<PAGE>
                                UNITED STATES 
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-K

 [X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                                  ACT OF 1934
                  For the fiscal year ended December 31, 1998
                                            -----------------
                                       OR
    [  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934
                 For the transition period from _____ to _____

                        COMMISSION FILE NUMBER: 0-22738
                                                -------

                         QUICKTURN DESIGN SYSTEMS, INC.
             (Exact name of registrant as specified in its charter)


 
                 Delaware                                 77-0159619
         -------------------------------           ----------------------
         (State or other jurisdiction of             (I.R.S. Employer
         incorporation or organization)            Identification Number)

                     55 W. Trimble Road, San Jose, CA 95131
         (Address of principal executive offices)            (zip code)

       Registrant's telephone number, including area code: (408) 914-6000

       Securities registered pursuant to Section 12(b) of the Act:  None

          Securities registered pursuant to Section 12(g) of the Act:
                    Common Stock, $.001 par value per share
                    ---------------------------------------
                                (Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.

                                Yes [X]  No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in Part  III of this Form 10-K or any amendment
to this Form 10-K.   [ ]

The aggregate market value of voting stock held by nonaffiliates of the
Registrant, based upon the closing sale price of the Common Stock on February
28, 1999 on the Nasdaq National Market was approximately $221,975,000. Shares
of Common Stock held by each officer and director and by each person who owns 5%
or more of the outstanding Common Stock have been excluded in that such persons
may be deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.

The number of shares outstanding of the Registrant's Common Stock as of February
                            28, 1999 was 18,376,513.
<PAGE>
 
                        QUICKTURN DESIGN SYSTEMS, INC.

    Annual Report on Form 10-K for the fiscal year ended December 31, 1998

                               TABLE OF CONTENTS

                                                                          Page #
PART I                                                                    ------
Item 1.   Business.......................................................     1
Item 2.   Properties.....................................................    21
Item 3.   Legal Proceedings..............................................    21
Item 4.   Submission of Matters to a Vote of
          Security Holders...............................................    23

PART II
Item 5.   Market for Quickturn's Common Equity
          and Related Stockholder Matters................................    24
Item 6.   Selected Financial Data........................................    25
Item 7.   Management's Discussion and Analysis of Financial
          Condition and Results of Operations............................    26
Item 7A.  Quantitative and Qualitative Disclosures
          About Market Risk..............................................    39
Item 8.   Financial Statements and Supplementary Data....................    41
Item 9.   Changes in and Disagreements with Accountants on 
          Accounting and Financial Disclosure............................    41

PART III
Item 10.  Quickturn's Directors and Executive Officers...................    42
          Compliance with Section 16(a) of the Exchange Act..............    47
Item 11.  Executive Compensation.........................................    48
Item 12.  Security Ownership of Certain Beneficial
          Owners and Management..........................................    53
Item 13.  Certain Relationships and Related Transactions.................    54

PART IV
Item 14.  Exhibits, Financial Statement Schedules and 
          Reports on Form 8-K............................................    55
          Signatures.....................................................    89


<PAGE>
 
     This Annual Report on Form 10-K contains forward-looking statements that
have been made pursuant to the provisions of the Private Securities Litigation
Reform Act of 1995. Such forward looking statements are based on current
expectations, estimates and projections about Quickturn's industry, management's
beliefs, and certain assumptions made by Quickturn's management. Words such as
"anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates,"
variations of such words and similar expressions are intended to identify such
forward-looking statements. These statements are not guarantees of future
performance and are subject to certain risks, uncertainties and assumptions that
are difficult to predict; therefore, actual results may differ materially from
those expressed or forecasted in any such forward-looking statements. Such risks
and uncertainties include those set forth herein under "Risk Factors" on pages
11 through 21. Unless required by law, Quickturn undertakes no obligation to
update publicly any forward-looking statements, whether as a result of new
information, future events or otherwise. However, readers should carefully
review the risk factors set forth in other reports or documents that Quickturn
files from time to time with the Securities and Exchange Commission,
particularly the Quarterly Reports on Form 10-Q and any Current Reports on Form
8-K.

                                    PART I
                                    ------

Item 1.    BUSINESS.
           ---------

Overview
 
     Quickturn Design Systems, Inc. ("Quickturn") is a leading provider of
complex computer systems that emulate the performance and operation of computer
chips and electronic systems.  Quickturn products are used to verify that the
customers' computer chips and electronic systems perform in accordance with
their desired specifications. Quickturn also provides its SpeedSim brand of
simulation software products that enable engineers to simulate the performance
and operation of individual computer chips early in the design process in order
to verify that each chip performs in accordance with its desired specifications.
Quickturn is also a leading provider of engineering services that enable
designers of electronic systems and complex computer chips to reduce the time it
takes from designing a product to marketing it.  Quickturn's systems and
software products serve the needs of chip and electronic system designers in a
variety of industries, including the merchant semiconductor, computer,
workstation, telecommunications, networking, multimedia and graphics industries.

     Quickturn's principal design verification products include the System
Realizer/TM/, Mercury Design Verification System/TM/ ("Mercury") and CoBALT/TM/

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(Concurrent Broadcast Array Logic Technology) emulators, and SpeedSim/TM/ cycle-
based simulation software.

     An emulation system is comprised of a reprogrammable computer, which is
sold to the customer, along with Quickturn's Quest brand of software, which is
licensed to the customer. This combination of hardware and software enables the
customer to load a chip design into the reprogrammable computer and to verify
that the chip design functions as intended.  Quickturn provides powerful related
software tools to help the customer identify computer chip errors, to correct
those errors and to re-load the corrected chip design into the reprogrammable
computer to continue testing the chip design. Quickturn's emulators are designed
to help customers identify and correct chip design errors much faster than
alternative methods, thereby enabling the customer to develop products much
faster than otherwise. Quickturn's customers create computer chips by linking
together units referred to as logic gates, and Quickturn's emulation systems are
sold in "modules" that are measured in logic gates. For example, Quickturn's
Mercury and CoBALT emulators are typically sold in modules of 1,000,000 logic
gates of capacity. The Mercury emulator has a total capacity of 10 modules or
10,000,000 logic gates. The CoBALT emulator has a total capacity of 20,000,000
logic gates.  A chip designed by a typical Quickturn customer can comprise from
100,000 to more than 3,000,000 logic gates.  As customers design chips of
greater complexity, they utilize more logic gates in their designs and may buy
additional modules of emulation capacity to verify increasingly complex designs.
As emulator capacity increases, with an increase in logic modules, the selling
price of the emulator increases correspondingly.

     SpeedSim simulation software is licensed on a per-user basis.  The SpeedSim
simulation software products, which complement Quickturn's emulation products,
can be used by customers to verify computer chip designs early in the design
process, particularly when design changes occur several times per day.  Later,
when designs become more stable, customers may use Quickturn's emulation
products to test the entire system that contains the design and to help identify
bugs at the system level, which cannot be found prior to this later stage in the
design process.

     Quickturn's principal executive offices are located at 55 W. Trimble Road,
San Jose, California, 95131, and its telephone number is (408) 914-6000.
Quickturn's homepage can be located on the Web at http://www.quickturn.com/.

Recent Developments

     Quickturn began operations in 1987 and commenced product shipments in 1989.
In February 1997, the Company acquired SpeedSim, Inc. ("SpeedSim"), a provider
of simulation software (the "SpeedSim Merger"). See "Part IV, Item 14 ---Note 3
of the Notes to Consolidated Financial Statements." In June 1997, pursuant to an
asset purchase agreement among Quickturn, Synopsys, Inc. ("Synopsys") and Arkos
Design Inc. ("Arkos"), Quickturn purchased from Synopsys certain assets relating
to Synopsys' emulation business, including all of the outstanding capital stock
of Arkos (the "Arkos Acquisition"). See "Part IV, Item 14 ---Note 3 of the Notes
to Consolidated Financial

                                      -2-
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Statements." In June 1998, Quickturn introduced Mercury, which is Quickturn's
fifth generation emulator and succeeds System Realizer. In October 1998,
Quickturn announced its QuickCycles program, which provides high-speed
simulation services on a pay-as-you-go basis. In November 1998, SpeedSim 3.0
simulation software was introduced, which featured twice the performance of
previous simulation software. Also in November 1998, CoBALT Plus was introduced,
which resulted from Quickturn's continuing technology relationship with IBM. In
August 1998, Mentor Graphics Corporation ("Mentor") launched a hostile tender
offer for all the outstanding shares Quickturn. That offer was withdrawn in
January 1999 after the announcement of a negotiated merger of Quickturn with
Cadence Design Systems, Inc. ("Cadence") in December 1998. 

Technology and Products

Cycle-based Simulation

          The computer chip design process begins when electronic design
engineers create an initial description of a computer chip, typically using high
level or register transfer level ("RTL") languages such as VHDL or Verilog.
This description is then debugged using software simulation on a workstation,
which creates a software mock-up of the computer chip's logic flow based on the
RTL description.  Test inputs are then fed into the mock-up to determine if the
current design performs as desired.

          Once a computer chip design is deemed reliable at the RTL level, the
designer maps out a physical layout of the transistors and gates.   This is
often accomplished using synthesis software, which transforms RTL designs into
logic gate level architecture. Once at the logic gate level, the design again
must be tested for critical operating functionality. Both RTL and logic gate
level tests are typically run on event-driven simulation software, which runs at
speeds substantially below the normal speed of a completed computer chip. The
speed of most event-driven simulation software is typically in the range of tens
or hundreds of cycles per second, while most complex computer chips are designed
to run in the range of tens of millions to hundreds of millions of cycles per
second. Therefore, software simulation testing of a highly complex design with
hundreds of thousands of logic

                                      -3-
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gates using event-driven simulation could take a substantial period of time.
Since a design may need to undergo dozens of iterations, given the time-to-
market demands in the electronics industry, the delays associated with full
event-driven simulation for complex computer chip designs can be unacceptable to
computer chip designers.

          Quickturn's SpeedSim high performance simulation software uses cycle-
based simulation ("CBS") technology, which is an alternative to traditional
event-driven simulation mentioned above.  CBS is specifically designed to
improve on the verification speed limitations of event-driven simulation, and it
may also contribute to lower project costs by reducing the need for expensive
hardware simulation accelerators.

          Quickturn's SpeedSim cycle-based simulator employs a proprietary
technology called Boolean Dataflow Engine ("BDE") to enhance verification
performance by having the cycle-based simulator examine results only at the end
of every clock cycle, thereby eliminating unnecessary calculations.  These
unnecessary calculations are inherent to traditional event-driven simulation,
which examines every active signal that propagates through every device during a
clock cycle.  Therefore, Quickturn believes that its CBS approach may be five
times faster than event-driven simulation because CBS focuses only on the
primary task at hand, which is functional verification of chip design logic.
BDE further enhances performance by employing fewer logic states, typically two
(1s and 0s), while full event-driven-simulation addresses from four to nine
logic states.

            Other enhancements related to BDE technology include:

          * Minimal Memory Usage:  The SpeedSim product enhances performance by
utilizing less memory than  event-driven simulation.  Using BDE, engineers can
fit a one million gate design into a 10MB image.  Without BDE, the computer
memory requirements for the same image may be typically three to ten times
larger.  For very large chip designs, the reduced memory requirements made
possible by BDE are further enhanced by allowing a design team to speed up
verification by running different tests on all of their desktop workstations in
their network at once, instead of on just one large server.

          * Simultaneous Test:  This SpeedSim option allows for up to 32
different tests to be run simultaneously on one image of a design model, using a
single workstation, which can  result in up to a five-fold to ten-fold gain in
performance throughput.

                                      -4-
<PAGE>
 
          * Symmetric MultiProcessing ("SMP"):  This feature allows chip
designers to take a single design of one million gates or more and divide it
into segments.  Each segment is then simulated on different CPUs within the SMP
box, thereby creating software simulation that is four to eight times faster
across multiple CPUs compared to having to simulate on a single CPU.

          * Fast Design Iterations:  After a design bug is located and fixed,
this feature provides for fast recompilation, typically within minutes for very
large designs, instead of hours using some event-driven simulation.

          The platforms supported by the SpeedSim product include UNIX
workstations on SUN, HP, DEC, and IBM platforms and Intel-compatible PCs running
LINUX or Windows/NT.

Emulation

          Quickturn's Mercury, System Realizer and CoBALT emulation systems are
used by electronic design engineers to generate reprogrammable physical
prototypes, or "virtual silicon/TM/" representations, of their electronic
circuit designs. This enables designers to achieve concurrent verification of
the entire target system, including system software and applications, and to
perform iterative design changes prior to actual silicon fabrication. Mercury
and System Realizer offer a versatile solution for synchronous and asynchronous
designs in the range of 150,000 to 10 million logic gates. CoBALT provides
verification capabilities for complex, synchronous designs of up to 20 million
logic gates. All systems share the same software environment, which allows
designers to select the optimum emulation solution for any design style.

          The emulation process begins with Quickturn's emulation products
automatically accepting logic designs which may have been created in any of the
most widely used, commercially available electronic design automation ("EDA")
systems, as well as those created in the proprietary design environments of
selected large customers.  These designs are then processed by Quickturn's
proprietary software on a commercial workstation.  Using information provided by
engineers as well as by built-in proprietary algorithms, the software is used to
partition designs into different blocks of logic which are then automatically
mapped into a virtual silicon implementation.  The user's gate or RTL
description is mapped into the programmable hardware of CoBALT or System
Realizer.  Optimization is done during the mapping process to best utilize the
programmable hardware.  Once the designs are partitioned, the software defines
the interconnection and logic routing of the various blocks of logic.

                                      -5-
<PAGE>
 
          The designs are then downloaded from the commercial workstation to the
emulation system, thereby creating a virtual silicon implementation of the
designs.  The virtual silicon is then cabled into the target system where the
fabricated silicon will ultimately reside.  At this time, the target system can
be run just as if  fabricated silicon were available.  The target system is then
tested by running embedded software, operating systems and application software.
The verification of the target system will typically run at speeds in the range
of millions of cycles per second, several orders of magnitude faster than logic
gate level simulation, but typically slower than real operating speeds.

          The emulation system includes an integrated logic analyzer and
software debugging tools, which enable the engineer to observe the details of
the design behavior at any location within a design. When design problems are
discovered, changes are made and then transferred by the emulation software to
the virtual silicon.  The impact of the changes can be determined quickly in the
target system while the design can still be easily modified.

          Quickturn's emulation products range in emulation capacities from
150,000 logic gates to 20 million logic gates and are priced at between $0.50 to
$0.70 per logic gate.

          Quickturn's products are based on Quickturn's patented technologies
and proprietary software algorithms that have produced the following core
technologies:

          * Logic compilation, including partitioning:   the complex software
that segments a large computer chip design into smaller units which are
programmed into the field programmable gate arrays ("FPGAs") for Mercury and
System Realizer or processor chips for CoBALT, and programmable memories that
constitute the core reprogrammable components of Quickturn's emulation systems.

          * High speed behavioral co-simulation:  the ability to emulate a
design in conjunction with a C or verilog behavioral testbench at multi-khz
speeds.

          * Interconnect architecture:  in Mercury and System Realizer, the
patented system-level method for connecting reprogrammable components, which is
implemented with Quickturn's proprietary interconnect computer chips and
placement and routing software.

          * Logic mapping:  the software which optimizes the mapping of the
design to be emulated into the basic cells of the FPGAs in the emulation system.

                                      -6-
<PAGE>
 
          * Memory architecture mapping:  the software which optimizes the use
of programmable memory in the emulation system to represent the memory
architecture of the computer chip to be emulated.

          * Instrumentation:  the fully integrated software and logic analyzer
technology which allows users of Quickturn's emulation systems to observe the
gate level behavior of the virtual silicon, allowing for the assessment of a
design's correctness at this level.

          These core technologies maximize the cost effectiveness of the
products by optimizing emulation system capacity and performance and minimizing
both the user's time to emulation and the costs required to verify and debug
designs.
 
          See "---Risk Factors: Quickturn's success depends on broad market
acceptance of Quickturn's products."

Customers
 
          Quickturn markets its products to customers who design complex
computer chips and electronic systems.  Early adopters represented the computer
chip and system companies with the largest design verification problems.  As the
technology has matured, a broader range of customers has adopted the technology.
Today, Quickturn's customers include merchant semiconductor, computer,
workstation, telecommunications, networking, multimedia and graphics companies.
Quickturn's customers are in industries characterized by rapid advances in
technology, competitive pressures to quickly develop and introduce new products
and the need for extensive system-level design verification and debugging prior
to design implementation.

          Microprocessors and microcontrollers with complexity levels of
hundreds of thousands and even millions of logic gates are applications for
which emulation is considered a critical technology because of the requirement
to verify design compatibility with new and existing software.  Typical new
users of Quickturn's design verification products are designers of custom
computer chips or Application Specific Integrated Circuits ("ASICs")  with
100,000 to 3,000,000 or more logic gates.  See "---Risk Factors:  Quickturn
relies on a few customers for much of its revenue."

Customer Service and Support

                                      -7-
<PAGE>
 
          Quickturn provides customers with technical support, training and
design consulting services.  Quickturn believes that a high level of customer
service and support is critical to the adoption of Quickturn's design
verification technology by new users.  During the early stages of a customer's
first project, Quickturn works closely with the customer's project team to
ensure a smooth integration of its design verification products into the design
process.  Quickturn maintains a rapid response program which is designed to meet
urgent customer support needs.  For customers using Quickturn's design
verification products on mission-critical projects, Quickturn offers expert-user
design consulting services to customers through its Time-to-Market-Engineering
Services ("TtME").  Additionally, substantially all of Quickturn's customers
currently have maintenance agreements with Quickturn.  Quickturn generally
warrants its products to be free from defects and to substantially conform to
material specifications for a period of 90 days.

Sales and Marketing

          Quickturn markets its products and services primarily through its
direct sales and service force.  Quickturn employs a highly skilled sales force
and an application engineering team capable of serving the sophisticated needs
of prospective customers' engineering and management staffs.  The sales process
is supported by a broad range of marketing programs which include trade shows,
direct marketing, public relations and customer seminars.  From time to time
Quickturn may enter into joint marketing agreements with EDA companies and other
technology partners to increase market acceptance of Quickturn's design
verification products.  See "---Risk Factors:  Quickturn's quarterly results of
operations can fluctuate substantially" and "---Risk Factors:  Quickturn's
products have lengthy sales cycles."

          As of February 28, 1999, Quickturn's direct sales and service force
consisted of 158 sales, technical, administrative and management employees.
Quickturn has 12 sales and support offices throughout the United States located
in Arizona, California (Garden Grove, San Diego, San Jose), Colorado,
Massachusetts, Minnesota, New Jersey, North Carolina, Oregon and Texas (Austin
and Dallas). Internationally, Quickturn has eight sales and support offices, one
each in Antwerp, London, Munich, Osaka, Paris, Stockholm, Tel Aviv and Yokohama.

          In Japan, Quickturn serves its customers through its direct sales and
service offices in Osaka and Yokohama.   Additionally in Japan, Quickturn has a
hardware maintenance agreement with D Scan Service Co., Ltd., which will

                                      -8-
<PAGE>
 
terminate in mid-1999.  Quickturn utilizes manufacturer's representatives and
other selected distributors in Korea, Singapore and Taiwan.

          Sales outside of the U.S. accounted for approximately 40%, 36% and 37%
of Quickturn's revenue in 1998, 1997 and 1996, respectively.  See "---Risk
Factors:  Quickturn is exposed to currency exchange rate fluctuations" and "---
Risk Factors:  Quickturn may continue to be affected by foreign economic
conditions."

Research and Development

          To support its current leadership position in the design verification
market, Quickturn presently invests and will continue to invest in continued
innovation in the key technology areas of new products and existing products.

          As of February 28, 1999, Quickturn's research and development group
consisted of 129 full-time employees.  Within the research and development
organization, approximately 72% were involved in software development, with the
balance in hardware design.  During 1998, 1997 and 1996, research and
development expenses were $23.4 million, $23.5 million and $19.7 million,
respectively.  Quickturn anticipates that it will continue to commit substantial
resources to research and development in the future.  See "---Risk Factors:
Quickturn's survival depends on its ability to introduce new products and keep
up with technological change."

Manufacturing

          Quickturn performs final assembly and test of its emulation products
in its San Jose, California facility.  Quickturn utilizes subcontractors for all
major subassembly manufacturing, including all individual printed circuit boards
and custom integrated circuits.  Quickturn has a testing and qualification
program to ensure that all subassemblies meet Quickturn's specifications before
going into final assembly and test.

          Although Quickturn's customers often forecast projected requirements
considerably in advance of the proposed shipment date, actual orders are
typically not received until shortly before the desired shipment date.  As a
result, backlog at the beginning of a period may not represent a significant
percentage of the product sales anticipated for that period.  Accordingly,
Quickturn does not consider backlog to be a significant measure of anticipated
sales for any future period.  However, Quickturn partially relies on forecasts
to determine inventory levels and manufacturing schedules.   See "---Risk
Factors:  Quickturn obtains key 

                                      -9-
<PAGE>
 
components from a limited number of suppliers" and "---Risk Factors: Quickturn
is highly dependent on maintaining high-quality manufacturing."

Competition

          The Electronic Design Automation ("EDA") industry is highly
competitive and rapidly changing.  Quickturn's products are specifically
targeted at the emerging portion of this industry relating to advanced
verification technology, and, to date, substantially all of Quickturn's revenue
has resulted from sales in this segment.  Quickturn faces significant
competition for emulation-based system-level design verification and cycle-based
simulation, and also competition from traditional design verification
methodologies which rely on the approach of building and then testing complete
system prototypes, as well as from potentially new tools such as formal
verification.  Quickturn will continue to inform potential customers of the
benefits of emulation and cycle-based simulation in order for such customers to
adopt Quickturn's advanced design verification systems as a complement to
standard simulation tools.  See "---Risk Factors:  Quickturn's industry is
highly competitive."

          In addition, competitors may resort to litigation as a means of
competition. Such litigation may result in substantial costs to Quickturn,
injunctive relief preventing Quickturn from engaging in activities critical to
its business, and significant diversion of management time. In 1995, Mentor
filed suit against Quickturn for declaratory judgment of non-infringement,
invalidity and unenforceability of several of the Company's patents. Several
actions between Quickturn and Mentor and a French subsidiary of Mentor, Meta
Systems ("Meta"), ensued, and those cases were consolidated in the U.S. District
Court for the District of Oregon, where five of Quickturn's patents are now
involved in the disputes. Quickturn has pending actions against Mentor and Meta
for infringement of the five patents at issue, and Mentor and Meta are seeking a
declaratory judgment of non-infringement and unenforceability of the five
patents in dispute, and of invalidity of two of those patents. Quickturn is also
involved in litigation with Mentor's German subsidiary; with Mentor's French and
Dutch subsidiaries, with Meta Systems and with a French company named M2000 in
France; and with Aptix Corporation, Meta and Mentor in the U.S. District Court,
the Northern District of California. See "Item 3 ---Legal Proceedings." Although
patent and intellectual property disputes in the EDA industry are often settled
through licensing, cross-licensing or similar arrangements, costs associated
with such litigation and arrangements may be substantial and no assurance can be
given that any licensing or other arrangements would be available on
economically feasible terms or at all.

Proprietary Rights

                                      -10-
<PAGE>
 
          Quickturn's success and ability to compete depend in part upon its
proprietary technology.  While Quickturn relies on patent, trademark, trade
secret and copyright law to protect its technology, Quickturn also believes that
factors such as the technological and creative skills of its personnel, new
product developments, frequent product enhancements, name recognition and
reliable product maintenance are essential to establishing and maintaining a
technology leadership position.

          Quickturn currently owns 35 U.S. patents of which three are co-owned.
Quickturn has 20 patent applications on file with the U.S. Patent and Trademark
Office of which 4 are co-owned.  Quickturn's U.S. patents expire between 2005
and 2017. Quickturn also owns 9 foreign patents and 37 foreign patent
applications.   Quickturn's foreign patents expire between 2008 and 2015.  See
"---Risk Factors:  Quickturn is involved in substantial intellectual property
litigation" and "Risk Factors:  Quickturn's proprietary rights are critical to
Quickturn's success."

Employees

          As of February 28, 1999, Quickturn had a total of 383 employees, of
whom 341 were based in the United States and 42 were based overseas.  Of the
total, 176 were engaged in sales, marketing and related customer support
services, 129 were in research and development, 53 were in manufacturing and 25
were in finance and administration.   See "---Risk Factors:  Quickturn depends
on key personnel."

Risk Factors

          The following risk factors should be carefully considered in
evaluating Quickturn and its business because such factors currently have a
significant impact or may have a significant impact in Quickturn's business,
operating results or financial condition.

Quickturn's success depends on broad market acceptance of Quickturn's products.

          Substantially all of Quickturn's revenue has been derived from the
sale of its design verification products, and sales of such products are
expected to continue to account for substantially all of Quickturn's revenue in
the foreseeable future. To date, Quickturn's products have been sold to a
limited number of customers.  See "--- Risk Factors:  Quickturn relies on a few
customers for much of its revenue."  Accordingly, broad market acceptance of
design verification products by existing and new customers is critical to
Quickturn's future success. The adoption of Quickturn's design verification
products in the design verification process by computer chip and system
designers, particularly those which have 

                                      -11-
<PAGE>
 
historically relied on other methodologies, generally requires the designer to
adopt an entirely new method of design verification. While Quickturn believes
that its design verification products offer considerable advantages in the high-
end system design process, there can be no assurance that market acceptance of
those products will continue to grow. Moreover, there can be no assurance that
emulation products will be adopted beyond the high-end emulation market, which
is characterized by complex computer chips of hundreds of thousands or, in some
cases, millions of logic gates. The adoption of Quickturn's design verification
products for designing computer chips and systems will also depend on the
continued increased complexity of computer chips designed into electronic
systems, integration of Quickturn's products with other tools for design and
verification, importance of the time-to-market benefits of Quickturn's design
verification products and industry acceptance of the need to close the gap
between high level design and silicon production. Because the market for design
verification products is new and evolving, it is difficult to predict with any
assurance whether the market for design verification products will continue to
expand.

Quickturn's quarterly results of operations can fluctuate substantially.

          A delay in the shipment of a few orders can have a significant adverse
effect upon Quickturn's total revenue and results of operations in a given
quarter.  Many of Quickturn's customers order products only when needed.  They
often wait until they know that a new computer chip development project will
begin.  In addition, a significant portion of Quickturn's revenue in each
quarter generally results from shipments in the last few weeks of the quarter.
Quickturn may not learn of these revenue shortfalls until late in the quarter.
For example, in two quarters of 1994, significant orders were delayed into the
succeeding quarter, causing Quickturn to miss its revenue targets.

Quickturn's products have lengthy sales cycles.

          Sales of Quickturn's products depend, in significant part, upon the
decision of the prospective customer to commence a project for the design and
development of complex computer chips and systems.  In view of the significant
amounts of both time and commitment of capital involved in the design and
development of complex computer chips and systems, Quickturn may experience
delays following initial qualification of Quickturn's design verification
products as a result of delays by customers in commencement of the project.  For
this and other reasons, Quickturn's design verification products typically have
a lengthy sales cycle during which Quickturn may expend substantial funds and
management effort.  Lengthy sales cycles subject 

                                      -12-
<PAGE>
 
Quickturn to a number of significant risks, including inventory obsolescence and
fluctuations in operating results, over which Quickturn has little or no
control.

Quickturn relies on a few customers for much of its revenue.

          The loss of a major customer or fewer or smaller orders by such a
major customer could harm Quickturn's financial condition or results of
operations.  Quickturn relies on a limited number of customers for a substantial
portion of its total revenue.  Quickturn's top ten customers represented, as a
percentage of total revenue, 60%, 43% and 52% in 1998, 1997 and 1996,
respectively.  In 1998 and 1996, sales to one customer, Fujitsu, were $14.7 
million or 14% of Quickturn's total revenue, and $13.1 million or 12% of 
Quickturn's total revenue, respectively. In 1997, no customer individually 
comprised more than 10% of Quickturn's total revenue. Quickturn expects that
sales to a limited number of customers in the future will continue to represent
a high percentage of its total revenue. In addition, any significant delays in
or cancellations of a major customer's development projects, new product
announcements and releases by Quickturn, and economic conditions in the
electronics industry generally could result in delayed, smaller or cancelled
orders. In the first quarter of 1997, some of Quickturn's major customers
lengthened their purchase cycles and, in the first quarter of 1998, major
customers in the Asia-Pacific region cancelled projects which would have
otherwise been expected to result in purchases of Quickturn's products.
 
Quickturn's success depends on the state of electronics industry.

          Quickturn is dependent upon the state of the electronics industry, and
in particular on new system and computer chip design projects. The electronics
industry is characterized by rapid technological change, short product life
cycles, fluctuations in manufacturing capacity and pricing and margin pressures,
which cause the industry to be volatile. As a result, the electronics industry
has historically experienced sudden and unexpected downturns during which new
system and design projects decrease. Because most of Quickturn's sales occur
upon the commencement of new projects for system and computer chip products,
Quickturn is dependent upon the rate of commencement of new system and computer
chip design projects. Accordingly, negative factors affecting the electronics
industry could have a material adverse effect on Quickturn's financial condition
or results of operations.

Quickturn's survival depends on its ability to introduce new products and keep
up with technological change.

          The EDA industry is characterized by extremely rapid technological
change in hardware and software development, frequent new product introductions
and evolving industry standards.  The introduction of products embodying new
technologies and the emergence of new industry standards can 

                                      -13-
<PAGE>
 
render existing products obsolete and unmarketable. Quickturn's future success
will depend upon its ability to enhance its current lines of verification
products and to design, develop and support its next-generation design
verification products on a timely basis that keep pace with technological
developments and emerging industry standards. Next-generation design
verification products must address increasingly sophisticated customer needs,
all of which require a high level of expenditures for research and development
by Quickturn. Although Quickturn is not currently aware of any material
limitations on its ability to develop new products which are capable of
verifying the next generation of computer chips, there can be no assurance that
Quickturn will successfully develop and market product enhancements or new
products that respond to technological change or evolving industry standards,
that Quickturn will not experience difficulties that could delay or prevent the
successful development, introduction and marketing of these products, or that
its new products and product enhancements will adequately meet the requirements
of the marketplace and achieve market acceptance. If Quickturn is unable, for
technological or other reasons, to develop and introduce products in a timely
manner in response to changing market conditions or customer requirements,
Quickturn's business, operating results and financial condition will be
materially and adversely affected. Moreover, from time to time, Quickturn may
announce new products or technologies that have the potential to replace
Quickturn's existing product offerings. There can be no assurance that the
announcement of new product offerings will not cause customers to defer
purchases of existing Quickturn products, which could adversely affect
Quickturn's results of operations.

Quickturn's industry is highly competitive.

          The EDA industry is highly competitive and rapidly changing. Quickturn
faces significant competition from companies that produce products similar to
Quickturn's, as well as from companies offering products based on other computer
chip design verification methods which involve building and then testing
complete electronics system prototypes and some of which rely on new electronics
technologies. Because of the growing demand for electronics design verification
methods that reduce the number of costly design cycles and improve product
quality, Quickturn expects competition to increase as other companies attempt to
introduce products similar to Quickturn's, and as new technologies emerge.
Increased competition could result in price reductions, reduced profits and loss
of market share, which could seriously harm Quickturn's business, operating
results and financial condition. Many of Quickturn's competitors have
significantly greater financial, technical and marketing 

                                      -14-
<PAGE>
 
resources and greater name recognition than Quickturn. Many have also
established relationships with current and potential customers of Quickturn.

Quickturn is exposed to currency exchange rate fluctuations.

          Fluctuations of the U.S. dollar against foreign currencies, the
current uncertain international economic situation and the seasonality of
international markets could harm Quickturn's results of operations and financial
condition.

          Revenue from most of Quickturn's international customers is in U.S.
dollars, but Quickturn transacts business with some customers in foreign
currencies. Quickturn's foreign currency hedging program may not protect it from
fluctuations in currency exchange rates and this could seriously harm the value
of payment generated by sales in foreign currencies.

Quickturn's inability to deal effectively with the conversion of the euro may 
negatively impact its marketing and strategies.

          On January 1, 1999, 11 member countries of the European Union adopted
the euro as their common legal currency and established fixed conversion rates
between their sovereign currencies and the euro. Electronic transactions can be
made in either the sovereign currencies or the euro until January 1, 2002, after
which the euro must be used exclusively for all transactions. Quickturn believes
that its internal systems and financial institution vendors are capable of
handling the euro conversion and is in the process of examining current
marketing and pricing policies and strategies that may be affected by conversion
to the euro. The cost of this effort is not expected to materially hurt
Quickturn's results of operations or financial condition. However, Quickturn
cannot be assured that all issues related to the euro conversion have been
identified and that any additional issues would not materially hurt Quickturn's
results of operations or financial condition. For example, the conversion to the
euro may have competitive implications on Quickturn's pricing and marketing
strategies and Quickturn may be at risk to the extent its principal European
customers are unable to deal effectively with the impact of the euro conversion.
Quickturn has not yet completed its evaluation of the impact of the euro
conversion on its functional currency designations.

Quickturn may continue to be affected by foreign economic conditions.

          Quickturn derives a significant portion of its revenue and net income
from its international operations. Quickturn's products may not achieve
widespread commercial acceptance in international markets in the future.
Quickturn is uncertain whether the recent weakness experienced in the Asia-
Pacific markets 

                                      -15-
<PAGE>
 
will continue. Because of this downturn, sales of Quickturn's products in Japan
have decreased in the first three quarters of 1998. The weakness could also
cause major Asia-Pacific electronics firms to continue lowering their EDA
spending budgets. Consequently, sales of Quickturn's design verification
products in the Asia-Pacific markets may continue to decrease.
          Quickturn's international sales may be subject to additional risks
associated with international operations, including:

 .  the adoption and expansion of unfavorable government trade regulations;

 .  limitations on the repatriation of earnings;

 .  reduced respect for Quickturn's intellectual property rights by some
    countries;

 .  recessions in foreign countries and regions;

 .  longer receivables collection periods and greater difficulty in collecting
    international accounts receivable;

 .  difficulties in managing Quickturn's own operations in multiple, distinct
    geographic locations and diverse cultures;

 .  political and economic instability;

 .  tariffs and other trade barriers; and

 .  difficulties in obtaining U.S. government export licenses.

Quickturn obtains key components from a limited number of suppliers.

          Quickturn depends on several suppliers for certain key components and
board assemblies used in its hardware-based emulation products. Quickturn's
inability to develop alternative sources or to obtain sufficient quantities of
these components or board assemblies could result in delays or reductions in
product shipments. In particular, Quickturn currently relies on Xilinx, Inc. for
the supply of key integrated circuits and on IBM for the hardware components for
both Quickturn's CoBALT and Mercury products. With regard to Mercury, IBM
recently replaced Quickturn's previous supplier and is currently providing the
assembly services for several Mercury components on an order-by-order basis.
Quickturn is negotiating with IBM to establish an overall contract, but these
negotiations may not be successfully completed, thereby causing disruptions in
the supply of IBM's products or services.  If there were a reduction or

                                      -16-
<PAGE>
 
interruption, Quickturn's results of operations would be seriously harmed. Even
if Quickturn could eventually obtain these components from alternative sources,
a significant amount of time and resources would be required to redesign
Quickturn's products to accommodate the alternative supplier.

Quickturn depends on key personnel.

          Quickturn's performance is substantially dependent on the performance
of its executive officers. Furthermore, the loss of the services of any of its
executive officers or other key employees could have a material adverse effect
on Quickturn. Quickturn does not maintain key person life insurance policies on
the lives of its key officers or key personnel, all of whom are important to
Quickturn's future success. Quickturn's future success also depends on its
continuing ability to attract and retain highly qualified technical and
managerial personnel. Competition for such personnel is intense, and there can
be no assurance that Quickturn will be able to retain its key managerial and
technical employees or that it will be able to attract, assimilate or retain
other highly qualified technical and managerial personnel in the future. The
inability of Quickturn to attract and retain the necessary technical personnel
in the future could impair the development of new products and have a material
adverse effect upon Quickturn's business, operating results and financial
condition. None of Quickturn's employees is represented by a labor union.
Quickturn has not experienced any work stoppages and considers its relations
with its employees to be good.

Quickturn is highly dependent on maintaining high-quality manufacturing.

          Quickturn's emulation systems are complex and are used by Quickturn's
customers in critical development projects which demand a high level of quality
and reliability. Quickturn invests substantial resources to ensure the quality
and reliability of its emulation systems and must provide a high level of
service to its customers to minimize customer downtime in the event of a
malfunction. There can be no assurance that Quickturn will be able to meet
customer requirements for quality and reliability in the future.

Quickturn is involved in substantial intellectual property litigation, which 
will be costly and may invalidate some of its intellectual property rights.

          Quickturn's competitors may sue Quickturn in order to obtain a
competitive edge. Litigation can result in substantial costs to Quickturn and
significant diversions of management time from Quickturn's day-to-day
operations. In 1995, Quickturn's competitor, Mentor, sued Quickturn. Mentor
sought to have several of Quickturn's patents declared invalid as well as to
have 

                                      -17-
<PAGE>
 
the court determine that Mentor was not infringing them. Quickturn filed
counterclaims against Mentor and Mentor's French subsidiary, Meta Systems, for
infringement of the same Quickturn patents. Quickturn is also involved in patent
litigation with Mentor's subsidiary in Germany; with Mentor's French and Dutch
subsidiaries, with Meta Systems and with a French company named M2000 in France;
and with Aptix Corporation, Meta Systems and Mentor in California. Even though
patent and intellectual property disputes in Quickturn's industry are often
settled through licensing, cross-licensing or similar arrangements, costs
associated with litigation can be substantial and no assurances can be given 
that any licensing or other arrangements would be available on economically
feasible terms or at all. The costs and any adverse outcomes of Quickturn's
current litigation could seriously harm its business, operating results and
financial condition. See "Item 3 ---Legal Proceedings."

Quickturn's proprietary rights are critical to Quickturn's success.

          There can be no assurance that others will not develop technologies
that are similar or superior to Quickturn's technology, duplicate Quickturn's
technology or design around the patents owned by Quickturn.  The source code for
Quickturn's proprietary software is protected both as a trade secret and as an
unpublished copyrighted work.  Despite these precautions, it may be possible for
a third party to copy or otherwise obtain and use Quickturn's products or
technology without authorization, or to develop similar technology
independently.  In addition, effective copyright and trade secret protection may
be unavailable or limited in certain foreign countries.  Quickturn generally
enters into confidentiality or license agreements with its employees,
distributors and customers, and limits access to and distribution of its
software, documentation and other proprietary information.  Nevertheless, there
can be no assurance that the steps taken by Quickturn will prevent
misappropriation of its technology.  In addition, litigation has been necessary
in the past to enforce Quickturn's patents and may be necessary in the future to
enforce Quickturn's patents and other intellectual property rights, to protect
Quickturn's trade secrets, to determine the validity and scope of the
proprietary rights of others, or to defend against claims of infringement or
invalidity.  See "---Competition," "---Risk Factors:  Quickturn's industry is
highly competitive"  and "Item 3 ---Legal Proceedings."  Such litigation could
result in substantial costs and diversion of resources and could have a material
adverse effect on Quickturn's business, financial condition and results of
operations.  There can be no assurance that any patent owned by Quickturn will
not be invalidated, circumvented or challenged, that the rights granted
thereunder will provide competitive advantages to Quickturn or that any of
Quickturn's pending or future patent applications, whether or not being
currently challenged by applicable governmental patent examiners, will be issued
with the scope of the claims sought by Quickturn, if at all.

                                      -18-


<PAGE>
 
          From time to time Quickturn has received, and may receive in the
future, notice of claims of infringement of other parties' proprietary rights.
Although Quickturn does not believe that its products infringe upon the
proprietary rights of any third parties, there can be no assurance that
infringement or invalidity claims (or claims for indemnification resulting from
infringement claims) will not be asserted against Quickturn or that any such
assertions will not materially adversely affect Quickturn's business, financial
condition or results of operations.  Irrespective of the validity or the
successful assertion of such claims, Quickturn could incur significant costs
with respect to the defense thereof, which costs could have a material adverse
effect on Quickturn's business, financial condition or results of operations.
If any claims or actions are asserted against Quickturn, Quickturn may seek to
obtain a license under a third party's intellectual property rights.  There can
be no assurance, however, that under such circumstances, a license would be
available under reasonable terms or at all.
 
          Quickturn also relies on certain software which it licenses from third
parties, including software which is integrated with internally-developed
software and used in Quickturn's verification products to perform key functions.
There can be no assurance that these third-party software licenses will continue
to be available to Quickturn on commercially reasonable terms.  The loss of or
inability to maintain any of these software licenses could result in delays or
reductions in product shipments until equivalent software is identified,
licensed and integrated, which would adversely affect Quickturn's operating
results.

Quickturn's stock price is highly volatile.

          The market for Quickturn's common stock is highly volatile, and could
be subject to wide fluctuations in response to quarterly variations in operating
and financial results, announcements of technological innovations or new
products by Quickturn or its competitors, changes in prices of Quickturn's or
its competitors' products and services, changes in product mix, changes in
revenue and revenue growth rates for Quickturn as a whole or for individual
geographic areas, product units, products or product categories, as well as
other events or factors including those described under "Risk Factors."
Statements or changes in opinions, ratings, or earnings estimates made by
brokerage firms or industry analysts relating to the market in which Quickturn
does business or relating to Quickturn specifically, or the failure of Quickturn
to achieve the estimates or other matters predicted by such firms or analysts,
have resulted, and could in the future result, in an immediate and adverse
effect on the market price of Quickturn's common stock. In addition, the stock
market has from time to time experienced extreme price and volume fluctuations
which have particularly affected the market price for the securities of many
high-technology companies and which often have been unrelated to the operating
performance of these

                                      -19-
<PAGE>
 
companies. These broad market fluctuations may adversely affect the market price
of Quickturn's common stock.

Quickturn has adopted provisions that have certain anti-takeover effects.

          Quickturn has adopted a number of provisions that could have
antitakeover effects. In January 1996, Quickturn's Board of Directors adopted a
Preferred Shares Rights Agreement, commonly referred to as a "poison pill." In
December 1998, Quickturn amended the poison pill rights plan to provide that the
merger with Cadence Design Systems, Inc. will not trigger the poison pill
effects. See "Part IV, Item 14 ---Note 12 of Notes to Consolidated Financial
Statements." In addition, Quickturn's Board of Directors has the authority to
issue up to 2,000,000 shares of Preferred Stock and to fix the rights,
preferences, privileges and restrictions, including voting rights, of these
shares without any further vote or action by the stockholders. Furthermore,
Quickturn is subject to the provisions of Section 203 of the General Corporation
Law of Delaware, which has the effect of restricting changes of control of a
company. In September 1998, Quickturn also implemented retention plans that
provide retention and severance benefits to the employees of Quickturn if there
is a change in control of Quickturn and the employees are involuntarily
terminated without cause, or are constructively terminated for certain
employees, within twelve months following the change of control. See "Part IV,
Item 14 ---Note 17 of Notes to Consolidated Financial Statements."

Introduction of new product may cause customers to defer purchases.

          In June 1998, Quickturn announced a new hardware-based emulation
product, Mercury, which is designed to replace its System Realizer emulation
product. This announcement could cause customers to defer purchasing the current
generation product. The transition to the new Mercury system may also be
disrupted by slow industry acceptance or interruptions in manufacturing or
component availability.

"Year 2000" computer problems could interrupt Quickturn's business operations.

          Quickturn's failure to correct a material Year 2000 problem could
result in an interruption in certain normal business activities or operations.
Any interruption of this kind could seriously harm Quickturn's business,
operating results and financial condition. Quickturn has determined that it must
modify or replace portions of its software so that its internal systems and
products recognize dates beyond December 31, 1999. If these modifications of
existing software and conversions are not made, the Year 2000 problem could
seriously harm Quickturn's operations. In addition, other systems on which
Quickturn's 

                                      -20-
<PAGE>
 
systems rely may not be converted in a timely fashion or in a way that is
compatible with Quickturn's systems. Quickturn's operations could also be
seriously harmed if third parties with whom Quickturn deals are not Year 2000
compliant.
 
Quickturn may not be able to sustain or increase its gross margins.

          Quickturn may not be able to sustain or increase its gross margins
which traditionally have averaged between 68% and 71%, excluding unusual items.
Gross margin represents the difference between the amount of revenue from the
sale of a product (less returns and allowances) and the cost of making the
product. Quickturn has experienced, and expects to continue to experience,
competitive pressures in its industry from existing companies and new entrants.
These pressures could cause Quickturn to lower its prices. Furthermore, to the
extent that Quickturn is able to achieve cost reductions, the resulting savings
may be passed on to Quickturn's customers.

Item 2.     PROPERTIES.
            -----------

          Quickturn's principal administrative, sales, marketing, manufacturing
and research and development facility is located in two buildings totaling
145,815 square feet in San Jose, California, which are subject to a lease that
expires in August 2004.  Quickturn leases 11 other domestic sales and service
offices throughout the United States.  Quickturn also leases international sales
and service offices in Antwerp, London, Munich, Osaka, Paris, Stockholm, Tel
Aviv and Yokohama.  Quickturn expects that it will be able to renew its leases
on satisfactory terms.  Quickturn believes that its existing facilities are
adequate for its current needs and that additional space will be available as
needed.

Item 3.     LEGAL PROCEEDINGS.
            ------------------
 
          In January 1996, Quickturn filed a complaint with the International
Trade Commission (the "ITC") in Washington, DC, seeking to stop unfair
importation of logic emulation systems manufactured by Meta. In the complaint,
Quickturn alleges that Mentor's hardware logic emulation systems infringe
Quickturn's patents. In December 1997, the ITC issued: (1) a Permanent Limited
Exclusion Order which permanently prohibits the importation of infringing
hardware logic emulation systems, subassemblies or components manufactured by
Mentor and/or Meta, and (2) a Permanent Cease and Desist Order permanently
prohibiting Mentor from, among other things, selling, offering for sale or
advertising the same hardware logic emulation devices. The ITC's two orders
remain in effect until April 28, 2009, the latest expiration date of Quickturn's
patents involved in the investigation.

                                      -21-
<PAGE>
 
          Quickturn is also engaged in a Federal District Court case with Mentor
and Meta involving five of Quickturn's patents.  Quickturn has pending actions
against Mentor and Meta for infringement of the five patents, and Mentor and
Meta are seeking a declaratory judgment of non-infringement and unenforceability
of the five patents in dispute, and of invalidity of two of those patents.  In
June 1997, Quickturn filed a motion for preliminary injunction, asking the
District Court to prohibit Mentor from manufacturing, assembling, marketing,
loaning or otherwise distributing emulation products and components in the
United States, which products and components infringe certain claims in
Quickturn's U.S. Patent No. 5,036,473.  On August 1, 1997, the U.S. District
Court in Oregon granted Quickturn's motion for a preliminary injunction against
Mentor's domestic emulation activities.  The Federal Circuit Court of Appeals
affirmed the Oregon District Court's decision on August 5, 1998.  The Oregon
action is presently set for a bench trial in April 1999 with respect to Mentor's
allegations of patent unenforceability.  A jury trial on the remaining liability
and damages issues has been set for June 1999.

          In November 1996, Aptix Corporation ("Aptix") filed a suit against
Quickturn, in the U.S. District Court, the Northern District of California, San
Jose Division, alleging various violations of the antitrust laws and unfair
competition.  Aptix sought preliminary damages of $5 million, an order
dedicating to the public all patents acquired by the Company, and an injunction
prohibiting Quickturn from acquiring further patents in the field of hardware
emulation and from enforcing its patents against competitors.  The District
Court granted a summary judgment motion in favor of Quickturn and dismissed the
case.  Aptix requested the Court to reconsider its decision and dismissal, but
the Court denied Aptix's request.  Aptix has appealed the dismissal to the Ninth
Circuit Court of Appeals.

          In October 1997, Quickturn filed a complaint in the German District
Court of Dusseldorf against Mentor's German subsidiary, Mentor Graphics
(Deutschland) GmbH, alleging infringement of the German part of Quickturn's
European Patent No. 0 437 491 B1. After two preliminary hearings in which
procedural matters were discussed, the parties have submitted their briefs to
the court. The Main Court Hearing for this action was held on March 16, 1999,
and the court's decision will be issued on April 29, 1999.

          On March 19, 1999, Quickturn's patent counsel in Germany received
official service of a Nullification Complaint, filed by Mentor Graphics
(Deutschland) GmbH, in the German Federal Patent Court located in Munich. The
Nullification Complaint seeks to have certain claims of Quickturn's European
Patent EP 0 437 491 declared void with respect to the sovereign territory of the
Federal Republic of Germany. Quickturn's initial response to this complaint is
due by April 19, 1999.

          In February 1998, Aptix and Meta filed a lawsuit against Quickturn, in
the U.S. District Court, the Northern District of California, alleging
infringement of a U.S. patent owned by Aptix and licensed to Meta.  Quickturn
named Mentor as a party to this suit and filed a counter claim requesting the
Court to declare the Aptix patent to be unenforceable based on inequitable
conduct during the 

                                      -22-
<PAGE>
 
prosecution of the patent. Quickturn also filed a counter claim against Aptix,
Meta and Mentor for abuse of process, based on Aptix, Meta and Mentor's
submission of falsified evidence relating to the date of invention of the
technology described in the Aptix patent. Quickturn is seeking $10 million in
damages from Mentor, Meta and Aptix for their abuse of process. The case is set
for trial in January 2000.

          In October 1998, Quickturn filed a complaint in the District Court of
Paris, France, against Mentor Graphics (France) SARL, Mentor Graphics
(Netherlands) BV, Meta Systems (France), and M2000 (France) S.A. for
infringement of the French part of Quickturn's European Patent No. 0 437 491 B1.
This case has only recently been initiated, and no schedule has been set for
determining its final disposition.

          Quickturn has mounted vigorous defenses against Aptix and Meta's
patent infringement claim.  The outcome of these actions cannot be predicted
with certainty.

          On August 12, 1998, a subsidiary of Mentor Graphics Corporation
initiated an unsolicited tender offer to purchase all outstanding shares of
Quickturn's common stock. Even though the Tender Offer was subsequently
withdrawn on January 8, 1999, Quickturn is still engaged in legal proceedings in
connection with the unsolicited tender offer. The outcome of these lawsuits
cannot be predicted with certainty.

          Quickturn is engaged in certain other legal and administrative
proceedings incidental to its normal business activities.  While it is not
possible to determine the ultimate outcome of these actions at this time,
management believes that any liabilities resulting from such proceedings, or
claims which are pending or known to be threatened, will not have a material
adverse effect on Quickturn's consolidated financial position or results of
operations.


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

            No matters were submitted to a vote of security holders during the
fourth quarter of fiscal year 1998.

                                      -23-
<PAGE>
 
                                    PART II
                                    -------

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

        Quickturn's common stock is traded on the Nasdaq National Market under
the symbol "QKTN". The following table sets forth the high and low sale prices 
per share of Quickturn's common stock for the periods indicated:


<TABLE> 
<CAPTION> 

Fiscal 1997                             High            Low
-----------                             ----            ---
<S>                                     <C>             <C> 
First Quarter.....................      $21.00          $15.00
Second Quarter....................      $15.88          $ 6.69
Third Quarter.....................      $16.63          $12.13
Fourth Quarter....................      $16.31          $10.69

Fiscal 1998                             
-----------
First Quarter.....................      $15.50          $ 9.94
Second Quarter....................      $10.63          $ 6.50
Third Quarter.....................      $11.38          $ 7.38
Fourth Quarter....................      $14.69          $ 9.50
</TABLE> 

        As of December 31, 1998, there were approximately 358 stockholders of 
record and an estimated 4,500 additional stockholders who held stock in "street 
name." No cash dividends have been declared or paid for the years ended December
31, 1998 and 1997. Quickturn has an unsecured revolving line of credit of $5.0 
million, which prohibits payment of any cash dividends.


                                     -24-
<PAGE>
 
Item 6.    SELECTED CONSOLIDATED FINANCIAL DATA
           ------------------------------------
<TABLE> 
<CAPTION> 

                                                    1998        1997 (2)        1996  (1)       1995   (1)        1994
                                                 ---------    ---------      ---------        ---------         --------
                                                   (amounts in thousands except per share and employee data)

For the Fiscal Year
-------------------
<S>                                              <C>          <C>            <C>              <C>               <C> 
Total revenue                                    $ 104,109    $ 110,404      $ 109,578        $  82,442         $  65,523
Net income (loss)                                $  (6,858)   $  (2,978)(2)  $  14,131        $  12,478         $   4,601
Diluted net income (loss) per share              $   (0.39)   $   (0.17)(2)  $    0.79        $    0.74         $    0.32

Total revenue by geographic area

  U.S.                                           $  62,662    $  71,056      $  69,406        $  55,056         $  48,217
  Japan                                             22,706       23,136         22,189            9,075             6,065
  Others                                            18,741       16,212         17,983           18,311            11,241
                                                 ---------    ---------      ---------        ---------         ---------        
Total                                            $ 104,109    $ 110,404      $ 109,578        $  82,442         $  65,523
                                                 =========    =========      =========        =========         =========

At Year End
-----------

Working capital                                  $  42,531    $  51,143      $  49,243        $  44,381         $  34,998
Total assets                                     $ 134,628    $ 131,560      $ 111,977        $  94,240         $  77,349
Long-term debt                                         ---          ---            ---        $   3,701         $   3,819
Stockholders' equity                             $  90,355    $  94,266      $  84,045        $  66,337         $  49,895

Employees                                              386          382            363              285               244
</TABLE> 
(1) The 1995 and 1996 results have been restated to reflect the February 1997
    merger of Quickturn with SpeedSim,Inc. which was accounted for as a
    pooling of interests.

(2) The 1997 results, which have been restated to reflect a change in the
    accounting for the Arkos Acquisition, include one-time acquisition and
    merger related charges of $1.8 million or ($0.10) per share, net of tax.


                                     -25-
<PAGE>
 
Item 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF 
         ---------------------------------------  
         FINANCIAL CONDITION AND RESULTS OF OPERATIONS
         ---------------------------------------------  

Overview 

Quickturn began operations in 1987 and commenced product shipments in 1989. In
February 1997, the Company acquired SpeedSim, a provider of simulation
software. See "Part IV, Item 14---Note 3 of the Notes to Consolidated Financial
Statements." In June 1997, pursuant to an asset purchase agreement among 
Quickturn, Synopsys, and Arkos, Quickturn purchased from Synopsys certain assets
relating to Synopsys' emulation business, including all of the outstanding 
capital stock of Arkos. See "Part IV, Item 14---Note 3 of the Notes to
Consolidated Financial Statements." In June 1998, Quickturn introduced Mercury,
which is Quickturn's fifth generation emulator and succeeds System Realizer. In
October 1998, Quickturn announced its QuickCycles program, which provides high-
speed simulation services on a pay-as-you-go basis. In November 1998, SpeedSim
3.0 simulation software was introduced, which featured twice the performance of
previous simulation software. Also in November 1998, CoBALT Plus was introduced,
which resulted from Quickturn's continuing technology relationship with IBM. In
August 1998, Mentor Graphics Corporation launched a hostile tender offer for all
the outstanding shares Quickturn. That offer was withdrawn in January 1999 after
the announcement in December 1998 of a negotiated merger of Quickturn with
Cadence Design Systems, Inc. See "Part IV, Item 14---Note 19 of the Notes to
Consolidated Financial Statements."

Quickturn has restated the accounting for the Arkos Acquisition as of December
31, 1997 and the year then ended. The financial statements have been restated to
reflect a change in the allocation of the purchase price. Of the $18.0 million
previously recognized as acquisition and merger charges, $10.1 million was
reclassified to cost of revenue, $5.1 million was capitalized as goodwill and
$2.8 million remains in Arkos-related acquisition and merger charges. As a
result, the 1997 operating loss was reduced by $4.6 million. These adjustments
resulted in a decrease in the benefit from income taxes of $2.2 million and a
decrease in net loss of $2.4 million. In addition, the 1998 results, as a result
of the recognition of the goodwill in 1997, reflect a charge of $1.0 million in
amortization expense.

Results of Operations  

The following table sets forth certain financial data from Quickturn's
consolidated statements of operations as a percentage of revenue:
                                         

                                                 Year Ended December 31,
                                                ------------------------       
                                                1998       1997    1996
                                               ------     ------  ------
Total revenue                                  100.0%     100.0%  100.0%
Cost of revenue                                 36.5%      39.0%   29.8%
                                               ------     ------  ------  
 Gross margin                                   63.5%      61.0%   70.2%
   
Operating expenses
 Research and development                       22.5%      21.3%   18.0%
 Sales and marketing                            36.5%      33.3%   29.2%
 General and administrative                     18.6%      10.4%    6.6%
 Amortization of goodwill                        1.0%       0.4%     ---
 Acquisition and merger related charges           ---       3.6%     ---
                                               ------     ------  ------ 
  Total operating expenses                      78.6%      69.0%   53.8%
                                               ------     ------  ------


                                     -26-
<PAGE>
 
  Operating income (loss)                      (15.1%)     (8.0%)  16.4%
Interest and other, net                          3.0%       2.0%    1.7%
                                               ------     ------  ------
Net income (loss) before provision
 for (benefit from) income taxes               (12.1%)     (6.0%)  18.1%
Provision for (benefit from) income taxes       (5.5%)     (3.3%)   5.2%
                                               ------     ------  ------
 Net income (loss)                              (6.6%)     (2.7%)  12.9%
                                               ======     ======  ======

Total Revenue
Quickturn derives its total revenue from the sales of its products, maintenance
and services. Product revenue primarily consists of sales of its System
Realizer, CoBALT and Mercury emulation systems, and SpeedSim simulation
software. Maintenance and service revenue consists of fees for maintenance and
support services, training and consulting.

Total revenue decreased by $6.3 million, or 6% in 1998 from 1997, compared with
an increase of $826,000, or 1%, in 1997 over 1996. The decrease in total revenue
in 1998 as compared to 1997 was attributable to a decrease of $15.4 million in
product revenue, partially offset by an increase of $9.1 million in maintenance
and service revenue. The relatively flat growth in total revenue in 1997 as
compared to 1996 was primarily attributable to an increase of $8.1 million in
maintenance and service revenue, and a nearly offsetting decrease of $7.2
million in product revenue.

Product revenue decreased in 1998 and 1997 as Quickturn sold emulations systems
at lower average selling prices. At the same time, the systems that were sold
contained increasingly greater emulation capacity in which to meet the needs of
increasingly larger customer designs. Average selling prices for these more
powerful emulation systems decreased due to increased competition and also to
manufacturing cost savings passed on to Quickturn's customers. Such
manufacturing cost savings resulted largely from the availability of cheaper,
more efficient components in Quickturn's emulation systems. Product sales also
decreased due to the economic slowdown in the Asia-Pacific region which also
adversely affected certain segments of the U.S. market that are heavily
dependent on sales to the Asia-Pacific region.

Maintenance and service revenue increased by $9.1 million, or 31%, in 1998 over
1997, compared with an increase of $8.1 million, or 38%, in 1997 over 1996. The
increase in maintenance and service revenue in both 1998 and 1997 was primarily
attributable to a larger installed customer base, and also to increased sales of
Quickturn's custom engineering services.

U.S. revenue decreased by $8.4 million, or 12%, in 1998 compared to 1997, and
increased by $1.7 million, or 2% in 1997 over 1996. Japan revenue decreased by
$430,000, or 2% in 1998 compared to 1997, and increased by $947,000, or 4% in
1997 over 1996. The revenue decrease for both the U.S. and Japan in


                                     -27-
<PAGE>
 
1998 was largely attributable to increased competition and to the sales of
cheaper, more powerful emulation systems as mentioned in the product revenue
explanation above.

Revenue in other regions increased by $2.5 million, or 16% in 1998 compared to
1997 largely due to increased sales in Europe, which grew by $2.0 million, or
18%. Revenue in other regions decreased by $1.8 million, or 10%, in 1997 over
1996 largely due to lower sales in non-Japanese Asia-Pacific markets, which
decreased by $5.1 million, or 64%, somewhat offset by higher European sales
which increased by $2.4 million or 27%. See "Part IV, Item 14 ---Note 15 of the
Notes to Consolidated Financial Statements."

Revenue from most international customers is denominated in U.S. dollars.
However, receivables and firm sales commitments from Japanese customers are
denominated in Japanese yen. Such receivables and firm sales commitments are
hedged, where practicable, by forward exchange contracts to minimize the impact
of foreign exchange rate movements on Quickturn's operating results. There have
been no material gains or losses as a result of Quickturn's hedging program.
However, there can be no assurance that fluctuations in the currency exchange
rates in the future will not have a material adverse impact on the sales and
receivables derived from foreign currency denominated sales and thus Quickturn's
operating results and financial condition. See "Part IV, Item 14 ---Note 2 of
the Notes to Consolidated Financial Statements."

A relatively  limited  number of customers  have  historically  accounted  for a
substantial  portion of Quickturn's  revenue.  These  customers  represent early
adopters of emulation  technology,  typically for the design of complex computer
chips. In particular,  the Company's top ten customers  represented 60%, 43% and
52% of total  revenue in 1998,  1997 and 1996,  respectively.  In 1998 and 1996,
sales to one customer,  Fujitsu,  were $14.7 million or 14% of Quickturn's total
revenue, and $13.1 million or 12% of Quickturn's total revenue, respectively. In
1997, no customer  individually  comprised  more than 10% of  Quickturn's  total
revenue.  Quickturn  expects that sales of its products to a relatively  limited
number of customers  will  continue to account for a high  percentage of revenue
for the  foreseeable  future.  The loss of a major  customer or any reduction in
orders by such a customer could have an adverse effect on Quickturn's  financial
condition or results of operations.

Quickturn recognizes revenue from sales of its design verification  products and
services when all substantial  conditions have been met,  including  shipment to
the customer,  fulfillment  of acceptance  terms,  if any, and completion of all
significant  contractual terms.  Maintenance  revenue is deferred and recognized
ratably over the term of the maintenance  agreement,  which is typically  twelve
months. Maintenance contracts are typically renewed annually. See "Part IV, Item
14 ---Note 2 of Notes to Consolidated Financial Statements."


                                     -28-
<PAGE>
 
Gross Margins
Cost of revenue includes materials, labor and overhead incurred in the
manufacture of emulation systems and cycle-based simulation software as well as
the cost of providing service and maintenance. Total gross margins in 1998 were
64%, which included an inventory obsolescence charge of $5.7 million resulting
from the introduction of Quickturn's new Mercury product in the second quarter
of 1998. 

Product gross margins in 1998 were 60%, which included the aforementioned
inventory obsolescence charge. Excluding the inventory obsolescence charge,
product gross margins in 1998 were 69% as compared to 58% in 1997 and 70% in
1996. Product gross margins in 1997 were impacted by $7.4 million of sales at
zero gross margin related to the Arkos Acquisition, a $2.6 million write off of
Arkos purchased inventory and a $2.0 million inventory obsolescence charge
caused by an anticipated shorter product life cycle of Quickturn's System
Realizer emulation product resulting from the effect of Arkos-related
technology. Excluding these items, product gross margins were 69%, 70% and 70% 
in 1998, 1997 and 1996 respectively. Product gross margins in all years reflect
charges for inventory write-downs due to loss, damage or obsolescence incurred
in the regular course of shipping and handling inventory and in the course of
normal product upgrade and enhancement. These charges were $3.4 million, $1.6
million and $719,000 for 1998, 1997 and 1996 respectively.

Of these amounts $1.2 million, $929,000 and $560,000 in 1998, 1997 and 1996,
respectively, were related to excess or obsolete inventory on hand. The $1.2
million charge in 1998 was due mainly to changing configuration needs in the
Mercury product. Similarly, the $929,000 charge in 1997 related mainly to
changing needs in the System Realizer line. In 1996, the write down of $560,000
was for older Quickturn products, which included the Mars, Enterprise and Logic
Animator lines.

In addition, in 1997 and 1996, write downs of $622,000 and $159,000,
respectively, were taken due to increased defective/damaged inventory on hand
related to the growing base of customers' emulation systems supported under
maintenance contracts. There was no write down in 1998 because the level of
defective/damaged inventory declined due mainly to fewer defective parts
returned from the field.

An inventory write down of $2.2 million in 1998 was associated with the write
off of inventory loaned to various customers to assist them in certain specific
design efforts. Quickturn expects such write offs and those associated with
defective, damaged or obsolete inventory to continue in the normal course of
business and as product volume increases.

Maintenance and service gross margins were 69% in both 1998 and 1996, and 70% in
1997. Increases in maintenance and service revenues have been accompanied by
increases in personnel, travel and overhead costs needed to service an
increasing number of maintenance and service contracts, which resulted in no
material change in gross margin percentages. Quickturn cannot be certain that
such increases in costs will not result in lower gross margins in the future.

Excluding the 1997 and 1998 inventory items mentioned above and the effect of
the Arkos Acquisition, Quickturn's gross margins have been maintained as average
selling prices have fallen due mainly to offsetting reductions in the cost of
components and also due to continuing manufacturing efficiencies. Quickturn
expects competitive pressures to increase in its market from existing companies
and new entrants, which, among other things, could result in continued
decreasing average selling price. Accordingly, there can be no assurance that
Quickturn will be able to sustain its recent gross margins. Furthermore, to the
extent that Quickturn's cost reduction goals are achieved, any resulting cost
savings that are passed on to Quickturn's customers may also have an adverse
effect on gross margins.

Research and Development
Research and development expenses were $23.4 million, $23.5 million and $19.7
million in 1998, 1997 and 1996, respectively. The decrease in research and
development expenses in 1998 as compared to 1997 was primarily attributable to
reduced hardware prototype expenses for the new Mercury emulator, which was
introduced in the second quarter of 1998. The increase in research and
development expenses in 1997 as


                                     -29-
<PAGE>
 
compared to 1996 was primarily attributable to increased staffing, equipment and
support costs related to the Mercury emulator development, and other increased
research and development activities focused on the next generation of emulation
and cycle-based simulation products. Research and development expenses as a
percentage of total revenue were approximately 22%, 21% and 18% in 1998, 1997
and 1996, respectively. Quickturn expects to continue to invest a significant
amount of its resources in research and development.

Sales and Marketing
Sales and marketing expenses were $38.0 million, $36.8 million and $32.0 million
in 1998, 1997 and 1996, respectively. Sales and marketing expenses increased in
each period due mainly to increases in headcount and related expenses as
Quickturn increased its worldwide sales presence. In addition, there was an
increase in marketing expenses in 1998 related to the introduction of the new
Mercury emulator. As a percentage of total revenue, sales and marketing expenses
were approximately 36%, 33% and 29% in 1998, 1997 and 1996, respectively.
Quickturn expects that sales and marketing expenses will continue to increase in
dollar amounts as Quickturn expands its sales and marketing efforts.

General and Administrative
General and administrative expenses were $19.4 million, $11.5 million and $7.3
million in 1998, 1997 and 1996, respectively. The increase in general and
administrative expenses in 1998 as compared to 1997 was largely due to legal and
advisory expenses of $7.1 million related to an unsolicited tender offer
initiated in August 1998, and increased legal costs related to ongoing patent
infringement and other legal proceedings. The increase in general and
administrative expenses in 1997 as compared to 1996 was primarily attributable
to increased legal costs related to a patent infringement lawsuit filed by
Quickturn in January 1996. See "Part IV, Item 14 ---Note 17 of the Notes to
Consolidated Financial Statements." Quickturn expects general and administrative
expenses to decrease to the extent that continuing legal costs decrease. General
and administrative expenses represented approximately 19%, 10% and 7% of total
revenue in 1998, 1997 and 1996, respectively.

Acquisition  and Merger Related  Charges  
SpeedSim Merger 
In connection with the SpeedSim Merger which was accounted for as a pooling of 
interests, Quickturn recorded a one-time charge of $1.2 million in the first
quarter of 1997 that included fees for investment banking, legal and accounting
services and other costs of consolidating. See "Part IV, Item 14---Note 3 of the
Notes to Consolidated Financial Statements."

Arkos Acquisition
In June 1997, pursuant to an asset purchase agreement among Quickturn, Synopsys,
and Arkos, Quickturn purchased from Synopsys certain assets relating to
Synopsys's emulation business, including all the outstanding capital stock of
Arkos.


                                     -30-
<PAGE>
 
The purchase price for the Arkos Acquisition was $16.7 million, consisting of
$5.0 million cash, 500,000 shares of Quickturn common stock valued at $6.5
million, warrants valued at $3.0 million and liabilities assumed of $2.2
million. The warrants are exercisable for 1.0 million shares of Quickturn common
stock at $13.34 per share and expire on June 14, 1999.

The acquisition was accounted for as a purchase. Accordingly, the purchase price
of $16.7 million was allocated to assets and liabilities based on their
estimated fair values as of the date of the acquisition as follows:

(in thousands)
Margins on sales to Arkos customers                 $    5,531
In-process R&D                                           2,757
Inventory                                                2,602
Patents                                                    541
Fixed assets                                               100
                                                    ----------      
 Net fair value of assets and liabilities acquired      11,531
 Goodwill                                                5,141
                                                    ----------    
  Total purchase price                              $   16,672
                                                    ==========    
Margins on sales to Arkos customers of $5.5 million represents revenue of
$7.4 million less cost of revenue of $1.9 million on sales to Arkos customers
that were substantially completed at the date of the acquisition. These margins
were charged to cost of revenue as the sales were completed.

The in-process research and development acquired in the Arkos Acquisition 
related to an emulator designed to verify the functional logic of an 
application-specific computer chip. The main features that were expected to be 
applicable to Quickturn's products were the handling of bulk memory and the 
interface of C-language simulation with the emulator. At the date of the Arkos 
Acquisition, these technologies were not complete nor were they fully 
integrated into a useful product. These technologies were estimated to be 60% 
complete and it was further estimated that Quickturn would spend approximately 
$2.0 million to develop these technologies to a viable state. Quickturn planned 
to develop the Arkos technology with the goal of incorporating these two 
features into Quickturn's emulation products so that the resulting systems would
better meet customer needs. Quickturn's research into the bulk memory handling
capability determined that it would not yield an economically viable product,
that the electronic interface to Quickturn's emulation systems would be too
complicated and that the electronic signals would be dependent on certain Arkos
architecture which was not transferable to the Quickturn systems. The feature
regarding the C-language simulation interface to the emulator was found to
provide no significant advantage over Quickturn's then-current approach of
Quickturn's specialty interface language, Quickturn Emulation Language.
Quickturn abandoned the Arkos technologies in early 1998. Management believes
that there was no impact on future results of operations or financial position
caused by the failure to develop the acquired technology. The in-process
research and development was charged to operations in the third quarter of 1997.

The patents and fixed assets are being amortized over three to five years.

Goodwill of $5.1 million which represents the cost in excess of net assets
acquired is being amortized on a straight line basis over five years.

Additionally, in the third quarter of 1997, $2.0 million was charged to cost of
revenue to reflect the obsolescence of Quickturn inventory caused by an
anticipated shorter product life cycle of Quickturn System Realizer product
resulting from the effect of Arkos related technology.

Interest Income and Expense
Interest income was $3.0 million, $2.4 million and $2.2 million in 1998, 1997
and 1996,


                                     -31-
<PAGE>
 
respectively. The increases in interest income in 1998 and 1997 were primarily
due to a higher average balance of cash and cash equivalents and marketable
securities in both years, and higher interest rates in 1998. Interest expense
was $132,000, $272,000 and $429,000 in 1998, 1997 and 1996, respectively. The
decreases in interest expense in 1998 and 1997 were primarily due to the payoff
of lease lines used to purchase certain fixed assets and the reduction of other
debt.

Provision for Income Taxes 
The provisions for federal, state and foreign income taxes were benefits of $5.8
million and $3.7 million in 1998 and 1997, respectively, and an expense of $5.7
million in 1996, representing effective tax provision (benefit) rates of
approximately (46%), (55%) and 29% in 1998, 1997 and 1996, respectively. The
effective income tax rate was impacted by a reduction in Quickturn's valuation
allowance against deferred tax assets of $1.9 million in 1996. The effective tax
rate was also impacted by the tax benefit from Quickturn's foreign sales
corporation, and by utilization of federal and state tax credits in all years
presented.

At December 31, 1998, Quickturn had federal and state net operating loss
carryforwards of $3.6 million and $6.0 million, respectively, and federal and
state tax credit carryforwards of $5.9 million and $2.1 million, respectively. A
portion of Quickturn's net operating loss and tax credit carryforwards was
acquired in a merger and is subject to an annual limitation of approximately
$1.2 million.

Factors Affecting Operating Results
Competition
The EDA industry is highly competitive and rapidly changing. Quickturn faces
significant competition for emulation-based system-level verification and cycle-
based simulation, in addition to competition from traditional design
verification methodologies which rely on the approach of building and then
testing complete system prototypes. Because of the growing demand for a design
verification methodology which reduces the number of costly design iterations
and improves product quality, Quickturn expects competition in the market for
system-level verification and cycle-based simulation to increase as other
companies attempt to introduce emulation and cycle-based simulation products and
product enhancements, and as major new EDA technologies may emerge. Moreover,
Quickturn competes with companies that have significantly greater financial,
technical and marketing resources, greater name recognition and larger installed
bases than Quickturn. In addition, many of these competitors have established
relationships with current and potential customers of Quickturn. Increased
competition could result in price reductions, reduced margins and loss of market
share, all of which could materially adversely affect Quickturn. Quickturn
believes that the principal competitive factors in the EDA market are quality of
results, the mission-critical nature of the technology, technical support,
product performance, reputation, price and support of industry standards.
Quickturn believes that it currently competes favorably with respect to these
factors. However, there can be no assurance that Quickturn will be  


                                     -32-
<PAGE>
 
able to compete successfully against current and future competitors or that
competitive pressures faced by Quickturn will not materially adversely affect
its business, operating results and financial condition.

In addition, competitors may resort to litigation as a means of competition.
Such litigation may result in substantial costs to Quickturn, injunctive relief
preventing Quickturn from engaging in activities critical to its business
and significant diversion of management time. In 1995, Mentor filed suit against
Quickturn for declaratory judgment of non-infringement, invalidity and
unenforceability of several of the Company's patents. Several actions between
Quickturn and Mentor and Mentor's French subsidiary, Meta, ensued, and those
cases were consolidated in the U.S. District Court for the District of Oregon,
where five of Quickturn's patents are now involved in the disputes. Quickturn
has pending actions against Mentor and Meta for infringement of the five patents
at issue, and Mentor and Meta are seeking a declaratory judgment of non-
infringement and unenforceability of the five patents in dispute, and of
invalidity of two of those patents. Quickturn is also involved in litigation
with Mentor's German subsidiary; with Mentor's French and Dutch subsidiaries,
with Meta and with a French company named M2000 in France; and with Aptix
Corporation, Meta and Mentor in the U.S. District Court, the Northern District
of California. See "Part IV, Item 14 ---Note 17 of the Notes to Consolidated
Financial Statements." Although patent and intellectual property disputes in the
EDA industry are often settled through licensing, cross-licensing or similar
arrangements, costs associated with such litigation and arrangements may be
substantial, and no assurance can be given that any licensing or other 
arrangements would be available on economically feasible terms, or at all.

Impact of the Year 2000 Issue
Many existing computer systems, applications and other control devices use
computer programs that recognize only two digits rather than four to define an
applicable year. Therefore, any computer systems or other equipment with
embedded date-sensitive technology may recognize a date using "00" as the year
1900 rather than the year 2000 (the "year 2000 issue"). In addition to affecting
the functionality of Quickturn's own software products and internal systems, the
year 2000 issue could result in system failure or miscalculations causing
disruptions in the operations of business and government entities which could
affect operations in any area of Quickturn, including supply chain,
manufacturing, distribution and financial.

Quickturn initiated a year 2000 compliance project in the fall of 1997. The
scope of this project includes addressing the year 2000 issue in six key areas:
(1) Quickturn's proprietary design verification products, (2) internal-use
computer systems for conducting business operations and product development, (3)
internal embedded systems or "infrastructure", (4) third-party suppliers of
products and services, (5) customers, and (6) marketing joint ventures and other
partnerships. The project consists of addressing each of these six areas in four
phases, which are: (1) planning, (2) investigation, (3) remediation, and (4)
testing.

Quickturn has substantially completed the planning phase, which involved
identifying and documenting all areas where material disruption of Quickturn's
activities might


                                     -33-
<PAGE>
 
occur due to year 2000 issue related failures, and then formulating and
implementing a plan to remediate these problems. A project team (the "year 2000
committee") is formally chartered with carrying out the year 2000 issue project.
The year 2000 committee reports regularly to Quickturn's board of directors.
Quickturn is currently completing the last item in the planning phase, which is
a comprehensive contingency plan that is intended to mitigate possible
disruptions that may occur due to material year 2000-related failures in any of
the six key areas described above. The issues identified and areas being
addressed in developing the contingency plan are further discussed below.
Quickturn intends to complete the contingency plan by mid-1999.

To date, Quickturn has also substantially completed the investigation phase in
all six areas of concern. The investigation included specifically identifying
information technology ("IT") and non-IT computer and embedded systems,
including Quickturn verification products and third party systems used in
Quickturn products and in business operations. Based on the investigation,
Quickturn determined that it would be required to modify or replace certain
portions of its third party and proprietary software so that its computer
systems and design verification products would properly utilize dates beyond
December 31, 1999. Specific IT and non-IT systems in Quickturn were targeted for
software and/or hardware upgrades or replacements.

Also during this phase, Quickturn completed formal communications with its
significant suppliers to determine the extent to which Quickturn is vulnerable
to those third parties' failure to remedy their own year 2000 issue. Computer
equipment and embedded-systems vendors, business service providers and other
third-party vendors on whom Quickturn relies to carry out normal business
operations generally have indicated substantial remediation, or documented plans
to remediate, the year 2000 issue. Some have given written certification of
internal and product compliance. Substantially all critical inventory suppliers
have indicated product compliance. There can be no assurance, however, that the
systems of third party service providers on which Quickturn's business
operations rely will be converted in a timely fashion, or that a failure to
convert by a third party, or a conversion that is incompatible with Quickturn's
systems, will not have a material adverse effect on Quickturn. For example,
failure by Quickturn's electricity provider to provide electricity on January 1,
2000 or on dates around January 1, 2000, could result, at worst, in a business
interruption such as a plant shutdown. Such an occurrence could adversely affect
Quickturn's quarterly results due to the inability to process and deliver
customer orders in a timely fashion or to carry on other business activities.
Nevertheless, Quickturn presently believes that, based on the positive responses
of most business partners, including customers and vendors, the year 2000 issue
is being diligently addressed and substantial mitigation will be achieved in
most, if not all, sectors.

To date, Quickturn has also substantially completed the remediation phase with
respect to internal-use IT systems and embedded non-IT systems and to its own
currently supported proprietary software products. All critical business and
development computer systems have been updated with year 2000 compliant versions
of software and are now in the testing phase to assure that the software
performs as indicated by


                                     -34-
<PAGE>
 
the vendors. Testing of these systems is expected to be substantially completed
by March 1999, with some business systems testing to continue through June 1999.
Material failure by one of these business systems is not expected, based on the
results of testing to date. However, if such failure were to occur, it could
result in business interruption that, at worst, might affect Quickturn's ability
to ship products to its customers, thus affecting the Company's results of
operations in that quarter. Year 2000 remediation efforts are not expected to
materially impact or delay Quickturn's other IT projects or new product
introductions.

The process of correcting year 2000 faults in Quickturn's proprietary software
is nearing completion, with final remediation and testing estimated to be
achieved by mid-1999 for all currently supported product lines and for those
products that may be introduced by that date. Based on remediation and testing
results achieved to date, it is expected that the year 2000 compliant versions
of Quickturn's software products will be fully functional and will not result in
any year 2000-related failure. However, if such failure were to occur, although
the date field in Quickturn's emulation and simulation software is not critical
to the performance of the software, some customers could experience
interruptions in their design process. For example, if Quickturn's proprietary
Quest software, which works on a separate workstation in conjunction with
Quickturn's emulation systems, failed to perform due to year 2000 programming
issues, Quickturn could be required to provide immediate assistance to affected
customers and could be held responsible for lost design time. Such a situation
could result, at worst, in litigation by affected customers. Quickturn is
diligently pursuing remediation efforts in its proprietary software products to
mitigate the possibility of such occurrences.

To further mitigate the effects of year 2000-related failures on Quickturn's
operations and relationships with its customers and vendors, Quickturn has begun
to address contingency plans in the event of either its own product failure or
the failure of any critical third party provider of goods or services. Quickturn
is in the process of completing contingency plans to assure secondary sources
for critical goods and services (inventory vendors and freight carriers, for
example). In general, third party vendors have indicated virtually complete
product compliance and substantially complete internal compliance, so although
Quickturn will identify alternative vendors for some critical items, it does not
expect failures in this area to be material. Quickturn has determined that it is
not practicable to identify or arrange for secondary backup services for such
critical functions as electricity, telephone, banking and government services on
which Quickturn must rely. Therefore, Quickturn continues to seek information on
the status of each of these service providers. The year 2000 committee will
continue to address options for coping with failures in these areas as part of
its contingency plan.

Quickturn's contingency plan for handling its proprietary software and hardware
product compliance consists principally of making available appropriate
engineering personnel to address customer problems that may occur. As
Quickturn's software products have been and will continue to be fully tested for
year 2000 readiness, the Company expects such issues, if any, to be immaterial
and to be handled in the normal


                                     -35-
<PAGE>
 
course of business by existing R&D engineering and field engineering staff.

Management's estimates of the expected costs to complete the Year 2000 project
are based on the results of the planning, investigation, remediation and testing
completed to date. Computer products purchased and used by Quickturn are
substantially all new or relatively new computer equipment that is certified
year 2000 compliant by the manufacturer. The main software platforms used in
research and development and most other operations of Quickturn are the latest
versions of Sun Solaris and Windows NT, both of which have been represented by
their manufacturers as year 2000 compliant. Quickturn's key internal business
system, Computer Associates' Manman product, which runs on an HP3000
minicomputer, has been updated to a year 2000 compliant version. Substantially
all software updates, if required, have been supplied to Quickturn free of
charge under existing maintenance agreements.

In addition, Quickturn's own product, Quest software, will be remediated as part
of a regular, new release that is scheduled for mid-1999. Therefore, research
and development costs, as well as the costs of distribution and installation,
for this release are considered normal and in the course of ordinary business.
Quickturn's SpeedSim simulation software has no compliance issues. None of the
inventory components used in Quickturn's emulation products are date sensitive.
There has been no inventory obsolescence identified with the year 2000 issue and
none is expected to occur.

Based on the above facts, management's estimate of $500,000 total cost for the
year 2000 project consists principally of the costs associated with travel by
field engineers and technicians to customer sites to assist in the installation
of upgraded Quest software before December 31, 1999 ($300,000); the cost of
estimated incremental engineering time and other related resources to assure
timely integration of year 2000 code in the latest version of Quest software
($125,000); and estimated miscellaneous, non-critical IT hardware systems
replacements and upgrades ($75,000). Estimated costs incurred to date related to
the year 2000 issue modifications are $180,000, all of which have been expensed
in the period incurred. Estimated costs do not include the costs associated with
contingency plans, which are currently being developed. These costs are not
expected to be material. There can be no assurance, however, that these cost
estimates will be achieved and actual results could differ materially from these
estimates. Specific factors that might cause such material difference include,
but are not limited to, the availability and cost of personnel trained in this
area, the ability to locate and correct all relevant computer code, the failure
of third parties which are material to Quickturn's operations to mitigate their
own year 2000 issue, and similar uncertainties. However, Quickturn is vigilantly
pursuing the year 2000 issue, and believes that, once all phases of the project
have been completed and contingency plans have been explored and put in place,
Quickturn will be able to significantly reduce the impact of any disruptions
that may occur.

Euro Currency
On January 1, 1999, eleven member countries of the European Union adopted the
euro as their common legal currency and established fixed conversion rates
between their 


                                     -36-
<PAGE>
 
sovereign currencies and the euro. Electronic transactions can be made in either
the sovereign currencies or the euro until January 1, 2002, after which the euro
must be used exclusively for all transactions. Quickturn believes that its
internal systems and financial institution vendors are capable of handling the
euro conversion and is in the process of examining current marketing and pricing
policies and strategies that may be affected by conversion to the euro. The cost
of this effort is not expected to be material to Quickturn's results of
operations or financial condition. For example, the conversion to the euro may
have competitive implications on Quickturn's pricing and marketing strategies.
Quickturn may be at risk to the extent its principal European customers are
unable to deal effectively with the impact of the euro conversion. Quickturn has
not yet completed the evaluation of the impact of the euro on its functional
currency designations.

Other Factors
Other factors which could adversely affect Quickturn's quarterly operating
results in the future include efficiencies as they relate to managing
inventories and fixed assets, the timing of expenditures in anticipation of
increased sales, customer product delivery requirements and shortages of
components or labor. Moreover, a significant portion of the Company's total
revenue in each quarter generally results from shipments in the last few weeks
of the quarter; therefore, a delay in the shipment of a few orders can have a
significant impact upon total revenue and results of operations in a given
quarter. Additionally, since a significant portion of Quickturn's revenue and
net income is derived from international operations, fluctuations of the U.S.
dollar against foreign currencies and the seasonality of Asia-Pacific, European
and other international markets could impact Quickturn's results of operations
and financial condition in a particular quarter. See "Part I, Item 1 ---
Business: Risk Factors."

Liquidity and Capital Resources
As of December 31, 1998, Quickturn had $60.2 million in cash, cash equivalents
and marketable securities. Additionally, Quickturn has $5.0 million in an
unsecured revolving bank line of credit, available through June 1, 1999. To
date, no funds have been drawn from the bank line of credit. Quickturn's credit
agreement contains certain affirmative and restrictive covenants that are
typical of such commercial lending arrangements. The agreement requires, among
other things, that Quickturn maintain a stipulated tangible net worth, meet
certain financial ratios (quick assets to current liability and debt to tangible
net worth), achieve annual profitability and maintain quarterly debt service.
The agreement also prohibits, among other things, Quickturn from paying cash
dividends. At December 31, 1998, Quickturn was in compliance with the agreement,
except for the annual profitability covenant. The compliance with the defaulted
profitability covenant was waived by the lender for the year ended December 31,
1998. See "Part IV, Item 14 ---Note 9 of the Notes to Consolidated Financial
Statements."

Net cash provided by operating activities was $13.1 million, $9.2 million and
$22.4 million in 1998, 1997 and 1996, respectively. The increase in cash
provided by operating activities in 1998 as compared to 1997 was primarily
attributable to decreases in accounts receivable and prepaid expenses and other
current assets,   


                                     -37-
<PAGE>
 
partially offset by the absence of the effect of the Arkos Acquisition in 1997.
The decrease in cash provided by operations in 1997 as compared to 1996 was
primarily attributable to a decrease in net income and an increase in accounts
receivable, partially offset by the effect of the Arkos Acquisition in 1997.

Net cash used in investing activities was $2.4 million, $20.6 million and $13.3
million in 1998, 1997 and 1996, respectively. The decrease in cash used in
investing activities in 1998 as compared to 1997 was primarily due to a decrease
in the amount of marketable securities held compared to an increase in 1997,
while the increase in cash used in investing activities in 1997 as compared to
1996 was primarily attributable to the Arkos Acquisition.

Capital expenditures were approximately $7.2 million, $7.5 million and $6.4
million in 1998, 1997 and 1996, respectively. These expenditures were primarily
for the expansion of production capacity and the addition of research and
development equipment. Having no material capital commitments, Quickturn
anticipates that its planned purchases of capital equipment in 1999 will require
additional expenditures of approximately $10.0 million, a portion of which may
be financed with cash and a portion of which may be financed through capital
leases.

Quickturn believes that its cash and cash equivalents, together with its
existing credit facility and the cash flows expected to be generated by
operations, will be sufficient to meet its anticipated cash needs for working
capital, capital expenditures and marketing expansion through at least 1999.


                                    -38-
<PAGE>
 
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

Quickturn's investment portfolio consists entirely of fixed rate investments,
totaling $33.7 million as of December 31, 1998. These securities, like all fixed
income instruments, are subject to interest rate risk and will fall in value if
market interest rates increase. If market interest rates were to increase
immediately and uniformly by 10% from levels as of December 31, 1998, the fair
value of the portfolio would decline by approximately $900,000, or 3%.

Quickturn does not use derivative financial instruments for any speculative or
trading purposes. As discussed below, Quickturn uses foreign exchange forward
contracts to manage certain foreign currency risk.

The following table provides information regarding the principal cash flows and
fair value of Quickturn's fixed rate investments categorized by expected
maturity dates. 
-------------------------------------------------------------------------------
(in thousands except average interest rate)

<TABLE> 
<CAPTION> 
                                                                              Principal                                          
                                                          -------------------------------------------------          Total 
                                                           1999          2000            2001        Total         Fair Value
                                                          --------------------------------------------------       ----------
<S>                                                     <C>          <C>              <C>         <C>              <C> 
Corporate Debt Securities                                 $ 4,440       $15,658         $4,000      $24,098          $24,441
       Average interest rate                                 6.77%         6.61%          6.28%        6.58%            6.49%

U.S. Government and Municipal Debt Securities             $ 9,244       $     0         $    0      $ 9,244          $ 9,245
       Average interest rate                                 5.06%           --             --         5.06%            4.99%

Total Fixed Rate Investments                              $13,684       $15,658         $4,000      $33,342          $33,686
       Average interest rate                                 5.61%         6.61%          6.28%        6.16%            6.08%
</TABLE> 
            

Foreign Currency Exchange Rate Risk 
Quickturn invoices its customers in foreign countries in U.S. dollars, with the
exception of Japan, where the customers of Quickturn's Japanese subsidiary are
invoiced in Japanese yen. Quickturn is exposed to foreign exchange rate
fluctuations as the results of operations for its international subsidiaries are
converted into U.S. dollars for consolidation.

Quickturn's revenue and expenses in its Japanese subsidiary are denominated in
yen. To offset the effects of currency fluctuations between the U.S. dollar and
the Japanese yen, Quickturn operates a foreign exchange hedging program.
Quickturn purchases foreign exchange forward contracts to offset individual
foreign currency commitments in Japan, such as large customer receivables, firm
sales, or expected net cash flows between Quickturn and its Japanese subsidiary,
thus substantially offsetting the impact of currency fluctuations. These hedges
offset substantially all of the foreign currency risk because the Japanese
subsidiary funds its operations with locally generated cash and this minimizes
the number of intercompany cash transactions.

As of December 31, 1998, Quickturn had two outstanding forward exchange
contracts

                                      -39-
<PAGE>
 
with a notional value totaling $12.4 million. These contracts are marked to
market, as are the underlying transactions being hedged, therefore, the impact
of exchange rate changes on the forward contracts will be substantially offset
by the impact of such changes on the underlying transactions. See "Part IV, Item
14 ---Note 2 of Notes to Consolidated Financial Statements."

The following table provides information regarding the contractual amount and
net fair value of Quickturn's forward exchange agreements, all of which mature
in 1999: 
--------------------------------------------------------------------------------
(in thousands except average exchange rate and yen amount)

<TABLE> 
<CAPTION> 
                                                                                           Total
                                                                                          --------
<S>                                                                                     <C> 
(Receive US$/Pay Japanese Yen) 
Contracts receivable (1.65 billion Japanese Yen)                                           $12,910
Notional value of forward exchange contracts                                               $12,375
Average contractual exchange rate(yen/$)                                                    127.80
Fair value of net contract liability                                                        $1,631
</TABLE> 
                       

Because expenses in Quickturn's European subsidiaries, which consist only of
selling and administrative costs, are not material, the impact of the
remeasurement from the various European currencies into U.S. dollars has not
had, and is not expected to have, a material impact on Quickturn's results of
operations.

Gains and losses resulting from currency fluctuations from period to period are
included in other income, with the exception, since 1997, of the Japanese
subsidiary whose translation gains and losses are recorded as a foreign currency
translation adjustment in the Stockholders Equity section titled "Accumulated
other comprehensive income (loss)". Prior to 1997, gains and losses in the
Japanese subsidiary were recognized in other income.

The following table shows the impact of foreign currency fluctuations on the
revenue and expenses of the foreign subsidiaries:
--------------------------------------------------------------------------------
(in thousands)

<TABLE> 
<CAPTION> 
                                                                                  Year ended December 31,
                                                                           ---------------------------------------
                                                                             1998            1997           1996
                                                                           --------        --------       --------
<S>                                                                        <C>             <C>            <C> 
Foreign exchange (gain) loss
       Japan                                                                  ($184)         ($312)          ($64)
       France                                                                    17             23             (1)
       Germany                                                                   (9)            18             14
       UK                                                                        (3)             4             (9)
       Belgium                                                                   (5)            --             --
       Sweden                                                                     2             (2)            --
       Israel                                                                    10             --             --
                                                                           --------        -------        --------
         Total foreign exchange gain                                          ($172)         ($269)           ($60)
                                                                           ========        =======        ========
Foreign currency translation adjustment 
       Japan                                                                  ($820)          $653              --
                                                                          =========         ======          ======
</TABLE> 

                                      -40-
<PAGE>
 
Item 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
         --------------------------------------------

     The information required by this item is included in Part IV, Item 14 of
this Form 10-K and are presented beginning on page 57.


Item 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND 
         ---------------------------------------------------------------  
         FINANCIAL DISCLOSURE.
         ---------------------
                  
     Not applicable.

                                    -41-
 
<PAGE>
 
                                   PART III
                                   --------

Item 10.    QUICKTURN'S DIRECTORS AND EXECUTIVE OFFICERS.
            ---------------------------------------------
 
          Quickturn's directors and executive officers and vice presidents are
appointed by, and serve at, the discretion of the Board of Directors.  Each
executive officer and vice president is a full-time employee of Quickturn.
There is no family relationship among any executive officer, vice president or
director of Quickturn.

Directors of Quickturn
----------------------
The directors of Quickturn and their ages as of February 23, 1999 are as
follows:
<TABLE>
<CAPTION>
 

Name                                          Age  Principal Occupation
----                                          ---  --------------------
<S>                                           <C>  <C>
Glen M. Antle...........................       60  Chairman of the Board of the
                                                   Company
Keith R. Lobo...........................       47  President and Chief
                                                   Executive Officer of
                                                   Quickturn
Richard C. Alberding....................       68  Executive Vice President,
                                                   Hewlett-Packard Company,
                                                   Retired
Michael R. D'Amour......................       45  President of D'Amour and
                                                   Associates
William A. Hasler.......................       57  Co-Chief Executive Officer
                                                   of Aphton Corporation
Dr. Yen-Son (Paul) Huang................       53  Entrepreneur
Charles D. Kissner......................       51  Chief Executive Officer of
                                                   Digital Microwave Corporation
Dr. David K. Lam........................       56  Chairman of David Lam Group,
                                                   Inc.
</TABLE>

      Glen M. Antle joined Quickturn in June 1993 as Chairman of the Board. From
July 1990 to June 1993, he served as Chairman of PiE Design Systems, Inc.
("PiE"), and from September 1992 to June 1993, he served as Chief Executive
Officer of PiE. He served as Chairman, from August 1982 to May 1988, as co-
Chairman, from May 1988 to June 1989, and as Chief Executive Officer, from
August 1982 to September 1988, of Cadence Design Systems, Inc., a company that
develops CAD software products. Mr. Antle is currently a director of Trident
Microsystems, Inc.

      Keith R. Lobo joined Quickturn in November 1992 as President, Chief
Executive Officer and Director. From March 1992 to October 1992, Mr. Lobo served
as a consultant in the venture capital field and was a private investor. From
March 1988 to February 1992, he served as Executive Vice President and Chief
Operating Officer of Chips & Technologies, Inc., a semiconductor supplier of
microcomputer components to the personal computer industry.


                                     -42-
<PAGE>
 
      Richard C. Alberding has served as Director of Quickturn since May 1995.
Mr. Alberding has served as a management consultant since June 1991. From 1958
to 1991, he served in a variety of positions for Hewlett-Packard Company, most
recently as Executive Vice President. Mr. Alberding also serves as a director of
Walker Interactive Systems, Inc., Paging Network, Inc., Sybase, Inc., Kennametal
Inc., Digital Microwave Corp., Digital Link Corp., and JLK Direct, Inc.

      Michael R. D'Amour co-founded Quickturn and has served as Director since
the inception of Quickturn. He is currently the CEO and President of Veridicom,
Inc., a position he has held since December 1998. Since December 1995, Mr.
D'Amour has served as President of D'Amour and Associates, a research and
development company. He had held several positions within Quickturn since he co-
founded Quickturn: from January 1995 to April 1995, he served as Executive Vice
President; from June 1990 to December 1994, he served as Executive Vice
President, International Sales; from September 1987 to June 1990, he served as
Executive Vice President, Research and Development; from September 1987 to July
1998, he served as President and Chief Executive; from the Quickturn's inception
until June 1993, he served as the Chairman of the Board. Mr. D'Amour also serves
a director of Fortress Technologies, Inc.

      William A. Hasler has served as Director of Quickturn since June 1998. Mr.
Hasler is currently the Co-Chief Executive Officer and director of Aphton
Corporation, a public bio-pharmaceutical company. From August 1991 through July
1998, Mr. Hasler served as Dean of the Haas School of Business at the University
of California at Berkeley. Mr. Hasler also serves as a member of the board of
directors of several other corporations, including Solectron, and Walker
Interactive. He is a public governor of the Pacific Stock & Options Exchange.

      Dr. Yen-Son (Paul) Huang has served as Director of Quickturn since June
1993. Dr. Huang served as Executive Vice President between January 1996 and
September 1997. He served as Executive Vice President, Product Development, from
June 1993 to January 1996. From January 1990 to June 1993, Dr. Huang served as
President of PiE, a company he co-founded.

      Charles D. Kissner has served as Director of Quickturn since June 1998.
Mr. Kissner was elected Director and CEO of Digital Microwave in July 1995 and
became Chairman in August 1996. From July 1993 to July 1995, Mr. Kissner served
as Vice President and General Manager of the Microelectronics Division of M/A-
Com, Inc., a manufacturer of radio and microwave communications products. From
February 1990 to July 1993, Mr. Kissner served as President, Chief Executive
Officer, and a Director of Aristacom International, Inc., a


                                     -43-
<PAGE>
 
communications software company.  He also formed and operated Fujitsu Network
Switching, Inc. from 1984 to 1990, and continued to serve as an outside Director
until October, 1993.  Mr. Kissner held several key positions at AT&T from 1971
to 1984.  Mr. Kissner is also a director of Spectrian, Inc. and American Medical
Flight Support, Inc and is a member of the board of directors of the American
Electronics Association and serves as chair of its Bay Area Political
Effectiveness Committee.

      Dr. David K. Lam has served as Director of Quickturn since September 1996.
Dr. Lam is Chairman of David Lam Group, a firm that advises and guides
technology-based companies in managing growth. Between April 1989 and October
1996, Dr. Lam served as President and Chief Executive Officer of ExpertEdge,
Inc., a provider of integrated, multimedia client-server software. From 1987 to
1989, he was Vice President at Wyse Technology, Inc., and he founded Lam
Research in 1980. Dr. Lam also served as a director of Asante Technology, Inc.
from May 1997 through December 1998.

Executive Officers and Vice Presidents of Quickturn
---------------------------------------------------
      The executive officers and vice presidents of Quickturn, and their
ages as of February 23, 1999 are as follows:

Name                               Age Position
----                               --- --------
Keith R. Lobo.................     47  President, Chief Executive Officer and
                                       Director
Raymond K. Ostby..............     51  Vice President, Finance and
                                       Administration, Chief Financial Officer
                                       and Secretary
Donald J. McInnis.............     52  Senior Vice President, Advanced
                                       Simulation Division
Dr. K.C. Chu..................     52  Vice  President, Software Development
Michael H. Ferguson...........     46  Vice President, Asia-Pacific Sales
Bernard A.Gilbert.............     42  Vice President, Engineering Operations,
                                       Advanced Simulation Division
Jeffrey K. Jordan.............     54  Vice President, North American Sales
Kevin L.Ladd..................     36  Vice President and Chief Technologist,
                                       Advanced Simulation Division
Stephen P.Sample..............     47  Vice President, Advanced Development
Dugald H.Stewart..............     46  Vice President, Operations
Christopher J.Tice............     39  Vice President, World-Wide Support
                                       Services
Tung-sun Tung.................     50  Vice President, Research and Development
Dr. Ming Yang Wang............     54  Vice President, Advanced Technology


                                     -44-
<PAGE>
 
                                       Solutions
Naeem Zafar...................     41  Vice President, Marketing
 


      Keith R. Lobo joined Quickturn in November 1992 as President, Chief
Executive Officer and as a Director. From March 1992 to October 1992, Mr. Lobo
served as a consultant in the venture capital field and was a private investor.
From March 1988 to February 1992, he served as Executive Vice President and
Chief Operating Officer of Chips & Technologies, Inc., a semiconductor supplier
of microcomputer components to the personal computer industry. From August 1981
to March 1988, he served in a variety of positions, most recently as Vice
President of Advanced Products and General Manager of the RISC Microprocessor
Group at LSI Logic Corporation, a supplier of ASICs.

      Raymond K. Ostby joined Quickturn in September 1993 as Vice President,
Finance and Administration, Chief Financial Officer and Secretary. From July
1991 to September 1993, he served as Vice President, Finance and Administration
and Chief Financial Officer at Force Computers, Inc., a computer products
company. From June 1985 to July 1991, he served as Vice President, Finance and
Administration and Chief Financial Officer of Atmel Corporation, a manufacturer
of semiconductor products.

      Donald J. McInnis has served as Senior Vice President, Advanced Simulation
Division of Quickturn from February 1997. From June 1994 to February 1997, he
served as President and Chief Executive Officer of SpeedSim, Inc. From May 1990
to February 1994, Mr. McInnis was Vice President and General Manager, Software
Business Unit of ComputerVision Corporation, a provider of CAD/CAM software
services.

      Dr. K.C. Chu joined Quickturn in June 1995 as Vice President, Entry
Systems and HDL-ICE Development and has served as Vice President, Software
Development since January 1996. From July 1992 to June 1995, he served as
Director, Sunnyvale Research and Development Lab of Mitsubishi Electric Research
Labs, Inc., a research and development facility, and from May 1990 to June 1992,
he served as Senior Manager, Research and Development at Mitsubishi Electronics
America, Inc., a supplier of semiconductor products.

      Michael H. Ferguson joined Quickturn in July 1998 as Vice President, Asia-
Pacific Sales. From March 1997 to July 1998, he served as Global Account
Director at Cadence Design Systems, Inc., a provider of services and design
automation tools to the electronics industry and from July 1994 to March 1997,
he served as Vice President, Asia-Pacific at Cadence. From October 1988 to July
1994, he served as Asia General Manager of the Assembly Group at Teradyne, Inc.,
a provider of automatic test equipment to electronics manufacturers.


                                     -45-
<PAGE>
 
      Bernard A. Gilbert has served as Vice President, Engineering Operations of
the Advanced Simulation Division of Quickturn since February 1997. From March
1996 to February 1997 he was Vice President, Engineering Operations at SpeedSim,
Inc., a provider of cycle-based simulation technology, and from March 1985 to
March 1996, he served as Director of Core Technology Research and Development at
ComputerVision Corp., a provider of CAD/CAM software services.

      Jeffrey K. Jordan joined Quickturn in April 1993 and has served as Vice
President, North American Sales since October 1996. From May 1994 to October
1996 he was Eastern Area Sales Director and from April 1993 to May 1994 he
served as Eastern Area Sales Manager. From August 1989 to April 1993, Mr. Jordan
served as Eastern Regional Sales Manager at Integrated Measurement Systems, a
provider of test station hardware and software.

      Kevin L. Ladd has served as Vice President and Chief Technologist of the
Advanced Simulation Division of Quickturn since February 1997. From June 1994 to
February 1997 he served as Chairman and Vice President of Research and
Development of SpeedSim, Inc. Mr. Ladd was a consulting engineer for ViewLogic
Systems, Inc., a provider of software products used in IC design and simulation,
from August 1992 to December 1993. From May 1982 to August 1992 he served in a
variety of positions most recently as Principal Engineer, at Digital Equipment
Corporation, a manufacturer of computer systems and software.

      Stephen P. Sample co-founded Quickturn and served as Director, Hardware
Design from its inception in July 1987. In July 1993, he became Vice President,
Hardware Design, and since August 1994 he has served as Vice President, Advanced
Development.

      Dugald H. Stewart joined Quickturn in January 1989 and has served
Quickturn as Vice President, Operations since July 1998. From June 1993 to June
1998, he served as Vice President, Manufacturing and from January 1989 to May
1993, he served as Director of Manufacturing. From August 1979 to January 1989,
he served as Director of Manufacturing at KLA Instruments, Inc., a semiconductor
equipment manufacturer.

      Christopher J. Tice has served as Vice President, World-Wide Support
Services since March 1995. Previously he was Director, World-Wide Support
Services from June 1993 to March 1995. From November 1991 to June 1993, Mr. Tice
served as Director, Support for PiE. From November 1985 to November


                                     -46-
<PAGE>
 
1991, he served as General Manager, Processor Business Group at Weitek, a
provider of enhancement processors and controllers.

      Tung-sun Tung has served as Vice President, Research and Development since
January 1996, and as Vice President , Emulation System Development from October
1994 to January 1996. From June 1993 to October 1994, he was Director, Hardware
Design. From October 1991 to June 1993, he served as Director, Manufacturing at
PiE. From April 1988 to October 1991, he was Director, Engineering at NetFRAME
Systems, Inc., a designer and manufacturer of fault tolerant servers.

      Dr. Ming Yang Wang has served as Vice President, Advanced Technology
Solutions from December 1996, and as Director, Solutions Development from July
1993 to December 1996. From April 1990 to July 1993, Dr. Wang was Program
Manager at PiE.

      Naeem Zafar joined Quickturn in June 1988 and has served as Vice
President, Marketing since September 1995. From March 1995 to September 1995, he
was Vice President, Technology Strategy and Planning, from December 1994 to
March 1995, he was Director, Advanced Products, and from June 1993 to December
1994, Mr. Zafar was Director, Marketing. From April 1992 to June 1993, he was
Director, Product Marketing, from October 1990 to April 1992, he was Senior
Product Marketing Manager, from April 1989 to October 1990, he was Technical
Marketing Manager, and from June 1988 to April 1989, he was Senior Hardware
Engineer.

                 SECTION 16(a) BENEFICIAL OWNERSHIP COMPLIANCE

      Section 16(a) of the Exchange Act ("Section 16(a)") requires Quickturn's
officers and directors, and persons who own more than ten percent of a
registered class of Quickturn's equity securities, to file reports of ownership
on Form 3 and amendments thereto and changes in ownership on Form 4 or Form 5
and amendments to each with the Securities and Exchange Commission (the "SEC")
and the National Association of Securities Dealers, Inc. Such officers,
directors and ten-percent stockholders are also required by the SEC rules to
furnish Quickturn with copies of all such forms that they file.

      Based solely on its review of the copies of such forms and amendments
thereto received by Quickturn, or written representations from certain reporting
persons that no Forms 5 were required for such persons, which representations
have been maintained for at least two years, Quickturn believes that during
fiscal 1998 all Section 16(a) requirements applicable to its officers, directors
and ten-percent stockholders were complied with.


                                     -47-
<PAGE>
 
Item 11. EXECUTIVE COMPENSATION
         ----------------------

Summary Compensation Table

The following table sets forth certain information concerning total compensation
received by the person serving as Chief Executive Officer and each of the four
most highly compensated executive officers during the last fiscal year (the
"Named Officers"), for services rendered to Quickturn in all capacities during
the last three fiscal years.

<TABLE> 
<CAPTION> 
                                                                                           Long-Term    
                                                                                          Compensation  
                                                                                             Awards     
                                                                                          -------------  
                                                                Annual Compensation        Securities             
                                                            --------------------------     Underlying           All Other 
Name and Principal Position                      Year         Salary       Bonus (1)         Options         Compensation(2)
-------------------------------                --------     ----------   -------------    -------------     ---------------- 
<S>                                            <C>          <C>          <C>              <C>               <C>
Keith R. Lobo                                    1998       $ 300,000      $ 225,000        200,000 (5)         $ 14,042
   President and Chief Executive Officer         1997       $ 250,000      $ 144,000              0             $ 11,168
                                                 1996       $ 250,000      $ 200,000        100,000             $  6,768 
                                                                                                                         
Michael H. Ferguson                              1998       $ 184,370 (3)  $ 145,000         60,000             $ 13,354
   Vice President, Asia                          1997       $     --       $     --             --              $    --
                                                 1996       $     --       $     --             --              $    --            

Jeffrey K. Jordan                                1998       $ 328,392 (4)  $     --          55,000 (6)         $ 17,294
   Vice President, North American Sales          1997       $ 227,351      $  17,000              0             $ 16,400
                                                 1996       $ 382,499      $  30,000         25,000             $ 34,000

Raymond K. Ostby                                 1998       $ 223,333      $ 150,000         70,000 (7)         $ 10,263
   Vice President, Finance and Administration,   1997       $ 205,000      $  59,000              0             $  6,968
   Chief Financial Officer and Secretary         1996       $ 190,000      $  70,000         40,000             $  6,768 

Tung sun Tung                                    1998       $ 209,000      $  88,000         98,000 (8)         $ 10,048
   Vice President, Research & Development        1997       $ 188,666      $  40,000              0             $  9,073
                                                 1996       $ 174,584      $  64,000         60,000             $  8,873
</TABLE> 
__________________________
(1)   Includes bonuses earned or accrued with respect to services rendered in
      the fiscal year indicated, whether or not such bonus was actually paid
      during such fiscal year.

(2)   Includes health care premiums, car allowance and 401(k) contributions.

(3)   Includes $130,501 from commissions.

(4)   Includes $220,592 from commissions.

(5)   Includes 100,000 repriced options.

(6)   Includes 35,000 repriced options.

(7)   Includes 40,000 repriced options.

(8)   Includes 73,000 repriced options.


                                     -48-
<PAGE>
 
Option Grants in Last Fiscal Year

The following table shows, as to the Named Officers, information concerning
stock options granted during the fiscal year ended December 31, 1998.

<TABLE> 
<CAPTION> 

                                                                                                        
                                                      Individual Grants                                   Potential Realizable
                                  -------------------------------------------------------------        Value at Assumed Annual
                                   Number of         Percent of                                         Rate of Stock Price
                                  Securities       Total Options                                       Appreciation for Option
                                  Underlying         Granted to                                                 Term (4)
                                   Options          Employees in       Exercise    Expiration     --------------------------------  
           Name                   Granted (1)      Fiscal Year (2)       Price      Date (3)             5%                10%
---------------------------      -----------       --------------      --------     --------      --------------    ---------------
<S>                             <C>                 <C>               <C>         <C>           <C>                <C> 
Keith R. Lobo                       100,000           4.17%            $ 7.4375     06/05/08      $      467,740    $     1,185,346
                                    100,000 (5)       4.17%            $ 7.4375     10/11/06      $      467,740    $     1,185,346

Michael H. Ferguson                  60,000           2.50%            $ 7.5000     07/10/08      $      283,003    $       717,184

Jeffrey K. Jordan                    20,000           0.83%            $ 7.4375     06/05/08      $       93,548    $       237,069
                                     10,000 (6)       0.42%            $ 7.4375     11/03/05      $       46,774    $       118,535
                                     25,000 (7)       1.04%            $ 7.4375     09/13/06      $      116,935    $       296,336

Raymond K. Ostby                     30,000           1.25%            $ 7.4375     06/05/08      $      140,322    $       355,604
                                     10,000 (8)       0.42%            $ 7.4375     04/12/06      $       46,774    $       118,535
                                     30,000 (5)       1.25%            $ 7.4375     10/11/06      $      140,322    $       355,604

Tung-sun Tung                        25,000           1.04%            $ 7.4375     06/05/08      $      116,935    $       296,336
                                     13,000 (9)       0.54%            $ 7.4375     10/14/04      $       60,806    $       154,095
                                     20,000 (10)      0.83%            $ 7.4375     01/16/06      $       93,548    $       237,069
                                     40,000 (5)       1.67%            $ 7.4375     10/11/06      $      187,096    $       474,138
</TABLE> 

--------------------------
(1)  All options in this table are incentive stock options or non-qualified
     stock options and were granted under the 1988 Plan, the 1996 Supplemental
     Stock Plan (the "1996 Plan") or the 1997 Plan and have exercise prices
     equal to the fair market value on the date of grant. All such options have
     ten-year terms and vest over a four-year period at the rate of one-fourth
     at the end of one year from the date of grant and 1/48th at the end of each
     month thereafter. Also included in this table are repriced options. Such
     options have ten-year terms and vest over a five-year period at the rate of
     one-fifth at the end of one year from the date of grant and 1/60th at the
     end of each month thereafter.

(2)  Quickturn granted options to purchase 2,398,657 shares of common stock to
     employees in fiscal 1998. This amount includes 1,546,503 repriced shares.

(3)  Options may terminate before their expiration upon the termination of
     optionee's status as an employee or consultant, the optionee's death or an
     acquisition of Quickturn.

                                      -49-
<PAGE>
 
(4)  Potential realizable value assumes that the stock price increases from the
     date of grant until the end of the option term (10 years) at the annual
     rate specified (5% and 10%). Annual compounding results in total
     appreciation of 63% (at 5% per year) and 159% (at 10% per year). If the
     price of Quickturn's common stock were to increase at such rates from the
     price at 1998 fiscal year end ($14.3125 per share) over the next 10 years,
     the resulting stock price at 5% and 10% appreciation would be $23.3136 and
     $37.1229, respectively. The assumed annual rates of appreciation are
     specified in SEC rules and do not represent Quickturn's estimate or
     projection of future stock price growth. Quickturn does not necessarily
     agree that this method can properly determine the value of an option.

(5)  Represents an option granted in October 1996 that was repriced in June
     1998.

(6)  Represents an option granted in November 1995 that was repriced in June
     1998.

(7)  Represents an option granted in September 1996 that was repriced in June
     1998.

(8)  Represents an option granted in April 1996 that was repriced in June 1998.

(9)  Represents an option granted in October 1994 that was repriced in June
     1998.

(10) Represents  an option  granted in January  1996 that was  repriced in June
     1998.

                                      -50-
<PAGE>
 
Option Exercises and Holdings

The following table sets forth, for each of the officers named in the Summary
Compensation Table, certain information concerning stock options exercised
during fiscal 1998, and the number of shares subject to both exercisable and
unexercisable stock options as of December 31, 1998. Also reported are values
for "in-the-money" options that represent the positive spread between the
respective exercise prices of outstanding stock options and the fair market
value of Quickturn's common stock on the last trading day of fiscal 1998, which
was $14.3125 per share.
<TABLE> 
<CAPTION> 
                                                                Number of Securities                  Value of Unexercised
                                                               Underlying Unexercised               In-the-Money Options at
                            Shares                          Options at Fiscal Year End                Fiscal Year End (1)
                           Acquired          Value          -------------------------------      -------------------------------
   Name                   On Exercise       Realized        Exercisable       Unexercisable      Exercisable       Unexercisable
------------------        -----------       --------        -----------       -------------      -----------       -------------
<S>                       <C>               <C>             <C>               <C>                <C>               <C> 
Keith R. Lobo                       0       $      -            477,916             157,084      $ 5,450,803       $   1,080,135

Michael H. Ferguson                 0       $      -                  0              60,000      $         -       $     408,750

Jeffrey K. Jordan               2,667       $ 24,670             17,750              37,583      $   122,468       $     258,383

Raymond K. Ostby                    0       $      -            113,333              51,667      $   903,582       $     355,211

Tung-sun Tung                       0       $      -             60,543              58,167      $   464,239       $     399,898

</TABLE> 
----------------------------

(1) Market value of underlying securities based on the closing price of the
    common stock on the last trading day of fiscal 1998 on the Nasdaq Market of
    $14.3125 minus the exercise price.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
-----------------------------------------------------------
Quickturn's Compensation Committee was formed in October 1993 and is currently
composed of Messrs. Alberding, Antle and Lam. No interlocking relationship
exists between any member of Quickturn's Board of Directors or Compensation
Committee and any member of the board of directors or compensation committee of
any other company, nor has any such interlocking relationship existed in the
past. No member of the Compensation Committee is or was formerly an officer or
an employee of Quickturn or its subsidiaries.



                                     -51-
<PAGE>
 
COMPENSATION OF DIRECTORS
-------------------------
 
Directors who are employees of Quickturn do not receive additional compensation
for their services as directors of Quickturn. However, nonemployee members of
the Board of Directors receive an annual cash retainer of $12,000 and an annual
committee membership stipend of $1,500 for each committee of the Board of
Directors on which such director serves. In addition, each director was
compensated $24,000 or $26,000 based on attendance at special meetings of the
Board of Directors held in 1998. There were thirteen such meetings during 1998.
 
In addition, nonemployee directors participate in Quickturn's 1994 Outside
Director Stock Option Plan (the "Director Plan"). The Director Plan was adopted
by the Board of Directors in January 1994 and was approved by the stockholders
in May 1994. The Director Plan provides for an automatic grant of a nonstatutory
stock option to purchase 20,000 shares of common stock to a nonemployee director
on the date of the first meeting on which such individual participates as a
director (an "Initial Option"). An Initial Option has a term of ten years and
vests monthly over four years. Beginning four years after the grant of an
Initial Option to a director, such director is granted an automatic annual
option to purchase 3,500 shares of common stock, which option has a term of ten
years and vests monthly over one year. The exercise price of each option granted
equals 100% of the fair market value of the common stock, based on the closing
sales price of the common stock as reported on the Nasdaq National Market on the
date of grant. Options granted under the Director Plan must be exercised within
three months following the end of the optionee's tenure as a director of
Quickturn or within twelve months after the termination of a director's tenure
due to death or disability. The Director Plan is designed to work automatically,
without administration; however, to the extent administration is necessary, the
Director Plan has been structured so that options granted to nonemployee
directors who administer Quickturn's other employee benefit plans qualify as
transactions exempt from Section 16(b) of the Securities and Exchange Act of
1934, as amended (the "Exchange Act"), pursuant to Rule 16b-3 promulgated
thereunder.
 

                                    -52-

<PAGE>
 
Item 12.        SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
                --------------------------------------------------------------

The following table sets forth the beneficial ownership of common stock as of
February 23, 1999 for the following: (i) each person or entity who is known by
Quickturn to own beneficially more than 5% of the outstanding shares of the
common stock, (ii) each of Quickturn's current directors, (iii) each of the
officers named in the Summary Compensation Table in Item 11 and (iv) all
directors and executive officers of Quickturn as a group.


<TABLE> 
<CAPTION> 
                                                         Shares            Percentage
                                                       Beneficially       Beneficially
Name                                                    Owned (1)            Owned
----                                                  --------------     --------------
<S>                                                   <C>                <C>
Principal Stockholders
Milton Arbitrage Partners, L.L.C. (2)................    996,946              5.4%
165 Mason Street
Greenwich, Connecticut  06830

Directors
Glen M. Antle (3) ...................................    328,282              1.8%
Keith R. Lobo (4) ...................................    490,000              2.6%
Richard C. Alberding (5) ............................     20,000              *
Michael R. D'Amour (6) ..............................     43,471              *
William A. Hasler (7) ...............................      6,167              *
Yen Son (Paul) Huang (8) ............................    357,050              1.9%
Charles D. Kissner (5) ..............................      4,167              *
David K. Lam (5) ....................................     12,917              *

Named Officers
Michael H. Ferguson .................................      2,409              *
Jeffrey K. Jordan (9) ...............................     23,292              *
Raymond K.Ostby (10) ................................    124,100              *
Tung sun Tung (11) ..................................     80,727              *

All directors and executive 
officers as a group (21 persons)(12) ................  2,688,824              13.8%
</TABLE> 
__________________________
 *     Less than 1%.

(1)    The number and percentage of shares beneficially owned is determined
       under rules of the Securities and Exchange Commission ("SEC"), and the
       information is not necessarily indicative of beneficial ownership for any
       other purpose. Under such rules, beneficial ownership includes any shares
       as to which the individual has sole or shared voting power or investment
       power and also any 


                                     -53-
<PAGE>
 
       shares which the individual has the right to acquire within sixty days of
       February 23, 1999 through the exercise of any stock option or other
       right. Unless otherwise indicated in the footnotes, each person has sole
       voting and investment power (or shares such powers with his or her
       spouse) with respect to the shares shown as beneficially owned.

(2)    This information was obtained from filings made with the SEC pursuant to
       Sections 13(d) or 13(g) of the Securities Exchange Act of 1934, as
       amended.

(3)    Includes 257,270 shares held by The Antle Family Trust, as to which Mr.
       Antle shares voting and dispositive power, and 71,012 shares of common
       stock subject to options exercisable within sixty days of February 23,
       1999.

(4)    Includes options to purchase 485,000 shares of common stock exercisable
       within sixty days from February 23, 1999.

(5)    All such shares are subject to options exercisable within sixty days from
       February 23, 1999.

(6)    Includes 7,900 shares held by The D'Amour Family Trust, as to which Mr.
       D'Amour shares voting and dispositive power, and 12,083 shares of common
       stock subject to options exercisable within sixty days of February 23,
       1999.

(7)    Includes options to purchase 4,167 shares of common stock exercisable
       within sixty days from February 23, 1999.

(8)    Includes 37,548 shares held by the Huang Living Trust, as to which Mr.
       Huang shares voting and dispositive power, and 33,750 shares of common
       stock subject to options exercisable within sixty days of February 23,
       1999.

(9)    Includes options to purchase 20,082 shares of common stock exercisable
       within sixty days from February 23, 1999.

(10)   Includes options to purchase 116,000 shares of common stock exercisable
       within sixty days from February 23, 1999.

(11)   Includes options to purchase 65,410 shares of common stock exercisable
       within sixty days from February 23, 1999.

(12)   Includes options to purchase 1,158,559 shares of common stock exercisable
       within sixty days from February 23, 1999.


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

       Not applicable.


                                     -54-
<PAGE>
 
                                           PART IV 
                                           -------
                                        
Item 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
          --------------------------------------------
          REPORTS ON FORM 8-K.
          --------------------

     (a)  1.  Financial Statements.
              ---------------------

              The following consolidated financial statements, and the related
          notes thereto, of Quickturn Design Systems, Inc. and the Report of
          Independent  Accountants  are  filed as a part of this Form 10-K.
<TABLE>
<CAPTION>
 
                                                                                           Page #
                                                                                           ------
<S>                                                                                        <C>
          Report of PricewaterhouseCoopers LLP, Independent
          Accountants..............................................................        57
 
          Consolidated Balance Sheets as of December 31, 1998
          and 1997.................................................................        58
 
          Consolidated Statements of Operations for the years
          ended December 31, 1998, 1997 and 1996...................................        59

          Consolidated Statements of Comprehensive Income (Loss)
          for the years ended December 31, 1998, 1997 and 1996.....................        60
 
          Consolidated Statements of Stockholders' Equity for
          the years ended December 31, 1998, 1997 and 1996.........................        61
 
          Consolidated Statements of Cash Flows for the years
          ended December 31, 1998, 1997 and 1996...................................        62
 
          Notes to Consolidated Financial Statements...............................        63
</TABLE>

          2.  Financial Statement Schedules.
              ------------------------------
 
              The following financial statement schedule of Quickturn for the
          years ended December 31, 1998, 1997 and 1996 is filed as part of this
          Form 10-K and should be read in conjunction with the Consolidated
          Financial Statements, and related notes thereto, of Quickturn.

          Schedule  Title                                  Page #
          --------  -----                                  ------
                    Report of Independent Accountants       
                    on Financial Statement Schedule         S-1
          
          II        Valuation and Qualifying Accounts       S-2

                                      -55-
<PAGE>
 
              Schedules other than those listed above have been omitted since
          they are either not required, not applicable, or the information is
          otherwise included.

          9.  Exhibits.
              ---------

              The exhibits listed on the accompanying index to exhibits
          immediately following the financial statement schedule are filed as
          part of, or incorporated by reference into, this Form 10-K.

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

          1.  A Current Report on Form 8-K was filed with the SEC by Quickturn
          on December 16, 1998, to report that Quickturn signed a merger
          agreement with Cadence.  Under the merger agreement, Cadence will
          acquire Quickturn in a transaction that is anticipated to be accounted
          for as a pooling of interests and will qualify as a tax-free
          reorganization.  The merger is subject to approval by various
          governmental agencies and Quickturn stockholders.

          2.  A Current Report on Form 8-K/A was filed with the SEC by Quickturn
          on December 22, 1998, for the sole purpose of correcting a
          typographical error to Quickturn's merger agreement with Cadence.

          3.  A Current Report on Form 8-K/A was filed with the SEC by Quickturn
          on January 6, 1999, to report that Quickturn and Cadence amended their
          merger agreement to reflect an increase in value of the shares of
          common stock of Cadence to be received in connection with the merger
          by holders of common stock of Quickturn to $15.00 per share of
          Quickturn common stock.

          4.  A Current Report on Form 8-K/A was filed with the SEC by Quickturn
          on January 6, 1999, for the sole purpose of re-filing Exhibit 2.1 of
          the Amendment to Form 8-K dated January 6, 1999.  Amendment No. 2 to
          the Agreement and Plan of Merger is replacing the Stock Option
          Agreement erroneously filed as Exhibit 2.1.

                                      -56-

<PAGE>
 
Report of Independent Accountants

To the Board of Directors and Stockholders
Quickturn Design Systems, Inc.
San Jose, California

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, comprehensive income (loss) and cash
flows, after the restatement described in "Note 4 of Notes to Consolidated
Financial Statements", present fairly, in all material respects, the financial
position of Quickturn Design Systems, Inc. and its subsidiaries at December 31,
1998 and 1997, and the results of their operations and their cash flows for each
of the three years in the peiod ended December 31, 1998, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.

/s/  PricewaterhouseCoopers LLP
San Jose, California
January 15, 1999



                                     -57-
<PAGE>
 
                        QUICKTURN DESIGN SYSTEMS, INC.
                          CONSOLIDATED BALANCE SHEETS
                   (amounts in thousands except share date)

<TABLE> 
<CAPTION>                                                              
                                                                                December 31,
                                                                        ----------------------------------------
                                                                        1998                       1997
                                                                        ------------------  --------------------
<S>                                                                     <C>                 <C> 
  Assets                                                          
   Current assets
    Cash and cash equivalents                                           $          26,552   $           14,589
    Marketable securities                                                          13,717               18,219
    Accounts receivable, net of allowance for doubtful            
       accounts of $1,840 in 1998 and 1997                                         27,905               31,709
    Inventories                                                                     9,904               10,899
    Prepaid expenses and other current assets                                       1,851                4,324
    Deferred income taxes                                                           6,875                8,697
                                                                        ------------------  -------------------
       Total current assets                                                        86,804               88,437

    Marketable securities                                                          19,969               20,326
    Fixed assets, net                                                              11,533               11,118
    Deferred income taxes                                                          11,475                5,770
    Goodwill                                                                        3,599                4,627
    Other assets                                                                    1,248                1,282
                                                                        ------------------  -------------------
       Total assets                                                     $         134,628   $          131,560
                                                                        ==================  ===================


  Liabilities      
   Current Liabilities
    Short term debt                                                     $            ---    $            1,095
    Accounts payable                                                               12,130                6,231
    Accrued liabilities                                                            21,282               20,351
    Deferred revenue                                                               10,861                9,617
                                                                         ------------------  -------------------
       Total current liabilities                                                   44,273               37,294
                                                                         ------------------  -------------------

   Commitments and contingencies (Notes 11 and 17).                  

  Stockholders' Equity                                                                 
   Preferred stock, $.001 par value: Authorized:                  
       2,000,000 shares; Issued and outstanding: no shares                            ---                  ---
   Common stock, $.001 par value:  Authorized: 40,000,000         
       shares; Issued and outstanding: 18,111,105 shares in       
       in 1998; 17,606,006 shares in 1997                                              18                   18
   Additional paid-in capital                                                      94,446               91,122
   Deferred compensation                                                             (346)                (573)
   Retained earnings (deficit)                                                     (2,594)               4,264
   Accumulated other comprehensive income (loss)                                      292                 (565)
   Treasury stock at cost                                         
       (195,000 shares in 1998; none in 1997)                                      (1,461)                 ---
                                                                         ------------------  -------------------
       Total stockholders' equity                                                  90,355               94,266
                                                                         ------------------  -------------------
       Total liabilities and stockholders' equity                        $        134,628   $          131,560
                                                                         ==================  ===================
</TABLE> 

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

                                      -58-
<PAGE>
 
                         Quickturn Design Systems, Inc.
                      Consolidated Statements of Operations
                  (amounts in thousands except per share data)
<TABLE> 
<CAPTION>                                                                                   Year Ended December 31,
                                                                           --------------------------------------------------------
                                                                                   1998               1997               1996
                                                                           ------------------ ------------------ ------------------
<S>                                                                        <C>                <C>                <C> 
Revenue
    Product revenue                                                        $          65,405  $          80,850  $          88,090
    Maintenance and service revenue                                                   38,704             29,554             21,488
                                                                           ------------------ ------------------ ------------------
      Total revenue                                                                  104,109            110,404            109,578
Cost of revenue
    Cost of product revenue                                                           25,974             34,117             26,050
    Cost of maintenance and service revenue                                           12,043              8,896              6,613
                                                                           ------------------ ------------------ ------------------
      Total cost of revenue                                                           38,017             43,013             32,663
                                                                           ------------------ ------------------ ------------------
      Gross profit                                                                    66,092             67,391             76,915

Operating expenses
    Research and development                                                          23,416             23,499             19,706
    Sales and marketing                                                               37,962             36,775             31,982
    General and administrative                                                        19,385             11,485              7,254
    Amortization of goodwill                                                           1,028                514                ---
    Acquisition and merger related charges                                               ---              3,957                ---
                                                                           ------------------ ------------------ ------------------
      Total operating expenses                                                        81,791             76,230             58,942
                                                                           ------------------ ------------------ ------------------

      Operating income (loss)                                                        (15,699)            (8,839)            17,973

Interest income                                                                        3,033              2,370              2,229
Interest expense                                                                        (132)              (272)              (429)
Other income (expense), net                                                              178                 77                 79
                                                                           ------------------ ------------------ ------------------
      Net income (loss) before provision
        for (benefit from) income taxes                                              (12,620)            (6,664)            19,852

Provision for (benefit from) income taxes                                             (5,762)            (3,686)             5,721
                                                                           ------------------ ------------------ ------------------
      Net income (loss)                                                    $          (6,858) $          (2,978) $          14,131
                                                                           ================== ================== ==================

Basic net income (loss) per share                                          $           (0.39) $           (0.17) $            0.87
                                                                           ================== ================== ==================
Number of shares used in basic
    per share calculation                                                             17,802             17,110             16,323
                                                                           ================== ================== ==================

Diluted net income (loss) per share                                        $           (0.39) $           (0.17) $            0.79
                                                                           ================== ================== ==================
Number of shares used in diluted
    per share calculation                                                             17,802             17,110             17,912
                                                                           ================== ================== ==================

</TABLE> 

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

                                      -59-
<PAGE>
 
                         QUICKTURN DESIGN SYSTEMS, Inc.
             Consolidated Statements of Comprehensive Income (Loss)
                             (amounts in thousands)
<TABLE> 
<CAPTION> 

                                                                              1998              1997              1996
                                                                         ---------------   ---------------   ----------------
<S>                                                                      <C>                <C>              <C> 
Net income (loss)                                                        $       (6,858)   $       (2,978)    $       14,131
                                                                    
Other comprehensive income (loss)                                   
     Foreign currency translation adjustment                                        820              (653)               ---
                                                                         ---------------   ---------------   ----------------
                                                                    
     Unrealized gains (losses) on securities                        
       Unrealized holding gains (losses) arising during period                       52                78                (92)
       Less:  realized gain included in net loss                                    (15)              ---                ---
                                                                         ---------------   ---------------   ----------------
     Net unrealized gain (loss) on securities                                        37                78                (92)
                                                                         ---------------   ---------------   ----------------
                                                                    
     Total other comprehensive income (loss)                                        857              (575)               (92)
                                                                         ---------------   ---------------   ----------------
                                                                    
Comprehensive income (loss)                                              $       (6,001)   $       (3,553)    $       14,039
                                                                         ===============   ===============   ================
</TABLE> 


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

                                      -60-
<PAGE>
 
                        Quickturn Design Systems, Inc.
                Consolidated Statements of stockholders' Equity
                   (amounts in thousands except share data)
 
<TABLE> 
<CAPTION> 

                                                                                                                          
                                                                      Common Stock     Additional               Retained  
                                                                  ------------------    Paid-in     Deferred    Earnings  
                                                                    Shares    Amount    Capital   Compensation (Deficit)
                                                                  ----------  ------    -------   ------------  ------
<S>                                                             <C>          <C>       <C>        <C>        <C> 
Balance, January 1, 1996                                          15,995,099  $   16    $73,108     $ ---      $(6,889)  
    Issuance of common stock,                                                                                            
       employee stock purchase plan                                  198,117     ---      1,452       ---          ---   
    Exercise of stock options                                        333,688       1      1,161       ---          ---   
    Tax benefit from option exercises                                    ---     ---        999       ---          ---   
    SpeedSim issuance of stock options in lieu                                                                           
       of compensation                                                   ---     ---        825      (825)         ---   
    Unrealized holding loss on marketable securities                     ---     ---        ---       ---          ---   
    Amortization of deferred compensation                                ---     ---        ---        56          ---   
    Net income                                                           ---     ---        ---       ---       14,131   
                                                                  ----------  ------    -------     -----      -------  
Balance, December 31, 1996                                        16,526,904      17     77,545      (769)       7,242  
    Issuance of common stock,                                                                                           
       employee stock purchase plan                                  176,733     ---      1,812       ---          ---  
    Exercise of stock options and warrants                           402,369     ---      1,406       ---          ---  
    Tax benefit from option exercises                                    ---     ---        860       ---          ---  
    Issuance of common stock for Arkos Acquisition                   500,000       1      6,499       ---          ---  
    Issuance of warrants for Arkos Acquisition                           ---     ---      3,000       ---          ---  
    Unrealized holding gain on marketable securities                     ---     ---        ---       ---          ---  
    Cumulative translation adjustment                                    ---     ---        ---       ---          ---  
    Amortization of deferred compensation                                ---     ---        ---       196          ---  
    Net loss                                                             ---     ---        ---       ---       (2,978) 
                                                                  ----------  ------    -------     -----      -------  
Balance, December 31, 1997                                        17,606,006      18     91,122      (573)       4,264  
    Issuance of common stock,                                                                                           
       employee stock purchase plan                                  197,554     ---      1,952       ---          ---  
    Exercise of stock options                                        307,545     ---      1,086       ---          ---  
    Tax benefit from option exercises                                    ---     ---        369       ---          ---  
    Gain on sale of marketable securities                                ---     ---        ---       ---          ---  
    Unrealized holding gain on marketable securities                     ---     ---        ---       ---          ---  
    Cumulative translation adjustment                                    ---     ---        ---       ---          ---  
    Amortization of deferred compensation                                ---     ---        (83)      227          ---  
    Repurchases of common stock                                          ---     ---        ---       ---          ---  
    Net loss                                                             ---     ---        ---       ---       (6,858) 
                                                                  ----------   -----    -------     -----      -------  
Balance, December 31, 1998                                        18,111,105  $   18    $94,446     $(346)     $(2,594) 
                                                                  ==========  ======    =======     =====      =======  
</TABLE> 

<TABLE> 
<CAPTION> 
                                                                                                                        
                                                               Accumulated            Treasury          
                                                            Other Comprehensive        Stock            
                                                               Income (Loss)          at Cost     Total
                                                            -------------------       -------   -----------            
<S>                                                             <C>                 <C>         <C> 
Balance, January 1, 1996                                         $ 102                 $  ---      $66,337
    Issuance of common stock,                                                                        
       employee stock purchase plan                                ---                    ---        1,452
    Exercise of stock options                                      ---                    ---        1,162 
    Tax benefit from option exercises                              ---                    ---          999 
    SpeedSim issuance of stock options in lieu                                                             
       of compensation                                             ---                    ---          --- 
    Unrealized holding loss on marketable securities               (92)                   ---          (92)
    Amortization of deferred compensation                          ---                    ---           56
    Net income                                                     ---                    ---       14,131
                                                                 -----                -------  -----------
Balance, December 31, 1996                                          10                      0       84,045 
    Issuance of common stock,                                                                              
       employee stock purchase plan                                ---                    ---        1,812 
    Exercise of stock options and warrants                         ---                    ---        1,406 
    Tax benefit from option exercises                              ---                    ---          860 
    Issuance of common stock for Arkos Acquisition                 ---                    ---        6,500 
    Issuance of warrants for Arkos Acquisition                     ---                    ---        3,000 
    Unrealized holding gain on marketable securities                78                    ---           78 
    Cumulative translation adjustment                             (653)                   ---         (653)
    Amortization of deferred compensation                          ---                    ---          196 
    Net loss                                                       ---                    ---       (2,978)
                                                                 -----                ------- ------------
Balance, December 31, 1997                                        (565)                     0       94,266 
    Issuance of common stock,                                                                              
       employee stock purchase plan                                ---                    ---        1,952 
    Exercise of stock options                                      ---                    ---        1,086 
    Tax benefit from option exercises                              ---                    ---          369 
    Gain on sale of marketable securities                          (15)                   ---          (15)
    Unrealized holding gain on marketable securities                52                    ---           52 
    Cumulative translation adjustment                              820                    ---          820 
    Amortization of deferred compensation                          ---                    ---          144 
    Repurchases of common stock                                    ---                 (1,461)      (1,461)
    Net loss                                                       ---                    ---       (6,858)
                                                                 -----                -------      -------
Balance, December 31, 1998                                       $ 292                $(1,461)     $90,355
                                                                 =====                =======      =======
</TABLE> 

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


                                     -61-
<PAGE>
 
                        Quickturn Design Systems, Inc.
                     Consolidated Statements of Cash Flows
                            (amounts in thousands)
<TABLE> 
<CAPTION> 
                                                                                        Year Ended December 31,
                                                                             -------------------------------------------
                                                                                 1998           1997            1996
                                                                             ------------    -----------    ------------
<S>                                                                          <C>             <C>            <C> 
Cash flows from operating activities
Net income (loss)                                                            $    (6,858)    $   (2,978)    $     14,131
Adjustments to reconcile net income (loss) to net cash
provided by operating activities
     Depreciation and amortization                                                 7,966          8,334            8,524
     Amortization of deferred compensation                                           144            196                56
     Gain on sale of marketable securities                                           (15)           ---               ---
     Charges related to the Arkos Acquisition                                        ---          8,288               ---
     Write-down of inventories                                                     3,435          6,153               719
     Deferred income taxes                                                        (3,883)        (5,119)             (782)
Changes in current assets and liabilities
     Accounts receivable                                                           3,804         (9,941)             (710)
     Inventories                                                                  (2,440)        (6,481)           (3,055)
     Prepaid expenses and other current assets                                     2,473         (1,871)           (1,094)
     Accounts payable and accrued liabilities                                      7,199         11,962              (285)
     Deferred revenue                                                              1,244            667             4,912
                                                                             ------------    ----------     -------------
          Net cash provided by operating activities                               13,069          9,210            22,416
                                                                             ------------    ----------     -------------
Cash flows from investing activities
     Acquisition of fixed assets                                                  (7,153)        (7,529)           (6,413)
     Sale of marketable securities                                                26,584         16,173            20,527
     Purchase of marketable securities                                           (21,673)       (25,828)          (25,544)
     Purchase of Arkos                                                               ---         (5,000)              ---
     Increase (decrease) in other assets                                            (166)         1,615            (1,868)
                                                                             ------------    ----------      ------------
          Net cash used in investing activities                                   (2,408)       (20,569)          (13,298)
                                                                             ------------    ----------      ------------
Cash flows from financing activities
     Payment of short term debt                                                   (1,095)        (2,407)           (3,600)
     Purchase of treasury stock                                                   (1,461)           ---               ---
     Proceeds from stock issuances                                                 3,038          3,218             2,614
                                                                             ------------    ----------      ------------
          Net cash provided by (used in) financing activities                        482            811              (986)
                                                                             ------------    ----------      ------------
Effect of exchange rates on cash and cash equivalents                                820           (653)              ---

Net increase (decrease) in cash and cash equivalents                              11,963        (11,201)            8,132
Cash and cash equivalents at beginning of year                                    14,589         25,790            17,658
                                                                             ------------    ----------      ------------
Cash and cash equivalents at end of year                                     $    26,552     $   14,589      $     25,790
                                                                             ============    ==========      ============
Supplemental disclosure of cash flow information
     Cash paid during the period for:
        Interest                                                             $       138     $      278      $        417
        Income taxes                                                         $       104     $    3,187      $      5,112

Supplemental disclosure of noncash investing and financing activities
     Unrealized holding gain (loss) on marketable securities                 $        52     $       78      $        (92)
     Tax benefit from stock option exercises                                 $       369     $      860      $        999
     Write-off of unearned deferred compensation                             $        83     $      ---      $        ---
     Goodwill and other assets acquired in Arkos Acquisition                 $       ---     $    5,782      $        ---
     Common stock and warrants issued in Arkos Acquisition                   $       ---     $    9,500      $        ---

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


                                     -62-
<PAGE>
 
Notes to Consolidated Financial Statements

1. Business of Quickturn
   Quickturn Design Systems, Inc. ("Quickturn") designs, manufactures, sells and
   supports emulation and cycle-based simulation system-level verification
   solutions for the design of computer chips and electronic systems.
   Quickturn's development and manufacturing facilities are located in San Jose,
   California, and additional development facilities are located in Chelmsford,
   Massachusetts. Quickturn's principal markets are in North America, Asia-
   Pacific and Europe.

2. Summary of Significant Accounting Policies
   Financial Statement Presentation
   The consolidated financial statements include the accounts of Quickturn and
   its wholly-owned subsidiaries. All significant intercompany accounts and
   transactions have been eliminated.

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

   Certain Risks and Concentrations
   Quickturn's products are concentrated in the EDA industry which is highly
   competitive and rapidly changing. Revenue is concentrated with a relatively
   limited number of customers, and supplies for certain components are
   concentrated among a few providers. The loss of a major customer or any
   reduction in orders by such a customer, the interruption of certain supplier
   relationships, significant technological changes in the industry or customer
   requirements, the infringement or expropriation of proprietary intellectual
   property rights or patents, or the emergence of a major direct competitor
   could affect operating results adversely. In addition, a significant portion
   of Quickturn's revenue is derived from international sales; therefore,
   fluctuations of the U.S. dollar against foreign currencies or local economic
   conditions could adversely affect operating results.

   All marketable securities are classified as available-for-sale and are
   carried at 


                                     -63-
<PAGE>
 
   fair value. Unrealized gains and losses on marketable securities
   classified as available-for-sale are reported as a separate component of
   stockholders' equity. Realized gains and losses on sales of all such
   investments are reported in earnings and computed using the specific
   identification cost method.

   Financial instruments which potentially subject Quickturn to a concentration
   of credit risk principally consist of cash and cash equivalents, marketable
   securities, accounts receivable and forward foreign exchange contracts used
   as accounting hedges.

   Quickturn sells products to companies in the electronics industry in North
   America, Asia-Pacific and Europe. To reduce credit risk, management performs
   ongoing credit evaluations of its customers' financial condition. Quickturn
   maintains reserves for potential credit losses on its trade accounts
   receivable which are uncollateralized. Quickturn has not experienced any
   significant losses related to individual customers or groups of customers in
   any particular industry or geographic area.

   Quickturn maintains its excess cash balances in a variety of financial
   instruments such as debt securities in various corporate institutions and
   securities backed by the U.S. government. Quickturn has not experienced any
   material losses in any of the instruments it has used for excess cash
   balances.

   Quickturn utilizes forward exchange contracts to hedge accounts receivable or
   firm sales denominated in Japanese yen to minimize the impact of foreign
   currency exchange rate fluctuations. For these contracts, risk reduction is
   assessed on a transaction basis and the contracts are designated and deemed
   effective as a hedge and have a high inverse correlation to the hedged item.
   Quickturn does not use any of these contracts for trading or speculative
   purposes. The premiums or discounts on the forward exchange contracts are
   amortized and recognized in other income over the terms of the contracts.
   Contracts that hedge against existing assets are marked to market at month-
   end with gains and losses recognized in other income to substantially offset
   the respective losses and gains recognized on the underlying exposures. Gains
   and losses on forward contracts that hedge against firm sales are deferred
   until the related sales are recognized. At December 31, 1998 and 1997,
   Quickturn had forward exchange contracts outstanding with notional value of
   $12.4 million and $5.2 million, respectively, and estimated fair value of a
   net liability of $1.6 million and a net asset of $400,000, respectively.
   Estimated fair values are based on 


                                     -64-
<PAGE>
 
   established pricing models and prevailing market rates. These contracts
   require Quickturn to exchange Japanese yen for U.S. dollars and generally
   mature in twelve months or less.

   Quickturn limits the risk that counterparties to forward exchange contracts
   may be unable to perform by transacting only with major financial
   institutions. Quickturn also limits its risk of loss by entering into
   contracts that provide for net settlement on maturity.

   Translation of Foreign Currencies
   Effective January 1997, Quickturn changed the functional currency of its
   Japanese subsidiary from the U.S. dollar to the Japanese yen. As an
   independent operation with the local currency as its functional currency,
   effective 1997, the Japanese subsidiary translates its net assets at year-end
   exchange rates and its income and expense accounts at average rates in effect
   during the year. Adjustments resulting from these translations are reflected
   as foreign currency translation adjustment in the Stockholders' Equity
   section titled "Accumulated other comprehensive income (loss)."

   Prior to 1997, all of Quickturn's foreign subsidiaries, including Japan, were
   considered to be extensions of the U.S. operation having the U.S. dollar as
   their functional currency.

   Quickturn's other foreign subsidiaries consist of European subsidiaries
   incurring only selling and administrative costs, whose functional currency is
   the U.S. dollar, remeasure monetary assets and liabilities at year-end
   exchange rates and non-monetary items at historical rates. Income and expense
   accounts are remeasured at average rates, except for depreciation and cost of
   revenue which are remeasured at historical rates. Remeasurement gains and
   losses related to these subsidiaries are included in other income.

   Revenue Recognition
   Quickturn recognizes revenue from sales of its design verification products
   and services when all substantial conditions have been met, including
   shipment to the customer, fulfillment of acceptance terms, if any, and
   completion of all significant contractual terms. Maintenance revenue is
   deferred and recognized ratably over the term of the maintenance agreement,
   which is typically twelve months. Maintenance contracts are typically renewed
   annually. Warranty and similar 

                                     -65-
<PAGE>
 
   costs related to post-contract customer support are accrued at the time of
   sale.

   Research and Development
   Research and development expenses are charged to operations as incurred.

   Cash Equivalents
   Highly liquid investments with original maturities of three months or less at
   the date of purchase are considered to be cash equivalents.

   Fair Value of Financial Instruments
   Carrying amounts of certain of Quickturn's financial instruments including
   cash and cash equivalents, accounts receivable, accounts payable and other
   accrued liabilities approximate fair value due to their short maturities.
   Based on borrowing rates currently available to Quickturn for loans with
   similar terms, the carrying values of the note payable and capital lease
   obligations approximate fair value. Estimated fair values for marketable
   securities (See Note 5---Marketable Securities) and forward exchange
   contracts (see Certain Risks and Concentrations, above) are based on quoted
   market prices for the same or similar instruments.

   Inventories
   Inventories are stated at the lower of cost (first-in, first-out method) or
   market. Quickturn's inventories include high technology parts and components
   that may be specialized in nature or subject to rapid technological
   obsolescence. While Quickturn has programs to minimize the required
   inventories on hand and considers technological obsolescence when estimating
   required reserves to reduce recorded amounts to market values, it is
   reasonably possible that such estimates could change in the near term.

   Depreciation and Amortization
   Fixed assets are stated at cost and are depreciated generally based on a
   straight-line method over the estimated useful lives of the assets, generally
   one to five years. Leasehold improvements are amortized based on a straight-
   line method over the shorter of the remaining lease term or the estimated
   useful life of the asset, generally two to seven years. Amortization of
   equipment under capital leases is computed using the straight-line method
   over the shorter of the remaining lease term or the estimated useful life of
   the related asset, typically three years. Intangibles comprise of patents and
   goodwill. Patents are included in other assets and are amortized on a
   straight-line basis over the term of the patents, generally from three to
   ten years. Goodwill, resulting from 

                                     -66-
<PAGE>
 
   the purchase acquisition of Arkos and consisting of the excess of cost over
   the fair value of net assets acquired, is amortized on a straight-line basis
   over five years.

   Accrued Warranty
   Quickturn provides an accrual for future warranty costs based on the
   historical relationship of revenue to warranty costs incurred.

   Income Taxes
   Quickturn provides for income taxes under the liability method in accordance
   with Statement of Financial Accounting Standards No.109, "Accounting for
   Income Taxes." Under this method, deferred tax assets and liabilities are
   determined based on differences between financial reporting and tax bases of
   assets and liabilities, measured at the tax rates that will be in effect when
   the differences are expected to reverse. Valuation allowances are established
   when necessary to reduce deferred tax assets to the amounts expected to be
   realized.

   Net Income (Loss) Per Share
   Effective in 1997, Quickturn adopted Statement of Financial Accounting
   Standards No. 128, "Earnings Per Share" ("SFAS 128").  All prior-period
   earnings per share data presented have been restated to comply with SFAS
   128.  The adoption of this standard did not have a material impact on
   Quickturn's earnings per share.

   Basic net income (loss) per share is calculated using the weighted average
   number of common shares outstanding for the period. Diluted net income (loss)
   per share is calculated using the weighted average number of common and
   dilutive common equivalent shares outstanding during the period. Dilutive
   common equivalent shares consist of common stock issuable upon exercise of
   stock options and warrants (using the treasury stock method).

   Fiscal Year-end
   Effective in 1997, Quickturn changed its fiscal year to December 31 from a 
   52-week or 53-week year, ending on the last Sunday in December. The change
   had no significant impact on the current period results of operations. For
   purposes of presentation, Quickturn has indicated that its fiscal year ended
   on December 31 for 1996, although it operated on a 53-week fiscal year for
   1996.

   Recent Accounting Pronouncements

                                     -67-
<PAGE>
 
   In March 1998, the Accounting Standards Executive Committee of the American
   Institute of Certified Public Accountants ("AcSEC") issued Statement of
   Position 98-4, "Deferral of the Effective Date of a provision of SOP 97-2"
   ("SOP 98-4"). SOP 98-4 defers for one year the application of certain
   provisions of Statement of Position 97-2 "Software Revenue Recognition" ("SOP
   97-2"). Different informal and non-authoritative interpretations of certain
   provisions of SOP 97-2 have arisen and, as a result, the AcSEC issued
   Statement of Position 98-9 ("SOP 98-9") in December 1998 which is effective
   for periods beginning after March 15, 1999. SOP 98-9 extends the effective
   date of SOP 98-4 and provides additional interpretive guidance. Quickturn
   believes its revenue recognition policy is in compliance with the terms of
   these pronouncements.

   In June 1998, the Financial Accounting Standards Board issued Statement of
   Financial Accounting Standards No. 133, "Accounting for Derivative
   Instruments and Hedging Activities" ("SFAS 133"), which establishes
   accounting and reporting standards for derivative instruments and hedging
   activities. SFAS 133 requires that an entity recognize all derivatives as
   either assets or liabilities in the balance sheets and measure those
   instruments at fair value. This statement becomes effective for fiscal
   years beginning after June 15, 1999. Quickturn is evaluating the requirements
   of SFAS 133 and the effects, if any, on Quickturn's current reporting and
   disclosures.

3. Business Combinations

   SpeedSim Merger
   In February 1997, Quickturn merged with SpeedSim, Inc. ("SpeedSim"), a
   provider of simulation software for the verification of digital logic designs
   (the "SpeedSim Merger"), for 2.8 million shares of Quickturn common stock.
   The merger was accounted for as a pooling of interests. Quickturn incurred
   direct transaction costs of $1.2 million associated with the merger, which
   were charged to operations during the quarter ended March 31, 1997. All
   financial information herein has been restated to include the results of
   operations of SpeedSim.

   Revenue and net income of the separate companies during the period preceding
   the SpeedSim Merger are presented below.
---------------------------------------------------------------
   (in thousands)

                                               Year Ended

                                     -68-
<PAGE>
 
                                               December 31, 1996
   Revenue
      Quickturn                                $   104,370
      SpeedSim                                       5,208
                                               -----------
    Combined                                   $   109,578
                                               ===========

   Net income
      Quickturn                                $    12,639
      SpeedSim                                       1,492
                                               -----------
    Combined                                   $    14,131
                                               ===========

   Arkos Acquisition
   In June 1997, pursuant to an asset purchase agreement among Quickturn,
   Synopsys, Inc. ("Synopsis") and Arkos Design, Inc. ("Arkos"), Quickturn
   purchased from Synopsys certain assets relating to Synopsys's emulation
   business, including all the outstanding capital stock of Arkos (the "Arkos
   Acquisition").

   The purchase price for the Arkos Acquisition was $16.7 million, consisting of
   $5.0 million cash, 500,000 shares of Quickturn common stock valued at $6.5
   million, warrants valued at $3.0 million and liabilities assumed of $2.2
   million. The warrants are exercisable for 1.0 million shares of Quickturn
   common stock at $13.34 per share and expire on June 14, 1999 .

   The acquisition was accounted for as a purchase. Accordingly, the purchase
   price of $16.7 million was allocated to assets and liabilities based on their
   estimated fair values as of the date of the acquisition as follows:
   -------------------------------------
   (in thousands)

   Margins on sales to Arkos customers         $     5,531
   In-process R&D                                    2,757
   Inventory                                         2,602
   Patents                                             541
   Fixed assets                                        100
                                               ----------- 
   Net fair value of assets and 
    liabilities acquired                            11,531
   Goodwill                                          5,141
                                               -----------
    Total purchase price                       $    16,672
                                               ===========

   Margins on sales to Arkos customers of $5.5 million represents revenue of
   $7.4 million less cost of revenue of $1.9 million on sales to Arkos customers
   that were 

                                     -69-
<PAGE>
 
   substantially completed at the date of the acquisition. These margins were
   charged to cost of revenue as the sales were completed.

   The in-process research and development acquired in the Arkos Acquisition
   related to an emulator designed to verify the functional logic of an
   application-specific computer chip. The main features that were expected to
   be applicable to Quickturn's products were the handling of bulk memory and
   the interface of C-language simulation with the emulator. At the date of the
   Arkos Acquisition, these technologies were not complete nor were they fully
   integrated into a useful product. These technologies were estimated to be 60%
   complete and it was further estimated that Quickturn would spend
   approximately $2.0 million to develop these technologies to a viable state.
   Quickturn planned to develop the Arkos technology with the goal of
   incorporating these two features into Quickturn's emulation products so that
   the resulting systems would better meet customer needs. Quickturn's research
   into the bulk memory handling capability determined that it would not yield
   an economically viable product, that the electronic interface to Quickturn's
   emulation systems would be too complicated and that the electronic signals
   would be dependent on certain Arkos architecture which was not transferable
   to the Quickturn systems. The feature regarding the C-language simulation
   interface to the emulator was found to provide no significant advantage over
   Quickturn's then-current approach of Quickturn's specialty interface
   language, Quickturn Emulation Language. Quickturn abandoned the Arkos
   technologies in early 1998. Management believes that there was no impact on
   future results of operations or financial position caused by the failure to
   develop the acquired technology. The in-process research and development was
   charged to operations in the third quarter of 1997.

   The patents and fixed assets are being amortized over three to five years.

   Goodwill of $5.1 million which represents the cost in excess of net assets
   acquired is being amortized on a straight line basis over five years.

   Additionally, in the third quarter of 1997, $2.0 million was charged to cost
   of revenue to reflect the obsolescence of Quickturn inventory caused by an
   anticipated shorter product life cycle of Quickturn System Realizer product
   resulting from the effect of Arkos related technology.

4. Restatement

   Quickturn has restated its accounting for the Arkos Acquisition as of
   December 31, 1997 and the year then ended. The financial statements have been
   restated to reflect a change in the allocation of the purchase price. Of the
   $18.0 million previously recognized as acquisition and merger charges, $10.1
   million was reclassified to cost of revenue, $5.1 million was capitalized as
   goodwill and $2.8 million remains in Arkos-related acquisition and merger
   charges. As a result, the 1997 operating loss was reduced by $4.6 million.
   These adjustments resulted in a decrease in the benefit from income taxes of
   $2.2 million and a decrease in net loss of $2.4 million. In addition, the
   1998 results, as a result of the recognition of the goodwill in 1997, reflect
   a charge of $1.0 million in amortization expense.

5. Marketable Securities

   At December 31, 1998 and 1997, all marketable securities are classified as
   available-for-sale and are summarized as follows:

   Marketable securities at December 31, 1998

<TABLE> 
<CAPTION> 
   --------------------------------------------------------------------------------------------- 
   (in thousands)                    Market     Cost        Unrealized Unrealized Net Unrealized
<S>                                 <C>        <C>         <C>        <C>        <C> 
</TABLE> 


                                     -70-
<PAGE>
 
<TABLE> 
<CAPTION> 
                                     Value      Basis       Gains      Losses     Gains(Losses)
                                     ---------  ----------  ---------  ---------  ---------- 
<S>                                 <C>        <C>         <C>        <C>        <C> 
U.S. government debt securities      $     997  $    1,000  $    ---   $      (3) $       (3)
Municipal debt securities                8,248       8,189         59       ---           59
Corporate debt securities               24,441      24,372         99        (30)         69
                                     ---------  ----------  ---------  ---------  ---------- 
                                     $  33,686  $   33,561  $     158  $     (33) $      125
                                     =========  ==========  =========  =========  ========== 
</TABLE> 

<TABLE> 
<CAPTION> 

Marketable securities at December 31, 1997
--------------------------------------------------------------------------------------------- 
(in thousands)                         Market     Cost     Unrealized  Unrealized Net Unrealized
                                       Value      Basis      Gains       Losses   Gains(Losses)
                                     ---------  ----------  ---------  ---------  ---------- 
<S>                                <C>        <C>          <C>        <C>         <C> 
U.S. government debt securities      $  14,562  $   14,549  $      21  $      (8) $       13
Municipal debt securities               22,424      22,348         78         (2)         76
Corporate debt securities                1,559       1,560          2         (3)         (1)
                                     ---------  ----------  ---------  ---------  ---------- 
                                     $  38,545  $   38,457  $     101  $     (13) $       88
                                     =========  ==========  =========  =========  ========== 
</TABLE> 

   At December 31, 1998 and 1997, all marketable debt securities classified as
   current had scheduled maturities of less than one year. Marketable debt
   securities classified as noncurrent had scheduled maturities of one to three
   years. During 1998, Quickturn realized a gain of $15,000 on sale of
   marketable securities.


6. Inventories

   Inventories comprise:
   ------------------------------------------------------------------
   (in thousands)                                     December 31,
                                                ---------------------
   Raw materials                                $    8,799  $   6,780
   Work in process                                   1,105      4,119
                                                ----------  ---------
                                                $    9,904  $  10,899
                                                ==========  =========
7. Fixed Assets

   Fixed assets comprise:
   ------------------------------------------------------------------
   (in thousands)                                    December 31,
                                                ---------------------
                                                  1998        1997
                                                ----------  ---------
   Equipment                                    $   23,780  $  23,070
   Furniture, fixtures & leasehold improvements      7,165      6,072
   Demonstration and rental equipment                1,561      1,698
                                                ----------  ---------
                                                    32,506     30,840
   Less accumulated depreciation & amortization    (20,973)   (19,722)
                                                ----------  ---------
                                                $   11,533  $  11,118
                                                ==========  =========

                                     -71-
<PAGE>
 
   Depreciation and amortization expense amounted to $6.7 million, $7.8 million
   and $8.2 million for the years ended December 31, 1998, 1997 and 1996,
   respectively.


   Fixed assets include equipment under capital leases as follows:
   ------------------------------------------------------------------
   (in thousands)
                                                     December 31,
                                                ---------------------
                                                   1998        1997
                                                ----------  ---------
   Cost                                         $       --  $     495
   Less accumulated amortization                        --       (389)
                                                ----------  ---------
                                                $       --  $     106
                                                ==========  =========

   The equipment under capital leases had been pledged as collateral for
   repayment of the related lease obligations.

8. Accrued Liabilities

   Accrued liabilities comprise:
   ------------------------------------------------------------------
   (in thousands)                                    December 31,
                                                ---------------------
                                                   1998       1997
                                                ----------  ---------
   Accrued payroll and related items            $    8,129  $   7,218
   Income taxes payable                              2,107      5,789
   Accrued legal expenses                            3,353      1,474
   Other accrued liabilities                         7,693      5,870
                                                ----------  ---------
                                                $   21,282  $  20,351
                                                ==========  =========

9. Bank Borrowing Arrangements

   Quickturn has an unsecured revolving line of credit of $5.0 million which
   provides for borrowings through June 1, 1999. Borrowings under this agreement
   bear interest at the bank's prime rate (7.75% at December 31, 1998). The
   agreement is subject to certain restrictive covenants which include achieving
   annual profitability, and meeting certain financial ratios and minimum
   tangible net worth requirements. The agreement also prohibits the payment of
   cash dividends. At December 31, 1998, Quickturn was in compliance with the
   agreement, except for the annual profitability covenant, which was waived for
   the year ended December 31, 1998. No funds have been drawn against the line
   of credit.

                                     -72-
<PAGE>
 
10.Short Term Debt

   Capital Lease Obligations
   At December 31, 1998 and 1997, Quickturn had equipment lease obligations of
   none and $495,000 at interest rates varying from 8.7% to 9.4%, respectively.

   Future minimum lease payments under these equipment lease arrangements were
   none and $510,000 of which $15,000 represented interest, at December 31, 1998
   and 1997, respectively.

   Note Payable
   At December 31, 1998 and 1997, Quickturn had an uncollateralized note payable
   of none and $600,000, respectively. The note had an original principal
   balance of $3.0 million at interest rate of 4% per annum, payable quarterly.

11.Commitments

   Quickturn leases its operating facilities under noncancellable operating
   leases with terms greater than one year. At December 31, 1998, future minimum
   rent payments under these leases are as follows:
   ----------------------------------------------------------------------------
   (in thousands)                               Year ending
                                                December 31,
                                                ----------
   1999                                         $    4,978
   2000                                              4,189
   2001                                              3,712
   2002                                              3,796
   2003                                              3,526
   Thereafter                                        2,138
                                                ----------
                                                $   22,339
                                                ==========

   Rent expense related to the facilities and various equipment leases was
   $4.3 million, $2.7 million and $1.6 million for the years ended December 31,
   1998, 1997 and 1996, respectively.

   Certain lease obligations were collateralized by restricted deposits at
   December 31, 1998 and 1997 of $19,000 and $73,000, respectively, which are
   included in other assets.

12.Stockholders' Equity

   Employee Stock Purchase Plan
   As of December 31, 1998, Quickturn had reserved 381,748 shares of common


                                     -73-
<PAGE>
 
   stock for issuance under the Employee Stock Purchase Plan ("ESPP"). Shares
   are purchased through employees' payroll deductions at exercise prices equal
   to 85% of the lesser of the fair market value of Quickturn's common stock at
   either the first day of an offering period or the last day of such offering
   period. Shares issued under the ESPP in 1998, 1997 and 1996 were 197,554,
   176,733 and 198,117, respectively.

   Stock Option Plans
   As of December 31, 1998, Quickturn had reserved 4,374,231 shares of common
   stock for issuance under various stock option plans. Except for the 1994
   Outside Director Stock Option Plan, which provides for automatic grants to
   non-employee directors, the board of directors may, under these plans, issue
   incentive stock options to employees and nonstatutory stock options to
   employees or paid consultants of Quickturn at prices no less than fair market
   value for incentive and 85% of fair market value for nonstatutory stock
   options. The options are exercisable at times and in increments as specified
   by the board of directors. Options generally vest over four years and expire
   ten years from date of grant. Options are exercisable prior to vesting,
   however such unvested shares are subject to repurchase by Quickturn at their
   original cost. At December 31, 1998, there were no shares subject to
   repurchase.


                                     -74-
<PAGE>
 
In accordance with Accounting Principles Board Opinion No. 25 ("APB"), Quickturn
recognized $825,000 of deferred compensation in 1996, which is being amortized
over the vesting period of the related options. The amortization expense for the
years ended December 31, 1998, 1997 and 1996 was $144,000, $196,000 and $56,000,
respectively.

In June 1998, Quickturn offered to all employees the opportunity to cancel 
outstanding stock options with exercise prices in excess of $7.44 per share (the
fair market value of the common stock at that time) in exchange for options 
exercisable at $7.44 per share which were otherwise identical to the cancelled 
options except for a one-year extension of the original vesting term. Options to
purchase 1,546,503 shares of common stock at original exercise prices ranging 
from $7.81 to $19.00 per share were exchanged and are included above as 1998 
grants and terminations. Furthermore, Quickturn amended its stock option plans 
to require stockholders' approval of future repricings of stock options.

Information with respect to activity under these stock option plans is set forth
below:
--------------------------------------------------------------------------------
(amounts in thousands, except share data)

<TABLE> 
<CAPTION> 
                                                                         Outstanding Options
                               Shares                ---------------------------------------------------------
                             Available    Options       Number          Price       Aggregate    Weighted Avg.
                             for Grant    Exercised   of Shares       Per Share       Price      Exercise Price
                             ----------   ---------   ----------   ----------------  --------    --------------
<S>                          <C>          <C>         <C>         <C>               <C>          <C>             
Balance, December 31, 1995    1,024,224   1,013,747    2,456,151   $ 0.19 - $ 13.25  $ 12,331          $   5.02
 Additional shares reserved   1,000,000           -            -                  -         -                 -
 Options granted             (1,436,110)          -    1,436,110   $ 0.19 - $ 19.00    15,206          $  10.59
 Options exercised                    -     333,688     (333,688)  $ 0.30 - $ 11.63    (1,166)         $   3.49
 Options terminated             363,852           -     (363,852)  $ 0.50 - $ 13.25    (3,302)         $   9.08
 Options retired                      -           -         (117)  $ 0.64 - $  0.64         -          $   0.64
                             ----------   ---------   ----------                     --------                   
Balance, December 31, 1996      951,966   1,347,435    3,194,604   $ 0.19 - $ 19.00    23,069          $   7.22
 Additional shares reserved   1,000,000           -            -                  -         -                 -
 Options granted               (751,097)          -      751,097   $ 2.83 - $ 18.63     8,617          $  11.47
 Options exercised                    -     389,156     (389,156)  $ 0.19 - $ 13.50    (1,406)         $   3.61
 Options terminated             267,791           -     (267,791)  $ 6.13 - $ 19.00    (3,330)         $  12.44
 Options retired                      -           -      (14,354)  $ 0.19 - $  6.30       (33)         $   2.30
                             ----------   ---------   ----------                     --------                   
Balance, December 31, 1997    1,468,660   1,736,591    3,274,400   $ 0.19 - $ 19.00    26,917          $   8.22
 Options granted             (2,398,657)          -    2,398,657   $ 7.44 - $ 14.63    18,084          $   7.54
 Options exercised                    -     307,545     (307,545)  $ 0.19 - $ 13.50    (1,086)         $   3.53
 Options terminated           1,706,261           -   (1,706,261)  $ 0.64 - $ 19.00   (20,566)         $  12.05
 Options retired                      -           -      (61,284)  $ 0.64 - $  7.81      (388)         $   6.33
                             ----------   ---------   ----------                     --------                   
Balance, December 31, 1998      776,264   2,044,136    3,597,967   $ 0.19 - $ 14.63  $ 22,961          $   6.38
                             ==========   =========   ==========                     ========
</TABLE> 
      
At December 31, 1998, 1997 and 1996 requested options to purchase 1,544,919,
1,657,860 and 1,251,457 shares, respectively, were unexercised.

                                    -75-
<PAGE>
 
    The following table summarizes information with respect to stock options
    outstanding at December 31, 1998:
    ----------------------------------------------------------------------------
<TABLE> 
<CAPTION> 
                           Options Outstanding                           Options Exercisable
                  -----------------------------------------------   ------------------------------
                    Number        Weighted Avg.      Weighted Avg.     Number        Weighted Avg.  
  Range of        Outstanding      Remaining            Exercise      Exercisable        Exercise
Exercise Prices   at 12/31/98  Contractual Life (Yrs.)  Price       at 12/31/98           Price
----------------  -----------  ---------------------   ---------    ------------     ------------ 
<S>               <C>              <C>                 <C>         <C>              <C>
$  0.19 - $ 2.00     622,025          4.49               $ 1.44        572,508           $ 1.46
$  4.00 - $ 7.00     421,747          5.12               $ 6.04        419,388           $ 6.04
$  7.44 - $ 7.44   2,139,205          9.43               $ 7.44        393,340           $ 7.44
$  7.50 - $ 10.50    355,890          8.31               $ 7.86        134,298           $ 7.96
$ 12.13 - $ 14.6      59,100          8.24               $13.64         25,385           $13.35
                   ---------                                         ---------
$  0.19 - $ 14.63  3,597,967          7.93               $ 6.38      1,544,919           $ 4.96
                   =========                                         ========= 
</TABLE> 

    Quickturn accounts for its stock option and employee stock purchase plans in
    accordance with APB 25 and related interpretations. The following
    information concerning such plans is provided in accordance with Statement
    of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for
    Stock-Based Compensation."

    Quickturn has estimated the fair value of each option grant on the date of
    grant using the Black-Scholes option pricing model using no expected
    dividends and the following weighted average assumptions:

<TABLE> 
<CAPTION> 
 
                                                    Stock Options
                                             ------------------------------
                                                Year Ended December 31,
                                             ------------------------------
                                             1998        1997          1996
                                             ----        ----          ----  
<S>                                        <C>         <C>          <C> 
Expected life (years)                        4.44        4.07          4.39
Expected volatility                            70%         80%           70%
Risk-free interest rate                      5.50%       6.16%         6.25%
</TABLE> 
 
    The weighted average fair values of those stock options granted in 1998,
    1997 and 1996 were $4.46, $7.24 and $8.43, respectively.
 
    Quickturn has also estimated the fair value of the purchase rights issued
    under its ESPP using the Black-Scholes option pricing model using no
    expected dividends and the following weighted average assumptions:

<TABLE> 
<CAPTION> 
 
                                              Employee Stock Purchase Plan
                                             ------------------------------
                                                Year Ended December 31,
                                             ------------------------------
                                             1998        1997          1996
                                             ----        ----          ----  
<S>                                        <C>         <C>          <C> 
Expected life (years)                       1.08            1.25         1.25
Expected volatility                           70%             80%          70%
Risk-free interest rate                     4.58%           5.84%        5.84%
</TABLE> 
 
    The weighted average fair value of those purchase rights granted in 1998,
    1997 and 1996 were

                                     -76-
<PAGE>
 
    $4.57, $6.14 and $5.15, respectively.
  
    The following pro forma income information has been prepared in accordance
    with the provisions of SFAS 123:    
    ----------------------------------------------------------------------------
    (amounts in thousands except per share data)

<TABLE> 
<CAPTION> 
                                                            1998           1997          1996
                                                           -------       --------       -------
<S>                                                     <C>           <C>            <C> 
Net income (loss) - pro forma                              $(9,834)      $ (5,027)      $12,430
 
Basic net income (loss) per share - pro forma              $ (0.55)      $  (0.29)      $  0.76
 
Diluted net income (loss) per share - pro forma            $ (0.55)      $  (0.29)      $  0.69
</TABLE>

    The above pro forma effects on net income (loss) may not be representative
    of the effects on net income for future years as option grants typically
    vest over several years and additional options are generally granted each
    year.

    Warrants
    At December 31, 1998, warrants to purchase 1.2 million shares of common
    stock were outstanding and exercisable at prices ranging from $13.34 to
    $30.00 per share. These included warrants to purchase 1.0 million shares
    issued in connection with the Arkos Acquisition. See "---Note 3 of Notes to
    Consolidated Financial Statements." The warrants expire over periods ranging
    from 6 months to 2 years.

    Stock Repurchase Program
    In April 1998, the board of directors authorized the repurchase of shares of
    Quickturn's common stock, at management's discretion, for total expenditures
    of up to $10 million. Shares repurchased under this program are expected to
    be used for issuance upon exercise of employee stock options previously
    granted or to be granted in the future under the Company's employee stock
    plans, thereby reducing the potential dilution that might otherwise result
    from such exercises. Quickturn's repurchases of shares of common stock are
    recorded as "Treasury stock at cost" and result in a reduction of
    Stockholders' Equity. As of December 31, 1998, 195,000 shares of common
    stock at an average per share cost of $7.49 had been repurchased under this
    Stock Repurchase Program.

    Stock Option Grant to Cadence
    In December 1998, in association with Quickturn's merger agreement with
    Cadence Design Systems, Inc. ("Cadence"), Cadence was granted an option to
    purchase Quickturn common stock. The option permits Cadence to purchase up
    to 3,619,100 shares of Quickturn common stock at a cash exercise price of
    $14 per share. This total number of shares issuable upon exercise of the
    option represents 19.99% of the Quickturn common stock outstanding on
    December 8, 1998, not including the option shares.

    Cadence may exercise the option, in whole or in part, if the merger
    agreement is terminated in a manner obligating Quickturn to pay liquidated
    damages of $10,557,000. Cadence may exercise the option until the 12 month
    anniversary of the date on which the merger agreement has been terminated.
    In any event, Cadence may not exercise the option if it has willfully and
    significantly breached the merger agreement.

    If before the option expires any third party acquires or agrees to acquire
    30% or more of the

                                     -77-
<PAGE>
 
    outstanding shares of Quickturn common stock, or Quickturn enters into an
    agreement with any person other than Cadence providing for an acquisition of
    Quickturn or any significant part of its asssets, then Cadence, instead of
    exercising the option, will have the right to receive in cancellation of the
    option cash equal to:

    1.  the lesser of a specified spread between the market value of a share of
        Quickturn common stock, or equivalent if there has been a sale of
        Quickturn assets, and the exercise price of the option and $3.8890884474
        multiplied by

    2.  the number of Quickturn shares then covered by the option.
 
    The economic benefit that Cadence may derive under the option agreement is
    limited to $14,075,000 less the amount of liquidated damages Quickturn has
    paid it under the merger agreement. The option may not be exercised for a
    number of Quickturn shares as would, at exercise, result in Cadence's
    receiving a total value exceeding this amount. Any amount Cadence receives
    in excess of $14,075,000 must be paid to Quickturn.

    If Cadence has acquired Quickturn shares upon exercise of the option, then,
    at any time during the period that begins 13 months after the exercise and
    ends 25 months after the exercise, Quickturn may require Cadence to sell to
    Quickturn any of these shares still held by Cadence. The per share purchase
    price will be the higher of:

    .  the exercise price of the option, less any dividends paid on the option
       shares to be repurchased by Quickturn, plus an amount representing an
       annual return of 15% of the exercise price of the option and

    .  the average of the high and low trading prices of Quickturn common stock
       for the 30 trading day period ending one day before Quickturn delivers
       notice to Cadence of Quickturn's intent to purchase the option shares.

    Preferred Shares Rights Agreement
    On January 10, 1996, Quickturn's board of directors declared a dividend of
    one Quickturn stockholder right for each outstanding share of Quickturn
    common stock which are evidenced by and trade with the Quickturn common
    stock certificates. Quickturn will mail rights certificates to its
    stockholders and the stockholder rights will become transferable apart from
    the Quickturn common stock upon the earlier of:

    .  the tenth day or such later date as may be determined by a majority of
       the Quickturn's board of directors not affiliated with the acquiring
       person or group after such person or group acquires beneficial ownership
       of 15% or more of Quickturn's common stock or

    .  the tenth day or such later date as may be determined by the directors
       not affiliated with the acquiring person or group after such person or
       group announces a tender or exchange offer, the completion of which would
       result in ownership by a person or group of 15% or more of Quickturn
       common stock.

    After either event listed above occurs, Quickturn stockholder right holders
    may purchase, for $50, a fraction of a share of Quickturn preferred stock
    with economic terms similar to one share

                                     -78-
<PAGE>
 
    of Quickturn common stock. If an acquiror obtains 15% or more of Quickturn's
    common stock other than from a tender offer deemed adequate and in the best
    interests of Quickturn and its stockholders by the Quickturn board of
    directors, thereby becoming a "Quickturn Acquiring Person," then each
    Quickturn stockholder right other than those owned by a Quickturn Acquiring
    Person or its affiliates will entitle the holder thereof to purchase, for
    the exercise price, a number of shares of Quickturn's common stock having a
    then current market value of twice the exercise price (a "Flip- In"). If,
    after the first date of public announcement that someone has become a
    Quickturn Acquiring Person, Quickturn merges with or into another entity or
    Quickturn sells more than 50% of its assets or earning power, then each
    Quickturn stockholder right other than Quickturn stockholder rights owned by
    a Quickturn Acquiring Person or its affiliates will entitle the holder
    thereof to purchase, for the exercise price, Quickturn common stock of the
    person engaging in the transaction with a then current market value of twice
    the rights' exercise price in most circumstances unless the transaction
    satisfies is consummated with a person who acquired shares pursuant to a
    tender offer deemed adequate and in the best interests of Quickturn and its
    stockholders by the Quickturn's board of directors in which case the rights
    will expire (a "Flip-Over").

    At any time after an event triggering the Flip-In or Flip-Over rights and
    prior to the acquisition by the Quickturn Acquiring Person of 50% or more of
    the outstanding shares of Quickturn common stock, the Quickturn board of
    directors may exchange the Quickturn stockholder rights, other than
    Quickturn stockholder rights owned by the Quickturn Acquiring Person or its
    affiliates,into one share of Quickturn common stock per Quickturn
    stockholder right. Quickturn stockholder rights are redeemable at
    Quickturn's option for $0.01 per Quickturn right at any time on or before
    the date the rights separate from the Quickturn common stock.

    The Quickturn stockholder rights expire on the earliest of January 10, 2006
    or exchange, redemption or expiration of the Quickturn stockholder rights.
    The terms of the Quickturn stockholder rights and Quickturn's "poison pill"
    rights plan may be amended without Quickturn stockholder approval on or
    prior to the date on which the rights separate from the Quickturn common
    stock, after which stockholder approval is required except to cure any
    ambiguities or to make changes which do not negatively affect the interests
    of Quickturn stockholder rights holders other than the Quickturn Acquiring
    Person. Quickturn stockholder rights do not have any voting rights but have
    the benefit of certain customary anti-dilution provisions.
 
    On December 8, 1998, in connection with the merger with Cadence, the
    Quickturn board of directors amended Quickturn's poison pill rights plan to
    provide that neither Cadence's entering into the merger agreement, the
    option agreement or the merger, nor Cadence's exercise of its option will
    cause the Quickturn stockholder rights to become exercisable or cause
    Cadence to become a beneficial owner of 15% or more of Quickturn common
    stock for purposes of its poison pill rights plan.


                                     -79-
<PAGE>
 
13. Income Taxes

    Income before taxes and details of the income tax provision consist of the
    following:
    ----------------------------------------------------------------------------
<TABLE>
<CAPTION>
(in thousands)                                          
                                                                       Year Ended December 31,                                      

                                                                  ----------------------------------
                                                                    1998         1997         1996                                 
                                                                  --------     --------     -------- 
<S>                                                           <C>             <C>         <C>                                     
                                                                                                                                  
Domestic income (loss) before taxes                               $(13,388)     $(7,186)     $18,856                                

Foreign income before taxes                                            768          522          996                                

                                                                  --------     --------     -------- 
 Income (loss) before taxes                                       $(12,620)     $(6,664)     $19,852                                

                                                                  ========     ========     ========
Income tax provision (benefit)                                                                                                    
Federal                                                                                                                           
 Current payable (net of benefit from                                                                                             
  utilization of net operating loss                                                                                               
  carryforwards of none, none and $1,292                                                                                          
  for 1998, 1997 and 1996, respectively)                          $ (2,240)     $   703      $ 5,235                                

 Deferred                                                           (2,606)      (4,270)        (678)
                                                                  --------     --------     --------                                

                                                                    (4,846)      (3,567)       4,557 
                                                                  --------     --------     --------                                

State                                                                                                                             
 Current payable                                                        46          365          692                                

 Deferred                                                           (1,277)        (849)        (103)
                                                                  --------     --------     --------                                

                                                                    (1,231)        (484)         589 
                                                                  --------     --------     --------                                

Foreign                                                                                                                           
 Current payable                                                       315          365          575 
                                                                  --------     --------     --------                                

  Income tax provision (benefit)                                  $ (5,762)     $(3,686)     $ 5,721                                

                                                                  ========     ========     ========
</TABLE> 
 
    The items accounting for the difference between income taxes (benefits)
    computed at the federal statutory rate and the provision (benefit) for
    income taxes are as follows:
    --------------------------------------------------------------------------- 
<TABLE> 
<CAPTION> 
                                                                        Year Ended December 31,                            
                                                                  ----------------------------------
                                                                    1998         1997         1996                                 
                                                                  --------     --------     -------- 
<S>                                                           <C>             <C>         <C>                                     
Income tax (benefit) at statutory rate                              (35.0%)      (35.0%)       35.0%                     
State income taxes, net of federal benefit                           (8.1%)      (11.3%)        5.5%                      
Change in valuation allowance                                          --           --         (9.5%)                       
Tax exempt interest                                                  (1.9%)         --           --                          
Benefit of foreign sales corporation                                   --         (3.2%)       (3.0%)                    
Nondeductible expenses                                                4.0%          --          0.5%                       
Foreign taxes                                                         1.3%         1.6%         1.4%                               
Research and development and                                                                                                       
 business tax credits                                                (6.2%)      (12.2%)       (3.7%)                   
Other                                                                 0.2%         4.8%         2.6%                         
                                                                  --------     --------     -------- 
 Effective tax provision (benefit) rate                             (45.7%)      (55.3%)       28.8%                     
                                                                  ========     ========     ========
</TABLE> 

                                     -80-
<PAGE>
 
The effective income tax provision rate in 1996 was impacted by a reduction in
Quickturn's valuation allowance against deferred tax assets of $1.9 million.
 
The components of the net deferred tax assets are:
--------------------------------------------------------------------------------
(in thousands)
                                                              December 31,
                                                         --------------------- 
                                                           1998         1997
                                                         --------     --------  
Accrued vacation and bonus                               $    293     $    391
Reserve for inventories                                     5,795        4,386
Depreciation expense                                        1,829        1,806
Deferred revenue                                              206        1,129
Other liabilities and reserves                                537        2,053
Net operating loss carryforward                             1,672        2,049
Research and development and other tax credits              8,018        2,653
                                                         --------     --------  
 Net deferred tax assets                                 $ 18,350     $ 14,467
                                                         ========     ========  

Quickturn's income taxes currently payable for both federal and state purposes
have been reduced by the tax benefit derived from the disqualifying dispositions
of incentive stock options and the exercise of nonqualified stock options. The
benefit, which totaled $369,000 and $860,000 in 1998 and 1997, respectively, was
credited directly to additional paid-in-capital.

At December 31, 1998, Quickturn had approximately $3.6 million and $6.0 million
of federal and state net operating loss carryforwards, respectively, and federal
and state tax credit carryforwards of $5.9 million and $2.1 million,
respectively. The carryforwards expire in 2003 through 2018, if not utilized. A
portion of Quickturn's federal net operating loss and tax credit carryforwards
is subject to an annual limitation of approximately $1.2 million.

                                     -81-
<PAGE>
 
14. Earnings per Share

    Basic and diluted earnings per share were calculated as follows:
    ----------------------------------------------------------------------------
    (amounts in thousands except per share data)
    
<TABLE>
<CAPTION>
                                                                   Year Ended December 31,
                                  --------------------------------------------------------------------------------------------  
                                              1998                            1997                          1996
                                  -----------------------------  ------------------------------ ------------------------------ 
                                     Net              Per share     Net               Per share    Net               Per share
                                    Loss     Shares     Amount     Loss     Shares     Amount    Income    Shares     Amount
                                  --------  --------  ---------  --------  --------  ---------- --------  --------  ----------  
<S>                               <C>      <C>         <C>        <C>      <C>         <C>      <C>      <C>         <C> 
 
Net income (loss)                  ($6,858)                       ($2,978)                       $14,131
 
Basic EPS
Net income (loss) available to
 common stockholders               ($6,858)   17,802    ($0.39)   ($2,978)   17,110      ($0.17) $14,131    16,323       $0.87
                                                        =======                          =======                         =====
 
Effect of dilutive securities
Options                                  -         -                    -         -                    -     1,554
Warrants                                 -         -                    -         -                    -        35
                                  --------  --------             --------  --------             --------  --------              
                                         -         -                    -         -                    -     1,589
 Diluted EPS
 Net income (loss) available to
  common stockholders plus
  assumed conversions              ($6,858)   17,802    ($0.39)   ($2,978)   17,110      ($0.17) $14,131    17,912       $0.79
                                  ========  ========  =========  ========  ========  ========== ========  ========  ==========  
</TABLE> 

During 1998 and 1997, options to purchase 1,247,365 and 1,547,522 shares,
respectively, and warrants for no and 50,802 shares, respectively, were
outstanding but were not included in the computation of diluted EPS because
their inclusion would have an anti-dilutive effect on the net loss per share.
During 1998, 1997 and 1996, options to purchase 573,008,  174,118 and  73,281
shares were outstanding, but were not included in the computation of diluted EPS
because the exercise prices of the options were greater than the average market
price of the common shares.  During 1998 warrants for 1,200,000 shares and
during 1997 and 1996 warrants for 200,000 shares were outstanding but were not
included in the computation of diluted EPS because the exercise price of the
warrants was greater than the average market price of the common shares. At the
end of 1998, anti-dilutive options for 13,600 shares and anti-dilutive warrants
for 200,000 shares were still outstanding.

                                     -82-
<PAGE>
 
15. Business Segments and Major Customers

    Quickturn operates in a single industry segment encompassing the
    development, manufacture, sale and support of system-level verification
    solutions for the design of computer chips and electronic systems.

    Quickturn's top ten customers represented 60%, 43% and 52% of total revenue
    for the years ended December 31, 1998, 1997 and 1996, respectively. In the
    years ended December 31, 1998 and 1996, sales to one customer, Fujitsu, were
    $14.7 million or 14% of Quickturn's total revenue, and $13.1 million or 12%
    of Quickturn's total revenue, respectively. In the year ended December 31,
    1997, no customer individually constituted more than 10% of Quickturn's
    total revenue.

    Quickturn markets its products to customers in North America, Asia-Pacific
    and Europe, and offers technical support, design consulting services,
    training, hardware maintenance and software upgrades to its customers.
    Products and services are marketed through a direct sales force in North
    America, Japan, Europe and Israel. Quickturn also maintains distributorship
    relationships in Korea, Singapore and Taiwan.

    Revenue information by geographic region is as follows:
    ---------------------------------------------------------------------------
    (in thousands)

                          Year Ended December 31,
                      ------------------------------
                        1998       1997       1996
                      --------   --------   --------
    U.S.              $ 62,662   $ 71,056   $ 69,406
    Japan               22,706     23,136     22,189
    Other               18,741     16,212     17,983
                      --------   --------   --------
                      $104,109   $110,404   $109,578
                      ========   ========   ========


    Revenue has been allocated to countries on the basis of location in which
    sales were originated.

    Identifiable assets of foreign operations are not significant. The net
    income (loss) for all periods presented are derived primarily from
    Quickturn's U.S. operations.

16. Employee Benefit Plans

    Quickturn maintains 401(k) savings plans to provide retirement benefits
    through tax deferred salary deductions for all its employees. Quickturn may
    make discretionary contributions, as determined by the board of directors,
    which cannot exceed a percentage of the annual aggregate salaries of those
    employees eligible to participate. Quickturn made total contributions to the
    plans of $570,000, $497,000 and $394,000 for the years ended December 31,
    1998, 1997 and 1996, respectively.

                                     -83-
<PAGE>
 
17. Contingencies

    Legal Proceedings

    In January 1996, Quickturn filed a complaint with the International Trade
    Commission (the "ITC") in Washington, DC, seeking to stop unfair importation
    of logic emulation systems manufactured by Meta Systems ("Meta"), a French
    subsidiary of Mentor Graphics Corporation ("Mentor"). In the complaint,
    Quickturn alleges that Mentor's hardware logic emulation systems infringe
    Quickturn's patents. In December 1997, the ITC issued: (1) a Permanent
    Limited Exclusion Order which permanently prohibits the importation of
    infringing hardware logic emulation systems, subassemblies or components
    manufactured by Mentor and/or Meta, and (2) a Permanent Cease and Desist
    Order permanently prohibiting Mentor from, among other things, selling,
    offering for sale or advertising the same hardware logic emulation devices.
    The ITC's two orders remain in effect until April 28, 2009, the latest
    expiration date of Quickturn's patents involved in the investigation.

    Quickturn is also engaged in a Federal District Court case with Mentor and
    Meta involving five of Quickturn's patents. Quickturn has pending actions
    against Mentor and Meta for infringement of the five patents, and Mentor and
    Meta are seeking a declaratory judgment of non-infringement and
    unenforceability of the five patents in dispute, and of invalidity of two of
    those patents. In June 1997, Quickturn filed a motion for preliminary
    injunction, asking the District Court to prohibit Mentor from manufacturing,
    assembling, marketing, loaning or otherwise distributing emulation products
    and components in the United States, which products and components infringe
    certain claims in Quickturn's U.S. Patent No. 5,036,473. On August 1, 1997,
    the U.S. District Court in Oregon granted Quickturn's motion for a
    preliminary injunction against Mentor's domestic emulation activities. The
    Federal Circuit Court of Appeals affirmed the Oregon District Court's
    decision on August 5, 1998. The Oregon action is presently set for a bench
    trial in April 1999 with respect to Mentor's allegations of patent
    unenforceability. A jury trial on the remaining liability and damages issues
    has been set for June 1999.

    In November 1996, Aptix Corporation ("Aptix") filed a suit against
    Quickturn, in the U.S. District Court, the Northern District of California,
    San Jose Division, alleging various violations of the antitrust laws and
    unfair competition. Aptix sought preliminary damages of $5 million, an order
    dedicating to the public all patents acquired by the Company, and an
    injunction prohibiting Quickturn from acquiring further patents in the field
    of hardware emulation and from enforcing its patents against competitors.
    The District Court granted a summary judgment motion in favor of Quickturn
    and dismissed the case. Aptix requested the Court to reconsider its decision
    and dismissal, but the Court denied Aptix's request. 

                                     -84-
<PAGE>
 
    Aptix has appealed the dismissal to the Ninth Circuit Court of Appeals.

    In October 1997, Quickturn filed a complaint in the German District Court of
    Dusseldorf against Mentor's German subsidiary, Mentor Graphics
    (Deutschland) GmbH, alleging infringement of the German part of Quickturn's
    European Patent No. 0 437 491 B1. After two preliminary hearings in which
    procedural matters were discussed, the parties have submitted their briefs
    to the court. The Main Court hearing for this action was held on March 16,
    1999, and the court's decision will be issued on April 29, 1999.
    
    On March 19, 1999, Quickturn's patent counsel in Germany received official
    service of a Nullification Complaint, filed by Mentor Graphics (Deutschland)
    GmbH, in the German Federal Patent Court located in Munich. The
    Nullification Complaint seeks to have certain claims of Quickturn's European
    Patent EP 0 437 491 declared void with respect to the sovereign territory of
    the Federal Republic of Germany. Quickturn's initial response to this
    complaint is due by April 19, 1999.

    In February 1998, Aptix and Meta filed a lawsuit against Quickturn, in the
    U.S. District Court, the Northern District of California, alleging
    infringement of a U.S. patent owned by Aptix and licensed to Meta. Quickturn
    named Mentor as a party to this suit and filed a counter claim requesting
    the Court to declare the Aptix patent to be unenforceable based on
    inequitable conduct during the prosecution of the patent. Quickturn also
    filed a counter claim against Aptix, Meta and Mentor for abuse of process,
    based on Aptix, Meta and Mentor's submission of falsified evidence relating
    to the date of invention of the technology described in the Aptix patent.
    Quickturn is seeking $10 million in damages from Mentor, Meta and Aptix for
    their abuse of process. The case is set for trial in January 2000.

    In October 1998, Quickturn filed a complaint in the District Court of Paris,
    France, against Mentor Graphics (France) SARL, Mentor Graphics (Netherlands)
    BV, Meta Systems (France), and M2000 (France) S.A. for infringement of the
    French part of Quickturn's European Patent No. 0 437 491 B1. This case has
    only recently been initiated, and no schedule has been set for determining
    its final disposition.

    Quickturn has mounted vigorous defenses against Aptix and Meta's patent
    infringement claim. The outcome of these actions cannot be predicted with
    certainty.

    On August 12, 1998, a subsidiary of Mentor Graphics Corporation initiated an
    unsolicited tender offer (the "Tender Offer") to purchase all outstanding
    shares of Quickturn's common stock. Even though the Tender Offer was
    subsequently withdrawn on January 8, 1999, Quickturn is still engaged in
    legal proceedings in connection with the Tender Offer. The outcome of these
    lawsuits cannot be predicted with certainty.

    Quickturn is engaged in certain other legal and administrative proceedings
    incidental to its normal business activities. While it is not possible to
    determine the ultimate outcome of these actions at this time, management
    believes that any liabilities resulting from such proceedings, or claims
    which are pending or known 

                                     -85-
<PAGE>
 
    to be threatened, will not have a material adverse effect on Quickturn's
    consolidated financial position or results of operations.

    Retention Plan
    In September 1998, Quickturn implemented two retention plans, the Management
    Retention Plan (the "Management Plan") and the Employee Retention Plan (the
    "Employee Plan") that provide retention and severance benefits to the
    employees of Quickturn if there is a change in control of Quickturn and, as
    a result, the employees are involuntarily terminated without cause, or, in
    the case of the Management Plan, are constructively terminated, within
    twelve months following the change of control. Pursuant to the plans, a
    change in control occurs when any person or entity becomes the beneficial
    owner of 50% or more of Quickturn's common stock, or when there is a change
    in the composition of the board of directors within a two-year period
    resulting in a fewer than majority of the directors being incumbent
    directors. The amount of severance benefits is governed by the individual
    plans and ranges from three months to two and a half years of salary and/or
    other remuneration. The Management Plan applies only to designated executive
    officers and vice presidents, while the Employee Plan applies to all
    employees who are not participants in the Management Plan. The maximum
    contingent liability under these agreements at December 31, 1998, assuming
    termination of 100% of Quickturn's employees was approximately $15 million.

    Liquidated Damages and Expenses Payable to Cadence
    If Quickturn's merger agreement with Cadence is terminated under certain
    conditions, Quickturn has agreed to pay Cadence $10,557,000 as liquidated
    damages. The conditions are:
    .  If Quickturn terminates its merger with Cadence because Quickturn's
       board of directors receives a superior proposal and responds in a way
       permitting termination.
    .  If Cadence terminates the merger because Quickturn's board
       recommends that Quickturn's stockholders approve a transaction other
       than the merger with Cadence, or Quickturn's board no longer
       recommends Quickturn's merger with Cadence, or Quickturn ceases
       attempts to convene a stockholders' meeting to approve the merger with
       Cadence.
    .  If Cadence terminates the merger because of a significant breach by
       Quickturn, and within a year of termination, Quickturn enters into
       another agreement for the sale of a substantial interest in Quickturn or
       of Quickturn's business, with a third party with whom Quickturn had been
       in contact before Quickturn's merger agreement with Cadence had been
       terminated.
    .  If Quickturn or Cadence terminates the merger because the requisite vote
       is not obtained at the Quickturn stockholders' meeting and at the time of
       the meeting another offer for Quickturn existed or is expected.

                                      -86-
<PAGE>
 
    In addition, Quickturn has agreed to pay Cadence $3.5 million as
    reimbursement of its fees and expenses under circumstances that include but
    are not limited to:
    .  If Quickturn terminates the merger agreement because Quickturn had
       failed to obtain stockholder approval of the merger with Cadence, or the
       Quickturn board received a superior proposal and responded in a way that
       permitted termination of the merger with Cadence.
    .  If Cadence terminates the merger agreement because Quickturn does not
       satisfy certain terms of the merger agreement or if a Quickturn
       stockholder meeting to vote on the merger is held but stockholders'
       approval is not obtained.

18. Comprehensive Income (Loss)
    Effective in the first quarter of 1998, Quickturn adopted Statement of
    Financial Accounting Standard No. 130, "Reporting Comprehensive Income"
    ("SFAS 130"). Comprehensive income generally represents all changes in
    stockholders' equity except those resulting from contributions by or
    disbursements to stockholders. Quickturn has reclassified earlier financial
    statements for comparative purposes. The adoption of this standard did not
    have a material impact on Quickturn's results of operations.

 
    Changes in accumulated other comprehensive income (loss) balances are as
    follows:
    ----------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                               Foreign    Net Unrealized   Accumulated
                                              Currency        Gain on         Other
                                            Translation     Marketable    Comprehensive
    (in thousands)                           Adjustment     Securities     Income (Loss)
    ------------------------------------------------------------------------------------ 
<S>                                          <C>         <C>        <C> 
    Balance, December 31, 1996              $        --   $           10  $           10
     Other comprehensive income (loss)             (653)              78            (575)
                                            -----------   --------------  --------------
    Balance, December 31, 1997              $      (653)  $           88  $         (565)
     Other comprehensive income                     820               37             857
                                            -----------   --------------  --------------
    Balance, December 31, 1998              $       167   $          125  $          292
                                            ===========   ==============  ==============
</TABLE>

19. Subsequent Event
    In December 1998, Quickturn's board of directors unanimously approved a
    definitive merger agreement with Cadence. Under the merger agreement, as
    amended in January 1999, Cadence will acquire Quickturn in a tax-free, 
    stock-for-stock transaction with an aggregate purchase price of
    approximately $271 million, and Quickturn will become a wholly-owned
    subsidiary of Cadence. Pursuant to the terms of the amended merger
    agreement, Quickturn's stockholders will receive Cadence's common stock with
    a value of $15 per share for each share of Quickturn's common stock owned.
    The merger is subject to certain conditions, including compliance with
    applicable regulatory requirements, and approval by Quickturn's
    shareholders. The merger will be accounted for

                                     -87-
<PAGE>
 
    under the pooling of interests method and the transaction is expected to be
    closed in the second quarter of 1999.

    In January 1999, Mentor withdrew its unsolicited tender offer initiated in
    August 1998. Additionally, Mentor withdrew its request for a Special Meeting
    of Quickturn Stockholders scheduled for January 1999, and withdrew its
    proposed slate of director nominees and related proposals that were
    scheduled to be voted on at the Special Meeting.

                                     -88-
<PAGE>
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on this 29/th/ day of March
1999.

                              Quickturn Design Systems, Inc.

                              By:    /s/   RAYMOND K. OSTBY
                                    -----------------------
                                    Raymond K. Ostby,
                                    Vice President, Finance and Administration,
                                    Chief Financial Officer and Secretary

Pursuant to the requirements of the Securities Exchange Act of 1934, this Form
10-K has been signed below by the following persons on March 29, 1999 on behalf
of the Registrant and in the capacities indicated:

 
      Signatures                             Title
  ------------------------        ---------------------------------------

 
/s/   KEITH R. LOBO               President and Chief Executive Officer  
--------------------------        (Principal Executive Officer)
      Keith R. Lobo                           
                                                         
    
/s/   RAYMOND K. OSTBY            Vice President, Finance and
--------------------------        Administration, Chief Financial Officer
      Raymond K. Ostby            and Secretary (Principal Financial and
                                  Accounting Officer)
    
/s/   GLEN M. ANTLE               Chairman of the Board
--------------------------
      Glen M. Antle
     
/s/   RICHARD C. ALBERDING        Director      
--------------------------  
      Richard C. Alberding
    
/s/   MICHAEL R. D'AMOUR          Director        
--------------------------  
      Michael R. D'Amour 
    
/s/   WILLIAM A. HASLER           Director                       
-------------------------- 
      William A. Hasler 
    
/s/   DR. YEN-SON (PAUL) HUANG    Director       
------------------------------  
      Dr. Yen-Son (Paul) Huang  
    
/s/   CHARLES D. KISSNER          Director       
--------------------------  
      Charles D. Kissner 
    
/s/   DR. DAVID K. LAM            Director     
-------------------------- 
      Dr. David K. Lam 

                                      -89-
<PAGE>
 
                       REPORT OF INDEPENDENT ACCOUNTANTS

Our report on the consolidated financial statements of Quickturn Design Systems,
Inc. is included on page 57 of this Form 10-K. In connection with our audits of 
such financial statements, we have also audited the related financial statement 
schedule listed in the index on page 55 of this Form 10-K.

In our opinion, the financial statement schedule referred to above, when 
considered in relation to the basic financial statements taken as a whole, 
presents fairly, in all material aspects, the information required to be 
included therein.

/s/ PricewaterhouseCoopers LLP

San Jose, California
January 15, 1999

                                      S-1
<PAGE>
 
              SCHEDULE II - PURSUANT TO REGULATION S-X RULE 12-09

                        QUICKTURN DESIGN SYSTEMS, INC.

                       Valuation and Qualifying Accounts
                                (in thousands)
<TABLE> 
<CAPTION> 

                                                                Deductions     Balance
                                   Balance at     Additions      (Charges        at
                                   Beginning     (Charges to     Against         End
       Description                 of Period      Expenses)     Reserves)     of Period
-------------------------------    ----------    -----------    ----------    --------- 
<S>                                <C>           <C>            <C>           <C>      
Year ended December 31, 1996
Allowance for doubtful accounts    $   1,840     $        --    $       --    $   1,840
                                   =========     ===========    ==========    =========  

Year ended December 31, 1997
Allowance for doubtful accounts    $   1,840     $        --    $       --    $   1,840
                                   =========     ===========    ==========    =========  

Year ended December 31, 1998
Allowance for doubtful accounts    $   1,840     $        --    $       --    $   1,840
                                   =========     ===========    ==========    =========  
</TABLE> 

                                      S-2
<PAGE>
 
                        QUICKTURN DESIGN SYSTEMS, INC.
                          Annual Report On Form 10-K
                       For Year Ended December 31, 1998

                               INDEX TO EXHIBITS
                               -----------------

Exhibit
Number    Description
-------   ----------------------------------------------------------------------

  2.1     Agreement and Plan of Merger dated as of December 8, 1998 among the 
          Registrant and Cadence Design Systems, Inc. (which is incorporated
          herein by reference to Exhibit 2.2 to the Registrant's Current Report
          on Form 8-K dated December 16, 1998, as amended on December 22, 1998
          and January 6, 1999).

  3.1     Certificate of Incorporation of the Registrant, as amended (which is 
          incorporated herein by reference to Exhibit 3.1 to the Registrant's
          Registration Statement on Form S-1, Registration No. 33-71022
          ("Registrant's 1993 Form S-1")).

  3.2     Certificate of Amendment of the Certificate of Incorporation of the 
          Registrant, dated April 11, 1997 (which is incorporated herein by
          reference to Exhibit 3.2 to the Registrant's 1997 Form 10-K).

  3.3     Bylaws of the Registrant (which are incorporated herein by reference 
          to Exhibit 3.2 to the Registrant's quarterly report on Form 10-Q for
          the quarterly period ended September 30, 1998).


  4.1     Form of Registrant's Common Stock certificate (which is incorporated
          herein by reference to Exhibit 4.1 to the Registrant's 1993 Form S-1).

 10.1    *Form of Indemnification Agreement entered into by Registrant with each
          of its directors and executive officers (which is incorporated herein
          by reference to Exhibit 10.1 to the Registrant's 1993 Form S-1).

 10.2    *1988 Stock Option Plan and related agreements (which is incorporated 
          herein by reference to Exhibit 10.2 to the Registrant's 1993 Form 
          S-1).
 
 10.3    *Key Executive Stock Option Plan and related agreements (which is 
          incorporated herein by reference to Exhibit 10.3 to the Registrant's
          1993 Form S-1).

 10.4    *1993 Employee Qualified Stock Purchase Plan and related agreements 
          (which is incorporated herein by reference to Exhibit 4.2 to the
          Registrant's Registration Statement on Form S-8, Registration No. 333-
          25459 ("Registrant's 1997 Form S-8")).


                                      -i-







<PAGE>
 
                        QUICKTURN DESIGN SYSTEMS, INC.
                           Annual Report on Form 10-K
                       For Year Ended December 31, 1998

                               INDEX TO EXHIBITS
                               -----------------


Exhibit
Number        Description
-------       ------------------------------------------------------------------

 10.5         Software License Agreement dated December 18, 1987 between Xilinx,
              Inc. and registrant (which is incorporated herein by reference to
              Exhibit 10.8 to the Registrant's 1993 Form S-1).

 10.6         Lease dated December 6, 1996 between San Jose Acquisition Co.,
              L.L.C. and Registrant (which is incorporated herein by reference
              to Exhibit 10.6 to the Registrant's 1997 Form 10-K).

 10.8        *Offer letter dated November 4, 1992 between Keith R. Lobo and
              Registrant, as amended (which is incorporated herein by reference
              to Exhibit 10.18 to Registrant's 1993 Form S-1).

 10.9        *1994 Outside Director Stock Option Plan (which is incorporated by
              reference to Exhibit 4.1 to the Registrant's Registration
              Statement on Form S-8, Registration No. 33-82452).
 
 10.10       *SpeedSim, Inc. 1995 Incentive and Nonqualified Stock Option Plan
              (which is incorporated by reference to Exhibit 4.1 to the
              Registrant's Registration Statement on Form S-8, Registration No.
              333-21587).
 
 10.11       *1996 Supplemental Stock Plan (which is incorporated herein by
              reference to Exhibit 4.1 to the Registrant's Registration
              Statement on Form S-8, Registration No. 333-18407).

 10.12       *1997 Stock Option Plan (which is incorporated herein by reference
              to Exhibit 4.1 to Registrant's Statement on Form S-8, Registration
              No. 33-25459).

 10.13        Stock Option Agreement, dated as of December 8, 1998, between
              Cadence Design Systems, Inc. and the Registrant (which is
              incorporated by reference to Exhibit 2.1 to the Registrant's
              Current Report on Form 8-K dated December 16, 1998, as amended on
              December 27, 1998 and January 6, 1999).

 21.1         Subsidiaries of the Registrant.

 23.1         Consent of PricewaterhouseCoopers LLP, Independent Accountants.

 27.1         Financial Data Schedule for fiscal year of 1998 (EDGAR).

-----------------
             *Indicates management compensatory plan, contract or arrangement.

                                     -ii-