PARADIGM TECHNOLOGY INC /DE/ - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K
(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

OR

/ / 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
---------

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 16,045,111 shares as of March 19, 1998.

TABLE OF CONTENTS
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Page
----
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.

PART I

ITEM 1. BUSINESS
--------

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) $2.25 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 3,471,669 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) $1.375 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 3,028,806 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) $0.59 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 527,003 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 424,481 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 80,917 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 has called a Special Meeting of Stockholders to be
held on May 1, 1998 to vote on a proposed 10-for-1 reverse stock split. The
Company believes that such a stock split will increase the price per share of
the Company's Common Stock and bring such price into compliance with the Nasdaq
criteria. No assurances can be made that the stock split will be approved by the
Company's stockholders or that if approved it 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."

-9-

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

-10-

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.

-11-

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

-12-

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.

-13-

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 has called a Special Meeting of Stockholders to be
held on May 1, 1998 to vote on a proposed 10-for-1 reverse stock split. The
Company believes that such a stock split will increase the price per share of
the Company's Common Stock and bring such price into compliance with the Nasdaq
criteria. No assurances can be made that the stock split will be approved by the
Company's stockholders or that if approved it 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

-14-

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.

-15-

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.

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

-16-

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 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 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

-17-

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 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.

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.
These 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.

-18-

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-

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.

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.

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, and the Company expects that international sales
will continue to represent a significant portion

-20-

of its sales. 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 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 $37.25 in August 1995 to a low of $0.125 in December 1997. 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-

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
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.

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

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

-22-

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 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,

-23-

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. 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-

High Low
---- ---

Fiscal Year ended December 31, 1995
Second Quarter (from June 28, 1995) $23.25 $17.25
Third Quarter 37.25 22.25
Fourth Quarter 30.25 12.00
Fiscal Year ended December 31, 1996
First Quarter 19.00 8.25
Second Quarter 12.00 6.25
Third Quarter 7.38 3.88
Fourth Quarter 5.50 2.06
Fiscal Year ended December 31, 1997
First Quarter 3.13 1.13
Second Quarter 1.88 0.69
Third Quarter 2.22 0.69
Fourth Quarter 1.50 0.125

(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-

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

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

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............... 1.18 1.39 (5.16) (1.19)
Diluted income (loss) per share............. 0.23 0.91 (5.16) (1.19)
Weighted average shares - basic............. 1,028 3,784 7,060 8,610
Weighted average shares - diluted........... 5,355 5,760 7,060 8,610

Pre-Reorganization(1) Post-Reorganization(1)
---------------------------------------- -------------------------------------
March 31, December 31,
---------------------------------------- -------------------------------------
1993 1994 1994 1995 1996 1997
------------ ------------ ------------ ------------ ----------- ----------

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.

-26-

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-

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.

-28-

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

-29-

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 314,394 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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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.

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.

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

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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 devel