<PAGE>

================================================================================

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

                              ___________________

                                   FORM 10-Q

(Mark One)
[X]   Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarter ended July 3, 1999 or

[_]   Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from __________ to __________

Commission File Number 0-18623

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


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

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

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

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

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

     Common Stock $.01 Par Value                    8,295,000
     ---------------------------
          (Title of Class)              (Outstanding as of July 3, 1999)

================================================================================
<PAGE>

                              IKOS SYSTEMS, INC.
                                   FORM 10-Q
                          QUARTER ENDED JULY 3, 1999

                                     INDEX
                                     -----


Part I:  Financial Information

         Item 1:  Financial Statements
                                                                          Page
                  Consolidated Balance Sheets at
                    July 3, 1999 and October 3, 1998.......................  3

                  Consolidated Statements of Operations
                    for the three and nine month periods ended
                    July 3, 1999 and July 4, 1998..........................  4

                  Consolidated Statements of Cash Flows
                    for the nine month periods ended
                    July 3, 1999 and July 4, 1998..........................  5

                  Notes to Consolidated Financial Statements...............  6

         Item 2:  Management's Discussion and Analysis
                    of Financial Condition and Results of Operations.......  8

Part II: Other Information

         Item 6: Exhibits and Reports on Form 8-K.......................... 16

         Signatures........................................................ 19
<PAGE>

                         Part I Financial Information


ITEM 1: Financial Statements

                              IKOS SYSTEMS, INC.
                          CONSOLIDATED BALANCE SHEETS
                   (in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                                                 July 3,           October 3,
                                                                                   1999               1998
                                                                              ---------------    ---------------
<S>                                                                           <C>                <C>
                                                        ASSETS
Current assets:
    Cash and cash equivalents...........................................         $  7,728           $  8,165
    Short-term investments..............................................            3,824              7,517
    Accounts receivable (net of allowances for
        doubtful accounts of $801 and $801, respectively)...............            8,410              6,033
    Inventories.........................................................            4,429              3,816
    Prepaid expenses and other assets...................................              579                536
                                                                              ---------------    ---------------
           Total current assets.........................................           24,970             26,067

    Equipment and leasehold improvements:
        Office and evaluation equipment.................................            5,246              4,876
        Machinery and equipment.........................................           10,406              9,201
        Leasehold improvements..........................................              711                587
                                                                              ---------------    ---------------
                                                                                   16,363             14,664
           Less allowances for depreciation and amortization............          (11,216)            (9,342)
                                                                              ---------------    ---------------
                                                                                    5,147              5,322
    Intangible assets (net of amortization of
        $612 and $303, respectively)....................................            1,250              1,559
    Other assets........................................................              546                396
                                                                              ---------------    ---------------
                                                                                 $ 31,913           $ 33,344
                                                                              ===============    ===============
                             LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
    Accounts payable....................................................         $  4,744           $  4,789
    Accrued payroll and related expenses................................            3,116              1,854
    Accrued commissions.................................................              717                801
    Income taxes payable................................................              960              1,185
    Other accrued liabilities...........................................            2,588              4,350
    Deferred revenues...................................................            6,410              7,596
                                                                              ---------------    ---------------
           Total current liabilities....................................           18,535             20,575

Accrued rent............................................................               89                156
Commitments
Stockholders' equity:
    Preferred stock, $.01 par value; 10,000 shares
        authorized, none issued and outstanding.........................              --                 --
    Common stock, $.01 par value; 50,000 shares
        authorized, 8,797 and 8,797 shares
        issued and 8,295 and 8,361 outstanding, respectively............               88                 87
    Additional paid-in capital..........................................           58,744             58,775
    Treasury stock, at cost, 502 shares in 1999 and
        436 in 1998.....................................................           (3,397)            (3,144)
    Accumulated other comprehensive loss................................             (449)              (314)
    Accumulated deficit.................................................          (41,697)           (42,791)
                                                                              ---------------    ---------------
           Total stockholders' equity...................................           13,289             12,613
                                                                              ---------------    ---------------
                                                                                 $ 31,913           $ 33,344
                                                                              ===============    ===============
</TABLE>
                See notes to consolidated financial statements

                                       3
<PAGE>

                               IKOS SYSTEMS INC.
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                   (in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                                           Three Months Ended             Nine Months Ended
                                                                    ----------------------------      -------------------------
                                                                         July 3,      July 4,            July 3,       July 4,
                                                                          1999         1998               1999          1998
                                                                          ----         ----               ----          ----
<S>                                                                 <C>           <C>                <C>             <C>
Net revenues
    Product......................................................        $11,098       $5,090            $28,669        $23,334
    Maintenance..................................................          3,914        3,334             11,369          9,474
                                                                    ------------   ----------         ----------      ---------
       Total net revenues........................................         15,012        8,424             40,038         32,808

Cost of revenues
    Product......................................................          2,681        4,473              7,121          9,651
    Maintenance..................................................          1,057          420              2,851          1,428
                                                                    ------------   ----------         ----------      ---------
       Total cost of revenues....................................          3,738        4,893              9,972         11,079
                                                                    ------------   ----------         ----------      ---------
       Gross profit..............................................         11,274        3,531             30,066         21,729

Operating expenses:
    Research and development.....................................          3,411        4,485              9,859         10,533
    Sales and marketing..........................................          5,719        4,924             15,859         13,704
    General and administration...................................          1,103        1,131              3,017          3,003
    Acquired in-process research and
       development and special charges                                       --         7,600               --            7,600
    Amortization of intangibles..................................            103          434                309          1,147
                                                                    ------------   ----------         ----------      ---------
       Total operating expenses..................................         10,336       18,574             29,044         35,987
                                                                    ------------   ----------         ----------      ---------
Income (loss) from operations....................................            938      (15,043)             1,022        (14,258)

Other income:
    Interest income..............................................            111          230                392            846
                                                                    ------------   ----------         ----------      ---------
Income (loss) before provision (benefit) for income taxes........          1,049      (14,813)             1,414        (13,412)
Provision (benefit) for income taxes.............................            265         (230)               320            300
                                                                    ------------   ----------         ----------      ---------
       Net income (loss).........................................           $784     ($14,583)            $1,094       ($13,712)
                                                                    ============   ==========         ==========      =========
Basic net income (loss) per share................................          $0.09       ($1.74)             $0.13         ($1.62)
                                                                    ============   ==========         ==========      =========
Weighted common shares used in
    computing basic per share amounts............................          8,288        8,392              8,285          8,443
                                                                    ============   ==========         ==========      =========
Dilutive net income (loss) per share.............................          $0.08       ($1.74)             $0.12         ($1.62)
                                                                    ============   ==========         ==========      =========
Common and common equivalent shares used
    in computing per share amounts...............................          9,406        8,392              9,008          8,443
                                                                    ============   ==========         ==========      =========
</TABLE>

                See notes to consolidated financial statements.



                                       4
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                               Nine Months Ended
                                                                                      ------------------------------------
                                                                                          July 3,             July 4,
                                                                                           1999                1998
                                                                                       ---------------    ----------------
<S>                                                                                    <C>                <C>
Operating activities:
    Net income (loss)...............................................................        $1,094            ($13,712)
    Adjustments to reconcile net income to net
      cash provided by (used in) operating activities:
      Depreciation and amortization.................................................         2,048               3,123
      Special charges...............................................................           --                7,600
      Accrued rent..................................................................           (67)                (40)

    Changes in operating assets and liabilities:
      Accounts receivable...........................................................        (2,377)              2,590
      Inventories...................................................................          (613)                607
      Prepaid expenses and other current assets.....................................           (43)                160
      Other assets..................................................................          (150)                193
      Accounts payable..............................................................           (45)                850
      Accrued payroll and other expenses............................................         1,262                 (98)
      Accrued commissions...........................................................           (84)               (321)
      Income taxes payable..........................................................          (225)                247
      Other accrued liabilities.....................................................        (1,762)                (50)
      Deferred revenues.............................................................        (1,186)                977
                                                                                       ---------------    ----------------
        Net cash provided by (used in) operating activities.........................        (2,148)              2,126

Investing activities:
    Purchases of equipment and leasehold improvements...............................        (1,699)             (2,335)
    Acquisiton of Deerbrook Systems, Inc............................................            --                (500)
    Acquistion of Interra, Inc. technology..........................................            --              (6,490)
    Purchase of short-term investments..............................................        (4,465)            (11,623)
    Maturities of short-term investments............................................         8,158              17,632
                                                                                       ---------------    ----------------
        Net cash provided by (used in) investment activities........................         1,994              (3,316)

Financing activities:
    Principal payments on long-term borrowings......................................            --                (350)
    Net repurchase of common stock..................................................          (283)             (2,402)
                                                                                       ---------------    ----------------
        Net cash used in financing activities.......................................          (283)             (2,752)
                                                                                       ---------------    ----------------
Decrease in cash and cash equivalents...............................................          (437)             (3,942)
Cash and cash equivalents at beginning of period....................................         8,165               9,486
                                                                                       ---------------    ----------------
Cash and cash equivalents at end of period..........................................        $7,728              $5,544
                                                                                       ===============    ================
</TABLE>

                See notes to consolidated financial statements.

                                       5
<PAGE>

                              IKOS SYSTEMS, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


1.   Basis of Presentation

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

2.   Fiscal Year

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

3.   Inventories

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

<TABLE>
<CAPTION>
                                                    July 3,      October 3,
                                                     1999           1998
                                                 -------------  -------------
        <S>                                        <C>            <C>
        Raw materials                              $1,195         $1,520
        Work-in-process                             1,225          1,163
        Finished goods                              2,009          1,133
                                                   ------         ------
                                                   $4,429         $3,816
                                                   ======         ======
</TABLE>

4.   Net Income (Loss) Per Share

     The computation of basic net income (loss) per share for the periods
     presented is derived from the information on the face of the income
     statement, and there are no reconciling items in either the numerator or
     denominator. Additionally, there are no reconciling items in the numerator
     used to compute dilutive net income (loss) per share. The total shares used
     in the denominator of the diluted net income per share calculation includes
     1,118,000 and 723,000 incremental common shares attributable to outstanding
     options for the three and nine months ended July 3, 1999, respectively. For
     the three and nine month periods in fiscal 1998, no shares were included in
     the earnings per share calculation as such share would have been anti-
     dilutive in those respective loss periods.

                                       6
<PAGE>

                               IKOS SYSTEMS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

5.   Comprehensive Income

     Comprehensive income (loss) for the three and nine month periods ending
     July 3, 1999 and July 4, 1998 are as follows (in thousands):



<TABLE>
<CAPTION>
                                            Three Months Ended           Nine Months Ended
                                     -------------------------------------------------------------
                                       July 3,       July 4,          July 3,            July 4,
                                         1999        1998              1999              1998
                                     -----------  -----------    -------------     --------------
<S>                                  <C>          <C>            <C>               <C>
Net income (loss) as reported              $ 784     ($14,583)          $1,094           ($13,712)

Accumulated translation
   adjustments                              (137)          (9)            (135)              (243)
                                     -----------  -----------    -------------     --------------

Comprehensive income (loss)                $ 647    $ (14,592)          $  959          $  13,955
                                     ===========  ===========    =============     ==============
</TABLE>


6.   Impact of Recently Issued Accounting Standards

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

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

     In June 1998, the Financial Accounting Standards Board issued Statement of
     Financial Accounting Standards No. 133, "Accounting for Derivative
     Instruments and Hedging Activities" ("SFAS133"), which is required to be
     adopted in years beginning after June 15, 2000. The adoption of SFAS 133 is
     not expected to materially impact the Company's results of operations or
     its financial position.

                                       7
<PAGE>

ITEM 2.  Management's Discussion and Analysis of Financial Condition and
         Results of Operations

Cautionary Statement

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

Net Revenues

Net revenues for the three and nine month periods ending July 3, 1999 totaled
$15,012,000 and $40,038,000, respectively, representing an increase of
approximately 78% and 22% from the same periods in fiscal 1998.  The increases
were primarily a result of increases in sales of the Company's emulation
products.  Emulation product revenue increased 488% from the prior year quarter.
The increase in revenues is a result of the Company's emulation product
offerings gaining acceptance in the marketplace during the three and nine months
ended July 3, 1999.  For the nine-month period, emulation revenues were in
excess of $13,000,000 which represented an increase of over 100% over the
comparable period from the previous year.  As indicated in the Company's Form
10-K filed in December of 1998, the Company encountered a lengthy beta period
with respect to its emulation offerings, which impacted the Company's
anticipated revenue growth in its emulation products during fiscal 1998.  The
beta period was completed in the fourth quarter of fiscal 1998 and the Company
began ramping up shipments in the first quarter of fiscal 1999, which has
continued through the third fiscal quarter.  The Company recently released its
next generation emulator and is expecting this new release to further enhance
its emulation sales.  The Company's simulation revenues for the quarter
increased 47% when compared with the previous year's results and increased 29%
over the preceding quarter. While the Company has anticipated a slow down in its
sales of simulation products, due in part to increased focus on its emulation
business, as well as the overall market evolution, the Company has seen a
continual demand for its simulation products.  The Company has released several
new simulation products and these new products are expected to keep the revenue
levels for the simulation business flat in the final quarter of the fiscal year.

Maintenance revenues for the three and nine month periods ending July 3, 1999
totaled $3,914,000 and $11,369,000, respectively, representing increases of 17%
and 20%, respectively, over the same periods from a year ago. The increases are
primarily attributable to the increasing emulation customer base and the
continued sale of maintenance for the current Voyager installed base. As the
Company transitions to more emulation focused customer base from its current
Voyager systems base, it is anticipated that maintenance revenues will remain
flat over the last quarter of the fiscal year.

International sales for the three and nine month periods ending July 3, 1999
totaled $4,370,000 and $13,643,000 respectively.  These represented increases
over the same periods of fiscal 1998 of 83% and 21%.  The Company has had higher
sales and bookings as economic demand has increased at its foreign locations
when compared to sales activity for the same periods of the previous year.

                                       8
<PAGE>

Gross Profit Margins

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

Research and Development Expenses

Research and development expenses for the three and nine month periods ending
July 3, 1999 were approximately $3,411,000 and $9,859,000 or 23% and 25%,
respectively, of net revenues. Research and development for the three and nine
month periods ending July 4, 1998 were $4,485,000 and $10,533,000, or 53% and
32%, respectively of net revenues.  The decrease in research and development
expenses are primarily due to certain non-recurring charges occurring in fiscal
1998 and certain start-up costs associated with the research and development
facility which opened in India in the third quarter of fiscal 1998.  As a
percentage of net revenues, the decrease is also attributable to the
significantly lower revenues in fiscal 1998.  The Company expects research and
development spending to increase in net absolute dollars as the Company
continues to address its on-going development efforts for new product technology
development.

Sales and Marketing Expenses

Sales and marketing expenses increased from $4,924,000, or 58% of net revenues
in the third quarter of fiscal 1998 to $5,719,000, or 38% of net revenues for
the third quarter of fiscal 1999.  Sales and marketing expenses also increased
from $13,704,000 for the nine months ending July 4, 1998 to $15,859,000 for the
same period in fiscal 1999.  The increases are a result of increased commissions
as certain salesmen exceed their quotas, increased rep commissions, focal
increases and other selling costs.

General and Administrative Expenses

General and administrative costs were $1,103,000 or 7% of net revenues and were
comparable in absolute dollars with the same quarter from fiscal 1998.  General
and administrative costs for the first nine months of fiscal 1999 were
$3,017,000 and were comparable in absolute dollars with the first nine months of
fiscal 1998.  General and administrative costs are expected to remain flat over
the remainder of fiscal 1999.

                                       9
<PAGE>

Income Taxes

The Company's effective tax rate on the consolidated pretax income for the three
and nine month periods ended July 3, 1999 is 25% and 23%, respectively, as
compared to an effective tax rate of (2%) and 2% on the consolidated pretax loss
for the three and nine month periods ended July 4, 1998.  The Company's 1999
effective tax rate for the three and nine month periods ended July 3, 1999
differs from the federal statutory rate primarily due to benefits associated
with its net operating loss carryforward. The tax benefit for the three month
period ended July 4, 1998, results from the overall loss reported for the
quarter and the fiscal year. The tax provision for the nine months ended July 4,
1998, results from taxes on income in jurisdictions despite an overall loss.

Other

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

Factors that May Affect Future Results of Operations

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

                                       10
<PAGE>

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

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

                                       11
<PAGE>

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

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

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

                                       12
<PAGE>

such new standard. In addition, the Company's simulation systems generally
accept designs in the broadly accepted hardware description language, Verilog-
XL, which Cadence has developed and made available to the Company. In the event
Cadence adopts a less cooperative stance toward the Company in the future, the
Company's systems may not be able to accept designs based on Verilog-XL and the
Company may be required to develop software to accept designs of other hardware
description languages. The inability to accept designs in Verilog-XL may
materially adversely affect the Company's results of operations. There can be no
assurance that the Company will be successful in developing and marketing
product enhancements or new products that respond to technological change or
evolving industry standards or changing customer requirements, that the Company
will not experience difficulties that could delay or prevent the successful
development, introduction and marketing of these products, or that its new
products and product enhancements will adequately meet the requirements of the
marketplace, will be of acceptable quality or will achieve market acceptance. If
the Company is unable, for technological or other reasons, to develop and
introduce products in a timely manner in response to changing market conditions
or customer requirements, the Company's business, operating results and
financial condition will be materially and adversely affected. Moreover, from
time to time, the Company may announce new products or technologies that have
the potential to replace the Company's existing product offerings. There can be
no assurance that the announcement of new product offerings will not cause
customers to defer purchases of existing Company products, which could adversely
affect the Company's results of operations for any particular quarter.

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

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

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

                                       13
<PAGE>

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

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

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

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

                                       14
<PAGE>

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

Liquidity and Capital Resources

Since inception, the Company has financed its operations, including increases in
accounts receivable, inventory and capital equipment acquisitions, primarily
through private and public sales of equity securities and a loan secured by
capital equipment. The Company's cash, cash equivalents and short-term
investments decreased to $11,552,000 at July 3, 1999 from $15,682,000 at October
3, 1998.  The decrease was a result of $2,148,000 of cash used in operating
activities, $1,699,000 of cash used in investing activities (excluding short-
term investment activities) and $283,000 of cash used in financing activities.

Operating Activities - The Company's operating activities used cash of
--------------------
$2,148,000 during the first nine months of fiscal 1999.  The $2,148,000 of cash
used in operations was primarily due to net income adjusted for depreciation,
amortization and deferred rent, increases in accounts receivable, inventory,
prepaid expenses and other assets combined with decreases in other accrued
liabilities, deferred revenues, taxes payable and accrued commission, offset by
an increase in accrued payroll and related expenses..

Investing Activities - Net cash provided by investing activities for the first
--------------------
nine months of 1999 was $1,994,000.  The $1,994,000 of cash provided was
primarily the result of $8,158,000 obtained from maturities of short-term
investment offset by purchases of short-term investments of $4,465,000 and
acquisition of capital equipment of $1,699,000. For each period presented,
capital expenditures were primarily for evaluation equipment and engineering
workstations.

Financing Activities - Net cash used in financing activities for the three
--------------------
months ended July 3, 1999, was $283,000 and was primarily related to the net
purchases of stock during the nine months. During fiscal 1998, the Company
announced its intention to repurchase up to 1,000,000 shares of its outstanding
common stock on the open market. The Company did not repurchase any shares in
the third fiscal quarter but had acquired 130,000 shares of common stock for the
nine month period ending July 3, 1999.  Through July 3, 1999, the Company had
repurchased approximately 516,500 shares at a weighted-average per share price
of $5.96.

The Company's primary unused sources of funds at July 3, 1999 consisted of
$7,728,000 of cash and cash equivalents, in addition to $3,824,000 of short-term
investments. The Company believes that its current cash, cash equivalents and
short-term investments, together with cash and cash equivalents generated from
operations will be sufficient to finance its operations for at least the next
twelve months. Should the Company require other financing arrangements, there
can be no assurances that such financing will be available on terms favorable or
acceptable to the Company.



                                       15
<PAGE>

                          PART II. OTHER INFORMATION


ITEMS 1-5    Not applicable

ITEM 6       Exhibits and Reports on Form 8-K


(a) INDEX TO EXHIBITS

                               INDEX TO EXHIBITS

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

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

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

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

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

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

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

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

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

                                       16
<PAGE>

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

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

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

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

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

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

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

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

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

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

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

                                       17
<PAGE>

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

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

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

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

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

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

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

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

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

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

                                       18
<PAGE>

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

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

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

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

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

10.24     Agreement dated April 11, 1997, by and between the
          Company and Robert Hum.

10.25     Agreement dated February 2, 1999, by and between the
          Company and Thomas N. Gardner.

10.26     Agreement dated February 3, 1999, by and between the
          Company and Nader Fathi.

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: August 13, 1999                 /s/ Joseph W. Rockom
                                      -------------------------------
                                      (JOSEPH W. ROCKOM CFO)
                                      Principal Financial Officer,
                                      Duly Authorized Officer

                                       19