SYNP Synplicity (MM)

SYNPLICITY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of Synplicity, Inc. and its wholly owned subsidiaries (“we”, “us”, or the “Company”). Intercompany balances and transactions have been eliminated in consolidation. The balance sheet at September 30, 2007 and the statements of income for the three and nine months ended September 30, 2007 and 2006 and the statements of cash flows for the nine months ended September 30, 2007 and 2006 are unaudited. In the opinion of management, these condensed consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) that are necessary for a fair presentation of the results for and as of the periods shown. The condensed consolidated balance sheet at December 31, 2006 was derived from the audited financial statements at that date. The accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States. Certain information or footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. These financial statements should be read in conjunction with the financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2006, filed with the Securities and Exchange Commission.

Acquisition

On June 1, 2007, HARDI Electronics, AB (“HARDI”) and Synplicity entered into a Stock Purchase Agreement (the “Agreement”), pursuant to which all of the outstanding shares of HARDI were acquired by Synplicity. The acquisition was completed on June 8, 2007. Upon completion of the acquisition, each share of HARDI’s common stock issued and outstanding immediately prior to the effective date of acquisition was acquired by Synplicity in exchange for $18.8 million in cash.

The acquisition has been accounted for in accordance with Statement of Financial Accounting Standards No. 141, Business Combinations (“SFAS 141”) using the purchase method of accounting. Under purchase accounting, HARDI’s tangible assets and liabilities and intangible assets were recorded at fair value resulting in a new carrying basis for those assets and liabilities and resulted in an amount for goodwill. Refer to Note 6 for details on the allocation of the purchase price.

Reclassifications

As of September 30, 2007, we changed the presentation of other current assets, our shareholders’ equity and accrued compensation amounts in our condensed consolidated balance sheet. Additionally, during the three months ended September 30, 2007 we reclassified foreign exchange gains and losses from operating expenses to other income in our condensed consolidated statements of income. Accordingly, the related amounts reported in the condensed consolidated financial statements in the prior periods have been reclassified to conform with the current period presentation.

Foreign Currency Translation

The functional currency of our foreign subsidiaries is U.S. dollar, with the exception of our subsidiary in Japan and one of our subsidiaries in Sweden whose functional currency is the Yen and the Krona (“SEK”), respectively. For our foreign subsidiaries for which the U.S. dollar is the functional currency, assets and liabilities denominated in foreign currencies are translated at the month-end exchange rates, except for non-monetary assets and liabilities such as property and equipment, are translated at historical rates. Revenue and

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expenses are translated at the average exchange rates for the period, except for expenses related to those balance sheet items that are translated using historical rates. Foreign exchange gain/loss resulting from these translations is included in our results of operations. For our Japanese and Swedish subsidiaries, assets and liabilities are denominated in Yen or SEK and translated at the month-end exchange rates, and equity balances are translated at historical rates. Revenue and expenses are translated at the average exchange rates for the period. Foreign exchange gain/loss resulting from these translations are included as cumulative translation adjustments in our shareholders’ equity.

Revenue Recognition

We license our software products as perpetual licenses, term licenses and time-based licenses. On June 8, 2007, the company completed its acquisition of HARDI, see Note 6, thereby adding High-performance ASIC Prototyping Systems (“HAPS”) to our product offerings. We generate revenue from direct sales, distributors and original equipment manufacturers (“OEMs”) and through custom software development services.

Revenue recognition criteria

We recognize software revenue based upon the residual method, in accordance with American Institute of Certified Public Accountants “AICPA” Statement of Position (SOP) 97-2, “Software Revenue Recognition,” as amended by SOP 98-4 and SOP 98-9. For non-software products, or HAPS systems, the company recognizes revenue in accordance with the provisions of Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statement (“SAB 101”) and Staff Accounting Bulletin No. 104, Revenue Recognition (“SAB 104”), and all related interpretations.

Revenue is recognized when all the conditions stated below are met:

We make judgments as to whether collection of the fee is probable based on our customer credit review analysis. Revenue on arrangements to customers who are not deemed creditworthy is deferred until cash is received. Revenue from sales to distributors, who do not have a right to return, is considered to have met the probability of collection criterion when either (i) we have received payment for the product or (ii) we assess that we have a substantial and sustained history of collections from the distributor.

Additionally, we assess whether the fee is fixed or determinable for sales with non-standard payment terms by evaluating our history of collections from these customers and/or their current financial standing.

We also enter into arrangements to deliver to our customers, multiple products and/or services. Revenue arrangements with multiple deliverables are evaluated to determine if the deliverables can be separated into more than one unit of accounting. An item can generally be considered a separate unit of accounting if all of the following criteria are met:

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Items which do not meet these criteria are combined into a single unit of accounting. If there is objective and reliable evidence of fair value for all units of accounting, the arrangement consideration is allocated to the separate units of accounting based on their relative fair values. In cases where there is objective and reliable evidence of the fair value of the undelivered item(s) in an arrangement but no such evidence for the delivered item(s), the residual method is used to allocate the arrangement consideration. For units of accounting which include more than one deliverable, we generally defer all revenue for the unit of accounting until the last undelivered item is delivered.

License, systems and maintenance offerings

License and systems revenue

We offer perpetual licenses for our products, whereby the customer receives the right to use the software license indefinitely. The first year of maintenance, which is renewable in subsequent years, is typically sold with the perpetual license.

We also offer two and three year term licenses for certain products, where the customer has rights to use the license for such periods. The first year of maintenance, which is renewable in subsequent years during the term of the agreement, is typically sold with term licenses.

Perpetual license and term license revenue is recognized upon delivery of the product as License and Systems Revenue in the Condensed Consolidated Statements of Income (“Statements of Income”). We also sell non-software products that we refer to as systems. We recognize the revenue from systems sales upon transfer of title as License and Systems Revenue in the Statements of Income.

Maintenance revenue

Maintenance revenue from perpetual and term licenses allows customers under maintenance agreements to receive unspecified product updates, electronic, internet-based and telephone technical support throughout their maintenance period, which is typically one year. The majority of our customers renew their maintenance contracts annually, at or near the list price for maintenance, which is 20% of the license list price, which establishes vendor specific objective evidence (“VSOE”) of the fair value of maintenance. Maintenance revenue from perpetual and term license sales is recognized on a straight-line basis over the maintenance period as Maintenance Revenue in the Statements of Income.

For larger value contracts entered into subsequent to March 31, 2006, we incorporated substantive contractual maintenance renewal rates into our agreements, at a consistent percentage of the net license fee, which establishes VSOE of fair value of maintenance for that class of arrangement per SOP 97-2. This methodology can be applied to arrangements of either perpetual or multi-year term licenses, where the first year’s maintenance is generally purchased with the term or perpetual licenses and the subsequent years are optional and can be purchased at the same percentage of the net license fee as the first year’s maintenance.

Bundled license and services revenue

We also generate revenue from time-based licenses, relationships with OEMs and custom software development. Time-based licenses include maintenance services for the duration of their terms. Revenue from time-based licenses is recognized as Bundled License and Services Revenue in the Statements of Income, on a straight-line basis over the period of the maintenance, as we do not have VSOE of the fair value of maintenance for time-based licenses.

In addition, we periodically sell perpetual and term licenses to OEMs for incorporation into their products and distribution to their customers. As part of these arrangements we have certain maintenance and

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support obligations to the OEMs. Since the maintenance associated with these types of arrangements is not sold separately, we do not have sufficient VSOE of fair value to allocate revenue among the elements. Thus, we recognize revenue from these arrangements on a straight-line basis over the maintenance period.

In 2006, we entered into arrangements with certain OEMs to slightly modify our existing products to work with the individual OEMs’ products. For the customization services, we made estimates of progress towards completion. Since the maintenance and customized services associated with these types of arrangement are not typically sold separately, we do not have sufficient VSOE of fair value to allocate revenue among the elements. Thus, we recognize revenue from these arrangements on a straight-line basis over the longer period of either the maintenance or the customization services.

Prior to 2006, we entered into various custom software development agreements with semiconductor manufacturers to customize certain of our ASIC products. This work typically involved significant modifications to our products under a statement of work negotiated with the customer. When time-based licenses were purchased as part of the agreement and delivery of the customized product had occurred, we recognized revenue from both the development and license fees on a straight-line basis over the period of the maintenance, as we did not have VSOE of the fair value of maintenance for time-based licenses. When licenses were not being purchased as part of the agreement, we recognized revenue from these development fees on a percentage of completion basis as determined by the relationship of the contract costs incurred to date and the estimated total contract costs, which were regularly reviewed during the life of the contract. Revenue recognized from these development agreements represented less than 10% of total revenue for the three and nine months ended September 30, 2007 and years 2006 and 2005 and was recorded in Bundled License and Services Revenue in the Statement of Income.

On occasion, we may sell time-based licenses and perpetual or term licenses combined within a single order. For these transactions, we generally recognize revenue from the entire transaction on a straight-line basis over the term of the longest period of maintenance, as generally we do not have VSOE of the fair value of maintenance for the time-based licenses.

Inventories

We record our inventory at the lower of cost or market. We make adjustments to reduce the cost of inventory to its net realizable value, if required. Factors influencing these adjustments include changes in demand, rapid technological changes, product life cycle and development plans, component cost trends, product pricing, physical deterioration and quality issues. Revisions to these adjustments would be required if these factors differ from our estimates.

Note 2. Stock-Based Compensation

In March 2007, our Board of Directors approved an amended and restated 2000 Stock Plan. In May 2007, our shareholders also approved the amended Plan. Under this new Plan, we are permitted to award stock options, restricted stock, restricted stock units, stock appreciation rights, performance units and performance shares. No options were issued or outstanding as a result of the HARDI acquisition.

Employee stock-based compensation expense was comprised of the following:

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Our computations of expected volatility for the three and nine months ended September 30, 2007 and 2006 were based on our historical volatility. Our computation of expected life was based on historical exercise patterns. The interest rate for periods within the contractual life of the award was based on the U.S. Treasury yield curve in effect at the time of grant.

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As of September 30, 2007, $5.4 million of total unrecognized compensation expense related to stock-options was expected to be recognized over the weighted-average vesting period of 2.4 years.

Restricted Stock Awards:

Restricted Stock awards vest 25% on first anniversary of the grant date and quarterly thereafter over four years. We use the straight line attribution method for recognizing the expense associated with these grants.

As of September 30, 2007, 109,950 shares of restricted stock were outstanding and unvested, with an aggregate intrinsic value of $717,000 and a weighted average remaining contractual life of approximately 3.86 years. The weighted average grant fair value price was $6.52. These shares are scheduled to vest through 2011.

As of September 30, 2007, $696,000 of total unrecognized compensation expense related to non-vested restricted stock awards was expected to be recognized over the weighted-average vesting period of 3.8 years.

Note 3. Net Income per Share

Basic net income per share has been computed using the weighted-average number of shares of common stock outstanding during the period. For purposes of computing basic net income per share, the weighted average number of outstanding shares of common stock excludes unvested restricted stock awards. Diluted net income per share includes the impact of options to purchase common stock, if dilutive and potential dilutive securities outstanding during the period. Potentially dilutive securities include stock options and unvested restricted stock units and awards, using the treasury stock method.

The following table presents the calculation of basic and diluted net income per share:

Weighted average options outstanding to purchase 2,241,446 and 2,991,852 shares of common stock for the three and nine months ended September 30, 2007, respectively, and weighted average options

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outstanding to purchase 5,167,544 and 4,405,240 shares of common stock for the three and nine months ended September 30, 2006, respectively, were excluded from the calculation of diluted net income per share as they were antidilutive.

Note 4. Comprehensive Income

Comprehensive income includes unrealized gains and losses on available-for-sale securities and foreign currency translation adjustments. The components of comprehensive income for the three months and nine months ended September 30, 2007 were as follows:

Note 5. Stock Repurchase Program

In January 2007, our Board of Directors approved a new stock repurchase program which authorizes management to repurchase up to $10.0 million in 2007 for common stock. From January 1, 2007 to September 30, 2007, we repurchased a total of 985,066 shares at an average price of $6.62 per share. During the three months ended September 30, 2007, we repurchased a total of 585,066 shares at an average price of $6.71 per share.

Repurchased shares of our common stock are no longer deemed outstanding.

Note 6. Acquisition

On June 8, 2007, we completed our acquisition of all of the common stock of HARDI, a company organized under the laws of Sweden. As discussed in Note 1, the acquisition was accounted for in accordance with SFAS 141 using the purchase method of accounting, from the date of completion, June 8, 2007. In addition to tangible and other intangible assets, we acquired the HAPS product line which is a modular system with multi-FPGA motherboards and standard or custom-made daughter boards, which can be combined together in a variety of ways. The HAPS products combined with our existing software products allow Synplicity to offer a comprehensive ASIC verification solution. The acquisition allows us to grow our ASIC Verification product line, particularly by selling HAPS products in combination with our software products through our direct sales channel. HARDI’s results of operations are included in our statement of income from the date of acquisition.

We acquired all the outstanding shares of the common stock of HARDI for cash consideration of $19.8 million, which comprised of the following: (a) $18.8 million in cash and (b) $1.0 million of acquisition related costs. Pursuant to the Agreement, an additional $5.4 million is held in an escrow account which is discussed in the Contingent Consideration paragraph below.

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The total purchase price was allocated based on the estimated fair value of net tangible and intangible assets acquired and assumed liabilities. Intangible assets consist of existing technology, customer relationships, trademarks/trade names and non-competition agreements. The intangible assets subject to amortization are being amortized on a straight-line basis during the useful lives below:

The allocation of purchase price is summarized as follows:

Deferred Tax Liability

We recognized a deferred tax liability of $3.6 million for the aggregate difference between the assigned value of the intangible assets and the tax bases of these assets. The deferred tax liability was computed at a tax rate of 31%, a combination of a Swedish rate of 28% and the California state tax rate, net of the federal benefit, of 3%.

Contingent Consideration

The acquisition includes $5.4 million of contingent consideration currently held as restricted cash, which is payable in two equal increments, at the end of 13 and 25 months from June 1, 2007, subject to the achievement of certain revenue targets from the sale of HAPS systems. Any payment made upon achievement of targets will increase the total purchase consideration and result in a corresponding increase in goodwill.

Pro Forma Financial Information

The unaudited financial information in the table below summarizes the combined results of operations of Synplicity and HARDI on a pro forma basis, as though the companies had been combined as of the beginning of each of the periods presented. The pro forma financial information is presented for informational purposes only and is not indicative of the results of operations for any subsequent quarter or for the fiscal year ending December 31, 2007.

The pro forma financial information for the three months ended September 30, 2007 represents our actual results for that period as the acquisition closed on June 8, 2007. The pro forma financial information for the nine months ended September 30, 2007 combines our results for the nine months ended September 30, 2007 with HARDI’s results for the period January 1, 2007 to June 7, 2007. The pro forma financial information for the three and nine months ended September 30, 2006 combines our historical results with the historical results of HARDI for those periods.

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The following table summarizes the pro forma financial information:

Amortization of intangible assets from the HARDI acquisition reflects the intangible assets acquired as part of our purchase of products, technology, and related intangible assets from HARDI. Intangible assets from the acquisition are expensed using the straight-line method over a period of two to five-years, reflecting their estimated useful lives.

Amortization of intangible assets from acquisitions prior to 2007 reflects the intangible assets acquired as part of our purchases of products and technology from IOTA and Bridges2Silicon in 2002. Intangible assets from those acquisitions are expensed using the straight-line method over five years.

Intangible assets from the purchase of technology for use in our products are expensed using the straight-line method over the remaining estimated economic life of the product, which is five years.

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The following summarizes our actual amortization expense of intangibles for the nine months ended September 30, 2007 and 2006 and the estimated future amortization expense related to our intangible assets:

The changes in the carrying value of goodwill are as follows:

To date, we have not recognized any impairment losses on goodwill.

Note 8. Segment Information

We follow Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information (“SFAS 131”). SFAS 131 establishes standards for the way that public business enterprises report information about operating segments in interim financial reports. SFAS 131 also establishes standards for related disclosures about products and services, geographic areas and major customers. We operate in only one industry segment, the development of software and systems solutions for the design and verification of semiconductors that serve a wide range of communications, military/aerospace, consumer, semiconductor, computer, and other electronic systems markets. We market and sell our products throughout North America, principally the United States, as well as in Europe, Japan and the rest of Asia.

The following table presents revenue from external customers by geographic areas:

Revenue by geographic area is based on the location of the customer are attributed to geography based on the country where the assets are located.

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The company does not typically maintain work-in-process inventory.

Note 10. Income Taxes

For the three and nine months ended September 30, 2007 and 2006, the provision for income taxes was based on our estimated annual effective tax rate in compliance with SFAS 109 and other related guidance. We update our estimate of our annual effective tax rate at the end of each quarterly period. These estimates and judgments occur in the calculation of tax credits and in the calculation of certain tax assets and liabilities, which arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes. Changes in these estimates may result in significant increases or decreases to our tax provision in a subsequent period, which in turn would affect net income.

A valuation allowance is recorded to reduce any deferred tax assets that at this time is more likely than not to be not realized. We perform assessments of the realization of our deferred tax assets considering all available evidence, both positive and negative. These assessments require that management make significant judgments about many factors, including the amount and likelihood of future taxable income. As a result of this assessment, we have concluded that it was more likely than not that our deferred tax assets would not be realized and have recorded a full valuation allowance against our deferred tax assets.

We will continue to evaluate the need for a valuation allowance. We may determine that some, or all, of our deferred tax assets will be realized, in which case we will reduce our valuation allowance in the quarter in which such determination is made. If the valuation allowance is reduced, we would recognize a benefit from income taxes on our income statement in that period. If such a benefit is recognized, subsequent periods may have higher tax provision expenses.

The following table presents the provision and benefit for income taxes and the effective tax rates for the three and nine months ended September 30, 2007 and 2006:

The provision for income taxes for the three and nine months ended September 30, 2007 of $571,000 and $1.2 million, respectively, related principally to the federal alternative minimum tax, state income taxes and tax on the earnings of certain foreign subsidiaries. The difference between the provision for income that would be derived by applying the statutory rate to our income before tax for the three months and nine

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months ended September 30, 2007 and the provision actually recorded was due to the use of tax credit carryforwards net of the impact of non-deductible SFAS 123R stock option compensation expenses to arrive at the federal alternative minimum tax computations.

Effective January 1, 2007, we adopted Financial Accounting Standards Interpretation No.48, Accounting for Uncertainty in Income Taxes-An Interpretation of FASB Statement No.109 (“FIN 48”). The two-step process involved our evaluation of whether our income tax positions will more likely than not sustain on technical merits if audited by the Internal Revenue Service (“IRS”). In each of the steps, the more likely than not threshold is assessed assuming that the taxing authority will examine the income tax position having full knowledge of all relevant information.

As a result of our assessment, we did not recognize any adjustment to the liability for uncertain tax positions and therefore did not record any adjustment to the beginning balance of accumulated deficit on the balance sheet. As of January 1, 2007 and September 30, 2007, we had $3.3 million and $3.8 million of unrecognized tax benefits, which is netted against deferred tax assets and is fully offset by a valuation allowance.

We file income tax returns in the U.S. federal jurisdiction, California and various state and foreign tax jurisdictions in which we have a subsidiary or branch operation. Our United States federal corporation income tax returns, beginning with the 2003 tax year, remain subject to examination by the IRS. Our California corporation income tax returns, beginning with the 2002 tax year (plus any amended tax returns), remain subject to examination by the California Franchise Tax Board.

Our policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. As of the date of adoption of FIN 48, we did not have any accrued interest or penalties associated with any unrecognized tax benefits. During the nine months ended September 30, 2007 we have not accrued any interest and penalty associated with unrecognized tax benefits. Although the timing of the resolution and/or closure on audits is highly uncertain, the company does not believe it is reasonably possible that the unrecognized tax benefits would materially change in the next 12 months.

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