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

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


                                  FORM 10-Q
                                        

                                        
(Mark One)

[X]  Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarter ended April 3, 1999 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 0-18623


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

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


                                        
               Delaware                                 77-0100318
   (State or other jurisdiction of                  (I.R.S. Employer
   incorporation or organization)                  Identification No.)

  19050 Pruneridge Ave., Cupertino, CA                      95014
(Address of principal executive offices)                 (zip code)


              Registrant's telephone number, including area code:
                                (408) 255-4567

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

   Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.

        Common Stock $.01 Par Value                 8,279,000
        ---------------------------     (Outstanding as of April 3, 1999)
            (Title of Class)        

================================================================================
<PAGE>
 
                              IKOS SYSTEMS, INC.
                                   FORM 10-Q
                          QUARTER ENDED April 3, 1999


                                     INDEX
                                     -----


                                        

<TABLE>
<CAPTION>

Part I:  Financial Information

         Item 1:  Financial Statements 
                                                                           Page
<S>                                                                      <C>
                  Consolidated Balance Sheets at
                     April 3, 1999 and October 3, 1998..................     3
 
                  Consolidated Statements of Income
                     for the three and six month periods ended
                     April 3, 1999 and April 4, 1998....................     4
 
                  Consolidated Statements of Cash Flows
                     for the six month periods ended
                     April 3, 1999 and April 4, 1998....................     5
 
                  Notes to Consolidated Financial Statements............     6
 
         Item 2:  Management's Discussion and Analysis
                     of Financial Condition and Results of Operations...     8
 
Part II: Other Information
 
         Item 4:  Submission of Matters to a Vote of Security Holders...    16
  
         Item 6:  Exhibits and Reports on Form 8-K......................    17
 
         Signatures.....................................................    20
 
</TABLE>
<PAGE>
                         PART I.  FINANCIAL INFOMATION

ITEM 1     Financial Statements
 
                              IKOS SYSTEMS, INC.
                          CONSOLIDATED BALANCE SHEETS
                   (in thousands, except per share amounts)
<TABLE>
<CAPTION>
                                                                                                April 3,              October 3, 
                                                                                                  1999                   1998
                                                                                             ---------------        --------------
                                         ASSETS                                                (unaudited)                (*)
<S>                                                                                        <C>                    <C>
Current assets:                                                                                         
        Cash and cash equivalents.....................................................           $  9,460               $  8,165
        Short-term investments........................................................              4,873                  7,517
        Accounts receivable (net of allowances for
                 doubtful accounts of $801 for 1999 and 1998, respectively)...........              5,595                  6,033
        Inventories...................................................................              5,001                  3,816
        Prepaid expenses and other assets.............................................                463                    536
                                                                                                 --------               --------
                        Total current assets..........................................             25,392                 26,067
                                                                                                
        Equipment and leasehold improvements                                                                                    
                Office and evaluation equipment.......................................              5,140                  4,876
                Machinery and equipment...............................................             10,009                  9,201
                Leasehold improvements................................................                716                    587
                                                                                                 --------               --------
                                                                                                   15,865                 14,664
                        Less allowances for depreciation and amortization.............            (10,557)                (9,342)
                                                                                                 --------               --------
                                                                                                    5,308                  5,322
        Intangible assets (net of amortization of 
                 $509 and $303, respectively).........................................              1,353                  1,559
        Other assets..................................................................                244                    396
                                                                                                 --------               --------
                                                                                                 $ 32,297               $ 33,344
                                                                                                 ========               ========
                                LIABILITIES AND STOCKHOLDERS' EQUITY                                                            
Current liabilities:                                                                                            
        Accounts payable..............................................................           $  3,999               $  4,789
        Accrued payroll and related expenses..........................................              2,641                  1,854
        Accrued commissions...........................................................              1,337                    801
        Income taxes payable..........................................................              1,116                  1,185
        Other accrued liabilities.....................................................              2,803                  4,350
        Deferred revenues.............................................................              7,794                  7,596
                                                                                                 --------               --------
                        Total current liabilities.....................................             19,690                 20,575

Accrued rent..........................................................................                111                    156
Commitments                                                                                             
Stockholders' equity:                                                                                           
         Preferred stock, $.01 par value; 10,000 shares
                 authorized, none issued and outstanding..............................                 --                     --
         Common stock, $.01 par value; 50,000 shares
                 authorized, 8,797 shares issued for 1999 and 1998,
                 respectively and 8,279 and 8,361 outstanding, respectively...........                 88                     87
         Additional paid-in capital...................................................             58,664                 58,775
         Treasury stock, at cost, 518 shares in 1999 and
                436 in 1998...........................................................             (3,463)                (3,144)
         Accumulated translation adjustment...........................................               (312)                  (314)
         Accumulated deficit..........................................................            (42,481)               (42,791)
                                                                                                 --------               --------
                        Total stockholders' equity....................................             12,496                 12,613
                                                                                                 --------               --------
                                                                                                 $ 32,297               $ 33,344
                                                                                                 ========               ========
</TABLE>

(*) Amounts were derived from audited financial statements at October 3, 1998.

                See notes to consolidated financial statements.

                                       3
<PAGE>
 
                               IKOS SYSTEMS INC.
                       CONSOLIDATED STATEMENTS OF INCOME
                   (in thousands, except per share amounts)
                                  (unaudited)

<TABLE>
<CAPTION>
                                                                   Three Months Ended            Six Months Ended
                                                                ------------------------    ---------------------------
                                                                   April 3,    April 4,        April 3,     April 4,
                                                                     1999        1998            1999        1998
                                                                     ----        ----            ----        ----
<S>                                                            <C>           <C>           <C>          <C>
Net revenues                                                                            
     Product..................................................      $ 9,958     $ 9,162         $17,571      $18,244
     Maintenance..............................................        3,724       3,157           7,455        6,140
                                                                    -------     -------         -------      -------
     Total net revenues.......................................       13,682      12,319          25,026       24,384

Cost of revenues                                                                          
     Product..................................................        2,471       2,723           4,440        5,178
     Maintenance..............................................          948         450           1,794        1,008
                                                                    -------     -------         -------      -------
     Total cost of revenues...................................        3,419       3,173           6,234        6,186
                                                                    -------     -------         -------      -------
     Gross profit.............................................       10,263       9,146          18,792       18,198

Operating expenses:                                                                       
     Research and development.................................        3,433       3,199           6,448        6,048
     Sales and marketing......................................        5,536       4,316          10,140        8,780
     General and administration...............................        1,011         901           1,914        1,872
     Amortization of intangibles..............................          103         377             206          713
                                                                    -------     -------         -------      -------
     Total operating expenses.................................       10,083       8,793          18,708       17,413
                                                                    -------     -------         -------      -------
Income from operations........................................          180         353              84          785

Other income:                                                                    
     Interest income..........................................          133         296             281          616
                                                                    -------     -------         -------      -------
Income before provision for income taxes......................          313         649             365        1,401
Provision for income taxes....................................           55         245              55          530
                                                                    -------     -------         -------      -------
     Net income...............................................      $   258     $   404         $   310      $   871
                                                                    =======     =======         =======      =======
Basic net income per share....................................      $  0.03     $  0.05         $  0.04      $  0.10
                                                                    =======     =======         =======      =======
Common shares used in computing basic                                       
     per share amounts........................................        8,336       8,435           8,319        8,468
                                                                    =======     =======         =======      =======
Dilutive net income per share.................................      $  0.03     $  0.05         $  0.04      $  0.10

Common and common equivalent shares used                                          
     in computing dilutive per share amounts..................        9,046       8,695           8,845        8,704
                                                                    =======     =======         =======      =======
</TABLE>
 

                See notes to consolidated financial statements.

                                       4
<PAGE>
 
                              IKOS SYSTEMS, INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
         Increase (decrease) in cash and cash equivalents in thousands
                                  (Unaudited)

<TABLE>
<CAPTION>
     
 
                                                                          Six Months Ended
                                                                      ------------------------
                                                                        April 3,     April 4,
                                                                          1999         1998
                                                                      ------------ ------------
<S>                                                             <C>               <C>
Operating activities:
     Net income...............................................          $   310       $   871
     Adjustments to reconcile net income to net
       cash provided by operating activities:
       Depreciation and amortization..........................            1,423         1,780
       Deferred rent..........................................              (45)          (27)

     Changes in operating assets and liabilities:
       Accounts receivable....................................              438           567
       Inventories............................................           (1,185)       (1,161)
       Prepaid expenses and other current assets..............               73            12
       Other assets...........................................              152          (261)
       Accounts payable.......................................             (790)         (787)
       Accrued payroll and other expenses.....................              787          (716)
       Accrued commissions....................................              536          (326)
       Income taxes payable...................................              (69)          644
       Other accrued liabilities..............................           (1,547)          (32)
       Deferred revenues......................................              198           591
                                                                        -------       -------
         Net cash provided by operating activities............              281         1,155

Investing activities:
     Purchases of equipment and leasehold improvements........           (1,201)       (1,887)
     Acquisiton of Deerbrook Systems, Inc.....................               --          (500)
     Other investments........................................               --          (630)
     Purchase of short-term investments.......................           (3,919)       (8,921)
     Maturities of short-term investments.....................            6,563        14,376
                                                                        -------       -------
         Net cash provided by investment activities...........            1,443         2,438

Financing activities:
     Principal payments on long-term borrowings...............               --          (350)
     Net repurchase of common stock...........................             (429)       (1,559)
         Net cash used in financing activities................             (429)       (1,909)
                                                                        -------       -------
Increase in cash and cash equivalents.........................            1,295         1,684
Cash and cash equivalents at beginning of period..............            8,165         9,486
                                                                        -------       -------
Cash and cash equivalents at end of period....................          $ 9,460       $11,170
                                                                        =======       ======= 
</TABLE>


                See notes to consolidated financial statements

                                       5
<PAGE>
 
                             IKOS SYSTEMS, INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
                                        



1.   Basis of Presentation


     The accompanying unaudited consolidated financial statements at April 3,
     1999 and for the three and six month periods ended April 3, 1999 and April
     4, 1998, have been prepared in conformity with generally accepted
     accounting principles, consistent with those applied in, and should be read
     in conjunction with, the audited consolidated financial statements for the
     year ended October 3, 1998 included in the Form 10-K as filed with the
     Securities and Exchange Commission on December 21, 1998.  The unaudited
     interim financial information reflects all normal recurring adjustments
     which are, in the opinion of management, necessary for a fair statement of
     results for the interim periods presented. The results for the three- and
     six-month period ended April 3, 1999 are not necessarily indicative of
     results expected for the full year.


2.   Fiscal Year


     The Company is on a 52-53 week fiscal year.  Fiscal year 1998 was a 53-week
     year and the three-month period ending January 3, 1998 included the
     additional week for the fiscal year.

3.   Inventories

     Inventories are stated at the lower of cost (first-in, first-out) or market
     and consisted of (in thousands):


                                         April 3,    October 3,
                                           1999         1998
                                           ----         ----
Raw materials                             $1,223       $1,520
Work-in-process                            1,013        1,163
Finished goods                             3,165        1,133
                                          ------       ------ 
                                          $5,001       $3,816
                                          ======       ====== 

4.   Net Income Per Share


     The computation of basic net income per share for the periods presented is
     derived from the information on the face of the income statement, and there
     are no reconciling items in either the numerator or denominator.
     Additionally, there are no reconciling items in the numerator used to
     compute dilutive net income per share.  The total shares used in the
     denominator of the diluted net income per share calculation includes
     710,000 and 260,000 incremental common shares attributable to outstanding
     options for the three months ended April 3, 1999 and April 4, 1998,
     respectively and 526,000 and 236,000 for the six month periods ended April
     3, 1999 and April 4, 1998, respectively.

                                       6
<PAGE>
 
                              IKOS SYSTEMS, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
                                        

5.   Comprehensive Income

     The Company has adopted Statement of Financial Accounting Standards No. 130
     (FAS 130), "Reporting Comprehensive Income" in the first quarter of fiscal
     1999. FAS 130 establishes standards for the reporting and disclosure of
     comprehensive income and its components; however, the disclosure has no
     impact on the Company's consolidated results of operations, financial
     position or cash flows. Comprehensive income is defined as the change in
     equity of a company during a period resulting from certain transactions and
     other events and circumstances, excluding transactions resulting from
     investments by owners and distributions to owners. The difference between
     net income and comprehensive income for the Company is from foreign
     currency translation adjustments. Comprehensive income for the three and
     six month periods ending April 3, 1999 and April 4, 1998 are as follows:

<TABLE>
<CAPTION>
                                                    Three Months Ended                               Six Months Ended
                                            --------------------------------------       -------------------------------------------

                                                  April 3,              April 4,              April 3,              April 4,
                                                    1999                  1998                  1999                  1998
                                            -----------------     -----------------      -----------------    ------------------
 
<S>                                           <C>                   <C>                    <C>              <C> <C>
Net income as reported                               $258,000              $404,000               $310,000             $ 871,000
 
Comprehensive income
   adjustments (*)                                    (82,000)              (44,000)                 2,000              (234,000)
                                            -----------------     -----------------      -----------------    ------------------
Comprehensive income                                 $176,000              $360,000               $312,000             $ 637,000
                                            =================     =================      =================    ==================
 
(*) Relates primarily to accumulated translations gains and (losses)
</TABLE>


6.   Impact of Recently Issued Accounting Standards

     In June 1997, the Financial Accounting Standards Board also issued
     Statement of Financial Accounting Standards No. 131, "Disclosures about
     Segments of an Enterprise and Related Information" ("SFAS 131"), which
     established standards for the way public enterprises report information in
     annual statements and financial reports regarding operating segments,
     products, services, geographic areas, and major customers.  SFAS 131 will
     be first reflected in the Company's 1999 Annual Report. The adoption of
     SFAS 131 is not expected to materially impact the Company's results of
     operations or financial position.

     In March 1998, the American Institute of Certified Public Accounts issued
     Statement of Position  98-1, "Accounting for the Costs of Computer Software
     Developed for Obtained for Internal Use" ("SOP 98-1"), which provides
     guidelines for accounting for costs of computer software developed for
     internal use.  SOP 98-1 is effective for financial statements for fiscal
     years beginning after December 15, 1998.  The adoption of SOP 98-1 is not
     expected to materially impact the Company's results of operations or
     financial position.

     In June 1998, the Financial Accounting Standards Board issued Statement of
     Financial Accounting Standards No. 133, "Accounting for Derivative
     Instruments and Hedging Activities" ("SFAS133"), which is required to be
     adopted in years beginning after June 15, 1999. The adoption of SFAS 133 is
     not expected to materially impact the Company's results of operations or
     its financial position.
<PAGE>
 
ITEM 2.   Management's Discussion and Analysis of Financial Condition and
          Results of Operations


Cautionary Statement

The statements in the Management's Discussion and Analysis of Financial
Condition and Results of Operations that are forward looking involve numerous
risks and uncertainties and are based on current expectations.  Actual results
may differ materially from those projected.  Such risks and uncertainties may be
more fully described in other reports and information filed by the Company with
the Securities and Exchange Commission. Certain of these risks and uncertainties
are discussed under the caption "Factors That May Affect Future Results of
Operations."

Net Revenues

Net revenues for the three and six month periods ending April 3, 1999 totaled
$13,682,000 and $25,026,000, respectively, representing an increase of
approximately 11% and 3% from the same periods in fiscal 1998.  The increases
were primarily a result of increases in sales of the Company's emulation
products.  Emulation product revenue increased 82% from the prior year quarter
and increased over 68% over the immediately preceding quarter.  The increase in
revenues is a result of the Company's emulation product offerings gaining
acceptance in the marketplace.  For the six month period, emulation revenues
were in excess of $7,750,000 which represented an increase of over 48% over the
previous year.  As indicated in the Company's Form 10-K filed in December of
1998, the Company encountered a lengthy beta period with respect to its
emulation offerings, which impacted the Company's anticipated revenue growth in
its emulation product.  The beta period was completed in the fourth quarter of
fiscal 1998 and the Company began ramping up shipments in the first quarter of
fiscal 1999, which has continued through the second quarter.  The Company is
expecting to release its next generation emulator in the next three to six
months which is expected to further enhance its emulation sales.  The Company's
simulation revenues for the quarter were flat with the previous year's results
and slightly higher than the preceding quarter. While the Company has
anticipated a slow down in its sales of simulation product, due in part to
increased focus on its emulation business, as well as the overall market
evolution, the Company has released or will be releasing several new simulation
products in the next three to six months.  These new simulation products are
expected to keep the revenue levels for the simulation business flat for
slightly higher for the remaining two quarters of the fiscal year.

Maintenance revenues for the three and six month periods ending April 3, 1999
totaled $3,724,000 and $7,455,000, respectively, representing 18% and 21%
increases over the same periods from a year ago. The increases are primarily
attributable to the increasing emulation customer base and the continued sale of
maintenance for the current Voyager installed base. As the Company transitions
to a more emulation focused customer base from its current Voyager systems base,
it is anticipated that maintenance revenues will remain flat or be slightly
lower over the next two quarters of the fiscal year.

International sales for the three and six month periods ending April 3, 1999
totaled $4,811,000 and $9,273,000, respectively.  These represented increases
over the same periods of fiscal 1998 of 10% and 5%.  The Company has had
slightly higher sales and bookings as economic demand has increased at its
foreign locations when compared to sales activity in the previous fiscal year.

                                       8
<PAGE>
 
Gross Profit Margins

Gross profit margin for the three and six month periods ending April 3, 1999 was
75% and are comparable to the margins for the same periods in the prior year.
The Company's product margins were higher than the same quarter from the
previous year, while the margins on its maintenance products decreased. The
increases in margins were primarily the result of increased sales of the
Company's higher margin products. The decreased margins for the maintenance is a
result of increased costs associated with new products, primarily emulation,
offset by the larger maintenance customer base.

Research and Development Expenses

Research and development for the three and six month periods ending April 3,
1999 were approximately $3,433,000 and $6,448,000 or 25% and 26%, respectively,
of net revenues. Research and development for the three and six month periods
ending April 4, 1998 were $3,199,000 and $6,048,000, or 26% and 25%,
respectively of net revenues. The increases are primarily due to additional
funds spent on focal increases, increased headcount, consulting and prototypes,
as the company continued to focus on its new product offerings and emulation
efforts. These increases also include the additional costs associated with the
Company's new research and development facility in India. The Company expects
research and development spending to continue to increase in absolute dollars as
the Company continues to address its on-going development efforts for new
product technology development.

Sales and Marketing Expenses

Sales and marketing expenses increased from $4,316,000, or 35% of net revenues
in the second quarter of fiscal 1998 to $5,536,000, or 40% of net revenues for
the second quarter of fiscal 1999. Sales and marketing expenses also increased
from $8,780,000 for the six months ending April 3, 1998 to $10,140,000. The
increases are a result of increased commissions as certain salesman exceed their
quotas, increased rep commissions, focal increases and other selling costs.

General and Administrative Expenses

General and administrative costs were $1,011,000 or 7% of net revenues and were
slightly higher when compared to the same quarter from fiscal 1998, due to focal
increases.  General and administrative costs for the six months of fiscal 1999
were $1,914,000 and were comparable with the first six months of fiscal 1998.
General and administrative costs are expected to remain flat over the remainder
of fiscal 1999.

Income Taxes

The Company's effective tax rate on the consolidated pretax income for the three
and six month periods ended April 3, 1999 is 18% and 15%, respectively as
compared to an effective tax rate of 38% on the consolidated pretax income for
the three and six month periods ended April 4, 1998.  The Company's 1999
effective tax rate for the three and six month periods ended April 3, 1999
differs from the federal statutory rate primarily due to benefits associated
with its net operating loss carryforward. The Company's 1998 effective tax rate
for the three and six month periods ended April 4, 1998 differs from the federal
statutory rate primarily due to tax benefits associated with its foreign sales
corporation and research credits offset by costs associated with the non-
deductible goodwill amortization and state income taxes.

                                       9
<PAGE>
 
Other

The Company has experienced minimal gains or losses on foreign currency
translation since substantially all of its international sales to date have been
billed and collected in U.S. dollars. The Company pays the expenses of its
international operations in local currencies and to date the Company has not
engaged in hedging transactions with respect to such obligations. The Company
has reorganized its operations at its Japan subsidiary and is engaging in
transactions in the Japanese local currency. As such, the Company periodically
enters into foreign exchange contracts to minimize foreign exchange risk
relating to the Japanese subsidiary's sales that are denominated in yen. A
forward exchange contract obligates the Company to exchange predetermined
amounts of a specified foreign currency at a specified exchange rate on a
specified date or to make an equivalent US dollar payment equal to the value of
such exchange. These contracts are accounted for as hedges of identifiable
receivables denominated in Japanese yen. Realized gains or losses are recognized
upon maturity of the contracts and offset the underlying asset or liability.
Through April 3, 1999, such hedging arrangements have been immaterial to the
Company operations.


Factors that May Affect Future Results of Operations

Potential Fluctuations in Quarterly Results - The Company's quarterly operating
-------------------------------------------                                    
results have in the past and may in the future vary significantly depending on
factors including the timing of customer development projects and purchase
orders, new product announcements and releases by the Company and other
companies, gain or loss of significant customers, price discounting of the
Company's products, the timing of expenditures, customer product delivery
requirements, availability and cost of components or labor and economic
conditions generally and in the electronics industry specifically. Any
unfavorable change in these or other factors could have a material adverse
effect on the Company's operating results for a particular quarter. Many of the
Company's customers order on an as-needed basis and often delay issuance of firm
purchase orders until their project commencement dates are determined. Quarterly
revenue and operating results will therefore depend on the volume and timing of
orders received during the quarter, which are difficult to forecast accurately.
Moreover, a significant portion of the Company's revenue may result from
shipments during the last few weeks of the quarter from orders generally
received in the last month of the quarter. Any concentration of sales at the end
of the quarter may limit the Company's ability to plan or adjust operating
expenses and production and inventory levels. Therefore, if anticipated
shipments in any quarter do not occur or are delayed, expenditure levels could
be disproportionately high as a percentage of revenue, and the Company's
operating results for that quarter would be adversely affected. In addition,
sales of individual systems with high average sales prices can constitute a
significant percentage of the Company's quarterly revenue. Operating results in
any period should not be considered indicative of the results to be expected for
any future period, and there can be no assurance that the Company's net revenues
will increase or that the Company will remain profitable in any future period.

                                       10
<PAGE>
 
Increased Sales and Development of the Company's Products - Substantially all of
---------------------------------------------------------                       
the Company's product revenues since fiscal 1993 have been derived from the sale
of its Voyager and Gemini simulation systems. The Company has seen a decline in
such revenues and there can be no assurance the decline in these product's
revenues will reverse. Continued sales of the Company's hardware-assisted
simulation products for the verification of IC and system designs are expected
to depend on the introduction of new simulation products and methodologies.
Furthermore, sales will also depend on an increasing number of complex ICs
designed for electronic systems, integration of the Company's products with
other tools for IC design and simulation, the ability of hardware-assisted
simulation systems to shorten the time of simulation of IC designs and continued
industry acceptance of mixed-level hardware-assisted simulation at a reasonable
cost to the customer.  Because the market for hardware-assisted simulation
products is evolving, it is difficult to predict with any assurance whether the
market for hardware-assisted simulation products will continue to expand. There
can be no assurances that such market will expand, or even if such market
expands that the Company's products will achieve the market acceptance required
to maintain revenue growth and profitability in the future.

Over the past year, the Company has increasingly focused a significant level of
its resources on its emulation product line.  The Company's initial emulation
product was commercially released in the first quarter of fiscal 1997.  The
Company encountered several hardware and software design issues with its initial
emulation product, and in addition, the EDA marketplace for emulation products
continued to evolve, impacting the original design.  During 1998, the Company
addressed its hardware and software design issues by completely redesigning the
emulation product and has recently commercially released its second-generation
emulation product.  While the Company has seen favorable results with its latest
release, particularly through the second quarter of fiscal 1999, there can be no
assurance that the product will adequately meet the requirements of the
marketplace.  There continues to be further development of the emulation
product, and as the Company continues to develop emulation products which are
based on the new technology concept, there can be no assurance that the enhanced
products or other developed products resulting from this development will
provide the necessary solutions to customer design verification needs, be of
acceptable quality or achieve further market acceptance. The success of the
Company in developing, introducing, selling and supporting emulation products
will depend on a variety of factors, including but not limited to, the timely
and successful enhancement of current products, completion of product design and
development of future products, the timely and efficient implementation of
manufacturing processes, effective sales, marketing and customer service, and
the absence of performance problems or other difficulties that may require
design modifications and related expenses and may hinder or damage market
acceptance of the products. While the Company's emulation systems are designed
to provide cost and ease of use advantages intended to broaden the market for
logic emulation, there can be no assurance that its products will be able to
achieve such goals. Moreover, there can be no assurance that the market for
logic emulation will broaden beyond the current set of emulation systems users.
The adoption of any emulation products the Company has or may develop will also
depend on the continued increasing complexity of ICs designed for electronic
systems, integration of such products with other tools for IC design and
verification, importance of the time to market benefits of emulation systems and
industry acceptance of the need to close the gap between high level design and
silicon production. Because the market for emulation products is new and
evolving, it is difficult to predict with any assurance whether the market for
emulation products will continue to expand, or even if such market expands, that
the Company's products will achieve the market acceptance required to maintain
revenue growth and continued profitability.

                                       11
<PAGE>
 
In May 1998, the Company completed its acquisition of certain technology and
research and development expertise from Interra, Inc., and its affiliate,
Delsoft India Pvt. Limited.  While the Company expects that the technology
acquired and the resources obtained in this transaction will assist the Company
in meeting its new product introduction goals and deadlines, the Company has
significant development risk with respect to incorporating the acquired
technology into current products or generating new products from such
technology.  Such effort will result in increased spending on research and
development as the Company attempts to meet these goals and deadlines.  There
can be no assurances that such goals or deadlines will be achieved in a timely
manner.  Furthermore, should such goals and deadlines for the introduction of
new products be attained, there can be no assurances that the resulting new
products will adequately meet the requirements of the marketplace.

Competition - The EDA industry is highly competitive and rapidly changing. The
-----------                                                                   
Company's products are specifically targeted at the emerging portion of the
industry relating to complex designs that the Company believes benefit from
simulation and emulation products.  The Company currently competes with
traditional software verification methodologies, including product offerings
sold by Cadence, Synopsis and Mentor Graphics. The Company's main competition
for the sale of emulation systems is Quickturn. The Company expects competition
in the market for verification tools to increase as other companies attempt to
introduce new products, such as cycle-based software simulation products and
product enhancements. Moreover, the Company competes, and expects that it will
continue to compete, with established EDA companies. A number of these companies
have longer operating histories, significantly greater financial, technical and
marketing resources, greater name recognition and larger installed customer
bases than the Company. In addition, many of these competitors and potential
competitors have established relationships with current and potential customers
of the Company and offer a broader and more comprehensive product line.
Increased competition could result in price reductions, reduced margins and loss
of market share, all of which could materially adversely affect the Company. In
addition, current competitors or other entities may develop other products that
have significant advantages over the Company's products. There can be no
assurance that the Company will be able to compete successfully against current
and future competitors or that competitive pressures faced by the Company will
not materially adversely affect its operating results.

New Products and Technological Change - The EDA industry is characterized by
-------------------------------------                                       
extremely rapid technological change in both hardware and software development,
frequent new product introductions, evolving industry standards and changing
customer requirements. The introduction of products embodying new technologies
and the emergence of new industry standards can render existing products
obsolete and unmarketable. The Company's future success will depend upon its
ability to enhance its current series of simulation and emulation systems and to
design, develop and support its future simulation and emulation products on a
timely basis. These efforts require a high level of expenditures for research
and development by the Company to address the increasingly sophisticated needs
of the customers. For example, all of the Company's current products operate in,
and planned future products will operate in, the Unix operating environment, an
industry standard in the EDA market. In the event that another operating system,
such as Windows NT, becomes an industry standard, the Company may be required to
port its products to

                                       12
<PAGE>
 
such new standard. In addition, the Company's simulation systems generally
accept designs in the broadly accepted hardware description language, Verilog-
XL, which Cadence has developed and made available to the Company. In the event
Cadence adopts a less cooperative stance toward the Company in the future, the
Company's systems may not be able to accept designs based on Verilog-XL and the
Company may be required to develop software to accept designs of other hardware
description languages. The inability to accept designs in Verilog-XL may
materially adversely affect the Company's results of operations. There can be no
assurance that the Company will be successful in developing and marketing
product enhancements or new products that respond to technological change or
evolving industry standards or changing customer requirements, that the Company
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, will be of acceptable quality or will achieve market acceptance. If
the Company 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, the Company's business, operating results and
financial condition will be materially and adversely affected. Moreover, from
time to time, the Company may announce new products or technologies that have
the potential to replace the Company'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 Company products, which could adversely
affect the Company's results of operations for any particular quarter.

Dependence on Electronics Industry - The Company is dependent upon the
----------------------------------                                    
electronics industry and, in particular, new system and IC design projects. The
electronics industry is characterized by rapid technological change, short
product life cycles, fluctuations in manufacturing capacity and pricing and
margin pressures, all of which cause it to be volatile. As a result, the
electronics industry has historically experienced sudden and unexpected
downturns, at which time the number of new system and IC design projects
decrease. Because most of the Company's sales occur upon the commencement of new
projects for system and IC products, the Company is dependent upon the rate of
commencement of new system and IC design projects. Accordingly, negative factors
affecting the electronics industry could have a material adverse effect on the
Company's results of operations.

Dependence Upon Certain Suppliers - Certain key components used in the Company's
---------------------------------                                               
products are presently available from sole or limited sources. The inability to
develop alternative sources for these sole or limited source components or to
obtain sufficient quantities of these components could result in delays or
reductions in product shipments which could adversely affect the Company's
operating results. The Company's systems use proprietary ASICs and FPGAs that
are currently manufactured solely by American Microsystems, Inc. (''AMI'') and
Xilinx, Inc. ("Xilinx"), respectively.

The Company generally purchases these components, including semiconductor
memories used in the Company's simulator and emulator hardware, pursuant to
purchase orders placed from time to time in the ordinary course of business and
has no supply arrangements with any of its source suppliers that require the
suppliers to provide components in guaranteed quantities or at set prices.
Moreover, the manufacture of these components can be extremely complex, and the
Company's reliance on the suppliers of these components exposes the Company to
production difficulties and quality variations that may be experienced by these
suppliers. Therefore, the Company's reliance on its sole and limited source
suppliers involves several risks, including a potential inability to obtain an
adequate supply of required components, reduced control over pricing and timely
delivery and quality of acceptable components. While the timeliness and quality
of deliveries to date from such suppliers have been acceptable, there can be no
assurance 

                                       13
<PAGE>
 
that problems will not occur in the future. Any prolonged inability to obtain
components or subassemblies in sufficient quantities or quality or on favorable
pricing or delivery terms, or any other circumstances that would require the
Company to seek alternative sources of supply, could have a material adverse
effect on the Company's operating results and could damage the Company's
relationships with its customers.

Customer Concentration - A relatively limited number of customers have
----------------------                                                
historically accounted for a substantial portion of the Company's net revenues.
During fiscal 1998, 1997 and 1996, sales to the Company's top ten customers
accounted for approximately 45%, 52% and 65%, respectively, of the Company's net
revenues. The Company expects that sales of its products to a limited number of
customers will continue to account for a high percentage of net revenues for the
foreseeable future. The loss of a major customer or any reduction in orders by
such customers, including reductions due to market or competitive conditions in
the electronics or EDA industries, would have an adverse effect on the Company's
results of operations. Moreover, the Company's ability to increase its sales
will depend in part upon its ability to obtain orders from new customers, as
well as the financial condition and success of its existing customers and the
general economy. There can be no assurance that such increases will occur.

Year 2000 Considerations - The Year 2000 issue is the result of computer
------------------------
programs being written using two digits rather than four to define the
applicable year. As such there is the risk that computer programs or hardware
that have date-sensitive software or embedded chips may recognize a date using
"00" as the year 1900 rather than the year 2000. Such recognition, could result
in miscalculations, classifications errors or system failures. The Company has
taken steps to review, update or confirm such update of all of the systems (IT
and Non IT) which use date-sensitive computerized information used in its
operations, including its current products, vendor and customer systems. The
Company has completed its assessment and testing for Year 2000 compliance within
its current product lines and all future products are being designed and tested
to be Year 2000 compliant. The costs associated with this assessment and testing
have been immaterial and have not materially impacted other non-Year 2000 IT
projects. The Company has completed its assessments of its significant third
party systems, including its IT systems and other vendor systems and believe
such systems are in compliance. The Company is currently in the process of
performing its testing of such systems to confirm compliance. The Company does
not believe that the costs incurred to date or expected to be incurred in the
future in addressing this matter are material to the Company's operating
results. However, if the Company has failed to adequately address any of its
systems or if its vendor or customer systems fail to adequately address this
risk, the Company's financial condition and results of operations could be
adversely affected. The Company is currently completing its contingency plans.
Accordingly, the Company will continue to devote the necessary resources to the
issue.

Euro Currency - Effective January 1999, 11 members of the countries of the
-------------                                                            
European Union established a fixed conversion rate between their existing
sovereign currencies and the Euro and adopted the Euro as their common legal
currency.  During a three-year transition, the Euro will be available for non-
cash transactions and legal currencies will remain the legal tender.  The
Company is assessing the Euro impact on its business including the ability to
handle the conversion in the accounting system and other information systems,
ability of foreign banks to

                                       14
<PAGE>
 
report on dual currencies, the legal and contractual implications of contracts,
and reviewing pricing strategies.  The Company expects that modifications to its
operations and systems will be completed on a timely basis, and does not believe
the conversion will have a material adverse impact on the Company's operations.
However, there can be no assurance that the Company will be able to successfully
modify all systems and contracts to comply with Euro requirements on a timely
basis.

Liquidity and Capital Resources

Since inception, the Company has financed its operations, including increases in
accounts receivable, inventory and capital equipment acquisitions, primarily
through private and public sales of equity securities and a loan secured by
capital equipment. The Company's cash, cash equivalents and short-term
investments decreased to $14,333,000 at April 3, 1999 from $15,682,000 at
October 3, 1998.  The decrease was a result of $1,201,000 of cash used in
investing activities (excluding short-term investment activities) and $429,000
of cash used in financing activities, offset by cash provided from operations of
approximately $281,000.

Operating Activities - The Company's operating activities provided cash of
--------------------                                                      
$281,000 during the first six months of fiscal 1999.  The $281,000 of cash
provided by operations was primarily due to net income adjusted for
depreciation, amortization and deferred rent, decreases in accounts receivable
and increases in accrued payroll expenses, accrued commissions and deferred
revenues offset by increases in inventory and decreases accounts payable and
other accrued liabilities.

Investing Activities - Net cash provided by investing activities for the first
--------------------                                                          
six months of 1999 was $1,443,000.  The $1,443,000 of cash provided was
primarily the result of $6,563,000 obtained from maturities of short-term
investment offset by purchases of short-term investments of $3,919,000 and
acquisition of capital equipment of $1,201,000. For each period presented,
capital expenditures were primarily for evaluation equipment and engineering
workstations.

Financing Activities  Net cash used in financing activities for the six months
--------------------                                                          
ended April 3, 1999, was $429,000 and was primarily related to the net purchases
of stock during the six months. During fiscal 1998, the Company announced its
intention to repurchase up to 1,000,000 shares of its outstanding common stock
on the open market. The Company did not repurchase any shares in the second
fiscal quarter but had acquired 130,000 shares of common stock for the six month
period ending April 3, 1999.  Through April 3, 1999, the Company had repurchased
approximately 516,500 shares at a weighted-average per share price of $5.96.

The Company's primary unused sources of funds at April 3, 1999 consisted of
$9,460,000 of cash and cash equivalents, in addition to $4,873,000 of short-term
investments. The Company believes that its current cash, cash equivalents and
short-term investments, together with cash and cash equivalents generated from
operations will be sufficient to finance its operations for at least the next
twelve months. Should the Company require other financing arrangements, there
can be no assurances that such financing will be available on terms favorable or
acceptable to the Company.

                                       15
<PAGE>
 
                           PART II. OTHER INFORMATION
                                        

ITEMS 1-3      Not applicable

ITEM 4         Submission of Matters to a Vote of Security Holders

The annual meeting of stockholders was held on January 22, 1999.

The stockholders approved a proposal to elect the Board of Directors of the
Company to serve for the ensuing fiscal year. The proposal received the
following votes:

                                  For                Against
                                  ---                -------
Gerald S. Casilli              6,838,432             145,007
Ramon A. Nunez                 6,838,832             145,607
James R. Oyler                 6,847,273             136,166
Glenn E. Penisten              6,845,533             137,906
William Stevens                6,846,533             136,906
Jackson Hu                     6,848,273             135,166

The stockholders approved a proposal to increase the number of shares of the
Company's Common Stock reserved for issuance under its 1995 Outside Directors
Stock Option Plan by 100,000 shares.  The proposal received the following votes:

       For               Against           Abstentions        Broker Non-votes
       ---               -------           -----------        ---------------- 
     2,723,215           490,040              23,741              3,746,443

The stockholders approved a proposal to increase by 400,000 shares the maximum
aggregate number of shares of Common Stock issuable under the Company's Employee
Stock Purchase Plan.  The proposal received the following votes:

       For               Against           Abstentions        Broker Non-votes
       ---               -------           -----------        ----------------
    3,016,686            205,986              14,324              3,746,443

In addition, stockholders ratified the appointment of Ernst & Young LLP as
independent public accountants of the Company for the fiscal year ending October
2, 1999. The proposal received the following votes:

       For               Against           Abstentions        Broker Non-votes
       ---               -------           -----------        ----------------
    6,924,655            49,680               9,104                   0


ITEM 5  Not applicable

                                       16
<PAGE>
 
ITEM 6               Exhibits and Reports on Form 8-K


(a)  INDEX TO EXHIBITS
                               INDEX TO EXHIBITS
                                        
Exh. No.                Documentation Description                           Page
-------                 -------------------------                           ----

 2.1      Agreement and Plan of Reorganization among the Company, 
          VMW Acquisition Corporation and VMW dated May 14, 1996 
          (Incorporated by reference to Exhibit 2.1 of the Company's 
          registration statement on Form S-3 effective June 26, 1996).

 2.2      Technology Purchase Agreement dated May 12, 1998 by and 
          between the Company and Interra, Inc. (Incorporated by 
          reference to Exhibit 2.1 of the Company's Current Report 
          on Form 8-K filed May 20, 1998).

 3.1      Certificate of Incorporation (Incorporated by reference 
          to Exhibit 3.1 of the Company's registration statement on 
          Form S-1 effective July 25, 1990).

 3.2      Certificate of Amendment of Certificate of Incorporation 
          filed May 5, 1994 (Incorporated by reference to Exhibit 4.1 
          of the Company's registration statement on Form S-2 effective 
          October 12, 1995).

 3.3      Certificate of Amendment of Certificate of Incorporation 
          filed April 24, 1995 (Incorporated by reference to Exhibit 
          4.2 of the Company's registration statement on Form S-2 
          effective October 12, 1995).

 3.4      Certificate of Amendment of Certificate of Incorporation 
          filed February 3, 1997 (Incorporated by reference to 
          Exhibit 3.4 of the Company's quarterly report on Form 10-Q
          for the quarter ending March 29, 1997).

 3.5      By laws (Incorporated by reference to Exhibit 3.2 of the 
          Company's registration statement on Form S-1 effective 
          July 25, 1990).

 4.1      Rights agreement dated as of January 27, 1992 between the 
          Company and Manufacturers Hanover Trust Company of 
          California, Rights Agent. (Incorporated by reference to 
          Exhibit (C)1, in the Company's report on Form 8-K filed 
          February 10, 1992).

                                       17
<PAGE>
 
Exh. No.                Documentation Description                           Page
-------                 -------------------------                           ----

10.1      Lease Agreement for the Company's principal facility dated
          March 20, 1992, between Ames Avenue Associates and the 
          Company, as amended. (Incorporated by reference to Exhibit 
          10.1 of the Company's annual report on 10-K for the year 
          ending September 26, 1992).

10.2      Form of Director and Officer Indemnity Agreement. 
          (Incorporated by reference to Exhibit 10.6 of the Company's 
          registration statement on Form S-1 effective July 25, 1990).

10.3      1988 Stock Option Plan. (Incorporated by reference to Exhibit 
          10.14 of the Company's registration statement on Form S-1 
          effective July 25, 1990).

10.4      Patent Cross License Agreement dated May 17, 1989 with Zycad 
          Corporation (Incorporated by reference to Exhibit 10.20 of 
          the Company's registration statement on Form S-1 effective 
          July 25, 1990).

10.5      International Distributorship Agreement dated April 11, 1988, 
          with C. Itoh & Co., Ltd. (Incorporated by reference to 
          Exhibit 10.24 of the Company's registration statement on Form 
          S-1 effective July 25, 1990). Confidential Treatment has been 
          granted as to certain portions of this Exhibit.

10.6      OEM Software License Agreement between CAD Language Systems, 
          Inc. and IKOS Systems, Inc. dated June 22, 1989 and amendment 
          dated September 1991 (Incorporated by reference to Exhibit 
          10.18 of the Company's Annual Report for the year ended 
          September 28, 1991).

10.7      Technology Transfer and Joint Development Agreement with 
          Racal-Redac, Inc. dated July 1, 1993   (Incorporated by       
          reference to Exhibit 10.19 of the Company's quarterly report  
          on Form 10-Q for the quarter ended July 3, 1993).  
          Confidential Treatment has been granted as to certain portions 
          of this Exhibit.

10.8      Settlement Agreement and Release dated March 31, 1994 between 
          Racal Redac, Inc. and the Company (Incorporated by reference 
          to Exhibit 10.13 of the Company's registration statement on 
          Form S-2 effective October 12, 1995).

10.9      Software License Agreement with Compass Design Automation 
          dated December 31, 1993  (Incorporated by reference to Exhibit 
          10.17 of the Company's quarterly report on Form 10-Q for the 
          quarter ended January 1, 1994).

10.10     Agreement dated June 2, 1994, by and between the Company and  
          Gerald S. Casilli (Incorporated by reference to Exhibit 10.18 
          of the Company's quarterly report on Form 10-Q for the quarter 
          ended July 2, 1994).

                                       18
<PAGE>
 
Exh. No.                Documentation Description                           Page
-------                 -------------------------                           ----

10.11     Agreement dated June 2, 1994, by and between the Company and 
          Daniel R. Hafeman (Incorporated by reference to Exhibit 10.18 
          of the Company's quarterly report on Form 10-Q for the quarter 
          ended July 2, 1994).

10.12     Agreement dated June 2, 1994, by and between the Company and 
          Stephen McLaughlin. (Incorporated by reference to Exhibit 10.18       
          of the Company's quarterly report on Form 10-Q for the quarter 
          ended July 2, 1994).

10.13     Agreement dated June 2, 1994, by and between the Company and 
          Larry A. Melling (Incorporated by reference to Exhibit 10.18 
          of the Company's quarterly report on Form 10-Q for the quarter 
          ended July 2, 1994).

10.14     Agreement dated June 2, 1994, by and between the Company and 
          Ramon A. Nunez (Incorporated by reference to Exhibit 10.18 of 
          the Company's quarterly report on Form 10-Q for the quarter 
          ended July 2, 1994).

10.15     Agreement dated June 2, 1994, by and between the Company and  
          Joseph W. Rockom (Incorporated by reference to Exhibit 10.18 
          of the Company's quarterly report on Form 10-Q for the quarter 
          ended July 2, 1994).

10.16     The Company's 1995 Outside Directors Stock Option Plan 
          (Incorporated by reference to Exhibit 10.22 of the Company's 
          registration statement on Form S-2 effective October 12, 1995).

10.17     Development and OEM Agreement for Verilog/IKOS Co-simulation 
          Interface dated August 26, 1994 by and between the Company and 
          Precedence Incorporated (Incorporated by reference to Exhibit 
          10.24 of the Company's registration statement on Form S-2 
          effective October 12, 1995).

10.18     Amendment to OEM Agreement for the acquisition of certain 
          software technology, by and between Compass Design Automation, 
          Inc. and the Company dated December 27, 1995  (Incorporated by 
          reference to Exhibit 10.20 of the Company's quarterly report on 
          Form 10-Q for the quarter ended December 30, 1995).

10.19     Amended and Restated Employment Agreement dated August 1, 1995
          by and between the Company and Ramon Nunez (Incorporated by 
          reference to Exhibit 10.21 of the Company's quarterly report on 
          Form 10-Q for the quarter ended December 30, 1995).

                                       19
<PAGE>
 
Exh. No.                Documentation Description                           Page
-------                 -------------------------                           ----

10.20     Patent License Agreement dated December 22, 1993 between 
          Massachusetts Institute of Technology and the Company 
          (Incorporated by reference to Exhibit 10.20 of the Company's 
          quarterly report on Form 10-Q for the quarter ended June 29, 
          1996). Confidential treatment has be granted as to certain 
          portions of this Exhibit.

10.21     The Company's 1995 Stock Option Plan, as amended (Incorporated 
          by reference to Exhibit 10.21 of the Company's Quarterly Report 
          on Form 10-Q for the quarter ended April 4, 1998).

10.22     The Company's 1996 Employee Stock Purchase Plan, as amended 
          (Incorporated by reference to Exhibit 10.22 of the Company's 
          Quarterly Report on Form 10-Q for the quarter ended April 4, 
          1998).

10.23     The Company's amended and restated Rights Plan by and between 
          the Company and Bank of Boston NA dated January 22, 1999 
          (Incorporated by reference to Exhibit 1 of the Company's report 
          on Form 8-A /a filed on January 29, 1999.

27.1      Financial Data Schedule



(b)  REPORTS ON FORM 8-K

          NONE

                                  SIGNATURES

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

                                      IKOS SYSTEMS, INC.
                                      ------------------
                                      Registrant


Date: May 17, 1999                     /s/ Joseph W. Rockom
                                      -----------------------------
                                      (JOSEPH W. ROCKOM CFO)
                                      Principal Financial Officer,
                                      Duly Authorized Officer

                                       20