependent on industry-wide production capacity and demand. In this
regard, the Company did experience rapid erosion in product pricing during 1996
and 1997 which was not within the control of the Company. The Company could
continue to experience a downward trend in product pricing which could further
adversely effect the Company's operating results.

The Company's recent operations have consumed substantial amounts of
cash. During 1997, the Company completed the private placement of Series A
Preferred Stock, Series B Preferred Stock, and Series C Preferred Stock for net
proceeds of approximately $4,673,000. The Company believes that it will require
additional cash infusion from similar or related private placements and other
sources of liquidity, such as asset sales and equipment financing to meet the
Company's projected working capital and other cash requirements in 1998. See
Note 13.

NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

REVERSE STOCK SPLIT

Share information for all periods has been retroactively adjusted to
reflect a 10-for-1 reverse stock split of common stock effected on May 1, 1998.

-44-
<PAGE>

BASIS OF PRESENTATION

The preparation of these 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 at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could vary from those
estimates.

CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

The Company considers all highly liquid investments purchased with an
initial maturity of 90 days or less to be cash equivalents and investments with
original maturities of greater than 90 days to be short-term investments. The
Company accounts for its short-term investments in accordance with Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" ("SFAS 115"). As of December 31, 1996 and 1997, the
Company had no short-term investments.

CONCENTRATION OF CREDIT RISK

Export sales, primarily to Europe and the Far East, represent 28%, 25%,
and 12% of total sales for the years ended December 31, 1995, December 31, 1996,
and December 31, 1997, respectively. The Company's sales have been denominated
in U.S. dollars.

The Company performs ongoing credit evaluations of its customers and
generally does not require collateral. The following table summarizes the
percentage of net sales to significant customers:

<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1995 1996 1997
---------- ---------- ----------

<S> <C> <C> <C>
Customer A 28% 25% --
Customer B -- 13% 15%
Customer C -- 13% --
Customer D -- -- 16%
Customer E -- -- 16%
Customer F -- -- 10%
</TABLE>

As of December 31, 1996, accounts receivable from three customers
accounted for approximately 16%, 17% and 18% of total gross accounts receivable,
respectively. As of December 31, 1997, accounts receivable from three customers
accounted for approximately 25%, 25%, and 15% of total gross accounts
receivable, respectively. The Company maintains allowances for potential credit
losses based upon expected collectibility of all accounts receivable.

-45-
<PAGE>

INVENTORY

Inventory is stated at the lower of cost (determined on a first-in,
first-out method) or market.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost, net of certain equipment
impairment charges. Depreciation is computed using the straight-line method over
estimated useful lives of three to five years. Leasehold improvements are
amortized over the shorter of the lease term or the estimated useful life.

Pursuant to Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be disposed of" ("SFAS 121"), the Company reviews long-lived assets, including
the identifiable intangible assets and goodwill and will record impairment
charges, whenever events or changes in circumstances indicate the carrying
amount of the assets may not be fully recoverable.

REVENUE RECOGNITION

Revenue from product sales is generally recognized upon shipment and a
reserve is provided for estimated returns. The Company's sales to distributors
are made under agreements allowing certain rights of return and price protection
on products unsold by the distributors. Accordingly, the Company defers
recognition of revenue on such sales until the products are sold by the
distributors.

RESEARCH AND DEVELOPMENT

Research and development expenses are charged to the statement of
operations as incurred.

STOCK BASED COMPENSATION

Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), encourages, but does not require
companies to record compensation cost for stock-based employee compensation
plans based on the fair value of options granted. The Company has chosen to
continue to account for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees." Accordingly, compensation for stock options is
measured as the excess, if any, of the quoted market price of the Company's
stock at the date of the grant over the amount an employee must pay to acquire
the stock. The Company provides additional pro forma disclosures as required by
FAS 123.

-46-
<PAGE>

NET INCOME (LOSS) PER SHARE

During the quarter ended December 31, 1997, the Company adopted
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS
128"). SFAS 128 requires presentation of both Basic EPS and Diluted EPS. Basic
EPS is computed by dividing net income available to common stockholders
(numerator) by the weighted average number of common shares outstanding
(denominator) during the period. Diluted EPS gives effect to all dilutive
potential common shares outstanding during a period. In computing Diluted EPS,
the average price for the period is used in determining the number of shares
assumed to be purchased from exercise of stock options, warrants and Convertible
Preferred Stock. Net income (loss) per share for all prior periods presented has
been restated to conform to the provisions of SFAS 128.

<TABLE>
Following is a reconciliation of the numerators and denominators of the
Basic and Diluted EPS computations for the periods presented below:

<CAPTION>
1995 1996 1997
----------- ------------ -----------
(in thousands, except per share data)

<S> <C> <C> <C>
Net income (loss)........................................ $ 5,263 $ (36,425) $ (8,911)
Accretion related to Convertible Preferred Stock......... -- -- (1,307)
----------- ------------ -----------
Net income attributable to common shareholders........... $ 5,263 $ (36,425) $ (10,218)
=========== ============ ===========
Shares calculation:
Average shares outstanding--basic......................... 378 706 861
Effect of dilutive securities:
Stock options and warrants............................ 38 -- --
Convertible Preferred Stock........................... 160 -- --
----------- ------------ -----------
Average shares outstanding--diluted....................... 576 706 861
=========== ============ ===========
Net income (loss) per share--basic........................ $ 13.87 $ (51.59) $ (11.87)
=========== ============ ===========
Net income (loss) per share--diluted...................... $ 9.14 $ (51.59) $ (11.87)
=========== ============ ===========
</TABLE>

Options to purchase 112,900 shares of common stock at prices ranging
from $2.50 to $20.60 per share were outstanding during 1997 and approximately
1,067,000 shares issuable on the conversion of the 257 shares of Convertible
Preferred Stock, based on the conversion factor at December 31, 1997, were not
included in the computation of diluted EPS because the inclusion of such options
and shares would have been antidilutive.

RECENT ACCOUNTING PRONOUNCEMENTS

-47-
<PAGE>

In June 1997, the FASB issued SFAS 131, "Disclosure about Segments of
an Enterprise and Related Information." This statement establishes standards for
the way companies report information about operating segments in annual
financial statements. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. The
disclosures prescribed by SFAS 131 are effective in fiscal 1998.

<TABLE>
NOTE 3 -- BALANCE SHEET DETAIL:
(in thousands)

<CAPTION>
December 31,
-------------------------------
1996 1997
------------ ------------
<S> <C> <C>
Inventory:
Raw materials......................... $ 16 $ --
Work in process....................... 1,778 1,562
Finished goods........................ 678 1,018
------------ ------------
$ 2,472 $ 2,580
============ ============

Property and equipment:
Machinery and equipment............... $ 9,488 $ 4,081
Leasehold improvements................ -- 245
Furniture and fixtures................ 19 115
------------ ------------
9,507 4,441
Less accumulated depreciation......... (2,869) (1,704)
------------ ------------
$ 6,638 $ 2,737
============ ============

Accrued Liabilities:
Accrued payroll and commissions....... $ 804 $ 366
Other................................. 1,962 1,421
------------ ------------
$ 2,766 $ 1,787
============ ============
</TABLE>

NOTE 4 -- RELATED PARTY TRANSACTIONS:

As a result of the Company's 1994 reorganization, certain of the
Company's creditors became stockholders. Transactions with stockholders consist
of the following:

During the years ended December 31, 1995, 1996 and 1997, the Company
purchased product with a value of $3,237,000, $6,111,000 and $2,667,000,
respectively, from NKK Corporation ("NKK"). There was no amount due NKK at
December 31, 1996 or December 31, 1997.

In April 1995, NKK and the Company modified their previous technology
license and development agreements. This 1995 agreement provides for payment of
royalties to the Company by NKK on certain quantities of 1M SRAM's sold and,
with certain exceptions, cancels further obligations of each party to deliver
technology improvements or design updates to the other.

-48-
<PAGE>

On April 28, 1995, pursuant to certain agreements with certain of the
Company's stockholders, Atmel Corporation ("Atmel") acquired 42,500 shares of
common stock from the Company, 30,000 shares of common stock from certain
stockholders of the Company who had been unsecured creditors of the Company as
of the reorganization, and 12,805 shares of common stock from the Company's
equipment lessors all of which shares were purchased at a price of $80.00 per
share (the "Atmel Stock"). Atmel also acquired certain warrants to purchase
17,500 shares of common stock at an exercise price of $10.00 per share, for a
purchase price of $70.00 per share subject to the warrants. In connection with
these transactions, the Company entered into an Agreement with Atmel (the "Stock
Purchase Agreement") pursuant to which Atmel agreed to certain transfer
restrictions for a period of three years. Atmel also agreed to certain
standstill provisions, including an agreement not to increase its beneficial
ownership above 19.9% of the voting power of the Company on a fully diluted
basis for a period of five years from the date of the Stock Purchase Agreement.
The foregoing restrictions terminate on the date on which a person or entity
acquires more than 50% of the voting power of the Company. In addition, Atmel
agreed that, for a period of ten years from the date of the Stock Purchase
Agreement, it will vote the Atmel Stock in proportion to the votes cast by the
other stockholders of the Company, except with respect to certain material
events. The voting and standstill restrictions terminate at such time as Atmel
beneficially owns less than 5% of the common stock of the Company. On April 28,
1995, Atmel also entered into a Licensing and Manufacturing Agreement (the
"Agreement") with the Company. This Agreement provides Atmel with a
nonexclusive, royalty bearing license to manufacture, use and sell certain of
the Company's products. The royalty fee is based on a percentage of the average
selling price of the products sold. In addition, under the Agreement, a certain
wafer manufacturing capacity per week has been made available to the Company by
Atmel. The Agreement does not include a purchase commitment by the Company.
However, to the extent the Company provides Atmel with its three-month demand
forecast, it is committed to purchase the three-month forecasted quantities. No
obligation to purchase wafers existed as of December 31, 1997. The price of the
wafers has been fixed at the current fair market value. The Agreement expires on
April 28, 2000. There were no purchases from Atmel in 1997, and there was no
amount due Atmel at December 31, 1997. The value of product purchased from Atmel
in the year ended December 31, 1996 was $429,000 of which $140,000 is included
in the accounts payable, related party balance at December 31, 1996.

NOTE 5 -- LINE OF CREDIT AND DEBT OBLIGATIONS:

In November 1996, the Company replaced an existing line of credit with
a new line of credit from Greyrock Business Credit with a borrowing limit of
$6,000,000. Borrowings under this line of credit were limited to 80% of eligible
receivables and interest was at the greater of LIBOR plus 5.25% or 9%. At
December 31, 1996, the outstanding balance under this line of credit was
$2,015,000.

In October 1997, the Company renewed its line of credit with Greyrock
Business Credit. Borrowing is limited to the lesser of $5,000,000 or
the sum of (a) 80% of the amount of eligible receivables owing from original
equipment manufacturers; plus (b) 70% of the amount of eligible receivables
owing from distributors. The interest rate remained unchanged from the November
1996 agreement. The line of credit is subject to renewal again in October 1998,
unless prior
-49-
<PAGE>

notice is given by either party to terminate the agreement. The line of credit
is secured by the Company's trade receivables, inventory, equipment and general
intangibles. At December 31, 1997, the outstanding balance under the line of
credit was $1,719,000.

Debt obligations aggregating $534,000 consist of outstanding promissory
notes which bear interest at rates ranging from 8.0% to 19.8% at December 31,
1997, and were repayable at various dates through 1999. These notes are secured
by the related equipment purchased.

NOTE 6 -- NEWLOGIC ACQUISITION

In June 1996, the Company acquired, through a stock purchase and merger
transaction, NewLogic, a company which develops and manufactures logic designs
with large memory arrays. In exchange for its purchase of the NewLogic capital
stock, the Company issued 31,439 shares of the Company's common stock, with a
market value of approximately $2,656,000, and approximately $825,000 in cash. In
addition, the Company incurred transaction costs of approximately $237,000. The
fair value of NewLogic's tangible net assets at the date of acquisition was a
deficit of $373,000. Approximately $3,841,000 of the purchase price in excess of
the fair market value of the net tangible assets was allocated to in-process
technology which the Company wrote off in the quarter ended June 30, 1996.
Approximately $250,000 was allocated to other intangibles. The unamortized
balance of these other intangibles was written off in connection of the shutdown
of NewLogic in early 1997.

The Company accounted for this acquisition using the purchase method of
accounting and accordingly, the results of operations and cash flows of the
acquisition were included only from the date of acquisition. Excluding the
$3,841,000 write-off of purchased in-process technology, the pro forma impact on
the Company's results of operations had the acquisition been consummated on
January 1, 1995 was not materially different from the results presented in the
accompanying statement of operations.

NOTE 7 -- CONVERTIBLE PREFERRED STOCK

On January 23, 1997, the Company sold a total of 200 shares of Series A
Preferred Stock in a private placement, at a price of $10,000 per share, for
total proceeds (net of payments to third parties) of approximately $1,880,000.
The Series A Preferred Stock includes cumulative dividends at 5% per annum. The
Series A Preferred Stock also includes an embedded discount on conversion which
was accreted from the issuance date through April 23, 1997, the date upon which
the Series A Preferred Stock became convertible. The accretion of the embedded
discount and the cumulative dividends were treated as a charge to accumulated
deficit. Also in connection with the sale of the Series A Preferred Stock the
Company issued a warrant to purchase 15,000 shares of its Common Stock for
$41.25 per share. The warrant is exercisable until January 22, 2000. The Company
valued these warrants at $67,000 using the Black/Scholes option pricing model.

The Series A Preferred Stock is convertible at the option of the holder
into the number of fully paid and non-assessable shares of Common Stock as is
determined by dividing (A) the sum of (1) $10,000 plus (2) the amount of all
accrued but unpaid or accumulated dividends on

-50-
<PAGE>

the shares of Series A Preferred Stock being converted by (B) the Series A
Conversion Price in effect at the time of conversion. The "Series A Conversion
Price" is equal to the lower of (i) $22.50 or (ii) eighty-two percent (82%) of
the average closing bid price of a share of Common Stock as quoted on the SCM
(or quoted on such other national or regional securities exchange or automated
quotation system upon which the Common Stock is listed and principally traded)
over the five (5) consecutive trading days immediately preceding the date of
notice of conversion of the Series A Preferred Stock. During 1997, the holders
of the Series A Preferred Stock converted 149 shares of the Series A Preferred
Stock into 239,605 shares of the Company's Common Stock. As of December 31,
1997, there were 51 shares of the Series A Preferred Stock outstanding.

On July 22, 1997, the Company sold a total of 200 shares of Series B
Preferred Stock in a private placement at a price of $10,000 per share, for
total proceeds (net of payments to third parties) of approximately $1,870,000.
The Series B Preferred Stock includes cumulative dividends at 5% per annum. The
Series B Preferred Stock also includes an embedded discount on conversion which
was accreted from the issuance date through September 10, 1997, the date upon
which the Series B Preferred Stock became convertible. The accretion of the
embedded discount and the cumulative dividends have been treated as a charge to
accumulated deficit.

The Series B Preferred Stock is convertible at the option of the holder
into the number of fully paid and non-assessable shares of Common Stock as is
determined by dividing (A) the sum of (1) $10,000 plus (2) the amount of all
accrued but unpaid or accumulated dividends on the shares of Series B Preferred
Stock being converted by (B) the Series B Conversion Price in effect at the time
of conversion. The "Series B Conversion Price" will be equal to the lower of (i)
$13.75 or (ii) eighty-two percent (82%) of the average closing bid price of a
share of Common Stock as quoted on the SCM (or quoted on such other national or
regional securities exchange or automated quotation system upon which the Common
Stock is listed and principally traded) over the five (5) consecutive trading
days immediately preceding the date of notice of conversion of the Series B
Preferred Stock. During 1997, the holders of the Series B Preferred Stock
converted 94 shares of the Series B Preferred Stock into 136,040 shares of the
Company's Common Stock. As of December 31, 1997, there were 106 shares of the
Series B Preferred Stock outstanding.

The Series A Preferred Stock and Series B Preferred Stock agreements
contained restrictions on the number of shares of Common Stock that were
issuable on the conversion of the Series A Preferred Stock and Series B
Preferred Stock. Shares of Preferred Stock which were not convertible as a
result of these restrictions were redeemable by the Company for cash. On
September 26, 1997 at a Special Meeting of Shareholders, the Stockholders
approved the elimination of the restrictions on the number of shares of Common
Stock issuable on the conversion of the Series A Preferred Stock and Series B
Preferred Stock.

On November 27, 1997, the Company sold a total of 100 shares of Series
C Preferred Stock in a private placement at a price of $10,000 per share, for
total proceeds (net of payments to third parties) of approximately $923,000. The
Series C Preferred Stock includes cumulative dividends at 5% per annum. The
Series C Preferred Stock also includes an embedded discount on conversion which
was accreted from the issuance date through January 27, 1998, the date -51-
<PAGE>

upon which the Series C Preferred Stock became convertible. The accretion of the
embedded discount and the cumulative dividends have been treated as a charge to
accumulated deficit.

The Series C Preferred Stock is convertible at the option of the holder
into the number of fully paid and non-assessable shares of Common Stock as is
determined by dividing (A) the sum of (1) $10,000 plus (2) the amount of all
accrued but unpaid or accumulated dividends on the shares of Series C Preferred
Stock being converted by (B) the Series C Conversion Price in effect at the time
of conversion. The "Series C Conversion Price" will be equal to the lower of (i)
$5.90 or (ii) eighty-two percent (82%) of the average closing bid price of a
share of Common Stock as quoted on the SCM (or quoted on such other national or
regional securities exchange or automated quotation system upon which the Common
Stock is listed and principally traded) over the five (5) consecutive trading
days immediately preceding the date of notice of conversion of the Series C
Preferred Stock. During 1997, none of the Series C Preferred Stock was converted
into shares of the Company's Common Stock.

NOTE 8 -- STOCK COMPENSATION PLANS:

The 1994 Stock Option Plan ("Option Plan") was established on June 21,
1994. Under the Option Plan, the maximum aggregate number of shares which may be
issued under the Option Plan upon exercise of options is 149,800 shares
(subject to a 3% increase each January 1st). Nonstatutory stock options may be
granted to employees, outside directors and consultants, whereas incentive stock
options can only be granted to employees. Options are generally granted at fair
market value subject to the following:

(a) With respect to options granted to an employee who, at the
time of the grant owns stock representing more than 10% of the
voting power of all classes of stock of the Company or any
parent or subsidiary, the per share exercise price shall be no
less than 110% of the fair market value on the date of the
grant for incentive and nonstatutory stock options.

(b) With respect to options granted to any employee other than
described in the preceding paragraph, the exercise price shall
be no less than 100% for incentive stock options and 85% for
nonstatutory stock options of the fair market value on the
date of the grant.

The Option Plan separately reserves 15,000 shares of common stock for
option grants to outside directors. Grant of options to the Company's outside
directors are made upon appointment to the Board of Directors and in annual
increments thereafter. The exercise price of options granted is the fair market
value at the date of grant.

-52-
<PAGE>

Nonstatutory stock option activity under the Option Plan was as
follows (in thousands):

<TABLE>
<CAPTION>
1995 1996 1997
---------------- ---------------- ---------------

<S> <C> <C> <C>
Outstanding at beginning of period........ 73 90 114
Granted.......................... 41 118 105
Canceled......................... (16) (70) (108)
Exercised........................ (8) (24) (4)
--------------- --------------- ---------------
Outstanding at December 31................ 90 114 107
--------------- --------------- ---------------
Exercisable at December 31................ 38 30 42
--------------- --------------- ---------------
Available for Grant at December 31........ 31 15 18
--------------- --------------- ---------------
</TABLE>

<TABLE>
Weighted average option exercise price information for the years 1995,
1996 and 1997 as follows:

<CAPTION>
1995 1996 1997
---------------- ---------------- ----------------

<S> <C> <C> <C>
Outstanding at beginning of period........ $ 3.20 $ 43.00 $ 45.40
Granted during the year................... 102.60 62.00 15.30
Canceled during the year.................. 33.50 82.40 48.50
Exercised during the year................. 4.30 5.80 3.00
Outstanding at December 31................ 43.00 45.40 12.20
Exercisable at December 31................ 13.60 27.70 11.70
</TABLE>

<TABLE>
Significant option groups outstanding at December 31, 1997, and related
weighted average price and life information follows (options in thousands):

Weighted
Outstanding Exercisable Average
------------------- -------------------- Remaining
Exercise Prices Shares Price Shares Price Life (Years)
- ------------------------- -------- -------- ---------- -------- ------------

Options granted vest over a period of four years. The term of the
options shall be no longer than 10 years. All options were granted at an
exercise price equal to the fair market value of the Company's common stock at
the date of grant. The weighted average fair value at date of grant for options
granted during 1995, 1996 and 1997 was $53.40, $27.40 and $14.40 per option,

-53-
<PAGE>

respectively. The fair value of options at date of grant was estimated using the
Black-Scholes model with the following assumptions:

<TABLE>
<CAPTION>
1995 1996 1997
--------- -------- -------

<S> <C> <C> <C>
Expected life (years)....... 5 5 5
Risk free interest rate..... 6.9% 6.6% 6.2%
Volatility.................. 48% 50% 168%
Dividend yield.............. -- -- --
</TABLE>

In April 1995, the board of directors of the Company adopted the
Paradigm Technology, Inc. Employee Stock Purchase Plan (the "ESPP") to provide
employees of the Company with an opportunity to purchase common stock through
payroll deductions. The ESPP became effective upon the closing of the Company's
initial public offering in July 1995. Under the ESPP, 25,000 shares of common
stock have been reserved for issuance to full-time employees employed with the
Company for at least three consecutive months.

Under the ESPP, the purchase price of the common stock will be equal to
85% of the lower of (i) the market price of common stock immediately before the
beginning of the applicable participation period or (ii) the market price of
common stock at the time of purchase. In general, each participation period is
24 months long, with a new participation period beginning every six months.
During 1996 and 1997, 7,678 and 2,500 shares were issued under the plan. The
fair value of the employee's purchase rights was estimated using the
Black-Scholes model with the following assumptions for 1995, 1996 and 1997,
respectively; dividend yield of 0% in all years; an expected life of two years
for each purchase period; expected volatility of 48%, 50% and 168%; and risk
free interest rates of 6.2%, 6.3% and 6.2%. The weighted-average fair value of
these purchase rights granted in 1995, 1996 and 1997 was $53.70, $47.80 and
$18.70, respectively.

-54-
<PAGE>

Had compensation expense for the Company's stock-based compensation
plans been determined based on the methods prescribed by SFAS No. 123, the
Company's net income (loss) and net income (loss) per share would have been as
follows (in thousands, except per share amounts):

<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1995 1996 1997
---------- ----------- ----------

<S> <C> <C> <C>
Net income (loss):
As reported................................. $ 5,263 $ (36,425) $ (8,911)
Pro forma................................... 5,024 (37,272) (9,704)

Diluted Net income (loss) per share:
As reported................................. $ 9.14 $ (51.59) $ (11.87)
Pro forma................................... 8.72 (52.79) (12.79)
</TABLE>

NOTE 9 -- INCOME TAXES:

<TABLE>
The provision (benefit) for income taxes consists of the following (in
thousands):

<CAPTION>
Year Ended December 31,
--------------------------------------
1995 1996 1997
---------- ----------- ----------

<S> <C> <C> <C>
Federal:
Current................. $ 1,673 $ (1,125) $ --
State:
Current................. 472 -- --
---------- ---------- ----------
$ 2,145 $ (1,125) $ --
========== ========== ==========
</TABLE>

<TABLE>
The components of the net deferred tax asset were as follows (in
thousands):

December 31,
---------------------------
1996 1997
----------- -----------

<S> <C> <C>
Inventory and other reserves................. $ 3,052 $ 899
Depreciation and capital leases.............. 972 328
Other........................................ 551 122
Net operating losses......................... 13,885 20,232
----------- -----------
18,460 21,581
Less valuation allowance..................... (18,460) (21,581)
----------- -----------
$ -- $ --
=========== ===========
</TABLE>

-55-
<PAGE>

<TABLE>
The Company's effective tax rate for 1995, 1996 and 1997 was 29%, (3%)
and (0%), respectively. This rate differs from the federal statutory rate due
principally to the following:

<CAPTION>
Year Ended December 31,
------------------------
1995 1996 1997
---- ---- ----

<S> <C> <C> <C>
Tax at statutory rate.............................. 34% (34)% (34)%
State taxes, net of federal benefit................ 6 (6) (6)
Tax losses not recognized.......................... (11) 37 40
---- ---- ----

Net operating losses and tax credits utilized...... 29% (3)% 0%
==== ==== ====
</TABLE>

The Company has established a valuation allowance equal to its deferred
tax assets on the basis that realization of such assets is not probable.
Management's assessment is based on the Company's current net operating losses.

The Tax Reform Act of 1986 limits the use of net operating loss and tax
credit carryforwards in certain situations where changes occur in the stock
ownership of a company. The Company experienced ownership changes as a result of
the Reorganization of the Company in 1994. As a result of the conversion of
Preferred Stock to Common Stock, the Company experienced a change in ownership
subsequent to December 31, 1997. As a result of this change in ownership,
approximately $4 million of net operating losses will be available to the
Company through 2012.

NOTE 10 -- CAPITAL LEASE OBLIGATIONS AND COMMITMENTS:

In December 1996, the Company entered into an agreement to lease its
new principal administrative facility under an operating lease expiring in 2002.
Future minimum payments under noncancelable operating leases at December 31,
1997 are as follows (in thousands):

<TABLE>
<CAPTION>
Year Ending
December 31, Operating Leases
-------------- ----------------
<S> <C>
1998 $ 460
1999 473
2000 485
2001 490
2002 40
-------
$1,948
=======
</TABLE>

Rent expense for the years ended December 31, 1995, 1996 and 1997 was
$715,000, $680,000 and $475,000, respectively.

-56-
<PAGE>

NOTE 11 -- SALE OF WAFER FABRICATION FACILITY

The Company recorded a loss of $4.6 million in the quarter ended
December 31, 1996 as a result of the sale of its wafer fabrication facility.
This charge included the excess of the net book value of leasehold improvements,
wafer fabrication equipment, fabrication work in process inventory and other
assets sold to Orbit Semiconductor, Inc. ("Orbit") over the proceeds received
from Orbit, professional fees, a reserve for an adverse purchase commitment
related to the wafer manufacturing agreement and accruals for other estimated
costs.

Orbit paid to the Company aggregate consideration of $20 million
consisting of $6.7 million in cash, assumption of $7.5 million of indebtedness
associated with and secured by the Fab, and promissory notes in the principal
amounts of $4.8 million and $1.0 million.

The $4.8 million promissory note was issued in connection with a wafer
supply agreement that required Orbit to supply Paradigm with approximately 9,750
of certain fabricated wafers through May 1997 at $500 per wafer purchased by
Paradigm. In accordance with the terms of the promissory note and wafer supply
agreement, for each wafer purchased from Orbit no cash payment was required to
be made, however, the amount of the promissory note receivable was reduced by
$500 for each wafer purchased. Accordingly, as Paradigm purchased wafers from
Orbit, the outstanding balance of the promissory note receivable was reduced and
inventory was recorded. No balance remained on this note at December 31, 1997.

The $1.0 million promissory note was held in escrow to satisfy certain
representation and warranties made by the Company. In July 1997, the Company
negotiated an accelerated payment on the $1.0 million promissory note held in
escrow. As part of the agreement, the Company allowed Orbit to retain $250,000
for repairs on equipment purchased as part of the Fab sale and certain
additional amounts for other matters, and Paradigm received a net payment of
$750,000 in 1997. No balance remained on this note at December 31, 1997.

NOTE 12 -- LITIGATION:

On August 12, 1996, a securities class action lawsuit was filed in
Santa Clara County Superior Court against the Company and certain of its
officers and directors (the "Paradigm Defendants") and PaineWebber, Inc. The
class alleged by plaintiffs consisted of purchasers of the Company's Common
Stock from November 20, 1995 to March 22, 1996, inclusive (the "Class Period").
The complaint alleges negligent misrepresentation, fraud and deceit, breach of
fiduciary duty, and violations of certain provisions of the California Corporate
Securities Law and Civil Code. The plaintiffs seek an unspecified amount of
compensatory and punitive damages. Plaintiffs allege, among other things, that
the Paradigm Defendants wrongfully represented that the Company would have
protection against adverse market conditions in the semiconductor market based
on the Company's focus on high speed, high performance semiconductor products.
The Paradigm Defendants intend to vigorously defend the action. On

-57-
<PAGE>

September 30, 1996, the Paradigm Defendants filed a demurrer seeking to have
plaintiffs' entire complaint dismissed with prejudice. On December 12, 1996, the
Court sustained the demurrer as to all of the causes of action against Michael
Gulett and as to all causes of actions, except for violation of certain
provisions of the California Corporate Securities Law, against the remaining
Paradigm Defendants. The Court, however, granted plaintiffs leave to amend the
complaint to attempt to cure the defects which caused the Court to sustain the
demurrer. Plaintiffs failed to amend within the allotted time. On January 8,
1997, the Paradigm Defendants filed an answer to the complaint denying any
liability for the acts and damages alleged by the plaintiffs. Plaintiffs have
since served the Paradigm Defendants with discovery requests for production of
documents and interrogatories, to which the Paradigm Defendants have responded.
Plaintiffs have also subpoenaed documents from various third parties. The
Paradigm Defendants have served the plaintiffs with an initial set of discovery
requests, to which plaintiffs have responded. The Paradigm Defendants also took
the depositions of the named plaintiffs on April 9, 1997. On January 15, 1997,
plaintiffs filed a motion to certify the matter as a class action. Plaintiffs
sought by their motion to certify a nationwide class of those who purchased the
Company's stock during the Class Period. After several hearings and
continuances, on February 9, 1998 the Court certified a class consisting only of
California purchasers of the Company's stock during the Class Period. Plaintiffs
have set a hearing date of April 9, 1998 for a motion to amend their complaint
to incorporate factual allegations derived from the February 21, 1997 action
described below. There can be no assurance that the Company will be successful
in the defense of this action. Even if Paradigm is successful in such defense,
it may incur substantial legal fees and other expenses related to this claim. If
unsuccessful in the defense of any such claim, the Company's business, operating
results and cash flows could be materially adversely affected.

On February 21, 1997, an additional purported class action lawsuit was
filed in Santa Clara County Superior Court against the Company and certain of
its officers and directors, with causes of action and factual allegations
essentially identical to those of the August 12, 1996 class action lawsuit. This
second class action is asserted against the same Paradigm Defendants,
PaineWebber, Inc. and Smith Barney. Prior to the hearing on the Paradigm
Defendants' demurrer to the initial complaint, plaintiff amended his complaint
to incorporate factual allegations derived from the May 19, 1997 lawsuit
described below. The Paradigm Defendants filed a demurrer to the amended
complaint, which was heard on September 9, 1997. On September 10, 1997, the
Court issued an order sustaining the Paradigm Defendants' demurrer as to all
causes of action without leave to amend. A judgment in favor of the Paradigm
Defendants dismissing the entire complaint was entered by the Court on September
23, 1997. Plaintiffs have appealed the decision and filed a brief in support of
its appeal. The Paradigm Defendants' responsive brief is due to be filed March
30, 1998. There can be no assurances that the Company will be successful in
defeating the appeal. Even if Paradigm is successful in defeating the appeal, it
may incur substantial legal fees and other expenses related to this appeal. If
unsuccessful in defeating the appeal, the Company's business operating results
and cash flows could be materially adversely affected.

On May 19, 1997, several former employees of the Company filed an
action in Santa Clara County Superior Court. The complaint names as defendants
the Company, Michael Gulett, Richard Veldhouse, Dennis McDonald and Chiang Lam.
Plaintiffs filed with the complaint a notice that they consider their case
related legally and factually to the August 12, 1996 class

-58-
<PAGE>

action lawsuit described above. The Complaint alleges fraud, breach of fiduciary
duty and violations of certain provisions of the California Corporate Securities
Law and Civil Code. Plaintiffs allege that they purchased the Company's stock at
allegedly inflated prices and were damaged thereby. The plaintiffs seek an
unspecified amount of compensatory, rescissory and/or punitive damages.
Defendants responded to the complaint on September 12, 1997 by filing a demurrer
as to all causes of action. Prior to the hearing on the demurrer, Plaintiffs
amended their complaint to identify two allegedly fraudulent sale transactions.
On February 20, 1998, defendants filed a demurrer as to all causes of action in
the amended complaint, which is set to be heard April 2, 1998. Plaintiffs have
served the Company and two of the individual defendants with requests for
production of documents, to which the Company and the individual defendants have
responded. The Company has served plaintiff with form interrogatories, to which
they have responded. There can be no assurance that the Company will be
successful in such defense. Even if Paradigm is successful in such defense, it
may incur substantial legal fees and other expenses related to this claim. If
unsuccessful in the defense of any such claim, the Company's business, operating
results and cash flows could be materially adversely affected.

NOTE 13 -- SUBSEQUENT EVENTS:

In January and February, 1998, holders of the Series A Preferred Stock,
Series B Preferred Stock, and Series C Preferred Stock converted additional
shares of the Preferred Stock into the Company's Common Stock, as follows:

<TABLE>
<CAPTION>
Shares of Shares of
Preferred Stock Common Stock
Series Converted Issued
---------- --------------- ------------

-59-
<PAGE>

On March 6, 1998, the Company entered into a definitive merger
agreement providing for the acquisition of all of the outstanding capital stock
of IXYS Corporation ("IXYS") in exchange for Common Stock of the Company. The
exchange ratio in the Merger for the IXYS equity securities will be the greater
of two ratios. The first ratio provides that upon the Merger the holders of
equity securities of IXYS hold 95% of the fully diluted capitalization of the
combined company and that the holders of equity securities of the Company will
hold 5% of the fully diluted capitalization of the combined company. (As used
herein, fully diluted capitalization means the sum of the number of shares of
common stock outstanding and issuable upon exercise or conversion of all
outstanding preferred stock, warrants, options and other rights.) The second
ratio provides that the value associated with the fully diluted capitalization
of IXYS, at the time of the consummation of the Merger, be at least $150
million, based upon an average of the closing prices of the Company's Common
Stock prior to the Company's stockholders meeting. Consummation of the merger
requires the approval of the Company's and IXYS' stockholders and various
regulatory approvals. If approved, the transaction is anticipated to be
accounted for as a purchase of the Company by IXYS for financial reporting
purposes.

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

None.

-60-
<PAGE>

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

(a) Directors of the Registrant.
---------------------------

MICHAEL GULETT, 45, the Company's President and Chief Executive
Officer, joined Paradigm in March 1992. Mr. Gulett, was elected President in
February 1993, was appointed Chief Executive Officer in July 1993 and was
appointed to the board in March 1994. Prior to joining Paradigm, Mr. Gulett was
a consultant from May 1989 until March 1992. From July 1987 until May 1989, Mr.
Gulett was the Director of ASIC Operations at VLSI Technology, Inc., a
semiconductor manufacturer. He has also worked for NCR Microelectronics,
California Devices, Intel Corporation and Burroughs Corporation. Mr. Gulett
received his B.S. in electrical engineering from the University of Dayton.

GEORGE J. COLLINS, 55, has served as a Director of the Company since
October 1995. Mr. Collins has been a professor of electrical engineering at
Colorado State University since 1973. Mr. Collins is a Fellow with the American
Physical Society and the Institute of Electrical Engineers. Mr. Collins is a
Director of Quantum Research Corporation. Mr. Collins received his B.S.E.E. from
Manhattan University and his M.S. and Ph.D. in engineering from Yale University.

JAMES L. KOCHMAN, 48, has served as Director of the Company since June
1994 and has been a partner with the investment banking firm of Alliant Partners
LLP (formerly, Bentley, Hall, Von Gehr International) since April 1992. He was
formerly President and Chief Executive Officer of TEKNA/S-TRON, a consumer
products company. Prior to joining TEKNA, he spent six years with FMC
Corporation in a variety of corporate staff and operating assignments, including
Director of Manufacturing and Director of Technology and Business Development
with FMC's Ordinance Division in San Jose. Previously Mr. Kochman worked for
International Harvester Company. Mr. Kochman received his B.S. in mechanical
engineering from the University of Illinois and an M.B.A. from the University of
Chicago.

(b) Executive Officers of the Registrant.
------------------------------------

MICHAEL GULETT, the Company's President and Chief Executive Officer,
joined Paradigm in March 1992. Mr. Gulett was elected President in February
1993, was appointed Chief Executive Officer in July 1993 and was appointed to
the board in March 1994. Prior to joining Paradigm, Mr. Gulett was a consultant
from May 1989 until March 1992. From July 1987 until May 1989, Mr. Gulett was
the Director of ASIC Operations at VLSI Technology, Inc., a semiconductor
manufacturer. He has also worked for NCR Microelectronics, California Devices,
Intel Corporation and Burroughs Corporation. Mr. Gulett received his B.S. in
electrical engineering from the University of Dayton.

DAVID G. CAMPBELL has served as Paradigm's Vice President of Finance
and Chief Financial Officer since April 1997. For the year prior to joining
Paradigm, Mr. Campbell was Vice President of Finance and Administration of Image
Quest Technologies, Inc., a flat-panel display company. From September 1987, to
April 1996, Mr. Campbell was Vice President of

-61-
<PAGE>

Finance and Administration and Chief Financial Officer of Ascent Logic
Corporation, a system design engineering software company. Mr. Campbell holds a
B.S. degree in Accounting from La Salle College, an M.B.A. from San Jose State
University, and a Ph.D. in Business Administration from La Salle University. Mr.
Campbell also holds C.P.A. and C.M.A. certifications.

JAMES H. BOSWELL has served as Paradigm's Vice President, Sales for
Europe since October 1997. Mr. Boswell who has also served as Paradigm's Vice
President, Sales and Marketing from December 1996 to October 1997, joined the
Company in November 1995 as Director of Marketing. Prior to joining Paradigm,
Mr. Boswell was the Sales Manager of Sharp from 1994 to 1995. Mr. Boswell was in
the marketing and sales department of Hitachi from 1989 to 1994. Mr. Boswell
received his B.S. from University of New Mexico and his M.B.A.
from the University of Arizona.

RICHARD MORLEY has served as Paradigm's Vice President, Operations
since February 1997. Prior to joining Paradigm, Mr. Morley worked in other IC
based Operations, notably Kopin Corporation as General Manager of Display
Manufacturing from 1994 to 1996, and was Director of Operations for Zilog's
Nampa Mod II and Mod III CMOS wafer fabrication facilities from 1988 to 1994.
Mr. Morley has also worked for other IC manufacturing companies such as General
Instrument, NCR, Sprague Solid State, California Devices and VLSI Technology.
Mr. Morley received his B.S. in chemistry from Manhattan College.

SUNEEL RAJPAL has served as Paradigm's Vice President, Sales and
Marketing since October 1997, and joined the Company in April 1997 as Director
of Marketing. He has responsibility for sales in America and Asia. Prior to
joining Paradigm, Mr. Rajpal held sales, marketing and engineering management
positions at Monolithic Memories, Integrated Device Technology, Quality
Semiconductor and Qlogic Corporation. Mr. Rajpal received his B. Tech. from the
Indian Institute of Technology and a M.A.Sc. degree from University of Toronto.

-62-
<PAGE>

ITEM 11. EXECUTIVE COMPENSATION
----------------------

EXECUTIVE COMPENSATION

The following table provides certain summary information concerning
compensation paid to the Company's Chief Executive Officer, and each of the
other four most highly compensated executive officers, who were serving as
executive officers on December 31, 1997 (the "Named Executive Officers") and
whose aggregate salary and bonus exceeded $100,000, for the fiscal years ended
December 31, 1995, 1996 and 1997.

<TABLE>
SUMMARY COMPENSATION TABLE

<CAPTION>
Long-Term
Compensation
Payouts
Annual Compensation ------------
------------------------------------------------- Securities
Other Annual Underlying
Name and Principal Position Year Salary($) Bonus($)(1) Compensation($) Options(#)
--------------------------- ---- ------------- ----------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Michael R. Gulett 1997 $ 243,408 $ -- $ -- $ --
President and Chief 1996 249,185 85,000 -- 2,500(2)
Executive Officer 1995 219,692 115,000 -- 1,500(3)

James Boswell (4) 1997 144,779 9,000 7,477(5) --
Vice President, Sales 1996 119,638 9,174 1,385(6) 2,625(7)
and Marketing 1995 6,250 -- -- 1,500(8)

Dennis McDonald (9) 1997 103,037 -- -- --
Former Vice President, 1996 134,302 19,174 -- 1,700(10)
Human Resources 1995 70,400 175 -- 2,500(11)

Richard Morley(12) 1997 124,471 -- -- --
Vice President
of Operations

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

(1) Represents cash bonuses, profit sharing and commissions paid during the
year.
(2) Includes options granted on February 3, 1997 for 2,500 shares upon
cancellation of a previous option granted on July 24, 1996.
(3) Includes options granted on February 3, 1997 for 1,500 shares upon
cancellation of a previous option granted on June 15, 1995.
(4) Mr. Boswell was hired by the Company in November 1995.
(5) Represents car allowance.
(6) Represents automobile expenses.
(7) Includes options granted on February 3, 1997 for 1,500 shares and 1,125
shares upon cancellation of previous options granted on July 24, 1996 and
November 21, 1996, respectively.
(8) Includes options granted on February 3, 1997 for 1,500 shares upon
cancellation of previous options granted on December 28, 1995.
(9) Mr. McDonald, hired by the Company in May 1997, became a consultant with
the Company in March 1997.
(10) Includes options granted on February 3, 1997 for 500 shares and 12,000
shares upon cancellation of previous options granted on January 1, 1996
and July 24, 1996, respectively.
(11) Includes options granted on February 3, 1997 for 2,500 shares upon
cancellation of a previous option granted on May 24, 1995.
(12) Mr. Morley was hired by the Company in February 1997.
</TABLE>

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<PAGE>

The following table sets forth certain information regarding options
granted during the fiscal year ended December 31, 1997 to the Named Executive
Officers.

<TABLE>
OPTION GRANTS IN LAST FISCAL YEAR
<CAPTION>
Potential Realizable Value
at Assumed Annual Rates
Number of of Stock Price
Securities Percent of Total Appreciation for Option
Underlying Options Granted Exercise or Term(3)
Options to Employees in Base Price Expiration ----------------------------
Granted(1) Fiscal Year(2) ($/Share) Date 5% ($) 10% ($)
------------- ---------------- ----------- ---------- ------------- -----------

<S> <C> <C> <C> <C> <C> <C>
Michael R. Gulett 2,550 2.3% 14.70 08/18/07 23,558 59,700

James H. Boswell 2,375 2.1 12.50 04/25/07 18,670 47,314
1,125 1.0 14.70 08/18/97 10,393 26,339
1,000 * 2.50 12/23/07 1,572 3,984

Dennis McDonald -- -- -- -- -- --

Richard Morley 1,125 1.0 14.70 08/18/07 10,393 26,339
300 * 2.50 12/23/07 472 1,195

- ----------

* Less than one percent.
(1) Six months after the original grant date, 1/8th of the shares will be
vested and thereafter the remaining shares will vest over four years at
1/48th per month.
(2) Based on options to purchase an aggregate of 112,900 shares of Common
Stock granted during fiscal 1997.
(3) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. These gains
are based on assumed rates of stock appreciation of 5% and 10% compounded
annually from the date the respective options were granted to their
expiration date and are not presented to forecast possible future
appreciation, if any, in the price of the Common Stock. The gains shown
are net of the option exercise price, but do not include deductions for
taxes or other expenses associated with the exercise of the options or the
sale of the underlying shares. The actual gains, if any, on the stock
option exercises will depend on the future performance of the Common
Stock, the optionee's continued employment through applicable resting
periods and the date on which the options are exercised.
</TABLE>

-64-
<PAGE>

The following table shows stock options exercised by the Named
Executive Officers as of December 31, 1997. In addition, this table includes the
number of shares of Common Stock represented by outstanding stock options held
by each of the Named Executive Officers as of December 31, 1997. The closing
price of the Company's Common Stock at fiscal year-end was $3.44.

<TABLE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION VALUES

<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Shares Options at FY-End(#) at FY-End($)(1)
Acquired on Value ---------------------------- ----------------------------
Name Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
- - ------------------- ------------ ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Michael R. Gulett -- $ -- 19,763 3,288 $ 7,260 $ --
James Boswell -- -- 2,063 6,562 -- 940
Dennis McDonald -- -- 2,040 2,160 -- --
Richard Morley -- -- 750 8,675 -- 282

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

(1) Value is calculated by (i) subtracting the exercise price per share from
the year-end closing price of $3.44 per share; and (ii) multiplying the
number of shares subject to the option.
</TABLE>

-65-
<PAGE>

TEN-YEAR OPTION REPRICINGS

REPRICING OF STOCK OPTIONS

In February 1997, the Company's Board agreed that additional incentives
were needed since many of the Company's exployees and directors held stock
options with grants priced significantly higher than the fair market value of
the Company's common stock. Therefore, the Company implemented a program whereby
option holders could exchange higher priced option shares for the same number of
lower priced option shares. The new options were issued on February 3, 1997 at
the then fair market value of $20.625 per share. Executive officers must remain
active on the Company's payroll until August 3, 1997 to exercise their new
options. All executive officers and directors holding options were eligible to
participate in this program. The total options owned by directors and executive
officers prior to the repricing represented 5% and 35%, respectively. Data for
executive officers and directors who were eligible to reprice options are shown
in the first table entitled "Ten-Year Option Repricings." The following table
sets forth the repricing of options held by the Named Executive Officers and
directors.

<TABLE>
<CAPTION>
Length of
Market Original
Number of Price of Exercise Option Term
Securities Number Stock at Price at Remaining
Underlying of New Time of Time of New at Date of
Options Options Repricing Repricing Exercise Repricing
Name Date Repriced (#) Granted ($) ($) Price ($) (years.months)
- - ----------------------- ----------- -------------- ------------ ----------- ------------ ----------- --------------

<S> <C> <C> <C> <C> <C> <C> <C>
Michael Gulett 02/03/97 1,500 1,500 $ 20.625 $ 90.00 $ 20.625 8.4
02/03/97 2,500 2,500 20.625 45.00 20.625 9.5

Robert C. McClelland 02/03/97 1,000 1,000 20.625 9.00 20.625 8.4
02/03/97 500 500 20.625 135.00 20.625 8.10
02/03/97 800 800 20.625 45.00 20.625 9.5

Philip Siu 02/03/97 6,250 6,250 20.625 85.00 20.625 8.2
02/03/97 1,000 1,000 20.625 135.00 20.625 8.10
02/03/97 1,200 1,200 20.625 45.00 20.625 9.5

Dennis McDonald 02/03/97 2,500 2,500 20.625 90.00 20.625 8.3
02/03/97 500 500 20.625 135.00 20.625 8.10
02/03/97 1,200 1,200 20.625 45.00 20.625 9.5

James Boswell 02/03/97 1,500 1,500 20.625 45.00 20.625 9.5
02/03/97 1,125 1,125 20.625 25.00 20.625 9.9
02/03/97 1,500 1,500 20.625 135.00 20.625 8.9

George Collins 02/03/97 1,250 1,250 20.625 250.00 20.625 8.8

James Kochman 02/03/97 1,250 1,250 20.625 60.00 20.625 8

Atiq Raza 02/03/97 1,250 1,250 20.625 135.00 20.625 8.10
</TABLE>

COMPENSATION OF DIRECTORS

The Company's non-employee directors ("Outside Directors") receive a
fee of $3,000 per quarter. All Outside Directors are also reimbursed for
expenses incurred in connection with attending Board and committee meetings. The
Company's 1994 Stock Option Plan (the "Option Plan") provides for the grant of
options to Outside Directors pursuant to a nondiscretionary, automatic grant
mechanism, whereby each Outside Director is granted an option at fair market
value to purchase 313 shares of Common Stock on the date of each Annual
Meeting of Stockholders, provided such director is re-elected. These options
vest over four years at the rate of 25% per year so long as the optionee remains
an Outside Director of the Company. Each new Outside Director who joins the
Board is automatically granted an option at fair market value to

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<PAGE>

purchase 1,250 shares of Common Stock upon the date on which such person first
becomes an Outside Director. These options vest over four years at the rate of
25% per year.

EMPLOYMENT AGREEMENTS

The Company entered into an employment agreement with Michael Gulett on
August 26, 1996 (the "Agreement"), which provides for a base salary of $255,000
and the right to participate in the Company's executive compensation program.
The Company may terminate Mr. Gulett's employment at any time with or without
cause upon 90 days' advance written notice; provided, however, that if he is
terminated without cause (other than as a result of disability or change of
control of the Company), he will receive salary continuation for six months. In
the event Mr. Gulett's employment is terminated during the term of the Agreement
and within the first six-month period after the occurrence of a change of
control of the Company, as defined in the Agreement, Mr. Gulett will be entitled
to receive one and a half times his annual rate of base salary as in effect on
the date of the employment termination, plus one and a half times the last
annual bonus awarded by the Company.

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<PAGE>

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
---------------------------------------------------
MANAGEMENT
----------

The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of March 6, 1998 by: (i) each person
known to the Company to beneficially own more than five percent (5%) of the
Company's Common Stock, (ii) each of the Company's directors, (iii) each of the
Named Executive Officers, and (iv) all directors and executive officers of the
Company as a group. Except as indicated in the footnotes to this table, the
persons named in the table have sole voting and investment power with respect to
all shares of Common Stock shown as beneficially owned by such person subject to
community property laws where applicable.

Shares
Beneficially
Name of Beneficial Owner Owned Percent
------------------------ ------------ -------
Lyford Ltd.(1)
28 Hagvura
Karni-Shomron, Israel ......................... 204,611 13.7%

Vintage Products, Inc.(2)
Arlozorv Street
Telaviv, Israel ............................... 342,165 23.0

Chiang Lam(3).................................. 125,000 8.3

ACMA Limited(4)
17 Jurong Port Road
Singapore 2261................................. 125,000 8.3

Michael R. Gulett(5)........................... 21,988 1.4

Philip Siu(6).................................. 9,488 *

James L. Kochman(7)............................ 3,125 *

Richard Morley(8).............................. 3,913 *

James Boswell(9)............................... 3,406 *

George J. Collins(10).......................... 625 *

David G. Campbell(11).......................... 2,825 *

Suneel Rajpal(12).............................. 1,325 *

All directors and executive officers as a
group (8 persons)(13).......................... 46,694 3.1

- ----------

* Less than one percent (1%).

(1) Represents up to 204,611 shares of Common Stock issuable upon conversion
of the Company's 5% Series B Convertible Redeemable Preferred Stock (the
"Series B Preferred Stock"). For purposes of determining the number of
shares of Common Stock owned by Lyford Ltd., the number of shares of
Common Stock calculated to be issuable upon conversion of the Series B
Preferred Stock is based on a conversion price of $3.434. Such conversion
price is arbitrarily selected and is 82% of the average closing bid price
over the five consecutive trading days preceding March 6, 1998 of $4.188.
The number of shares of Common Stock issuable upon conversion of the
Series B Preferred Stock is subject to adjustment depending on the date of
the conversion thereof and could be materially less or more than such
estimated amount depending on factors which cannot be predicted by the
Company including, among other things, the future market price of the
Common Stock. The natural persons who share beneficial ownership of the
shares of Common Stock owned by Lyford Ltd. are unknown to the Company.
John Gainsford is a director of Lyford who has voting and investment power
with respect to the shares held by Lyford.
(2) Represents up to 342,165 shares of Common Stock issuable upon conversion
of the Company's 5% Series A Convertible Redeemable Preferred Stock and 5%
Series C Convertible Preferred Stock (the "Preferred Stock"). For purposes
of determining the number of shares of Common Stock owned by Vintage
Products, Inc., the number of shares of Common Stock calculated to be
issuable upon conversion of the Preferred Stock is based on a conversion
price of $3.434. Such conversion price is

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<PAGE>

arbitrarily selected and is 82% of the average closing bid price over the
five consecutive trading days preceding March 6, 1998 of $4.188. The
number of shares of Common Stock issuable upon conversion of the Preferred
Stock is subject to adjustment depending on the date of the conversion
thereof and could be materially less or more than such estimated amount
depending on factors which cannot be predicted by the Company including,
among other things, the future market price of the Common Stock. The
natural persons who share beneficial ownership of the shares of Common
Stock owned by Vintage are unknown to the Company. John Gainsford and
Brian Bell are directors of Vintage who share voting and investment power
with respect to the shares held by Vintage.
(3) Includes 105,000 shares held by ACMA and 20,000 shares issuable upon
exercise of outstanding warrants. Mr. Lam is a consultant and advisor to
ACMA. Mr. Lam disclaims beneficial ownership of the shares held by ACMA.
(4) Includes 20,000 shares issuable upon exercise of outstanding warrants.
ACMA is a publicly held Singapore Corporation. The directors of ACMA who
share voting and investment power with respect to the shares held by ACMA
are as follows: Quek Sim Pin, Executive Chairman; Tan Chee Jin; Tan Seng
Tjie; Rai Rajen, Managing Director; Low Seow Chye; Kwok Chee Wai; Tan Keng
Lin; and Chou Kong Seng, Finance Director. See note 3 above.
(5) Includes 20,738 shares subject to stock options that are exercisable or
will become exercisable within 60 days of March 6, 1998.
(6) Includes 9,488 shares subject to stock options that are exercisable or
will become exercisable within 60 days of March 6, 1998.
(7) Includes 3,125 shares subject to stock options that are exercisable or
will become exercisable within 60 days of March 6, 1998.
(8) Includes 1,163 shares subject to stock options that are exercisable or
will become exercisable within 60 days of March 6, 1998.
(9) Includes 3,406 shares subject to stock options that are exercisable or
will become exercisable within 60 days of March 6, 1998.
(10) Includes 625 shares subject to stock options that are exercisable or
will become exercisable within 60 days of March 6, 1998.
(11) Includes 2,263 shares subject to stock options that are exercisable or
will become exercisable within 60 days of March 6, 1998.
(12) Includes 1,325 shares subject to stock options that are exercisable or
will become exercisable within 60 days of March 6, 1998.
(13) Includes 42,131 shares subject to stock options that are exercisable or
will become exercisable within 60 days of March 6, 1998.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE.

Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange
Act") and the rules of the Securities and Exchange Commission (the "Commission")
thereunder require the Company's directors, executive officers and 10%
beneficial owners to file reports of their ownership and changes in ownership of
Common Stock with the Commission. Personnel of the Company generally prepare
these reports on the basis of information obtained from the Company's directors
and officers. Based on such information, the Company believes that all reports
required by Section 16(a) of the Exchange Act to be filed by its directors and
executive officers during the last fiscal year were filed on time, except that
Dennis McDonald inadvertently filed a Form 3 late relating to the acquisition of
Common Stock in January 1997, James Boswell inadvertently filed a Form 3 and
Form 5 late relating to grants of nonstatutory stock options in July 1997 and
November 1997. Although each is a greater than 10% beneficial owner of the
Company's Common Stock, the Company believes that Vintage Products, Inc. and
Lyford Ltd. made no filings required by Section 16(a) of the Exchange Act.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------

ALLIANT PARTNERS LLP

James Kochman, a director of the Company, is a partner of Alliant
Partners LLP ("Alliant") (formerly Bentley, Hall, Von Gehr International), an
investment banking firm which performed investment banking services for the
Company during the 12 months ended December 31, 1997. Such services related to
matters concerning potential sources of equity financing and/or strategic
partnering. Compensation to Alliant during 1997 was $6,000, which did not exceed
5% of Alliant's consolidated gross revenues for its most recent fiscal year.

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<PAGE>

Alliant may also perform investment banking services for the Company from time
to time in the future.

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<PAGE>

PART IV

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

(a) Financial Statements.
--------------------

The financial statements listed below appear on the page indicated:

Page Number
-----------

Report of Independent Accountants.................................... 39

Balance Sheets, December 31, 1996 and December 31, 1997.............. 40

Statements of Operations for the years ended December 31, 1995,
December 31, 1996 and December 31, 1997..................... 41

Statements of Stockholders' Equity (Deficit) for the years ended
December 31, 1995, December 31, 1996 and December 31,
1997........................................................ 42

Statements of Cash Flows for the years ended December 31, 1995,
December 31, 1996 and December 31, 1997..................... 43

Notes to Financial Statements........................................ 44

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

A Current Report on Form 8-K was filed with the Commission on December
5, 1997. The report announced the private placement of a total of 100 shares of
the Registrant's 5% Series C Convertible Preferred Stock to Vintage Products,
Inc. at a price of $10,000 per share, for total proceeds of approximately
$923,000.

The exhibits listed in the accompanying index to exhibits have been
filed or incorporated by reference as part of this annual report.

(d) Financial Statement Schedules.
-----------------------------

Financial statement schedules are omitted because they are not required
or are not applicable, or the required information is shown in the financial
statements or notes thereto included as part of the Company's 1997 Annual Report
on Form 10-K.

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<PAGE>

INDEX TO EXHIBITS

Exhibit
Number Exhibit
------- -------

1.3 Agreement and Plan of Merger between the Registrant and
Paradigm Technology Delaware Corporation, a Delaware
corporation.(1)

1.4 Agreement and Plan of Merger dated as of June 5, 1996 between
the Registrant and NewLogic Corp.(8)

2.1 Third Amended Joint Plan of Reorganization effective June 21,
1994.(1)

2.2 Stock Purchase Agreement, dated as of January 21, 1997, by
and between Paradigm Technology, Inc. and Vintage Products,
Inc.(7)

2.3 Securities Purchase Agreement dated as of April 22, 1996
between the Registrant, NewLogic Corp. and certain
securityholders of NewLogic Corp.(8)

2.4 First Amendment to Securities Purchase Agreement dated as of
April 22, 1996 between the Registrant, NewLogic Corp. and
certain securityholders of NewLogic Corp.(8)

2.5 Investor Securities Purchase Agreement dated as of May 29,
1996 between the Registrant and certain Investors listed on
Schedule A attached thereto.(8)

3.1 Amended and Restated Certificate of Incorporation.(1)

3.2 Bylaws of the Registrant, as amended.(1)

4.1 Certificate of Designation of the 5% Series A Convertible
Redeemable Preferred Stock as filed with the Secretary of
State of the State of Delaware.(7)

4.2 Certificate of Designation of the 5% Series B Convertible
Redeemable Preferred Stock as filed with the Secretary of the
State of Delaware.(10)

4.3 Certificate of Designation of the 5% Series C Convertible
Preferred Stock as filed with the Secretary of the State of
Delaware.(11)

4.4 Certificate of Amendment.(9)

9.1 Voting Trust Agreement dated as of May 24, 1996 between Hans
Olsen and the persons listed on Schedule A attached
thereto.(8)

10.1 Amended and Restated 1994 Stock Option Plan of the Registrant
(the "Plan").(5)

10.2 Form of Incentive Stock Option Agreement under the Plan.(1)

10.3 Form of Nonstatutory Stock Option Agreement under the
Plan.(1)

10.4 1995 Employee Stock Purchase Plan of the Registrant.(1)

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<PAGE>

Exhibit
Number Exhibit
------- -------

10.5 Office Building Lease between Sobrato Development Companies
#871, a California limited partnership and the Registrant
dated December 7, 1988.(1)

10.6 Second Amendment to Office Building Lease between Sobrato
Development Companies #871, a California limited partnership
and the Registrant dated June 18, 1990.(1)

10.7 First Amendment to Office Building Lease between Sobrato
Development Companies #871, a California limited partnership
and the Registrant dated May 4, 1989.(1)

10.8 Technology Development Agreement for SRAM/ASM Process
Technology and Design between NKK Corporation and the
Registrant dated January 17, 1992.(1)(2)

10.9 Side Letter to Technology Development Agreement for SRAM/ASM
Process Technology and Design between NKK Corporation and the
Registrant dated January 17, 1992.(1)

10.10 Amendment No. 1 to Technology Development Agreement for
SRAM/ASM Process Technology and Design between NKK
Corporation and the Registrant dated October 23, 1992.(1)(2)

10.11 Amendment No. 2 to Technology Development Agreement for
SRAM/ASM Process Technology and Design between NKK
Corporation and the Registrant dated October 30, 1992.(1)

10.12 Amendment No. 3 to Technology Development Agreement for
SRAM/ASM Process Technology and Design between NKK
Corporation and the Registrant dated February 16, 1995.(1)(2)

10.13 Restated Technology Development Agreement for 4Mb SRAM
Process and Design between NKK Corporation and the Registrant
dated May 26, 1992.(1)(2)

10.14 Amendment No. 1 to Restated Technology Development Agreement
for 4Mb SRAM Process and Design between NKK Corporation and
the Registrant dated October 23, 1992.(1)(2)

10.15 Amendment No. 2 to Restated Technology Development Agreement
for 4Mb SRAM Process and Design between NKK Corporation and
the Registrant dated October 30, 1992.(1)

10.16 Restated Technology Transfer and License Agreement 256K/1Mb
SRAM Process and Design between NKK Corporation and the
Registrant dated May 26, 1992.(1)(2)

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<PAGE>

Exhibit
Number Exhibit
------- -------

10.17 Amendment No. 1 to Restated Technology Transfer and License
Agreement 256K/1Mb SRAM Process and Design between NKK
Corporation and the Registrant dated October 23, 1992.(1)(2)

10.18 Amendment No. 2 to Restated Technology Transfer and License
Agreement 256K/1Mb SRAM Process and Design between NKK
Corporation and the Registrant dated October 30, 1992.(1)

10.19 Amendment No. 3 to Restated Technology Transfer and License
Agreement 256K/1Mb SRAM Process and Design between NKK
Corporation and the Registrant dated August 16, 1994.(1)(2)

10.20 Agreement on 1M SRAM Sales Right and OEM Supply and
Modification of Existing Agreements between NKK Corporation
and the Registrant dated April 18, 1995.(1)(2)

10.21 Marketing and Resale Agreement between the Registrant and
National Semiconductor Corporation dated October 13,
1994.(1)(2)

10.22 License and Manufacturing Agreement between the Registrant
and Atmel Corporation dated April 28, 1995.(1)(2)

10.23 Patent License Agreement between the Registrant and American
Telephone and Telegraph Company dated December 13, 1990.(1)

10.24 Amended and Restated Registration Rights Agreement between
the Registrant and certain stockholders of the Registrant
dated April 28, 1995.(1)

10.25 Amended Warrant for 50,000 shares of Common Stock of the
Registrant issued to ACMA Limited on June 23, 1994 (share
amount does not reflect the 10-for-1 reverse stock split
effected on May 1, 1998).(1)

10.26 Warrant for 100,000 shares of Common Stock transferred by
ACMA Limited to Chiang Lam on December 9, 1994 (share
amount does not reflect the 10-for-1 reverse stock split
effected on May 1, 1998).(1)

10.27 Warrant for 50,000 shares of Common Stock issued by the
Registrant to ACMA Limited on January 25, 1995 between the
Registrant and Atmel Corporation (share amount does not
reflect the 10-for-1 reverse stock split effected on May 1,
1998).(1)

10.28 Warrant for 350,000 shares of Common Stock of the Registrant
transferred by ACMA Limited to Atmel Corporation on May 1,
1995 (share amount does not reflect the 10-for-1 reverse
stock split effected on May 1, 1998).(1)

10.29 Loan and Security Agreement between the Registrant and
Greyrock Business Credit dated February 28, 1995.(1)

10.30 Amendment to Loan Documents between the Registrant and
Greyrock Business Credit dated April 7, 1995.(1)

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<PAGE>

Exhibit
Number Exhibit
------- -------

10.31 Amendment to Loan Documents between the Registrant and
Greyrock Business Credit dated May 1, 1995.(1)

10.32 Form of Indemnification Agreement.(1)

10.33 General Release and Covenant Not to Sue dated May 24, 1995
between Anthony C. Langley and the Registrant.(1)

10.34 Stock Purchase Agreement dated as of April 28, 1995 between
the Registrant and Atmel Corporation.(1)

10.35 Letter of Credit dated March 2, 1995 issued by Royal Bank of
Canada Singapore on behalf of ACMA Limited in favor of
Greyrock Business Credit.(1)

10.36 Observation Rights Agreement dated June 16, 1995 between ACMA
Limited and the Registrant.(1)

10.37 Third Amendment to Office Building Lease between Sobrato
Development Companies #871, a California limited partnership
and the Registrant dated December 21, 1995.(3)

10.38 Loan and Security Agreement dated February 9, 1996 between
Bank of the West and the Registrant.(3)

10.39 Loan and Security Agreement dated February 14, 1996 between
the Registrant and the CIT Group/Equipment Financing, Inc.(4)

10.40 Agreement of Purchase and Sale of Assets dated as of November
7, 1996 between the Registrant and Orbit Semiconductor, Inc.
Exhibits to this Agreement omitted from this report will be
furnished to the Securities and Exchange Commission upon
request.(6)

10.41 Wafer Manufacturing Agreement dated as of November 7, 1996
between the Registrant and Orbit Semiconductor, Inc.(6)

10.42 Promissory Note dated November 15, 1996 in the aggregate
principal amount of $4,800,000 issued by Orbit Semiconductor,
Inc. to the Registrant.(6)

10.43 Promissory Note dated November 15, 1996 in the aggregate
principal amount of $1,000,000 issued by Orbit Semiconductor,
Inc. to the Registrant.(6)

10.44 Office Building Lease Agreement dated December 26, 1996
between the Registrant, John Arrillaga, Trustee, UTA dated
7/20/77 and Richard T. Perry, Trustee, UTA dated 7/20/77.(8)

10.45 Loan and Security Agreement dated October 25, 1996 between
the Registrant and Greyrock Business Credit.(8)

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<PAGE>

Exhibit
Number Exhibit
------- -------

10.46 Employee letter agreement dated May 23, 1996 between the
Registrant and Hans Olsen.(8)

10.47 Employee letter agreement dated May 24, 1996 between the
Registrant and Bruce Campbell.(8)

10.48 Employee letter agreement dated May 23, 1996 between the
Registrant and Gregory Roberts.(8)

10.49 Executive Compensation Agreement dated August 26, 1996
between the Registrant and Michael Gulett.(8)

10.50 Stock Purchase Agreement dated as of January 23, 1997 by and
between the Registrant and Vintage Products, Inc.(7)

10.51 Stock Purchase Agreement dated as of July 22, 1997 by and
between the Registrant and Lyford Ltd.(10)

10.52 Transition Plan/Employment Agreement dated October 23, 1997
between the Registrant and Dennis McDonald.(9)

10.53 Standard Sublease dated November 24, 1997 between the
Registrant and EG&G IC Sensors.(9)

10.54 Stock Purchase Agreement dated as of November 26, 1997 by and
between the Registrant and Vintage Products, Inc.(11)

10.55 Consent to Sublease dated December 10, 1997 between the
Registrant and Peeryl Arrillaga.(9)

10.56 Letter Agreement dated December 27, 1997 between the
Registrant and Suneel Rajpal.(9)

10.57 Warrant to Purchase Stock dated June 30, 1997 between the
Registrant and Greyrock Business Credit.(9)

10.58 Amendment to Loan Documents dated January 29, 1998 between
the Registrant and Greyrock Business Credit.(9)

10.59 Agreement and Plan of Merger and Reorganization dated March
6, 1998 by and among the Registrant, Paradigm Enterprises,
Inc. and IXYS Corporation.(9)

23.1 Consent of Price Waterhouse LLP, Independent Accountants.

27.1 Financial Data Schedule, for the period ending December 31,
1997.

27.2 Financial Data Schedule, for the period ending March 29,
1997.

27.3 Financial Data Schedule, for the period ending September 30,
1997.

27.4 Financial Data Schedule, for the period ending June 30,
1997.

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<PAGE>

Exhibit
Number Exhibit
------- -------

27.5 Financial Data Schedule, for the period ending March 31,
1997.

27.6 Financial Data Schedule, for the period ending December 31,
1996.

27.7 Financial Data Schedule, for the period ending September 30,
1996.

27.8 Financial Data Schedule, for the period ending June 30,
1996.

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

(1) Filed with the Company's Registration Statement on Form S-1 (Reg. No.
33-92390) and incorporated herein by reference.
(2) Confidential treatment granted as to certain portions.
(3) Filed with the Company's Annual Report on Form 10-K for the year ended
December 31, 1995, and incorporated herein by reference.
(4) Filed with the Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1996, and incorporated herein by reference.
(5) Filed with the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1996, and incorporated herein by reference.
(6) Filed with the Company's Current Report on Form 8-K filed on December
2, 1996, and incorporated herein by reference.
(7) Filed with the Company's Current Report on Form 8-K filed on February
6, 1997, and incorporated herein by reference.
(8) Filed with the Company's Annual Report on Form 10-K for the year ended
December 31, 1996, and incorporated herein by
reference.
(9) Filed with the Company's Annual Report on Form 10-K for the year ended
December 31, 1997, and incorporated herein by reference.
(10) Filed with the Company's Current Report on Form 8-K filed July 29,
1997, and incorporated herein by reference. (11) Filed with the
Company's Current Report on Form 8-K filed on December 4, 1997, and
incorporated herein by reference.

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<PAGE>

SIGNATURES

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

Dated: June 3, 1998.

PARADIGM TECHNOLOGY, INC.

By /s/ MICHAEL GULETT
-------------------------------------
Michael Gulett
President and Chief Executive Officer

Signature and Title Date

By /s/ Michael Gulett June 3, 1998
------------------------------------------------
Michael Gulett
President, Chief Executive Officer and Director
(Principal Executive Officer)

By /s/ David G. Campbell June 3, 1998
------------------------------------------------
David G. Campbell
Vice President of Finance and
Chief Financial Officer
(Principal Financial Officer)

By * June 3, 1998
------------------------------------------------
George Collins
Director

By * June 3, 1998
------------------------------------------------
James Kochman
Director

* By power of attorney

/s/ Michael Gulett
------------------------------------------------
Attorney-in-Fact

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<PAGE>

EXHIBIT 23.1

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 333-4412) and Forms S-3 (No. 333-21505, No.
333-34247 and No. 333-39793) of Paradigm Technology, Inc. of our report dated
February 21, 1998, except as to Note 13, which is as of March 9, 1998, and
except as to the first paragraph of Note 2, which is as of May 1, 1998,
appearing on page 39 of this annual Report on Form 10-K.

/s/ Price Waterhouse LLP

PRICE WATERHOUSE LLP

San Jose, California
May 29, 1998