<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 June 28, 1997 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                             8,520,000
    ---------------------------                             ---------
          (Title of Class)                    (Outstanding as of June 28, 1997)

 

                                       1
<PAGE>
 
                               IKOS SYSTEMS, INC.
                                   FORM 10-Q
                          QUARTER ENDED JUNE 28, 1997


                                     INDEX
                                     -----


Part I: Financial Information
 
        Item 1: Financial Statements
                                                                         PAGE
                Consolidated Balance Sheets at
                  June 28, 1997 and September 28, 1996..............       3
 
                Consolidated Statements of Operations
                  for the three and nine months ended
                  June 28, 1997 and June 29, 1996...................       4
 
                Consolidated Statements of Cash Flows
                  for the nine months ended
                  June 28, 1997 and June 29, 1996...................       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....................      13

        Signatures..................................................      16

                                       2
<PAGE>
 
                              IKOS SYSTEMS, INC.
                          CONSOLIDATED BALANCE SHEETS
                   (in thousands, except per share amounts)
 
 
                                                    June 28,   September 28,
                                                      1997         1996
                                                  -----------  -------------
                  ASSETS                          (Unaudited)       (1)
Current assets:
   Cash and cash equivalents.......................  12,372      $ 10,590
   Short-term investments..........................  13,785        14,638
   Accounts receivable (net of allowances for
     doubtful accounts of $476 and $271, 
     respectively).................................  11,528         9,193
   Inventories.....................................   4,684         3,514
   Deferred tax assets.............................   3,450         4,187
   Prepaid expenses and other assets...............     635           537
                                                    -------       -------
       Total current assets........................  46,454        42,659
 
   Equipment and leasehold improvements
     Office and evaluation equipment...............   3,750         3,088
     Machinery and equipment.......................   6,705         5,738
     Leasehold improvements........................     333           331
                                                    -------       -------
                                                     10,788         9,157
       Less allowances for depreciation and 
        amortization...............................  (6,656)       (5,565)
                                                    -------       -------
                                                      4,132         3,592
   Intangible assets (net of amortization of
     $1,366 and $421, respectively)................   4,941         5,890
   Deferred tax assets.............................   1,127         1,125
   Other assets....................................     500           205
                                                    -------       -------
                                                    $57,154       $53,471
                                                    =======       =======

    LIABILITIES AND STOCKHOLDERS' EQUITY
 
Current liabilities:
   Accounts payable................................ $ 3,044       $4,775
   Accrued payroll and related expenses............   2,194        2,406
   Accrued commissions.............................     568          725
   Income taxes payable............................   2,123        1,745
   Other accrued liabilities.......................   2,965          496
   Deferred maintenance revenues...................   3,315        3,843
   Current portion of long-term debt...............     350          750
                                                    -------       -------
       Total current liabilities...................  14,559        14,740
Long-term debt, less current portion...............      --           350
Accrued rent.......................................     220           237
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, 8,520 and 8,179 shares
     issued and outstanding, respectively..........      85            82
   Additional paid-in capital......................   56,876        54,994
   Accumulated deficit.............................  (14,586)      (16,932)
       Total stockholders' equity..................   42,375        38,144
                                                     -------       -------
                                                     $57,154       $53,471
                                                     =======       =======

(1)  Derived from audited financial statements.

                See notes to consolidated financial statements.

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

<TABLE> 
<CAPTION> 
                 
 
                                                                                  Three Months Ended          Nine Months Ended
                                                                               ------------------------     ---------------------
                                                                               June 28,        June 29,      June 28,    June 29,
                                                                                 1997           1996          1997         1996
                                                                                 ----           ----          ----         ----
<S>                                                                            <C>             <C>           <C>         <C>       
Net revenues
  Product..........................................................            $12,308       $  9,874        $36,182     $ 26,845
  Maintenance......................................................              2,121          1,976          6,911        5,436
                                                                               -------       --------        -------     --------
    Total net revenues.............................................             14,429         11,850         43,093       32,281
 
Cost of revenues
  Product...........................................................             2,771          2,126          8,141        6,109
  Maintenance.......................................................               492            384          1,379          934
                                                                               -------       --------        -------     --------
    Total cost of revenues..........................................             3,263          2,510          9,520        7,043
                                                                               -------       --------        -------     --------
   Gross profit.....................................................            11,166          9,340         33,573       25,238
 
Operating expenses:
  Research and development..........................................             2,648          2,640          7,508        5,908
  Sales and marketing...............................................             4,470          3,517         12,428       10,428
  General and administration........................................               832            778          2,935        2,501
  Acquired in-process research and
    development and special charges.................................             7,002          9,600          7,002        9,600
                                                                               
  Amortization of intangibles.......................................               315            101            945          101
                                                                               -------       --------        -------     -------- 
   Total operating expenses.........................................            15,267         16,636         30,818       28,538
                                                                               -------       --------        -------     --------
Income from operations..............................................            (4,101)        (7,296)         2,755       (3,300)
 
Other income (expense):
  Interest income...................................................               344            259            906          741
  Interest expense..................................................                 -              -              -          (42)
  Other.............................................................                 6             31             71           90
                                                                               -------       --------        -------     --------
   Total other income...............................................               350            290            977          789
                                                                               -------       --------        -------     --------
 
Income (loss) before provision (benefit)
  for income taxes..................................................            (3,751)        (7,006)         3,732       (2,511)
Provision (benefit) for income taxes................................            (1,407)           410          1,386        1,120
                                                                               -------       --------        -------     --------
    Net income (loss)...............................................           ($2,344)       ($7,416)       $ 2,346      ($3,631)
                                                                               =======       ========       ========     ========
Net income (loss) per share.........................................            ($0.28)         $1.00          $0.26       ($0.51)
                                                                               =======       ========       ========     ========
Common and common equivalent shares used
  in computing per share amounts....................................             8,457          7,407          8,940        7,149
                                                                               =======       ========       ========     ========
</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)

                                                         Nine Months Ended
                                                     ---------------------------
                                                      June 28,         June 29,
                                                        1997             1996
                                                     -----------     -----------
Operating activities:
         Net income..............................     $2,346           ($3,631)
         Adjustments to reconcile net income to 
           net cash provided by operating 
           activities:
           Depreciation and amortization.........      2,036               892
           Special charges.......................      7,002             9,600
           Loss on retirement of equipment.......          4                25
           Deferred tax assets...................        735                --
           Deferred rent.........................        (17)               (2)

         Changes in operating assets and 
           liabilities:
           Accounts receivable...................     (2,335)            1,999
           Inventories...........................     (1,170)           (1,242)
           Prepaid expenses and other current
            assets...............................        (98)               55
           Other assets..........................       (295)              (80)
           Accounts payable......................      (1,731)           1,644
           Accrued payroll and other expenses....        (212)             512
           Accrued commissions...................        (157)            (511)
           Income taxes payable..................         378              338
           Other accrued liabilities.............         (33)            (265)
           Deferred maintenance revenues.........        (528)             919
                                                      -------          -------
             Net cash provided by operating
             activities..........................       5,925           10,253

Investing activities:
         Purchases of equipment and leasehold
          improvements...........................      (1,631)          (1,788)
         Investment in Virtual Machine 
          Works, Inc.............................          --           (1,250)
         Acquisition of Virtual Machine 
          Works, Inc.............................          --           (9,751)
         Purchase of Zycad Lightspeed
          technology.............................      (4,500)              --
         Purchase of short-term investments......     (22,078)         (15,466)
         Maturities of short-term
          investments............................      22,931            9,155
                                                      -------          -------
             Net cash used in investment   
             activities..........................      (5,278)         (19,100)

Financing activities:
         Principal payments on long-term
          borrowings.............................        (750)            (888)
         Sale of common stock....................       1,885           11,561
                                                      -------          -------
             Net cash provided by financing
             activities..........................       1,135           10,673
                                                      -------          -------

Increase in cash and cash equivalents............       1,782            1,826
Cash and cash equivalents at beginning of
 period..........................................      10,590            7,305
                                                      -------          -------
Cash and cash equivalents at end of
period...........................................     $12,372          $ 9,131
                                                      =======          =======


                See notes to consolidated financial statements.

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


1.  Basis of Presentation

          The accompanying consolidated financial statements at June 28, 1997
     and for the three and nine month periods ended June 28, 1997 and June 29,
     1996, 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 28, 1996 included in the Form 10-K as filed with the
     Securities and Exchange Commission on December 20, 1996.  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
     nine month periods ended June 28, 1997 are not necessarily indicative of
     results expected for the full year.

2.   Use of Estimates

          The preparation of the financial statements in conformity with
     generally accepted accounting principles requires management to make
     estimates and assumptions that effect the amounts reported in the financial
     statements and accompanying notes.  Actual results could differ from those
     estimates.

3.   Inventories

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

                                              June 28,  September  28,
                                                1997         1996
                                             --------  --------------
 
                       Purchase parts         $1,024       $  631
                       Work-in-process         2,406        2,245
                       Finished goods          1,254          638
                                              ------       ------
                         Total inventories    $4,684       $3,514
                                              ======       ======
4.   Net Income Per Share

          Net income per share is based on the weighted average number of common
     shares outstanding during the period.  Common equivalent shares from
     options have been included in the computation when dilutive.

          In February 1997, the Financial Accounting Standards Board (FASB)
     issued Statement of Financial Accounting Standards No. 128, "Earnings Per
     Share." The overall objective of the Statement No. 128 is to simplify the
     calculation of earnings per share by excluding the dilutive effect of stock
     options and warrants from the "basic" earnings per share calculation.  The
     statement is effective for interim and annual financial statements for
     periods ending after December 31, 1997 and earlier application is not
     permitted.  The Company will not be required to adopt such statement until
     after its first quarter of fiscal 1998 and such adoption, when effective,
     will not result in a materially different disclosure of "dilutive" earnings
     per share than currently disclosed.

                                       6
<PAGE>
 
5.   Zycad Purchased Technology

          In April 1997, the Company completed the purchase of certain software
     and hardware simulation technology from Zycad Corporation for approximately
     $5,400,000 in cash.  Under the terms of the agreement, the companies have
     jointly implemented a product transition program for all of Zycad's current
     logic simulation customers.  Through June 28, 1997, IKOS has paid
     $4,500,000 with the remaining $900,000 to be paid to Zycad upon the
     completion of certain milestones under the customer transition program. The
     technology acquisition was charged to operations in the current quarter. In
     addition, in connection with the customer transition program, the
     anticipated cost of approximately $1,600,000 of such program was charged
     to operations in the current quarter.

                                       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 the Private Securities Litigation
Reform Act of 1995.  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.

NET REVENUES

Net revenues for the third quarter of fiscal 1997 totaled $14,429,000, an
increase of approximately 22% over the same quarter in fiscal 1996. Net revenues
for the nine months ended June 28, 1997 were $43,093,000, representing an
increase of 33% over the same nine month period of fiscal 1996.  The increases
are primarily the result of approximately $1,500,000 in emulation product sales
during the quarter. In addition, Voyager product sales and maintenance revenues
increased slightly over the same quarter in fiscal 1996.  The Company began its
commercial shipment of the emulation product in the first quarter of 1997.  For
the three and nine months ended June 28, 1997, the Company's new emulation
product contributed over 10% and 9% of net revenues, respectively. There were no
emulation revenues recognized during the first nine months of fiscal 1996 as the
product was in development during that period. The Voyager product line
contributed over 65% of net revenues and represented increases over the same
periods of fiscal 1996 of approximately 7% and 16%, respectively.  Maintenance
revenues which were over 15% and 16% of net revenues for the three month and
nine month periods ending June 28, 1997, respectively, increased 7% and 27%
respectively over the same three and nine month periods of fiscal 1996.  During
the quarter, the Company discontinued its support of its older 2800/2900 product
resulting in a lower growth rate of maintenance revenues during the quarter.

The Company has seen an increase in activity for its emulation product and a
flattening in the overall simulation revenue growth.  The Company expects the
emulation revenues to continue to grow as a percentage of overall revenues as
the Company continues its transition from only offering simulation related
products to a company offering a full range of simulation and emulation
solutions.  The Company also expects to continue to see growth in the simulation
business although at a lower rate due to the increasing focus on the emulation
business and changes in the Electronic Design Automation (EDA) marketplace.  In
addition, the Company has continued its focus on providing consulting services
to its customers.  The Company has seen increased activity with respect to these
services as well.

International sales for the third quarter of fiscal 1997 increased approximately
29% over the same quarter in fiscal 1996 and accounted for over 33% of net
revenues for the quarter.  For the nine month period ended June 28, 1997,
international revenue increased 58% when compared to the same period in fiscal
1996. The significant increase in revenues for the nine month period is
primarily the result of a strong first quarter of international revenues for
fiscal 1997 and a weak first quarter in fiscal 1996.  During the quarter, the
Company continued its transition from a distributor sales channel in Japan to a
direct sales channel.  This transition resulted in less than expected revenues
in Japan during the quarter partially as a result of the level of resources
available to serve the market.  The Company has increased its headcount and
expects that as the Japan location matures revenues should improve. The Company
expects this transition to be a continual process for the next several quarters.

                                       8
<PAGE>
 
GROSS PROFIT MARGINS

Gross profit margins for the three and nine month periods were approximately 77%
and 78% of net revenues, respectively and are slightly lower when compared to
the same periods of fiscal 1996.  The slight decrease in margins are a result of
increased maintenance costs associated with the newer products and the
cancellation of support for the Company's older 2800/2900 product line in which
maintenance cost were minimal.  Gross profit margins are expected to be
comparable in subsequent quarters.

RESEARCH AND DEVELOPMENT EXPENSES

Research and development expenses in the third quarter of fiscal 1997 totaled
$2,648,000 and are flat when compared to the same period in fiscal 1996.
Certain research and development costs increased during the quarter as a
result of increased headcount, however these increases were offset by lower
non-recurring engineering charges during the quarter. Research and development
expenses increased 27% from $5,908,000 for the first nine months of fiscal
1996 to $7,508,000 for the same period of fiscal 1997. The overall increase in
research and development expenses for the nine months of fiscal 1997 is the
result of increased headcount and associated expenses. The Company expects
research and development expenses to increase in absolute dollars over the
remainder of the year as the Company continues its development of its future
generation of products.

SALES AND MARKETING EXPENSES

Sales and marketing expenses increased to $4,470,000 for the third quarter of
fiscal 1997 or 27% when compared to $3,517,000 for the same period in fiscal
1996.   Sales and marketing expenses increased 19% from $10,428,000 for the
first nine months of 1996 to $12,428,000 for the first nine months of fiscal
1997. The increase is primarily the result of additional headcount and increased
commissions as a result of higher revenue levels, as well as increased expenses
for international operations.  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 $832,000 and $2,935,000 for the three
and nine month periods ended June 28, 1997.  These amounts represent increases
of 7% and 17%, respectively over the comparable periods in fiscal 1996.  The
increase in the current quarter is a result of increased headcount.  The
increases for the nine month period were a result of increased headcount,
increased investor relations expenses, professional services and profit sharing
expenses.  General and administrative expenses are expected to remain relatively
flat over the remainder of fiscal 1997.

INCOME TAXES

Due to the Company's loss before income taxes due to special charges associated
with the Zycad technology purchase and related transition program costs of
approximately $7,002,000, the Company has recognized a benefit for income taxes
for the third quarter of fiscal 1997.  For the nine months ended June 28, 1997,
the Company's provision for income taxes differs from the federal statutory rate
primarily due to benefits associated with its foreign sales corporation,
research credits, and costs associated with state income taxes and non
deductible goodwill amortization. The Company's 1996 provision for income taxes
for the third quarter consisted primarily of federal alternative minimum tax,
state and foreign taxes and Japanese withholding taxes. The tax rate during this
period was substantially below the federal statutory rate due to the utilization
of net operating loss carryovers for which no benefit had previously been
recognized.

                                       9
<PAGE>
 
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 particular in the electronics industry. Any
unfavorable change in these or other factors could have a material adverse
effect on the Company's operating results for a particular quarter. 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, that its rate of quarterly revenue and earnings
growth will be sustained, or that the Company will remain profitable in any
future period.

Continued Acceptance 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. There can be no assurance
that increased sales of these products will continue. 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 current products and future
products will achieve the market acceptance required to maintain revenue growth
and continued profitability in the future.

During the first fiscal quarter of 1997, the Company recorded its first
commercial shipment of its new emulation product. The success of the Company in
continuing to sell and support emulation products will depend on a variety of
factors, including 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 have been 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 as 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.

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 experiences significant
competition in both the simulation and emulation product environments. 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 formal proof products and product enhancements. 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.

                                       10
<PAGE>
 
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 systems and to design,
develop and support its future simulation and emulation products on a timely
basis. 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. 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.

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, including certain
---------------------------------
proprietary application-specific integrated circuits and subassemblies 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 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 these source suppliers that
require the suppliers to provide components in guaranteed quantities or at set
prices. 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.
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.

                                       11
<PAGE>
 
Transition to Direct Sales in Japan  -  Prior to April 1997, the Company
-----------------------------------
maintained a relationship with a certain distributor in Japan for sales in that
country.  In April 1997, the Company initiated the termination of its
relationship with such distributor and began selling directly to its customers
in Japan through its direct sales office.  Such transition has been slower than
expected as the Company continues to build its level of resources in the sales
office.  As a result revenues from the Japan location was less than expected.
The Company expects this transition to continue over the next several quarters.
There can be no assurance that the Company's direct sales office in Japan will
eventually generate revenues in line with or greater than those derived from its
prior relationship with its former distributor.  Accordingly, the Company's
results of operations could be negatively impacted.


LIQUIDITY AND CAPITAL RESOURCES

As of June 28, 1997, the Company had $26,157,000 in cash, cash equivalents and
short term investments which compares to $25,228,000 as of September 28, 1996.

Net cash provided by operating activities was $5,925,000 for the nine months
ended June 28, 1997.  The cash provided by operations was primarily due to net
income plus special charges associated with the Zycad acquisition, depreciation
and amortization and an increase in income taxes payable partially offset by an
increase in accounts receivable, an increase in inventories, the pay down of
accounts payable and payroll and related obligations and the decrease in
deferred maintenance revenues.

Net cash used in investing activities was approximately $5,278,000 due primarily
to maturities of approximately $22,931,000 of short-term investments offset by
the cash paid as a part of the Zycad technology purchase of approximately
$4,500,000, the purchase of approximately $1,631,000 of equipment and purchases
of approximately $22,078,000 of short-term investments.  The Company expects
capital expenditures to increase throughout the remainder of the year, as
expected headcount additions will require additional workstations.

Net cash provided by financing activities for the nine months ended June 28,
1997 was approximately $1,135,000 which was a result of exercise of stock
options by Company employees offset by the payment of $750,000 on debt
obligations.

The Company's primary unused sources of funds at June 28, 1997, consisted of
$26,157,000 of cash, cash equivalents and short-term investments.  The Company
believes that its present cash position and cash generated from operations will
be sufficient to meet its capital needs for at least the next twelve months.

In April 1997, the Company completed the purchase of certain software and
hardware simulation technology from Zycad Corporation for approximately
$5,400,000 in cash.  Under the terms of the agreement, the companies have
jointly implemented a product transition program for all of Zycad's current
logic simulation customers.  Through June 28, 1997, IKOS has paid $4,500,000
with the remaining $900,000 to be paid to Zycad upon the completion of certain
milestones under the customer transition program. The technology acquisition was
charged to operations in the current quarter. In addition, the Company charged
operations in the current quarter approximately $1,600,000 for the anticipated
cost of the customer transition program.

                                       12
<PAGE>
 
                          PART II.  OTHER INFORMATION


ITEMS 1-5.  Not applicable.

ITEM 6.     EXHIBITS AND REPORTS ON FORM 8-K.

(a) INDEX TO EXHIBITS

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

 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).

 4.2          Registration rights agreement by and among the Company
              and certain former stockholders of VMW (Incorporated by
              reference to Exhibit 4.1 of the Company's registration
              statement on Form S-3 effective July 26, 1996).

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 Form 10-K for
              the year ending September 26, 1992).

                                       13
<PAGE>
 
Exh. No.                 Documentation Description                         Page
--------                 -------------------------                         ----

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 (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).

                                       14
<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.

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

10.21          The Company's 1995 Stock Option Plan (Incorporated by
               reference to Exhibit 10.21 of the Company's Annual 
               Report on Form 10-K for the year ended September 28, 1996).

10.22          The Company's 1996 Employee Stock Purchase Plan 
               (Incorporated by reference to Exhibit 10.22 of the 
               Company's Annual Report on Form 10-K for the year ended
               September 28, 1996).

11.1           Statement of Computation of Earnings per Share.

27.1           Financial Data Schedule


(b) REPORTS ON FORM 8-K  - Not applicable


                                   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:  August 12, 1997              /s/ Joseph W. Rockom
       ---------------              -----------------------------------
                                    (JOSEPH W. ROCKOM, CFO)
                                    Principal Financial Officer,
                                    Duly Authorized Officer

                                       16