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                                                                   EXHIBIT 10.21

                              IKOS SYSTEMS, INC.

                             1995 STOCK OPTION PLAN

        

     1.    ESTABLISHMENT, PURPOSE AND TERM OF PLAN.
           --------------------------------------- 

           1.1        ESTABLISHMENT.  The IKOS Systems, Inc. 1988 Stock Option
Plan was initially established effective as of January 19, 1988 (the "INITIAL
PLAN").  The Initial Plan is hereby amended and restated in its entirety as the
IKOS Systems, Inc. 1995 Stock Option Plan (the "PLAN") effective as of October
26, 1995 (the "EFFECTIVE DATE").

           1.2        PURPOSE.  The purpose of the Plan is to advance the
interests of the Participating Company Group and its stockholders by providing
an incentive to attract, retain and reward persons performing services for the
Participating Company Group and by motivating such persons to contribute to the
growth and profitability of the Participating Company Group.

           1.3        TERM OF PLAN.  The Plan shall continue in effect until the
earlier of its termination by the Board or the date on which all of the shares
of Stock available for issuance under the Plan have been issued and all
restrictions on such shares under the terms of the Plan and the agreements
evidencing Options granted under the Plan have lapsed.  However, all Incentive
Stock Options shall be granted, if at all, within ten (10)  years from the
Effective Date. Notwithstanding the foregoing, if the maximum number of shares
of Stock issuable pursuant to the Plan as provided in Section 4.1 has been
increased at any time, all Incentive Stock Options shall be granted, if at all,
no later than the last day preceding the tenth (10th) anniversary of the earlier
of (a) the date on which the latest such increase in the maximum number of
shares of Stock issuable under the Plan was approved by the stockholders of the
Company or (b) the date such amendment was adopted by the Board.

     2.    DEFINITIONS AND CONSTRUCTION.
           ---------------------------- 

           2.1        DEFINITIONS.  Whenever used herein, the following terms
shall have their respective meanings set forth below:

                      (a) "BOARD" means the Board of Directors of the Company.
If one or more Committees have been appointed by the Board to administer the
Plan, "Board" also means such Committee(s).

                      (b) "CODE" means the Internal Revenue Code of 1986, as
amended, and any applicable regulations promulgated thereunder.

                      (c) "COMMITTEE" means the Compensation Committee or other
committee of the Board duly appointed to administer the Plan and having such
powers as shall be specified by the Board. Unless the powers of the Committee
have been specifically limited, the Committee shall have all of the powers of
the Board granted herein, including, without limitation, the power to amend or
terminate the Plan at any time, subject to the terms of the Plan and any
applicable limitations imposed by law.

                      (d) "COMPANY" means IKOS Systems, Inc., a Delaware
corporation, or any successor corporation thereto.
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                      (e) "CONSULTANT" means any person, including an advisor,
engaged by a Participating Company to render services other than as an Employee
or a Director.

                      (f) "DIRECTOR" means a member of the Board or of the board
of directors of any other Participating Company.

                      (g) "EMPLOYEE" means any person treated as an employee
(including an officer or a Director who is also treated as an employee) in the
records of a Participating Company; provided, however, that neither service as a
Director nor payment of a director's fee shall be sufficient to constitute
employment for purposes of the Plan.

                      (h) "EXCHANGE ACT" means the Securities Exchange Act of
1934, as amended.

                      (i) "FAIR MARKET VALUE" means, as of any date, the value
of a share of stock or other property as determined by the Board, in its sole
discretion, or by the Company, in its sole discretion, if such determination is
expressly allocated to the Company herein.

                      (j) "INCENTIVE STOCK OPTION" means an Option intended to
be (as set forth in the Option Agreement) and which qualifies as an incentive
stock option within the meaning of Section 422(b) of the Code.

                      (k) "INSIDER" means an officer or a Director of the
Company or any other person whose transactions in Stock are subject to Section
16 of the Exchange Act.

                      (l) "NONSTATUTORY STOCK OPTION" means an Option not
intended to be (as set forth in the Option Agreement) or which does not qualify
as an Incentive Stock Option.

                      (m) "OPTION" means a right to purchase Stock (subject to
adjustment as provided in Section 4.2) pursuant to the terms and conditions of
the Plan. An Option may be either an Incentive Stock Option or a Nonstatutory
Stock Option.

                      (n) "OPTION AGREEMENT" means a written agreement between
the Company and an Optionee setting forth the terms, conditions and restrictions
of the Option granted to the Optionee and any shares acquired upon the exercise
thereof.

                      (o) "OPTIONEE" means a person who has been granted one or
more Options.

                      (p) "PARENT CORPORATION" means any present or future
"parent corporation" of the Company, as defined in Section 424(e) of the Code.

                      (q) "PARTICIPATING COMPANY" means the Company or any
Parent Corporation or Subsidiary Corporation.

                      (r) "PARTICIPATING COMPANY GROUP" means, at any point in
time, all corporations collectively which are then Participating Companies.

                      (s) "RULE 16b-3" means Rule 16b-3 under the Exchange Act,
as amended from time to time, or any successor rule or regulation.

                      (t) "SECTION 162(m)" means Section 162(m) of the Code, as
amended by the Revenue Reconciliation Act of 1993 (P.L. 103-66).
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                      (u) "STOCK" means the common stock of the Company, as
adjusted from time to time in accordance with Section 4.2.

                      (v) "SUBSIDIARY CORPORATION" means any present or future
"subsidiary corporation" of the Company, as defined in Section 424(f) of the
Code.

                      (w) "TEN PERCENT OWNER OPTIONEE" means an Optionee who, at
the time an Option is granted to the Optionee, owns stock possessing more than
ten percent (10%) of the total combined voting power of all classes of stock of
a Participating Company within the meaning of Section 422(b)(6) of the Code.

           2.2        CONSTRUCTION.  Captions and titles contained herein are
for convenience only and shall not affect the meaning or interpretation of any
provision of the Plan.  Except when otherwise indicated by the context, the
singular shall include the plural, the plural shall include the singular, and
the term "or" shall include the conjunctive as well as the disjunctive.

     3.    ADMINISTRATION.
           -------------- 

           3.1        ADMINISTRATION BY THE BOARD.  The Plan shall be
administered by the Board, including any duly appointed Committee of the Board.
All questions of interpretation of the Plan or of any Option shall be determined
by the Board, and such determinations shall be final and binding upon all
persons having an interest in the Plan or such Option.  Any officer of a
Participating Company shall have the authority to act on behalf of the Company
with respect to any matter, right, obligation, determination or election which
is the responsibility of or which is allocated to the Company herein, provided
the officer has apparent authority with respect to such matter, right,
obligation, determination or election.

           3.2        POWERS OF THE BOARD.  In addition to any other powers set
forth in the Plan and subject to the provisions of the Plan, the Board shall
have the full and final power and authority, in its sole discretion:

                      (a) to determine the persons to whom, and the time or
times at which, Options shall be granted and the number of shares of Stock to be
subject to each Option;

                      (b) to designate Options as Incentive Stock Options or
Nonstatutory Stock Options;

                      (c) to determine the Fair Market Value of shares of Stock
or other property;

                      (d) to determine the terms, conditions and restrictions
applicable to each Option (which need not be identical) and any shares acquired
upon the exercise thereof, including, without limitation, (i) the exercise price
of the Option, (ii) the method of payment for shares purchased upon the exercise
of the Option, (iii) the method for satisfaction of any tax withholding
obligation arising in connection with the Option or such shares, including by
the withholding or delivery of shares of stock, (iv) the timing, terms and
conditions of the exercisability of the Option or the vesting of any shares
acquired upon the exercise thereof, (v) the time of the expiration of the
Option, (vi) the effect of the Optionee's termination of employment or service
with the Participating Company Group on any of the foregoing, and (vii) all
other terms, conditions and restrictions applicable to the Option or such shares
not inconsistent with the terms of the Plan;
<PAGE>
 
                      (e) to approve one or more forms of Option Agreement;

                      (f) to amend, modify, extend, or renew, or grant a new
Option in substitution for, any Option or to waive any restrictions or
conditions applicable to any Option or any shares acquired upon the exercise
thereof;

                      (g) to accelerate, continue, extend or defer the
exercisability of any Option or the vesting of any shares acquired upon the
exercise thereof, including with respect to the period following an Optionee's
termination of employment or service with the Participating Company Group;

                      (h) to delegate to the Chief Executive Officer or the
Chief Financial Officer of the Company the authority to grant one or more
Options, without further approval of the Board, to any person eligible pursuant
to Section 5, other than a person who, at the time of such grant, is an Insider;
provided, however, that (i) such Options shall not be granted to any one person
within any fiscal year of the Company for more than 2,000 shares in the
aggregate, (ii) the exercise price per share of each such Option shall be equal
to 100% of the closing price per share of the Stock on the date of grant (or, if
no price is reported for such date, on the last day preceding the date of grant
on which such price is reported) as quoted on the National Association of
Securities Dealers Automated Quotation System (or the average of the closing bid
and asked prices if the shares of Stock are so quoted instead), or as reported
on such other stock exchange or market system which constitutes the primary
market for the Stock, and (iii) each such Option shall be subject to the terms
and conditions of the appropriate standard form of Option Agreement approved by
the Board and shall conform to the provisions of the Plan and such other
guidelines as shall be established from time to time by the Board;

                      (i) to prescribe, amend or rescind rules, guidelines and
policies relating to the Plan, or to adopt supplements to, or alternative
versions of, the Plan, including, without limitation, as the Board deems
necessary or desirable to comply with the laws of, or to accommodate the tax
policy or custom of, foreign jurisdictions whose citizens may be granted
Options; and

                      (j) to correct any defect, supply any omission or
reconcile any inconsistency in the Plan or any Option Agreement and to make all
other determinations and take such other actions with respect to the Plan or any
Option as the Board may deem advisable to the extent consistent with the Plan
and applicable law.

           3.3        DISINTERESTED ADMINISTRATION.  With respect to
participation by Insiders in the Plan, at any time that any class of equity
security of the Company is registered pursuant to Section 12 of the Exchange
Act, the Plan shall be administered in compliance with the "disinterested
administration" requirements of Rule 16b-3, if any.

           3.4        COMMITTEE COMPLYING WITH SECTION 162(m).  If a
Participating Company is a "publicly held corporation" within the meaning of
Section 162(m), the Board may establish a Committee of "outside directors"
within the meaning of Section 162(m) to approve the grant of any Option which
might reasonably be anticipated to result in the payment of employee
remuneration that would otherwise exceed the limit on employee remuneration
deductible for income tax purposes pursuant to Section 162(m).

     4.   SHARES SUBJECT TO PLAN.
          ---------------------- 

          4.1         MAXIMUM NUMBER OF SHARES ISSUABLE.  Subject to adjustment
as provided in Section 4.2, the maximum aggregate number of shares of Stock that
may be issued 
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under the Plan shall be two million eight hundred ninety-two thousand eight
hundred fifty-seven (2,892,857) and shall consist of authorized but unissued or
reacquired shares of Stock or any combination thereof. If an outstanding Option
for any reason expires or is terminated or canceled or shares of Stock acquired,
subject to repurchase, upon the exercise of an Option are repurchased by the
Company, the shares of Stock allocable to the unexercised portion of such
Option, or such repurchased shares of Stock, shall again be available for
issuance under the Plan.

           4.2        ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE.  In the
event of any stock dividend, stock split, reverse stock split, recapitalization,
combination, reclassification or similar change in the capital structure of the
Company, appropriate adjustments shall be made in the number and class of shares
subject to the Plan and to any outstanding Options, and in the exercise price
per share of any outstanding Options.  If a majority of the shares which are of
the same class as the shares that are subject to outstanding Options are
exchanged for, converted into, or otherwise become (whether or not pursuant to
an Ownership Change Event, as defined in Section 8.1) shares of another
corporation (the "NEW SHARES"), the Board may unilaterally amend the outstanding
Options to provide that such Options are exercisable for New Shares.  In the
event of any such amendment, the number of shares subject to, and the exercise
price per share of, the outstanding Options shall be adjusted in a fair and
equitable manner as determined by the Board, in its sole discretion.
Notwithstanding the foregoing, any fractional share resulting from an adjustment
pursuant to this Section 4.2 shall be rounded up or down to the nearest whole
number, as determined by the Board, and in no event may the exercise price of
any Option be decreased to an amount less than the par value, if any, of the
stock subject to the Option.  The adjustments determined by the Board pursuant
to this Section 4.2 shall be final, binding and conclusive.

     5.    ELIGIBILITY AND OPTION LIMITATIONS.
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           5.1        PERSONS ELIGIBLE FOR OPTIONS.  Options may be granted only
to Employees, Consultants, and Directors.  For purposes of the foregoing
sentence, "Employees" shall include prospective Employees to whom Options are
granted in connection with written offers of employment with the Participating
Company Group, and "Consultants" shall include prospective Consultants to whom
Options are granted in connection with written offers of engagement with the
Participating Company Group.  Eligible persons may be granted more than one (1)
Option.

           5.2        DIRECTORS SERVING ON COMMITTEE.  At any time that any
class of equity security of the Company is registered pursuant to Section 12 of
the Exchange Act, no member of a Committee established to administer the Plan in
compliance with the "disinterested administration" requirements of Rule 16b-3,
if any, while a member, shall be eligible to be granted an Option.

           5.3        OPTION GRANT RESTRICTIONS.  Any person who is not an
Employee on the effective date of the grant of an Option to such person may be
granted only a Nonstatutory Stock Option.  An Incentive Stock Option granted to
a prospective Employee upon the condition that such person become an Employee
shall be deemed granted effective on the date such person commences service with
a Participating Company, with an exercise price determined as of such date in
accordance with Section 6.1.

           5.4        FAIR MARKET VALUE LIMITATION.  To the extent that the
aggregate Fair Market Value of stock with respect to which options designated as
Incentive Stock Options are exercisable by an Optionee for the first time during
any calendar year (under all stock option plans of the Participating Company
Group, including the Plan) exceeds One Hundred Thousand Dollars ($100,000), the
portion of such options which exceeds such amount shall be treated as
<PAGE>
 
Nonstatutory Stock Options.  For purposes of this Section 5.4, options
designated as Incentive Stock Options shall be taken into account in the order
in which they were granted, and the Fair Market Value of stock shall be
determined as of the time the option with respect to such stock is granted.  If
the Code is amended to provide for a different limitation from that set forth in
this Section 5.4, such different limitation shall be deemed incorporated herein
effective as of the date and with respect to such Options as required or
permitted by such amendment to the Code.  If an Option is treated as an
Incentive Stock Option in part and as a Nonstatutory Stock Option in part by
reason of the limitation set forth in this Section 5.4, the Optionee may
designate which portion of such Option the Optionee is exercising and may
request that separate certificates representing each such portion be issued upon
the exercise of the Option.  In the absence of such designation, the Optionee
shall be deemed to have exercised the Incentive Stock Option portion of the
Option first.

           5.5        SECTION 162(m) GRANT LIMIT.  Subject to adjustment as
provided in Section 4.2, no Employee shall be granted one or more Options within
any fiscal year of the Company which in the aggregate are for the purchase of
more than seven hundred fifty thousand (750,000) shares (the "SECTION 162(m)
GRANT LIMIT").  An Option which is canceled in the same fiscal year of the
Company in which it was granted shall continue to be counted against the Section
162(m) Grant Limit for such period.

     6.    TERMS AND CONDITIONS OF OPTIONS.  Options shall be evidenced by
           -------------------------------                                
Option Agreements specifying the number of shares of Stock covered thereby, in
such form as the Board shall from time to time establish.  Option Agreements may
incorporate all or any of the terms of the Plan by reference and shall comply
with and be subject to the following terms and conditions:

           6.1        EXERCISE PRICE.  The exercise price for each Option shall
be established in the sole discretion of the Board; provided, however, that (a)
the exercise price per share for an Option shall be not less than the Fair
Market Value of a share of Stock on the effective date of grant of the Option
and (b) no Incentive Stock Option granted to a Ten Percent Owner Optionee shall
have an exercise price per share less than one hundred ten percent (110%) of the
Fair Market Value of a share of Stock on the effective date of grant of the
Option.  Notwithstanding the foregoing, an Option (whether an Incentive Stock
Option or a Nonstatutory Stock Option) may be granted with an exercise price
lower than the minimum exercise price set forth above if (a) such Option is
granted pursuant to an assumption or substitution for another option in a manner
qualifying under the provisions of Section 424(a) of the Code, or (b) such
Option is deemed to have been granted as a consequence of an amendment (other
than an amendment of the exercise price) made to an outstanding Option, the
exercise price of which is less than the minimum exercise price set forth above
on the date of such deemed option grant.

           6.2        EXERCISE PERIOD.  Options shall be exercisable at such
time or times, or upon such event or events, and subject to such terms,
conditions, performance criteria, and restrictions as shall be determined by the
Board and set forth in the Option Agreement evidencing such Option; provided,
however, that (a) no Incentive Stock Option shall be exercisable after the
expiration of ten (10) years after the effective date of grant of such Option,
(b) no Incentive Stock Option granted to a Ten Percent Owner Optionee shall be
exercisable after the expiration of five (5) years after the effective date of
grant of such Option, and (c) no Option granted to a prospective Employee or
prospective Consultant may become exercisable prior to the date on which such
person commences service with a Participating Company.
<PAGE>
 
           6.3        PAYMENT OF EXERCISE PRICE.

                      (a) FORMS OF CONSIDERATION AUTHORIZED. Except as otherwise
provided below, payment of the exercise price for the number of shares of Stock
being purchased pursuant to any Option shall be made (i) in cash, by check, or
cash equivalent, (ii) by tender to the Company of shares of Stock owned by the
Optionee having a Fair Market Value (as determined by the Company without regard
to any restrictions on transferability applicable to such stock by reason of
federal or state securities laws or agreements with an underwriter for the
Company) not less than the exercise price, (iii) by the assignment of the
proceeds of a sale or loan with respect to some or all of the shares being
acquired upon the exercise of the Option (including, without limitation, through
an exercise complying with the provisions of Regulation T as promulgated from
time to time by the Board of Governors of the Federal Reserve System) (a
"CASHLESS EXERCISE"), (iv) by the Optionee's promissory note in a form approved
by the Company, (v) by such other consideration as may be approved by the Board
from time to time to the extent permitted by applicable law, or (vi) by any
combination thereof. The Board may at any time or from time to time, by adoption
of or by amendment to the standard forms of Option Agreement described in
Section 7, or by other means, grant Options which do not permit all of the
foregoing forms of consideration to be used in payment of the exercise price or
which otherwise restrict one or more forms of consideration.

                      (b) TENDER OF STOCK. Notwithstanding the foregoing, an
Option may not be exercised by tender to the Company of shares of Stock to the
extent such tender of Stock would constitute a violation of the provisions of
any law, regulation or agreement restricting the redemption of the Company's
stock. Unless otherwise provided by the Board, an Option may not be exercised by
tender to the Company of shares of Stock unless such shares either have been
owned by the Optionee for more than six (6) months or were not acquired,
directly or indirectly, from the Company.

                      (c) CASHLESS EXERCISE. The Company reserves, at any and
all times, the right, in the Company's sole and absolute discretion, to
establish, decline to approve or terminate any program or procedures for the
exercise of Options by means of a Cashless Exercise.

                      (d) PAYMENT BY PROMISSORY NOTE. No promissory note shall
be permitted if the exercise of an Option using a promissory note would be a
violation of any law. Any permitted promissory note shall be on such terms as
the Board shall determine at the time the Option is granted. The Board shall
have the authority to permit or require the Optionee to secure any promissory
note used to exercise an Option with the shares of Stock acquired upon the
exercise of the Option or with other collateral acceptable to the Company.
Unless otherwise provided by the Board, if the Company at any time is subject to
the regulations promulgated by the Board of Governors of the Federal Reserve
System or any other governmental entity affecting the extension of credit in
connection with the Company's securities, any promissory note shall comply with
such applicable regulations, and the Optionee shall pay the unpaid principal and
accrued interest, if any, to the extent necessary to comply with such applicable
regulations.

           6.4        TAX WITHHOLDING.  The Company shall have the right, but
not the obligation, to deduct from the shares of Stock issuable upon the
exercise of an Option, or to accept from the Optionee the tender of, a number of
whole shares of Stock having a Fair Market Value, as determined by the Company,
equal to all or any part of the federal, state, local and foreign taxes, if any,
required by law to be withheld by the Participating Company Group with respect
to such Option or the shares acquired upon the exercise thereof.  Alternatively
or in addition, in its sole discretion, the Company shall have the right to
require the Optionee, through 
<PAGE>
 
payroll withholding, cash payment or otherwise, including by means of a Cashless
Exercise, to make adequate provision for any such tax withholding obligations of
the Participating Company Group arising in connection with the Option or the
shares acquired upon the exercise thereof. The Company shall have no obligation
to deliver shares of Stock or to release shares of Stock from an escrow
established pursuant to the Option Agreement until the Participating Company
Group's tax withholding obligations have been satisfied by the Optionee.

           6.5        REPURCHASE RIGHTS.  Shares issued under the Plan may be
subject to a right of first refusal, one or more repurchase options, or other
conditions and restrictions as determined by the Board in its sole discretion at
the time the Option is granted.  The Company shall have the right to assign at
any time any repurchase right it may have, whether or not such right is then
exercisable, to one or more persons as may be selected by the Company.  Upon
request by the Company, each Optionee shall execute any agreement evidencing
such transfer restrictions prior to the receipt of shares of Stock hereunder and
shall promptly present to the Company any and all certificates representing
shares of Stock acquired hereunder for the placement on such certificates of
appropriate legends evidencing any such transfer restrictions.

     7.    STANDARD FORMS OF OPTION AGREEMENT.
           ---------------------------------- 

           7.1        INCENTIVE STOCK OPTIONS.  Unless otherwise provided by the
Board at the time the Option is granted, an Option designated as an "Incentive
Stock Option" shall comply with and be subject to the terms and conditions set
forth in the form of Incentive Stock Option Agreement adopted by the Board
concurrently with its adoption of the Plan and as amended from time to time.

           7.2        NONSTATUTORY STOCK OPTIONS.  Unless otherwise provided by
the Board at the time the Option is granted, an Option designated as a
"Nonstatutory Stock Option" shall comply with and be subject to the terms and
conditions set forth in the form of Nonstatutory Stock Option Agreement adopted
by the Board concurrently with its adoption of the Plan and as amended from time
to time.

           7.3        STANDARD TERM OF OPTIONS.  Except as otherwise provided in
Section 6.2 or by the Board in the grant of an Option, any Incentive Stock
Option granted hereunder shall have a term of ten (10) years from the effective
date of grant of the Option.

           7.4        AUTHORITY TO VARY TERMS.  The Board shall have the
authority from time to time to vary the terms of any of the standard forms of
Option Agreement described in this Section 7 either in connection with the grant
or amendment of an individual Option or in connection with the authorization of
a new standard form or forms; provided, however, that the terms and conditions
of any such new, revised or amended standard form or forms of Option Agreement
are not inconsistent with the terms of the Plan.  Such authority shall include,
but not by way of limitation, the authority to grant Options which are
immediately exercisable subject to the Company's right to repurchase any
unvested shares of Stock acquired by an Optionee upon the exercise of an Option
in the event such Optionee's employment or service with the Participating
Company Group is terminated for any reason, with or without cause.

     8.    TRANSFER OF CONTROL.
           ------------------- 

           8.1        DEFINITIONS.

                      (a) An "OWNERSHIP CHANGE EVENT" shall be deemed to have
occurred if any of the following occurs with respect to the Company:
<PAGE>
 
                          (i)   the direct or indirect sale or exchange in a
single or series of related transactions by the stockholders of the Company of
more than fifty percent (50%) of the voting stock of the Company;

                          (ii) a merger or consolidation in which the Company is
a party;

                          (iii) the sale, exchange, or transfer of all or
substantially all of the assets of the Company; or

                          (iv)  a liquidation or dissolution of the Company.

                      (b) A "TRANSFER OF CONTROL" shall mean an Ownership Change
Event or a series of related Ownership Change Events (collectively, the
"TRANSACTION") wherein the stockholders of the Company immediately before the
Transaction do not retain immediately after the Transaction, in substantially
the same proportions as their ownership of shares of the Company's voting stock
immediately before the Transaction, direct or indirect beneficial ownership of
more than fifty percent (50%) of the total combined voting power of the
outstanding voting stock of the Company or the corporation or corporations to
which the assets of the Company were transferred (the "TRANSFEREE
CORPORATION(S)"), as the case may be. For purposes of the preceding sentence,
indirect beneficial ownership shall include, without limitation, an interest
resulting from ownership of the voting stock of one or more corporations which,
as a result of the Transaction, own the Company or the Transferee
Corporation(s), as the case may be, either directly or through one or more
subsidiary corporations. The Board shall have the right to determine whether
multiple sales or exchanges of the voting stock of the Company or multiple
Ownership Change Events are related, and its determination shall be final,
binding and conclusive.

           8.2         EFFECT OF TRANSFER OF CONTROL ON OPTIONS. In the event of
a Transfer of Control, the surviving, continuing, successor, or purchasing
corporation or parent corporation thereof, as the case may be (the "ACQUIRING
CORPORATION"), may either assume the Company's rights and obligations under
outstanding Options or substitute for outstanding Options substantially
equivalent options for the Acquiring Corporation's stock. In the event the
Acquiring Corporation elects not to assume or substitute for outstanding Options
in connection with a Transfer of Control, any unexercisable or unvested portion
of the outstanding Options shall be immediately exercisable and vested in full
as of the date ten (10) days prior to the date of the Transfer of Control. The
exercise or vesting of any Option that was permissible solely by reason of this
Section 8.2 shall be conditioned upon the consummation of the Transfer of
Control. Any Options which are neither assumed or substituted for by the
Acquiring Corporation in connection with the Transfer of Control nor exercised
as of the date of the Transfer of Control shall terminate and cease to be
outstanding effective as of the date of the Transfer of Control. Notwithstanding
the foregoing, shares acquired upon exercise of an Option prior to the Transfer
of Control and any consideration received pursuant to the Transfer of Control
with respect to such shares shall continue to be subject to all applicable
provisions of the Option Agreement evidencing such Option except as otherwise
provided in such Option Agreement. Furthermore, notwithstanding the foregoing,
if the corporation the stock of which is subject to the outstanding Options
immediately prior to an Ownership Change Event described in Section 8.1(a)(i)
constituting a Transfer of Control is the surviving or continuing corporation
and immediately after such Ownership Change Event less than fifty percent (50%)
of the total combined voting power of its voting stock is held by another
corporation or by other corporations that are members of an affiliated group
within the meaning of Section 1504(a) of the Code without regard to the
provisions of Section 1504(b) of the Code, the outstanding Options shall not
terminate unless the Board otherwise provides in its sole discretion.
<PAGE>
 
     9.    PROVISION OF INFORMATION.  Each Optionee shall be given access to
           ------------------------                                         
 information concerning the Company equivalent to that information generally
 made available to the Company's common stockholders.

     10.   NONTRANSFERABILITY OF OPTIONS.  During the lifetime of the
           -----------------------------                             
 Optionee, an Option shall be exercisable only by the Optionee or the Optionee's
 guardian or legal representative.  No Option shall be assignable or
 transferable by the Optionee, except by will or by the laws of descent and
 distribution.  Notwithstanding the foregoing, a Nonstatutory Stock Option shall
 be assignable or transferable to the extent permitted by the Board and set
 forth in the Option Agreement evidencing such Option.

     11.   INDEMNIFICATION.  In addition to such other rights of
           ---------------                                      
 indemnification as they may have as members of the Board or officers or
 employees of the Participating Company Group, members of the Board and any
 officers or employees of the Participating Company Group to whom authority to
 act for the Board is delegated shall be indemnified by the Company against all
 reasonable expenses, including attorneys' fees, actually and necessarily
 incurred in connection with the defense of any action, suit or proceeding, or
 in connection with any appeal therein, to which they or any of them may be a
 party by reason of any action taken or failure to act under or in connection
 with the Plan, or any right granted hereunder, and against all amounts paid by
 them in settlement thereof (provided such settlement is approved by independent
 legal counsel selected by the Company) or paid by them in satisfaction of a
 judgment in any such action, suit or proceeding, except in relation to matters
 as to which it shall be adjudged in such action, suit or proceeding that such
 person is liable for gross negligence, bad faith or intentional misconduct in
 duties; provided, however, that within sixty (60) days after the institution of
 such action, suit or proceeding, such person shall offer to the Company, in
 writing, the opportunity at its own expense to handle and defend the same.

     12.   TERMINATION OR AMENDMENT OF PLAN.  The Board may terminate or
           --------------------------------                             
 amend the Plan at any time.  However, subject to changes in the law or other
 legal requirements that would permit otherwise, without the approval of the
 Company's stockholders, there shall be (a) no increase in the maximum aggregate
 number of shares of Stock that may be issued under the Plan (except by
 operation of the provisions of Section 4.2), (b) no change in the class of
 persons eligible to receive Incentive Stock Options, and (c) no expansion in
 the class of persons eligible to receive Nonstatutory Stock Options.  In any
 event, no termination or amendment of the Plan may adversely affect any then
 outstanding Option or any unexercised portion thereof, without the consent of
 the Optionee, unless such termination or amendment is required to enable an
 Option designated as an Incentive Stock Option to qualify as an Incentive Stock
 Option or is necessary to comply with any applicable law or government
 regulation.

     13.   CONTINUATION OF INITIAL PLAN AS TO OUTSTANDING OPTIONS.  Any
           ------------------------------------------------------      
 other provision of the Plan to the contrary notwithstanding, the terms of the
 Initial Plan shall remain in effect and apply to all Options granted pursuant
 to the Initial Plan.

     IN WITNESS WHEREOF, the undersigned Secretary of the Company certifies that
the foregoing IKOS Systems, Inc. 1995 Stock Option Plan was duly adopted by the
Board on October 26, 1995.



            /s/ Joseph W. Rockom    
            -------------------------                  
            Secretary
<PAGE>
 
                                  PLAN HISTORY
                                  ------------


January 19, 1988   1988 Stock Option Plan ("Initial Plan") adopted by Board of
                   Directors of IKOS Systems, Inc., a California corporation
                   ("IKOS California"), with a share reserve of 2,500,000.

February 24, 1988  Shareholders of IKOS California approve Initial Plan.

August 17, 1989    Board of Directors of IKOS California amends Initial Plan to
                   increase share reserve to 6,000,000.

March 30, 1990     Shareholders of IKOS California approve amendment of Initial
                   Plan share reserve to 6,000,000.

May 17, 1990       Board of Directors of IKOS California amends Initial Plan to
                   increase share reserve to 8,000,000.

June 19, 1990      Shareholders of IKOS California approve amendment of Initial
                   Plan share reserve to 8,000,000.

June 29, 1990      IKOS California reincorporates in Delaware as IKOS Systems,
                   Inc. The Company assumes all employee benefit plans of IKOS
                   California (including the Initial Plan). As part of the
                   reincorporation merger, each 3.5 shares of IKOS California
                   become one share of Company stock. The Initial Plan share
                   reserve was adjusted proportionately to 2,285,714.

November 7, 1991   Board of Directors of the Company amends Initial Plan to
                   increase share reserve to 2,785,714.

January 23, 1992   Stockholders of the Company approve amendment of Initial Plan
                   share reserve to 2,785,714.

November 19, 1992  Board of Directors amends Initial Plan to increase share
                   reserve to 4,285,714.

January 14, 1993   Stockholders approve amendment of Initial Plan share reserve
                   to 4,285,714.

April 24, 1995     Effective date of one-for-two reverse stock split. The
                   Initial Plan share reserve was adjusted proportionately to
                   2,142,857.

October 26, 1995   Board of Directors amends Initial Plan to increase share
                   reserve by 750,000 to 2,892,857 and amends and restates the
                   Initial Plan as the 1995 Stock Option Plan ("Plan").

February 8, 1996   Stockholders approve share reserve increase to 2,892,857 and
                   amendment and restatement of Initial Plan as the Plan.