##### Table of Contents



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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




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FORM 10-Q

(Mark One)



|      |                                                                                                                                      
|----- | -------------------------------------------------------------------------------------------------------------------------------------
|[X]   | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarter ended June 30, 2001 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



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IKOS SYSTEMS, INC.

(Exact name of registrant as specified in its charter)


|                                                                           |  |                                                
|-------------------------------------------------------------------------- |  | -----------------------------------------------
|Delaware
(State or other jurisdiction of
incorporation or organization)    |  | 77-0100318
(I.R.S. Employer
Identification No.)
|                                                                          
|79 Great Oaks Blvd., San Jose, CA
(Address of principal executive offices) |  | 95119
(zip code)                               

Registrants telephone number, including area code:
(408) 284-0400

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 |  | 9,059,000                        
|(Title of Class)            |  | (Outstanding as of June 30, 2001)



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TABLE OF CONTENTS



|                          |                                                                                               |                                                                  |  |  |  |  |  | 
|------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------------------- |  |  |  |  |  | 
|                          |                                                                                               | CONSOLIDATED BALANCE SHEETS                                     
|                          |                                                                                               | CONSOLIDATED STATEMENTS OF OPERATIONS                           
|                          |                                                                                               | CONSOLIDATED STATEMENTS OF CASH FLOWS                           
|                          |                                                                                               | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|                          | ITEM 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
|                          | ITEM 3. Quantitative and Qualitative Disclosures About Market Risk                           
|PART II OTHER INFORMATION
|                          | ITEM 1 Legal Proceedings                                                                     
|                          | ITEMS 2  4 Not applicable                                                                   
|                          | ITEM 5 Other Information                                                                     
|                          | ITEM 6 Exhibits and Reports on Form 8-K                                                      
|INDEX TO EXHIBITS        
|SIGNATURES               
|Exhibit 2.3              
|EXHIBIT 10.21            

IKOS SYSTEMS, INC.
FORM 10-Q
QUARTER ENDED JUNE 30, 2001

|         |                       |                                                                                                                          |    |     
|-------- | --------------------- | ------------------------------------------------------------------------------------------------------------------------ | -- | ----
|         |                       |                                                                                                                          |    | Page
|         |                       |                                                                                                                          |    |     
|         |                       | INDEX                                                                                                                    |    |     
|        
|        
|        
|        
|Part I:  | Financial Information |                                                                                                                          |   
|        
|        
|        
|        
|         | Item 1:               | Financial Statements                                                                                                     |   
|        
|        
|        
|        
|         |                       | Condensed Consolidated Balance Sheets at
June 30, 2001 (unaudited) and September 30, 2000                                |    | 3   
|        
|        
|        
|        
|         |                       | Unaudited Condensed Consolidated Statements of Income
for the three and nine months ended June 30, 2001
and July 1, 2000 |    | 4   
|        
|        
|        
|        
|         |                       | Unaudited Condensed Consolidated Statements of Cash
Flows for the nine months ended June 30, 2001
and July 1, 2000       |    | 5   
|        
|        
|        
|        
|         |                       | Notes to Unaudited Condensed Consolidated Financial
Statements                                                           |    | 6   
|        
|        
|        
|        
|         | Item 2:               | Managements Discussion and Analysis
of Financial Condition and Results of Operations                                    |    | 9   
|        
|        
|        
|        
|         | Item 3:               | Quantitative and Qualitative Disclosures
About Market Risk                                                               |    | 16  
|        
|        
|        
|        
|Part II: | Other Information     |                                                                                                                          |   
|        
|        
|        
|        
|         | Item 1:               | Legal Proceedings                                                                                                        |    | 16  
|         | Item 5:               | Other Information                                                                                                        |    | 17  
|        
|        
|        
|        
|         | Item 6:               | Exhibits and Reports on Form 8-K                                                                                         |    | 17  
|        
|        
|        
|        
|         |                       | Signatures                                                                                                               | 19





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##### Table of Contents






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

|                                     |                                                                                                                                     |                                 |                                                   |         |       |             |        |               |        |         |   | 
|------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------- | ------------------------------- | ------------------------------------------------- | ------- | ----- | ----------- | ------ | ------------- | ------ | ------- | - | 
|                                     |                                                                                                                                     |                                 |                                                   |         |       | June 30,    |        | September 30,
|                                     |                                                                                                                                     |                                 |                                                   |         |       | 2001        |        | 2000         
|                                     |                                                                                                                                     |                                 |                                                   |         |       |             |        |              
|                                     |                                                                                                                                     |                                 |                                                   |         |       | (Unaudited) |        |               |        |        
|ASSETS                               |                                                                                                                                     |                                 |                                                   |         |       |             |        |              
|                                    
|                                    
|                                    
|                                    
|Current assets:                      |                                                                                                                                     |                                 |                                                   |         |       |             |        |              
|                                    
|                                    
|                                    
|                                    
|                                     | Cash and cash equivalents                                                                                                           |                                 | $                                                 | 9,344   |       |             | $      | 12,032        |       
|                                    
|                                    
|                                    
|                                    
|                                     | Short-term investments                                                                                                              |                                 |                                                   | 7,809   |       |             |        | 7,771         |       
|                                    
|                                    
|                                    
|                                    
|                                     | Accounts receivable (net of allowances for
doubtful accounts of $827 and $645, respectively)                                        |                                 |                                                   | 11,343  |       |             |        | 19,716        |       
|                                    
|                                    
|                                    
|                                    
|                                     | Inventories                                                                                                                         |                                 |                                                   | 8,527   |       |             |        | 3,997         |       
|                                    
|                                    
|                                    
|                                    
|                                     | Prepaid expenses and other assets                                                                                                   |                                 |                                                   | 1,048   |       |             |        | 578           |       
|                                     |                                                                                                                                     |                                 |                                                   |         |       |             |        |              
|                                     |                                                                                                                                     |                                 | Total current assets                              |         |       | 38,071      |        |               |        | 44,094  |  
|                                    
|                                    
|                                    
|                                    
|                                     | Equipment and leasehold improvements                                                                                               
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                                                                     | Office and evaluation equipment |                                                   |         | 6,305 |             |        |               | 6,782  |        
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                                                                     | Machinery and equipment         |                                                   |         | 7,626 |             |        |               | 11,487 |        
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                                                                     | Leasehold improvements          |                                                   |         | 3,142 |             |        |               | 2,640  |        
|                                     |                                                                                                                                     |                                 |                                                   |         |       |             |        |              
|                                     |                                                                                                                                     |                                 | 17,073                                            |         |       |             | 20,909 |              
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                                                                     |                                 | Less allowances for depreciation and amortization |         |       | (9,549      | )      |               |        | (14,534 | )
|                                     |                                                                                                                                     |                                 |                                                   |         |       |             |        |              
|                                     |                                                                                                                                     |                                 | 7,524                                             |         |       |             | 6,375  |              
|                                    
|                                    
|                                    
|                                    
|                                     | Intangible assets (net of amortization of
$1,050 and $924, respectively)                                                            |                                 |                                                   | 757     |       |             |        | 883           |       
|                                    
|                                    
|                                    
|                                    
|                                     | Other assets                                                                                                                        |                                 |                                                   | 1,100   |       |             |        | 653           |       
|                                     |                                                                                                                                     |                                 |                                                   |         |       |             |        |              
|                                     |                                                                                                                                     | $                               | 47,452                                            |         |       | $           | 52,005 |              
|                                     |                                                                                                                                     |                                 |                                                   |         |       |             |        |              
|LIABILITIES AND STOCKHOLDERS EQUITY |                                                                                                                                     |                                 |                                                   |         |       |             |        |              
|                                    
|                                    
|                                    
|                                    
|Current liabilities:                 |                                                                                                                                     |                                 |                                                   |         |       |             |        |              
|                                    
|                                    
|                                    
|                                    
|                                     | Notes payable                                                                                                                       |                                 | $                                                 |        |       |             | $      | 1,809         |       
|                                    
|                                    
|                                    
|                                    
|                                     | Accounts payable                                                                                                                    |                                 |                                                   | 5,021   |       |             |        | 5,446         |       
|                                    
|                                    
|                                    
|                                    
|                                     | Accrued payroll and related expenses                                                                                                |                                 |                                                   | 3,811   |       |             |        | 3,549         |       
|                                    
|                                    
|                                    
|                                    
|                                     | Accrued commissions                                                                                                                 |                                 |                                                   | 393     |       |             |        | 2,094         |       
|                                    
|                                    
|                                    
|                                    
|                                     | Income taxes payable                                                                                                                |                                 |                                                   | 368     |       |             |        | 3,252         |       
|                                    
|                                    
|                                    
|                                    
|                                     | Other accrued liabilities                                                                                                           |                                 |                                                   | 2,048   |       |             |        | 2,511         |       
|                                    
|                                    
|                                    
|                                    
|                                     | Deferred revenues                                                                                                                   |                                 |                                                   | 11,754  |       |             |        | 8,388         |       
|                                     |                                                                                                                                     |                                 |                                                   |         |       |             |        |              
|                                     |                                                                                                                                     |                                 | Total current liabilities                         |         |       | 23,395      |        |               |        | 27,049  |  
|                                    
|                                    
|                                    
|                                    
|Accrued rent                         |                                                                                                                                     |                                 | 545                                               |         |       |             | 92     |              
|                                    
|                                    
|                                    
|                                    
|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, 9,059 and 8,797 shares
issued and 9,059 and 8,778 outstanding, respectively |                                 |                                                   | 90      |       |             |        | 88            |       
|                                    
|                                    
|                                    
|                                    
|                                     | Additional paid-in capital                                                                                                          |                                 |                                                   | 59,076  |       |             |        | 57,791        |       
|                                    
|                                    
|                                    
|                                    
|                                     | Treasury stock, at cost, no shares in
2001 and 19 in 2000                                                                           |                                 |                                                   |        |       |             |        | (126          | )     
|                                    
|                                    
|                                    
|                                    
|                                     | Accumulated adjustments to comprehensive income                                                                                     |                                 |                                                   | (1,251  | )     |             |        | (842          | )     
|                                    
|                                    
|                                    
|                                    
|                                     | Accumulated deficit                                                                                                                 |                                 |                                                   | (34,403 | )     |             |        | (32,047       | )     
|                                     |                                                                                                                                     |                                 |                                                   |         |       |             |        |              
|                                     |                                                                                                                                     |                                 | Total stockholders equity                        |         |       | 23,512      |        |               |        | 24,864  |  
|                                     |                                                                                                                                     |                                 |                                                   |         |       |             |        |              
|                                     |                                                                                                                                     | $                               | 47,452                                            |         |       | $           | 52,005 |              
|                                     |                                                                                                                                     |                                 |                                                   |         |       |             |        |              

See notes to financial statements

3



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##### Table of Contents






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

|                                                                        |                             |                          |        |                    |         |                   |       |          |        |         |        |        |         |   |       |        |        | 
|----------------------------------------------------------------------- | --------------------------- | ------------------------ | ------ | ------------------ | ------- | ----------------- | ----- | -------- | ------ | ------- | ------ | ------ | ------- | - | ----- | ------ | ------ | 
|                                                                        |                             |                          |        | Three Months Ended |         | Nine Months Ended
|                                                                        |                             |                          |        |                    |         |                  
|                                                                        |                             |                          |        | June 30,           |         | July 1,           |       | June 30, |        | July 1,
|                                                                        |                             |                          |        | 2001               |         | 2000              |       | 2001     |        | 2000   
|                                                                        |                             |                          |        |                    |         |                   |       |          |        |        
|Net revenues                                                            |                             |                          |        |                    |         |                   |       |          |        |         |        |        |         |   |       |       
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|                                                                        | Product                     |                          | $      | 5,271              |         |                   | $     | 13,876   |        |         | $      | 33,453 |         |   | $     | 37,328 |       
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|                                                                        | Maintenance                 |                          |        | 5,789              |         |                   |       | 4,567    |        |         |        | 16,026 |         |   |       | 13,319 |       
|                                                                        |                             |                          |        |                    |         |                   |       |          |        |         |        |        |         |   |       |       
|                                                                        |                             | Total net revenues       |        |                    | 11,060  |                   |       |          | 18,443 |         |        |        | 49,479  |   |       |        | 50,647 | 
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|Cost of revenues                                                        |                             |                          |        |                    |         |                   |       |          |        |         |        |        |         |   |       |       
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|                                                                        | Product                     |                          |        | 2,713              |         |                   |       | 2,834    |        |         |        | 8,964  |         |   |       | 7,995  |       
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|                                                                        | Maintenance                 |                          |        | 1,021              |         |                   |       | 1,102    |        |         |        | 3,301  |         |   |       | 3,340  |       
|                                                                        |                             |                          |        |                    |         |                   |       |          |        |         |        |        |         |   |       |       
|                                                                        |                             | Total cost of revenues   |        |                    | 3,734   |                   |       |          | 3,936  |         |        |        | 12,265  |   |       |        | 11,335 | 
|                                                                        |                             |                          |        |                    |         |                   |       |          |        |         |        |        |         |   |       |       
|                                                                        |                             | Gross profit             |        |                    | 7,326   |                   |       |          | 14,507 |         |        |        | 37,214  |   |       |        | 39,312 | 
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|Operating expenses:                                                     |                             |                          |        |                    |         |                   |       |          |        |         |        |        |         |   |       |       
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|                                                                        | Research and development    |                          |        | 4,359              |         |                   |       | 4,198    |        |         |        | 13,419 |         |   |       | 11,405 |       
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|                                                                        | Sales and marketing         |                          |        | 6,459              |         |                   |       | 6,161    |        |         |        | 20,959 |         |   |       | 17,842 |       
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|                                                                        | General and administration  |                          |        | 2,818              |         |                   |       | 1,231    |        |         |        | 5,864  |         |   |       | 3,572  |       
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|                                                                        | Amortization of intangibles |                          |        | 42                 |         |                   |       | 42       |        |         |        | 126    |         |   |       | 167    |       
|                                                                        |                             |                          |        |                    |         |                   |       |          |        |         |        |        |         |   |       |       
|                                                                        |                             | Total operating expenses |        |                    | 13,678  |                   |       |          | 11,632 |         |        |        | 40,368  |   |       |        | 32,986 | 
|                                                                        |                             |                          |        |                    |         |                   |       |          |        |         |        |        |         |   |       |       
|Income (loss) from operations                                           |                             |                          | (6,352 | )                  |         |                   | 2,875 |          |        |         | (3,154 | )      |         |   | 6,326 |       
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|Interest and other income                                               |                             |                          | 687    |                    |         |                   | 198   |          |        |         | 1,298  |        |         |   | 389   |       
|                                                                        |                             |                          |        |                    |         |                   |       |          |        |         |        |        |         |   |       |       
|Income (loss) before provision for income taxes                         |                             |                          | (5,665 | )                  |         |                   | 3,073 |          |        |         | (1,856 | )      |         |   | 6,715 |       
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|Provision (benefit) for income taxes                                    |                             |                          | (475   | )                  |         |                   | 770   |          |        |         | 500    |        |         |   | 1,675 |       
|                                                                        |                             |                          |        |                    |         |                   |       |          |        |         |        |        |         |   |       |       
|                                                                        |                             | Net income (loss)        |        |                    | ($5,190 | )                 |       | $        | 2,303  |         |        |        | ($2,356 | ) |       | $      | 5,040  | 
|                                                                        |                             |                          |        |                    |         |                   |       |          |        |         |        |        |         |   |       |       
|Basic net income (loss) per share                                       |                             |                          | ($0.57 | )                  |         | $                 | 0.27  |          |        |         | ($0.26 | )      |         | $ | 0.59  |       
|                                                                        |                             |                          |        |                    |         |                   |       |          |        |         |        |        |         |   |       |       
|Common and common equivalent shares used
in computing per share amounts |                             |                          | 9,053  |                    |         |                   | 8,611 |          |        |         | 8,927  |        |         |   | 8,520 |       
|                                                                        |                             |                          |        |                    |         |                   |       |          |        |         |        |        |         |   |       |       
|Dilutive net income (loss) per share                                    |                             |                          | ($0.57 | )                  |         | $                 | 0.23  |          |        |         | ($0.26 | )      |         | $ | 0.52  |       
|                                                                        |                             |                          |        |                    |         |                   |       |          |        |         |        |        |         |   |       |       
|Common and common equivalent shares used
in computing per share amounts |                             |                          | 9,053  |                    |         |                   | 9,897 |          |        |         | 8,927  |        |         |   | 9,781 |       
|                                                                        |                             |                          |        |                    |         |                   |       |          |        |         |        |        |         |   |       |       

See notes to financial statements

4



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##### Table of Contents






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

|                                                 |                                                                                          |                                           |                                                     |         |                   |        |         |        |        |        |  
|------------------------------------------------ | ---------------------------------------------------------------------------------------- | ----------------------------------------- | --------------------------------------------------- | ------- | ----------------- | ------ | ------- | ------ | ------ | ------ | -
|                                                 |                                                                                          |                                           |                                                     |         | Nine Months Ended
|                                                 |                                                                                          |                                           |                                                     |         |                  
|                                                 |                                                                                          |                                           |                                                     |         | June 30,          |        | July 1,
|                                                 |                                                                                          |                                           |                                                     |         | 2001              |        | 2000   
|                                                 |                                                                                          |                                           |                                                     |         |                   |        |        
|Operating activities:                            |                                                                                          |                                           |                                                     |         |                   |        |         |       
|                                                
|                                                
|                                                
|                                                
|                                                 | Net income (loss)                                                                        |                                           |                                                     | ($2,356 | )                 |        | $       | 5,040  |       
|                                                
|                                                
|                                                
|                                                
|                                                 | Adjustments to reconcile net income (loss) to net
cash provided by operating activities: |                                           |                                                     |         |                   |        |         |        |       
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                                          | Depreciation and amortization             |                                                     |         | 2,554             |        |         |        | 2,072  |       
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                                          | Gain on sale of capital equipment         |                                                     |         | (17               | )      |         |        |       |       
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                                          | Accumulated translation adjustments       |                                                     |         | (409              | )      |         |        | (249   | )     
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                                          | Accrued rent                              |                                                     |         | 453               |        |         |        | (64    | )     
|                                                
|                                                
|                                                
|                                                
|                                                 | Changes in operating assets and liabilities:                                             |                                           |                                                     |         |                   |        |         |        |       
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                                          | Accounts receivable                       |                                                     |         | 8,373             |        |         |        | (2,348 | )     
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                                          | Inventories                               |                                                     |         | (4,530            | )      |         |        | (280   | )     
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                                          | Prepaid expenses and other current assets |                                                     |         | (470              | )      |         |        | 252    |       
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                                          | Other assets                              |                                                     |         | (447              | )      |         |        | 93     |       
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                                          | Accounts payable                          |                                                     |         | (425              | )      |         |        | (349   | )     
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                                          | Accrued payroll and related expenses      |                                                     |         | 262               |        |         |        | 215    |       
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                                          | Accrued commissions                       |                                                     |         | (1,701            | )      |         |        | (36    | )     
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                                          | Income taxes payable                      |                                                     |         | (2,884            | )      |         |        | 1,380  |       
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                                          | Other accrued liabilities                 |                                                     |         | (463              | )      |         |        | (681   | )     
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                                          | Deferred revenues                         |                                                     |         | 3,366             |        |         |        | 2,447  |       
|                                                 |                                                                                          |                                           |                                                     |         |                   |        |         |       
|                                                 |                                                                                          |                                           | Net cash provided by operating activities           |         |                   | 1,306  |         |        |        | 7,492  |  
|                                                
|                                                
|                                                
|                                                
|Investing activities:                            |                                                                                          |                                           |                                                     |         |                   |        |         |       
|                                                
|                                                
|                                                
|                                                
|                                                 | Purchases of equipment and leasehold improvements                                        |                                           |                                                     | (3,560  | )                 |        |         | (1,700 | )     
|                                                
|                                                
|                                                
|                                                
|                                                 | Purchase of short-term investments                                                       |                                           |                                                     | (14,640 | )                 |        |         | (4,999 | )     
|                                                
|                                                
|                                                
|                                                
|                                                 | Maturities of short-term investments                                                     |                                           |                                                     | 14,602  |                   |        |         | 3,843  |       
|                                                 |                                                                                          |                                           |                                                     |         |                   |        |         |       
|                                                 |                                                                                          |                                           | Net cash used in investment activities              |         |                   | (3,598 | )       |        |        | (2,856 | )
|                                                
|                                                
|                                                
|                                                
|Financing activities:                            |                                                                                          |                                           |                                                     |         |                   |        |         |       
|                                                
|                                                
|                                                
|                                                
|                                                 | Principal payments on short-term borrowings                                              |                                           |                                                     | (1,809  | )                 |        |         |       |       
|                                                
|                                                
|                                                
|                                                
|                                                 | Sale of common stock                                                                     |                                           |                                                     | 1,413   |                   |        |         | 977    |       
|                                                 |                                                                                          |                                           |                                                     |         |                   |        |         |       
|                                                 |                                                                                          |                                           | Net cash provided by (used in) financing activities |         |                   | (396   | )       |        |        | 977    |  
|                                                
|                                                
|                                                
|                                                
|Increase (decrease) in cash and cash equivalents |                                                                                          |                                           |                                                     |         |                   |        |         |       
|                                                 |                                                                                          |                                           |                                                     |         |                   |        |         |       
|Cash and cash equivalents at beginning of period |                                                                                          |                                           | (2,688                                              | )       |                   |        | 5,613   |       
|                                                
|                                                
|                                                
|                                                
|Cash and cash equivalents at end of period       |                                                                                          |                                           | 12,032                                              |         |                   |        | 7,664   |       
|                                                 |                                                                                          |                                           |                                                     |         |                   |        |         |       
|                                                 |                                                                                          | $                                         | 9,344                                               |         |                   | $      | 13,277  |       
|                                                 |                                                                                          |                                           |                                                     |         |                   |        |         |       

See notes to consolidated financial statements.

5



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##### Table of Contents






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



|1. |  | Basis of Presentation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The accompanying unaudited consolidated financial statements at June 30,
2001 and for the three and nine months ended June 30, 2001 and July 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 September 30, 2000 included in the Company's Form 10-K as filed with the
Securities and Exchange Commission on December 21, 2000. 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 months ended June 30, 2001 are not necessarily indicative of
results expected for the full fiscal year.
|  
|2. |  | Inventories                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|  
|   |  | Inventories are stated at the lower of cost (first-in, first-out) or
market and consisted of (in thousands):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

|                |  |          |       |               |  |   |       | 
|--------------- |  | -------- | ----- | ------------- |  | - | ----- | 
|                |  | June 30, |       | September 30,
|                |  | 2001     |       | 2000         
|                |  |          |       |              
|Raw materials   |  | $        | 822   |               |  | $ | 951   | 
|               
|               
|               
|               
|Work-in-process |  |          | 5,217 |               |  |   | 1,386 | 
|               
|               
|               
|               
|Finished goods  |  |          | 2,488 |               |  |   | 1,660 | 
|                |  |          |       |               |  |   |       | 
|                |  | $        | 8,527 |               |  | $ | 3,997 | 
|                |  |          |       |               |  |   |       | 



|3. |  | 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 statement of
operations, 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
incremental common shares attributable to outstanding options for the
three and nine month periods ended July 1, 2000 included in the total
shares used in the denominator of the diluted net income per share
calculation are 1,395,000 and 1,249,000 respectively. Due to the net
loss for the three and nine month periods ended June 30, 2001,
incremental common
shares attributable to outstanding options (assuming proceeds would be
used to purchase treasury stock) of 857,000 and 1,158,000 respectively, were not included in the
diluted net loss per share computation because the effect would have been
anti-dilutive.

6



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##### Table of Contents



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



|4. |  | Comprehensive Income (loss)                                                                                                   
|-- |  | ------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Comprehensive income (loss) for the three and nine months ending June 30,
2001 and July 1, 2000 are as follows (in thousands):

|                                    |  |                    |        |                   |  |          |       |         |  |   |        |   |  |   |       |  
|----------------------------------- |  | ------------------ | ------ | ----------------- |  | -------- | ----- | ------- |  | - | ------ | - |  | - | ----- | -
|                                    |  | Three Months Ended |        | Nine Months Ended
|                                    |  |                    |        |                  
|                                    |  | June 30,           |        | July 1,           |  | June 30, |       | July 1,
|                                    |  | 2001               |        | 2000              |  | 2001     |       | 2000   
|                                    |  |                    |        |                   |  |          |       |        
|Net income (loss) as reported       |  | $                  | (5,190 | )                 |  | $        | 2,303 |         |  | $ | (2,356 | ) |  | $ | 5,040 |  
|                                   
|                                   
|                                   
|                                   
|Accumulated translation
adjustments |  |                    | 63     |                   |  |          | (89   | )       |  |   | (409   | ) |  |   | (249  | )
|                                    |  |                    |        |                   |  |          |       |        
|Comprehensive income (loss)         |  | $                  | (5,127 | )                 |  | $        | 2,214 |         |  | $ | (2,765 | ) |  | $ | 4,791 |  
|                                    |  |                    |        |                   |  |          |       |         |  |   |        |   |  |   |       |  



|5. |  | Income Taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The Company recognized a benefit provision
of $475,000 for the three months ended June 30, 2001 and an income tax provision
of $500,000 for the nine-month period ending June 30, 2001. The benefit provision
for the three months ended June 30, 2001 is comprised of a benefit from operating
losses recorded in this period offset by foreign taxes on foreign earnings and foreign
withholding taxes. The provision for the nine-month period ending June 30, 2001
is principally comprised of foreign taxes on foreign earnings and foreign withholding taxes.
The Company's effective tax rate on the consolidated pretax income was
approximately 25% for the three and nine month periods ending July 1, 2000
and such rate differs from the federal statutory rate primarily due to benefits associated
with its net operating loss carryforward. The income tax provision is based on current tax law,
the current estimate of earnings and the expected distribution of income among various tax
jurisdictions, and is subject to change.
|  
|6. |  | Litigation and Contingencies                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|  
|   |  | On February 9, 2001, the Company filed a patent infringement complaint
against Axis Systems, Inc. (Axis) in the United States District Court in
the District of Delaware. The complaint alleges infringement by Axis of
four patents involving the Companys Virtual Wires technology, which
allows high resource utilization in FPGA-based emulators. The Company is
seeking both injunctive relief and monetary damages.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|  
|   |  | On March 22, 2001, Axis filed a patent infringement complaint against the
Company in the United States District Court for the Northern District of
California. The complaint alleges infringement by IKOS of Axiss patent
for a Simulation/Emulation System and Method, U.S. Patent No 6,009,256.
Axis claims that this patent covers technology for a single system that
provides simulation, acceleration, and emulation of complex electronic
integrated circuit and system-on-chip designs. The compliant alleges
that certain of the Companys emulation products infringe on the patent.
Axis is seeking both injunctive relief and monetary damages. The Company
believes the claim is without merit and intends to vigorously defend the
action.                                                                                                                                                                                                                                                                                         

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|7. |  | Recent Accounting Pronouncements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | In December 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in
Financial Statements. IKOS is required to implement SAB 101 no later than
the quarter ending September 29, 2001. The Company is currently
evaluating the impact of SAB 101 and is uncertain as to what impact, if
any, SAB 101 will have on its revenues and results of operations. The
impact of SAB 101, if any, will be reported as a change in accounting
principle in accordance with FASB Statement No. 3. This may result in a
significant cumulative effect change in accounting adjustment that would
be reflected in the Companys results of operations for the fiscal year
ended September 29, 2001.                                                                                                                                                                                                                                                                                                                                                                                 
|  
|   |  | In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, Accounting
for Derivative Instruments and Hedging Activities, which establishes
accounting and reporting standards for derivative instruments and hedging
activities. It requires the Company to recognize all derivatives as
either assets or liabilities in the balance sheet and measure those
instruments at fair value. It further provides criteria for derivative
instruments to be designated as fair value, cash flow, or foreign
currency hedges, and establishes accounting standards for reporting
changes in the fair value of the derivative instruments. Upon adoption,
the Company was required to adjust hedging instruments to fair value in
the balance sheet and recognize the offsetting gains or losses as
adjustments to be reported in net income or other comprehensive income,
as appropriate. The Company adopted SFAS No. 133 as of October 1, 2000.
The adoption of SFAS No. 133 did not have a material effect on the
Companys results of operations or financial position.
|  
|   |  | In July 2001, the FASB issued SFAS No. 141 Business Combinations, and
SFAS No. 142, Goodwill and Other Intangible Assets. These standards
become effective for fiscal years beginning after December 15, 2001.
IKOS intends to early adopt such that beginning in the first quarter
of 2002, goodwill will no longer be
amortized but will be subject to annual impairment tests. The adoption
of SFAS No. 141 is expected to reduce the Company's amortization
of intangibles for fiscal 2002 by approximately $168,000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|  
|8. |  | Subsequent Event                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|  
|   |  | On July 2, 2001, IKOS and Synopsys, Inc. (Synopsys)
signed a merger agreement, which was amended on August 1, 2001, providing for the acquisition
by Synopsys of all outstanding shares of IKOS. The merger targeted
completion date is set for August 2002, in order to ensure Synopsys full
compliance with the terms of a five-year non-competition agreement
arising from the June 1997 sale of its prior emulation technology. Upon
closing of the transaction each shareholder of IKOS will receive Synopsys
common stock. For additional information regarding the transaction,
see the Agreement and Plan of Merger and Reorganization attached
hereto as Exhibit 2.3.                                                                                                                                                                                                                                                                                                                                                                                                                                                              

8



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##### Table of Contents






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 IKOS 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 month and nine month periods ending June 30, 2001
were $11,060,000 and $49,479,000, respectively, representing a 40% and 2%
decrease, respectively, over the same periods of the prior year. The decrease
from the prior year is the result of a decrease in product sales offset in part
by an increase in maintenance revenues. Product revenues decreased from
$13,876,000 and $37,328,000 for the three and nine month periods ending July 1,
2000, respectively, to $5,271,000 and $33,453,000 for the three and nine months
ended June 30, 2001, respectively. Product revenues declined due to the
downturn in the economy, resulting in fewer orders being placed for IKOS
products. While IKOS customers have expressed interest in IKOS products,
these customers have not placed orders with IKOS due to limited and reduced
budgets for capital expenditures. Maintenance revenues increased 27% and 20%
for the three and nine month periods ending June 30, 2001 when compared with
the same period from the prior year. The increase is primarily the result of
customers continuing to purchase maintenance contracts on current equipment and
the increasing base of IKOS verification systems in the market. IKOS
believes that until the economy improves, visibility over future revenue growth,
if any, will remain unclear.

International revenues for the three and nine month periods ending June 30,
2001, totaled $4,115,000 and $15,873,000, respectively or approximately 37% and
32% of total revenues, respectively. International revenues for the three and
nine months ending June 30, 2001 decreased 40% and 17%, respectively as a
result of the weakened global economy. Consistent with overall
revenues, IKOS believes international revenues should improve when the economy
improves.

Gross Profit Margins

Gross profit margins for the three and nine month periods ended June 30, 2001
were 66% and 75%, respectively. Gross profit margins for the three and nine
month periods end July 1, 2000 were 79% and 78%, respectively. Because of the
fixed nature of certain manufacturing costs, the lower than expected revenues
during the quarter resulted in a decline in margins when compared with the
prior year.

Research and Development Expenses

Research and development expenses for the three and nine month periods ending
June 30, 2001 were approximately $4,359,000 and $13,419,000, respectively,
representing 39% and 27% of revenues, respectively. Research and development
expenses for the three and nine month periods ending July 1, 2000 were
approximately $4,198,000 and $11,405,000, respectively, representing 23% of
revenues for both periods. The increases for both the three and nine months
ended June 30,

9



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##### Table of Contents



2001, as a percentage of revenues, are due to the overall increase in research
and development expenses against lower than expected revenues for the quarter
and nine month periods. The increases in absolute dollars for the three and
nine month periods are primarily related to increased payroll and related costs
due to increased headcount and increased consulting fees. In light of the
current economic climate, IKOS is restricting hiring and capital spending until
the economic climate improves.

Sales and Marketing Expenses

Sales and marketing expenses for the three and nine month periods ending June
30, 2001 were approximately $6,459,000 and $20,959,000, respectively,
representing 58% and 42% of revenues, respectively. Sales and marketing
expenses for the three and nine month periods ending July 1, 2000 were
approximately $6,161,000 and $17,842,000, respectively, representing 33% and
35% of revenues, respectively. The increases as a percentage of sales, for both
the three and nine months ended June 30, 2001, are due to the overall increase
in sales and marketing expenses against lower than expected revenues for the
quarter and nine month periods. The increases in absolute dollars over the
prior year quarter and nine months are primarily related to increased payroll
and commissions, recruiting, travel and trade show expenses. IKOS is
restricting hiring and capital spending, as well as limiting other
discretionary marketing programs to ensure that sales and marketing expenses
are in line with its revenue levels.

General and Administrative Expenses

General and administrative expenses for the three and nine month periods ending
June 30, 2001 were approximately $2,818,000 and $5,864,000, respectively,
representing 25% and 12% of revenues, respectively. General and administrative
expenses for the three and nine month periods ending July 1, 2000 were
approximately $1,231,000 and $3,572,000, respectively, representing 7% for both
periods. The increases for both the three and nine months ended June 30, 2001,
as a percentage of revenues, are due to the overall increase in general and
administrative expenses against lower than expected revenues for the three and
nine month periods. For the three and nine month periods ending June 30, 2001,
the general and administrative expenses were higher than the prior year periods
in terms of absolute dollars as a result of increased legal and professional
fees, salaries and related expenses. In addition, general and administrative
expenses included over $600,000 in charges related to the impending merger with
Synopsys.

Income Taxes

The Company recognized a benefit provision of $475,000 for the three months
ended June 30, 2001 and an income tax provision of $500,000 for the nine-month
period ending June 30, 2001. The benefit provision for the three months ended
June 30, 2001 is comprised of a benefit from operating losses recorded in this
period offset by foreign taxes on foreign earnings and foreign withholding
taxes. The provision for the nine-month period ending June 30, 2001 is
principally comprised of foreign taxes on foreign earnings and foreign
withholding taxes. The Company's effective tax rate on the consolidated pretax
income was approximately 25% for the three and nine month periods ending July 1,
2000 and such rate differs from the federal statutory rate primarily due to
benefits associated with its net operating loss carryforward. The income tax
provision is based on current tax law, the current estimate of earnings and the
expected distribution of income among various tax jurisdictions, and is subject
to change.

10



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##### Table of Contents



Other

IKOS has experienced minimal gains or losses on foreign currency translation.
With the exception of IKOS Japan operations, substantially all of its
international sales to date have been billed and collected in U.S. dollars.
IKOS pays the expenses of its international operations in local currencies and
to date IKOS has not engaged in hedging transactions with respect to such
obligations. IKOS sales in Japan are billed and collected in the Japanese
local currency. As such, IKOS 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 IKOS 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. Through June
30, 2001, the impact of such arrangements have been immaterial to IKOS
operations.

Factors that May Affect Future Results of Operations

IKOS operating results have fluctuated widely in the past from period to
period, making it difficult to rely on past quarters as indicators of future
performance.



| |  | IKOS quarterly operating results have fluctuated widely in the past and
IKOS expects them to continue to fluctuate in the future as a result of a
variety of factors, including:
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The timing of orders from customers, and the timing of
shipments to customers, for IKOS products varies. Many of IKOS
customers order on an as-needed basis and often delay issuance of
firm purchase orders. As a result, quarterly revenue and operating
results will depend on the volume and timing of orders that IKOS
receives during the quarter, which are difficult to predict.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | IKOS has a historical pattern of concentrated shipments in
the last few weeks of the quarter. This pattern is exacerbated by
the fact that IKOS recognizes product revenue when orders are
delivered and the earning process is complete, rather than ratably
over a term. This means that a failure to deliver product in a
quarter deprives such quarter of all of the revenue attributable to
such order. Therefore the timing of an order, and whether it is
shipped in one quarter or the next, can have a significant effect on
the revenue recognized for such quarter. In addition, any
concentration of sales at the end of the quarter may limit IKOS
ability to plan or adjust operating expenses and production and
inventory levels. Consequently, if anticipated shipments in any
quarter do not occur, expenditure levels could be disproportionately
high, adversely affecting IKOS operating results for that quarter.
|
| |  |  | IKOS must develop, introduce and ship new products on a
timely basis. Any failure to meet expected customer ship dates
results in deferred sales (such that IKOS recognizes revenue in a
quarter later than expected) or the failure to make a sale to a
particular customer altogether.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  |  | IKOS competes with other emulation vendors, potentially
resulting in lost or deferred sales.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  |  | IKOS must obtain key components used in its products,
including Field Programmable Gate Arrays (FPGAs) at acceptable
prices.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  |  | IKOS success depends upon the health of the semiconductor
industry and its impact on capital expenditures by customers who
design semiconductors.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       



| |  | For all of the reasons above, IKOS quarterly operating results have in the
past been and may in the future be different from the expectations of public
market analysts and investors. Because IKOS
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

11



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| |  | quarterly operating results fluctuate, IKOS believes that quarter-to-quarter
comparisons of its operating results are not necessarily meaningful and
investors should not rely on them as indicators of future performance.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

A downturn in the semiconductor industry will have a negative impact on IKOS
business.



| |  | IKOS depends on the semiconductor industry, which is historically volatile,
for sales of its emulation products. The semiconductor industry is
characterized by rapid technological change, short product life cycles,
fluctuations in manufacturing capacity and pricing and margin pressures.
These factors can adversely affect sales of IKOS products. For example,
IKOS believes that the semiconductor industry is currently in a downturn,
which has tightened capital expenditure budgets of IKOS customers and led
to a deferral of purchasing decisions and a decrease in sales to such
customers. In addition, since IKOS products are used at the verification
stage of the new semiconductor designs, and decrease in design starts by
semiconductor customers would result in lower demand for IKOS products and
could have an adverse effect on IKOS results of operations.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

IKOS depends on a limited number of customers for a significant part of its
revenues, the loss of any of which could have a material adverse effect on
IKOS business, results of operation and financial condition



| |  | During fiscal 2000, 1999 and 1998, sales to IKOS top ten customers
accounted for approximately 66%, 60% and 45%, respectively, of IKOS net
revenues. IKOS 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 IKOS results of operations.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The failure to continue to grow emulation product revenues would have a
material adverse effect on IKOS business, financial condition and results of
operations.



| |  | Over the past several years IKOS sales of simulation products have
decreased and its sales of emulation products has increased. As a result,
any failure to continue to grow its emulation revenues would have a material
adverse effect on IKOS business, financial condition and results of
operations. Increased emulation sales depends on a number of factors,
including:
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | continued increase in demand for complex integrated circuits
(ICs);                                                                                                                                                           
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | IKOS ability to effectively integrate its emulation products
with other vendors IC design tools;                                                                                                                            
|
| |  |  | the competitiveness of IKOS emulation products against
emulation products offered by IKOS competitors, such as
Cadence-Quickturn Design Systems, Inc. and IKOS ability to win new
customers for its emulation products; and
|
| |  |  | the capital expenditure budgets of IKOS customers, which are
influenced by the financial condition of such customers and the
overall market for semiconductor products;                                                      



| |  | Because the market for hardware-assisted verification products is evolving,
IKOS cannot be certain that the market for its emulation solutions will
continue to expand. Even if such market expands, IKOS cannot be certain
that its products will achieve and maintain the market acceptance required
to maintain revenue growth and profitability in the future.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

12



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IKOS results of operations could be adversely impact if IKOS does not continue
to develop new products and enhance existing ones.



| |  | Over the past several years, the market for emulation products has evolved
substantially, requiring that IKOS develop new, higher gate count emulation
products in a timely manner. While IKOS continues to develop new emulation
products based on IKOS understanding of customer requirements, there can be
no assurance that IKOS new products, which require a substantial amount of
time and resources to develop, will meet customer requirements. In
addition, any delays in releasing new products can impact customer
acceptance and sales. For instance, IKOS encountered several product related
issues with the introduction of its second-generation emulation product.
This in turn resulted in delays in releasing such product to its customers
and severely impacted the financial results of the second half of fiscal
1998. Any failure to meet customer deadlines or requirements could have a
material adverse effect on IKOS results of operations. From time to time,
IKOS may announce new products or technologies that have the potential to
replace IKOS existing product offerings. In addition, IKOS announcement
of new product offerings could cause customers to defer purchases of
existing IKOS products. For example, IKOS believes that introduction of its
V-Station 15M emulator product has adversely affected sales of its V-Station
5M product. Such deferrals could adversely affect IKOS results of
operations for any particular quarter. Finally, successfully releasing new
emulation products will require IKOS successful implementation of new
manufacturing processes, effective sales, marketing and customer service
efforts and identifying and resolving product performance or quality issues
at an early stage. If IKOS encounters delays or difficulties in developing
new products or enhancing existing ones, its business, financial condition
and results of operations could be materially and adversely affected.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

IKOS dependence on foreign sales could adversely impact IKOS business,
results of operations and financial condition



| |  | IKOS international sales, including export sales and foreign operation net
revenues, accounted for approximately 34%, 37% and 36% of IKOS net revenues
in fiscal 2000, 1999 and 1998, respectively. While IKOS attempts to reduce
the risk of fluctuations in exchange rates associated with international
revenues by selling its products primarily denominated in U.S. dollars,
conducting sales overseas entails numerous risks including regional or
worldwide economic or political difficulties and changes in foreign currency
exchange rates. For example, IKOS pays the expenses of its international
operations in local currencies and has not engaged in hedging transactions
with respect to such obligations. Any significant deterioration in foreign
economies could have a material adverse effect on IKOS sales in such
countries. In addition, conducting business in international markets
requires compliance with applicable laws and regulations, such as safety and
telecommunication laws and regulations of foreign jurisdictions and import
duties and quotas, as well as U.S. export control laws.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

IKOS failure to compete effectively would have a material adverse effect on
its business, results of operations and financial condition



| |  | The EDA industry is constantly evolving and is characterized by extremely
rapid technological change in both hardware and software development,
frequent new product introductions, evolving industry standards and changing
customer requirements.                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Many of these factors are outside of IKOS control and there can be no
assurance that IKOS will be able to compete effectively in the future.
IKOS specifically targets its products at the emerging portion of the
industry relating to complex designs. IKOS currently competes with
traditional software verification methodologies, including product offerings
sold by Quickturn Design Systems, a unit of Cadence Design Systems, Synopsys
and Mentor Graphics. IKOS main competition for the sale of emulation
systems is Quickturn/Cadence and Mentor Graphics. IKOS expects competition
in the market for verification tools to increase as other companies
introduce new

13



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##### Table of Contents





| |  | products and product enhancements. The risk of competition is exacerbated
because of the long product lives and substantial expense of emulation
products. In particular, if IKOS fails to make a sale to a customer, such
customer is unlikely to seek a new emulation system for an extended period
of time.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | These companies have longer operating histories, significantly greater
financial, technical and marketing resources, greater name recognition and
larger installed customer bases than IKOS. In addition, many of these
competitors and potential competitors have established relationships with
current and potential IKOS customers and offer a broader and more
comprehensive product line. Moreover, IKOS competes with a number of
smaller companies, including Axis Systems, which can quickly gain market
share. Increased competition could result in price reductions, reduced
margins and loss of market share, all of which could materially adversely
affect IKOS financial condition and results of operations. Any failure by
IKOS to compete effectively against these, or other competitors, will have a
material adverse effect on its business, results of operations and financial
condition.

Any failure to obtain sufficient quantities of crucial components will
adversely impact IKOS business, results of operations and financial condition



| |  | IKOS uses certain key components in its products that are presently
available from sole or limited sources. For example, IKOS purchases FPGAs
and other components of its emulation systems from only one supplier. IKOS
generally purchases these components, including semiconductor memories used
in IKOS verification hardware, pursuant to purchase orders placed from time
to time in the ordinary course of business. IKOS 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. IKOS reliance
on the suppliers of these components exposes IKOS to production difficulties
and quality variations these suppliers may experience. 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 IKOS
operating results.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Any allegation of intellectual property infringement against IKOS could have a
material adverse effect on its business



| |  | From time to time IKOS has received, and may receive in the future, notice
of claims of infringement of other parties proprietary rights. Although
IKOS does not believe that its products infringe the proprietary rights of
any third parties, third parties could assert, and have asserted,
infringement or invalidity claims (or claims for indemnification resulting
from infringement claims) against IKOS. Moreover, there are numerous
patents in the EDA industry and new patents are being issued at a rapid
rate. As a result, IKOS is exposed to increased risk of involvement in
costly and time consuming patent infringement litigation, either as
plaintiff or defendant. Adverse determinations in litigation could result
in one or more of the following materially adverse effects:
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | IKOS could be forced to pay damages to a party claiming infringement;                                                                                     
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | IKOS could lose its proprietary rights;                                                                                                                   
|
| |  |  | IKOS could become subject to significant liabilities;                                                                                                     
|
| |  |  | an adverse judgment could require IKOS to seek licenses
from third parties, and such licenses may not be available on terms
acceptable to IKOS, if at all;
|
| |  |  | an adverse judgement could prevent IKOS from licensing its
technology; and                                                                                
|
| |  |  | IKOS could be forced to redesign challenged technology, which
could be time-consuming and costly.                                                         

14



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##### Table of Contents





| |  | Infringement of intellectual property claims, regardless of merit, could
consume valuable management time, result in costly litigation, or cause
product shipment delays, all of which could seriously harm IKOS business,
operating results, and financial condition.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

A judgment adverse to IKOS in its ongoing litigation with Axis Systems, Inc.
could harm IKOS business.



| |  | On February 9, 2001, IKOS filed a patent infringement complaint against Axis
Systems, Inc. (Axis) in the United States District Court in the District of
Delaware that alleges infringement by Axis of four patents relating to IKOS
Virtual Wires technology. IKOS is seeking both injunctive relief and
monetary damages. On March 22, 2001, Axis filed a patent infringement
complaint against IKOS in the United States District Court for the Northern
District of California alleging infringement by IKOS of Axis patent titled
Simulation and Emulation System and Method, U.S. Patent No 6,009,256.
Axis is seeking both injunctive relief and monetary damages. IKOS believes
Axis claims are without merit and intends to vigorously defend the action;
however, such actions are currently in the discovery phase only and IKOS
cannot assure you that it will prevail in either case. A failure to prevail
in either case could result in IKOS being required to redesign certain parts
of its product, which could adversely affect future sales. In addition, such
a failure to prevail would allow Axis to continue to compete against IKOS.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Irrespective of the validity or the successful assertion of such claims,
IKOS could incur significant costs and diversion of management efforts with
respect to the defending the claims. Such efforts and costs could have a
material adverse effect on IKOS business, financial condition or results of
operations. If any other claims or actions are asserted against IKOS, it
may seek to obtain a license under a third partys intellectual property
rights. IKOS cannot assure you, however, that under such circumstances, a
license would be available under reasonable terms or at all.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

IKOS has entered into a merger agreement with Synopsys, Inc., but completion of
the merger is subject to a number of conditions. Failure to complete the
contemplated merger could adversely affect IKOS stock price and future
business and operations.



| |  | Under the merger agreement, Synopsys has the right not to close the merger
if IKOS does not meet certain financial targets for the 12 month period ending
June 30, 2002. In addition, Synopsys is not required to complete the merger if
certain other conditions are not satisfied, including the retention of
specified percentages of five categories of employees. The difficult current
economic climate has resulted in deferral of customer purchasing decisions for
IKOS and other capital equipment suppliers, and IKOS is not able to predict its
financial performance for the 12-month measurement period in light of these
economic conditions. IKOS also cannot assure you that the required percentages
of employees will remain with IKOS until the merger is completed. In addition,
the transaction remains subject to the approval of IKOS stockholders and to
other regulatory and customary closing conditions.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | If the merger is not completed for any reason, IKOS may be subject to a
number of material risks, including the following:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          



| |  |  | customer and employee perception of the terminated transaction
could adversely affect IKOS relationships with its customers and
employees;   
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the market perception of IKOS as a viable independent company may
be damaged;                                                                 
|
| |  |  | IKOS costs related to the merger, such as legal, accounting and
financial advisor fees, must be paid even if the merger is not
completed;    
|
| |  |  | the possibility that IKOS may be required to pay Synopsys a
termination fee if the merger agreement is terminated under certain
circumstances.



| |  | Further, if the merger agreement is terminated and IKOS board of
directors determines to seek another merger or business combination, IKOS may
not be able to find a partner willing to pay an equivalent or more attractive
price than that which would be paid by Synopsys.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The long period between execution of the merger agreement and the expected
closing date could harm IKOS business and impair IKOS ability to meet the
financial and employee retention conditions to the merger.



| |  | The merger with Synopsys is not anticipated to close until August 2002.
During the pre-closing period, IKOS and Synopsys will not be able to integrate
their operations, thus deferring the benefits from the combination of the two
companies until at least August 2002. This could have an adverse effect on
IKOS business. For example, customers and suppliers may defer or cancel
pending purchases, delay purchasing decisions, or decline to make future
purchases from IKOS. In addition, the pre-closing period may adversely affect
IKOS ability to attract, retain and motivate key technical, management and
sales personnel. If any of these events occur, they could adversely affect
IKOS ability to meet the closing conditions contained in the merger agreement,
including conditions relating to IKOS financial performance and the retention
of IKOS employees. If these closing conditions are not met, Synopsys will not
be required to complete the merger.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Benefits of the merger may not be realized.



| |  | Synopsys and IKOS entered into the merger agreement with the expectation
that the merger will result in benefits to the combined company. However, the
expected benefits may not be fully realized. Achieving the benefits of the
merger will depend in part on the successful and timely integration of the
products, technology, operations and personnel of the two companies following
the closing of the merger. When the merger is completed, holders of IKOS
common stock will become holders of Synopsys common stock. Failure to achieve
a successful and timely integration of IKOS and Synopsys could result in the
loss of existing or potential customers of Synopsys and could have a material
and adverse affect on Synopsys business, financial condition and results of
operations and on the price of Synopsys common stock.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Liquidity and Capital Resources



| |  | Since inception, IKOS 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. IKOS cash, cash equivalents and short-term investments were
$17,153,000 at June 30, 2001 down from $19,803,000 at September 30, 2000. The
decrease was a result of $3,560,000 of cash used in investing activities
(excluding short-term investment activities) and $396,000 of cash used in
financing activities partially offset by $1,306,000 of cash provided by
operating activities.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Operating Activities  IKOS operating activities provided cash of $1,306,000
during the first nine months of fiscal 2001. The cash provided by operations
was primarily due to net loss adjusted for depreciation, amortization and
accrued rent and a decreases in accounts receivables, combined with an
increases in accrued payroll expenses and deferred revenues. These increases
in cash provided by operations were partially offset by increases in
inventories, prepaid expenses and other assets combined with decreases in
accounts payable, accrued commissions, income taxes payable and other accrued
liabilities.               
|
| |  | Investing Activities  Net cash used in investing activities for the first nine
months of fiscal 2001 was $3,598,000. The use of cash was primarily related to
the purchases of short-term investments of $14,640,000 and the acquisition of
capital equipment of $3,560,000, partially offset by the maturities of
short-term investment in the amount of $14,602,000.                                                                                                                                                                                                                                                                          
|
| |  | Financing Activities  Net cash used in financing activities for the nine
months of fiscal, 2001, was $396,000 and was primarily related to the repayment
of the outstanding line of credit in the amount of $1,809,000 partially offset
by the net sales of stock under stock option and purchase plans during the nine
months of $1,413,000.                                                                                                                                                                                                                                                                                                   

15



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##### Table of Contents





| |  | IKOS primary unused sources of funds at June 30, 2000 consisted of $9,344,000
of cash and cash equivalents, in addition to $7,809,000 of short-term
investments. IKOS renegotiated its working capital line of credit and currently
maintains a $5,000,000 working capital line. Subsequent to June 30, 2001, the
Company drew down the line of credit by $2,500,000 to fund certain working
capital expenditures. As of August 8, IKOS has approximately $1,000,000
available under IKOS line as the remainder serves as collateral under two
letter of credit arrangements IKOS has outstanding relating to its facilities.
IKOS believes that its current cash, cash equivalents, short-term investments
and its available credit facility, together with cash and cash equivalents
generated from operations will be sufficient to finance its operations for at
least the next twelve months. Should IKOS require other financing arrangements,
there can be no assurance that such financing will be available, if at all, on
terms favorable or acceptable to IKOS.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




ITEM 3. Quantitative and Qualitative Disclosures About Market Risk



| |  | As of June 30, 2001, IKOS investment portfolio consists of money market funds,
corporate-backed debt obligations and mortgaged-backed government obligations
generally due within one year. IKOS primary objective with its investment
portfolio is to invest available cash while preserving principal and meeting
liquidity needs. In accordance with IKOS investment policy, IKOS places
investments with high credit quality issuers and limits the amount of credit
exposure to any one issuer. These securities, which approximate $15,053,000
and have an average interest rate of approximately 5.0%, are subject to
interest rate risks. However, based on the investment portfolio contents and
the ability of IKOS to hold these investments until maturity, IKOS believes
that if a significant change in interest rates were to occur, it would not have
a material effect on IKOS financial condition, although there can be no
assurance of this.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | In addition to its cash equivalents and short-term investments, IKOS enters
into derivative financial instruments such as forward exchange contracts to
hedge certain identifiable receivables denominated in Japanese yen. Any market
risks associated with these contracts and related underlying transactions are
deemed minimal.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                




PART II OTHER INFORMATION




ITEM 1 Legal Proceedings

On February 9, 2001, IKOS filed a patent infringement complaint against
Axis Systems, Inc. (Axis) in the United States District Court in the District
of Delaware. The complaint alleges infringement by Axis of four patents
involving IKOS Virtual Wires technology, which allows high resource
utilization in FPGA-based emulators. IKOS is seeking both injunctive relief
and monetary damages.

On March 22, 2001, Axis filed a patent infringement complaint against IKOS
in the United States District Court for the Northern District of California.
The complaint alleges infringement by IKOS of Axiss patent for a
Simulation/Emulation System and Method, U.S. Patent No 6,009,256. Axis
claims that this patent covers technology for a single system that provides
simulation, acceleration, and emulation of complex electronic integrated
circuit and system-on-chip designs. The compliant alleges that certain of
IKOS emulation products infringe on the patent. Axis is seeking both
injunctive relief and monetary damages. IKOS believes the claim is without
merit and intends to vigorously defend the action.

Through August 8, 2001, both parties are continuing with discovery phase and no
further actions have been taken.

16



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##### Table of Contents






ITEMS 2  4Not applicable




ITEM 5 Other Information

On July 2, 2001,
IKOS and Synopsys, Inc. (Synopsys), signed a merger agreement, which was amended on
August 1, 2001, providing for the acquisition
by Synopsys of all outstanding shares of IKOS. The merger targeted
completion date is set for August 2002, in order to ensure Synopsys full
compliance with the terms of a five-year non-competition agreement
arising from the June 1997 sale of its prior emulation technology. Upon
closing of the transaction each shareholder of IKOS will receive Synopsys
common stock. For additional information regarding the transaction,
see the Agreement and Plan of Merger and Reorganization attached
hereto as Exhibit 2.3.




ITEM 6 Exhibits and Reports on Form 8-K






|(a) |  | INDEX TO EXHIBITS
|--- |  | -----------------

INDEX TO EXHIBITS

|        |  |                                                                                                                                                                                                                                                          
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                          
|Number  |  | Description                                                                                                                                                                                                                                              
|        |  |                                                                                                                                                                                                                                                          
|2.1     |  | Agreement and Plan of Reorganization among IKOS, VMW Acquisition
Corporation and VMW dated May 14, 1996 (Incorporated by reference
to Exhibit 2.1 of IKOS registration statement on Form S-3
effective June 26, 1996)                                   
|       
|       
|       
|       
|2.2     |  | Technology Purchase Agreement dated May 12, 1998 by and between
IKOS and Interra, Inc. (Incorporated by reference to Exhibit 2.1
of IKOS Current Report on Form 8-K filed May 20, 1998)                                                                 
|       
|       
|       
|       
|2.3     |  | Agreement and Plan of Merger and Reorganization by and among Synopsys, Inc., Oak Merger Corporation and IKOS
Systems, Inc. dated as of July 2, 2001, as amended August 1, 2001.                                                                          
|       
|       
|       
|       
|3.1     |  | Certificate of Incorporation (Incorporated by reference to Exhibit
3.1 of IKOS 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 IKOS
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 IKOS
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
IKOS 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 IKOS
registration statement on Form S-1 effective July 25, 1990)                                                                                                                                   
|       
|       
|       
|       
|4.1     |  | Rights agreement dated as of January 27, 1992 between IKOS and
Manufacturers Hanover Trust Company of California, Rights Agent.
(Incorporated by reference to Exhibit (C)1, in IKOS report on
Form 8-K filed February 10, 1992)                         
|       
|       
|       
|       
|4.2     |  | IKOS amended and restated Rights Plan by and between IKOS and
Bank of Boston NA dated January 22, 1999 (Incorporated by
reference to Exhibit 1 of IKOS report on Form 8-A /a filed on
January 29, 1999).                                               
|       
|       
|       
|       
|4.3     |  | Amendment No. 1 to Amended and Restated Rights Plan by and between
IKOS and Bank of Boston NA dated July 2, 2001 (Incorporated by
reference to Form 8-A /a filed on August 1 2001).                                                                      
|       
|       
|       
|       
|10.1    |  | Form of Director and Officer Indemnity Agreement. (Incorporated by
reference to Exhibit 10.6 of IKOS registration statement on Form
S-1 effective July 25, 1990)                                                                                        
|       
|       
|       
|       
|10.2    |  | 1988 Stock Option Plan. (Incorporated by reference to Exhibit
10.14 of IKOS registration statement on Form S-1 effective July
25, 1990)                                                                                                                 
|       
|       
|       
|       
|10.3    |  | 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
IKOS Annual Report for the year ended September 28, 1991)
|       
|       
|       
|       
|10.4    |  | Software License Agreement with Compass Design Automation dated
December 31, 1993 (Incorporated by reference to Exhibit 10.17 of
IKOS quarterly report on Form 10-Q for the quarter ended January
1, 1994)                                              
|       
|       
|       
|       
|10.5    |  | Agreement dated June 2, 1994, by and between IKOS and Gerald S.
Casilli (Incorporated by reference to Exhibit 10.18 of IKOS
quarterly report on Form 10-Q for the quarter ended July 2, 1994)                                                           

17



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##### Table of Contents



|        |  |                                                                                                                                                                                                                                                                                                               
|------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                                               
|Number  |  | Description                                                                                                                                                                                                                                                                                                   
|        |  |                                                                                                                                                                                                                                                                                                               
|10.6    |  | Agreement dated June 2, 1994, by and between IKOS and Daniel R.
Hafeman (Incorporated by reference to Exhibit 10.18 of IKOS
quarterly report on Form 10-Q for the quarter ended July 2, 1994)                                                                                                                
|       
|       
|       
|       
|10.7    |  | Agreement dated June 2, 1994, by and between IKOS and Ramon A.
Nuñez (Incorporated by reference to Exhibit 10.18 of IKOS
quarterly report on Form 10-Q for the quarter ended July 2, 1994)                                                                                                                   
|       
|       
|       
|       
|10.8    |  | Agreement dated June 2, 1994, by and between IKOS and Joseph W.
Rockom (Incorporated by reference to Exhibit 10.18 of IKOS
quarterly report on Form 10-Q for the quarter ended July 2, 1994)                                                                                                                 
|       
|       
|       
|       
|10.9    |  | IKOS 1995 Outside Directors Stock Option Plan (Incorporated by
reference to Exhibit 10.22 of IKOS registration statement on Form
S-2 effective October 12, 1995)                                                                                                                                            
|       
|       
|       
|       
|10.10   |  | Amendment to OEM Agreement for the acquisition of certain software
technology, by and between Compass Design Automation, Inc. and
IKOS dated December 27, 1995 (Incorporated by reference to Exhibit
10.20 of IKOS quarterly report on Form 10-Q for the quarter ended
December 30, 1995)                    
|       
|       
|       
|       
|10.11   |  | Amended and Restated Employment Agreement dated August 1, 1995 by
and between IKOS and Ramon Nuñez (Incorporated by reference to
Exhibit 10.21 of IKOS quarterly report on Form 10-Q for the
quarter ended December 30, 1995)                                                                                
|       
|       
|       
|       
|10.12   |  | Patent License Agreement dated December 22, 1993 between
Massachusetts Institute of Technology and IKOS (Incorporated by
reference to Exhibit 10.20 of IKOS 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.
|       
|       
|       
|       
|10.13   |  | IKOS 1995 Stock Option Plan, as amended (Incorporated by
reference to Exhibit 10.21 of IKOS Quarterly Report on Form 10-Q
for the quarter ended April 4, 1998)                                                                                                                                              
|       
|       
|       
|       
|10.14   |  | IKOS 1996 Employee Stock Purchase Plan, as amended (Incorporated
by reference to Exhibit 10.22 of IKOS Quarterly Report on Form
10-Q for the quarter ended April 4, 1998)                                                                                                                                   
|       
|       
|       
|       
|10.15   |  | Agreement dated July 11, 1997, by and between IKOS and Robert Hum
(Incorporated by reference to Exhibit 1 of IKOS report of Form
8-A as filed on January 29, 1999)                                                                                                                                           
|       
|       
|       
|       
|10.16   |  | Agreement dated February 2, 1999, by and between IKOS and Thomas
N. Gardner (Incorporated by reference to Exhibit 10.25 of IKOS
quarterly report on Form 10-Q for the quarter ended July 3, 1999)                                                                                                            
|       
|       
|       
|       
|10.17   |  | Agreement dated February 3, 1999, by and between IKOS and Nader
Fathi (Incorporated by reference to Exhibit 10.26 of IKOS
quarterly report on Form 10-Q for the quarter ended July 3, 1999)                                                                                                                  
|       
|       
|       
|       
|10.18   |  | Revolving Credit and Security Agreement dated as of March 31, 2000
by and between IKOS Systems, Inc. and Comerica BankCalifornia.
(Incorporated by reference to Exhibit 10.27 of IKOS quarterly
report on Form 10-Q for the quarter ended July 1, 2000)                                                     
|       
|       
|       
|       
|10.19   |  | Lease Agreement for IKOS principal facility dated January 14,
2000, by and between IKOS and Pepper LaneGreat Oaks, LLC.
(Incorporated by reference to Exhibit 10.28 of IKOS Annual Report
on Form 10-K for the year ended September 30, 2000)                                                              
|       
|       
|       
|       
|10.20   |  | Lease Agreement for IKOS Waltham Research and Development
facility dated July 28, 2000 by and between IKOS and LGP Limited
Partnership (Incorporated by reference to Exhibit 10.28 of IKOS
Annual Report on Form 10-K for the year ended September 30,
2000)                                                
|       
|       
|       
|       
|10.21   |  | Modification to Revolving Credit and Security Agreement dated
March 27,
2001 by and between IKOS Systems, Inc. and Comerica Bank.                                                                                                                                                                             



|(b) |  | REPORTS ON FORM 8-K
|--- |  | -------------------

Form 8-K/A filed on August 9, 2001 regarding
Amendment No. 1 to Amended and Restated Rights Plan by and between IKOS and Bank of Boston NA dated July 2, 2001.

18



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##### Table of Contents






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 14, 2001 |  |  |  | /s/ Joseph W. Rockom                                                       
|                      |  |  |  |                                                                            
|                      |  |  |  | (JOSEPH W. ROCKOM CFO)
Principal Financial Officer, Duly Authorized Officer

19



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##### Table of Contents



EXHIBIT INDEX

|        |      |             |  |                                                                                                                                                                                                                                                          
|------- | ---- | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |      |            
|Number  |      | Description
|        |      |            
|        | 2.1  |             |  | Agreement and Plan of Reorganization among IKOS, VMW Acquisition
Corporation and VMW dated May 14, 1996 (Incorporated by reference
to Exhibit 2.1 of IKOS registration statement on Form S-3
effective June 26, 1996)                                   
|       
|       
|       
|       
|        | 2.2  |             |  | Technology Purchase Agreement dated May 12, 1998 by and between
IKOS and Interra, Inc. (Incorporated by reference to Exhibit 2.1
of IKOS Current Report on Form 8-K filed May 20, 1998)                                                                 
|       
|       
|       
|       
|        | 2.3  |             |  | Agreement and Plan of Merger and Reorganization by and among Synopsys, Inc., Oak Merger Corporation and IKOS
Systems, Inc. dated as of July 2, 2001, as amended August 1, 2001.                                                                          
|       
|       
|       
|       
|        | 3.1  |             |  | Certificate of Incorporation (Incorporated by reference to Exhibit
3.1 of IKOS 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 IKOS
registration statement on Form S-2 effective October 12, 1995)                                                             
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|        | 3.3  |             |  | Certificate of Amendment of Certificate of Incorporation filed
April 24, 1995 (Incorporated by reference to Exhibit 4.2 of IKOS
registration statement on Form S-2 effective October 12, 1995)                                                          
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|        | 3.4  |             |  | Certificate of Amendment of Certificate of Incorporation filed
February 3, 1997 (Incorporated by reference to Exhibit 3.4 of
IKOS quarterly report on Form 10-Q for the quarter ending March
29, 1997)                                                  
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|        | 3.5  |             |  | By laws (Incorporated by reference to Exhibit 3.2 of IKOS
registration statement on Form S-1 effective July 25, 1990)                                                                                                                                   
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|        | 4.1  |             |  | Rights agreement dated as of January 27, 1992 between IKOS and
Manufacturers Hanover Trust Company of California, Rights Agent.
(Incorporated by reference to Exhibit (C)1, in IKOS report on
Form 8-K filed February 10, 1992)                         
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|        | 4.2  |             |  | IKOS amended and restated Rights Plan by and between IKOS and
Bank of Boston NA dated January 22, 1999 (Incorporated by
reference to Exhibit 1 of IKOS report on Form 8-A /a filed on
January 29, 1999).                                               
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|        | 4.3  |             |  | Amendment No. 1 to Amended and Restated Rights Plan by and between
IKOS and Bank of Boston NA dated July 2, 2001 (Incorporated by
reference to Form 8-A /a filed on August 9, 2001).                                                                     
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|        | 10.1 |             |  | Form of Director and Officer Indemnity Agreement. (Incorporated by
reference to Exhibit 10.6 of IKOS registration statement on Form
S-1 effective July 25, 1990)                                                                                        
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|        | 10.2 |             |  | 1988 Stock Option Plan. (Incorporated by reference to Exhibit
10.14 of IKOS registration statement on Form S-1 effective July
25, 1990)                                                                                                                 
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|        | 10.3 |             |  | 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
IKOS Annual Report for the year ended September 28, 1991)
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|        | 10.4 |             |  | Software License Agreement with Compass Design Automation dated
December 31, 1993 (Incorporated by reference to Exhibit 10.17 of
IKOS quarterly report on Form 10-Q for the quarter ended January
1, 1994)                                              
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|        | 10.5 |             |  | Agreement dated June 2, 1994, by and between IKOS and Gerald S.
Casilli (Incorporated by reference to Exhibit 10.18 of IKOS
quarterly report on Form 10-Q for the quarter ended July 2, 1994)                                                           
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##### Table of Contents



|        |       |             |  |                                                                                                                                                                                                                                                                                                               
|------- | ----- | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |            
|Number  |       | Description
|        |       |            
|        | 10.6  |             |  | Agreement dated June 2, 1994, by and between IKOS and Daniel R.
Hafeman (Incorporated by reference to Exhibit 10.18 of IKOS
quarterly report on Form 10-Q for the quarter ended July 2, 1994)                                                                                                                
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|       
|       
|       
|        | 10.7  |             |  | Agreement dated June 2, 1994, by and between IKOS and Ramon A.
Nuñez (Incorporated by reference to Exhibit 10.18 of IKOS
quarterly report on Form 10-Q for the quarter ended July 2, 1994)                                                                                                                   
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|       
|       
|       
|        | 10.8  |             |  | Agreement dated June 2, 1994, by and between IKOS and Joseph W.
Rockom (Incorporated by reference to Exhibit 10.18 of IKOS
quarterly report on Form 10-Q for the quarter ended July 2, 1994)                                                                                                                 
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|       
|       
|       
|        | 10.9  |             |  | IKOS 1995 Outside Directors Stock Option Plan (Incorporated by
reference to Exhibit 10.22 of IKOS registration statement on Form
S-2 effective October 12, 1995)                                                                                                                                            
|       
|       
|       
|       
|        | 10.10 |             |  | Amendment to OEM Agreement for the acquisition of certain software
technology, by and between Compass Design Automation, Inc. and
IKOS dated December 27, 1995 (Incorporated by reference to Exhibit
10.20 of IKOS quarterly report on Form 10-Q for the quarter ended
December 30, 1995)                    
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|       
|       
|       
|        | 10.11 |             |  | Amended and Restated Employment Agreement dated August 1, 1995 by
and between IKOS and Ramon Nuñez (Incorporated by reference to
Exhibit 10.21 of IKOS quarterly report on Form 10-Q for the
quarter ended December 30, 1995)                                                                                
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|       
|       
|       
|        | 10.12 |             |  | Patent License Agreement dated December 22, 1993 between
Massachusetts Institute of Technology and IKOS (Incorporated by
reference to Exhibit 10.20 of IKOS 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.
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|       
|       
|       
|        | 10.13 |             |  | IKOS 1995 Stock Option Plan, as amended (Incorporated by
reference to Exhibit 10.21 of IKOS Quarterly Report on Form 10-Q
for the quarter ended April 4, 1998)                                                                                                                                              
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|       
|       
|       
|        | 10.14 |             |  | IKOS 1996 Employee Stock Purchase Plan, as amended (Incorporated
by reference to Exhibit 10.22 of IKOS Quarterly Report on Form
10-Q for the quarter ended April 4, 1998)                                                                                                                                   
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|       
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|       
|        | 10.15 |             |  | Agreement dated July 11, 1997, by and between IKOS and Robert Hum
(Incorporated by reference to Exhibit 1 of IKOS report of Form
8-A as filed on January 29, 1999)                                                                                                                                           
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|       
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|        | 10.16 |             |  | Agreement dated February 2, 1999, by and between IKOS and Thomas
N. Gardner (Incorporated by reference to Exhibit 10.25 of IKOS
quarterly report on Form 10-Q for the quarter ended July 3, 1999)                                                                                                            
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|       
|       
|       
|        | 10.17 |             |  | Agreement dated February 3, 1999, by and between IKOS and Nader
Fathi (Incorporated by reference to Exhibit 10.26 of IKOS
quarterly report on Form 10-Q for the quarter ended July 3, 1999)                                                                                                                  
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|       
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|        | 10.18 |             |  | Revolving Credit and Security Agreement dated as of March 31, 2000
by and between IKOS Systems, Inc. and Comerica BankCalifornia.
(Incorporated by reference to Exhibit 10.27 of IKOS quarterly
report on Form 10-Q for the quarter ended July 1, 2000)                                                     
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|       
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|        | 10.19 |             |  | Lease Agreement for IKOS principal facility dated January 14,
2000, by and between IKOS and Pepper LaneGreat Oaks, LLC.
(Incorporated by reference to Exhibit 10.28 of IKOS Annual Report
on Form 10-K for the year ended September 30, 2000)                                                              
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|       
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|        | 10.20 |             |  | Lease Agreement for IKOS Waltham Research and Development
facility dated July 28, 2000 by and between IKOS and LGP Limited
Partnership (Incorporated by reference to Exhibit 10.28 of IKOS
Annual Report on Form 10-K for the year ended September 30,
2000)                                                
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|       
|       
|       
|        | 10.21 |             |  | Modification to Revolving Credit and Security Agreement dated
March 27,
2001 by and between IKOS Systems, Inc. and Comerica Bank.