<PAGE>
 
                    U.S. 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 quarterly period ended September 30, 1998 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 NO. 0-13836

                         SILICON VALLEY RESEARCH, INC.
                         -----------------------------
             (Exact name of registrant as specified in its charter)


                 California                 94-2743735
------------------------------------------------------------------------------
  (State or other jurisdiction of           (IRS Employer
  incorporation or organization)            Identification No.)


  6360 San Ignacio Avenue    San Jose, CA            95119-1231
------------------------------------------------------------------------------
  (Address of principal executive offices)           (Zip Code)

                              (408) 361-0333
------------------------------------------------------------------------------
       Registrant's telephone number, including area code


------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)

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 Shares Outstanding at September 30, 1998:  26,203,220

           This report, containing all exhibits, contains 35 pages. 
                       The exhibit index in on page 20.
<PAGE>
 
                SILICON VALLEY RESEARCH, INC. AND SUBSIDIARIES
                                        
                                     INDEX

                                                                          Pages
                                                                          -----
Part I.   FINANCIAL INFORMATION
          ---------------------

          Item 1.    Financial Statements

            Consolidated Balance Sheets -
              March 31, 1998 and September 30, 1998 (unaudited)               3
 
            Consolidated Statements of Operations -
               Three and Six Months Ended September 30, 1997 
               and 1998 (unaudited)                                           4
 
            Consolidated Condensed Statements of Cash Flows -
               Six Months Ended September 30, 1997 and 1998 (unaudited)       5
 
            Notes to Consolidated Financial Statements                      6-9
 
          Item 2.    Management's Discussion and Analysis of
                     Financial Condition and Results of
                     Operations                                           10-18
 
          Item 3.    Quantitative and Qualitative Disclosures 
                     About Market Risk                                       18
 
Part II.    OTHER INFORMATION                                             19-20
            -----------------

          Item 1  Legal Proceedings
          Item 2  Changes in Securities and Use of Proceeds
          Item 3  Defaults Upon Senior Securities
          Item 4  Submission of Matters to a Vote of
                  Securities Holders
          Item 5  Other Information
          Item 6  Exhibits and Reports on Form 8-K

          Signatures                                                         21

                                  Page 2 of 35
<PAGE>
 
                        PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

                SILICON VALLEY RESEARCH, INC. AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS
                                (IN THOUSANDS)

 
Assets                                      March 31, 1998  September 30, 1998
----------------------------------------------------------  -------------------
                                                                (Unaudited)

Current Assets:                                        
  Cash and cash equivalents                   $  1,926           $  1,276
  Accounts receivable, net of allowances of            
     $150 in each period                           484                410
  Prepaid expenses and other current assets        257                140
                                              --------           --------
                                                 2,667              1,826
                                                       
Fixed assets, net                                  667                530
Other assets, net                                1,931              1,596
                                              --------           --------
                                              $  5,265           $  3,952
                                              ========           ========
                                                       
Liabilities and Shareholders' Equity                   
-------------------------------------------            
                                                       
Current Liabilities:                                   
  Short-term borrowing                        $    285           $    285
  Current portion of long-term debt                263                203
  Notes payable                                    200                 75
  Accounts payable                                 352                254
  Accrued expenses                                 968                814
  Deferred revenue                                 539                394
                                              --------           --------
                                                 2,607              2,025
                                                       
Long-term debt, less current portion                77                 57
                                              --------           --------
                                                       
Deferred tax liability                              17                 --
                                              --------           --------
                                                       
Shareholders' Equity:                                  
Preferred stock, no par value:                         
  Authorized: 1,000 shares                             
  Issued and outstanding: none                      --                 --   
Common stock, no par value:                            
  Authorized: 60,000 shares                            
  Issued and outstanding:                              
   23,759 shares at March 31, 1998                     
   and 26,203 shares at September 30, 1998      41,834             43,928
Accumulated deficit                            (39,346)           (42,161)
Cumulative translation adjustment                   76                103
                                              --------           --------
                                                 2,564              1,870
                                              --------           --------
                                                       
                                              $  5,265           $  3,952
                                              ========           ========

  The accompanying notes are an integral part of these consolidated financial
                                  statements.

                                  Page 3 of 35
<PAGE>
 
                 SILICON VALLEY RESEARCH, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (UNAUDITED)
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

 
                                        Three Months Ended    Six Months Ended
                                          September 30,        September 30,  
                                         1997       1998       1997      1998 
                                       ---------  ---------  --------  --------
Revenue:                                                                       
  Products                              $   487    $   157   $   729   $   382 
  Services                                  497        203       968       571 
                                        -------    -------   -------   ------- 
  Total revenue                             984        360     1,697       953 
                                        -------    -------   -------   ------- 
                                                                               
Cost of revenue:                                                               
  Products                                  212        109     1,530       179 
  Services                                  155        117       261       346 
                                        -------    -------   -------   ------- 
  Total cost of revenue                     367        226     1,791       525 
                                        -------    -------   -------   ------- 
                                                                               
Gross margin                                617        134       (94)      428 
                                        -------    -------   -------   ------- 
                                                                               
Operating expenses:                                                            
  Engineering, research and development   1,152        771     1,777     1,407 
  Selling and marketing                     932        506     2,273     1,174 
  General and administrative                277        231       580       643 
  Impairment loss on prepaid royalty         --         --     1,217        -- 
                                        -------    -------   -------   ------- 
  Total operating expenses                2,361      1,508     5,847     3,224
                                        -------    -------   -------   ------- 
                                                                               
Operating loss                           (1,744)    (1,374)   (5,941)   (2,796)
                                        -------    -------   -------   ------- 
 
Other income (expense):
  Interest income                            34         32       105        45 
  Interest expense                           (8)       (14)      (12)      (29)
  Other, net                                (96)       104        40       (35)
                                        -------    -------   -------   ------- 
  Total other income                        (70)       122       133       (19)
                                        -------    -------   -------   ------- 
                                                                               
Loss before provision for                                                      
  income taxes                           (1,814)    (1,252)   (5,808)   (2,815)
                                                                               
Provision for income taxes                   --         --        --        -- 
                                        -------    -------   -------   ------- 
Net loss                                $(1,814)   $(1,252)  $(5,808)  $(2,815)
                                        =======    =======   =======   ======= 
 

Net loss per basic share and diluted 
  share                                  $(0.11)    $(0.05)   $(0.35)   $(0.11)
                                        =======     ======    ======    ======

Weighted-average common shares
  outstanding (basic and diluted)        16,773     26,199    16,375    25,290
                                         ======     ======    ======    ======

  The accompanying notes are an integral part of these consolidated financial
                                  statements.

                                  Page 4 of 35
<PAGE>
 
                 SILICON VALLEY RESEARCH, INC. AND SUBSIDIARIES
                CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
                                  (UNAUDITED)
                                 (IN THOUSANDS)

 
                                                           Six Months Ended
                                                             September 30,
                                                             1997     1998
                                                           -------   ------- 
 
Cash Flows from Operating Activities:
Net loss                                                   $(5,808)   $(2,815)
Adjustments to reconcile net loss to net
cash used in operating activities:
  Provision for impairment of prepaid marketing royalty      1,217    
  Amortization of software development costs                 1,259        109
  Depreciation and amortization                                522        376
Changes in assets and liabilities, net:
  Accounts receivable                                         (136)        74
  Prepaid expenses and other current assets                    180        117
  Accounts payable                                             477        (98)
  Accrued expenses                                            (480)      (154)
  Deferred revenue                                             (85)      (145)
  Other, net                                                    77         27
                                                           -------    -------
 
Net cash used in operating activities                       (2,777)    (2,509)
                                                           -------    -------
 
Cash Flows from Investing Activities:
Acquisition of fixed assets                                    (21)       (17)
Capitalization of software development costs and
  purchase of software licenses                             (1,038)       (23)
                                                           -------    -------
 
Net cash used in investing activities                       (1,059)       (40)
                                                           -------    -------
 
Cash Flows from Financing Activities:
Principal payments of long-term debt                          (121)       (97)
Principal payments on notes payable                             --       (125)
Advances on credit line                                        301         --
Proceeds from issuance of common stock                       3,888      2,094
                                                           -------    -------
 
Net cash provided by financing activities                    4,068      1,872
                                                           -------    -------
 
Effect of exchange rate changes on cash                        (32)        27
                                                           -------    -------
 
Net increase (decrease)  in cash and
  cash equivalents                                             200       (650)
Cash and cash equivalents at beginning
  of period                                                  2,064      1,926
                                                           -------    -------
 
Cash and cash equivalents at end
  of period                                                $ 2,264    $ 1,276
                                                           =======    =======

  The accompanying notes are an integral part of these consolidated financial
                                  statements.

                                  Page 5 of 35
<PAGE>
 
                 SILICON VALLEY RESEARCH, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                         SEPTEMBER 30, 1998- UNAUDITED
                                 (IN THOUSANDS)

NOTE 1:  BASIS OF PRESENTATION AND FINANCIAL STATEMENT INFORMATION

     The accompanying consolidated financial statements have been prepared by
the Company pursuant to the rules and regulations of the Securities and Exchange
Commission for interim financial statements. Therefore, they do not include all
the disclosures which were presented in the Company's annual report on Form 10-
K. These financial statements do not include all disclosures required by
generally accepted accounting principles and accordingly, should be read in
conjunction with the consolidated financial statements and notes included as
part of the Company's latest annual report on Form 10-K.

     In the opinion of management, the consolidated financial statements include
all adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the consolidated financial position, results of operations and
cash flows for the interim period.  The results of operations presented are not
necessarily indicative of the results to be expected for the full year or for
any other period.

     The report of PricewaterhouseCoopers LLP on the Company's fiscal 1998
consolidated financial statements dated June 12, 1998 included an explanatory
paragraph regarding the Company's ability to continue as a going concern.  There
can be no assurance that the Company will not continue to incur significant
operating losses or that required additional financing will be available to meet
the Company's business plans in fiscal 1999 and beyond.

NOTE 2:  EARNINGS PER SHARE

     The Company has adopted Statement of Financial Accounting Standards No. 128
"Earnings per Share" (FAS 128).  As required by the statement, all prior period
earnings per share (EPS) amounts presented have been restated to conform with
the provisions of FAS 128.  Under FAS 128, the Company presents two EPS amounts.
Basic EPS is calculated based on income or loss to common shareholders and the
weighted-average number of shares outstanding during the reported period.
Diluted EPS includes additional dilution from common stock equivalents, such as
stock issuable pursuant to the exercise of stock options and warrants.  Common
stock equivalents were not included in the computation of diluted earnings per
share when the Company reported a loss because to do so would have been
antidilutive for the periods presented.

     The following is a reconciliation of the computation for basic and diluted
EPS:

<TABLE> 
<CAPTION> 
                                                Three Months Ended      Six Months Ended
                                                   September 30,          September 30,
                                                 1997        1998       1997        1998
                                                 ----        ----       ----        ----
<S>                                            <C>         <C>         <C>         <C> 
Net loss                                       $(1,814)    $(1,252)    $(5,808)    $(2,815)
                                               =======     =======     =======     =======

Weighted-average common shares
  outstanding (basic)                           16,773      26,199      16,375      25,290
 
Weighted-average common stock equivalents:
  Stock options                                     --          --          --          --
  Warrants                                          --          --          --          --
                                               -------     -------     -------     -------
 Weighted-average common shares
  outstanding (diluted)                         16,773      26,199      16,375      25,290
                                               =======     =======     =======     =======
</TABLE>

                                  Page 6 of 35
<PAGE>
 
                SILICON VALLEY RESEARCH, INC. AND SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                         SEPTEMBER 30, 1998- UNAUDITED
                                (IN THOUSANDS)

NOTE 3:  COMPREHENSIVE INCOME (LOSS)

     The Company has adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income."  This Statement requires that all items
recognized under accounting standards as components of comprehensive earnings be
reported in an annual financial statement that is displayed with the same
prominence as other annual financial statements.  This Statement also requires
that an entity classify items of other comprehensive earnings by their nature in
an annual financial statement.  For example, other comprehensive earnings may
include foreign currency translation adjustments and unrealized gains and losses
on marketable securities classified as available-for-sale.  Annual financial
statements for prior periods will be reclassified, as required.  The Company's
total comprehensive earnings were as follows:

<TABLE> 
<CAPTION> 
                                     Three Months Ended         Six Months Ended
                                        September 30,             September 30,
                                       1997       1998           1997       1998
                                       ----       ----           ----       ----
<S>                                  <C>         <C>           <C>         <C>
Net loss                             $(1,814)    $(1,252)      $(5,808)    $(2,815)
Other comprehensive (loss) gain           36         (95)          (32)         27
                                     -------     -------       -------     -------
  Total comprehensive loss           $(1,778)    $(1,347)      $(5,840)    $(2,788)
                                     =======     =======       =======     =======
</TABLE>

NOTE 4:  STATEMENT OF CASH FLOWS INFORMATION

                                                    Six Months Ended
                                                     September 30,
                                                 1997                 1998
                                                 ----                 ----   
Supplemental Cash Flow Information:
Cash paid during the period for:
     Interest                                     $12                  $29
     Income Taxes                                  --                   --
 
 
NOTE 5:   BALANCE SHEET COMPONENTS
                                              March 31,          September 30,
                                                 1998                 1998
                                                 ----                 ----     
Other Assets:                  
Software development costs                    $ 2,098               $  799
Software licenses                               3,134                1,241
                                              -------               ------
                                                5,232                2,040
Less accumulated amortization                  (3,898)                (889)
                                              -------               ------
                                                1,334                1,151
Prepaid royalties, net                             67                   --
Goodwill                                          245                  220
Other                                             285                  225
                                              -------               ------
                                              $ 1,931               $1,596
                                              =======               ======

Accrued Expenses:
Payroll and related costs                     $   477               $  399
Taxes payable                                     147                  145
Accrued professional fees                         229                  204
Other                                             115                   66
                                              -------               ------
                                              $   968               $  814
                                              =======               ====== 

                                  Page 7 of 35
<PAGE>
 
                 SILICON VALLEY RESEARCH, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                         SEPTEMBER 30, 1998- UNAUDITED
                                 (IN THOUSANDS)

NOTE 6:  BANK LINES OF CREDIT

     The Company had a $298 equipment line with its bank.  As of September 30,
1998, $149 remains to be repaid on that line.  The line bears interest at prime
plus two percent, 10.5% at September 30, 1998. The line is collateralized by
substantially all of the assets of the Company.  The terms of the credit
agreement require minimum amounts of net worth, maximum ratios of indebtedness
to net worth and minimum quarterly after tax profits.  The Company is currently
not in compliance with certain of these covenants.

     In June 1997, the Company entered into an additional line of credit with
its bank.  The revolving line of credit had provided for borrowings limited to
certain percentages of eligible accounts receivable. As of September 30, 1998,
$285 had been borrowed under the line of credit.  The revolving line of credit
expired by its terms in early June 1998.  The parties are currently in the
process of negotiating the terms and timing for repayment of amounts borrowed on
the line of credit and the equipment line.  There can be no assurance that the
Company will be able to successfully re-negotiate the terms and timing for
repayment, in which event the lender may accelerate the Company's payment
obligations and exercise other rights and remedies as a secured creditor under
the credit agreements and by law, including, but not limited to, foreclosure on
substantially all the Company's assets which were pledged as collateral under
the lines of credit.  The amounts outstanding under its line of credit and
equipment line of credit are classified as current in the September 30, 1998
balance sheet.

NOTE 7:  RECENT ACCOUNTING PRONOUNCEMENTS

     In October 1997 and March 1998, the American Institute of Certified Public
Accountants issued Statements of Position 97-2, "Software Revenue Recognition"
("SOP 97-2") and 98-4 "Deferral of the Effective Date of a Provision of SOP 97-
2, Software Revenue Recognition" ("SOP 98-4"), which the Company is required to
adopt for transactions entered into in the fiscal year beginning April 1, 1998.
SOP 97-2 and SOP 98-4 provide guidance on recognizing revenue on software
transactions and supersede SOP 91-1. The Company believes that the adoption of
SOP 97-2 and SOP 98-4 will not have a significant impact on its current
licensing or revenue recognition practices.  However, should the Company adopt
new or change its existing licensing practices, the Company's revenue
recognition practices may be subject to change to comply with the accounting
guidance provided in SOP 97-2 and SOP 98-4.

     In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131 ("FAS 131"), "Disclosures About Segments of an Enterprise and Related
Information."  This statement establishes standards for the way companies report
information about operating segments in annual financial statements.  It also
establishes standards for related disclosures about products and services,
geographic areas and major customers.  The Company has not yet determined the
impact, if any, of adopting this new standard.  The disclosures prescribed by
FAS 131 will be effective for the Company's consolidated financial statements
for the year ending March 31, 1999.

     In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1").  SOP 98-1
provides guidance for determining whether computer software is internal-use
software and on accounting for the proceeds of computer software originally
developed or obtained for internal use and then subsequently sold to the public.
It also provides guidance on capitalization of the costs incurred for computer
software developed or obtained for internal use.  The Company has not yet
determined the impact, if any, of adopting this statement.  The disclosures
prescribed by SOP 98-1 will be effective for the year ending March 31, 2000
consolidated financial statements.

                                  Page 8 of 35
<PAGE>
 
                 SILICON VALLEY RESEARCH, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                         SEPTEMBER 30, 1998 - UNAUDITED
                                 (IN THOUSANDS)
                                        
     In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS 133).  SFAS 133 establishes accounting and reporting standards
for derivative instruments, embedded in other contracts, and for hedging
activities.  It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value.  The accounting for changes in the fair value of a
derivative depends on the intended use of the derivative and the resulting
designation.  The Company currently does not invest in derivative instruments.

NOTE 8:  YEAR 2000 ISSUES

     The "Year 2000 Issue" arises because most computer systems and programs
were designed to handle only a two-digit year, as opposed to a four digit year.
When the year 2000 begins, these computers may interpret "00" as the year 1900
and could either stop processing date-related computations or could process them
incorrectly.  As customers and potential customers of the Company begin to
devote incremental resources to this issue, resources previously allocated to
other information systems requirements may be redirected to address the Year
2000 issue.  To the extent that the Company's products are not selected as part
of customers' overall Year 2000 solution, redirection of these customer
resources could have a material adverse effect on the Company's results of
operations and financial condition.  In addition,  the Year 2000 Issue creates
risk for the Company from unforeseen problems in its internal computer systems
and from third parties with which the Company interacts.  Such failures of the
Company's and/or third parties' computer systems could have a material impact on
the Company's ability to conduct its business and to process and account for the
transfer of funds electronically.

                                  Page 9 of 35
<PAGE>
 
ITEM 2.             MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS
                                (IN THOUSANDS)

This Management's Discussion and Analysis of Financial Condition and Results of
Operations includes a number of forward-looking statements which reflect the
Company's current view with respect to future events and financial performance.
These forward-looking statements are subject to certain risks and uncertainties,
including those discussed in the Other Factors Affecting Future Results section
of this Item 2, elsewhere in this Form 10-Q and as set forth in the Company's
form 10-K on file with the SEC  that could cause actual results to differ
materially from historical results or those anticipated.  In this report, the
words "anticipates," "believes," "expects," "intends," "future," and similar
expressions identify forward-looking statements.  Readers are cautioned not to
place undue reliance on these forward-looking statements, which speak only as of
the date hereof.

RESULTS OF OPERATIONS

REVENUE

     Revenue for the second quarter of fiscal year 1999, which ended September
30, 1998, was $360, a decrease from $984 in the second quarter a year ago.
Revenue for the six month period ended September 30, 1998 decreased to $953 from
$1,697 over the six month period ended September 30, 1997.  The decrease in
revenues was due primarily to a multi-license order from a leading design
services company being recorded during the prior year second quarter and a
decrease in product and service revenue, primarily resulting from a reduction in
capital investment by customers and increased competition.  Revenue from
services includes the activity of Quality I.C. Corporation, which was acquired
by the Company on March 31, 1998.  The Company intends to focus increasingly on
the services market going forward in order to provide customers with a service-
driven integrated circuit design solution.  International sales, primarily Japan
and the Far East accounted for 64% of total revenue in the second quarter of
fiscal 1999 compared to 24% in the second quarter a year ago.

     The Company's expense levels are based, in part, on its expectations as to
future revenue levels, which are difficult to predict.  A substantial portion of
the Company's revenues in each quarter results from shipments during the last
month of that quarter, and for that reason among others, the Company's revenues
are subject to significant quarterly fluctuations.  If revenue levels are below
expectations, as in the quarter ended September 30, 1998, operating results may
be materially and adversely affected.  In addition, the Company's quarterly and
annual results may fluctuate as a result of many factors, including the size and
timing of software license fees and service contracts, timing of co-development
projects with customers, timing of operating expenditures, increased
competition, new product announcements and releases by the Company and its
competitors, gain or loss of significant customers or distributors, expense
levels, renewal of maintenance contracts, pricing changes by the Company or its
competitors, personnel changes, foreign currency exchange rates, and economic
conditions generally and in the electronics industry specifically.

COST OF REVENUE

     Cost of products for the second quarter of fiscal year 1999 was $109,
compared to $212 in the second quarter of fiscal 1998.  Cost of products for the
six months ended September 30, 1998 was $179, compared to $1,530 for the six
months ended September 30, 1997.  Cost of sales of products is primarily the
amortization of software development costs and amortization of prepaid royalty
payments to third parties.  Based on the Company's plans for the future, the
Company wrote-off $1,036 of unamortized software development costs in the six
months ended September 30, 1997.

     Cost of services for the second quarter of fiscal year 1999 was $117
compared to $155 in the second quarter of fiscal 1998.  Cost of services for the
six months ended September 30, 1998 was $346 compared to $261 for the six months
ended September 30, 1997.  Cost of services is primarily the cost of providing
design services, technical support and technical documentation.  Cost of
services includes the design services costs of Quality I.C. Corporation, which
was acquired by the Company on March 31, 1998.

                                 Page 10 of 35
<PAGE>
 
ENGINEERING, RESEARCH AND DEVELOPMENT EXPENSES

     Engineering, research and development expenses for the second quarter of
fiscal year 1999 were $771 compared to $1,152 in the second quarter a year ago.
Comparing the second quarter of fiscal 1999 and the second quarter of fiscal
1998, engineering, research and development expenses were 214% and 117% of total
revenue, respectively. Engineering, research and development expenses for the
six months ended September 30, 1998 were $1,407 compared to $1,777 for the six
months ended September 30, 1997. Comparing these periods, engineering, research
and development expenses were 148% and 105% of total revenue, respectively. The
decrease in engineering, research and development expenses is due to cost-
cutting measures instituted by management, including a reduction in personnel.

SELLING AND MARKETING EXPENSES

     Selling and marketing expenses for the second quarter of fiscal year 1999
decreased to $506 from $932 in the second quarter a year ago.  In the second
quarter of fiscal 1999 and the second quarter of fiscal 1998, selling and
marketing expenses were 141% and 95% of total revenue, respectively.  Selling
and marketing expenses for the six months ended September 30, 1998 decreased to
$1,174 from $2,273 for the six months ended September 30, 1997.  Comparing the
six month periods, selling and marketing expenses were 123% and 134% of total
revenue, respectively.  The decrease in actual dollars is due to the effects of
the Company's cost-cutting measures, including a reduction in salaries and
occupancy costs.

GENERAL AND ADMINISTRATIVE EXPENSES

     General and administrative expenses decreased to $231 for the second
quarter of fiscal year 1999 from $277 in the second quarter a year ago. In the
second quarter of fiscal 1999 and the second quarter of fiscal 1998, general and
administrative expenses were 64% and 28% of total revenue, respectively. The
decrease for the second quarter of fiscal 1999 is due to a decrease in
professional fees. General and administrative expenses for the six months ended
September 30, 1998 increased to $643 from $580 for the six months ended
September 30, 1997. Comparing the six month periods, general and administrative
expenses were 67% and 34% of total revenue, respectively. The six month increase
is due to the activity of Quality I.C. Corporation, which was acquired by the
Company on March 31, 1998.

IMPAIRMENT LOSS ON PREPAID ROYALTY

     In June 1996, the Company entered into an agreement whereby the Company was
granted the exclusive marketing rights to Bell Labs' CLOVER line of deep
submicron verification products worldwide, with the exception of Japan and
Taiwan.  Pursuant to the four year agreement, the Company had made prepaid
royalty payments of $1,750.  Despite active marketing efforts, the product had
limited success due to product issues and to strong competitive factors.
Accordingly, the Company ceased sales of the product line in July 1997.
Provision was made in the September 30, 1997 financial statements to expense the
full amount of unamortized prepaid royalty of $1,217, the future value of which
was considered impaired.

LIQUIDITY AND CAPITAL RESOURCES

     The Company's primary unused sources of funds at September 30, 1998
consisted of cash and cash equivalents of $1,276. As of September 30, 1998, the
Company's cash and cash equivalents were not sufficient to discharge the
Company's current liabilities. On June 8, 1998, the Company's $2,000 line of
credit with its bank expired and the $285 outstanding under the line of credit
became due and payable. In addition, the Company is currently not in compliance
with certain financial covenants in the line of credit and in its equipment line
with the same lender. There can be no assurance that the Company will be able to
obtain a waiver for its noncompliance with such covenants. If the Company is in
default under such lines of credit and if such defaults are not waived, the
lender may accelerate the Company's payment obligations and exercise other
rights and remedies as a secured creditor under the credit agreements and by
law, including, but not limited to, foreclosure on substantially all the
Company's assets which were pledged as collateral under the lines of credit. The
exercise of rights and remedies under the lines of credit could prevent or delay
the

                                 Page 11 of 35
<PAGE>
 
continued development and marketing of the Company's products and services,
could require substantial curtailment of the Company's operations and could
result in the Company's bankruptcy.

     The Company believes that its cash and cash generated from operations will
not be sufficient to finance its operations through the remainder of fiscal
1999. Management is exploring financing alternatives to supplement the Company's
cash position. Potential sources of additional financing include private equity
financings, mergers, strategic investments, strategic partnerships or various
forms of debt financings. However, if the Company's Common Stock is delisted
from trading on the Nasdaq National Market, the Company's ability to obtain
additional financing through the issuance of its Common Stock or securities
convertible into its Common Stock could be adversely affected. See "Compliance
with Nasdaq Listing Requirements; Disclosure Relating to Low-Priced Stock." The
Company may issue a series of Preferred Stock with rights, preferences, or
privileges senior to those of the Company's Common Stock. The Company has no
commitments or arrangement to obtain any additional funding and there can be no
assurance that the required financing of the Company will be available on
acceptable terms, if at all. The Company is currently negotiating with its
creditors for the terms and timing for repayment of amounts due such creditors.
The unavailability or timing of any financing could prevent or delay the
continued development and marketing of the Company's products and services,
could require substantial curtailment of the Company's operations and could
result in the Company's bankruptcy.

     Since inception, the Company has financed its operations primarily through
sales of equity securities and to a lesser extent, cash generated from
operations.  To date in fiscal 1999, the Company has received net cash of $2,094
from the private placement of equity securities and the exercise of warrants and
options to purchase Common Stock ("financing activities").  During the six
months ended September 30, 1998, cash and cash equivalents decreased $650 from
$1,926 to $1,276.  This decrease resulted from cash provided by the financing
activities of $1,872 less cash used by operations of $2,509 and $40 of cash used
for investing activities.

     The Company incurred a loss for the first six months of fiscal 1999 and
expects operating losses to continue, at least in the near term.  The
achievement of profitability is primarily dependent upon the continued
development and commercial acceptance of the Company's products and services,
the successful management of the business and management's ability to
strategically focus the Company.  There can be no assurance as to whether or
when achievement of profitable operations will occur.  In addition, the Company
is experiencing negative cash flow from operations and it is expected that it
will continue to experience negative cash flow at least through fiscal 1999 and
potentially thereafter.

OTHER FACTORS AFFECTING FUTURE RESULTS

NEED FOR ADDITIONAL FUNDS; NO ASSURANCE OF AVAILABLE FINANCING.  The Company's
primary unused sources of funds at September 30, 1998 consisted of cash and cash
equivalents of $1,276.  As of September 30, 1998, the Company's cash and cash
equivalents were not sufficient to discharge the Company's current liabilities.
On June 8, 1998, the Company's $2,000 line of credit with its bank expired and
the $285 outstanding under the line of credit became due and payable.  In
addition, the Company is currently not in compliance with certain financial
covenants in the line of credit and in its equipment line with the same lender.
There can be no assurance that the Company will be able to obtain a waiver for
its noncompliance with such covenants.  If  the Company is in default under such
lines of credit and if such defaults are not waived, the lender may accelerate
the Company's payment obligations and exercise other rights and remedies as a
secured creditor under the credit agreements and by law, including, but not
limited to, foreclosure on substantially all the Company's assets which were
pledged as collateral under the lines of credit.  The exercise of rights and
remedies under the lines of credit could prevent or delay the continued
development and marketing of the Company's products and services, could require
substantial curtailment of the Company's operations and could result in the
Company's bankruptcy.

     The Company believes that its cash and cash generated from operations will
not be sufficient to finance its operations through the remainder of fiscal
1999.  Management is exploring financing alternatives to supplement the
Company's cash position.  Potential sources of additional financing include
private equity financings, mergers, strategic investments, strategic
partnerships or various forms of debt financings.  However, if the Company's
Common Stock is delisted from trading on the Nasdaq National Market, the
Company's ability to obtain additional financing through the issuance of its
Common Stock or securities

                                 Page 12 of 35
<PAGE>
 
convertible into its Common Stock could be adversely affected. See "Compliance
with Nasdaq Listing Requirements; Disclosure Relating to Low-Priced Stock." The
Company may issue a series of Preferred Stock with rights, preferences, or
privileges senior to those of the Company's Common Stock. The Company has no
commitments or arrangement to obtain any additional funding and there can be no
assurance that the required financing of the Company will be available on
acceptable terms, if at all. The Company is currently negotiating with its
creditors for the terms and timing for repayment of amounts due such creditors.
The unavailability or timing of any financing could prevent or delay the
continued development and marketing of the Company's products and services,
could require substantial curtailment of the Company's operations and could
result in the Company's bankruptcy.

RECENT AND EXPECTED LOSSES; ACCUMULATED DEFICIT.  The Company incurred a net
loss of $1,252 for the quarter ended September 30, 1998 and had an accumulated
deficit of $42,161 as of September 30, 1998.  The Company expects to incur
losses for the remainder of its current fiscal year.  There can be no assurance
that the Company will not incur additional losses for a longer period, will
generate positive cash flow from its operations, or that the Company will attain
or thereafter sustain profitability in any future period.  To the extent the
Company continues to incur losses or grows in the future, its operating and
investing activities may use cash and, consequently, such losses or growth will
require the Company to obtain additional sources of financing in the future or
to reduce operating expenses.

GOING CONCERN ASSUMPTIONS.  The Company's independent accountants' report on its
financial statements as of and for the years ended March 31, 1997 and 1998
contained an explanatory paragraph indicating that the Company's historical
operating losses and limited capital resources raise substantial doubt about its
ability to continue as a going concern.  The Company will require substantial
additional funds in the near future, and there can be no assurance that any
independent accountant's report on the Company's future financial statements
will not include a similar explanatory paragraph if the Company is unable to
raise sufficient funds or generate sufficient cash from operations to cover the
cost of its operations.

DEPENDENCE ON SINGLE PRODUCT LINE.  Revenues from sales of the SVR GARDS family
of products have historically represented  a substantial majority of the
Company's revenues.  The life cycles of the Company's products are difficult to
predict due to the effect of new product introductions or product enhancements
by the Company or its competitors, market acceptance of new and enhanced
versions of the Company's products and competition in the Company's marketplace.
Declines in the demand for the SVR GARDS family of products, whether as a result
of competition, technological change, price reductions or otherwise, could have
a material adverse effect on the Company's business, operating results and
financial condition.

NEW PRODUCTS AND RAPID TECHNOLOGICAL CHANGE; RISK OF PRODUCT DEFECTS.  The EDA
industry is characterized by extremely rapid technological change, frequent new
product introductions and enhancements, evolving industry standards and rapidly
changing customer requirements.  The development of more complex ICs embodying
new technologies will require increasingly sophisticated design tools.  The
Company's future results of operations will depend, in part, upon its ability to
enhance its current products and to develop and introduce new products on a
timely and cost-effective basis that will keep pace with technological
developments and evolving industry standards and methodologies, as well as
address the increasingly sophisticated needs of the Company's customers.  The
Company has in the past, and may in the future, experience delays in new product
development and product enhancements.

     The Company has recently released significant upgrades to GARDS and SC.
Improvements were made to the Company's placement technology providing greater
completion utilization rates.  Enhancements to the Company's ECO flow will
minimize the number of "design turns" needed to complete a design.  Additional
engineering effort was invested in the refinement of the Company's delay
modeling and analysis capabilities.  This includes the integration of 3D
modeling and extraction software, which the Company is offering through an OEM
agreement with OEA International, Inc.  There can be no assurance that these new
products will gain market acceptance or that the Company will be successful in
developing and  marketing product enhancements or other new products that
respond to technological change, evolving industry standards and 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 product enhancements, or that its new products and product
enhancements will adequately meet the requirements of the marketplace and
achieve any significant degree of market acceptance.

                                 Page 13 of 35
<PAGE>
 
     In addition, all of the Company's current products operate in, and planned
future products will operate in, the Unix operating system.  In the event that
another operating system, such as Windows NT, were to achieve broad acceptance
in the EDA industry, the Company would be required to port its products to such
an operating system, which would be costly and time consuming and could have a
material adverse effect on the Company's business, operating results or
financial condition.  Failure of the Company, for technological or other
reasons, to develop and introduce new products and product enhancements in a
timely and cost-effective manner would have a material and adverse effect on the
Company's business, operating results and financial condition.  In addition, the
introduction, or even announcement of products by the Company or one or more of
its competitors embodying new technologies or changes in industry standards or
customer requirements could render the Company's existing products obsolete or
unmarketable.  There can be no assurance that the introduction or announcement
of new product offerings by the Company, or one or more of its competitors, will
not cause customers to defer purchases of existing Company products.  Such
deferment of purchases could have a material adverse effect on the Company's
business, operating results or financial condition.

     Software products as complex as those offered by the Company may contain
defects or failures when introduced or when new versions are released.  The
Company has in the past discovered software defects in certain of its products
and may experience delays or lost revenue to correct such defects in the future.
Although the Company has not experienced material adverse effects resulting from
any such defects to date, there can be no assurance that, despite testing by the
Company, errors will not be found in new products or releases after commencement
of commercial shipments, resulting in loss of market share or failure to achieve
market acceptance.  Any such occurrence could have a material effect upon the
Company's business, operating results or financial condition.

COMPLIANCE WITH NASDAQ LISTING REQUIREMENTS; DISCLOSURE RELATING TO LOW-PRICED
STOCK The Company's common stock is quoted on the Nasdaq National Market (the
"National Market").  However, in order to continue to be included in the
National Market, a company must meet certain maintenance criteria.  The
maintenance criteria requires a minimum bid price of $1.00 per share (the
"Minimum Bid Price"), $4,000 in net tangible assets (total assets less total
liabilities and goodwill) (the "Required Net Tangible Assets") and $5,000 market
value of the public float (excluding shares held directly or indirectly by any
officer or director of the Company and by any person holding beneficially more
than 10% of the Company's outstanding shares) (the "Required Public Float").

     By letter dated July 24, 1998, The Nasdaq Stock Market, Inc. ("Nasdaq")
notified the Company that it would be delisted from the National Market because
of its failure to maintain the Required Net Tangible Assets.  On July 29, 1998,
the Company requested and subsequently received approval for an oral hearing to
appeal Nasdaq's decision.  In this hearing, Nasdaq would also address the issue
of the Company's noncompliance with the Minimum Bid Price.  The hearing was held
on October 8, 1998 and as of November 12, 1998, Nasdaq has not rendered its
decision.  As of November 11, 1998, the closing bid price of a share of the
Company's common stock was $0.1875 and the Company's common stock had failed to
maintain the Minimum Bid Price.  The Company also failed to meet the Required
Net Tangible Assets and Required Public Float as of that date.

     Failure to meet these maintenance criteria and an adverse decision by
Nasdaq will result in the delisting of the Company's common stock from the
National Market.  Trading, if any, in the Company's common stock would
thereafter be conducted in the non-Nasdaq over-the-counter market.

     If the Company's common stock were delisted from trading on the National
Market, an investor may find it more difficult to dispose of, or to obtain
accurate quotation as to the market value of, the Company's common stock.  If
the trading price of the common stock was less that $5.00 per share, trading in
the common stock would also be subject to certain rules promulgated under the
Exchange Act, which require additional disclosure by broker-dealers in
connection with any trades involving a stock defined as a penny stock
(generally, any non-Nasdaq equity security that has a market price of less than
$5.00 per share, subject to certain exceptions).  Such rules require the
delivery, prior to any penny stock transaction, of a disclosure schedule
explaining the penny stock market and the risks associated therewith, and impose
various sales practice requirements on broker-dealers who sell penny stock to
persons other than established customers and accredited investors (generally
institutions).  For these types of transactions, the broker-dealer must make a
special suitability determination for the purchaser and have received the
purchaser's written consent to the 

                                 Page 14 of 35
<PAGE>
 
transactions prior to sale. The additional burden imposed upon broker-dealers by
such requirements may discourage broker-dealers from effecting transactions in
the common stock, which could severely limit the market liquidity of the common
stock and limit the ability of the Company's stockholders to sell the common
stock in the secondary market. In addition, the Company's ability to obtain
additional financing through the issuance of common stock or securities
convertible into common stock could be adversely affected.

POSSIBLE VOLATILITY OF STOCK PRICE.  The market price of the Company's common
stock has been volatile.  Future announcements concerning the Company or its
competitors, quarterly variations in operating results, announcements of
technological innovations, the introduction of new products or changes in
product pricing policies by the Company or its competitors, proprietary rights
or other litigation, changes in earnings estimates by analysts or other factors
could cause the market price of the common stock to fluctuate substantially.  In
addition, the stock market has from time to time experienced significant price
and volume fluctuation that have particularly affected the market prices for the
common stocks of technology companies and that have often been unrelated to the
operating performance of particular companies.  The broad market fluctuations
may also adversely affect the market price of the Company's common stock.  In
the past, following periods of volatility in the market price of a company's
securities, securities class action litigation has occurred against the issuing
company.  There can be no assurance that such litigation will not occur in the
future with respect to the Company.  Such litigation could result in substantial
costs and divert management attention and resources, which could have a material
adverse effect on the Company's business, financial condition and results of
operations.  Any adverse determination in such litigation could also subject the
Company to significant liabilities.

POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS.  Numerous factors may
materially and unpredictably affect operating results of the Company, including
the uncertainties of the size and timing of software license fees, timing of co-
development projects with customers, timing of operating expenditures, increased
competition, new product announcements and releases by the Company and its
competitors, gain or loss of significant customers or distributors, expense
levels, renewal of maintenance contracts, pricing changes by the Company or its
competitors, personnel changes, foreign currency exchange rates, 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 delivery of firm
purchase orders until their project commencement dates are determined, and, as a
result, the Company operates with no significant backlog.  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.
Historically, the Company has often recognized a substantial portion of its
license revenues in the last month of the quarter, with these revenues
frequently concentrated in the last two weeks of the quarter.  Operating results
would be disproportionately affected by a reduction in revenue because only a
small portion of the Company's expenses vary with its 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
revenues will increase or that the Company will achieve profitability.

LENGTHY SALES CYCLE.  The licensing and sales of the Company's software products
generally involves a significant commitment of capital by prospective customers,
with the attendant delays frequently associated with large capital expenditures
and lengthy acceptance procedures.  For these and other reasons, the sales cycle
associated with the licensing of the Company's products is typically lengthy and
subject to a number of significant risks over which the Company has little or no
control.  Because the timing of customer orders is hard to predict, the Company
believes that its quarterly operating results are likely to vary significantly
in the future.  Actual results of the Company could vary materially as a result
of a variety of factors, including, without limitation, the high average selling
price and long sales cycle for the Company's products, the relatively small
number of orders per quarter, dependence on sales to a limited number of large
customers, timing of receipt of orders, successful product introduction and
acceptance of the Company's products and increased competition.

DEPENDENCE UPON SEMICONDUCTOR AND ELECTRONICS INDUSTRIES; GENERAL ECONOMIC AND
MARKET CONDITIONS.  The Company is dependent upon the semiconductor and more
generally, the electronics industries.  Each of these industries is
characterized by rapid technological change, short product life cycles,
fluctuations in manufacturing capacity and pricing and gross margin pressures.
Each of these industries is highly cyclical and has periodically experienced
significant downturns, often in connection with, or in anticipation of, declines
in general economic conditions during which the number of new IC design projects

                                 Page 15 of 35
<PAGE>
 
often decreases.  Purchases of new licenses from the Company are largely
dependent upon the commencement of new design projects, and factors negatively
affecting any of these industries could have a material adverse effect on the
Company's business, operating results or financial condition.  The Company's
business, operating results and financial condition may in the future reflect
substantial fluctuations from period to period as a consequence of patterns and
general economic conditions in either the semiconductor or electronics industry.

INTERNATIONAL SALES.  International sales, primarily in Japan and Taiwan,
accounted for approximately 43%, 25%, 32% and 48% of the Company's total revenue
in fiscal 1996, 1997, 1998 and the first six months of 1999, respectively.
Revenues from international sales have declined as a result of the reduction in
capital expenditures by semiconductor manufacturers, particularly in Asia as a
result of the current financial crisis in that region, and increased competition
in the EDA software market.  The Company expects that international sales will
continue to account for a significant portion of its revenue.  This revenue
involves a number of inherent risks, including economic downturn in the
electronics industry in Asia, traditionally slower adoption of the Company's
products internationally, general strikes or other disruptions in working
conditions, generally longer receivables collection periods, unexpected changes
in or impositions of legislative or regulatory requirements, reduced protection
for intellectual property rights in some countries, potentially adverse taxes,
delays resulting from difficulty in obtaining export licenses for certain
technology and other trade barriers.  There can be no assurance that such
factors will not have a material adverse effect on the Company's future
international sales and, consequently, on the Company's results of operations.
Sales orders received by foreign sales subsidiaries are primarily denominated in
currencies other than the U.S. dollar.  In order to reduce the risk of loss
between the time the Company's products are purchased by subsidiaries and the
time payment is made, the subsidiaries enter into foreign exchange contracts
when economically feasible.

DEPENDENCE ON CERTAIN CUSTOMERS.  A small number of customers account for a
significant percentage of the Company's total revenue.  In fiscal 1996, HAL
Computer Systems, Inc., a subsidiary of Fujitsu Ltd. ("HAL"), accounted for 16%
and  Motorola, Inc. and Yamaha Corporation each accounted for 11% of the
Company's total revenue.  In fiscal 1997, HAL accounted for 14%, Lucent
Technologies accounted for 19% and Motorola, Inc. accounted for 13% of the
Company's total revenue.  In fiscal 1998, Motorola, Inc. accounted for 13% and
Aspec Technology accounted for 20% of the Company's total revenue.  There can be
no assurance that sales to these entities, individually or as a group, will
reach or exceed historical levels in any future period.  Any substantial
decrease in sales to one or more of these customers could have a material
adverse effect on the Company's business, operating results or financial
condition.

MANAGEMENT TRANSITION.  The Company is experiencing a period of management
transition that has placed, and may continue to place, a significant strain on
its resources, including its personnel.  James O. Benouis joined the Company in
March 1998 as its President and Chief Operating Officer.  On August 4, 1998, Mr.
Benouis was appointed Chief Executive Officer of the Company.  The Company's
ability to manage growth successfully will require its new management personnel
to work together effectively and will require the Company to improve its
operations, management and financial systems and controls.  If the Company
management is unable to manage this transition effectively,  the Company's
business, competitive position, results of operations and financial condition
will be materially and adversely affected.  See - "Dependence on Key Personnel"

DEPENDENCE ON KEY PERSONNEL.   The Company's success depends to a significant
extent upon a number of key technical and management employees, in particular,
upon Robert R. Anderson, the Company's Chairman, and James O. Benouis, the
Company's President and Chief Executive Officer.  The Company does not currently
have "key man" life insurance on Mr. Anderson, Mr. Benouis or any other members
of its senior management.  The loss of services of Mr. Anderson, Mr. Benouis or
any other members of its senior management could have a material adverse effect
on the Company.  See - "Management Transition."  The Company's success will
depend, in large part, on its ability to attract and retain highly-skilled
technical, managerial, sales and marketing personnel.  Competition for such
personnel is intense.  There can be no assurance that the Company will be
successful in retaining its key technical and management personnel and in
attracting and retaining the personnel it requires to grow.

                                 Page 16 of 35

<PAGE>
 
CONCENTRATION OF STOCK OWNERSHIP.  The present directors, executive officers and
5% shareholders of the Company and their affiliates beneficially own
approximately 72.6% of the outstanding common stock.  As a result, these
shareholders may be able to exercise significant influence over all matters
requiring shareholder approval, including the election of directors and approval
of significant corporate transactions.  Such concentration of ownership may have
the effect of delaying or preventing a change in control of the Company.

EFFECT OF CERTAIN CHARTER PROTECTIONS; BLANK CHECK PREFERRED STOCK.  The
Company's Board of Directors has the authority to issue up to 1,000 shares of
Preferred Stock and to determine the price, rights, preferences, privileges and
restrictions, including voting rights, without any further vote or action by the
Company's shareholders.  The rights of the holders of the common stock will be
subject to, and may be adversely affected by, the rights of the holders of any
Preferred Stock that may be issued in the future.  The issuance of Preferred
Stock, while providing desirable flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of making it
more difficult for a third party to acquire a majority of the outstanding voting
stock of the Company.

INFLATION.  To date, inflation has not had a significant impact on the results
of the Company's operations.

RECENT ACCOUNTING PRONOUNCEMENTS.  In October 1997 and March 1998, the American
Institute of Certified Public Accountants issued Statements of Position 97-2,
"Software Revenue Recognition" ("SOP 97-2") and 98-4 "Deferral of the Effective
Date of a Provision of SOP 97-2, Software Revenue Recognition" ("SOP 98-4"),
which the Company is required to adopt for transactions entered into in the
fiscal year beginning April 1, 1998.  SOP 97-2 and SOP 98-4 provide guidance on
recognizing revenue on software transactions and supersede SOP 91-1. The Company
believes that the adoption of SOP 97-2 and SOP 98-4 will not have a significant
impact on its current licensing or revenue recognition practices.  However,
should the Company adopt new or change its existing licensing practices, the
Company's revenue recognition practices may be subject to change to comply with
the accounting guidance provided in SOP 97-2 and SOP 98-4.

     In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131 ("FAS 131"), "Disclosures About Segments of an Enterprise and Related
Information."  This statement establishes standards for the way companies report
information about operating segments in annual financial statements.  It also
establishes standards for related disclosures about products and services,
geographic areas and major customers.  The Company has not yet determined the
impact, if any, of adopting this new standard.  The disclosures prescribed by
FAS 131 will be effective for the Company's consolidated financial statements
for the year ending March 31, 1999.

     In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1").  SOP 98-1
provides guidance for determining whether computer software is internal-use
software and on accounting for the proceeds of computer software originally
developed or obtained for internal use and then subsequently sold to the public.
It also provides guidance on capitalization of the costs incurred for computer
software developed or obtained for internal use.  The Company has not yet
determined the impact, if any, of adopting this statement.  The disclosures
prescribed by SOP 98-1 will be effective for the year ending March 31, 2000
consolidated financial statements.

     In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS 133).  SFAS 133 establishes accounting and reporting standards
for derivative instruments, embedded in other contracts, and for hedging
activities.  It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value.  The accounting for changes in the fair value of a
derivative depends on the intended use of the derivative and the resulting
designation.  The Company currently does not invest in derivative instruments.

YEAR 2000 ISSUE.  The "Year 2000 Issue" arises because most computer systems and
programs were designed to handle only a two-digit year, as opposed to a four
digit year.  When the year 2000 begins, these computers may interpret "00" as
the year 1900 and could either stop processing date-related computations or
could process them incorrectly.  As customers and potential customers of the
Company begin to devote incremental resources to this issue, resources
previously allocated to other information systems requirements may be redirected
to address the Year 2000 issue.  To the extent that the Company's products are
not 

                                 Page 17 of 35
<PAGE>
 
selected as part of customers' overall Year 2000 solution, redirection of these
customer resources could have a material adverse effect on the Company's results
of operations and financial condition. In addition, the Year 2000 Issue creates
risk for the Company from unforeseen problems in its internal computer systems
and from third parties with which the Company interacts. Such failures of the
Company's and/or third parties' computer systems could have a material impact on
the Company's ability to conduct its business and to process and account for the
transfer of funds electronically.

ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Not Applicable

                                 Page 18 of 35
<PAGE>
 
                          PART II.  OTHER INFORMATION

Item 1.   Legal Proceedings: Not Applicable

Item 2.   Changes in Securities and Use of Proceeds:  Not Applicable

Item 3.   Defaults Upon Senior Securities:

          On June 8, 1998, the Company's $2,000,000 line of credit with its bank
          expired and the $285,000 outstanding under the line of credit became
          due and payable.  In addition, the Company is currently not in
          compliance with certain financial covenants in the line of credit and
          in its equipment line with a current unpaid balance of $149,000 with
          the same lender.  There can be no assurance that the Company will be
          able to obtain a waiver for its noncompliance with such covenants.  If
          the Company is in default under such lines of credit and if such
          defaults are not waived, the lender may accelerate the Company's
          payment obligations and exercise other rights and remedies as a
          secured creditor under the credit agreements and by law, including,
          but not limited to, foreclosure on substantially all the Company's
          assets which were pledged as collateral under the lines of credit.
          The exercise of rights and remedies under the lines of credit could
          prevent or delay the continued development and marketing of the
          Company's products and services, could require substantial curtailment
          of the Company's operations and could result in the Company's
          bankruptcy.

Item 4.   Submission of Matters to a Vote of Securities Holders:

          (A) On September 2, 1998, the Annual Meeting of the Shareholders of
              the Registrant was held.  A total of 19,500,976 shares, or
              approximately 75% of the shares outstanding, were represented at
              this meeting.

          (B) At the annual meeting, the shareholders elected Robert R.
              Anderson, Roy L. Rogers and Thomas A. Sherby as Directors with
              19,391,903 votes in favor and 109,073 withheld; and James O.
              Benouis as Director with 19,376,253 votes in favor and 124,723
              votes withheld.

          (C) The amendment to the Company's Amended and Restated Articles of
              Incorporation to increase the number of shares of common stock
              authorized from 40,000,000 to 60,000,000 was approved by
              19,248,859 in favor, 243,395 opposed and 8,722 abstained.

          (D) The amendment to the Company's 1988 Stock Option Plan to increase
              the number of shares authorized to be issued thereunder from
              3,745,976 to 5,745,976 was approved by 12,845,942 in favor,
              300,442 opposed, 24,622 abstained and 6,329,970 broker non-votes.

          (E) The amendments to the Company's 1990 Directors' Stock Option Plan
              were approved by 12,910,745 in favor, 330,029 opposed, 26,250
              abstained and 6,233,952 broker non-votes.

          (F) The amendment to the Company's Amended and Restated Articles of
              Incorporation to effect within six months of the annual meeting a
              one-for-three reverse stock split was approved by 18,910,977 in
              favor, 455,821 opposed, 38,160 abstained and 96,018 broker non-
              votes.

                                 Page 19 of 35
<PAGE>
 
Item 5.   Other Information:

          Nasdaq Letters
          --------------

          By letter dated July 24, 1998, Nasdaq notified the Company that it
          would be delisted from the National Market because of its failure to
          maintain the Required Net Tangible Assets.  On July 29, 1998, the
          Company requested and subsequently received approval for an oral
          hearing to appeal Nasdaq's decision.  In this hearing, Nasdaq would
          also address the issue of the Company's noncompliance with the Minimum
          Bid Price.  The hearing was held on October 8, 1998 and as of November
          12, 1998 Nasdaq has not rendered its decision.  As of November 11,
          1998, the closing bid price of a share of the Company's common stock
          was $0.1875 and the Company's common stock had failed to maintain the
          Minimum Bid Price.  The Company also failed to meet the Required Net
          Tangible Assets and Required Public Float as of that date.

          Shareholder Proposals
          ---------------------

          Pursuant to new amendments to Rule 14a-4(c) of the Securities Exchange
          Act of 1934, as amended, the Company's proxy for its 1999 Annual
          Meeting of Shareholders may confer discretionary authority to vote on
          any proposal submitted by a shareholder if written notice of such
          proposal is not received at the Company's executive office on or
          before June 16, 1999.

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

                                 (A)  EXHIBITS:


EXHIBIT
Number    DESCRIPTION OF EXHIBIT
------    ----------------------

3.01      Registrant's Articles of Incorporation as amended to date
          (incorporated by reference to Exhibit 3.01 of Registrant's
          Registration Statement on Form S-1 ( File No. 2-89943) filed March 14,
          1984, as amended (the "1984 Registration Statement")).

3.02      Registrant's amendment to Amended and Restated Articles of
          Incorporation filed October 16, 1998.

3.03      Registrant's bylaws, as amended to date (incorporated by reference to
          Exhibit 4.01 of the 1984 Registration Statement).

3.05      Amendment to Bylaws dated November 12, 1996 (incorporated by reference
          to Exhibit 3.04 of Registrant's Quarterly Report on Form 10-Q for the
          quarter ended December 31, 1996).

10.01*    Registrant's 1990 Directors' Stock Option Plan, as amended to date.

10.03*    Registrant's 1988 Stock Option Plan, as amended to date.

27.00     Financial Data Schedule

          *Management Contract or Compensatory Plan or Arrangement

                           (B)  REPORTS ON FORM 8-K:
                                        
No Reports on Form 8-K were filed during the quarter covered by this report.

                                 Page 20 of 35
<PAGE>
 
                                   SIGNATURE



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.


                                    SILICON VALLEY RESEARCH, INC.



Date:  November 13, 1998            /s/ James O. Benouis
       -----------------            --------------------
                                    James O. Benouis
                                    President and
                                    Chief Executive Officer
 


                                    /s/ Laurence G. Colegate, Jr.
                                    -----------------------------
                                    Laurence G. Colegate, Jr.
                                    Senior Vice President,
                                    Finance and Administration

                                    (Chief Financial and Accounting
                                    Officer)

                                 Page 21 of 35