<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 December 31, 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 December 31, 1998:  26,209,220




       This report contains 20 pages. The exhibit index is on page 18.
<PAGE>
 
               SILICON VALLEY RESEARCH, INC. AND SUBSIDIARIES
                                        
                                    INDEX

<TABLE> 
<CAPTION> 
Part I.   FINANCIAL INFORMATION                                                         Pages
          ---------------------                                                         -----
<S>       <C>                                                                          <C> 
          Item 1.   Financial Statements
 
             Consolidated Balance Sheets -
              March 31, 1998 and December 31, 1998 (unaudited)                             3
 
             Consolidated Statements of Operations -
              Three and Nine Months Ended December 31, 1997 and 1998 (unaudited)           4
 
             Consolidated Condensed Statements of Cash Flows -
              Nine Months Ended December 31, 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
 
          Item 3.   Quantitative and Qualitative Disclosures About Market Risk            17
 
Part II.  OTHER INFORMATION                                                               18
          -----------------

          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                                                                      19
</TABLE> 

                                  Page 2 of 20
<PAGE>
 
                        PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

                SILICON VALLEY RESEARCH, INC. AND SUBSIDIARIES
                          Consolidated Balance Sheets
                                (In thousands)

<TABLE>
<CAPTION>
 
Assets                                            March 31, 1998     December 31, 1998
------                                            --------------     -----------------
                                                                        (Unaudited)
<S>                                               <C>                <C>
Current Assets:
  Cash and cash equivalents                          $  1,926            $    586
  Accounts receivable, net of allowances of
     $150 in each period                                  484                 444
  Prepaid expenses and other current assets               257                 110
                                                     --------            --------
                                                        2,667               1,140
 
Fixed assets, net                                         667                 404
Other assets, net                                       1,931               1,379
                                                     --------            --------
                                                     $  5,265            $  2,923
                                                     ========            ========
 
Liabilities and Shareholders' Equity
------------------------------------
 
Current Liabilities:
  Short-term borrowing                               $    285            $    285
  Current portion of long-term debt                       263                 175
  Notes payable                                           200                  50
  Accounts payable                                        352                 372
  Accrued expenses                                        968                 735
  Deferred revenue                                        539                 445
                                                     --------            --------
                                                        2,607               2,062
 
Long-term debt, less current portion                       77                  --
                                                     --------            --------
 
Deferred tax liability                                     17                  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 26,209 shares at December 31, 1998              41,834              43,929
Accumulated deficit                                   (39,346)            (43,194)
Cumulative translation adjustment                          76                 109
                                                     --------            --------
                                                        2,564                 844
                                                     --------            --------
 
                                                     $  5,265            $  2,923
                                                     ========            ========
</TABLE>

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

                                  Page 3 of 20
<PAGE>
 
                SILICON VALLEY RESEARCH, INC. AND SUBSIDIARIES
                     Consolidated Statements of Operations
                                  (Unaudited)
                     (In thousands, except per share data)

<TABLE>
<CAPTION>
                                               Three Months Ended        Nine Months Ended
                                                  December 31,             December 31,
                                               1997         1998         1997        1998
                                               ----         ----         ----        ---- 
<S>                                          <C>          <C>          <C>         <C>
Revenue:
  Products                                   $   131      $    26      $   860     $   408
  Services                                       421          343        1,389         914
                                             -------      -------      -------     -------
  Total revenue                                  552          369        2,249       1,322
                                             -------      -------      -------     -------
 
Cost of revenue:
  Products                                       255           80        1,785         259
  Services                                       151          196          412         542
                                             -------      -------      -------     -------
  Total cost of revenue                          406          276        2,197         801
                                             -------      -------      -------     -------
 
Gross margin                                     146           93           52         521
                                             -------      -------      -------     -------
 
Operating expenses:
  Engineering, research and development          934          469        2,711       1,876
  Selling and marketing                          728          511        3,001       1,685
  General and administrative                     253          158          833         801
  Impairment loss on prepaid royalty              --           --        1,217          --
                                             -------      -------      -------     -------
  Total operating expenses                     1,915        1,138        7,762       4,362
                                             -------      -------      -------     -------
 
Operating loss                                (1,769)      (1,045)      (7,710)     (3,841)
                                             -------      -------      -------     -------
 
Other income (expense):
  Interest income                                 16            7          121          52
  Interest expense                               (13)         (13)         (25)        (42)
  Other, net                                    (119)          18          (79)        (17)
                                             -------      -------      -------     -------
  Total other income (expense)                  (116)          12           17          (7)
                                             -------      -------      -------     -------
  
Loss before provision for
  income taxes                                (1,885)      (1,033)      (7,693)     (3,848)
 
Provision for income taxes                        --           --           --          --
  
Net loss                                     $(1,885)     $(1,033)     $(7,693)    $(3,848)
                                             =======      =======      =======     =======

Net loss per basic share and diluted share   $ (0.11)     $ (0.04)     $ (0.47)    $ (0.15)
                                             =======      =======      =======     =======

Weighted-average common shares
  outstanding (basic and diluted)             16,868       26,208       16,537      25,597
                                             =======       ======      =======     =======
</TABLE> 

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

                                  Page 4 of 20
<PAGE>
 
                SILICON VALLEY RESEARCH, INC. AND SUBSIDIARIES
                Consolidated Condensed Statements of Cash Flows
                                  (Unaudited)
                                (In thousands)


<TABLE>
<CAPTION>
                                                                     Nine Months Ended
                                                                        December 31,
                                                                    1997           1998
                                                                    ----           ---- 
<S>                                                               <C>            <C>
Cash Flows from Operating Activities:
Net loss                                                          $(7,693)       $(3,848)
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                        1,358            188
  Depreciation and amortization                                       732            569
  Loss on sale of fixed assets                                         --             15
Changes in assets and liabilities, net:
  Accounts receivable                                                 580             40
  Prepaid expenses and other current assets                           204            147
  Accounts payable                                                   (281)            20
  Accrued expenses                                                   (455)          (233)
  Deferred revenue                                                   (320)           (95)
  Other, net                                                          213             77
                                                                  -------        -------
 
Net cash used in operating activities                              (4,445)        (3,120)
                                                                  -------        -------
 
Cash Flows from Investing Activities:
Acquisition of fixed assets                                           (45)           (52)
Proceeds from sale of fixed assets                                     --             31
Capitalization of software development costs and
  purchase of software licenses                                    (1,421)           (12)
                                                                  -------        -------
 
Net cash used in investing activities                              (1,466)           (33)
                                                                  -------        -------
 
Cash Flows from Financing Activities:
Principal payments of long-term debt                                 (108)          (164)
Principal payments on notes payable                                    --           (150)
Advances on credit line                                               340             --
Proceeds from issuance of common stock                              6,718          2,095
                                                                  -------        -------
 
Net cash provided by financing activities                           6,950          1,781
                                                                  -------        -------
 
Effect of exchange rate changes on cash                                56             32
                                                                  -------        -------
 
Net increase (decrease)  in cash and
  cash equivalents                                                  1,095         (1,340)
Cash and cash equivalents at beginning
  of period                                                         2,064          1,926
                                                                  -------        -------
 
Cash and cash equivalents at end
  of period                                                       $ 3,159        $   586
                                                                  =======        =======
</TABLE>

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

                                  Page 5 of 20
<PAGE>
 
                SILICON VALLEY RESEARCH, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                         December 31, 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      Nine Months Ended
                                                  December 31,           December 31,

                                                1997        1998        1997         1998
                                                ----        ----        ----         ----
<S>                                           <C>         <C>          <C>         <C>
Net loss                                      $(1,885)    $(1,033)     $(7,693)    $(3,848)
                                              =======     =======      =======     =======

Weighted-average common shares
  outstanding (basic)                          16,868      26,208      16,537      25,597
 
Weighted-average common stock equivalents:
  Stock options                                    --          --          --          --
  Warrants                                         --          --          --          --
                                              -------     -------      ------      ------
Weighted-average common shares
  outstanding (diluted)                        16,868      26,208      16,537      25,597
                                              =======     =======      ======      ======
</TABLE>

                                  Page 6 of 20
<PAGE>
 
               SILICON VALLEY RESEARCH, INC. AND SUBSIDIARIES
          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
                        December 31, 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     Nine Months Ended
                                       December 31,           December 31,

                                      1997       1998        1997       1998
                                      ----       ----        ----       ----
<S>                               <C>         <C>         <C>        <C>
Net loss                           $(1,885)   $(1,033)    $(7,693)   $(3,848)
Other comprehensive gain                89          6          56         33
                                   -------    -------     -------    -------
  Total comprehensive loss         $(1,796)   $(1,027)    $(7,637)   $(3,815)
                                   =======    =======     =======    =======
</TABLE>

Note 4:  Statement of Cash Flows Information

<TABLE> 
<CAPTION> 
                                                           Nine Months Ended
                                                              December 31,
                                                         1997             1998
                                                         ----             ----
<S>                                                    <C>             <C>
Supplemental Cash Flow Information:
Cash paid during the period for:
     Interest                                          $  25             $  32
     Income Taxes                                         --                --
 
Note 5:  Balance Sheet Components
<CAPTION> 
                                                       March 31,       December 31,
                                                         1998             1998
                                                         ----             ---- 
<S>                                                    <C>             <C>
Other Assets:
Software development costs                             $ 2,098         $  799
Software licenses                                        3,134            982
                                                       -------         ------
                                                         5,232          1,781
Less accumulated amortization                           (3,898)          (823)
                                                       -------         ------
                                                         1,334            958
Prepaid royalties, net                                      67             --
Goodwill                                                   245            208
Other                                                      285            213
                                                       -------         ------
                                                       $ 1,931         $1,379
                                                       =======         ======
 
Accrued Expenses:
Payroll and related costs                              $   477         $  384
Taxes payable                                              147            145
Accrued professional fees                                  229            155
Other                                                      115             51
                                                       -------         ------
                                                       $   968         $  735
                                                       =======         ======
</TABLE>

                                  Page 7 of 20
<PAGE>
 
                SILICON VALLEY RESEARCH, INC. AND SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
                         December 31, 1998 - Unaudited
                                (In thousands)

Note 6:  Bank Lines of Credit


     The Company had a $298 equipment line with its bank.  As of December 31,
1998, $137 remains to be repaid on that line.  The line bears interest at prime
plus two percent, 9.75% at December 31, 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 December 31, 1998,
$285 had been borrowed under the line of credit.  The revolving line of credit
expired by its terms in early June 1998.  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 December 31, 1998
balance sheet.

     In January 1999, the Company entered into a Forbearance Agreement with the
lender.  Under this agreement, the lender shall not take any action to enforce
its rights and remedies under the above referenced credit agreements until after
May 31, 1999, so long as the Company is not in default of the Forbearance
Agreement.  The Company made a Forbearance Payment of $75 to obtain this
Agreement; $60 represented a principal payment on the revolving line of credit,
reducing the amount outstanding to $225, and the balance was for interest and
administrative costs.

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 20
<PAGE>
 
                SILICON VALLEY RESEARCH, INC. AND SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
                         December 31, 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 20
<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 third quarter of fiscal year 1999, which ended December 31,
1998, was $369, a decrease from $552 in the third quarter a year ago.  Revenue
for the nine month period ended December 31, 1998 decreased to $1,322 from
$2,249 over the nine month period ended December 31, 1997.  The decrease in
revenue was due primarily to a multi-license order from a leading design
services company being recorded during the prior year nine months 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 the
Far East, accounted for 20% of total revenue in the third quarter of fiscal 1999
compared to 47% in the third 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 December 31, 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 third quarter of fiscal year 1999 was $80,
compared to $255 in the third quarter of fiscal 1998.  Cost of products for the
nine months ended December 31, 1998 was $259, compared to $1,785 for the nine
months ended December 31, 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 nine
months ended December 31, 1997.

     Cost of services for the third quarter of fiscal year 1999 was $196
compared to $151 in the third quarter of fiscal 1998.  Cost of services for the
nine months ended December 31, 1998 was $542 compared to $412 for the nine
months ended December 31, 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 20
<PAGE>
 
ENGINEERING, RESEARCH AND DEVELOPMENT EXPENSES

     Engineering, research and development expenses for the third quarter of
fiscal year 1999 were $469 compared to $934 in the third quarter a year ago.
Comparing the third quarter of fiscal 1999 and the third quarter of fiscal 1998,
engineering, research and development expenses were 127% and 169% of total
revenue, respectively.  Engineering, research and development expenses for the
nine months ended December 31, 1998 were $1,876 compared to $2,711 for the nine
months ended December 31, 1997.  Comparing these periods, engineering, research
and development expenses were 142% and 121% 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 third quarter of fiscal year 1999
decreased to $511 from $728 in the third quarter a year ago.  In the third
quarter of fiscal 1999 and the third quarter of fiscal 1998, selling and
marketing expenses were 138% and 132% of total revenue, respectively.  Selling
and marketing expenses for the nine months ended December 31, 1998 decreased to
$1,685 from $3,001 for the nine months ended December 31, 1997.  Comparing the
nine month periods, selling and marketing expenses were 127% and 133% 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.  Costs for the third quarter of fiscal 1999 include
approximately $100 for one-time costs associated with the closing of a sales
office in Japan.

GENERAL AND ADMINISTRATIVE EXPENSES

     General and administrative expenses decreased to $158 for the third quarter
of fiscal year 1999 from $253 in the third quarter a year ago.  In the third
quarter of fiscal 1999 and the third quarter of fiscal 1998, general and
administrative expenses were 43% and 46% of total revenue, respectively.  The
decrease for the third quarter of fiscal 1999 is due to a decrease in
professional fees and cost-cutting measures instituted by management.  General
and administrative expenses for the nine months ended December 31, 1998
decreased to $801 from $833 for the nine months ended December 31, 1997.
Comparing the nine month periods, general and administrative expenses were 60%
and 37% of total revenue, respectively.  The nine month amounts include 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 December 31, 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 December 31, 1998 consisted
of cash and cash equivalents of $586.  As of December 31, 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 

                                 Page 11 of 20
<PAGE>
 
the Company's operations and could result in the Company's bankruptcy. In
January 1999, the Company entered into a Forbearance Agreement with the lender.
Under this agreement, the lender shall not take any action to enforce its rights
and remedies under the above referenced credit agreements until after May 31,
1999, so long as the Company is not in default of the Forbearance Agreement.

  The Company believes that its cash and cash generated from operations will not
be sufficient to finance its operations much beyond 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, the Company's Common
Stock was recently delisted from trading on the Nasdaq National Market and now
trades in the over-the-counter 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 "Delisting
From Nasdaq; 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.  Discussions of a potential merger with another company continue.
However, based on progress to date and issues that need to be addressed, it is
not likely that a definitive agreement will be reached in the foreseeable
future.

     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 $2,095
from the private placement of equity securities and the exercise of warrants and
options to purchase Common Stock ("financing activities").  During the nine
months ended December 31, 1998, cash and cash equivalents decreased $1,340 from
$1,926 to $586.  This decrease resulted from cash provided by the financing
activities of $1,781 less cash used by operations of $3,120 and $33 of cash used
for investing activities.

     The Company incurred a loss for the first nine 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 mid 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 December 31, 1998 consisted of cash and cash
equivalents of $586.  As of December 31, 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. In January 1999, the Company entered into a Forbearance
Agreement with the lender.  Under this agreement, the lender shall not take any
action to enforce its rights and remedies under the above referenced credit
agreements until after May 31, 1999, so long as the Company is not in default of
the Forbearance Agreement.

                                 Page 12 of 20
<PAGE>
 
     The Company believes that its cash and cash generated from operations will
not be sufficient to finance its operations much beyond 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, the Company's Common
Stock was recently delisted from trading on the Nasdaq National Market and now
trades in the over-the-counter 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 "Delisting
From Nasdaq; 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.  Discussions of a potential merger with another company continue.
However, based on progress to date and issues that need to be addressed, it is
not likely that a definitive agreement will be reached in the foreseeable
future.

Recent and Expected Losses; Accumulated Deficit.  The Company incurred a net
loss of $1,033 for the quarter ended December 31, 1998 and had an accumulated
deficit of $43,194 as of December 31, 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.  There 

                                 Page 13 of 20
<PAGE>
 
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.

     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.

Delisting From Nasdaq; Disclosure Relating to Low-Priced Stock.  Effective
November 16, 1998, the Company's common stock was delisted from The Nasdaq Stock
Market ("Nasdaq") for failure to satisfy the requirements for continued listing
on Nasdaq.  The Company's common stock immediately began trading on the OTC
Bulletin Board.  An investor may find it more difficult to dispose of the
Company's common stock.  With the trading price of the common stock less than
$5.00 per share, trading in the common stock will 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.  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 

                                 Page 14 of 20
<PAGE>
 
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
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 41% of the Company's total revenue
in fiscal 1996, 1997, 1998 and the first nine 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 

                                 Page 15 of 20
<PAGE>
 
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. Effective December 1998, the
Company discontinued operating its Tokyo sales office and will, in the future,
use distributors to service the Japanese market.

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.

Concentration of Stock Ownership.  The present directors, executive officers and
5% shareholders of the Company and their affiliates beneficially own
approximately 70.9% 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.

                                 Page 16 of 20
<PAGE>
 
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 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 20
<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 $137,000 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. In January 1999, the Company entered into a
           Forbearance Agreement with the lender. Under this agreement, the
           lender shall not take any action to enforce its rights and remedies
           under the above referenced credit agreements until after May 31,
           1999, so long as the Company is not in default of the Forbearance
           Agreement.

Item 4.    Submission of Matters to a Vote of Securities Holders:  Not 
           Applicable

Item 5.    Other Information:  Not Applicable

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

27.00   Financial Data Schedule


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

                                 Page 18 of 20
<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:  February 16, 1999               /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 19 of 20