<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 January 1, 2000 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                     8,435,000,
        ---------------------------
              (Title of Class)               (Outstanding as of January 1, 2000)


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

                              IKOS SYSTEMS, INC.
                                   FORM 10-Q
                         QUARTER ENDED January 1, 2000


                                     INDEX
                                     -----

<TABLE>
<CAPTION>
Part I:  Financial Information

         Item 1:  Financial Statements
                                                                          Page
<S>                                                                       <C>
                  Consolidated Balance Sheets at
                     January 1, 2000 and October 2, 1999...................  3

                  Consolidated Statements of Income
                     for the three months ended January 1, 2000
                     and January 2, 1999...................................  4

                  Consolidated Statements of Cash Flows
                     for the three months ended January 1, 2000
                     and January 2, 1999...................................  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............................................................ 20
</TABLE>
<PAGE>

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


<TABLE>
<CAPTION>
                                                                                              January 1,     October 2,
                                                                                                2000           1999
                                                                                           -------------- --------------
                                                                                             (unaudited)
<S>                                                                                        <C>            <C>
                                           ASSETS
Current assets:
     Cash and cash equivalents..............................................................   $10,874         $7,664
     Short-term investments.................................................................     2,308          2,870
     Accounts receivable (net of allowances for
       doubtful accounts of $801 and $801, respectively)....................................     9,006         10,549
     Inventories............................................................................     3,270          3,455
     Prepaid expenses and other assets......................................................       451            435
                                                                                              ---------      ---------
          Total current assets..............................................................    25,909         24,973

     Equipment and leasehold improvements
       Office and evaluation equipment......................................................     6,296          5,663
       Machinery and equipment..............................................................    10,819         10,513
       Leasehold improvements...............................................................       721            718
                                                                                             ---------      ---------
                                                                                                17,836         16,894
          Less allowances for depreciation and amortization.................................   (12,587)       (11,832)
                                                                                             ---------      ---------
                                                                                                 5,249          5,062
     Intangible assets (net of accumulated amortization of
       $799 and $716, respectively).........................................................     1,063          1,146
     Other assets...........................................................................       875            609
                                                                                             ---------      ---------
                                                                                               $33,096        $31,790
                                                                                             =========      =========

                          LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
     Accounts payable.......................................................................    $4,001         $3,763
     Accrued payroll and related expenses...................................................     2,871          2,709
     Accrued commissions....................................................................       921          1,052
     Income taxes payable...................................................................     1,296          1,019
     Other accrued liabilities..............................................................     2,046          2,815
     Deferred revenues......................................................................     5,770          5,337
                                                                                             ---------      ---------
          Total current liabilities.........................................................    16,905         16,695

Accrued rent................................................................................        33             64
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 8,435 and 8,401 outstanding, respectively.................................        88             88
     Treasury stock, at cost, 362 shares in 2000 and
       396 in 1999..........................................................................    (2,337)        (2,536)
     Additional paid-in capital.............................................................    58,225         58,312
     Accumulated other comprehensive income.................................................      (576)          (498)
     Accumulated deficit....................................................................   (39,242)       (40,335)
                                                                                             =========      =========
          Total stockholders' equity........................................................    16,158         15,031
                                                                                             =========      =========
                                                                                               $33,096        $31,790
                                                                                             =========      =========
</TABLE>

                      See notes to financial statements.

                                       3
<PAGE>

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

<TABLE>
<CAPTION>
                                                         Three Months Ended
                                                     --------------------------
                                                     January 1,     January 2,
                                                        2000           1999
                                                        ----           ----
<S>                                                  <C>            <C>
Net revenues
     Product........................................   $11,049         $ 7,613
     Maintenance....................................     4,356           3,731
                                                     ---------       ---------
          Total net revenues........................    15,405          11,344

Cost of revenues
     Product........................................     2,705           1,969
     Maintenance....................................     1,023             846
                                                     ---------       ---------
          Total cost of revenues....................     3,728           2,815
                                                     ---------       ---------
          Gross Profit..............................    11,677           8,529

Operating expenses:
     Research and development.......................     3,254           3,015
     Sales and marketing............................     5,921           4,604
     General and administration.....................     1,053             903
     Amortization of intangibles....................        83             103
                                                     ---------       ---------
          Total operating expenses..................    10,311           8,625
                                                     ---------       ---------
Income (loss) from operations.......................     1,366             (96)

Other income (expense):
     Interest income................................        92             148
     Interest expense...............................         -               -
     Other..........................................         -               -
                                                     ---------       ---------
          Total other income........................        92             148
                                                     ---------       ---------
Income before provision for income taxes............     1,458              52
Provision for income taxes..........................       365               -
                                                     ---------       ---------
          Net income................................   $ 1,093         $    52
                                                     =========       =========

Basic net income per share..........................   $  0.13         $  0.01
                                                     =========       =========

Weighted-average common shares used
 in computing basic per share amounts...............     8,417           8,302
                                                     =========       =========

Dilutive net income per share.......................   $  0.11         $  0.01
                                                     =========       =========

Common and common equivalent shares used
 in computing dilutive per share amounts............     9,519           8,644
                                                     =========       =========
</TABLE>

                       See notes to financial statements.

                                       4

<PAGE>

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

<TABLE>
<CAPTION>
                                                                                      Three months ended
                                                                              ----------------------------------
                                                                               January 1,             January 2,
                                                                                  2000                   1999
                                                                              ------------           -----------
<S>                                                                           <C>                    <C>
Operating activities:
  Net income...............................................................     $1,093               $      52
  Adjustments to reconcile net income to net
    cash provided by operating activities:
    Depreciation and amortization..........................................        838                     692
    Accumulated translation adjustments....................................        (78)                     84
    Deferred rent..........................................................        (31)                    (22)

Changes in operating assets and liabilities:
    Accounts receivable....................................................      1,543                  (2,433)
    Inventories............................................................        185                  (1,749)
    Prepaid expenses and other current assets..............................        (16)                    (74)
    Other assets...........................................................       (266)                     34
    Accounts payable.......................................................        238                     210
    Accrued payroll and other expenses.....................................        162                     556
    Accrued commissions....................................................       (131)                    106
    Income taxes payable...................................................        277                      (1)
    Other accrued liabilities..............................................       (769)                 (1,006)
    Deferred revenues......................................................        433                   1,835
                                                                             ---------               ---------
     Net cash provided by (used in) operating activities...................      3,478                  (1,716)

Investing activities:
    Purchases of equipment and leasehold improvements......................       (942)                   (531)
    Purchase of short-term investments.....................................       (972)                 (1,596)
    Maturities of short-term investments...................................      1,534                   3,861
                                                                             ---------               ---------
     Net cash used in (provided in) investment activities..................       (380)                  1,734

Financing activities:
     Net sale (repurchase) of common stock.................................        112                    (515)
                                                                             ---------               ---------
Increase (decrease) in cash and cash equivalents...........................      3,210                    (497)
Cash and cash equivalents at beginning of period...........................      7,664                   8,165
                                                                             ---------               ---------
Cash and cash equivalents at end of period.................................    $10,874                  $7,668
                                                                             =========               =========
</TABLE>

                      See notes to financial statements.

                                       5
<PAGE>

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


1.   Basis of Presentation

     The accompanying unaudited consolidated financial statements at January 1,
     2000 and for the three months ended January 1, 2000, 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 2, 1999
     included in the Form 10-K as filed with the Securities and Exchange
     Commission on December 20, 1999.  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 month period ended
     January 1, 2000 are not necessarily indicative of results expected for the
     full year.

     Certain reclassifications, none of which affected net income, have been
     made to prior year's amounts to conform to the current year's presentation.


2.   Inventories

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


                                               January 1,     October 2,
                                                  2000           1999
                                                ------         ------

            Raw materials                       $  698         $  818
            Work-in-process                      1,388          1,435
            Finished goods                       1,184          1,202
                                                ------         ------
                                                $3,270         $3,455
                                                ======         ======

3.   Net Income Per Share

     The computation of basic net income per share for the periods presented is
     derived from the information on the face of the income statement, and there
     are no reconciling items in either the numerator or denominator.
     Additionally, there are no reconciling items in the numerator used to
     compute dilutive net income per share.  The total shares used in the
     denominator of the diluted net income per share calculation includes
     1,102,000 and 342,000 incremental common shares attributable to outstanding
     options for the three months ended January 1, 2000 and January 2, 1999,
     respectively.

                                       6
<PAGE>

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

4.   Comprehensive Income

     Comprehensive income for the three month periods  ending January 1, 2000
     and January 2, 1999 are as follows (in thousands):


                                              Three Months
                                                 Ended
                                      ------------------------------
                                        January 1,       January 2,
                                          2000              1999
                                      -------------    -------------

              Net income as reported     $1,093              $  52

              Accumulated translation
                  adjustments               (78)                84
                                      --------------   -------------

              Comprehensive income       $1,015              $ 136
                                      ==============   =============

5.   Subsequent Events

     Subsequent to January 1, 2000, the Company entered into a commitment to
     sign a line of credit with its bank.  Under the terms of the pending
     agreement, the Company will be able to utilize up to $3,000,000 for working
     capital purposes and an additional $1,500,000 for capital acquisitions.

     In addition, the Company signed a new facility lease agreement for the
     Company's principal executive offices.  Under the new lease the Company
     will have approximately 106,000 square feet of leased office building space
     in San Jose, California.  The lease term is for 10 years with options to
     renew for up to an additional 10 years.  The Company will be relocating to
     the new facility in the later part of the calendar 2000 year.  Future
     minimum payments under the lease are as follows (in thousands):

              Fiscal Year         Amount
              -----------         ------

              Year 1              $ 2,010
              Year 2                2,010
              Year 3                2,010
              Year 4                2,191
              Year 5                2,191
              Thereafter           11,811
                                  -------
                                  $22,223
                                  =======

                                       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 first quarter of fiscal 2000 were $15,405,000 representing
a 36% increase over the same quarter of the prior year. The increase was a
result of increases in both product and maintenance revenues. Product revenues
increased as result of increased emulation sales during the quarter. Emulation
revenues increased approximately 110% over the prior year's quarter as the
product is being increasingly accepted in the marketplace. For the second
straight quarter emulation product revenues have surpassed the Voyager product
system sales. The Company anticipates this trend to continue as it expects
additional growth within its emulation products with flat to lower growth in its
simulation products.

Maintenance revenues have increased due to the Company's current Voyager system
installed base and the Company's increasing emulation system installed base
which has resulted in an overall higher installed base of systems being
maintained. However, it should be noted that the rate of Voyager systems
renewals is expected to be lower than in the past and such decrease may impact
overall maintenance revenue levels in future periods.

International sales for the quarter totaled $7,687,000 or approximately 50% of
total revenues. International revenues for the quarter increased 66% over the
prior year first quarter. The increase in revenues is primarily due to a
resurgence of demand in all international areas. Japan has shown an increase of
71% over the prior year quarter which supports its movement from the sluggish
results in the past. The Company anticipates increasing revenues in all foreign
locations, however, the Company believes that international revenues should
approximate 40% of total revenues in future periods.

Gross Profit Margins

Gross profit margins for the quarter ended January 1, 2000 were 76% and are
comparable with the prior year quarter. Both product margins and maintenance
margins are consistent with the prior year. The Company expects margins to
increase slightly over the course of the year as the Company expects to realize
greater manufacturing efficiencies from higher revenues as well as the
anticipation of shipment of higher margin products.

                                       8
<PAGE>

Research and Development Expenses

Research and development expenses for the three month period ending January 1,
2000 were approximately $3,254,000 or 21% of net revenues. This represented an
increase of 8% over the first quarter of 1999. Research and development expenses
are impacted by increased salaries and consulting costs as well as the timing of
the development of prototype products. The Company expects that research and
development expenses will continue to increase as the Company initiates certain
prototype projects in the upcoming months.

Sales and Marketing Expenses

Sales and marketing expenses increased from $4,604,000, or 41% of net revenues,
in the first quarter of fiscal 1999 to $5,921,000, or 38% of net revenues, for
the first quarter of fiscal 2000. The increases are a result of increased
commissions, as certain salesmen exceeded their quarterly quotas, increased rep
commissions, focal increases and other selling costs.

General and Administrative Expenses

General and administrative costs were $1,053,000 or 7% of net revenues and were
comparable in absolute dollars with the same quarter from fiscal 1999 and
slightly lower when compared as a percentage of revenues. General and
administrative costs are expected to remain flat as a percentage of revenues
over the remainder of fiscal 2000.

Income Taxes

The Company's effective tax rate on the consolidated pretax income for the three
month period ended January 1, 2000 is 25%, as compared to an effective tax rate
of zero percent for the same three month period in the prior year. The Company's
2000 effective tax rate for the three month period ended January 1, 2000 differs
from the federal statutory rate primarily due to benefits associated with its
net operating loss carryforward. The Company's 1999 effective tax rate for the
three month period ended January 2, 1999 differs from the federal statutory rate
primarily due to benefits associated with its net operating loss carryforward.

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 January 1, 2000, the impact of such hedging arrangements have been
immaterial to the Company operations.

                                       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 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.

Sales Trends - Over the past several years the marketplace for the Company's
------------
products has evolved substantially. The Company has seen a significant reduction
in sales of its simulation products as revenues have declined from approximately
$37,044,000 in fiscal 1997 to approximately $19,463,000 in fiscal 1999. While
the decrease is due in part to the evolution of the market, the primary cause of
the decrease is the result of the Company's focus on its new emerging product
line of emulation solutions. The Company has seen its revenues from its
emulation products increase from approximately $6,000,000 in fiscal 1997 to over
$20,000,000 in fiscal 1999. The Company anticipates that the simulation product
revenue will continue to decrease, however, on a slower pace over the next year
and its emulation revenues will increase resulting in increased sales overall.
There can be no assurance that the Company will be able to maintain these
expected trends. These trends will be dependent upon the Company introducing new
products and methodologies. Furthermore, increased overall 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, the
ability of the Company's products to shorten overall customer design cycles and
increased industry acceptance of the Company's verifications solutions. Because
the market for hardware-assisted verification products is evolving, it is
difficult to predict with any assurance whether the markets for such solutions
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
and maintain the market acceptance required to maintain revenue growth and
profitability in the future.

                                      10
<PAGE>

New Product Development - To obtain the expected revenue growth, the
-----------------------
Company needs to continue to invest in new product development. The Company has
focused most of its development resources on its emulation products. 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 released its second-
generation emulation product late in the fourth quarter of fiscal 1998. During
fiscal 1999, the Company released its third-generation emulation product, which
provides a five million-gate emulation solution. 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 as well as other
verification products, and as the Company continues to develop such products,
which are based on the new technology, there can be no assurance that the
enhanced products or other developed products resulting from this development
will provide the necessary solutions for customer design verification needs, be
of acceptable quality or achieve further market acceptance. The success of the
Company in developing, introducing, selling and supporting verification 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.
Furthermore, the absence of performance problems or other difficulties that may
require design modifications and related expenses will contribute to overall
success otherwise such issues may hinder or damage market acceptance of the
products. While the Company's verification systems are designed to provide cost
and ease of use advantages intended to broaden the market for hardware-assisted
verification, 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 such
verification solutions will broaden beyond the current set of users.

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. The Company has developed certain of the technology
into new products and the resources obtained in this transaction have positively
impacted the Company's product development deadlines. However, the Company has
significant development risk with respect to the continued incorporation of the
acquired technology into future products. Such effort will result in increased
spending on research and development as the Company attempts to continue to meet
its goals and deadlines. There can be no assurance 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
assurance that the resulting new products will adequately meet the requirements
of the marketplace.

                                      11
<PAGE>

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 its
verification products. The Company currently competes with traditional software
verification methodologies, including product offerings sold by Cadence,
Synopsis and Mentor Graphics. The Company's main competition for the sale of
emulation systems is Quickturn/Cadence. The Company expects competition in the
market for verification tools to increase as other companies attempt to
introduce new 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 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 those
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


                                      12


<PAGE>

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 verification 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 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.

                                      13





<PAGE>

Customer Concentration - A relatively limited number of customers have
----------------------
historically accounted for a substantial portion of the Company's net revenues.
During fiscal 1999, 1998 and 1997, sales to the Company's top ten customers
accounted for approximately 60%, 45% and 52%, 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, classification 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 completed its assessment and testing for Year 2000 compliance within its
current product lines and the Company believes all existing products to be
compliant. 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. To
date, the Company has not had any issues with respect to year 2000 concerns. The
Company will continue to evaluate the status of its systems and products to
ensure that any Year 2000 issues that may arise in the future are readily
addressed.

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 increased to $13,182,000 at January 1, 2000 from $10,534,000 at
October 2, 1999. The increase was a result of $3,478,000 of cash provided by
operating activities, $942,000 of cash used in investing activities (excluding
short-term investment activities) and $112,000 of cash provided by financing
activities.

Operating Activities - The Company's operating activities provided cash of
--------------------
$3,478,000 during the first three months of fiscal 2000. The $3,478,000 of
cash provided by operations was primarily due to net income adjusted for
depreciation, amortization and deferred rent, decreases in accounts receivable,
inventory, combined with increases in accounts payable, deferred revenues, taxes
payable and accrued payroll and related expenses partially offset by a decrease
in accrued commissions and other accrued expenses.

                                      14
<PAGE>

Investing Activities - Net cash used in investing activities for the first three
--------------------
months of 2000 was $380,000. The $380,000 of cash used was primarily the result
of $1,534,000 obtained from maturities of short-term investment offset by
purchases of short-term investments of $972,000 and acquisition of capital
equipment of $942,000. For each period presented, capital expenditures were
primarily for evaluation equipment and engineering workstations.

Financing Activities - Net cash provided by financing activities for the three
--------------------
months ended January 1, 2000, was $112,000 and was primarily related to the net
purchases of stock during the three months. The Company did not repurchase any
shares under its existing stock repurchase program during the quarter ended
January 1, 2000.

The Company's primary unused sources of funds at January 1, 2000 consisted of
$10,874,000 of cash and cash equivalents, in addition to $2,308,000 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 assurance that such financing will be available,
if at all, 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
          /a filed on January 29, 1999.

10.24     Agreement dated April 11, 1997, by and between the
          Company and Robert Hum (Incorporated by reference
          to Exhibit 1 of the Company's report of Form 8-A
          as filed on January 29, 1999).

10.25     Agreement dated February 2, 1999, by and between
          the Company and Thomas N. Gardner (Incorporated by
          reference to Exhibit 10.25 of the Company's
          quarterly report on Form 10-Q for the quarter
          ended July 3, 1999).

10.26     Agreement dated February 3, 1999, by and between
          the Company and Nader Fathi (Incorporated by
          reference to Exhibit 10.26 of the Company's
          quarterly report on Form 10-Q for the quarter
          ended July 3, 1999).

27.1      Financial Data Schedule



(b) REPORTS ON FORM 8-K

          NONE

                                       19
<PAGE>

                                  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: February 10, 2000                 /s/ Joseph W. Rockom
                                        ------------------------------------
                                        (JOSEPH W. ROCKOM CFO)
                                        Principal Financial Officer,
                                        Duly Authorized Officer

                                       20