<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 June 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 June 30, 1998:  26,190,113

           This report, containing all exhibits, contains 21 pages. 
                      The exhibit index is on page 19.
<PAGE>
 
                 SILICON VALLEY RESEARCH, INC. AND SUBSIDIARIES

                                     INDEX

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

          Item 1. Financial Statements
 
             Consolidated Balance Sheets -
                March 31, 1998 and June 30, 1998 (unaudited)                 3
 
             Consolidated Statements of Operations -
                Three Months Ended June 30, 1997 and 1998 (unaudited)        4
 
             Consolidated Condensed Statements of Cash Flows -
                Three Months Ended June 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          10-17
 
Part II. OTHER INFORMATION                                               18-19
         -----------------
 
          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                                                        20

Exhibit 27. Financial Data Schedule                                         21

                                  Page 2 of 21
<PAGE>
 
                         PART I.  FINANCIAL INFORMATION
 
ITEM 1.  FINANCIAL STATEMENTS
 
                SILICON VALLEY RESEARCH, INC. AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS
                                (IN THOUSANDS)
 
Assets                                          March 31, 1998   June 30, 1998
------                                          --------------   -------------
                                                                  (Unaudited)
Current Assets:                                
  Cash and cash equivalents                           $  1,926        $  2,383
  Accounts receivable, net of allowances of    
   $150 in each period                                     484             558
  Prepaid expenses and other current assets                257             151
                                                      --------        --------
                                                         2,667           3,092
                                               
Fixed assets, net                                          667             601
Other assets, net                                        1,931           1,918
                                                      --------        --------
                                                      $  5,265        $  5,611
                                                      ========        ========
                                               
Liabilities and Shareholders' Equity           
------------------------------------           
                                               
Current Liabilities:                           
  Short-term borrowing                                $    285        $    285
  Current portion of long-term debt                        263             245
  Notes payable                                            200             150
  Accounts payable                                         352             244
  Accrued expenses                                         968             923
  Deferred revenue                                         539             492
                                                      --------        --------
                                                         2,607           2,339
                                               
Long-term debt, less current portion                        77              61
                                                      --------        --------
                                               
Deferred tax liability                                      17               -
                                                      --------        --------
                                               
Contingencies (Note 8)                         
                                               
Shareholders' Equity:                          
Preferred stock, no par value:                 
  Authorized: 1,000 shares                     
  Issued and outstanding: none                               -               -
Common stock, no par value:                    
  Authorized: 40,000 shares                    
  Issued and outstanding:                      
     23,759 shares at March 31, 1998           
     and 26,190 shares at June 30, 1998                 41,834          43,922
Accumulated deficit                                    (39,346)        (40,909)
Cumulative translation adjustment                           76             198
                                                      --------        --------
                                                         2,564           3,211
                                                      --------        --------
                                                      $  5,265        $  5,611
                                                      ========        ========

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

                                  Page 3 of 21
<PAGE>
 
                SILICON VALLEY RESEARCH, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (UNAUDITED)
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
                                            Three Months Ended
                                                 June 30,
                                             1997       1998
                                           ---------  ---------
Revenue:
  Products                                  $   242    $   225
  Services                                      471        368
                                            -------    -------
     Total revenue                              713        593
                                            -------    -------
 
Cost of revenue:
  Products                                    1,318         70
  Services                                      106        229
                                            -------    -------
     Total cost of revenue                    1,424        299
                                            -------    -------
 
Gross margin                                   (711)       294
                                            -------    -------
 
Operating expenses:
  Engineering, research and development         625        636
  Selling and marketing                       1,341        668
  General and administrative                    303        412
  Impairment loss on prepaid royalty          1,217          -
                                            -------    -------
     Total operating expenses                 3,486      1,716
                                            -------    -------
 
Operating loss                               (4,197)    (1,422)
                                            -------    -------
 
Other income (expense):
  Interest income                                71         13
  Interest expense                               (4)       (15)
  Other, net                                    136       (139)
                                            -------    -------
     Total other income                         203       (141)
                                            -------    -------
 
Loss before provision for
  income taxes                               (3,994)    (1,563)
 
Provision for income taxes                        -          -
                                            -------    -------
 
Net loss                                    $(3,994)   $(1,563)
                                            =======    =======
 
Net loss per basic share and diluted 
  share                                     $ (0.25)   $ (0.06)
                                            =======    =======

Weighted-average common shares
  outstanding (basic and diluted)            15,964     24,371
                                            =======    =======

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

                                  Page 4 of 21
<PAGE>
 
                SILICON VALLEY RESEARCH, INC. AND SUBSIDIARIES
                CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
                                  (UNAUDITED)
                                (IN THOUSANDS)
 
 
                                                            Three  Months Ended
                                                                 June 30,
                                                              1997       1998
                                                           ----------  ---------
Cash Flows from Operating Activities:
Net loss                                                     $(3,994)   $(1,563)
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                   1,204         29
  Depreciation and amortization                                   11        204
Changes in assets and liabilities, net:
  Accounts receivable                                            (57)       (74)
  Prepaid expenses and other current assets                      154        106
  Accounts payable                                                66       (107)
  Accrued expenses                                              (414)       (45)
  Deferred revenue                                               (27)       (47)
  Other, net                                                     204         21
                                                             -------    -------
 
Net cash used in operating activities                         (1,636)    (1,476)
                                                             -------    -------
 
Cash Flows from Investing Activities:
Acquisition of fixed assets                                       (3)       (13)
Capitalization of software development costs and
  purchase of software licenses                                 (567)      (162)
                                                             -------    -------
 
Net cash used in investing activities                           (570)      (175)
                                                             -------    -------
 
Cash Flows from Financing Activities:
Principal payments of long-term debt                             (45)       (52)
Principal payments on notes payable                                -        (50)
Proceeds from issuance of common stock                         3,878      2,088
                                                             -------    -------
Net cash provided by financing activities                      3,833      1,986
                                                             -------    -------
Effect of exchange rate changes on cash                          (68)       122
                                                             -------    -------
Net increase (decrease)  in cash and
  cash equivalents                                             1,559        457
Cash and cash equivalents at beginning
  of period                                                    2,064      1,926
                                                             -------    -------
Cash and cash equivalents at end
  of period                                                  $ 3,623    $ 2,383
                                                             =======    =======

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

                                  Page 5 of 21
<PAGE>
 
                SILICON VALLEY RESEARCH, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           JUNE 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:
 
                                            Three Months Ended
                                                   June 30,
 
                                                1997      1998
                                              -------   -------
 
Net loss                                      $(3,994)  $(1,563)
                                              =======   =======
 
Weighted-average common shares
 outstanding (basic)                           15,964    24,371
 
Weighted-average common stock equivalents:
 Stock options                                      -         -
 Warrants                                           -         -
                                              -------   -------
Weighted-average common shares
 outstanding (diluted)                         15,964    24,371
                                              =======   =======
 

                                  Page 6 of 21
<PAGE>
 
                SILICON VALLEY RESEARCH, INC. AND SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                           JUNE 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:
 
                                                   Three Months Ended
                                                         June 30,
                                                    1997       1998
                                                  -------    -------
 
Net loss                                          $(3,994)   $(1,563)
Other comprehensive loss (gain)                       (68)       122
                                                  -------    -------
   Total comprehensive loss                       $(4,062)   $(1,441)
                                                  =======    =======
 
 
NOTE 4: STATEMENT OF CASH FLOWS INFORMATION

                                                   Three Months Ended
                                                         June 30,
                                                    1997       1998
                                                  -------    -------
Supplemental Cash Flow Information:
Cash paid during the period for:
       Interest                                   $     4    $    15
       Income Taxes                                     -          -
 
 
NOTE 5: BALANCE SHEET COMPONENTS

                                                 March 31,  June 30,
                                                   1998       1998
                                                  -------    -------
Other Assets:
Software development costs                        $ 2,098    $   799
Software licenses                                   3,134      1,380
                                                  -------    -------
                                                    5,232      2,179
Less accumulated amortization                      (3,898)      (724)
                                                  -------    -------
                                                    1,334      1,455
Prepaid royalties, net                                 67          -
Goodwill                                              245        232
Other                                                 285        231
                                                  -------    -------
                                                  $ 1,931    $ 1,918
                                                  =======    =======
 
Accrued Expenses:
Payroll and related costs                         $   477    $   420
Taxes payable                                         147        145
Accrued professional fees                             229        251
Other                                                 115        107
                                                  -------    -------
                                                  $   968    $   923
                                                  =======    =======
 

                                  Page 7 of 21
<PAGE>
 
                SILICON VALLEY RESEARCH, INC. AND SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                           JUNE 30, 1998- UNAUDITED
                                (IN THOUSANDS)

NOTE 6:  BANK LINE OF CREDIT

     The Company has a $300 equipment line of credit with its bank.  The line
bears interest at prime plus two percent, 10.5% at June 30, 1998. The line of
credit 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 June 30, 1998, $285
has 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 a continuation of the line.  There can be no assurance
that the Company will be able to successfully re-negotiate the line of credit or
that a waiver will be obtained for its noncompliance with certain covenants
under its equipment line of credit.  The amounts outstanding under its line of
credit and equipment line of credit are classified as current in the June 30,
1998 balance sheet.


NOTE 7:  CAPITAL STOCK

       On June 8, 1998, the Company completed a private placement of units
comprising 2,378 shares of Common Stock and warrants to purchase an additional
2,378 shares of Common Stock at an exercise price of $0.37 per share, with
proceeds to the Company of approximately $2,000.  The shares of Common Stock are
unregistered.  The Company will file a registration statement with the
Securities and Exchange Commission to become effective on or before December 8,
1998 pursuant to the terms of the unit purchase agreement.  One director and one
officer/director participated in the private placement.


NOTE 8:  CONTINGENCIES

       The Company is subject to various types of litigation during its normal
course of business.  In January 1997, Gambit Automated Design, Inc. ("Gambit"),
a competitor of the Company, filed a complaint alleging misappropriation of
trade secrets, breach of contract, inducing breach of contract, breach of
fiduciary duty, unfair competition and unjust enrichment against the Company and
a former employee of Gambit who is a current employee of the Company.  Gambit
sought injunctive relief, compensatory and punitive damages, restitution and
attorneys" fees and costs.  The parties have agreed to resolve the asserted
claims on terms that do not involve the payment of any money by the Company.
Accordingly, the Company does not believe that the ultimate settlement of this
litigation will have a material adverse effect on its financial position or
results of operations.  The parties are in the process of documenting the
settlement.


NOTE 9:  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.

                                  Page 8 of 21
<PAGE>
 
                SILICON VALLEY RESEARCH, INC. AND SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                           JUNE 30, 1998- UNAUDITED
                                (IN THOUSANDS)

     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.


NOTE 10: 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 21
<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 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 first quarter of fiscal year 1999, which ended June 30, 1998,
was $593, a decrease from $713 in the first quarter a year ago.  The 17%
decrease in revenues was due to lower license and maintenance revenue during the
quarter ended June 30, 1998, 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.  International sales, primarily Japan and the Far
East accounted for 39% of total revenue in the first quarter of fiscal 1999
compared to 28% in the first 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 June 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, 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 first quarter of fiscal year 1999 was $70, compared
to $1,318 in the first quarter of fiscal 1998.  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 three months ended June 30, 1997.

   Cost of services for the first quarter of fiscal year 1999 was $229 compared
to $106 in the first quarter of fiscal 1998.  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.

ENGINEERING, RESEARCH AND DEVELOPMENT EXPENSES

   Engineering, research and development expenses for the first quarter of
fiscal year 1999 were $636 compared to $625 in the first quarter a year ago.
Comparing the first quarter of fiscal 1999 and the first quarter of fiscal 1998,
engineering, research and development expenses were 107% and 88% of total
revenue, respectively.  The consistency in engineering, research and development
expenses is due to the Company's continuing emphasis on its technology and
product development.

                                 Page 10 of 21
<PAGE>
 
SELLING AND MARKETING EXPENSES

   Selling and marketing expenses for the first quarter of fiscal year 1999
decreased to $668 from $1,341 in the first quarter a year ago.  In the first
quarter of fiscal 1999 and the first quarter of fiscal 1998, selling and
marketing expenses were 113% and 188% of total revenue, respectively.  The
decrease 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 increased to $412 for the first quarter
of fiscal year 1999 from $303 in the first quarter a year ago.  In the first
quarter of fiscal 1999 and the first quarter of fiscal 1998, general and
administrative expenses were 70% and 42% of total revenue, respectively.  The
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 June 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

   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 $2,088
from the private placement of equity securities and the exercise of warrants and
options to purchase Common Stock ("financing activities").  During the three
months ended June 30, 1998, cash and cash equivalents increased $457 from $1,926
to $2,383.  This increase resulted from cash provided by the financing
activities of $1,986 less cash used by operations of $1,476 and $175 of cash
used for investing activities.

   The Company incurred a loss in the first quarter of fiscal 1999 and expects
operating losses to continue, at least in the near term, as it expands its
product development and marketing capabilities.  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.

   The Company's primary unused sources of funds at June 30, 1998 consisted of
cash and cash equivalents of $2,383.  On June 8, 1998, the Company's $2,000 line
of credit with its bank expired by its terms.  The Company is currently in the
process of negotiating a continuation with its bank.  The Company believes its
cash and cash generated from operations and available borrowings may not be
sufficient to finance its operations through 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.  The Company may be prevented or restricted from raising additional
funds by issuing equity securities or securities convertible into Common Stock
unless the Company amends its Articles of Incorporation to increase the number
of authorized shares of Common Stock.  The Company is seeking shareholder
approval to increase the Company's authorized shares of Common Stock at its next
annual shareholder meeting.  However, no assurance can be given as to whether
such shareholder approval will be obtained in a timely manner, if at all.  The
Company may issue a series of Preferred Stock with rights, preferences or
privileges senior to those of the Company's Common Stock.  The 

                                 Page 11 of 21
<PAGE>
 
Company has no commitments or arrangements 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 unavailability or timing of any
financing could prevent or delay the continued development and marketing of the
products of the Company and could require substantial curtailment of operations
of the Company.

OTHER FACTORS AFFECTING FUTURE RESULTS

RECENT AND EXPECTED LOSSES; ACCUMULATED DEFICIT.  The Company incurred a net
loss of $1,563 for the quarter ended June 30, 1998 and had an accumulated
deficit of $40,909 as of June 30, 1998.  The Company expects to incur losses for
most 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; FUTURE CAPITAL NEEDS; NO ASSURANCE OF FUTURE
FINANCING.  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 may require substantial additional
funds in the 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 12 of 21
<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).

     As of August 7, 1998, the closing bid price of a share of the Company's
common stock was $0.5313 and the Company's common stock had failed to maintain
the Minimum Bid Price.  By letter dated June 26, 1998, The Nasdaq Stock Market,
Inc. ("Nasdaq") notified the Company that it will have ninety calendar days in
which to regain compliance with the Minimum Bid Price.  The Company's common
stock needs to maintain the Minimum Bid Price for ten consecutive trading days
in order to be considered in compliance.  If the Company is unable to
demonstrate compliance on or before the end of the period, Nasdaq may delist the
Company's securities from the National Market.

     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.
The hearing date has not been set but is expected to take place in mid-September
1998.  Nasdaq is expected to render its decision approximately 30 days after the
hearing.

     Failure to meet these maintenance criteria may result in the delisting of
the Company's common stock from the National Market and the quotation of the
Company's common stock on the Nasdaq SmallCap Market (the "SmallCap Market"),
if the requirements for inclusion on the SmallCap Market are met. A company
must have $4,000 in net tangible assets or $50,000 market capitalization or
$750 net income in two of the last three years, a minimum bid price of $4.00
per share and a public float of $5,000 for inclusion in the SmallCap Market,
subject to certain exceptions. Failure to meet the SmallCap Market inclusion
criteria, or the failure to meet the SmallCap Market maintenance criteria if
the initial SmallCap Market inclusion criteria are met, may result in the
delisting of the Company's common stock from Nasdaq. Trading, if any, in the
Company's common stock would thereafter be conducted in the non-Nasdaq over-
the-counter market.

                                 Page 13 of 21
<PAGE>
 
     If the Company's common stock were delisted from trading on the National
Market and the SmallCap 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 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.

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, 

                                 Page 14 of 21
<PAGE>
 
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
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 39% of the Company's total revenue
in fiscal 1996, 1997, 1998 and the first quarter of 1999, respectively.
Declining revenues from international sales were 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 and plans to
continue to expand its international sales and distribution channels.  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 AND RESELLERS.  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.  The Company currently sells and markets its products overseas, other
than in Japan and Taiwan, through a limited number of distributors.  The Company
has a limited history of performance by its distributors.  In addition, there
can be no assurance that the new distributors will be able to successfully
distribute and support the Company's products on a timely basis or that such
distributors will not reduce their efforts devoted to selling the Company's
products or terminate their relationship with the Company as a result of
competition with other suppliers' products.  The loss of, or changes in, the
relationship with, or performance by, one or more of the Company's international
distributors could have an adverse effect on the Company's business.

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

                                 Page 15 of 21
<PAGE>
 
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 continue to grow.

CONCENTRATION OF STOCK OWNERSHIP.  The present directors, executive officers and
5% shareholders of the Company and their affiliates beneficially own
approximately 69.5% 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 PROJECTIONS; 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.

                                 Page 16 of 21
<PAGE>
 
     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 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 17 of 21
<PAGE>
 
                          PART II.  OTHER INFORMATION

Item 1. Legal Proceedings:

        In January 1997, Gambit Automated Design, Inc. ("Gambit"), a competitor
        of the Company, filed a complaint alleging misappropriation of trade
        secrets, breach of contract, inducing breach of contract, breach of
        fiduciary duty, unfair competition and unjust enrichment against the
        Company and a former employee of Gambit who is a current employee of the
        Company. Gambit sought injunctive relief, compensation and punitive
        damages, restitution and attorneys' fees and costs. The parties have
        reached an agreement in principle to resolve this litigation. Such
        agreement is awaiting final documentation and does not call for the
        payment of any monies by the Company.

Item 2. Changes in Securities and Use of Proceeds:

        (c) Recent Sales of Unregistered Securities

        On June 8, 1998, the Company completed a private placement of units
        ("Units") comprised of 2,377,909 shares of Common Stock and warrants
        ("Warrants") to purchase an additional 2,377,909 shares of Common
        Stock at $0.37 per share for an aggregate of $2,045,000. The Units
        were sold to 14 investors, including certain directors, executive
        officers and 5% shareholders of the Company. The Warrants are
        exercisable for a term of seven years and the exercise price for the
        Warrants is payable in cash, cancellation of indebtedness, in shares
        of the Company's Common Stock, through a "same day sale" commitment or
        "margin" commitment from the Warrant holder and a broker who is a
        member of the National Association of Securities Dealers, Inc. or by a
        "net exercise". The issuance of the Units was deemed to be exempt from
        registration under the Securities Act of 1933, as amended (the "Act")
        in reliance on Section 4(2) of the Act and/or Regulation D promulgated
        thereunder as a transaction by an issuer not involving a public
        offering.


Item 3. Defaults Upon Senior Securities:

        Not Applicable

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

        Not Applicable

Item 5. Other Information:

        Nasdaq letters
        --------------

        As of August 7, 1998, the closing bid price of a share of the Company's
        common stock was $0.5313 and the Company's common stock had failed to
        maintain the Minimum Bid Price. By letter dated June 26, 1998, The
        Nasdaq Stock Market, Inc. ("Nasdaq") notified the Company that it will
        have ninety calendar days in which to regain compliance with the Minimum
        Bid Price. The Company's common stock needs to maintain the Minimum Bid
        Price for ten consecutive trading days in order to be considered in
        compliance. If the Company is unable to demonstrate compliance on or
        before the end of the period, Nasdaq may delist the Company's securities
        from the National Market.

        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. The hearing date has not been set but is
        expected to take place in mid-September 1998. Nasdaq is expected to
        render its decision approximately 30 days after the hearing.

        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.

                                 Page 18 of 21
<PAGE>
 
Item 6. Exhibits and Reports on Form 8-K:

                                 (A)  EXHIBITS:

EXHIBIT
NUMBER   DESCRIPTION OF EXHIBIT
------   ----------------------

(a)(1)   The financial statements filed as part of this Report at Item 1 are
         listed in the Index to Financial Statements and Financial Statement
         Schedules on page 2 of this Report.

(a)(2)   The following exhibits are filed with this Quarterly Report on Form 
         10-Q:

 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 September 19, 1997 (incorporated by reference to
         Exhibit 3.02 of Registrant's Quarterly Report on Form 10-Q for the
         quarter ended September 30, 1997).

 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).

 4.01    Form of Unit Purchase Agreement dated May 29, 1998 among Silicon Valley
         Research, Inc. and several investors.

 4.02    Form of Warrant to Purchase the Company's Common Stock dated May 29,
         1998 among Silicon Valley Research, Inc. and several investors.

27.00    Financial Data Schedule

         *Management Contract or Compensatory Plan or Arrangement

                           (B)  REPORTS ON FORM 8-K:

On Form 8-K and one Form 8-K/A were filed during the quarter covered by this
report:

One Current Report on Form 8-K was dated March 31, 1998 and filed on April 10,
1998.  This reported the Company's acquisition of Quality I.C. Corporation.

One Current Report on Form 8-K/A was dated March 31, 1998 and filed on June 15,
1998.  This report amended the report filed April 10, 1998 to include the
audited financial statements of Quality I.C. Corporation at the date of
acquisition and pro forma financial information required pursuant to Article 11
of Regulation S-X at the date of acquisition.

                                 Page 19 of 21
<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: August 12, 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 20 of 21