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

                                    FORM 10-K

[x]      ANNUAL  REPORT  PURSUANT  TO  SECTION  13 OR 15 (d)  OF THE  SECURITIES
         EXCHANGE ACT OF 1934

                  For the fiscal year ended December 31, 1996

                                       OR

[ ]      TRANSITION  REPORT  PURSUANT  TO SECTION 13  OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934 For the transition  period from _______ to _______
                         Commission File Number 0-25864

                               AVANT! CORPORATION
             (Exact name of registrant as specified in its charter)

              Delaware                                         94-3133226
   (State or other jurisdiction of                         (I.R.S. Employer
   incorporation or organization)                          Identification No.)

                             1208 East Arques Avenue
                           Sunnyvale, California 94086
          (Address of principal executive offices, including Zip Code)

                                 (408)-738-8881
              (Registrant's telephone number, including area code)

           Securities registered pursuant to Section 12(b) of the Act:
                                      None

           Securities registered pursuant to section 12(g) of the Act:
                Common Stock, $.0001 par value (Title of Class)

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. [ x ] Yes [ ] No

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

The  aggregate  market value of the voting stock held by  non-affiliates  of the
registrant, as of February 28, 1997 was approximately $656,792,000 (based on the
last sale price of such stock as reported by the Nasdaq National Market).

The number of shares of the registrant's Common Stock outstanding as of February
28, 1997 was 25,184,497.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy  Statement to be filed by the Company with the  Securities
and  Exchange  Commission  within 120 days after the end of the fiscal  year are
incorporated by reference in Part III of this Form 10-K.


<PAGE>



<TABLE>

                               AVANT! CORPORATION

                             FORM 10-K ANNUAL REPORT

                      For the Year Ended December 31, 1996

                                Table of Contents
<CAPTION>

                                                                                            Page
                                                                                            ----
<S>            <C>                                                                            <C>
PART I.

Item 1.        Business                                                                         1

Item 2.        Properties                                                                      11

Item 3.        Legal Proceedings                                                               12

Item 4.        Submission of  Matters to a Vote of Security Holders                            13

PART II

Item 5.        Market for Registrant's Common Equity and Related Stockholder Matters           13

Item 6.        Selected Consolidated Financial Data                                            14

Item 7.        Management's Discussion and Analysis of Financial Condition and
               Results of Operation                                                            14

Item 8.        Consolidated Financial Statements and Supplementary Data                        20

Item 9.        Changes in and Disagreements With Accountants on Accounting
               and Financial Disclosure                                                        40

PART III.

Item 10.       Directors and Executive Officers of the Registrant                              40

Item 11.       Executive Compensation                                                          40

Item 12.       Security Ownership of Certain Beneficial Owners and Management                  41

Item 13.       Certain Relationships and Related Transactions                                  41

PART IV.

Item 14.       Exhibits, Financial Statement Schedules, and Reports on Form 8-K                41

Signature Page                                                                                 43

</TABLE>


<PAGE>



                                     PART I.

This  Report  contains   forward-looking   statements  that  involve  risks  and
uncertainties.  The Company's actual results may differ  significantly  from the
results discussed in the  forward-looking  statements.  Factors that might cause
such a difference  include,  but are not limited to,  those  discussed in Item 1
under the heading "Business".

Item 1.  Business

GENERAL

Avant!  Corporation  (the Company or Avant!) resulted from the merger of ArcSys,
Inc. (ArcSys) and Integrated  Silicon Systems,  Inc. (ISS) on November 27, 1995.
Avant! merged with Anagram, Inc. (Anagram) on September 27, 1996, Meta-Software,
Inc. (Meta) on October 29, 1996,  FrontLine Design Automation,  Inc. (FrontLine)
on November 27, 1996 and acquired  Nexsyn  Design  Technology  Inc.  (Nexsyn) on
December 31, 1996. Avant! is a Delaware  corporation that develops,  markets and
supports  software products that assist design engineers in the physical layout,
design,  verification,  simulation,  timing and analysis of advanced  integrated
circuits (ICs).

The  Company's  objective is to  establish a  significant  market  position as a
supplier of design software for the integrated  circuit design automation (ICDA)
market. To achieve this objective,  Avant! has adopted its mission,  which is to
provide  innovative  technology,  products,  and  business  models  that  enable
customers to solve the toughest problems in deep submicron (less than 0.5-micron
feature size) IC design, improve their productivity and achieve a high return on
their  investment.  To effect its mission,  Avant! has adopted the strategies of
maintaining   focus  on   technological   innovation   and  creating   strategic
relationships with customers.

PRODUCTS

Avant!  products  are  based  on  the  Company's  proprietary  architecture  and
technology,   which   provide  a  breadth  of  automated   IC  physical   design
capabilities.  Avant!'s  product  architecture is designed to solve the problems
inherent in submicron (less than 1.0-micron  feature size) and deep submicron IC
design  and  to  offer  improved  time  to  market,   reduced   development  and
manufacturing  costs,  and  enhanced IC  performance  when  compared to previous
generations of ICDA software.

Avant!  products are designed to be compatible  with the most commonly used ICDA
tools  and  to  be  easily  integrated  into  the  customer's   existing  design
environments and methodologies  through industry standard  interfaces.  Avant!'s
products are primarily written in C, run on UNIX workstations such as those from
Sun  Microsystems,  Inc.  and  Hewlett-Packard  Company,  and  support  industry
standards such as Motiff,  Xwindows,  GDSII Stream format,  EDIF, SDF, SPICE and
Verilog.

The Company's  Aquarius family of cell-based  place and route products  includes
Aquarius-BV,  Aquarius-XO  and  Aquarius-GA.  All  products are based on Avant's
patented cell-path  timing-driven  algorithms which increase circuit performance
and reduce design  iterations.  Aquarius-BV is used for standard-cell IC designs
with up to  three  layers  of  metal.  Aquarius-XO  is  used  for  more  complex
standard-cell  and  mixed-block  IC  designs  with up to six  layers  of  metal.
Aquarius-BV  and -XO reduce die size and shorten the design  cycle by  combining
the advantages of over-the-cell  channel routing and channel compaction with the
flexibility of area-based maze routing.

The Company's  Aquarius-GA  product is an advanced  multi-layer  place and route
system for gate-array ICs. Aquarius-GA  increases gate utilization and minimizes
design congestion by using proprietary  congestion-driven  placement and routing
algorithms.  Aquarius-GA  includes many of the same features as Aquarius-BV  and
-XO to  improve  circuit  performance.  Aquarius-GA  supports  embedded  designs
through its horizontal integration with Aquarius-BV and -XO.

Avant!'s  Planet  product  complements  the Aquarius  products and is a physical
floorplanning  and analysis  solution for accurate  prediction  of the impact of
physical  effects  on design  performance  and  routability  early in the design
process.

The Company's Solar family of products are synthesis-oriented  layout refinement
tools  designed to  optimize  the  performance  and area of ICs to meet new deep
submicron  "golden  file"  needs.  Solar is  tightly  integrated  with  Avant!'s
Aquarius family of place and route tools.


                                       1

<PAGE>


The Company believes its Hercules family of design verification  software is the
industry's  most  advanced  suite  of IC  physical  verification  products.  The
Hercules  family of  products  provide  geometric  and  electrical  verification
physical design  layouts.  Hercules' first module for design rule checking (DRC)
was introduced in January 1992 and is the first hierarchical  system offered for
complex submicron design.

The Company's  Star-Hspice  product is the  industry-standard  circuit simulator
that validates critical paths,  performs noise margin analysis and optimizes the
tradeoffs  between  IC speed and power  prior to  commencement  of  fabrication.
Star-Hspice incorporates special analysis features for performance and for yield
optimization,  which has become  increasingly  important in deep  submicron chip
design.

Avant!'s  Star-Sim family of products are high-capacity  circuit  simulators for
deep submicron process  applications such as graphics,  memory,  communications,
and  mixed-signal  IC designs.  The Star-Sim family of products help increase IC
performance  and  reliability  and increase  designer  productivity  by enabling
designers to characterize  large blocks;  to accurately  simulate  mixed-signal,
dynamic logic and memory circuits where performance,  signal integrity and power
analyses are  essential;  and to reuse  high-performance  intellectual  property
without  changing  the  design  process.  Star-RC  is a  full-chip  hierarchical
capacitance extractor and a critical net resistance and capacitance extractor.


All of Avant!'s Star products are tightly integrated with Avant!'s  hierarchical
layout and  verification  tools,  Aquarius and Hercules,  to provide  efficient,
accurate and predictable IC performance.

The Company's Polaris family of products utilize  innovative  Verilog simulation
solutions to ease the simulation, automated design verification and optimization
of IC design.  To handle the  complexity of large designs the Polaris  family of
products is capable of several levels of design  abstraction  and uses a variety
of design capture  techniques.  The products run on Unix and Windows workstation
platforms and are  therefore  attractive  tools for a variety of hardware  logic
designers.

During each of 1996, 1995 and 1994, the Company derived substantially all of its
total revenue from the licensing and support of Aquarius,  its cell-based  place
and route software product,  Hercules,  its hierarchical  physical  verification
software product,  Star-Hspice,  its circuit simulator,  Star-Sim products,  its
high-capacity circuit simulation and high-accuracy timing analysis software, and
Polaris  products,  its Verilog  simulation  product.  Absent any  extraordinary
results  from  existing  litigation,  the Company  currently  expects that these
products  will  continue to account for a  significant  portion of the Company's
revenue for the foreseeable  future. As a result, the Company's future operating
results are  significantly  dependent upon continued market  acceptance of these
products.  The Company  believes  that a number of factors will be necessary for
its products to achieve  continued  market  acceptance.  These  factors  include
performance  of the  Company's  existing  products,  successful  development  of
advanced  features,   adaptability  into  the  user's  design  environment,  the
Company's  technical,   managerial,  service  and  support  expertise,  and  the
customer's assessment of the Company's financial resources.  A decline in demand
for these  products as a result of  competition,  technological  change or other
factors would have a material adverse effect on the business,  operating results
and  financial  condition of the Company.  There can be no assurance  that these
products will achieve  continued  market  acceptance or that the Company will be
successful in marketing any new or enhanced products.

                                       2

<PAGE>

During 1996, 1995 and 1994, the Company derived 34%, 32%, and 33%, respectively,
of its total  revenue from the  licensing  and support of its software  products
internationally,  principally  in Asia. The Company  currently  expects that the
percentage  from the license and support of its  software  products in Asia will
continue to be a significant  percentage of its total revenue.  Any  significant
decline  in demand  for the  Company's  products  in Asia  would have a material
adverse  effect on the  Company's  business,  operating  results  and  financial
condition.  The  Company's  international  revenue  involves  a number of risks,
including the impact of possible recessionary  environments in economies outside
the United States, longer receivables  collection periods and greater difficulty
in accounts receivable collection, difficulties in staffing and managing foreign
operations, political and economic instability, unexpected changes in regulatory
requirements,  reduced  protection  for  intellectual  property  rights  in some
countries and tariffs and other trade  barriers.  There can be no assurance that
the  Company  will  be  able  to  sustain  or  increase   revenue  derived  from
international licensing and service or that the forgoing factors will not have a
material  adverse  effect on the  Company's  future  international  license  and
service revenue, and, consequently, on the Company's business, operating results
and  financial  condition.  Failure to sustain or increase  such  revenue  would
materially and adversely affect the Company's  business,  operating  results and
financial  condition.  Although the Company has  attempted to reduce the risk of
fluctuations in exchange rates associated with international  revenue by pricing
its  products  and  services in United  States  dollars,  the  Company  pays the
expenses  of its  international  operations  in  local  currencies  and does not
currently  engage in hedging  transactions  with  respect  to such  obligations.
Currency  exchange  fluctuations in countries in which the Company  licenses its
products  could  have a  material  adverse  effect  on the  Company's  business,
operating  results or  financial  condition  by resulting in prices that are not
competitive with products priced in local currencies.  Furthermore, there can be
no  assurance  that in the future the Company  will be able to continue to price
its  products  and  services  internationally  in  United  States  dollars.  See
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations".

The ICDA 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.  For
example,  all of the Company's  current  products  operate in, and planed 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
ICDA  industry,  the Company  would be required to port its  products to such an
operating  system,  which  would be  costly,  time  consuming  and could  have a
material  adverse  effect  on  the  Company's  business,  operating  results  or
financial  condition.  The  Company  has  in the  past  and  may  in the  future
experience  delays in new  product  development.  The  introduction  of  certain
products  in the past have been  delayed  by as much as 12 months  beyond  their
original  scheduled  release  dates.  There can be no assurance that the Company
will be successful  in developing  and  marketing  product  enhancements  or new
products that respond to technological  change,  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.
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 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.

                                       3

<PAGE>


CUSTOMERS

Avant!   focuses  its  sales  and  marketing   efforts  on  creating   strategic
relationships  with  technology  leaders in IC design and with early adopters of
the most advanced  electronic  design automation (EDA) tools. By creating strong
relationships with industry leaders, Avant! receives critical technical feedback
that enables it to develop and implement  proprietary  design  technologies  and
methodologies.  In addition,  strategic  relationships  with these companies can
create influential references for other prospective customers.

The market for the Company's physical layout, design, verification,  simulation,
timing and analysis products  encompasses a wide range of industries,  including
semiconductor, computer, consumer electronics, multimedia and telecommunications
IC companies  worldwide.  End-users of the Company's  products  range from small
companies  to a  number  of the  world's  largest  manufacturing  organizations.
Approximately  1,000 of the Company's  physical layout and verification  systems
are installed worldwide at approximately 200 companies as of December 31, 1996.

No one customer accounted for greater than 10% of the Company's revenue in 1996,
1995 or 1994.  The Company does not believe that  seasonality  is a  significant
factor in sales.

SALES AND MARKETING

The Company markets its products in North America and Europe  primarily  through
its direct sales and support force. Avant!  employs highly skilled engineers and
technically  proficient sales persons capable of serving the sophisticated needs
of its prospective  customers'  engineering and management  staffs.  Avant!  has
domestic  sales  and  support  offices  in  or  near  Austin,   Texas;   Boston,
Massachusetts;  Chicago,  Illinois;  Dallas,  Texas;  Los  Angeles,  California;
Phoenix,  Arizona;  Portland,  Oregon;  Philadelphia,   Pennsylvania;   Research
Triangle Park,  North  Carolina;  and Sunnyvale,  California;  sales and support
offices in London,  England; Paris, France and Tokyo, Japan; and support offices
in Munich, Germany; Geneva, Switzerland,  and Seoul, South Korea. In addition to
its direct sales and marketing  efforts,  Avant!  participates in industry trade
shows and  organizes  seminars  to promote  the  adoption  of its  products  and
methodologies.

In Asia,  Avant!  markets its  products  primarily  through a limited  number of
independent   distributors  and  manufacturer's   representatives  (Third  Party
Sellers) that license and service Avant!  products in this market.  Avant!  also
supports  these  distributors  and  representatives  and  their  customers  with
technical, sales and management personnel.

The Company has relied on Third Party  Sellers for  licensing and support of its
products in Japan,  Korea,  Taiwan, and Singapore.  A substantial portion of the
Company's  international license and service revenue has resulted from a limited
number of these Third Party Sellers.  During 1996, 1995, and 1994,  revenue from
these  channels  accounted for an aggregate of  approximately  27%, 28% and 30%,
respectively, of the Company's total revenue.

Since the Company's products are used by highly skilled professional  engineers,
in  order  to be  effective,  a  Third  Party  Seller  must  possess  sufficient
technical,  marketing and sales  resources and must devote these  resources to a
lengthy sales cycle,  customer training and product service and support.  Only a
limited number of Third Party Sellers possess such resources.  In addition,  the
Company's  Third Party Sellers  generally  offer  products of several  different
companies,  including,  in some cases,  products that are  competitive  with the
Company's  products.  There can be no assurance that the Company's current Third
Party  Sellers  will  choose to or be able to market or service  and support the
Company's products effectively, that economic conditions or industry demand will
not adversely  affect these or other Third Party  Sellers,  that any Third Party
Seller will continue to market and support the Company's  products or that these
Third  Party  Sellers  will  not  devote  greater  resources  to  marketing  and
supporting products of other companies.  The loss of, or a significant reduction
in revenue from, one of the Company's  Third Party Sellers could have a material
adverse  effect  on the  Company's  business,  operating  results  or  financial
condition.  See "Management's Discussion and Analysis of Financial Condition and
Results of Operations".

                                       4


<PAGE>

In 1997, Avant!  combined most of its Japanese and Asian sales channels by using
a joint venture approach between the Company, the Company's President and former
third party  distributors.  No assurance can be provided that this joint venture
approach will be successful.  If it is not successful,  it could have a material
adverse  effect  on the  Company's  business,  operating  results  or  financial
condition.

The license 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
license 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 and, as a
result, the Company believes that its quarterly  operating results are likely to
vary significantly in the future.  Due to the nature of the Company's  business,
the Company does not believe any of its backlog orders to be firm.

CUSTOMER SERVICE AND SUPPORT

Avant!'s  product  management group provides  customers with technical  support,
training and consulting services.  Avant! believes that a high level of customer
service and support is critical to the adoption and  successful  utilization  of
its physical design technology and products.

To address  technical  issues,  Avant!  has established both field and corporate
technical   application   engineering   groups   that   understand   the  design
methodologies  of Avant!'s  customers and generally have IC design  backgrounds.
Most of Avant!'s  customers  currently have maintenance  agreements that entitle
them to receive  software  updates,  documentation  updates and a formal problem
identification  and resolution  process through a support hotline.  Questions or
suggestions  may be submitted by facsimile or through the Internet  network mail
system.  Avant!  also offers additional  training and consulting  services for a
fee. The Company provides on-site and in-house training on all products.

Avant!   consultants   are  available  to  work  closely  with  customer  design
engineering  teams for all phases of  physical  design from  conception  through
implementation.  Avant!  consultants  provide customers with in-depth  technical
expertise in the use of the Company's physical design methodology and products.

RESEARCH AND DEVELOPMENT

The ICDA industry is  characterized  by extremely  rapid  technological  change,
frequent 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.
Avant!  believes  that its future  competitive  position  and future  results of
operations   will   depend  in  large  part  on  its   ability  to  quickly  and
cost-effectively develop new products,  maintain and enhance its current product
line,  maintain  technological  competitiveness  and meet an expanding  range of
customer  requirements.  In addition to  supporting  and  enhancing its existing
physical layout, design, verification, simulation, timing and analysis products,
Avant!  maintains an advanced  research group that is responsible  for exploring
new directions and applications of Avant!'s proprietary technologies,  migrating
new technologies into the existing product lines and maintaining strong research
relationships  outside Avant!  with industry and academia.  During 1996,  Avant!
created  W.I.T.  (World  Institute of  Technology)  to close the gap between the
general broad based education  provided by current academia and industry's needs
for engineers who know how to create marketable  products and speed the products
to market.  WIT has enrolled more than 100  students,  the majority of which are
Avant! employees.

During 1996, 1995, and 1994 the Company's research and development  expenditures
were  approximately  $20,696,000,   $15,318,000,   and  $9,728,000  respectively
(including capitalized software development costs of none, $63,000 and $143,000,
respectively,  for  the  same  periods).  The  amount  of  capitalized  software
development costs amortized was $88,000,  $228,000, and $199,000 for 1996, 1995,
and 1994, respectively.

                                       5

<PAGE>

The Company  believes that it must continue to commit  substantial  resources to
enhance and extend its product lines in order to remain  competitive in the ICDA
market.  The  Company  intends to continue  to  increase  its  internally-funded
product  development  program  and, if  appropriate,  to enter into  development
agreements  with  customers  and other  third  parties to develop  specific  new
product  applications  and  features.  The  Company  currently  has no  material
third-party funded development agreements.

COMPETITION AND RELATED LITIGATION

The  ICDA  software  market,  in  which  the  Company  competes,   is  intensely
competitive and subject to rapid change. The Company currently faces competition
from major ICDA vendors, including Cadence Design Systems, Inc. (Cadence), which
currently holds a dominant share of the market for IC physical design  software,
and Mentor Graphics Corporation  ("Mentor").  As the Company expands its product
offerings to include other library generation tools and other EDA tools, it will
compete  increasingly  with these EDA vendors.  Each of these major ICDA vendors
has a longer operating history,  significantly greater financial,  technical and
marketing  resources,  greater name recognition and a larger installed  customer
base than the Company.  In addition,  each of these  competitors  will likely be
able to respond  more  quickly to new or  emerging  technologies  and changes in
customer  requirements,  and to devote  greater  resources  to the  development,
promotion and sale of their products than the Company. These companies also have
established  relationships  with current and potential  customers of the Company
and can devote  substantial  resources  aimed at  preventing  the  Company  from
enhancing  relationships with existing  customers or establishing  relationships
with potential customers.  Moreover,  the industry in which the Company competes
is undergoing a trend toward  consolidation that is expected to result in large,
more financially  flexible  competitors with a broad range of product offerings.
Further,  other companies may develop and bring new products to the market which
could  create  significant   competition  for  the  Company  and  its  products.
Competition  from EDA companies  that currently  offer only  functional or logic
design  products  and that  choose to enter the  physical  design  market  could
present particularly  formidable competition due to their relationships with the
Company's  current and  potential  customers,  their ability to offer a complete
integrated IC design  solution which Avant!  does not currently  offer and their
knowledge of the EDA industry.

The Company also  competes  with the  internal  ICDA  development  groups of its
existing and  potential  customers,  many of whom design and develop  customized
design  tools for their  particular  needs and  therefore  may be  reluctant  to
purchase  products  offered  by  independent  vendors,   such  as  the  Company.
Furthermore,  because there are relatively low barriers to entry in the software
industry,  the Company expects additional competition from other established and
emerging  companies.  There can be no assurance  that the  Company's  current or
potential  competitors will not develop products comparable or superior to those
developed  by the  Company  or  adapt  more  quickly  than  the  Company  to new
technologies,  evolving  industry  trends  or  changing  customer  requirements.
Increased competition could result in price reductions,  reduced margins or loss
of  market  share,  any of which  could  materially  and  adversely  affect  the
Company's business,  operating results or financial condition.  In addition, the
EDA industry has become increasingly concentrated in recent years as a result of
consolidations,   acquisitions  and  strategic  alliances.  Accordingly,  it  is
possible that new  competitors or alliances among  competitors  could emerge and
rapidly acquire  significant  market share.  Alliances among  competitors  could
present  particularly  formidable  competition to the Company by combining their
resources.  There can be no  assurance  that the Company will be able to compete
successfully   against  current  and  future  competitors  or  that  competitive
pressures  faced by the Company will not have a material  adverse  effect on its
business, operating results and financial condition. If the Company is unable to
compete  successfully  against  current and future  competitors,  the  Company's
business,  operating  results and financial  condition  will be  materially  and
adversely affected.

The Company competes on the basis of certain factors,  including first-to-market
product capabilities, product performance, price, support of industry standards,
ease of use and customer  technical  support and service.  The Company  believes
that it currently  competes  favorably  overall  with respect to these  factors,
particularly   first-to-market  product  capabilities,   technical  support  and
customer service.


                                       6

<PAGE>

In addition, competitors and potential competitors may resort to litigation as a
means of competition.  Cadence has initiated  litigation against the Company and
certain of its officers and employees alleging trade secret misappropriation and
other  claims.  See  "Legal   Proceedings."  There  can  be  no  assurance  that
competitors of the Company, in particular Cadence,  will not initiate additional
litigation  against  the  Company  and its  officers,  directors,  employees  or
consultants.   The  pending  litigation  against  the  Company  and  any  future
litigation against the Company or its employees,  regardless of the outcome, may
result  in  substantial  costs  and  expenses  to the  Company  and  significant
diversion of effort by the Company's  technical and  management  personnel.  Any
such litigation could have a material adverse effect on the Company's  business,
operating results or financial condition.

PROPRIETARY RIGHTS

The Company relies on a combination of license agreements,  patents,  copyright,
trademark and trade secret laws to establish and protect  proprietary  rights to
its technology.  The Company holds several patents  covering  certain aspects of
its  products.  The  Company  generally  provides  products to  end-users  under
non-exclusive licenses,  which typically have a perpetual term unless terminated
for  breach.  The  license  provides  that the  software  may be used solely for
internal  operations in designated  computers at specified  sites. The Company's
software is shipped with a software  security lock which limits  software access
to authorized users. The source code of the Company's products is protected both
as a trade  secret  and as an  unpublished  copyrighted  work,  and is not  made
available to third parties. Despite these precautions,  it may be possible for a
third  party to copy or  otherwise  obtain  and use the  Company's  products  or
technology without authorization or to develop similar technology independently.
In addition,  effective copyright and trade secret protection may be unavailable
or limited in certain foreign  countries.  The Company believes that, due to the
rapid pace of innovation  within the IC CAD software  industry,  factors such as
the   technological   and  creative   skills  of  its  personnel,   new  product
developments,  frequent  product  enhancements,  name  recognition  and reliable
product  maintenance  are more  important  to  establishing  and  maintaining  a
technology  leadership  position than are the various legal  protections  of its
technology.

The Company is heavily dependent upon its proprietary software  technology.  The
Company  currently  holds several  patents and also relies on a  combination  of
trade secret,  copyright and trademark laws, nondisclosure and other contractual
agreements  and  technical  measures  to protect its  proprietary  rights in its
products.  Although the Company holds several patents, there can be no assurance
that the Company will develop  additional  proprietary  products or technologies
that are  patentable,  that any issued  patent will provide the Company with any
competitive  advantages  or will not be  challenged by third parties or that the
patents of others will not have an adverse effect on the Company's ability to do
business.   Furthermore,  there  can  be  no  assurance  that  others  will  not
independently develop similar products,  duplicate the Company's products or, if
patents  are issued to the  Company,  design  around the  patents  issued to the
Company.  There can be no  assurance  that the steps taken by the  Company  will
prevent  misappropriation  of its  technology,  and  such  protections  may  not
preclude  competitors  from developing  products with  functionality or features
similar to the Company's  products.  In addition,  effective copyright and trade
secret  protection may be unavailable or limited in certain  foreign  countries.
The Company  expects that software  companies  will  increasingly  be subject to
infringement claims as the number of products and competitors in the industry in
which the Company competes grows and the  functionality of products in different
industry  segments  overlaps.  In particular,  Avant!'s current  litigation with
Cadence  involves  such  infringement  claims.  The  Company  believes  that its
products and  trademarks  do not infringe upon the  proprietary  rights of third
parties. There can be no assurance,  however, that third parties will not assert
infringement  claims,  regardless of merit, against the Company in the future or
that such claims will not require the Company to cease use of certain technology
or enter into expensive  royalty  arrangements,  if licenses are  available,  or
result in costly litigation,  any of which could materially and adversely affect
the Company's business, operating results or financial condition.

EMPLOYEES

As of  February  28,  1997,  the Company had 444  employees,  including,  194 in
research and development,  194 in sales,  marketing and related customer support
services,  and 56 in finance and  administration.  Of these employees,  415 were
located in the United States,  15 in Europe, 13 in Japan and 1 in Korea. None of
the  Company's  employees  is  represented  by a labor  union or is subject to a
collective bargaining agreement,  nor has Avant!  experienced any work stoppage.
Avant! considers its relations with its employees to be good.

                                       7

<PAGE>

The Company has recently  experienced  a period of rapid  growth and  expansion,
especially the mergers of four companies in a four month period, that has placed
and  continues to place a  significant  strain upon its  management  systems and
resources.  The Company  currently  plans to  continue  to expand its staff.  To
accommodate  this recent  growth,  the Company  will be required to  implement a
variety of new and upgraded  operational and financial  systems,  procedures and
controls,  some of which currently require substantial  management effort. There
can be no  assurance  that the Company will be able to do so  successfully.  The
increase  in the number of the  Company's  employees  and the  Company's  market
diversification  and product  development  activities have resulted in increased
responsibility  for the  Company's  management.  The  Company  anticipates  that
continued  growth,  if any,  will  require it to recruit and hire a  substantial
number of new engineering,  managerial, finance, sales and marketing and support
personnel;  however,  there  can  be no  assurance  that  the  Company  will  be
successful at hiring or retaining  these  personnel.  The  Company's  ability to
compete  effectively  and to manage  future  growth,  if any,  will  require the
Company  to  continue  to  implement  and  improve  operational,  financial  and
management  information systems on a timely basis and to expand, train, motivate
and  manage  its work  force.  There  can be no  assurance  that  the  Company's
personnel,  systems,  procedures  and  controls  will be adequate to support the
Company's  operations.  Any  failure to  implement  and  improve  the  Company's
operational,  financial and management systems or to expand,  train, motivate or
manage  employees,  could  have a  material  adverse  effect  on  the  Company's
business, operating results or financial condition.

The Company's  future  operating  results  depend in  significant  part upon the
continued  service  of  its  key  technical  and  senior  management  personnel,
including  in  particular,  Gerald C. Hsu,  the  Company's  President  and Chief
Executive  Officer.  None of the  Company's  employees is bound by an employment
agreement.  The Company's  business,  operating results and financial  condition
also depend on its  continuing  ability to attract and retain  highly  qualified
technical and managerial  personnel.  Competition for such personnel is intense,
and there can be no assurance that the Company will retain its key technical and
managerial personnel or attract such personnel in the future. Uncertainty during
the existing  litigation may adversely  affect the Company's  ability to attract
and retain such  personnel.  In  particular,  there are only a limited number of
qualified ICDA engineers,  and  competition  for such  individuals is especially
intense.  The Company  has at times  experienced  and  continues  to  experience
difficulty in recruiting qualified personnel, and there can be no assurance that
the Company will not experience such  difficulties  in the future.  The Company,
either directly or through personnel search firms,  actively recruits  qualified
research  and  development,  financial  and sales  personnel.  If the Company is
unable to hire and retain  qualified  personnel  in the future,  such  inability
could  have a  material  adverse  effect on the  Company's  business,  operating
results or financial condition.  Additionally,  if a criminal complaint is filed
relating to the matters  underlying the pending  litigation  between Avant!  and
Cadence resulting in a loss of Avant!  personnel,  then the Company's  business,
operating results and financial condition may be materially adversely affected.

ENVIRONMENTAL AFFAIRS

The Company's  operations are subject to numerous federal,  state and local laws
and regulations designed to protect the environment. There are no administrative
or judicial  proceedings  pending or  threatened  against  the Company  alleging
violations of such  environmental  laws and  regulations.  Compliance with these
laws and  regulations  has not had,  and is not  expected  to have,  a  material
adverse effect on the capital expenditures, earnings and competitive position of
the Company.

                                       8

<PAGE>

FLUCTUATIONS IN QUARTERLY OPERATING RESULTS; FUTURE OPERATING RESULTS UNCERTAIN

The  quarterly  operating  results of the  Company may vary  substantially  from
period to  period  depending  on  factors  such as the  outcome  of  outstanding
litigation, increased competition, the size, timing and structure of significant
licenses,  the  timing  of  revenue  recognition  under its  time-based  license
agreements, the timing of new or enhanced product announcements,  introductions,
or delays in the  introductions,  of new or enhanced  versions of the  Company's
products, changes in pricing policies by the Company or its competitors,  market
acceptance  of  new  and  enhanced  versions  of  the  Company's  products,  the
cancellation of time-based licenses or maintenance agreements, the mix of direct
and indirect  sales,  changes in operating  expenses,  changes in the  Company's
strategy,  seasonal factors,  personnel changes, foreign currency exchange rates
and general economic factors. Due to the foregoing factors, and particularly the
variability of the size, timing and structure of significant licenses, quarterly
revenue and operating results are difficult to forecast.  In particular,  Avant!
has adopted a flexible  pricing  strategy  pursuant to which Avant!  offers both
perpetual and time-based  software licenses to customers,  depending on customer
requirements and financial constraints. Because each time-based license may have
a different  structure and could be subject to  cancellation,  future revenue is
unpredictable,  In addition, quarterly operating results of one of the Company's
wholly owned subsidiaries have in the past fluctuated as a result of seasonality
of customer buying patterns, with revenues for the first quarter of a year often
lower than those for the last quarter of the preceding  year,  and a significant
portion of revenue in a quarter  typically  is received in the last few weeks or
days of that  quarter.  The  Company's  expense  levels are based,  in part,  on
expectations as to future revenue levels.  Accordingly,  net income, if any, may
be  disproportionately  affected by a reduction in revenue  because only a small
portion of the Company's expenses fluctuate with revenue.  If revenue levels are
below  expectations,  the Company's  business,  operating  results and financial
condition are likely to be materially adversely affected. Such shortfalls in the
Company's  revenue or operating  results from levels  expected by public  market
analysts and investors could have an immediate and significant  material adverse
effect on the market price of the  Company's  common  stock.  Additionally,  the
Company may not learn of such revenue shortfalls or earnings shortfalls or other
failures to meet market  expectations  for results of operations until late in a
quarter,  which could  result in an even more  immediate  and  material  adverse
effect on the trading price of Avant!  common stock.  In such event,  the market
price of Avant!'s common stock would be materially  adversely  affected.  Due to
the  foregoing,  the Company  believes that period to period  comparisons of its
results of operations  are not  necessarily  meaningful and should not be relied
upon as indications of future performance.

In  addition,  the stock  market has from time to time  experienced  significant
price and volume fluctuations that have particularly  affected the market prices
for the common stocks of technology  companies.  These broad market fluctuations
may  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 often  occurred  against a
company,  as evidenced by the Company's current status as a defendant in a class
action  lawsuit  following a sharp decline in the price of the Company's  common
stock. See "Legal  Proceedings."  There can be no assurance that such litigation
will not occur again in the future with respect to the Company.  Such litigation
could result in substantial costs and a diversion of management's  attention and
resources, which could have a material adverse effect on the Company's business,
operating results and financial condition.  See "Selected Consolidated Financial
Data" and  "Management's  Discussion  and  Analysis of Financial  Condition  and
Results of Operations."


                                       9

<PAGE>

<TABLE>
<CAPTION>
                                               Q1/95     Q2/95      Q3/95       Q4/95      Q1/96      Q2/96       Q3/96     Q4/96
                                             --------   --------   --------   --------    --------   --------   --------   --------
(in 000's, except per share data,
price and percentages)
(unaudited)
<S>                                          <C>        <C>        <C>        <C>         <C>        <C>        <C>        <C>
REVENUE:
  Software                                   $  9,791   $ 13,187   $ 15,093   $ 17,093    $ 18,603   $ 19,807   $ 21,620   $ 22,104
  Services                                      2,556      3,064      3,959      4,125       4,944      6,011      6,308      6,690
                                             --------   --------   --------   --------    --------   --------   --------   --------
     Total revenue                             12,347     16,251     19,052     21,218      23,547     25,818     27,928     28,794
                                             --------   --------   --------   --------    --------   --------   --------   --------
COSTS AND EXPENSES:
  Costs of software                               310        417        350        452         615        509        678        710
  Costs of services                               930      1,166      1,314      1,435       1,798      1,750      1,835      1,886
  Selling and marketing                         4,356      5,629      5,785      6,971       6,867      7,641      7,810      7,610
  Research and development                      3,002      3,590      4,084      4,642       4,781      4,814      5,538      5,563
  General and administrative                    1,212      1,374      1,856      1,920       2,735      3,852      4,022      4,841
  Acquisition of technology                      --         --         --        2,693        --         --          300      1,400
  Merger expenses                                --         --         --        3,590        --         --          920      8,380
                                             --------   --------   --------   --------    --------   --------   --------   --------
     Total operating expenses                   9,810     12,176     13,389     21,703      16,796     18,566     21,103     30,390
                                             --------   --------   --------   --------    --------   --------   --------   --------
     Income (loss) from operations              2,537      4,075      5,663       (485)      6,751      7,252      6,825     (1,596)
Interest income, net                              383        512        890      1,002         908      1,135      1,057      1,104
                                             --------   --------   --------   --------    --------   --------   --------   --------
     Income (loss) before
       income taxes                             2,920      4,587      6,553        517       7,659      8,387      7,882       (492)
Provision for income taxes (pro
  forma in 1995)                                  983      1,571      2,277      1,396       2,745      3,019      2,900      2,288
                                             --------   --------   --------   --------    --------   --------   --------   --------
     Net income (loss)  (pro forma
       in 1995)                              $  1,937      3,016      4,276       (879)      4,914      5,368      4,982     (2,780)
                                             ========   ========   ========   ========    ========   ========   ========   ========
Net income (loss) per
  common share (pro forma
  in 1995)                                   $   0.09   $   0.12   $   0.16   $  (0.03)   $   0.19   $   0.20   $   0.18   $  (0.11)
                                             ========   ========   ========   ========    ========   ========   ========   ========

Weighted average number of
  shares outstanding                           21,815     25,960     26,140     26,593      26,120     26,618     27,125     24,775

Common stock price (1):
  High                                             $-   $  36.00   $  51.00   $  47.00    $  26.25   $  27.75   $  34.25   $  37.00
  Low                                              $-   $  20.75   $  33.25   $  12.50    $  14.00   $  16.25   $  20.50   $  25.50
<FN>
(1) Initial public offering was completed during June 1995 at $13 per share.
</FN>
</TABLE>

                                                                 10

<PAGE>
<TABLE>
<CAPTION>
                                                       Q1/95     Q2/95     Q3/95     Q4/95      Q1/96     Q2/96     Q3/96     Q4/96
                                                       -----     -----     -----     -----      -----     -----     -----     -----
<S>                                                     <C>       <C>       <C>       <C>        <C>       <C>       <C>       <C>
Percentage of total revenue

REVENUE:
  Software                                               79%       81%       79%       81%        79%       77%       77%       77%
  Services                                               21%       19%       21%       19%        21%       23%       23%       23%
                                                        ----      ----      ----      ----       ----      ----      ----      ----
     Total revenue                                      100%      100%      100%      100%       100%      100%      100%      100%
                                                        ----      ----      ----      ----       ----      ----      ----      ----
COSTS AND EXPENSES:
  Costs of software                                       2%        3%        2%        2%         2%        2%        3%        2%
  Costs of services                                       8%        7%        7%        7%         8%        7%        7%        7%
  Selling and marketing                                  35%       35%       30%       33%        29%       29%       28%       26%
  Research and development                               24%       22%       21%       22%        20%       19%       20%       20%
  General and administrative                             10%        8%       10%        9%        12%       15%       14%       17%
  Acquisition of technology                               -%        -%        -%       12%         -%        -%        1%        5%
  Merger expenses                                         -%        -%        -%       17%         -%        -%        3%       29%
                                                        ----      ----      ----      ----       ----      ----      ----      ----
     Total operating expenses                            79%       75%       70%      102%        71%       72%       76%      106%
                                                        ----      ----      ----      ----       ----      ----      ----      ----
     Income (loss) from operations                       21%       25%       30%       (2)%       29%       28%       24%       (6)%
Interest income, net                                      3%        3%        4%        4%         4%        4%        4%        4%
                                                        ----      ----      ----      ----       ----      ----      ----      ----
     Income (loss) before
       income taxes                                      24%       28%       34%        2%        33%       32%       28%       (2)%
Provision for income taxes (pro
  forma in 1995)                                          8%        9%       12%        6%        12%       11%       10%        8%
                                                        ----      ----      ----      ----       ----      ----      ----      ----
     Net income (loss)  (pro forma
       in 1995)                                          16%       19%       22%       (4)%       21%       21%       18%      (10)%
                                                        ====      ====      ====      ====       ====      ====      ====      ====
</TABLE>

Item 2.  Properties

The  Company  occupies  approximately  115,000  square  feet  of  space  for its
headquarters in Sunnyvale,  California with an annual base rent of approximately
$1,120,000. This lease expires on February 15, 1998. The Company also occupies a
facility near Research  Triangle Park in Durham,  North  Carolina with an annual
base rent of  approximately  $666,000.  This lease expires on November 30, 2005.
The Company also leases 10 sales and support offices in the United States,  four
in Europe,  one in Japan and one in Korea.  Avant!  believes  that its  existing
facilities are adequate for its current needs.

In February 1997, the Company  signed a lease for its  headquarters  in Fremont,
California.  The lease covers four buildings with an aggregate of  approximately
281,000  square  feet of space  with an  aggregate  annual  base rent  amount of
approximately  $4,800,000.  The  lease  for three of the  buildings  expires  on
September  1, 2000 and for the  fourth  building  on May 1,  2010.  The  Company
expects to move into its new headquarters in June 1997.


                                       11



<PAGE>


Item 3.  Legal Proceedings

On December 6, 1995,  Cadence filed an action against the Company and certain of
its officers in the Northern  California  United States  District Court alleging
copyright infringement,  unfair competition,  misappropriation of trade secrets,
conspiracy,   breach  of  contract,  inducing  breach  of  contract,  and  false
advertising.  The essence of the complaint is that certain Avant!  employees who
were formerly Cadence employees allegedly  misappropriated and improperly copied
source code for certain important  functions of Avant!  place and route products
from  Cadence,  and that the Company has allegedly  competed  unfairly by making
false statements  concerning  Cadence and its products.  The action also alleges
that  the  Company  induced  certain  individual   defendants  to  breach  their
agreements of employment and confidentiality with Cadence. In addition to actual
and punitive  damages,  which were not  quantified by Cadence,  Cadence seeks to
enjoin the sale of certain  place and route  products.  On March 18,  1997,  the
Northern  California  United States  District Court denied  Cadence's  motion to
obtain a preliminary  injunction  that would have  prohibited the production and
sale of Avant!'s  ArcCell,  ArcCell XO, Aquarius XO and Aquarius XO 2.0 products
or any other product that Avant! is currently  selling.  The matter is currently
awaiting trial, pending further pretrial matters. A trial date has not been set.

On January 16, 1996, Avant! filed a counterclaim  alleging antitrust violations,
racketeering,  false advertising,  defamation,  trade libel, unfair competition,
unfair trade practices,  negligent and intentional interference with prospective
economic  advantage,  and intentional  interference with contractual  relations.
Although Avant!'s  counterclaim seeks  unquantified  damages according to proof,
Avant!  specifically  alleges  that it has  suffered  losses  in  excess of $500
million.  The alleged  losses are due  largely to the decline in Avant!'s  stock
market value caused by Cadence's misconduct.

The Santa Clara County  District  Attorney's  office is also  investigating  the
allegations of misappropriation of trade secrets set forth in Cadence's lawsuit,
described  above.  On December  5, 1995,  a search  warrant was  executed at the
Company's  Sunnyvale,  California,  facility  to  determine  whether  there  was
evidence of criminal  conduct.  No criminal  charges have been filed against the
Company,  the  Company's  management or its  employees,  but no assurance can be
given that such charges will not be filed in the future.  A criminal  complaint,
if filed against the Company, the Company's  management or its employees,  could
result in a loss of management and other personnel and could have other material
adverse effects on the Company.

On December  15, 1995,  Paul  Margetis  and Helen  Margetis  filed in the United
States District Court for the Northern District of California a securities fraud
class action complaint.  In addition,  on December 19, 1995, Fred Tarca filed in
the United States District Court for the Northern District of California a class
action  complaint for  violations of the federal  securities  laws.  These class
action lawsuits allege certain  securities law violations,  including  omissions
and/or  misrepresentation  of  material  facts.  The  alleged  omissions  and/or
misrepresentations  are largely  consistent  with those  outlined in the Cadence
claim. In February 1997,  plaintiff Tarca  voluntarily  dismissed his action and
the Margetis plaintiffs were certified as class representatives in their action.
The Margetis action has been informally  stayed pending  resolution of Cadence's
preliminary injunction motion.

When the  lawsuits  were  originally  filed  against  the  Company,  the Company
experienced  delays in orders by customers due to the uncertainty of the pending
lawsuits  against  the  Company.  If the Company  suffers an adverse  outcome in
either  the  civil or  criminal  proceedings,  then  the  Company  would  likely
experience  future delays in orders from customers,  and would likely suffer the
loss of  customers.  If such  events  were to occur,  there  would be a material
adverse  effect on the Company's  business,  financial  condition and results of
operations.


                                       12


<PAGE>


The Company  believes it has sufficient  defenses to all the plaintiffs'  claims
and intends to defend  itself  vigorously.  If however,  Avant!'s  defenses  are
unsuccessful,  the Company may be enjoined from selling  certain place and route
products and may be required to pay damages to Cadence. In such event,  Avant!'s
business,  operating  results,  and  financial  condition  would  be  materially
adversely affected.  In addition,  it is likely that an adverse judgment against
Avant!  would result in a steep  decline in the market price of Avant!'s  common
stock.  Although  it is  reasonably  possible  the Company may incur a loss upon
conclusion of these  claims,  an estimate of any loss or range of loss cannot be
made, and the Company  believes,  based on  information it presently  possesses,
that the  conclusion of these claims will not have a material  adverse effect on
the Company's consolidated financial position, however there can be no assurance
that an adverse  judgment,  if  granted  on any claim  would not have a material
adverse effect on the Company's business,  consolidated  financial position,  or
consolidated results of operations.

The Company is subject to other claims that have arisen in the  ordinary  course
of business. In the opinion of management, all such matters are without merit or
involve amounts which would not have a material  adverse effect on the Company's
consolidated financial position if unfavorably resolved.

Item 4.  Submission of Matters to a Vote of Security Holders

On October 29, 1996, a special  meeting of  Stockholders  of the  Registrant was
held at which stockholders  approved a proposal to issue shares of the Company's
common stock in connection with the merger of Natasha Merger Corp., a California
corporation and a wholly owned  subsidiary of the Company (Merger Sub), with and
into Meta-Software,  Inc., a California  corporation (Meta),  pursuant to which,
amount other things,  (a) Merger Sub merged with and into Meta,  following which
Meta became a wholly owned  subsidiary of the Company,  (b) each share of Meta's
common stock  outstanding as of the closing of the merger was converted into the
right to receive  0.438 of a share of the Company's  common  stock,  and (c) all
Meta stock options and  subscription  rights,  together with the underlying Meta
stock  plans,  were  assumed by the  Company  and  converted  into  options  and
subscription rights to purchase shares of the Company's Common Stock. 11,160,341
votes were for the proposal,  2,329 votes were against the  proposal,  and 6,420
votes were broker non-votes.

                                    PART II.

Item 5.  Market for Registrant's Common Equity and Related Stockholder Matters

The Company's  Common Stock has traded on the Nasdaq  National  Market under the
Nasdaq symbol AVNT since November 27, 1995. The Company's Common Stock traded on
the  National  Market  System  under the Nasdaq  symbol ARCS from the  Company's
initial public offering on June 7, 1995 until November 26, 1995. The Company has
not paid  cash  dividends  in the past and none are  expected  to be paid in the
future.  As of February 28, 1997, the Company had approximately 198 shareholders
of record.

The information  required by Item 5 concerning the high and low sales prices for
the  Company's  common  stock is  incorporated  by  reference  from Item 1. Such
quotations reflect inter-dealer prices without mark-up, mark-down or commissions
and may not necessarily represent actual transactions.

                                       13

<PAGE>

Item 6.  Selected Consolidated Financial Data

(in 000's, except per share data)
<TABLE>
<CAPTION>
                                                                                      Year ended December 31,
                                                            ------------------------------------------------------------------------
                                                              1996             1995            1994           1993             1992
                                                              ----             ----            ----           ----             ----
<S>                                                         <C>              <C>              <C>             <C>             <C>
Consolidated Statements of Operations Data:
Total revenue                                               $106,087          68,868          39,344          22,560          14,806
Income from operations                                      $ 19,232          11,790           5,348           1,231           1,171
Pro forma net income                                        $ 12,484           8,350           4,009           2,389             307
Pro forma income per common share                           $   0.47            0.35            0.20            0.15            0.03
Weighted average number of common and
     common equivalent shares outstanding                     26,761          24,159          20,457          16,284           8,954

                                                                                           December 31,
                                                            ------------------------------------------------------------------------
                                                              1996             1995            1994           1993             1992
                                                              ----             ----            ----           ----             ----
Consolidated Balance Sheets Data:
Cash and cash equivalents                                   $ 33,067          50,010           9,925           9,682           6,966
Working capital                                             $115,977          93,005          36,464          12,530           7,397
Total assets                                                $156,103         123,173          52,222          24,277          13,397
Long-term obligations                                       $  1,017           1,730           1,021             173             152
Manditorily redeemable convertible
     preferred stock                                        $   --              --             8,312           8,312           3,830
Shareholders' equity                                        $124,823          99,411          31,525           7,177           5,868
</TABLE>

Item 7.  Management's Discussion and Analysis of Financial Condition and Results
         of Operation

This  discussion  contains  forward-looking  statements  that involve  risks and
uncertainties.  The Company's actual results could differ  materially from those
discussed  herein.  Factors that could cause or contribute  to such  differences
include,  but are not limited to,  those  discussed in  "Quarterly  Results" and
"Factors That May Impact Future  Operations" as well as those  discussed in this
section and  elsewhere  in this  report,  and the risks  discussed  in the "Risk
Factors"  section  on Form  S-3 as  declared  effective  by the  Securities  and
Exchange  Commission on January 31, 1997,  and other risks detailed from time to
time in the Company's Securities and Exchange Commission reports.

Overview

The Company develops,  markets and supports software products that assist design
engineers in the physical layout,  design,  verification,  simulation and timing
analysis of advanced  ICs. The  Company's  strategy is to focus on  productivity
enhancing software for the ICDA segment of the EDA market.

Effective  September  27, 1996,  October 29, 1996 and  November  27,  1996,  the
Company merged with Anagram,  Inc.  (Anagram),  Meta-Software,  Inc.  (Meta) and
FrontLine Design Automation,  Inc. (FrontLine),  respectively.  The mergers have
been accounted for by the  pooling-of-interests  method,  and  accordingly,  the
Company's  consolidated  financial  statements give  retroactive  effect for all
periods presented to include the results of operations,  financial  position and
cash flows of Anagram, Meta and FrontLine.

The Company began  shipping  Hercules  (formerly  VeriCheck),  its  hierarchical
physical  verification  software,  in the third  quarter of 1992,  and  Aquarius
(formerly  ArcCell),  its cell-based place and route software product,  in 1993.
Anagram  was  founded  in  March  1993,   and  began  shipping   Star-Sim,   its
high-capacity  circuit simulation and high-accuracy timing analysis software, in
December 1994.  Meta was founded in 1980,  when it introduced its simulation and
library software products including Star-Hspice.  FrontLine was founded in 1993.
Substantially  all of the Company's revenue for 1996, 1995, and 1994 was derived
from the licensing and support of Aquarius, Hercules, Star-Sim and Star-Hspice.

                                       14

<PAGE>

<TABLE>

Results of Operations

The  following  table  sets  forth  the  percentage  of  total  revenue  and the
percentage  change for certain  items in the  Company's  Consolidated  Financial
Statements (after giving effect to rounding) for the periods indicated:
<CAPTION>

                                                 Year Ended December 31,         Percentage Change
                                                 -----------------------         -----------------
                                                  1996      1995     1994     1995-1996     1994-1995
                                                  ----      ----     ----     ---------     ---------
<S>                                               <C>      <C>        <C>        <C>           <C>
REVENUE:
  Software.........................................77%      80%        79%        49%           78%
  Services.......................................  23       20         21         75            63
                                                  ---      ---        ---        ---           ---
     Total revenue................................100%     100%       100%        54%           75%
                                                  ---      ---        ---        ---           ---
COSTS AND EXPENSES:
  Costs of software................................ 2        2          3         64            36
  Costs of services................................ 7        7          7         50            65
  Selling and marketing........................... 28       33         37         32            57
  Research and development.........................20       23         25         35            58
  General and administrative.......................14        9         10        143            54
  Acquisition of technology........................ 2        4          4        (37)           68
  Merger expenses.................................  9        5          -        159           n/a
                                                  ---      ---        ---        ---           ---
     Total operating expenses..................... 82       83         86         52            68
                                                  ---      ---        ---        ---           ---
     Income from operations........................18       17         14         63           121
Interest income, net..............................  4        4          2         51           233
                                                  ---      ---        ---        ---           ---
     Income before income taxes....................22       21         16         61           136
Provision for income taxes (pro forma in 1995
  and 1994)........................................10        9          6         76           186
                                                  ---      ---        ---        ---           ---
     Net income (pro forma in 1995 and 1994).....  12%      12%        10%        50%          108%
                                                  ===      ===        ===        ===           ===
</TABLE>

Comparison of Years Ended December 31, 1996, 1995 and 1994

Revenue.  Revenue  consists  primarily  of fees for  licenses  of the  Company's
software  products,  maintenance and customer support.  Revenue from the sale of
software  licenses is recognized  after  shipment of the  products,  delivery of
permanent  authorization  codes and  fulfillment  of acceptance  terms,  if any,
providing  that no  significant  vendor and  post-contract  support  obligations
remain and  collection  of the related  receivable  is probable.  Any  remaining
insignificant  vendor or  post-contract  support  obligations are accrued at the
time the  revenue is  recognized.  In  instances  where  there is a  contingency
regarding the sale,  revenue  recognition is delayed until the  contingency  has
been resolved. When the Company receives advance payments for software products,
such payments are reported as deferred  revenue until all conditions for revenue
recognition  are met. The Company has entered into  certain  license  agreements
under which software, support and other services are provided to customers for a
bundled  price for a  specific  period of time.  Generally,  revenue  under such
agreements is recognized ratably over the contract period.  Maintenance  revenue
is deferred and recognized  ratably over the term of the maintenance  agreement,
which is typically 12 months. Revenue from customer training,  support and other
services is recognized as the service is performed.

The  Company's  total  revenue  increased  54%  to  $106,087,000  in  1996  from
$68,868,000 in 1995 and 75% in 1995 from  $39,344,000 in 1994. The percentage of
the Company's revenue  attributable to software licenses  decreased  slightly to
77% in 1996  from 80% in 1995 and 79% in 1994 due to the  larger  user  base and
resulting increase in maintenance revenue.

Software  revenue  increased 49% to $82,134,000 in 1996 from $55,164,000 in 1995
and 78% in 1995 from $30,929,000 in 1994. Increases in software revenue were due
primarily  to increased  license  revenue  from the  Company's  place and route,
physical  verification,   simulation  and  timing  software.   Services  revenue
increased 75% to  $23,953,000  in 1996 from  $13,704,000 in 1995 and 63% in 1995
from  $8,415,000  in 1994,  reflecting  the growing base of  installed  systems.
Through  December 31, 1996,  price  increases have not been a material factor in
the Company's revenue growth. The Company does not believe that period-to-period
comparisons  of past  revenue  growth  should be relied upon as  indications  of
future performance.

                                       15

<PAGE>

As discussed in Legal  Proceedings,  the Company is involved in litigation  with
Cadence, and other related actions (collectively,  the Cadence litigation). As a
result of the Cadence  litigation,  some customers may cancel or postpone orders
of the  Company's  products.  As of December 31, 1996,  such  cancellations  and
postponements had not had a material financial impact on the Company's revenues.
However, cancellations or a significant delay of orders in the future may impact
the  Company's  business,  financial  condition  and results of  operations.  An
adverse ruling in the Cadence  litigation could result in Avant!'s  inability to
sell certain of its products and, as a result, could materially adversely affect
Avant!'s business, financial condition and results of operations. In particular,
Avant!'s place and route products in dispute,  ArcCell-BV and ArcCell-XO  (which
have been replaced by Aquarius-BV and Aquarius-XO),  accounted for approximately
30% of the  Company's  consolidated  revenues  for the  three-year  period ended
December 31, 1996.

Deferred  revenue  increased  to  $13,824,000  as  of  December  31,  1996  from
$9,585,000 as of December 31, 1995 due to increases in the number of maintenance
agreements and license agreements where software and services are provided for a
specific period and revenue is recognized ratably over the contract period.

Costs of Software.  Costs of software consist  primarily of expenses  associated
with product  documentation and production costs. Costs of software increased to
$2,512,000  in 1996 from  $1,529,000 in 1995 and  $1,122,000  in 1994.  Costs of
software  as a  percentage  of  software  revenue  was 3% in both  1996 and 1995
compared to 4% in 1994. Costs of software  included  amortization of capitalized
software  amounting to $88,000,  $228,000  and $199,000 in 1996,  1995 and 1994,
respectively.

Costs of  Services.  Costs of  services  consist  of  costs of  maintenance  and
customer  support and direct costs  associated  with providing  other  services.
Maintenance  includes  activities  undertaken after the product is available for
general release to customers to correct errors, make routine changes and provide
additional  features.  Customer support  includes any  installation  assistance,
training classes, telephone question and answer services,  newsletters,  on-site
visits and  software  or data  modifications.  Costs of  services  increased  to
$7,269,000 in 1996 from $4,845,000 in 1995 and $2,940,000 in 1994,  representing
30%, 35% and 35% of services revenue for 1996, 1995 and 1994, respectively.  The
increases in costs of services  were due primarily to increases in personnel and
expenses necessary to support the Company's growing base of installed  software.
The reduction in costs of services as a percentage of service  revenue  reflects
the improved  utilization of the Company's customer support resources in serving
its increasing customer base.

Selling and  Marketing.  Selling and  marketing  expenses  consist  primarily of
costs,  including  sales  commissions,  of all  personnel  involved in the sales
process.   This  includes  sales   representatives,   marketing  associates  and
application  engineers.  Selling and  marketing  expenses  also include costs of
advertising,  public  relations,   conferences  and  trade  shows.  Selling  and
marketing expenses increased to $29,928,000 in 1996 from $22,741,000 in 1995 and
$14,476,000 in 1994. The increases reflect higher sales  commissions  associated
with  increased  sales volumes and  increases in sales and marketing  personnel.
Selling and marketing expenses  represented 28%, 33% and 37% of total revenue in
1996,  1995 and 1994,  respectively.  The  decrease  in  selling  and  marketing
expenses as a percentage of total revenue for these periods  resulted  primarily
from revenue growth and improved sales productivity. The Company expects to hire
additional  sales  and  marketing   personnel  and  to  increase  promotion  and
advertising expenditures throughout 1997.

Research and  Development.  Research and development  expenses include all costs
associated with the  development of new products and significant  enhancement of
existing products. Research and development expenses increased to $20,696,000 in
1996 from  $15,318,000 in 1995 and  $9,728,000 in 1994.  The increases  resulted
from increased  personnel-related  costs  associated with the development of new
products  and  significant  enhancements  of  existing  products.  Research  and
development expenses represented 20%, 23% and 25% of total revenue in 1996, 1995
and 1994, respectively.  The Company anticipates that it will continue to devote
substantial resources to product research and development throughout 1997.

                                       16

<PAGE>

Software  development  costs are accounted for in accordance  with  Statement of
Financial   Accounting   Standards  (SFAS)  No.  86,  under  which  the  Company
capitalizes software  development costs once technological  feasibility has been
established.  The Company amortizes such amounts over three years. The amount of
software development costs capitalized for 1996, 1995 and 1994 was none, $63,000
and $143,000, respectively.

General and  Administrative.  General and  administrative  expenses increased to
$15,450,000  in 1996  from  $6,362,000  in 1995  and  $4,130,000  in  1994.  The
increases  were  primarily  due to  increases  in  personnel  and related  costs
necessary  to support the  Company's  growth and legal and other costs  incurred
relating  to  the  Cadence  litigation.   General  and  administrative  expenses
represented  14%,  9% and  10%,  of  total  revenue  in  1996,  1995  and  1994,
respectively.  The Company charged to expenses  approximately  $6,850,000 during
1996,  net  of  expected  recoveries  from  insurance  related  to  the  Cadence
litigation.  The Company expects these legal expenditures to continue throughout
1997.

Acquisition of Technology.  In September and December 1996, the Company acquired
rights  to  certain  software  technology  under  development.  As the  acquired
technology had not reached technological feasibility at the date of acquisition,
it was expensed upon  acquisition.  In October 1995, the Company purchased a set
of timing simulator algorithms which had not reached  technological  feasibility
at the date of  acquisition  and the cost  associated  with the  technology  was
expensed upon  acquisition.  In April 1994,  the Company  purchased and expensed
in-process library generation and automated cell characterization technology now
embodied in its MASTER Toolbox product, recently renamed Gemini. As the acquired
technology had not reached technological feasibility at the date of acquisition,
it was expensed upon acquisition.

Merger  Expenses.  In connection  with the 1996 mergers with  Anagram,  Meta and
FrontLine,  the Company  incurred direct  transaction  costs and  merger-related
integration expenses of approximately $9,300,000, consisting of transaction fees
for  investment  bankers,   attorneys,   accountants,   financial  printing  and
shareholder meetings of approximately $5,352,000, charges for the elimination of
duplicate  facilities  of  approximately  $2,250,000,  and  severance  and other
related costs of approximately $1,698,000.

In  connection  with the 1995  merger  with ISS,  the  Company  incurred  direct
transaction  costs and  merger-related  integration  expenses  of  approximately
$3,590,000  consisting of transaction  fees for investment  bankers,  attorneys,
accountants,  financial  printing  and  shareholder  meetings  of  approximately
$2,858,000, charges for the elimination of duplicate facilities of approximately
$233,000  and  severance  and  certain  other  related  costs  of  approximately
$499,000.

As of December 31, 1996, accrued liabilities included  approximately  $3,910,000
of merger-related  costs, which the Company expects to pay in 1997, all of which
are related to the 1996 mergers.

Income from  Operations.  The Company had income from operations of $19,232,000,
$11,790,000 and $5,348,000 in 1996, 1995 and 1994, respectively.  The changes in
operating  results are attributable to revenue growth net of increased  expenses
necessary to support the Company's growth. Operating income represented 18%, 17%
and 14% of total revenue in 1996, 1995 and 1994, respectively.

Interest  Income.  Interest  income was  $4,204,000,  $2,787,000 and $836,000 in
1996, 1995 and 1994, respectively.  Interest income increased due to larger cash
balances  resulting  primarily from the proceeds of the Company's initial public
offering which was completed in June 1995, and the Meta initial public  offering
which was completed in November 1995.

Income Taxes.  The Company accounts for income taxes in accordance with SFAS No.
109. Pro forma income taxes have been  provided for 1995 and 1994 as if Meta (an
S corporation for income tax reporting  purposes) had been a C corporation.  The
provision  for  income  taxes (pro  forma in 1995 and 1994) as a  percentage  of
pre-tax income was 47%, 43% and 35% for 1996, 1995 and 1994,  respectively.  The
percentage  in 1996 and 1995 (pro forma) was higher  than the federal  statutory
income  tax  rate of  approximately  35% due to the  effect  of  certain  merger
expenses that were not deductible for income tax purposes.

                                       17

<PAGE>

Quarterly Results

The  Company's  quarterly  results have varied in the past and may be subject to
fluctuations  resulting  from a variety of  factors,  including  the  outcome of
outstanding  litigation,  purchasing  patterns of customers,  the  completion of
product evaluations by customers, the timing of product enhancements and product
introductions  by the Company and its  competitors and the timing of significant
orders.  The customer  evaluation process for the Company's products is lengthy,
and the timing and  outcome of such  evaluations  have  affected  the  Company's
historical  quarterly  performance and may impact future  quarterly  results.  A
substantial portion of the Company's revenue in each quarter results from orders
received in the same quarter.  The Company's  expense levels are based, in part,
on its  expectations as to future revenue.  The Company  continues to expand and
increase its operating expenses in order to generate and support future revenue.
If revenue  levels are below  expectations,  operating  results are likely to be
disproportionately  affected  because  only a  small  portion  of the  Company's
expenses varies with its revenue.  As a result, the Company believes that period
to period  comparison of financial  results are not  necessarily  meaningful and
should not be relied upon as an indication of future performance.

Due to the factors noted above,  the Company's  future  earnings and stock price
may be subject to significant volatility, particularly on a quarterly basis. Any
shortfall in revenues or earnings from levels  expected by  securities  analysts
could have an immediate and  significant  adverse effect on the trading price of
the  Company's  common  stock.  Additionally,  the Company may not learn of such
shortfalls until late in a quarter, which could result in an even more immediate
and adverse effect on the trading price of the Company's common stock.

Liquidity and Capital Resources

Net cash  provided by operating  activities  was  $21,414,000,  $20,089,000  and
$5,568,000 in 1996, 1995 and 1994, respectively.  The increases in cash provided
by  operating  activities  primarily  results  from  increases  in  net  income,
depreciation,  accrued  liabilities  and  deferred  revenue.  The  Company  used
$42,020,000,  $28,267,000  and  $23,488,000 of net cash in 1996,  1995 and 1994,
respectively,  for investing  activities.  Net cash used in investing activities
relates   primarily  to  net   purchases  of   short-term   "available-for-sale"
securities. The securities,  which are accounted for in accordance with SFAS No.
115,  consist  of  short-term  debt  securities,  U.S.  Government  Agency  debt
securities,  U.S. Treasury Bills,  municipal/corporate  auction preferred stock,
municipal bonds and demand deposit investments in limited-maturity  fixed-income
mutual funds. Cash was also used to acquire  equipment,  furniture and fixtures.
Purchases of equipment,  furniture  and fixtures  primarily  represent  computer
workstations and file servers for the Company's  employees.  The Company expects
that purchases of equipment will likely increase as the Company's  employee base
grows. Net cash provided by financing activities was $3,663,000, $48,263,000 and
$17,953,000 in 1996, 1995 and 1994, respectively. Net cash provided by financing
activities was lower in 1996 than in 1995 and 1994 due to the Company  receiving
the  proceeds  from the ISS initial  public  offering,  which was  completed  in
February 1994, the Avant!  initial public offering,  which was completed in June
1995 and the Meta initial public offering, which was completed in November 1995.

The Company's  stated payment terms generally are net 30 days.  However,  in the
Company's experience, many customers do not comply with stated payment terms due
to industry practice, slower payment by certain major companies and most foreign
customers and general economic conditions.  The Company  periodically  increases
its  allowance  for  doubtful  accounts to reflect  increased  sales  levels and
collection  experience.  The Company  believes  that its  allowance for doubtful
accounts is adequate.

As of December 31, 1996,  the Company had  $117,323,000  of cash and  short-term
investments and  $115,977,000 in working  capital.  As of December 31, 1996, the
Company  had  $30,263,000  in  current  liabilities,  including  $13,824,000  of
deferred  revenue.  As of  December  31,  1996,  there was no bank  indebtedness
outstanding  and  the  Company  had no  long-term  commitments  other  than  the
technology acquisition payable and operating and capital lease obligations.

Based on its  operating  plan and absent any  adverse  judgments  in the Cadence
litigation,  the Company  believes  that it has  available  cash and  short-term
investments  sufficient  to fund the Company's  operations  through at least the
next 12 months.

                                       18

<PAGE>

Factors That May Affect Future Results

On December 6, 1995,  Cadence filed an action against the Company and certain of
its officers in the Northern  California  United States  District Court alleging
copyright infringement,  unfair competition,  misappropriation of trade secrets,
conspiracy,   breach  of  contract,   inducing  breach  of  contract  and  false
advertising.  In  addition  to  actual  and  punitive  damages,  which  were not
quantified  by Cadence,  Cadence  seeks to enjoin the sale of certain  place and
route  products.  On March 18,  1997,  the  Northern  California  United  States
District Court denied Cadence's  motion to obtain a preliminary  injunction that
would have prohibited the production and sale of Avant!'s  ArcCell,  ArcCell XO,
Aquarius XO and  Aquarius XO 2.0 products or any other  product  that Avant!  is
currently  selling.  The matter is currently  awaiting  trial,  pending  further
pretrial matters. A trial date has not been set. Avant! has filed a counterclaim
alleging antitrust  violations,  racketeering,  false  advertising,  defamation,
trade  libel,  unfair  competition,   unfair  trade  practices,   negligent  and
intentional  interference  with prospective  economic  advantage and intentional
interference  with  contractual  relations.  The  Santa  Clara  County  District
Attorney's office is also investigating the allegations of  misappropriation  of
trade secrets set forth in Cadence's  lawsuit.  A criminal  complaint,  if filed
against the Company, the Company's management or its employees,  could result in
a loss of management and other  personnel and could have other material  adverse
effects  on the  Company.  The  Cadence  litigation  may result in  canceled  or
postponed customer orders and increased future expenditures.  Since only a small
portion  of  Avant!'s  expenses  varies  with its  revenue,  canceled  orders or
significant  expenses  related  to the  Cadence  litigation  may have an adverse
affect  on  Avant!'s  business,   operating  results  and  financial  condition.
Furthermore,  an  adverse  ruling  in the  Cadence  litigation  could  result in
Avant!'s  inability  to sell  certain of its place and route  products  and as a
result  could have a material  adverse  effect on Avant!'s  business,  operating
results and financial  condition.  Avant!'s place and route products in dispute,
ArcCell-BV  and  ArcCell  XO  (which  have  been  replaced  by  Aquarius-BV  and
Aquarius-XO)  accounted for approximately 30% of total consolidated revenues for
the three-year period ended December 31, 1996.

The  Company's  products  compete  with  similar  products  from both larger and
smaller  EDA  vendors  and with  dissimilar  EDA  products  for a share of their
customers'  EDA  budgets.  The  EDA  industry,  and as a  result  the  Company's
business,  has benefited from the rapid  worldwide  growth of the  semiconductor
industry.  There can be no  assurance  that this growth will  continue.  The EDA
industry as a whole may experience  pricing and margin pressures from a decrease
in  growth  in the  semiconductor  industry,  or other  changes  in the  overall
computer industry.  In fact during 1996, the semiconductor  industry experienced
slower  growth than in 1995.  In  addition,  the EDA  industry  is  experiencing
consolidation  as the major EDA vendors are seeking to provide a complete  range
of EDA products to customers. There can be no assurance that the Company will be
able to compete  successfully  against current and future  competitors,  or that
market  conditions  faced by the Company will not adversely affect its operating
results and financial condition.

The  Company's  future  success  depends  upon its  ability to  improve  current
products and develop new products  that address the  increasingly  sophisticated
needs of its customers. There can be no assurance that the Company will continue
to be successful in developing  technologically  acceptable products on a timely
basis. The Company's ability to develop and improve products is dependent on key
individuals  for  their  technical  and  other  contributions.  There  can be no
assurance  that the  Company  can  continue  to  attract  and  retain  these key
personnel.  Loss of certain key personnel  could result in loss of the Company's
market advantage and could adversely affect its operating  results and financial
condition.

The American Institute of Certified Public  Accountants  approved for exposure a
draft  Statement of Position  (Exposure  Draft) that would  supersede  SOP 91-1,
Software  Revenue  Recognition.  The adoption of the  provisions of the Exposure
Draft is not expected to have a material  effect on the  Company's  consolidated
results of operations or financial position.

                                       19

<PAGE>

Item 8.  Consolidated Financial Statements and Supplementary Data

                          Independent Auditors' Report

The Board of Directors
Avant! Corporation:

We  have  audited  the  accompanying   consolidated  balance  sheets  of  Avant!
Corporation and subsidiaries (the Company) as of December 31, 1996 and 1995, and
the related consolidated  statements of income,  shareholders'  equity, and cash
flows for each of the years in the three-year period ended December 31, 1996. In
connection  with  our  audits  of  the   accompanying   consolidated   financial
statements,  we  have  also  audited  the  accompanying  consolidated  financial
statement  schedule.  These  consolidated  financial  statements and the related
consolidated   financial  statement  schedule  are  the  responsibility  of  the
Company's  management.  Our  responsibility  is to  express  an opinion on these
consolidated  financial statements and consolidated financial statement schedule
based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects,  the financial position of Avant!  Corporation
and  subsidiaries  as of December  31,  1996 and 1995,  and the results of their
operations and their cash flows for each of the years in the  three-year  period
ended  December 31, 1996,  in  conformity  with  generally  accepted  accounting
principles.  Also in our opinion, the related  consolidated  financial statement
schedule,  when  considered  in  relation  to the basic  consolidated  financial
statements taken as a whole,  presents  fairly,  in all material  respects,  the
information set forth therein.

                                                       /s/ KPMG PEAT MARWICK LLP

January 22,  1997,  except as to the
second paragraph of note 11
which is as of March 18, 1997
San Jose, California

                                       20

<PAGE>
<TABLE>
                       AVANT! CORPORATION AND SUBSIDIARIES
                           Consolidated Balance Sheets
                           December 31, 1996 and 1995

                      (in thousands, except per share data)
<CAPTION>
                                                                                   1996                   1995
                                                                                 ---------              ---------
                                     Assets
<S>                                                                              <C>                    <C>
Current assets:
     Cash and cash equivalents                                                   $  33,067              $  50,010
     Short-term investments                                                         84,256                 46,969
     Accounts receivable, net                                                       13,321                 12,839
     Deferred income taxes                                                           6,450                  3,167
     Prepaid income taxes                                                            1,254                    328
     Other assets                                                                    7,892                  1,724
                                                                                 ---------              ---------
         Total current assets                                                      146,240                115,037
Equipment, furniture and fixtures, net                                               8,929                  7,003
Capitalized software, net                                                               62                    150
Other assets                                                                           872                     97
Deferred income taxes                                                                 --                      886
                                                                                 ---------              ---------
         Total assets                                                            $ 156,103              $ 123,173
                                                                                 =========              =========

                      Liabilities and Shareholders' Equity
Current liabilities:
     Current portion of capital lease obligations                                $      52              $     145
     Accounts payable                                                                1,716                  1,000
     Accrued compensation                                                            4,082                  2,418
     Accrued income taxes                                                             --                      553
     Other accrued liabilities                                                       9,947                  5,655
     Current portion of technology acquisition payable                                 642                    876
     Deferred revenue                                                               13,824                  9,585
     Shareholder distribution payable                                                 --                    1,800
                                                                                 ---------              ---------
         Total current liabilities                                                  30,263                 22,032
Capital lease obligations, less current portion                                       --                       40
Deferred rent                                                                           71                    110
Other noncurrent liabilities                                                            43                    156
Technology acquisition payable, less current portion                                   903                  1,424
                                                                                 ---------              ---------

         Total liabilities                                                          31,280                 23,762
                                                                                 ---------              ---------

Commitments and contingencies

Shareholders' equity:
Series A convertible preferred stock,
     $.0001 par value; 5,000 shares authorized;
     no shares issued and outstanding
     in 1996 and 1995                                                                 --                     --
Common stock, $.0001 par value;
     50,000 and 25,000 shares authorized,
     24,952 and 23,845 shares
     issued and  outstanding in
     1996 and 1995, respectively                                                         3                      2
Additional paid-in capital                                                         110,583                 95,189
Deferred compensation                                                               (2,820)                  (517)
Net unrealized gain (loss) on short-term investments                                   (75)                    89
Retained earnings                                                                   17,132                  4,648
                                                                                 ---------              ---------
         Total shareholders' equity                                                124,823                 99,411
                                                                                 ---------              ---------

         Total liabilities and shareholders' equity                              $ 156,103              $ 123,173
                                                                                 =========              =========
<FN>
See accompanying notes to consolidated financial statements
</FN>
</TABLE>

                                       21

<PAGE>

                       AVANT! CORPORATION AND SUBSIDIARIES
                        Consolidated Statements of Income
                  Years Ended December 31, 1996, 1995 and 1994

                      (in thousands, except per share data)


                                                    1996       1995       1994
                                                  --------   --------   --------

Revenue:
     Software                                     $ 82,134   $ 55,164   $ 30,929
     Services                                       23,953     13,704      8,415
                                                  --------   --------   --------

         Total revenue                             106,087     68,868     39,344
                                                  --------   --------   --------

Costs and expenses:
     Costs of software                               2,512      1,529      1,122
     Costs of services                               7,269      4,845      2,940
     Selling and marketing                          29,928     22,741     14,476
     Research and development                       20,696     15,318      9,728
     General and administrative                     15,450      6,362      4,130
     Acquisition of technology                       1,700      2,693      1,600
     Merger expenses                                 9,300      3,590       --
                                                  --------   --------   --------

         Total operating expenses                   86,855     57,078     33,996
                                                  --------   --------   --------

         Income from operations                     19,232     11,790      5,348

Interest income                                      4,204      2,787        836
                                                  --------   --------   --------

         Income before income taxes                 23,436     14,577      6,184

Provision for income taxes                          10,952      4,053      1,549
                                                  --------   --------   --------

         Net income                               $ 12,484   $ 10,524   $  4,635
                                                  ========   ========   ========

Net income per common share                       $   0.47
                                                  ========

Pro forma net income and per share data:
     Income before income taxes as reported                  $ 14,577   $  6,184
     Pro forma provision for income taxes                       6,227      2,175
                                                             --------   --------

     Pro forma net income                                    $  8,350   $  4,009
                                                             ========   ========

     Pro forma net income per common share                   $   0.35   $   0.20
                                                             ========   ========

Weighted average number of common and common
     equivalent shares outstanding                  26,761     24,159     20,457
                                                  ========   ========   ========


See accompanying notes to consolidated financial statements

                                       22

<PAGE>

<TABLE>

                                                         AVANT! CORPORATION
                                          Consolidated Statements of Shareholders' Equity
                                            Years Ended December 31, 1996, 1995 and 1994
                                                           (in thousands)
<CAPTION>
                                                                                                         Net
                                                                                                      unrealized
                                                                                                     gain (loss)
                                                Series A                                                 on
                                               convertible                                              short-              Total
                                             preferred stock   Common stock     Additional  Deferred    term                share-
                                            ---------------  ----------------   paid-in     compen-    invest-    Retained  holders'
                                            Shares   Amount   Shares   Amount   capital     sation      ments     earnings  equity
                                            ------  -------   -------  ------   --------   ---------   ------    ---------  ------
<S>                                        <C>      <C>       <C>       <C>     <C>         <C>       <C>        <C>       <C>
Balances as of December 31, 1993            1,710   $  630    10,711    $  1    $  4,094    $    -    $   (8)    $ 3,044   $ 7,761
     Issuance of common stock                  -        -        239       -         517         -        -         -          517
     Conversion of preferred
     stock to common stock                 (1,023)    (630)    1,023       -         630         -        -         -          -
     Issuance of  common stock
     in public offering, net of
     expenses                                  -        -      2,250       -      20,342         -        -         -       20,342
     Exercise of common stock options,
         including related tax benefits        -        -        134       -         848         -        -         -          848
     Issuance of common stock under
         employee stock purchase plan          -        -          5       -          66         -        -         -           66
     Issuance of  shares and
         accumulated deficit of
         merged company                        -                 113       -          1          -        -         (103)     (102)
     Repurchase of common stock                -        -        (12)      -         (2)         -        -         -           (2)
     Issuance of common stock
         options at below market value         -        -        -         -          62        (62)      -         -          -
     Unrealized loss on short-term
         investments                           -        -        -         -         -           -      (214)       -         (214)
     Distributions to shareholders             -        -        -         -         -           -        -       (2,326)   (2,326)
     Net income                                -        -        -         -         -           -        -        4,635     4,635
                                            ------  -------  -------   -----     -------     ------   ------      ------   -------
Balances as of December 31, 1994              687       -     14,463       1      26,558        (62)    (222)      5,250    31,525
     Issuance of common stock                  -        -      1,063       -         660         -        -         -          660
     Conversion of long-term
         debt to common stock                  -        -        100       -         100         -        -         -          100
     Issuance of common stock
         in public offerings,
         net of expenses                       -        -      3,367       -      52,381         -        -         -       52,381
     Conversion of mandatorily
         redeemable convertible
         preferred stock into
         common stock                          -        -      3,570       1       8,311         -        -         -        8,312
     Conversion of preferred stock
     into common stock                       (687)      -        687       -         -           -        -         -          -
     Exercise of common stock
         options and warrants,
         including related tax benefits        -        -        570       -       5,948         -        -         -        5,948
     Repurchase of common stock                -        -        (18)      -          (3)        -        -         -           (3)
     Issuance of common stock
         options at below market value         -        -        -         -         588       (588)      -         -          -
     Amortization of deferred
         compensation                          -        -        -         -         -          133       -         -          133
     Issuance of common stock
         under employee stock
         purchase plan                         -        -         43       -         534         -        -         -          534
     Unrealized gain on
         short-term investments                -        -        -         -         -           -       311        -          311
     Distributions to shareholders             -        -        -         -         -           -        -      (11,126)  (11,126)
     Issuance of common stock
         upon exercise of stock
         appreciation rights                   -        -        -         -         112         -        -         -          112
     Net income                                -        -        -         -         -           -        -       10,524    10,524
                                            ------  -------  -------   -----     -------    ------    ------      ------   -------
Balances as of December 31, 1995               -        -     23,845       2      95,189      (517)       89       4,648     99,411
</TABLE>

                                                                 23

<PAGE>

<TABLE>
<CAPTION>
                                                                                                         Net
                                                                                                      unrealized
                                                                                                     gain (loss)
                                                Series A                                                 on
                                               convertible                                              short-               Total
                                             preferred stock   Common stock     Additional  Deferred     term                share-
                                            ---------------  ----------------    paid-in     compen-    invest-  Retained   holders'
                                            Shares   Amount   Shares    Amount    capital    sation     ments    earnings    equity
                                            ------  -------  -------   -------   --------   --------    ------   --------   -------
<S>                                            <C>    <C>     <C>       <C>     <C>        <C>        <C>         <C>      <C>
Balances as of December 31, 1995                -        -    23,845       2      95,189       (517)      89        4,648    99,411
  Issuance of common stock in acquisition
      of technology                             -        -        29       -       1,500       (750)      -         -           750
  Issuance of common stock for services         -        -         6       -         140         -        -         -           140
  Exercise of common stock options,
      including related tax benefits            -        -       989       1       9,857         -        -         -         9,858
  Issuance of common stock under employee
      stock purchase plan                       -        -        83       -       1,177         -        -         -         1,177
  Issuance of common stock options at
      below market value                        -        -        -        -       2,122     (2,122)      -         -           -
  Amortization of deferred compensation         -        -        -        -         -          569       -         -           569
  Unrealized loss on short-term
      investments                               -        -        -        -         -           -      (164)       -          (164)
  Issuance of common stock upon exercise
      of stock appreciation rights              -        -        -        -         488         -        -         -           488
  Reversal of prior year shareholder
      distribution                              -        -        -        -          46         -        -         -            46
  Contributed capital related to stock
      compensation expense                      -        -        -        -          64         -        -         -            64
  Net income                                    -        -        -        -         -           -        -        12,484    12,484
                                            ------    -----  -------   ------   ---------  ---------  --------   --------  --------
Balances as of December 31, 1996                -     $  -    24,952    $  3    $110,583   $ (2,820)  $  (75)     $17,132  $124,823
                                           =======    =====  =======   ======   =========  =========  ========   ========  ========
<FN>
See accompanying notes to consolidated financial statements
</FN>
</TABLE>

                                                                 24

<PAGE>




<TABLE>
<CAPTION>
                                                 AVANT! CORPORATION AND SUBSIDIARIES
                                                Consolidated Statements of Cash Flows
                                              Years Ended December 31, 1996, 1995, 1994
                                                           (in thousands)

                                                                                        1996              1995              1994
                                                                                     ---------         ---------         ---------
<S>                                                                                   <C>               <C>               <C>
Cash flows from operating activities:
     Net income                                                                       $  12,484         $  10,524         $   4,635
     Adjustments to reconcile net income to net cash
         provided by operating activities:
         Depreciation                                                                     2,657             2,112             1,520
         Gain on sale of securities                                                         (14)             --                --
         Compensation expense (benefit) attributable
              to stock appreciation rights                                                  (31)              484               380
         Stock compensation expense                                                          64               112              --
         Loss on disposal of equipment                                                     --                  19                16
         Amortization of capitalized software costs                                          88               228               199
         Amortization of deferred compensation                                              569               133              --
         Deferred income taxes                                                           (2,397)           (1,431)              156
         Deferred rent                                                                      (39)              110                70
         Acquisition of technology                                                          750             2,693              --
         Stock issued for services                                                          140              --                  52
         Changes in operating assets and liabilities:
              Accounts receivable, net                                                     (482)           (2,974)           (4,826)
              Prepaid income taxes and other assets                                      (3,139)             (799)             (217)
              Shareholder advances                                                         --                --                 300
              Accounts payable                                                              716               277               266
              Accrued compensation                                                        1,664               650             1,521
              Accrued income taxes                                                         (553)              403              (221)
              Other accrued liabilities                                                   4,698             3,722               318
              Deferred revenue                                                            4,239             3,826             1,399
                                                                                      ---------         ---------         ---------
                  Net cash provided by operating activities                              21,414            20,089             5,568
                                                                                      ---------         ---------         ---------

Cash flows from investing activities:
     Purchases of short-term investments                                               (206,593)          (79,568)          (92,615)
     Maturities and sales of short-term investments                                     169,156            56,471            71,366
     Purchases of equipment, furniture and fixtures                                      (4,583)           (5,107)           (2,115)
     Capitalized software development costs                                                --                 (63)             (143)
     Cash received in merger                                                               --                --                  19
                                                                                      ---------         ---------         ---------
                  Net cash used in investing activities                                 (42,020)          (28,267)          (23,488)
                                                                                      ---------         ---------         ---------

Cash flows from financing activities:
     Distributions to shareholders                                                       (1,754)           (9,327)           (2,896)
     Payments on notes payable                                                             --                --                (163)
     Principal payments under capital lease obligations                                    (133)             (235)             (235)
     Payments on technology acquisition payable                                            (755)             (393)             --
     Issuance of preferred stock, net                                                      --                 500               427
     Repurchase of common stock                                                            --                  (3)               (2)
     Exercise of stock options                                                            5,128             4,646               201
     Issuance of common stock under employee stock purchase plan                          1,177               534                66
     Issuance of common stock, net                                                         --              52,541            20,365
     Issuance of convertible note                                                          --                --                  19
                                                                                      ---------         ---------         ---------
                  Net cash provided by financing activities                               3,663            48,263            17,953
                                                                                      ---------         ---------         ---------

Net increase (decrease) in cash and cash equivalents                                    (16,943)           40,085                33
Cash and cash equivalents, beginning of year                                             50,010             9,925             9,892
                                                                                      ---------         ---------         ---------
Cash and cash equivalents, end of year                                                $  33,067         $  50,010         $   9,925
                                                                                      =========         =========         =========
<FN>
See accompanying notes to consolidated financial statements
</FN>
</TABLE>

                                                                 25

<PAGE>




                       AVANT! CORPORATION AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        December 31, 1996, 1995, and 1994


1.       Nature Of Business And Summary Of Significant Accounting Policies

         Nature of Business

         Avant!  Corporation  (the  Company or  Avant!)  develops,  markets  and
         supports   software  products  that  assist  design  engineers  in  the
         automated  design,  layout,   physical  verification  and  analysis  of
         advanced integrated  circuits.  Its primary customers are semiconductor
         companies in the United States, Japan, Korea, Taiwan and Europe.

         Principles of Presentation and Preparation

         The accompanying consolidated financial statements include the accounts
         of the  Company  and its wholly  owned  subsidiaries.  All  significant
         intercompany   accounts  and  transactions   have  been  eliminated  in
         consolidation. The consolidated financial statements have been restated
         to reflect the effect of the mergers with Integrated  Silicon  Systems,
         Inc. (ISS),  Anagram,  Inc. (Anagram),  Meta-Software,  Inc. (Meta) and
         FrontLine Design Automation, Inc. (FrontLine) discussed in Note 2.

         The  preparation of financial  statements in conformity  with generally
         accepted  accounting  principles  requires management to make estimates
         and  assumptions  that  affect  the  reported  amounts  of  assets  and
         liabilities and disclosure of contingent  assets and liabilities at the
         date of the financial  statements and reported  amounts of revenues and
         expenses during the reporting period.  Actual results could differ from
         those estimates.

         Revenue Recognition

         Revenue  consists  primarily  of fees  for  licenses  of the  Company's
         software products, maintenance and customer support.

           Software Revenue

           Revenue  from  the  sale of  software  licenses  is  recognized  upon
           shipment of the products,  delivery of permanent  authorization codes
           and  fulfillment  of  acceptance  terms,  if any,  providing  that no
           significant vendor and post-contract  support  obligations remain and
           collection  of the related  receivable  is  probable.  Any  remaining
           insignificant vendor or post-contract support obligations are accrued
           at the time the revenue is recognized.  In instances where there is a
           contingency  regarding the sale, revenue recognition is delayed until
           the contingency has been resolved.  When the Company receives advance
           payments  for  software  products,  such  payments  are  reported  as
           deferred  revenue until all  conditions for revenue  recognition  are
           met. The Company has entered into certain  license  agreements  under
           which software, support and other services are provided to a customer
           for a bundled price for a specific period of time. Generally, revenue
           under such agreements is recognized ratably over the contract period.

           Services Revenue

           Maintenance  revenue is deferred and recognized ratably over the term
           of the maintenance  agreement,  which is typically 12 months. Revenue
           from customer  training,  support and other services is recognized as
           the service is performed.

                                       26

<PAGE>

         Cash and Cash Equivalents

         The Company  considers all highly liquid  investments  with an original
         maturity of three months at the date of  acquisition or less to be cash
         equivalents.

         Cash   equivalents  are  stated  at  cost  and  consist   primarily  of
         certificates  of deposit and commercial  paper.  The carrying amount of
         cash and cash equivalents approximates fair value.

         Short-Term Investments

         Short-term investments,  which consist of demand deposit investments in
         limited maturity fixed-income mutual funds, short-term debt securities,
         U.S.   Government   Agency  debt  securities,   U.S.   Treasury  Bills,
         municipal/corporate auction preferred stock, municipal bonds and demand
         deposit investments in  limited-maturity  fixed-income mutual funds are
         reported  at fair  value,  and  are  classified  as  available-for-sale
         securities.  The  cost of  securities  sold  is  determined  using  the
         specific  identification  method  when  computing  realized  gains  and
         losses. Fair value is determined using available market information. As
         of December 31, 1996, the net unrealized loss on short-term investments
         of $75,000 consisted of $86,000 of gross unrealized gains, and $161,000
         of gross unrealized losses. As of December 31, 1995, the net unrealized
         gain on  short-term  investments  of $89,000  consisted  of $136,000 of
         gross unrealized gains, and $47,000 of gross unrealized losses.

         Equipment, Furniture and Fixtures

         Equipment,   furniture  and  fixtures  consist  primarily  of  computer
         workstations  and file servers for employees and are stated at cost net
         of accumulated depreciation of $7,784,000 and $5,127,000 as of December
         31,  1996 and  1995,  respectively.  Depreciation  is  provided  on the
         straight-line  method over the  estimated  useful  lives of the related
         assets (generally, five years).

         Software Development Costs

         Certain  software  development  costs  for  new  products  and  product
         enhancements  are capitalized  upon the  establishment of technological
         feasibility,  which is defined by the  Company as the  completion  of a
         working  model of the  software.  Capitalization  of computer  software
         development costs ceases, and amortization  begins, when the product is
         available for general release to customers.  The ongoing  assessment of
         the realizability of these costs requires considerable judgment related
         to anticipated  future product  revenues,  estimated  economic life and
         changes in hardware  and  software  technology.  The amount of software
         development  costs  capitalized  for the years 1996,  1995 and 1994 was
         none, $63,000, and, $143,000 respectively.  Accumulated amortization of
         software development costs was $1,165,000 and $1,077,000 as of December
         31, 1996 and 1995, respectively.

         Amortization   of   software   development   costs  is  provided  on  a
         product-by-product  basis.  Annual  amortization  is the greater of the
         amount computed using the ratio of current product revenue to the total
         of current and anticipated  future product revenue or the straight-line
         method over the remaining  estimated economic life of the product.  All
         current  products  have  estimated   economic  lives  of  three  years.
         Amortization of software development costs for the years 1996, 1995 and
         1994 was $88,000, $228,000, and $199,000, respectively. Amortization of
         software  development  costs is  included  in costs of  software in the
         accompanying consolidated statements of income.

                                       27

<PAGE>


         Income Taxes

         Income taxes are accounted  for under the asset and  liability  method.
         Deferred tax assets and  liabilities  are recognized for the future tax
         consequences   attributable   to  differences   between  the  financial
         statement carrying amounts of existing assets and liabilities and their
         respective tax bases and operating  loss and tax credit  carryforwards.
         Deferred  tax assets and  liabilities  are measured  using  enacted tax
         rates  expected to apply to taxable  income in the years in which those
         temporary  differences  are expected to be  recovered  or settled.  The
         effect on deferred tax assets and  liabilities of a change in tax rates
         is recognized in income in the period that includes the enactment date.

         The pro forma provision for income taxes for 1995 and 1994 reflects the
         tax expense that would have been reported if Meta (an S corporation for
         income tax reporting  purposes)  had been a C corporation  during those
         periods.

         Net Income and Pro Forma Net Income Per Common Share

         Net income per common  share is  computed  using the  weighted  average
         number of common and common equivalent shares  outstanding  during each
         period  presented  using  the  treasury  stock  method.   Common  stock
         equivalents consist of stock options and awards.

         Pro forma net income per common  share is computed  using pro forma net
         income which  reflects the tax expense that would have been reported if
         Meta (an S corporation for income tax reporting  purposes) had been a C
         corporation.

         Common stock  equivalents  are excluded from the  computation  if their
         effect is  antidilutive,  except  that  common  stock  issued and stock
         options and awards during the 12 months preceding the initial filing of
         the  Registration  Statement for the Company's  initial public offering
         have been included in the  calculation of common and common  equivalent
         shares using the treasury stock method as if they were  outstanding for
         all  periods   presented.   In  addition  during  1995  and  1994,  the
         calculation  includes shares deemed to be outstanding,  which represent
         the number of shares  sufficient  to fund  Meta's  final S  corporation
         distribution.

         Stock Option and Stock Purchase Plans

         The  Company  accounts  for  its  stock-based   compensation  plans  in
         accordance  with the  provisions of Accounting  Principles  Board (APB)
         Opinion No. 25,  Accounting for Stock Issued to Employees,  and related
         interpretations. As such, compensation expense would be recorded on the
         date of grant only if the current market price of the underlying  stock
         exceeded the exercise  price.  On January 1, 1996, the Company  adopted
         the  disclosure  requirements  of  Statement  of  Financial  Accounting
         Standards  (SFAS) No. 123,  Accounting  for  Stock-Based  Compensation.
         Under SFAS No. 123, the Company must  disclose pro forma net income and
         pro forma  earnings  per share for  employee  stock  option  grants and
         employee  stock  purchases  made in 1995  and  future  years  as if the
         fair-value-based method defined in SFAS No. 123 had been applied.

                                       28

<PAGE>



         Statements of Cash Flows

         Interest of  $141,000,  $51,000 and $42,000 was paid in 1996,  1995 and
         1994,  respectively.  Income  taxes  of  $11,076,000,   $2,041,000  and
         $1,125,000  was  paid  during  1996,   1995  and  1994,   respectively.
         Acquisition of equipment  under capital lease  obligations was $298,000
         during 1994. Deferred compensation of $2,872,000,  $588,000 and $62,000
         was recognized in 1996, 1995 and 1994, respectively,  for stock options
         issued  below  market  value.  An income tax  benefit  attributable  to
         employee  stock  plans of  $4,730,000,  $1,302,000,  and  $647,000  was
         credited to equity in the years ended December 31, 1996, 1995 and 1994,
         respectively  which is included in the change in prepaid  income  taxes
         and other assets.  In  connection  with the  Company's  initial  public
         offering in 1995,  mandatorily  redeemable  convertible preferred stock
         was  converted  to  common  stock in the  amount of  $8,312,000.  Other
         accrued  liabilities  were  reduced  $488,000  through the  issuance of
         common stock related to accrued stock appreciation  rights liabilities.
         The Company  issued  $750,000 of common  stock for the  acquisition  of
         technology  during 1996.  Conversion of long-term  debt to common stock
         was $100,000 in 1995.

         Translation of Foreign Currencies

         The functional  currency of the Company's  foreign  subsidiaries is the
         U.S. dollar.  Resulting  foreign exchange gains and losses,  which have
         been insignificant, are included in the results of operations.

         Reclassification

         Certain amounts in the 1995 and 1994 consolidated  financial statements
         have been reclassified to conform to the 1996 presentation.

2.       Mergers and Acquisitions

         On December 31, 1996, the Company issued approximately 29,000 shares of
         its  common  stock for all of the  outstanding  stock of Nexsyn  Design
         Technology  Inc.  (Nexsyn),  and  assumed  approximately  22,000  stock
         options  under  option  plans.  The  financial  position,   results  of
         operations  and cash flows of Nexsyn were not  material to Avant!,  and
         the acquisition was accounted for by the purchase method.

         On November 27, 1996, the Company issued approximately 1,812,000 shares
         of its  common  stock  for  all  of the  outstanding  common  stock  of
         FrontLine, and assumed approximately 410,000 warrants and stock options
         under option plans.

         On October 29, 1996, the Company issued approximately  4,471,000 shares
         of its common  stock for all of the  outstanding  common stock of Meta,
         and assumed approximately 608,000 stock options and subscriptions under
         option and purchase plans.

         On  September  27, 1996,  the Company  issued  approximately  2,154,000
         shares  of its  common  stock  for all of the  outstanding  common  and
         preferred  stock of Anagram,  and assumed  approximately  260,000 stock
         options under option plans. The Anagram outstanding preferred stock has
         been  presented  as  common  stock  for all  periods  presented  in the
         consolidated financial statements.

         The  FrontLine,  Meta and Anagram  mergers have been  accounted  for as
         poolings of interests,  and,  accordingly,  the Company's  consolidated
         financial  statements  have been  restated for all periods prior to the
         mergers to include the results of operations,  financial position,  and
         cash flows of FrontLine, Meta and Anagram.

                                       29

<PAGE>

         Total  revenue  and  net  income  (loss)  for the  individual  entities
         throughout  their  respective  acquisition  dates  are as  follows  (in
         thousands):


                                                        Years ended
                                                        December 31,
                                              ---------------------------------
                                                1996        1995         1994
                                              --------    --------     --------

     Total revenue:
         Avant!                               $ 70,608    $ 38,004     $ 18,958
         Anagram                                 7,009       3,508          241
         Meta                                   24,121      25,281       19,652
         FrontLine                               4,349       2,075          493
                                              --------    --------     --------
                                              $106,087    $ 68,868     $ 39,344
                                              ========    ========     ========

     Net income (loss):
         Avant!                               $  5,309    $  5,065     $  2,260
         Anagram                                 2,498       1,170           19
         Meta (pro forma 1995 and 1994)          4,477       2,177        2,134
         FrontLine                                  70         (99)        (646)
                                              --------    --------     --------
                                                12,354       8,313        3,767
     Adjustment for deferred taxes                 130          37          242
                                              --------    --------     --------
     As restated                              $ 12,484    $  8,350     $  4,009
                                              ========    ========     ========

         In connection with the 1996 mergers with  FrontLine,  Meta and Anagram,
         the  Company  incurred  direct  transaction  costs  and  merger-related
         integration  expenses  of  approximately   $9,300,000,   consisting  of
         transaction  fees  for  investment  bankers,  attorneys,   accountants,
         financial   printing   and   shareholder   meetings  of   approximately
         $5,352,000,  charges for the  elimination  of duplicate  facilities  of
         approximately $2,250,000, and severance costs and certain other related
         costs of approximately  $1,698,000. Of the $9,300,000 of merger-related
         costs,  approximately  $8,400,000  related to cash  expenditures  while
         approximately $900,000 related to noncash charges.

         On November 27, 1995, the Company issued approximately 6,400,000 shares
         of its common stock for all of the outstanding common stock of ISS, and
         assumed  approximately  1,500,000 stock options and subscriptions under
         various  ISS stock  option  and  purchase  plans.  The  merger has been
         accounted for as a pooling of interests, and accordingly, the Company's
         consolidated  financial  statements  have been restated for all periods
         prior to the merger to include  the  results of  operations,  financial
         position and cash flows of ISS.

         In  connection  with the 1995  merger with ISS,  the  Company  incurred
         direct  transaction costs and  merger-related  integration  expenses of
         approximately  $3,590,000 consisting of transaction fees for investment
         bankers,  attorneys,  accountants,  financial  printing and shareholder
         meetings of  approximately  $2,858,000,  charges for the elimination of
         duplicate  facilities  of  approximately  $233,000,  and  severance and
         certain  other  related  costs  of  approximately   $499,000.   Of  the
         $3,590,000 of merger-related costs, approximately $3,390,000 related to
         cash  expenditures  while  approximately  $200,000  related  to noncash
         charges.

         As of December 31, 1996,  accrued  liabilities  included  approximately
         $3,910,000 of merger related costs, which the Company expects to pay in
         1997, all of which are related to the 1996 mergers.

         On  May 5,  1994,  ISS  completed  a  merger  with  Performance  Signal
         Integrity,  Inc.  (PSI),  a  Pennsylvania  corporation.  The  financial
         position, results of operations and cash flows of PSI were not material
         to ISS, and the merger was accounted  for as an  immaterial  pooling of
         interests.  Therefore, ISS's previously reported financial results were
         not restated for the PSI merger.

                                       30

<PAGE>

3.       Mandatorily Redeemable Convertible Preferred stock

         In  connection  with the  completion of the  Company's  initial  public
         offering  in June  1995,  all the  outstanding  mandatorily  redeemable
         convertible preferred stock automatically  converted into approximately
         3,570,000   shares  of  the  Company's   common  stock.   In  addition,
         outstanding   warrants  to  acquire  Series  B  preferred   stock  were
         automatically   converted  into  approximately  26,000  shares  of  the
         Company's common stock.

4.       Shareholders' Equity

         Initial Public Offering and Changes in Authorized  Common and Preferred
         Stock

         In April 1995, the Company increased its authorized number of shares of
         preferred  stock  to  5,000,000  shares  and  authorized  the  Board of
         Directors to fix the rights,  preferences,  privileges and restrictions
         thereof,  including dividend rights,  conversion rights, voting rights,
         terms of redemption,  liquidation  preferences and the number of shares
         constituting any series or the designation of such series,  without any
         further vote or action by the shareholders.

         In June 1995, the Company closed its initial public  offering of common
         stock at $13.00  per  share.  The net  proceeds  of the  offering  were
         $27,713,000   after  deducting   applicable  costs  and  expenses.   In
         connection  with the  public  offering,  all the  outstanding  Series A
         preferred  stock  automatically  converted into  approximately  687,000
         shares of the Company's common stock.

         In May 1996, the Company  increased its authorized  number of shares of
         common stock from 25,000,000 to 50,000,000 shares.

         Shareholder Distributions

         Meta  (an  S  corporation  for  income  tax  reporting  purposes)  made
         distributions  to its  shareholders  to provide  them with funds to pay
         income taxes on corporate earnings. Prior to the completion of the Meta
         initial  public  offering  and  the  termination  of the S  corporation
         election in November  1995,  Meta  declared a  distribution  payable to
         existing   shareholders   of  Meta.   This   distribution   represented
         undistributed tax basis earnings of Meta through the termination of the
         S corporation election.

         1995 Stock Option/Issuance Plan

         The Company  approved the 1995 Stock  Option/Stock  Issuance  Plan (the
         1995 Plan) in April 1995, under which all remaining  outstanding  stock
         options and shares  available for grant under the Company's  1993 Stock
         Option/Stock  Issuance  Plan and  1,000,000  additional  shares  of the
         Company's common stock has been authorized for issuance.  The 1995 Plan
         is  intended  to serve as a  successor  to the 1993 Stock  Option/Stock
         Issuance  Plan (see  below) and has terms  similar to those of the 1993
         Stock Option/Stock  Issuance Plan. Under the 1995 Plan,  however,  each
         individual  serving as a nonemployee  Board of Directors' member on the
         date the  Underwriting  Agreement for the initial  public  offering was
         executed  received  an option  grant on such date for 20,000  shares of
         common stock,  provided such  individual  had not otherwise been in the
         prior  employ of the  Company.  Each  individual  who  first  becomes a
         nonemployee  Board of Directors'  member  thereafter  receives a 20,000
         share  option  grant on the date  such  individual  joins  the Board of
         Directors  provided such individual has not been in the prior employ of
         the  Company.  In  addition,  at  each  annual  shareholders'  meeting,
         beginning with the 1996 Annual Shareholders'  Meeting,  each individual
         who  continues to serve as a  nonemployee  Board of  Directors'  member
         after the meeting receives an additional option grant to purchase 5,000
         shares of common stock whether or not such  individual  has been in the
         prior employ of the Company.

                                       31

<PAGE>

         1993 Stock Option/Stock Issuance Plan

         In  September  1993,  the Board of  Directors  approved  the 1993 Stock
         Option/Stock  Issuance Plan (the Plan).  Options granted under the Plan
         may be either incentive stock options or nonstatutory stock options, as
         designated  by the  Board  of  Directors.  The Plan  provides  that the
         exercise price of an incentive  stock option and a nonstatutory  option
         will be no less than the fair  market  value and 85% of the fair market
         value,  respectively,  of the  Company's  common  stock  at the date of
         grant, as determined by the Board of Directors.

         The Company's Board of Directors also has the authority to set exercise
         dates (no longer than 10 years from the date of grant),  payment  terms
         and other  provisions for each grant.  Generally  options granted under
         the Plan become  exercisable as to 25% of the shares on the anniversary
         date of grant and  thereafter  become  exercisable  ratably  over three
         years.

         The  Company  has  recorded   deferred   compensation   of  $3,522,000,
         representing  the difference  between the exercise price and the deemed
         fair value of the Company's  common stock for 604,000 shares subject to
         common stock options  granted in the fourth  quarter of 1994, the first
         quarter  of 1995 and  options  assumed  in the  Anagram  and  FrontLine
         mergers and Nexsyn acquisition  during 1996. The deferred  compensation
         will be amortized to compensation  expense over the period during which
         the options become exercisable, generally four years.

         In  connection  with the  mergers  discussed  in Note 2,  various  ISS,
         Anagram,  Meta and FrontLine  option plans were assumed by the Company,
         thereby allowing  participants to purchase Avant!  stock in amounts and
         at prices  adjusted  to reflect  the  relative  exchange  ratios of the
         mergers.

         1992 Stock Option/Appreciation Plan

         Under Meta's 1992 Stock  Option/Appreciation  Plan (the 1992 Plan), the
         exercise  price of stock  options  is to be at not less than 90% of the
         fair  market  value at the date of grant.  Fair  market  value,  in the
         absence of  trading  on a national  or  regional  stock  exchange,  was
         established  by  Meta's  Board of  Directors  based  on an  independent
         valuation  of Meta.  Options  generally  vested over a period of one to
         four  years  from the date of grant,  expire ten years from the date of
         grant, and are terminated, to the extent not exercised, one month after
         termination of employment.

         The 1992 Plan  provides for the exercise of stock  appreciation  rights
         with respect to outstanding options in the absence of trading of Meta's
         stock on a national or regional  stock  exchange.  Upon the exercise of
         stock  appreciation   rights,  the  employee  surrendered  the  related
         unexercised option and received cash payment equal to the excess of the
         fair market value of the underlying shares at the time of exercise over
         the  aggregate  exercise  price  of the  related  option.  Compensation
         expense was recognized for the  appreciation  in value from the date of
         grant.

         During the months of June,  July,  and August  1995,  Meta entered into
         agreements with  substantially  all individual option holders under the
         1992 Plan  terminating  the stock  appreciation  right  feature  of the
         individual awards.  Compensation expense of $484,000,  representing the
         difference  between the exercise price and the fair market value of the
         stock,  was recorded based on the vested stock  appreciation  rights of
         the  individual   shareholders   through  the  date  such  rights  were
         terminated. Upon effectiveness of the Meta initial public offering, all
         stock  appreciation  rights  terminated,  and no  further  compensation
         expense was recorded.

                                       32

<PAGE>

         The Company applies APB Opinion No. 25 in accounting for its option and
         purchase  plans  and   accordingly,   compensation   expense  has  been
         recognized for its stock options in the financial  statements using the
         intrinsic value method. Had the Company determined compensation expense
         based on the fair value at the grant date for its stock  options  under
         SFAS No. 123,  the  Company's  net income and  earnings per share would
         have been  reduced  to the pro forma  amounts  indicated  below for the
         years ended December 31, (in thousands):

                                                            1996         1995
                                                          --------     --------
Net income
    As reported (pro forma in 1995)                       $ 12,484     $  8,350
    Additional compensation cost resulting from:
        Fixed stock options                                 (4,592)      (1,772)
        Performance based stock options                         (2)          (2)
        Employee stock purchase rights                      (1,044)        (309)
                                                          --------     --------
    Pro forma                                             $  6,846     $  6,267
                                                          ========     ========

Earnings per share
    As reported (pro forma in 1995)                       $   0.47     $   0.35
    Pro forma                                             $   0.26     $   0.26

         The fair value of each option is  estimated  on the date of grant using
         the   Black-Scholes    option-pricing    model   with   the   following
         weighted-average   assumptions  used  for  grants  in  1996  and  1995,
         respectively:  expected  volatility of 57% and 57%,  risk-free interest
         rates of 5.27% and 7.86%,  expected  lives of six months after  vesting
         and no dividend yield.

         The effects of applying SFAS No. 123 for disclosing  compensation  cost
         may not be  representative  of the effects on  reported  net income for
         future years because pro forma net income reflects  compensation  costs
         only for stock  options  granted in 1996 and 1995 and does not consider
         compensation cost for stock options granted prior to January 1, 1995.

<TABLE>
         A summary of the status of  the  Company's  fixed stock option plans as
         of December  31,  1996,  1995 and 1994,  and  changes  during the years
         ending on those dates is presented below:

<CAPTION>
                                         1996                      1995                     1994
                                ---------------------     ---------------------      ---------------------
                                            Weighted                   Weighted                 Weighted
                                             average                   average                  average
                                 Shares     exercise      Shares       exercise      Shares     exercise
                                 (000)       price         (000)        price        (000)       price
                                 -----       -----         -----        -----        -----       -----
<S>                              <C>         <C>           <C>         <C>             <C>        <C>
Outstanding at beginning
     of year                     3,477       $ 9.42        2,600       $ 6.42          734        $0.78
       Granted                   1,738        17.61        1,816        14.00        2,275         6.95
       Exercised                 (990)         3.41        (598)        11.21        (134)         0.69
       Canceled                  (362)        14.10        (341)         7.16        (275)         0.68
                                 -----                     -----                    -----
Outstanding at end of year       3,863       $12.84        3,477       $ 9.42       2,600         $6.42
                                 =====                     =====                    =====

Options exercisable at end
     of year                     1,996                     1,444                       881

Weighted average fair
     value of options granted
     during the year             $7.28                     $5.96                         -
</TABLE>

                                                                   33

<PAGE>

<TABLE>

         The  following   summarizes   information  about  fixed  stock  options
         outstanding as of December 31, 1996:

<CAPTION>
                                           Options outstanding                        Options exercisable
                          -------------------------------------------------       -----------------------------
                                                  Weighted
    Range                                          average                                              Weighted
     of                         Number            remaining         Weighted           Number            average
  exercise                    outstanding        contractual         average         exercisable        exercise
   price                         (000)          life (years)     exercise price         (000)             price
-----------------                -----          ------------     --------------         -----             -----
<S>                             <C>                  <C>           <C>                <C>              <C>
$0.07-0.30                        902                6.86          $  0.28              647            $   0.29
$0.31-15.00                     1,367                8.48             7.13              617                6.47
$15.00-25.00                    1,145                8.61            18.66              672               17.35
$25.01-44.50                      449                9.42            35.66               60               38.01
                                -----                ----           ------            -----             -------
$0.07-44.50                     3,863                8.15          $ 12.84            1,996            $   7.57
                                =====                ====           ======            =====             =======
</TABLE>

         FrontLine  granted certain  employees stock option awards whose vesting
         is contingent upon achieving certain performance measures. The exercise
         price of each option, which has a ten year life, is equal to the market
         price of the Company's stock on the date of grant.

         The fair value of each  FrontLine  option is  estimated  on the date of
         grant using the Black-Scholes  option-pricing  model with the following
         weighted-average   assumptions  used  for  grants  in  1996  and  1995,
         respectively: risk-free interest rates of 5.27% and 7.86%, and expected
         lives six months after vesting and no dividend yield.
<TABLE>
         The  following  is a  summary  of  the  activity  under  the  Company's
performance based stock option plan:
<CAPTION>
                                                          1996                              1995
                                                   ------------------------        ------------------------
                                                                   Weighted                        Weighted
                                                                   average                         average
                                                   Shares          exercise         Shares         exercise
                                                   (000)            price           (000)            price
                                                   -----            -----           -----            -----
<S>                                               <C>               <C>             <C>              <C>
Outstanding at beginning of year                     72             $0.58               -            $   -
Granted                                              24              0.58              72             0.58
                                                     --                                --
Outstanding at end of year                           96             $0.58              72            $0.58
                                                     ==                                ==

Options exercisable at end of year                   35                                13
Weighted average fair value of
     options granted during the year              $0.08                             $0.11
</TABLE>

         As of December 31, 1996,  the 96,000  performance  options  outstanding
         under the Plan have an exercise  price of $0.58 and a weighted  average
         remaining  contractual  life of 8.68 years.  The Company  expects  that
         approximately  50% of the nonvested awards as of December 31, 1996 will
         eventually vest.

         Warrants

         During 1995,  FrontLine  issued a warrant to purchase  10,380 shares of
         common  stock at a price  of  $0.58  per  share  in  connection  with a
         technology development  agreement.  This warrant expires on October 31,
         2000 and is exercisable  upon completion of certain  milestones.  As of
         December 31, 1996, there were no warrants  exercisable.  Accounting for
         the value of this warrant will be  determined  upon  completion  of the
         milestones  and will be  charged  to income at that  time  because  the
         technology had not reached technological feasibility at the date of the
         technology development agreement.

                                       34

<PAGE>

         Common Stock Awards

         An  agreement  with a  distributor  provides for the issuance of common
         stock  in lieu of cash  sales  commissions.  In April  1996,  FrontLine
         issued  approximately  6,000  shares of common  stock and  recognized a
         charge to income of approximately $140,000. The Company may issue up to
         15,000  additional  shares of common stock for future sales commissions
         through 1998.

5.       Leases

         Capital Leases

         The Company is obligated to make future  minimum lease  payments  under
         capital lease arrangements of $52,000 during 1997.

         Operating Leases

         The Company leases its Sunnyvale,  California,  Research Park Triangle,
         North  Carolina,  and certain sales  facilities  under  operating lease
         agreements  which  expire  over the next  nine  years.  Rental  expense
         incurred  by the  Company  under  operating  lease  agreements  totaled
         $2,164,000,  $1,366,000,  and  $1,190,000,  and  for  the  years  ended
         December 31, 1996, 1995 and 1994, respectively.

         Future annual  minimum lease payments  under  operating  leases for the
         years ended December 31, are as follows (in thousands):

                  1997                                                  $  2,047
                  1998                                                     1,175
                  1999                                                       851
                  2000                                                       742
                  2001                                                       700
                  Thereafter                                               2,741
                                                                        --------
                                                                        $  8,256
                                                                        ========
6.       Income Taxes

         The components of income tax expense,  as presented in the accompanying
         consolidated  statements  of income,  are  comprised of federal  taxes,
         state taxes and certain  foreign  taxes.  The pro forma  provision  for
         income  taxes  reflects  the  income tax  expense  that would have been
         reported if Meta (an S corporation  for income tax reporting  purposes)
         had been a C  corporation  for the years  ended  December  31, 1995 and
         1994.  The  components of income taxes and pro forma income taxes as of
         December 31, 1996, 1995 and 1994, are as follows (in thousands):

                                                 1996         1995         1994
                                                ------       ------       ------
    Provision for income taxes:
    Current:
        Federal                               $  7,127     $  1,736       $  105
        Foreign                                    725        1,609          535
        State                                      767          837          106
                                                ------       ------       ------
                 Total                           8,619        4,182          746
                                                ------       ------       ------
    Deferred:
        Federal                                 (2,144)        (826)         102
        State                                     (253)        (605)          54
                                                ------       ------       ------
                 Total                          (2,397)      (1,431)         156
                                                ------       ------       ------
        Charge in lieu of taxes attributable
             to employee stock plans             4,730        1,302          647
                                                ------        -----       ------
                 Total provision for income
                    taxes                     $ 10,952     $  4,053      $ 1,549
                                                ======        =====       ======

                                       35

<PAGE>

      Pro forma income taxes:
      Current:
          Federal                                         $ 2,989       $ 1,073
          Foreign                                           1,609           535
          State                                             1,240           332
                                                          -------       -------
                   Total                                    5,838         1,940
                                                          -------       -------
      Deferred:
          Federal                                            (396)         (394)
          State                                              (517)          (18)
                                                          -------       -------
                   Total                                     (913)         (412)
                                                          -------       -------
      Charge in lieu of taxes attributable
           to employee stock plans                          1,302           647
                                                          -------       -------
                   Total pro forma provision for
                     income taxes                         $ 6,227       $ 2,175
                                                          =======       =======

         The Company's  effective tax rate and pro forma  effective rate differs
         from  the  federal  statutory  income  tax rate of 35% as  follows  (in
         thousands):
                                                 1996        1995        1994
                                               --------    --------    --------

Income tax expense at statutory rate           $  8,203   $ 5,102      $  2,164
State tax expense                                 1,540       491           153
Nondeductible merger costs                        2,355       938          --
Change in valuation allowance                      --         (89)           89
Tax exempt income                                  (307)     (306)         (140)
Tax credits                                        (387)     (148)          (78)
Foreign sales corporation                          (980)      (96)         --
S corporation benefit                              --        (575)       (1,134)
Establishment of deferred tax assets
  in conjunction with Meta's transition
  from an S corporation to C corporation
  status                                           --      (1,725)         --
Foreign taxes paid by S Corporation                --         423           497
Other                                               528        38            (2)
                                               --------  --------      --------

             Actual income tax expense         $ 10,952  $  4,053      $  1,549
                                               ========  ========      ========

Income tax expense at statutory rate                      $ 5,102       $ 2,164
State tax expense                                             815           259
Nondeductible merger costs                                    938          --
Change in valuation allowance                                 (89)           89
Tax exempt income                                            (306)         (140)
Tax credits                                                  (253)         (222)
Foreign sales corporation                                     (96)         --
Other                                                         116            25
                                                          -------       -------

             Pro forma income tax expense                 $ 6,227       $ 2,175
                                                          =======       =======

                                       36

<PAGE>

         The  tax  effects  of the  temporary  differences  that  give  rise  to
         significant  portions of the deferred tax assets and  liabilities as of
         December 31, 1996 and 1995 are as follows (in thousands):

                                                                  1996     1995
                                                                 ------   ------

Deferred tax assets:
    Accrued liabilities                                          $1,343   $1,385
    Allowance for doubtful accounts                                 305      158
    Tax credit carryforwards                                       --        361
    Net operating loss carryforwards                                201      286
    Deferred revenue                                              4,682      942
    Property and equipment, principally due to depreciation         760    1,140
    Other                                                            91       95
                                                                 ------   ------

        Total gross deferred tax assets                           7,382    4,367
                                                                 ------   ------

Less valuation allowance                                           --       --
                                                                 ------   ------
        Deferred tax assets, net of valuation allowance           7,382    4,367
Deferred tax liability - Accrual to cash conversion                 932       31
                                                                 ------   ------
    Net deferred tax assets                                      $6,450   $4,053
                                                                 ======   ======

         Management  believes it is more likely than not that future  operations
         will  generate  sufficient  taxable  income to realize the deferred tax
         assets.

         The Company  had net  operating  loss  carryforwards  of  $503,000  and
         $760,000  as of  December  31,  1996 and 1995,  respectively,  expiring
         through the year 2011.

7.       Employee Benefit Plans

         401(k) Plan

         The   Company  has  a  401(k)   retirement   savings   plans   covering
         substantially   all  employees.   Contributions   are  matched  at  the
         discretion  of the  Board  of  Directors.  The  matching  contributions
         amounted to  $769,000,  $115,000  and $77,000 for 1996,  1995 and 1994,
         respectively.

         Employee Stock Purchase Plan

         The Company has a Qualified Employee Stock Purchase Plan, which permits
         eligible employees to purchase newly issued common stock of the Company
         up to an aggregate of 500,000  shares.  Under this plan,  employees may
         purchase from the Company a designated number of shares through payroll
         deductions  at a price per share equal to 85% of the lesser of the fair
         market value of the Company's  common stock as of the date of the grant
         or the date the right to purchase  is  exercised.  Under the Plan,  the
         Company sold  83,000,  43,000 and 5,000  shares,  to employees in 1996,
         1995 and 1994, respectively.

         Under SFAS No. 123,  compensation cost would be recognized for the fair
         value of the employee's purchase rights,  which was estimated using the
         Black-Scholes  model with the following  assumptions for 1996 and 1995,
         respectively:  expected  volatility of 57% and 57%,  risk-free interest
         rates of 5.61% and 7.76% and no dividend  yield.  The weighted  average
         fair value of those purchase rights  (including the 15% discount to the
         fair value of the Company's common stock) granted in 1996 and 1995 were
         $8.17 and $13.25, respectively.

                                       37

<PAGE>

8.       Concentrations of Credit Risk

         The Company  maintains  excess cash  balances in a variety of financial
         instruments  such  as  securities   backed  by  the  U.S.   government,
         municipal/corporate   auction   preferred   stock,   municipal   bonds,
         short-term  debt   securities,   and  demand  deposit   investments  in
         limited-maturity   fixed-income  mutual  funds.  The  Company  has  not
         experienced  any material  losses in any of the instruments it has used
         for excess cash balances.

         To reduce credit risk, the Company performs ongoing credit  evaluations
         of its customers' financial  condition.  The Company maintains reserves
         for potential  credit losses,  but historically has not experienced any
         significant  losses  related  to  individual  customers  or  groups  of
         customers in any geographic area. The Company's  allowance for doubtful
         accounts  was  $762,000  and $899,000 as of December 31, 1996 and 1995,
         respectively.

9.       Business Segment and Geographic Information

         The Company operates primarily in one business segment,  comprising the
         electronic design automation industry.

         The Company's  export  revenues are all  denominated  in U.S.  dollars.
         International revenue,  principally to customers in Asia, accounted for
         approximately  34%,  32% and 33% of total  revenue  in the years  ended
         December 31, 1996, 1995 and 1994, respectively.

         As of December  31, 1996 and 1995,  no customer  comprised in excess of
         10% of total accounts receivable.

10.      Acquisitions of Technology

         In each of December 1996,  September 1996, October 1995 and April 1994,
         the  Company  acquired  rights to  certain  software  technology  under
         development.  As the acquired  software  had not reached  technological
         feasibility  at  the  date  of   acquisition,   it  was  expensed  upon
         acquisition.

         Under the October 1995  agreement,  the Company  will make  payments of
         approximately $670,000,  $475,000, $350,000 and $200,000 in March 1997,
         1998,  1999 and  2000,  respectively.  The net  present  value of these
         payments  is  included  in  technology   acquisition   payable  in  the
         accompanying consolidated balance sheets.

11.      Commitments and Contingencies

         On December 6, 1995,  Cadence Design Systems,  Inc.  (Cadence) filed an
         action  against the Company and certain of its officers in the Northern
         California   United   States   District   Court   alleging    copyright
         infringement,  unfair  competition,  misappropriation of trade secrets,
         conspiracy,  breach of contract,  inducing breach of contract and false
         advertising.  The  essence  of the  complaint  is that  certain  Avant!
         employees who were formerly Cadence employees allegedly misappropriated
         and improperly  copied source code for certain  important  functions of
         Avant! place and route products from Cadence,  and that the Company has
         allegedly  competed  unfairly  by making  false  statements  concerning
         Cadence  and its  products.  The action also  alleges  that the Company
         induced  certain  individual  defendants to breach their  agreements of
         employment and confidentiality  with Cadence. In addition to actual and
         punitive damages, which were not quantified by Cadence,  Cadence seeks
         to enjoin  the sale of  certain  place and route  products.

         On March 18, 1997, the Northern California United States District Court
         denied Cadence's  motion to obtain a preliminary  injunction that would
         have  prohibited the production and sale of Avant!'s  ArcCell,  ArcCell
         XO,  Aquarius XO and Aquarius XO 2.0 products or any other product that
         Avant! is currently  selling.  The matter is currently  awaiting trial,
         pending further pretrial matters. A trial date has not yet been set.

                                       38

<PAGE>

         On January 16, 1996,  Avant!  filed a counterclaim  alleging  antitrust
         violations,  racketeering, false advertising,  defamation, trade libel,
         unfair competition,  unfair trade practices,  negligent and intentional
         interference  with  prospective   economic  advantage  and  intentional
         interference with contractual relations. Although Avant!'s counterclaim
         seeks  unquantified  damages  according to proof,  Avant!  specifically
         alleges  that it has  suffered  losses in excess of $500  million.  The
         alleged  losses are due largely to the decline in Avant!'s stock market
         value caused by Cadence's misconduct.

         The Santa Clara County District Attorney's office is also investigating
         the  allegations  of  misappropriation  of trade  secrets  set forth in
         Cadence's  lawsuit,  described  above.  On December  5, 1995,  a search
         warrant was executed at the Company's Sunnyvale,  California,  facility
         to  determine  whether  there was  evidence  of  criminal  conduct.  No
         criminal  charges have been filed  against the Company,  the  Company's
         management  or its  employees,  but no assurance can be given that such
         charges will not be filed in the future. A criminal complaint, if filed
         against the Company, the Company's  management or its employees,  could
         result in a loss of management and other personnel and could have other
         material adverse effects on the Company.

         On December 15, 1995,  Paul  Margetis and Helen  Margetis  filed in the
         United States District Court for the Northern  District of California a
         securities fraud class action complaint.  In addition,  on December 19,
         1995,  Fred Tarca  filed in the United  States  District  Court for the
         Northern District of California a class action complaint for violations
         of the federal  securities  laws.  These class action  lawsuits  allege
         certain   securities  law  violations,   including   omissions   and/or
         misrepresentation  of  material  facts.  The alleged  omissions  and/or
         misrepresentations  are largely  consistent  with those outlined in the
         Cadence claim. In February 1997, plaintiff Tarca voluntarily  dismissed
         his  action  and  the  Margetis  plaintiffs  were  certified  as  class
         representatives   in  their  action.   The  Margetis  action  has  been
         informally   stayed   pending   resolution  of  Cadence's   preliminary
         injunction motion.

         When the  lawsuits  were  originally  filed  against the  Company,  the
         Company   experienced   delays  in  orders  by  customers  due  to  the
         uncertainty of the pending lawsuits against the Company. If the Company
         suffers an adverse outcome in either the civil or criminal proceedings,
         then the Company would likely  experience  future delays in orders from
         customers and would likely suffer the loss of customers. If such events
         were  to  occur,  there  would  be a  material  adverse  effect  on the
         Company's business, financial condition and results of operations.

         The Company believes it has sufficient  defenses to all the plaintiffs'
         claims and intends to defend itself vigorously.  If, however,  Avant!'s
         defenses  are  unsuccessful,  the Company may be enjoined  from selling
         certain place and route  products and may be required to pay damages to
         Cadence.  In such  event,  Avant!'s  business,  operating  results  and
         financial  condition  would  be  materially   adversely  affected.   In
         particular,  Avant!'s place and route  products in dispute,  ArcCell-BV
         and  ArcCell  XO  (which  have  been   replaced  by   Aquarius-BV   and
         Aquarius-XO)  accounted  for  approximately  30% of total  consolidated
         revenues  for  the  three-year  period  ended  December  31,  1996.  In
         addition,  it is likely that an adverse judgment  against Avant!  would
         result in a steep decline in the market price of Avant!'s common stock.
         Although it is  reasonably  possible  the Company may incur a loss upon
         conclusion  of these  claims,  an estimate of any loss or range of loss
         cannot be made,  and the  Company  believes,  based on  information  it
         presently possesses,  that the conclusion of these claims will not have
         a  material  adverse  effect on the  Company's  consolidated  financial
         position;  however, there can be no assurance that an adverse judgment,
         if granted on any claim would not have a material adverse effect on the
         Company's  business,  consolidated  financial  position or consolidated
         results of operations.

         The Company is subject to other claims that have arisen in the ordinary
         course of business. In the opinion of management,  all such matters are
         without merit or involve amounts that would not have a material adverse
         effect on the Company's  consolidated financial position if unfavorably
         resolved.

         As of December 31, 1996, the Company was  contingently  liable for a $4
         million letter of credit for general corporate matters.

                                       39

<PAGE>

Item 9.  Changes in  and  Disagreements  With   Accountants  on  Accounting  and
         Financial Disclosure

See Item 14, Exhibits,  Financial Statement Schedules,  and Reports on Form 8-K
regarding Form 8-K filed on December 20, 1996.

                                    PART III.

Item 10. Directors and Executive Officers of the Registrant

The information required by Item 10 as to directors is incorporated by reference
from  the  Company's  Proxy  Statement  to be  filed  by the  Company  with  the
Securities and Exchange  Commission  within 120 days after the end of the fiscal
year.

Executive  officers of the Company are appointed by the Board of Directors on an
annual  basis  and  serve  at the  discretion  of the  Board of  Directors.  The
executive officers of the Company are as follows:

Name                      Age        Position
----                      ---        --------
Gerald C. Hsu             50         President, Chief Executive Officer and
                                       Chairman of the Board of Directors
Y. Eric Cho               49         Senior Vice President of Corporate
                                       Operations and Director
John P. Huyett            43         Chief Financial Officer and Treasurer

Gerald C. Hsu joined the  Company in March 1994 as  President,  Chief  Executive
Officer and a director,  and has been Chairman of the Avant!  Board of Directors
since  November  1995.  From July 1991 to March  1994,  Mr. Hsu was  employed by
Cadence,  where his last position was  President  and General  Manager of the IC
Design  Group.  From  June  1988 to July  1991,  Mr.  Hsu  was  employed  by Sun
Microsystems,  Inc., an engineering workstation company, where his last position
was Director of Strategic Business  Development.  Mr. Hsu holds an M.S. in Ocean
Engineering from the Massachusetts Institute of Technology, an M.S. in Mechanics
and  Hydraulics  form the  University of Iowa and a B.S. in Applied  Mathematics
from the National Chung-Hsing University, Taiwan.

Y. Eric Cho  co-founded  the Company in February 1991 and has been a director of
the Company  since such date.  From  January  1996 to the  present,  Dr. Cho has
served as the Senior Vice President of Corporate  Operations.  From October 1993
until January 1996, he served as the Vice  President of Asian  Operations.  From
the inception of Avant!  until October 1993, Dr. Cho served as Vice President of
Sales and Marketing.  From September 1986 to February 1991, Dr. Cho was employed
by Cadence where his last  position was  Marketing  Director of the IC Division.
Dr. Cho holds an M.B.A.  form New York  University,  a Ph.D. in Computer Science
from the University of California, Berkeley and a B.S. in Electrical Engineering
from National Chiao-Tung University, Taiwan.

John P.  Huyett has  served as Chief  Financial  Officer  and  Treasurer  of the
Company  since he joined  Avant!  in  connection  with the merger of  Integrated
Silicon Solutions,  Inc. (ISS) with and into Avant! in November 1995. Mr. Huyett
also served as Vice  President of Financial  and  Administrative  Services  from
November  1995 to January  1997.  From July 1993 to November  1995,  Mr.  Huyett
served as Vice  President  of Finance and Chief  Financial  Officer of ISS.  Mr.
Huyett  also served as  Treasurer  and  Secretary  of ISS from  October  1994 to
November  1995.  Prior to July 1993,  Mr.  Huyett  was a partner  with KPMG Peat
Marwick LLP, independent auditors of Avant!.

The  information  required  by Item 10 as to the filings of Forms 3, 4, and 5 as
required by Section 16(a) of the Securities Exchange Act of 1934 is incorporated
by  reference  from the  Company's  Proxy to be  filed by the  Company  with the
Securities and Exchange  Commission  within 120 days after the end of the fiscal
year.

Item 11. Executive Compensation

The  information  required  by Item 11 is  incorporated  by  reference  from the
Company's  Proxy  Statement to be filed by the Company with the  Securities  and
Exchange Commission within 120 days after the end of the fiscal year.

                                       40

<PAGE>

Item 12. Security Ownership of Certain Beneficial Owners and Management

The  information  required  by Item 12 is  incorporated  by  reference  from the
Company's  Proxy  Statement to be filed by the Company with the  Securities  and
Exchange Commission within 120 days after the end of the fiscal year.

Item 13. Certain Relationships and Related Transactions

The  information  required  by Item 13 is  incorporated  by  reference  from the
Company's  Proxy to be filed by the Company  with the  Securities  and  Exchange
Commission within 120 days after the end of the fiscal year.

                                                   PART IV.

<TABLE>
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
<CAPTION>
                                                                                         Page number
                                                                                      in this Form 10-K
                                                                                      -----------------
<S>      <C>                                                                               <C>
(a) 1.   Financial Statements
         Independent Auditors' Report                                                       20
         Consolidated Balance Sheets as of  December 31, 1996 and 1995                      21
         Consolidated Statements of Income for the Years Ended December 31,
             1996, 1995 and 1994                                                            22
         Consolidated Statements of Shareholders' Equity  for the Years Ended
             December 31, 1996, 1995 and 1994                                               23
         Consolidated Statements of Cash Flows for the Years Ended December 31,
             1996, 1995 and 1994                                                            25
         Notes to Consolidated Financial Statements                                         26

                                                                                         Page number
                                                                                      in this Form 10-K
(a)2.    Financial Statement Schedule                                                 -----------------

         Schedule II -  Valuation and Qualifying Accounts for the
         years ended December 31, 1996, 1995 and 1994                                       44
</TABLE>

         All other financial  statement  schedules required under Regulation S-X
         are omitted as the required information is not applicable.

(a)3.    Exhibits

         The Exhibits  filed as part of this Form 10-K are listed on the Exhibit
         Index  immediately  preceding  such  Exhibits and are  incorporated  by
         reference.

(b)      Reports on Form 8-K

         The Company filed a report on Form 8-K,  under Item 2, dated  September
         27, 1996.  Pursuant to this report,  the Company  announced that it had
         completed its merger with Anagram.  Anagram's shareholders approved the
         merger with consents  duly adopted and approved in accordance  with the
         California  Corporations' Code, on September 27, 1996. Upon the closing
         of the merger, Anagram became a wholly owned subsidiary of Avant!.

         The Company filed a report on Form 8-K,  under Item 5, dated October 9,
         1996.  Pursuant to this report,  the Company  announced that it entered
         into an Agreement and Plan of Reorganization with FrontLine under which
         FrontLine would become a wholly owned subsidiary of Avant!.

                                       41

<PAGE>

         The  Company  filed a report  on Form 8-K  under  Items 2 and 5,  dated
         October 29, 1996.  Pursuant to this report,  the Company announced that
         it had completed  its merger with Meta.  Both  companies'  shareholders
         approved the merger at the companies'  respective  special  shareholder
         meetings convened on October 29, 1996. Upon closing of the merger, Meta
         became a wholly owned subsidiary of Avant!. Effective upon consummation
         of the merger,  Shawn M. Hailey,  President and Chief Executive Officer
         of Meta, was appointed to Avant!'s Board of Directors. Robert C. Kagle,
         a member of the Company's Board of Directors at the time of the merger,
         resigned upon consummation of the merger.

         The Company  filed a report on Form 8-K,  under Item 2, dated  November
         27, 1996.  Pursuant to this report,  the Company  announced that it had
         completed its merger with FrontLine.  FrontLine's shareholders approved
         the merger on  November  26,  1996.  Upon the  closing  of the  merger,
         FrontLine became a wholly owned subsidiary of Avant!.

         The  Company  filed a report on Form 8-K,  under  Items 4 and 5,  dated
         December 20, 1996.  Pursuant to this report, the Company announced that
         it  dismissed  Roberts  Accountancy   Corporation  as  the  independent
         accountant for Anagram and appointed KPMG Peat Marwick LLP as principal
         accountants.  The Company  acquired  Anagram on September 27, 1996, and
         the Company's principal  accountants  previously  expressed reliance on
         Roberts Accountancy  Corporation's report in the Company's registration
         statement on Form S-4 dated  September 30, 1996.  The  Company's  Audit
         Committee  of the Board of  Directors  approved  the decision to change
         accountants.  The Company provided  historical selected financial data,
         quarterly financial  information  management's  discussion and analysis
         and  consolidated   financial  statements  which  gave  effect  to  the
         acquisition  of Anagram  consummated on September 27, 1996. The Company
         also provided supplemental selected financial data, quarterly financial
         information  management's  discussion  and  analysis  and  consolidated
         financial  statements  which gave effect to the acquisition of Meta and
         FrontLine.

                                       42

<PAGE>



                                   SIGNATURES

Pursuant to the  requirements of Section 13 or 15(d) 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.

                                          Avant! Corporation
                                          --------------------------------------
                                          (Registrant)


March 28, 1997                         /s/  GERALD C. HSU
--------------                         -----------------------------------------
                                          Gerald C. Hsu
                                          President,  Chief  Executive  Officer,
                                          and Chairman of the Board of Directors

<TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following  persons on behalf of the  registrant and
in the capacities and on the dates indicated.

<CAPTION>
     Signature                                 Capacity                                   Date
     ---------                                 --------                                   ----

<S>                                      <C>                                          <C>
/s/  GERALD C. HSU                       President (principal executive               March 28, 1997
------------------                       officer), Chief Executive Officer            --------------
     Gerald C. Hsu                       and Chairman of the Board of Directors

/s/  JOHN P. HUYETT                      Chief Financial Officer and Treasurer        March 28, 1997
-------------------                      (principal accounting officer and            --------------
     John P. Huyett                       principal financial officer)

/s/ Y. ERIC CHO                          Senior Vice President of Corporate           March 28, 1997
---------------                          Operations and Director                      --------------
    Y. Eric Cho


/s/ ERIC A. BRILL                        Director                                     March 28, 1997
-----------------                                                                     --------------
    Eric A. Brill


/s/ TENCH COXE                           Director                                     March 28, 1997
--------------                                                                        --------------
    Tench Coxe


/s/ TATSUYA ENOMOTO                      Director                                     March 28, 1997
-------------------                                                                   --------------
    Tatsuya Enomoto


/s/ SHAWN M. HAILEY                     Senior Vice President of Silicon Tool         March 28, 1997
-------------------                     Division and Director                         --------------
    Shawn M. Hailey
</TABLE>

                                                        43

<PAGE>



                                                                     Schedule II


                               AVANT! CORPORATION
                       VALUATION AND QUALIFYING ACCOUNTS -
                         ALLOWANCE FOR DOUBTFUL ACCOUNTS
                                 (in thousands)




                                  Balance    Additions                  Balance
                                At Beginning  Charged                   At End
                                 of Period   to Expense  Deductions    of Period
                                ----------   ----------  ----------    ---------
Year ended December 31, 1994       $412        $ 86         $ 61          $437
Year ended December 31, 1995        437         590          128           899
Year ended December 31, 1996        899         454          591           762

                                       44


<PAGE>


                                INDEX TO EXHIBITS

(a)3.    Exhibits

Exhibit No.                     Description
-----------                     -----------

2.1      Agreement and Plan of Reorganization  dated as of August 18, 1996 among
         the Registrant, AGM Acquisition Corporation and Anagram, Inc. (2)
2.2      Agreement and Plan of Reorganization  dated as of August 22, 1996 among
         the Registrant, Natasha Merger Corporation and Meta-Software, Inc. (2)
2.3      Agreement and Plan of Reorganization  dated as of October 9, 1996 among
         the  Registrant,  DSM  Acquisition  Corporation  and  FrontLine  Design
         Automation, Inc. (3)
3.1      Restated Certificate of Incorporation (1)
3.2      Bylaws (1)
4.1      Amended and Restated Investors Rights Agreement between the Company and
         the Investors specified therin dated September 24, 1993 (1)
4.2      Specimen Common Stock Certificate (1)
4.3      Registration  Rights  Agreement  between  the  Registrant  and  certain
         investors dated November 27, 1996 (4)
10.1     Distribution   Agreement   between  the  Company  and  Marubeni  Hytech
         Corporation as of September 30, 1994 (1)
10.2     Distribution  Agreement between the Company and Design Solutions,  Inc.
         dated as of September 30, 1994 (1)
10.3     Real Property Lease between the Company and TRI/VEST Properties I dated
         as of January 5, 1993 (1)
10.4     In-Sync  Cooperative  Technical  and  Marketing  Agreement  between the
         Company and Synopsys, Inc. dated March 1, 1995 (1)
10.5     1995 Stock Option/Stock Issuance Plan (1)
10.6     Employee Stock Purchase Plan (1)
10.7     Form of Indemnification Agreement (1)
10.8     Indemnification  Agreement  entered into between the Company and Gerald
         C. Hsu dated May 24, 1994 (1)
11.1     Statement regarding Computation of Net Income Per Share
21.1     List of subsidiaries of the Company
23.1     Consent of KPMG Peat Marwick LLP, Independent Auditors

--------------
(1) Incorporated by reference from the Company's  Registration Statement on Form
S-1 (File No. 33-91128) as declared effective on June 6, 1995.
(2) Incorporated by reference from the Company's  Registration Statement on Form
S-4 (File No. 333-11659) as declared effective on September 30, 1996.
(3)  Incorporated  by reference  from the Company's  Current  Report on Form 8-K
filed with the SEC on October 24, 1996.
(4) Incorporated by reference from the Company's  Registration Statement on Form
S-3 (File No. 333-18445) as filed on January 27, 1997.

The Company's 1996 Annual Report to  Shareholders is not to be deemed filed as a
part of this Report.

                                       45