<PAGE>
 
                       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 4, 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 0-18623

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


                               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              8,448,000
          ---------------------------            
               (Title of Class)        (Outstanding as of April 4, 1998)

 
<PAGE>
 
                               IKOS SYSTEMS, INC.
                                   FORM 10-Q
                          QUARTER ENDED APRIL 4, 1998


                                     INDEX
                                     -----

<TABLE>
<CAPTION>

Part I:  Financial Information

     Item 1:  Financial Statements
                                                                  PAGE
<S>                                                             <C>
          Consolidated Balance Sheets at
            April 4, 1998 and September 27, 1997................    3

          Consolidated Statements of Income
            for the three and six months ended
            April 4, 1998 and March 29, 1997....................    4

          Consolidated Statements of Cash Flows
            for the six months ended April 4, 1998
            and March 29, 1997..................................    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 6:  Exhibits and Reports on Form 8-K..................   15

     Signatures.................................................   18
</TABLE>
<PAGE>
 
                         PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
ITEM 1 Financial Statements

                              IKOS SYSTEMS, INC.
                          CONSOLIDATED BALANCE SHEETS

                   (in thousands, except per share amounts)


                                                              April 4,    September 27,
                                                                1998           1997
                                                             -----------  --------------
<S>                                                          <C>          <C>
                               ASSETS                        (Unaudited)         (1)
Current assets:
 Cash and cash equivalents................................    $ 11,170        $  9,486
 Short-term investments...................................       9,874          15,329
 Accounts receivable (net of allowances for
  doubtful accounts of $551 and $501, respectively).......      11,661          12,228
 Inventories..............................................       5,965           4,804
 Deferred income taxes....................................       3,450           3,450
 Prepaid expenses and other assets........................       1,277             659
                                                              --------        --------
   Total current assets...................................      43,397          45,956

 Equipment and leasehold improvements
  Office and evaluation equipment.........................       4,325           3,684
  Machinery and equipment.................................       8,485           7,328
  Leasehold improvements..................................         435             337
                                                              --------        --------
                                                                13,245          11,349
   Less allowances for depreciation and amortization......      (8,147)         (7,080)
                                                              --------        --------
                                                                 5,098           4,269
 Intangible assets (net of amortization of
  $2,394 and $1,681, respectively)........................       4,404           4,626
 Deferred income taxes....................................       1,127           1,127
 Other assets.............................................         833             572
                                                              --------        --------
                                                              $ 54,859        $ 56,550
                                                              ========        ========

              LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
 Accounts payable.........................................    $  2,286        $  3,073
 Accrued payroll and related expenses.....................       1,721           2,437
 Accrued commissions......................................         416             742
 Income taxes payable.....................................       1,716           1,072
 Other accrued liabilities................................       1,519           1,551
 Deferred revenues........................................       5,714           5,123
 Current portion of long-term debt........................          --             350
                                                              --------        --------
   Total current liabilities..............................      13,372          14,348

Accrued rent..............................................         185             212
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, 8,448 and 8,579 shares
  issued and outstanding, respectively....................          84              85
 Additional paid-in capital...............................      55,884          57,442
 Accumulated deficit......................................     (14,666)        (15,537)
                                                              --------        --------
   Total stockholders' equity.............................      41,302          41,990
                                                              --------        --------
                                                              $ 54,859        $ 56,550
                                                              ========        ========
</TABLE>
(1) Derived from audited financial statements

                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 4,           March 29,            April 4,       March 29,
                                                               1998               1997                1998            1997
                                                              -------            -------             -------           -------
<S>                                                         <C>        <C>                <C>                 <C>
Net revenues
 Product..................................................    $ 9,162            $12,022             $18,244           $23,874
 Maintenance..............................................      3,157              2,453               6,140             4,790
                                                              -------            -------             -------           -------
  Total net revenues......................................     12,319             14,475              24,384            28,664

Cost of revenues
 Product..................................................      2,723              2,678               5,178             5,370
 Maintenance..............................................        450                466               1,008               887
                                                              -------            -------             -------           -------
  Total cost of revenues .................................      3,173              3,144               6,186             6,257
                                                              -------            -------             -------           -------
  Gross profit............................................      9,146             11,331              18,198            22,407

Operating expenses:
 Research and development.................................      3,199              2,509               6,048             4,860
 Sales and marketing......................................      4,316              3,758               8,780             7,958
 General and administration...............................        901              1,075               1,872             2,103
 Amortization of intangibles..............................        377                315                 713               630
                                                              -------            -------             -------           -------
  Total operating expenses................................      8,793              7,657              17,413            15,551
                                                              -------            -------             -------           -------
Income from operations....................................        353              3,674                 785             6,856

Other income (expense):
 Interest income..........................................        296                285                 616               562
 Other....................................................         --                 34                  --                65
                                                              -------            -------             -------           -------
  Total other income......................................        296                319                 616               627
                                                              -------            -------             -------           -------

Income before provision for income taxes..................        649              3,993               1,401             7,483
Provision for income taxes................................        245              1,478                 530             2,793
                                                              -------            -------             -------           -------
  Net income..............................................    $   404            $ 2,515             $   871           $ 4,690
                                                              =======            =======             =======           =======


Basic net income per share................................    $  0.05            $  0.30             $  0.10           $  0.56
                                                              =======            =======             =======           =======

Common and common equivalent shares used
 in computing per share amounts...........................      8,435              8,378               8,468             8,310
                                                              =======            =======             =======           =======

Dilutive net income per share.............................    $  0.05            $  0.28             $  0.10           $  0.53
                                                              =======            =======             =======           =======

Common and common equivalent shares used
 in computing per share amounts...........................      8,695              8,984               8,704             8,920
                                                              =======            =======             =======           =======
</TABLE>
All share and per share data have been adjusted retroactively to comply with the
requirements of Financial Accounting Standards Board Statement No. 128 
"Earnings Per Share."


                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 4,        March 29,
                                                                              1998            1997
                                                                          -----------    --------------
<S>                                                                       <C>            <C>
Operating activities:
 Net income...........................................................    $   871           $  4,690
 Adjustments to reconcile net income to net
  cash provided by operating activities:
  Depreciation and amortization.......................................      1,780              1,292
  Gain on retirement of equipment.....................................         --                 13
  Deferred income taxes...............................................         --                 (2)
  Deferred rent.......................................................        (27)               (11)

 Changes in operating assets and liabilities:
  Accounts receivable.................................................        567             (2,863)
  Inventories.........................................................     (1,161)              (420)
  Prepaid expenses and other current assets...........................         12                 58
  Other assets........................................................       (261)              (226)
  Accounts payable....................................................       (787)            (3,138)
  Accrued payroll and other expenses..................................       (716)              (401)
  Accrued commissions.................................................       (326)              (280)
  Income taxes payable................................................        644              2,615
  Other accrued liabilities...........................................        (32)               381
  Deferred revenues...................................................        591               (490)
                                                                          -------           --------
   Net cash provided by operating activities..........................      1,155              1,218

Investing activities:
 Purchases of equipment and leasehold improvements....................     (1,887)              (905)
 Acquisition of Deerbrook Systems, Inc.................................      (500)                --
 Other investments....................................................       (630)
 Purchase of short-term investments...................................     (8,921)           (13,551)
 Maturities of short-term investments.................................     14,376             16,105
                                                                          -------           --------
   Net cash provided by investment activities.........................      2,438              1,649

Financing activities:
 Principal payments on long-term borrowings...........................       (350)              (450)
 Net sales (repurchases) of common stock..............................     (1,559)             1,311
                                                                          -------           --------
   Net cash provided by (used in) financing activities...............      (1,909)               861
                                                                          -------           --------
Increase in cash and cash equivalents.................................      1,684              3,728
Cash and cash equivalents at beginning of period......................      9,486             10,590
                                                                          -------           --------
Cash and cash equivalents at end of period............................    $11,170           $ 14,318
                                                                          =======           ========
</TABLE>




                See notes to consolidate financial statements.


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

1.   BASIS OF PRESENTATION

     The accompanying consolidated financial statements at April 4, 1998 and for
     the three and six month periods ended April 4, 1998 and March 29, 1997,
     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 September 27, 1997 included in the Form 10-K as filed with the
     Securities and Exchange Commission on December 19, 1997.  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 periods ended April 4, 1998 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 is 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):

<TABLE>
<CAPTION>
                                           April 4,     September 27,
                                             1998           1997
                                         -------------  -------------
 
<S>                                      <C>            <C>
Raw materials                                   $1,444         $1,979
Work-in-process                                  1,739          1,385
Finished goods                                   2,782          1,440
                                                ------         ------
                                                $5,965         $4,804
                                                ======         ======
</TABLE>
                                                                                

                                       6
<PAGE>
 
                               IKOS SYSTEMS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
                                        
4.   NET INCOME PER SHARE

     The following table sets forth the computation of basic and diluted
     earnings per share:

 
<TABLE>
<CAPTION>
 
                                                                                                  
                                                                   Three Months Ended            Three Months Ended
                                                           --------------------------------------------------------------
                                                               April 4,          March 29,    April 4,          March 29,
                                                                 1998              1997         1998              1997
                                                               --------          ---------    --------          ---------
 
BASIC EARNINGS PER SHARE:
 
<S>                                                            <C>               <C>          <C>               <C>
Net income                                                       $  404             $2,515      $  871             $4,690
                                                                 ======             ======      ======             ======
 
Weighted average common shares outstanding                        8,435              8,378       8,468              8,310
                                                                 ======             ======      ======             ======
 
Basic net income per share                                       $ 0.05             $ 0.30      $ 0.10             $ 0.56
                                                                 ======             ======      ======             ======
 
DILUTIVE EARNINGS PER SHARE:
 
Net income                                                       $  404             $2,515      $  871             $4,690
                                                                 ======             ======      ======             ======
 
Number of shares used in computing per share amounts:
  Weighted average common shares outstanding                      8,435              8,378       8,468              8,310
  Common equivalent shares attributable to stock
  options (treasury stock method)                                   260                606         236                610
                                                                 ------             ------      ------             ------
 
Total weighted average common shares outstanding                  8,695              8,984       8,704              8,920
                                                                 ======             ======      ======             ======
 
Dilutive net income per share                                    $ 0.05             $ 0.28      $ 0.10             $ 0.53
                                                                 ======             ======      ======             ======
</TABLE>

5.   TECHNOLOGY ACQUISITION

     In January 1998, the Company entered into a letter of intent to acquire
     certain technology and research and development expertise from Interra,
     Inc. and its affiliate, Delsoft India Pvt. Limited.  In May 1998, the
     Company expects to complete the acquisition.  The basis of the transaction
     is to provide the Company with engineering resources and technology for
     approximately $8,500,000 in cash and stock of which approximately $608,000
     has already been paid.  In connection with the acquisition, the Company has
     established a research and development facility in India.  The transaction
     will be accounted for under the purchase method of accounting and the
     Company expects recognize a charge in its fiscal third quarter related to
     acquired in-process research and development.

                                       7
<PAGE>
 
ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
          RESULTS OF OPERATIONS


Forward-looking statements in this Quarterly Report on Form 10-Q are made
pursuant to the safe harbor provisions of Section 21E of the Securities Exchange
Act of 1934, as amended.  In this report, the words "anticipates," "believes,"
"expects," "future," "intends'" and similar expressions identify forward-looking
statements.  Investors are cautioned that all forward-looking statements involve
risks and uncertainties, including, without limitation, those contained under
the section entitled "Factors That May Affect Future Results of Operations" and
other risks detailed from time to time in the Company's periodic reports and
other information filed with the Securities and Exchange Commission.  Actual
events and results may differ materially from the Company's current expectations
and beliefs.

NET REVENUES

Net revenues for the three and six months ended April 4, 1998 totaled
$12,319,000 and $24,384,000, respectively, representing a decrease of
approximately 15% from the same periods in fiscal 1997.  The decreases were
primarily the result of the decline in the sales of the Company's Voyager
simulation product line due in part to delays in the introduction of new
simulation products and increased focus on the Company's emulation product line
and consulting services. Emulation revenues increased from approximately
$1,000,000 and $2,505,000 during the second quarter and first six months of
fiscal 1997 to over $2,600,000 and $4,600,000, respectively, for the same
periods of fiscal 1998.  The increases are a result of the increased focus on
the emulation business as well as increased acceptance in the marketplace for
the Company's emulation product offering.  Consulting services increased from
approximately $950,000 and $1,170,000 during the second quarter and first six
months of fiscal 1997 to over $1,575,000 and $2,904,000, respectively, for the
same periods in 1998.  The Company's aggressive pursuit of providing value added
consulting service to new and existing customers is the main reason for the
increases.

International sales for the three and six months ended April 4, 1998 totaled
$4,382,000 and $8,846,000, a decrease of approximately 12% and approximately
21%, respectively from the same periods in fiscal 1997.  The decrease is due in
part to the decline in sales activity in the Asian marketplace resulting from
the economic issues in that location and also as a result of the overall decline
in sales of the Company's simulation products.

GROSS PROFIT MARGINS

Gross profit margin for the three and six month periods ended April 4, 1998 were
approximately 74% and 75% of net revenues, respectively and are lower when
compared to the approximately 78% for the same periods of fiscal 1997.  The
decrease in margins are a result of the lower than expected revenues resulting
in less coverage of fixed manufacturing costs and the increase in the consulting
services personnel costs which increased the level of fixed costs charged
against margins.

RESEARCH AND DEVELOPMENT EXPENSES

Research and development expenses for the three and six months ended April 4,
1998 totaled $3,199,000 and $6,048,000, representing an increase of
approximately 28% and 24%, respectively, when compared to the same periods in
fiscal 1997.  The increases during the quarter and for the six months is a
result of increased outside consulting charges and certain non-recurring
engineering charges as well as increased depreciation expenses.  The Company
expects research and development expenses to continue to increase over the
remainder of the year as the Company continues its on-going development efforts
for enhancing its current products and for new product technology development.

                                       8
<PAGE>
 
SALES AND MARKETING EXPENSES

Sales and marketing expenses totaled $4,316,000 and $8,780,000 for three and six
month periods ended April 4, 1998, representing an increase of approximately 15%
and 10%, respectively, when compared to the same periods in fiscal 1997. The
increases are primarily the result of additional headcount offset by decreased
commissions as a result of lower revenue levels.  Sales and marketing expenses
are expected to continue to increase in absolute dollars over the remainder of
the year reflecting increased headcount, commission expense and marketing
expenses.

GENERAL AND ADMINISTRATIVE EXPENSES

General and administrative expenses were $901,000 and $1,872,000 for the three
and six month periods ended April 4, 1998 and were lower when compared to
$1,075,000 and $2,103,000 for the same three and six month periods in fiscal
1997. The decrease is primarily due to decreased profit sharing expenses as a
result of lower profit levels.  General and administrative expenses are expected
to remain relatively flat over the remainder of fiscal 1998.

INCOME TAXES

The Company's effective tax rate for the three and six month periods ended April
4, 1998 was 38% as compared to an effective tax rate of 37% for the same periods
in fiscal 1997.  The increase in the rate in 1998 is primarily attributable to
the increase in non-deductible goodwill amortization as a percentage of pre-tax
income when compared to the amounts recorded in 1997.

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 has entered
into hedging arrangements to mitigate the currency risk with respect to such
transactions.  Through April 4, 1998, 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

                                       9
<PAGE>
 
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.


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. Increased sales of the Company's hardware-assisted
simulation products for the verification of IC and system designs is expected to
depend on the introduction of new simulation products and methodologies.
Furthermore, increased 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, continued
industry acceptance of mixed-level hardware-assisted simulation.  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 continued
profitability in the future.

In addition to the Company's simulation product line the Company has focused
certain of its resources on its emulation product line.  The Company's initial
emulation product was commercially released in the first quarter of fiscal 1997.
While the Company has seen increases in its emulation revenues, there can be no
assurance that the product will adequately meet the requirements of the
marketplace.  In addition, there continues to be further development of the
emulation product.  As the Company continues to develop emulation products which
are based on a new technology concept, there can be no assurance that the
enhancement of current 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.

                                       10
<PAGE>
 
In January 1998, the Company entered into a letter of intent to acquire certain
technology and research and development expertise from Interra, Inc., and its
affiliate, Delsoft India Pvt. Limited.  In May 1998, the Company expects to
complete the acquisition. 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, 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 experiences
competition from traditional software verification methodologies, including
product offerings sold by Cadence, Synopsis and Mentor Graphics. The Company's
main competition for emulation systems are those sold by 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. Those 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 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  

                                       11
<PAGE>
 
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 hardware simulators, 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 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 1997 and 1996, sales to the Company's top ten customers accounted
for approximately 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.

                                       12
<PAGE>
 
LIQUIDITY AND CAPITAL RESOURCES

Since inception, the Company has financed its operations, including increases in
accounts receivable and 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 $21,044,000 at April 4, 1998 from $24,815,000 at
September 27, 1997.  The decrease was a result of $1,155,000 cash provided by
operating activities offset by $3,017,000 used in investing activities and
$1,909,000 of cash used in financing activities.

Operating Activities - The Company's operating activities provided cash of
--------------------                                                      
$525,000 during the first six months of fiscal 1998.  The $1,155,000 cash
provided by operations was primarily due to net income adjusted for depreciation
and amortization, a decrease in accounts receivable and increases in income
taxes payable and deferred revenues offset by increases in inventory, other
assets and payments on accounts payable, accrued payroll and accrued commission
balances.

Investing Activities - Net cash provided by investing activities for the six
--------------------                                                        
months ending April 4, 1998 was $3,068,000.  The primary source of cash during
this period was the net maturities of short-term investments totaling
$5,455,000.  The increase in cash equivalents from these maturities was the
result of the investment in higher yielding cash equivalent securities rather
than certain short-term investments. This source of cash from investment
activities was offset by approximately $1,887,000 in capital expenditures and
$500,000 related to the acquisition of Deerbrook Systems, Inc. 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 4, 1998 was primarily related to the net purchases of stock during
the six-month period. During the six-month period, the Company announced its
intention to repurchase up to 1,000,000 shares of its outstanding common stock
on the open market.  Through April 4, 1998, the Company had repurchased
approximately 214,000 shares at a weighted-average per share price of $8.12.  In
addition, the Company repaid its remaining principal debt obligations totaling
$350,000.

The Company's primary unused sources of funds at April 4, 1998 consisted of
$11,170,000 of cash and cash equivalents, in addition to $9,874,000 of short-
term investments. The Company believes that 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.

                                       13
<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 27, 1998.

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:

<TABLE>
<CAPTION>
                                                  FOR                               AGAINST
                                                  ---                               -------               
<S>                                          <C>                                   <C>
Gerald S. Casilli                              7,289,467                             316,859
Lutz P. Henckels                               7,289,667                             316,659
Ramon A. Nunez                                 7,291,067                             315,259
James R. Oyler                                 7,290,367                             315,959
Glenn E. Penisten                              7,288,467                             317,859
</TABLE>

The stockholders approved a proposal to increase the number of shares of the
Company's Common Stock reserved for issuance under its 1995 Stock Option Plan by
430,000 shares.  The proposal received the following votes:

<TABLE>
<CAPTION>
          FOR                      AGAINST                  ABSTENTIONS             BROKER NON-VOTES
          ---                      -------                  -----------             ----------------      
<S>                       <C>                        <C>                        <C>
       2,379,926                 2,262,177                     23,750                  2,940,473
</TABLE>

The stockholders approved a proposal to increase automatically, on the first day
of each fiscal year of the Company beginning on and after October 4, 1998, the
maximum aggregate number of shares of Common Stock issuable under the Company's
1995 Stock Option Plan by that number of shares of Common Stock of the Company
equal to 4.9% of the number of shares of the Company issued and outstanding on
the last day of the preceding fiscal year.  The proposal received the following
votes:

<TABLE>
<CAPTION>
          FOR                      AGAINST                  ABSTENTIONS             BROKER NON-VOTES
          ---                      -------                  -----------             ----------------      
<S>                       <C>                        <C>                        <C>
       2,439,812                 2,239,979                     30,073                  2,896,462
</TABLE>

The stockholders approved a proposal to increase by 150,000 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:

<TABLE>
<CAPTION>
          FOR                      AGAINST                  ABSTENTIONS             BROKER NON-VOTES
          ---                      -------                  -----------             ----------------      
<S>                       <C>                        <C>                        <C>
       4,285,909                   399,376                     24,579                  2,896,462
</TABLE>

In addition, stockholders ratified the appointment of Ernst & Young LLP as
independent public accountants of the Company for the fiscal year ending October
3, 1998. The proposal received the following votes:

<TABLE>
<CAPTION>
          FOR                      AGAINST                  ABSTENTIONS             BROKER NON-VOTES
          ---                      -------                  -----------             ----------------      
<S>                       <C>                        <C>                        <C>
       7,537,246                   45,026                     24,054                           0
</TABLE>

                                       14
<PAGE>
 
ITEM 5  Not applicable

ITEM 6  Exhibits and Reports on Form 8-K


(a) INDEX TO EXHIBITS

Exh. No.                Documentation Description  
-------                 -------------------------  

 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).

 3.1      Certificate of Incorporation (Incorporation 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).

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).

                                       15
<PAGE>
 
Exh. No.                Documentation Description  
-------                 -------------------------  

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).

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).

                                       16
<PAGE>
 
Exh. No.                Documentation Description  Page
-------                 -------------------------  ----


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).

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.

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


10.21     The Company's 1995 Stock Option Plan, as amended.

10.22     The Company's 1996 Employee Stock Purchase Plan, as amended

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 11, 1998                     /s/ Joseph W. Rockom
                                      ------------------------------
                                      (JOSEPH W. ROCKOM CFO)
                                      Principal Financial Officer,
                                      Duly Authorized Officer

                                       18