<PAGE>

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

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

                                 _____________



                                   FORM 10-Q

(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarter ended July 1, 2000 or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the transition period from ______ to ______

Commission File Number 0-18623


                                 ____________

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


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

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

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



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


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


        Common Stock $.01 Par Value               8,625,000,
        ---------------------------
               (Title of Class)        (Outstanding as of July 1, 2000)


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

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


                                     INDEX
                                     -----


Part I:  Financial Information

         Item 1: Financial Statements
                                                                         Page
                 Consolidated Balance Sheets at

                   July 1, 2000 (unaudited) and October 2, 1999........    3

                 Unaudited Consolidated Statements of Income
                  for the three and nine months ended July 1, 2000
                  and July 3, 1999.....................................    4

                 Unaudited Consolidated Statements of Cash Flows
                  for the nine months ended July 1, 2000
                  and July 3, 1999.....................................    5

                 Notes to Unaudited Consolidated Financial Statements..    6

        Item 2:  Management's Discussion and Analysis
                   of Financial Condition and Results of Operations....    9

Part II: Other Information

        Item 6:  Exhibits and Reports on Form 8-K......................   17

     Signatures .......................................................   21

<PAGE>

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

<TABLE>
                                                                      July 1,          October 2,
                                                                       2000               1999
                                                                  ----------------   ---------------
                                                                    (unaudited)
<S>                                                               <C>                <C>
                                    ASSETS
Current assets:
     Cash and cash equivalents................................          $13,277            $7,664
     Short-term investments...................................            4,026             2,870
     Accounts receivable (net of allowances for
         doubtful accounts of $801 and $801, respectively)....           12,897            10,549
     Inventories..............................................            3,735             3,455
     Prepaid expenses and other assets........................              183               435
                                                                  ----------------   ---------------
            Total current assets..............................           34,118            24,973

     Equipment and leasehold improvements
         Office and evaluation equipment......................            6,543             5,663
         Machinery and equipment..............................           11,207            10,513
         Leasehold improvements...............................              844               718
                                                                  ----------------   ---------------
                                                                         18,594            16,894
            Less allowances for depreciation and amortization.          (13,737)          (11,832)
                                                                  ----------------   ---------------
                                                                          4,857             5,062
     Intangible assets (net of accumulated amortization of
         $883 and $716, respectively).........................              979             1,146
     Other assets.............................................              516               609
                                                                  ----------------   ---------------
                                                                        $40,470           $31,790
                                                                  ================   ===============

                     LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
     Accounts payable.........................................           $3,414            $3,763
     Accrued payroll and related expenses.....................            2,924             2,709
     Accrued commissions......................................            1,016             1,052
     Income taxes payable.....................................            2,399             1,019
     Other accrued liabilities................................            2,134             2,815
     Deferred revenues........................................            7,784             5,337
                                                                  ----------------   ---------------
            Total current liabilities.........................           19,671            16,695

Accrued rent..................................................               --                64
Commitments
Stockholders' equity:
     Preferred stock, $.01 par value; 10,000 shares
         authorized, none issued and outstanding..............               --                --
     Common stock, $.01 par value; 50,000 shares
         authorized, 8,797 and 8,797 shares
         issued and 8,625 and 8,401 outstanding, respectively.               88                88
     Treasury stock, at cost, 173 shares in 2000 and
         396 in 1999..........................................           (1,115)           (2,536)
     Additional paid-in capital...............................           57,868            58,312
     Accumulated other comprehensive income...................             (747)             (498)
     Accumulated deficit......................................          (35,295)          (40,335)
                                                                  ----------------   ---------------
            Total stockholders' equity........................           20,799            15,031
                                                                  ----------------   ---------------
                                                                        $40,470           $31,790
                                                                  ================   ===============
</TABLE>




                      See notes to financial statements.

                                       3
<PAGE>

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


<TABLE>
<CAPTION>
                                                                          Three Months Ended                  Nine Months
                                                                                                                    Ended
                                                         -----------------------------------------------------------------------
<S>                                                      <C>              <C>                       <C>            <C>
                                                             July 1,               July 3,           July 1,         July 3,
                                                               2000                 1999              2000             1999
Net revenues
    Product.............................................          $13,876               $11,098        $37,328          $28,669
    Maintenance.........................................            4,567                 3,914         13,319           11,369
                                                         -----------------    ------------------   ------------    -------------
       Total net revenues...............................           18,443                15,012         50,647           40,038

Cost of revenues
    Product.............................................            2,834                 2,681          7,995            7,121
    Maintenance.........................................            1,102                 1,057          3,340            2,851
                                                         -----------------    ------------------   ------------    -------------
       Total cost of revenues...........................            3,936                 3,738         11,335            9,972

                                                        ------------------    ------------------   ------------    -------------
       Gross profit.....................................           14,507                11,274         39,312           30,066

Operating expenses:
    Research and development............................            4,198                 3,411         11,405            9,859
    Sales and marketing.................................            6,161                 5,719         17,842           15,859
    General and administration..........................            1,231                 1,103          3,572            3,017
    Amortization of intangibles.........................               42                   103            167              309
                                                         -----------------    ------------------   ------------    -------------
       Total operating expenses.........................           11,632                10,336         32,986           29,044

                                                        ------------------    ------------------   ------------    -------------
Income from operations..................................            2,875                   938          6,326            1,022


Interest income.........................................              198                   111            389              392

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


Income before provision for income taxes................            3,073                 1,049          6,715            1,414
Provision for income taxes..............................              770                   265          1,675              320

                                                        ------------------    ------------------   ------------    -------------
       Net income.......................................           $2,303                  $784         $5,040           $1,094
                                                         =================    ==================   ============    =============


Basic net income per share..............................            $0.27                 $0.09          $0.59            $0.13
                                                         =================    ==================   ============    =============

Common and common equivalent shares used
    in computing per share amounts......................            8,611                 8,288          8,520            8,285
                                                         =================    ==================   ============    =============

Dilutive net income per share                                       $0.23                 $0.08          $0.52            $0.12

Common and common equivalent shares used
    in computing per share amounts......................            9,897                 9,406          9,781            9,008
                                                         =================    ==================   ============    =============

</TABLE>

                       See notes to financial statements.

                                        4
<PAGE>

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

<TABLE>
                                                                                Nine months ended
                                                                        --------------------------------------
                                                                             July 1,             July 3,
                                                                              2000                 1999
                                                                        ------------------   -----------------
<S>                                                                      <C>                  <C>
Operating activities:
    Net income...................................................              $5,040              $1,094
    Adjustments to reconcile net income to net
      cash provided by (used in) operating activities:
      Depreciation and amortization..............................               2,072               2,048
      Accumulated translation adjustments........................                (249)               (135)
      Change in accrued rent.....................................                 (64)                (67)

    Changes in operating assets and liabilities:
      Accounts receivable........................................              (2,348)             (2,377)
      Inventories................................................                (280)               (613)
      Prepaid expenses and other current assets..................                 252                 (43)
      Other assets...............................................                  93                (150)
      Accounts payable...........................................                (349)                (45)
      Accrued payroll and other expenses.........................                 215               1,262
      Accrued commissions........................................                 (36)                (84)
      Income taxes payable.......................................               1,380                (225)
      Other accrued liabilities..................................                (681)             (1,762)
      Deferred revenues..........................................               2,447              (1,186)
                                                                        ------------------   -----------------
        Net cash provided by (used in) operating activities......               7,492              (2,283)

Investing activities:
    Purchases of equipment and leasehold improvements............              (1,700)             (1,699)
    Purchase of short-term investments...........................              (4,999)             (4,465)
    Maturities of short-term investments.........................               3,843               8,158
                                                                        ------------------   -----------------
        Net cash provided by (used in) investment activities.....              (2,856)              1,994

Financing activities:
    Net sale (repurchase) of common stock........................                 977                (148)

                                                                        ------------------   -----------------
Increase (decrease) in cash and cash equivalents.................               5,613                (437)
Cash and cash equivalents at beginning of period.................               7,664               8,165

                                                                        ------------------   -----------------
Cash and cash equivalents at end of period.......................             $13,277              $7,728
                                                                        ==================   =================
</TABLE>


                       See notes to financial statements.

                                        5
<PAGE>

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


1.   Basis of Presentation

     The accompanying unaudited consolidated financial statements at July 1,
     2000 and for the three and nine months ended July 1, 2000 and July 3, 1999,
     have been prepared in conformity with generally accepted accounting
     principles, consistent with those applied in, and should be read in
     conjunction with, the audited consolidated financial statements for the
     year ended October 2, 1999 included in the Form 10-K as filed with the
     Securities and Exchange Commission on December 20, 1999.  The unaudited
     interim financial information reflects all normal recurring adjustments
     which are, in the opinion of management, necessary for a fair statement of
     results for the interim periods presented.  The results for the three and
     nine month periods ended July 1, 2000 are not necessarily indicative of
     results expected for the full year.

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


2.   Inventories

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

<TABLE>
<CAPTION>
                                                  July 1,       October 2,
                                                   2000            1999
                                                 ------          ------
<S>                                       <C>             <C>
Raw materials                                    $  732          $  818
Work-in-process                                   1,061           1,435
Finished goods                                    1,942           1,202
                                                 ------          ------
                                                 $3,735          $3,455
                                                 ======          ======
</TABLE>

3.   Net Income Per Share

     The computation of basic net income per share for the periods presented is
     derived from the information on the face of the income statement, and there
     are no reconciling items in either the numerator or denominator.
     Additionally, there are no reconciling items in the numerator used to
     compute dilutive net income per share.  The incremental common shares
     attributable to outstanding options for the three and nine months ended
     July 1, 2000 and July 3, 1999 included in the total shares used in the
     denominator of the diluted net income per share calculation are as follows
     (in thousands):
<TABLE>
<CAPTION>

                                    July 1,   July 3,
                                     2000      1999
                                    -----     -----
<S>                               <C>       <C>
          Three months ended        1,285     1,118
                                    =====     =====
          Nine months ended         1,261       723
                                    =====     =====
</TABLE>

                                       6
<PAGE>

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

4.   Comprehensive Income

     Comprehensive income for the three and nine month periods ending July 1,
     2000 and July 3, 1999 are as follows (in thousands):

<TABLE>
<CAPTION>

                                                          Three Months Ended                      Nine Months Ended
                                              ------------------------------------      -----------------------------------
                                                    July 1,              July 3,             July 1,              July 3,
                                                      2000                 1999                2000                 1999
                                              ---------------      ---------------      --------------      ---------------
<S>                                              <C>                  <C>                  <C>            <C>  <C>
Net income as reported                                 $2,303                $ 784              $5,040               $1,094

Accumulated translation
   adjustments                                            (89)                (137)               (249)                (135)
                                              ---------------      ---------------      --------------      ---------------
Comprehensive income                                   $2,214                $ 647              $4,791               $  959
                                              ===============      ===============      ==============      ===============
</TABLE>



5.   Line of Credit Facility

     In April, the Company completed the establishment of a line of credit with
     its bank.  Under the terms of the agreement, the Company will be able to
     utilize up to $3,000,000 for working capital purposes and an additional
     $1,500,000 for capital acquisitions.  The Company has offset a portion of
     the working capital line for use as collateral for letter of credits
     relating to its new facility leases.  As of July 1, 2000, approximately
     $1,500,000 remains available for used under the line of credit facility.


6.   Facility Lease Agreements

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

                       Fiscal Year     Amount
                       ----------      ------
                     <S>             <C>

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

                                       7
<PAGE>

6.   Facility Lease Agreements (continued)


     In July, the Company signed a new facility lease agreement for the
     Company's engineering group in Waltham, MA.  Under the new lease, the
     Company will have approximately 34,000 square feet of leased office
     building space in Waltham, MA. The lease term is for 10 years.  The
     engineering group will be relocating to the new facility during the fourth
     quarter of fiscal 2000.
<TABLE>
<CAPTION>

                     Fiscal Year    Amount
                     ----------     ------
                   <S>            <C>

                     Year 1          $   70
                     Year 2             577
                     Year 3             767
                     Year 4             860
                     Year 5             860
                     Thereafter       5,018
                                     ------
                                     $8,152
                                     ======
</TABLE>

7.   Recent Accounting Pronouncements

     In December 1999, the Securities and Exchange Commission (SEC) issued Staff
     Accounting Bulletin 101, (SAB 101), "Revenue Recognition in Financial
     Statements." SAB 101 provides guidance on the recognition, presentation and
     disclosure of revenue in the financial statements of public companies. The
     accounting profession is currently exploring practical means of
     implementing the guidelines established by SAB 101. To the extent that SAB
     101 is applicable to the Company, the Company will be required to change
     its revenue recognition policy. In June 2000, the SEC issued SAB 101B that
     delays the effective date of SAB 101 until no later than the fourth fiscal
     quarter of fiscal years beginning after December 15, 1999. The Company will
     be required to adopt SAB 101 by the fourth quarter of fiscal 2001.
     Financial information for prior quarters would be restated with the
     cumulative effect adjustment reflected in the fourth quarter of 2001 in
     accordance with FASB Statement No. 3, Reporting Accounting Changes in
     Interim Financial Statements. In subsequent periods, the Company would
     disclose the amount of revenue, if material, recognized in those periods
     that were included in the cumulative effect adjustment. The Company
     currently cannot determine what effect, if any, that SAB 101 will have on
     the Company's financial statements. Management believes that SAB 101, to
     the extent it is applicable to the Company, will not effect the underlying
     strength or weakness of the Company's business operations as measured by
     the dollar value of the Company's shipments and cash flows.

     In March 2000, the Financial Accounting Standard Board issued FASB
     Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
     Compensation - an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
     clarifies the application of APB Opinion No. 25 and among other issues
     clarifies the 6 following: the definition of an employee for purposes of
     applying APB Opinion No. 25; the criteria for determining whether a plan
     qualifies as a noncompensatory plan; the accounting consequences of various
     modifications to the terms of previously fixed stock options or awards; and
     the accounting for an exchange of stock compensation awards in a business
     combination. FIN 44 is effective July 1, 2000, but certain conclusions in
     FIN 44 cover specific events that occurred after either December 15, 1998
     or January 12, 2000. The Company does not expect the application of FIN 44
     to have a material impact on the Company's financial position or results of
     operations.

                                       8
<PAGE>

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


Cautionary Statement

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

Net Revenues

Net revenues for the three and nine month periods ending July 1, 2000 were
$18,443,000 and $50,647,000, respectively, representing a 23% and 26% increase
over the same periods of the prior year.  This increase was a result of
increases in product of 25% and maintenance revenues of 17%.  For the three
months ended July 1, 2000, product revenues increased as result of increases in
emulation sales during the quarter.  Emulation revenues increased approximately
72% over the prior year's quarter and 41% over the immediately preceding
quarter, as demand continues to increase for the Company's latest emulation
product offering. For the nine month period, emulation revenues grew by over 53%
when compared to the prior year nine month period.  The increase is a result of
the growing acceptance of the Company's current emulation offerings and the
ongoing upgrades to the product itself. Simulation revenues were 10% lower than
the prior year's quarter and 14% lower than the previous quarter.  For the nine
month period, simulation revenues increased 20% when compared to the same period
in fiscal 1999.  While the Company has realized stronger than expected sales of
its simulation product for the nine month period, the third quarter decrease is
believed to be indicative of the expected trend of simulation product sales.
The Company's newer simulation products are still in demand, however, the
Company anticipates that the ongoing revenue growth will be mainly from its
emulation products and the simulation revenues will show flat to lower results
as the transition to emulation continues.

For the three and nine month period ended July 1, 2000, maintenance revenues
have increased primarily due to the Company's increasing installed base of
emulation customers.  In addition, maintenance revenues on the Company's
simulation products are slightly higher for the nine month period as customers
continue to renew and maintain their simulation product investment. Maintenance
revenues are expected to continue to grow, as they relate to the emulation
products.  However, the overall growth of maintenance revenues may be limited
due to fewer customers renewing their maintenance for the simulation products as
this business evolves.

International revenues for the quarter ended July 1, 2000, totaled $6,814,000 or
approximately 37% of total revenues.  International revenues for the quarter
increased 53% when compared to the prior year quarter. For the nine month
period, international revenues totaled $19,015,000 or 38% of total revenues and
represents an increase of 43% from the same period a year ago. The increase in
international revenues is due in part to timing of orders coupled with continued
strong demand for the simulation products internationally and growing demand for
emulation products.

                                       9
<PAGE>

Gross Profit Margins

Gross profit margins for the three and nine month periods ended July 1, 2000
were 79% and 78%, respectively.  Gross profit margins for the three and nine
month periods ended July 3, 1999 were 75%.  The increase in gross profit margins
for the three and nine month periods ended July 1, 2000 as compared to the same
periods in the previous year are a result of the sales of higher margin products
and the increased manufacturing efficiencies.  Product margins increased due to
the higher margin products and volume while maintenance margins decreased as a
result of higher support costs related to newer products.

Research and Development Expenses

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 or 23%
of net revenues. This represented an increase of 23% over the third quarter of
1999 and 16% for the nine month period.  Research and development expenses
increased primarily as a result of increased salaries and prototype costs.  As
the Company continues to research verification tool methodologies and introduce
new products, research and development costs are expected to increase in
absolute dollars over the remainder of the year.

Sales and Marketing Expenses

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 or 33% and 35%
of net revenues. This represented an increase of 8% and 13% over the same three
and nine month periods in fiscal 1999.  The increase over the prior year quarter
and nine month period is primarily related to increase salaries, commissions,
consulting expenses and trade show expenses.

General and Administrative Expenses

General and administrative costs for the three and nine month periods ending
July 1, 2000 were $1,231,000 and $3,572,000 or 7% of net revenues.  For the
three and the nine month periods, the general and administrative expenses were
comparable with the prior year in terms of percentage of revenues although
slightly higher in absolute dollars as a result of increased salaries and
related expenses. General and administrative costs are expected to remain flat
as a percentage of revenues over the remainder of fiscal 2000.

Income Taxes

The Company's effective tax rate on the consolidated pretax income for the three
and nine month periods ended July 1, 2000 is 25%, as compared to an effective
tax rate of 25% and 23% for the three and nine month periods of fiscal 1999. The
Company's 2000 effective tax rate for the three and nine month periods ended
July 1, 2000 differs from the federal statutory rate primarily due to benefits
associated with its net operating loss carryforward.  The Company's 1999
effective tax rate for the three and nine month periods ended July 3, 1999
differs from the federal statutory rate primarily due to benefits associated
with its net operating loss carryforward.

                                       10
<PAGE>

Other

The Company has experienced minimal gains or losses on foreign currency
translation since substantially all of its international sales to date have been
billed and collected in U.S. dollars. The Company pays the expenses of its
international operations in local currencies and to date the Company has not
engaged in hedging transactions with respect to such obligations.  The Company
has reorganized its operations at its Japan subsidiary and is engaging in
transactions in the Japanese local currency.  As such, the Company periodically
enters into foreign exchange contracts to minimize foreign exchange risk
relating to the Japanese subsidiary's sales that are denominated in yen.  A
forward exchange contract obligates the Company to exchange predetermined
amounts of a specified foreign currency at a specified exchange rate on a
specified date or to make an equivalent US dollar payment equal to the value of
such exchange.  These contracts are accounted for as hedges of identifiable
receivables denominated in Japanese yen.  Realized gains or losses are
recognized  upon  maturity of  the contracts and offset the underlying asset or
liability. Through July 1, 2000, the impact of such hedging arrangements have
been immaterial to the Company operations.

In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin 101, (SAB 101), "Revenue Recognition in Financial
Statements". SAB 101 provides guidance on the recognition, presentation and
disclosure of revenue in the financial statements of public companies. The
accounting profession is currently exploring practical means of implementing the
guidelines established by SAB 101.  To the extent that SAB 101 is applicable to
the Company, the Company will be required to change its revenue recognition
policy.  In June 2000, the SEC issued SAB 101B that delays the effective date of
SAB 101 until no later than the fourth fiscal quarter of fiscal years beginning
after December 15, 1999. The Company will be required to adopt SAB 101 by the
fourth quarter of fiscal 2001. Financial information for prior quarters would be
restated with the cumulative effect adjustment reflected in the fourth quarter
of 2001 in accordance with FASB Statement No. 3, Reporting Accounting Changes in
Interim Financial Statements. In subsequent periods, the Company would disclose
the amount of revenue, if material, recognized in those periods that were
included in the cumulative effect adjustment. The Company currently cannot
determine what effect, if any, that SAB 101 will have on the Company's financial
statements. Management believes that SAB 101, to the extent it is applicable to
the Company, will not effect the underlying strength or weakness of the
Company's business operations as measured by the dollar value of the Company's
shipments and cash flows.

In March 2000, the Financial Accounting Standard Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation - an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
clarifies the application of APB Opinion No. 25 and among other issues clarifies
the 6 following: the definition of an employee for purposes of applying APB
Opinion No. 25; the criteria for determining whether a plan qualifies as a
noncompensatory plan; the accounting consequences of various modifications to
the terms of previously fixed stock options or awards; and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 is
effective July 1, 2000, but certain conclusions in FIN 44 cover specific events
that occurred after either December 15, 1998 or January 12, 2000. The Company
does not expect the application of FIN 44 to have a material impact on the
Company's financial position or results of operations.

                                       11
<PAGE>

Factors that May Affect Future Results of Operations

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

Sales Trends - Over the past several years the marketplace for the Company's
------------
products has evolved substantially. The Company has seen a significant reduction
in sales of its simulation products as revenues have declined from approximately
$37,044,000 in fiscal 1997 to approximately $19,463,000 in fiscal 1999.
Simulation revenues were approximately $17,184,000 for the first nine months of
fiscal 2000. While the overall decrease is due in part to the evolution of the
market, the primary cause of the decrease is the result of the Company's focus
on its new emerging product line of emulation solutions. The Company has seen
its revenues from its emulation products increase from approximately $6,000,000
in fiscal 1997 to $20,143,000 through nine months of fiscal 2000. The Company
anticipates that the simulation product revenue will continue to decrease,
however, at a slower rate over the next year and its emulation revenues will
increase resulting in increased sales overall. There can be no assurance that
the Company will be able to maintain these expected trends. These trends will be
dependent upon the Company introducing new products and methodologies.
Furthermore, increased overall sales will also depend on an increasing number of
complex ICs designed for electronic systems, integration of the Company's
products with other tools for IC design, the ability of the Company's products
to shorten overall customer design cycles and increased industry acceptance of
the Company's verifications solutions. Because the market for hardware-assisted
verification products is evolving, it is difficult to predict with any assurance
whether the markets for such solutions will continue to expand. There can be no
assurances that such market will expand, or even if such market expands, that
the Company's products will achieve and maintain the market acceptance required
to maintain revenue growth and profitability in the future.

Major Accounts - The Company believes that in order to grow revenues, the
--------------
Company must establish volume purchase relationships with large customers who
will
                                       12
<PAGE>

make routine and recurring purchases of the Company's products and represent
major accounts to the Company. The Company believes that through these
relationships, it can achieve its growth objectives. However, there can be no
assurance that the Company can successfully establish such relationships with
certain large customers whereby the customer purchases product on a routine and
recurring basis. Furthermore, there can be no assurance that such relationships
if established would in fact provide for increasing revenues to meet the
Company's growth objectives.

New Product Development - To continue its expected revenue growth, the Company
-----------------------
needs to continue to invest in new product development. The Company continues to
focus most of its development resources on its emulation products. Since fiscal
1997, when the Company released its first generation emulator, the Company has
released two new generations of its emulation product. The Company has seen
favorable results with its latest release; however, there can be no assurance
that the product will continue to meet the requirements of the marketplace.
There continues to be further development of the emulation product as well as
other verification products, and as the Company continues to develop such
products, which are based on the new technology, there can be no assurance that
the enhanced products or other developed products resulting from this
development will provide the necessary solutions for customer design
verification needs, be of acceptable quality or achieve further market
acceptance. The success of the Company in developing, introducing, selling and
supporting verification products will depend on a variety of factors, including
but not limited to, the timely and successful enhancement of current products,
completion of product design and development of future products, the timely and
efficient implementation of manufacturing processes, effective sales, marketing
and customer service. However, performance problems or other difficulties that
may require design modifications and related expenses may hinder or damage
market acceptance of the products. While the Company's verification systems are
designed to provide cost and ease of use advantages intended to broaden the
market for hardware-assisted verification, there can be no assurance that its
products will be able to achieve such goals. Moreover, there can be no assurance
that the market for such verification solutions will broaden beyond the current
set of users.

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

                                       13
<PAGE>

New Products and Technological Change - The EDA industry is characterized by
-------------------------------------
extremely rapid technological change in both hardware and software development,
frequent new product introductions, evolving industry standards and changing
customer requirements. The introduction of products embodying new technologies
and the emergence of new industry standards can render existing products
obsolete and unmarketable. The Company's future success will depend upon its
ability to enhance its current series of simulation and emulation systems and to
design, develop and support its future simulation and emulation products on a
timely basis. These efforts require a high level of expenditures for research
and development by the Company to address the increasingly sophisticated needs
of the customers. For example, all of the Company's current products operate in,
and planned future products will operate in, the Unix operating environment, an
industry standard in the EDA market. In the event that another operating system,
such as Windows NT, becomes an industry standard, the Company may be required to
port its products to such new standard. In addition, the Company's simulation
systems generally accept designs in the broadly accepted hardware description
language, Verilog-XL, which Cadence has developed and made available to the
Company. In the event Cadence adopts a less cooperative stance toward the
Company in the future, the Company's systems may not be able to accept designs
based on Verilog-XL and the Company may be required to develop software to
accept designs of other hardware description languages. The inability to accept
designs in Verilog-XL may materially adversely affect the Company's results of
operations. There can be no assurance that the Company will be successful in
developing and marketing product enhancements or new products that respond to
technological change or evolving industry standards or changing customer
requirements, that the Company will not experience difficulties that could delay
or prevent the successful development, introduction and marketing of these
products, or that its new products and product enhancements will adequately meet
the requirements of the marketplace, will be of acceptable quality or will
achieve market acceptance. If the Company is unable, for technological or other
reasons, to develop and introduce products in a timely manner in response to
changing market conditions or customer requirements, the Company's business,
operating results and financial condition will be materially and adversely
affected. Moreover, from time to time, the Company may announce new products or
technologies that have the potential to replace the Company's existing product
offerings. There can be no assurance that the announcement of new product
offerings will not cause customers to defer purchases of existing Company
products, which could adversely affect the Company's results of operations for
any particular quarter.

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

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

                                       14
<PAGE>

The Company generally purchases these components, including semiconductor
memories used in the Company's verification hardware, pursuant to purchase
orders placed from time to time in the ordinary course of business and has no
supply arrangements with any of its source suppliers that require the suppliers
to provide components in guaranteed quantities or at set prices. Moreover, the
manufacture of these components can be extremely complex, and the Company's
reliance on the suppliers of these components exposes the Company to production
difficulties and quality variations that may be experienced by these suppliers.
Therefore, the Company's reliance on its sole and limited source suppliers
involves several risks, including a potential inability to obtain an adequate
supply of required components, reduced control over pricing and timely delivery
and quality of acceptable components. While the timeliness and quality of
deliveries to date from such suppliers have been acceptable, there can be no
assurance that problems will not occur in the future. Any prolonged inability to
obtain components or subassemblies in sufficient quantities or quality or on
favorable pricing or delivery terms, or any other circumstances that would
require the Company to seek alternative sources of supply, could have a material
adverse effect on the Company's operating results and could damage the Company's
relationships with its customers.

Customer Concentration - A relatively limited number of customers have
----------------------
historically accounted for a substantial portion of the Company's net revenues.
During fiscal 1999, 1998 and 1997, sales to the Company's top ten customers
accounted for approximately 60%, 45% and 52%, respectively, of the Company's net
revenues. The Company expects that sales of its products to a limited number of
customers will continue to account for a high percentage of net revenues for the
foreseeable future. The loss of a major customer or any reduction in orders by
such customers, including reductions due to market or competitive conditions in
the electronics or EDA industries, would have an adverse effect on the Company's
results of operations. Moreover, the Company's ability to increase its sales
will depend in part upon its ability to obtain orders from new customers, as
well as the financial condition and success of its existing customers and the
general economy. There can be no assurance that such increases will occur.

Sales Support Personnel - Due the complex and technical environment, in which
-----------------------
the Company operates, the Company's products require a significant level of pre-
sale support and in certain instances post-sale support.  Due to the current
competitive environment for these support resources, the Company is faced with
many challenges in hiring, training and retaining the best application support
resources available.  While the Company has been successful in the past in
hiring and training sales support personnel, there are no guarantees that the
Company can continue to hire and retain new employees as needed.  Should the
Company be unable to attract and maintain an adequate level of application
support personnel, the Company's sales and support operations could be adversely
impacted.  It is the Company's position to be competitive in the hiring,
training and retention of such personnel.

Liquidity and Capital Resources

Since inception, the Company has financed its operations, including increases in
accounts receivable, inventory and capital equipment acquisitions, primarily
through private and public sales of equity securities and a loan secured by
capital equipment. The Company's cash, cash equivalents and short-term
investments increased to $17,303,000 at July 1, 2000 from $10,534,000 at October
2, 1999.  The increase was a result of $7,492,000 of cash provided by operating
activities, $1,700,000 of cash used in investing activities (excluding short-
term investment activities) and $977,000 of cash provided by financing
activities.

                                       15
<PAGE>

Operating Activities - The Company's operating activities provided cash of
--------------------
$7,492,000 during the first nine months of fiscal 2000.  The $7,492,000 of cash
provided by operations was primarily due to net income adjusted for
depreciation, amortization, accumulated translation adjustments and accrued
rent, decreases in prepaid expenses and other assets, combined with increases in
accrued payroll and related expenses, deferred revenues and income taxes
payable.  These increases in cash were partially offset by increases in accounts
receivable and inventories combined with decreases in accounts payable, accrued
commissions and other accrued liabilities.

Investing Activities - Net cash used in investing activities for the first nine
--------------------
months of 2000 was $2,856,000.  The $2,856,000 of cash used was primarily the
result of purchases of short-term investments of $4,999,000 and acquisition of
capital equipment of $1,700,000 offset by $3,843,000 obtained from maturities of
short-term investment.

Financing Activities - Net cash provided by financing activities for the nine
--------------------
months ended July 1, 2000, was $977,000 and was primarily related to the net
sales of stock under stock option and purchase plans during the nine months.

The Company's primary unused sources of funds at July 1, 2000 consisted of
$13,277,000 of cash and cash equivalents, in addition to $4,026,000 of short-
term investments. In April 2000, the Company completed the signing of a new
credit facility that provides a $3,000,000 working capital line and a $1,500,000
capital equipment line. Of this total the Company has approximately $1,750,000
available under the working capital line as the remainder serves as collateral
under two letter of credit arrangements the Company has outstanding relating to
its facilities. The Company 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 the Company require other
financing arrangements, there can be no assurance that such financing will be
available, if at all, on terms favorable or acceptable to the Company.

                                       16
<PAGE>

                          PART II. OTHER INFORMATION



ITEMS 1-5 Not applicable

ITEM 6    Exhibits and Reports on Form 8-K


(a) INDEX TO EXHIBITS
                               INDEX TO EXHIBITS

<TABLE>
<CAPTION>


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

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

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

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

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

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

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

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

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

                                       17
<PAGE>

<TABLE>
<CAPTION>

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

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

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

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

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

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

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

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

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

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

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

                                       18
<PAGE>

<TABLE>
<CAPTION>

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

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

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

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

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

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

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

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

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

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

                                       19
<PAGE>

<TABLE>
<CAPTION>

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

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

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

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

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

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

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

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

10.27     Revolving Credit and Security Agreement dated as of March 31, 2000 by and
          between IKOS Systems, Inc. and Comerica Bank- California.

27.1      Financial Data Schedule
</TABLE>


(b) REPORTS ON FORM 8-K

     NONE

                                       20
<PAGE>

                                  SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

                                      IKOS SYSTEMS, INC.
                                      ------------------
                                      Registrant


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

                                       20